Business Context and Reporting Period
OneSpaWorld Holdings Limited is a global provider of beauty, health and wellness services and products operating on cruise ships and at destination resorts. At March 31, 2019, the company operated on 163 cruise ships and at 69 destination resorts.
The Form 10-Q covers the three months ended March 31, 2019. The March 19, 2019 business combination created a successor entity and resulted in acquisition accounting. Accordingly, results are presented as successor information for March 20–31, 2019 and predecessor information for January 1–March 19, 2019; these periods are not directly comparable with one another or with the prior-year predecessor period.
Key Financial Metrics
| Metric | Successor: Mar. 20–31, 2019 | Predecessor: Jan. 1–Mar. 19, 2019 | Predecessor: Q1 2018 |
|---|---|---|---|
| Total revenue | $19.0 million | $118.5 million | $128.9 million |
| Service revenue | $14.7 million | $91.3 million | $98.0 million |
| Product revenue | $4.3 million | $27.2 million | $30.8 million |
| Operating income (loss) | $(21.3) million | $(14.9) million | $11.7 million |
| Net income (loss) | $(22.6) million | $(24.8) million | $3.8 million |
| Net income (loss) attributable to common shareholders | $(22.7) million | $(25.5) million | $2.9 million |
| Basic and diluted earnings (loss) per share | $(0.37) | Not applicable | Not applicable |
For the company’s combined 2019 period, which adds successor and predecessor revenue, revenue was approximately $137.5 million versus $128.9 million in the comparable 2018 period, an increase of approximately 6.6%. Service revenue represented approximately 77% of combined 2019 revenue and product revenue approximately 23%.
Reported successor operating margin was approximately negative 112%, and predecessor operating margin was approximately negative 13%. These margins were heavily affected by transaction-related items, including $20.4 million of stock-based compensation in the successor period and $26.3 million of change-in-control payments in the predecessor period.
- Cash and cash equivalents were $16.3 million at March 31, 2019, compared with $15.3 million at December 31, 2018.
- Total current assets were $86.4 million and total current liabilities were $44.7 million, producing reported working capital of approximately $41.7 million.
- Debt consisted of $2.1 million of current debt and $237.4 million of long-term debt, net of deferred financing costs, for total reported debt of approximately $239.4 million.
- Net cash used in operating activities was $22.5 million in the successor period, compared with $3.7 million of cash provided by operating activities in the predecessor period and $14.7 million in Q1 2018.
- Cash used in investing activities was $711.3 million in the successor period, principally reflecting the cash consideration for the business combination. The filing’s MD&A separately refers to net acquisition payments of $805.2 million; investors should reconcile this presentation to the statement of cash flows and acquisition disclosures.
- Cash provided by financing activities was $736.3 million in the successor period, including common-share proceeds of $122.5 million, Haymaker contributions of $374.4 million and term-loan proceeds of $245.9 million, offset by $6.5 million of deferred financing costs.
Material Changes Versus the Prior Comparable Period
- Combined 2019 revenue increased approximately 6.6% from Q1 2018, supported by six incremental net new shipboard centers, 13 incremental destination resort centers, larger shipboard facilities and increased partner collaboration.
- Average ship count increased to 160 from 154, while period-end ship count increased to 163 from 158. Average resort count increased to 68 from 55, and period-end resort count increased to 69 from 58.
- Average weekly revenue per ship increased 2% to $60,452 from $59,033. Average revenue per shipboard staff member per day increased modestly to $468 from $467.
- Average weekly revenue per destination resort decreased 14% to $13,601 from $15,793.
- Cost of services remained approximately 84.2% of service revenue in both 2019 periods, compared with 84.8% in Q1 2018. Cost of products improved to 83.5% of product revenue in the successor period and 88.2% in the predecessor period, compared with 87.7% in Q1 2018.
- The company transitioned from predecessor debt of approximately $356.2 million, which was paid off by the parent before closing, to new credit facilities. The new facilities included a $208.5 million first-lien term loan, a $25.0 million second-lien term loan, a $20.0 million revolving facility and a $5.0 million delayed-draw facility.
- Balance-sheet assets increased substantially following acquisition accounting, including $626.8 million of definite-lived intangible assets and $199.4 million of goodwill at March 31, 2019. The purchase-price allocation remained provisional.
Outlook, Commentary, Risks and Unusual Items
Management stated that existing liquidity and capital sources are expected to be sufficient to fund operations, the growth strategy and anticipated public-company expenses for at least the next 12 months. The filing does not provide quantitative revenue, earnings or cash-flow guidance.
- Management expects growth from new and enhanced shipboard facilities, destination resort expansion, higher-value services, product offerings, partner marketing and pre-booking technology. Contracts were cited with Virgin Voyages and Celebrity Cruises for future vessels.
- Revenue is seasonal, with generally stronger results in the third quarter and holiday periods. Hurricanes may adversely affect cruise and resort operations, particularly from August through October.
- Key risks include dependence on the cruise and hospitality industries, discretionary consumer spending, economic conditions, fuel costs, foreign-exchange movements, competition, management of growth, customer and partner relationships, and regulatory changes.
- The company has material interest-rate exposure under LIBOR-based credit facilities. First-lien debt bears interest at LIBOR plus 4.00%, subject to a potential step-down, while second-lien debt bears interest at LIBOR plus 7.50%.
- The company recognized $20.4 million of stock-based compensation for options granted to executives; the options were fully vested upon grant but become exercisable only after the stock price reaches the specified hurdle.
- The predecessor period included a $3.4 million loss on extinguishment of debt and $26.3 million of change-in-control payments. These items reduce comparability with Q1 2018.
- Definite-lived intangible-asset amortization is estimated at approximately $17.8 million annually in each of the next five years beginning in 2019. The acquisition valuation, including intangible assets, goodwill and certain liabilities, remains subject to measurement-period adjustments.
- The company reported no legal proceedings, no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements other than operating leases.
- The company plans to adopt the new revenue-recognition standard for quarterly periods beginning January 1, 2020, using the modified retrospective method, but had not determined whether the impact would be material.
Investor Verification Checklist
- Reconcile successor and predecessor results before assessing year-over-year operating performance or margins.
- Verify the cash consideration and total funding sources for the March 19 business combination, including the difference between the $711.3 million cash-flow statement amount and the $805.2 million acquisition payment referenced in MD&A.
- Assess leverage, interest expense, mandatory amortization, financial covenants and available revolver capacity under the new credit facilities.
- Review the provisional valuation of the $633.3 million of acquired identifiable intangible assets and $199.4 million of goodwill, including impairment and amortization sensitivity.
- Separate recurring operating results from the $20.4 million successor stock-compensation charge, predecessor change-in-control payments and debt-extinguishment loss.
- Monitor resort productivity, cruise and resort counts, contract renewals, discretionary consumer spending, seasonality, hurricanes and foreign-exchange exposure.
- Confirm the effect of future option and warrant exercises on dilution; 27.6 million warrant shares and 4.5 million employee-option shares were excluded from diluted loss per share because they were antidilutive.