The accompanying notes are an integral part of the condensed consolidated and combined financial statements.
The accompanying notes are an integral part of the condensed consolidated and combined financial statements.
The accompanying notes are an integral part of the condensed consolidated financial statements.
The accompanying notes are an integral part of the condensed consolidated financial statements.
The accompanying notes are an integral part of the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
MARCH 31, 2020
(Unaudited)
1. ORGANIZATION
OneSpaWorld Holdings Limited (“OneSpaWorld”, the “Company”, “we”, “us”, “our”) is an international business company incorporated under the laws of the Commonwealth of The Bahamas. OneSpaWorld is a global provider and innovator in the fields of health and wellness, fitness and beauty. In facilities on cruise ships and in land-based resorts, the Company strives to create a relaxing and therapeutic environment where guests can receive health and wellness, fitness and beauty services and experiences of the highest quality. The Company’s services include traditional and alternative massage, body and skin treatments, fitness, acupuncture, and Medispa treatments. The Company also sells premium quality health and wellness, fitness and beauty products at its facilities and through its timetospa.com website. The predominant business, based on revenues, is sales of services and products on cruise ships and in land-based resorts, followed by sales of products through the timetospa.com website.
On March 19, 2019 (the “Business Combination Date”), OneSpaWorld consummated a business combination pursuant to a Business Combination Agreement, dated as of November 1, 2018 (as amended on January 7, 2019, by Amendment No. 1 to the Business Combination Agreement), by and among Steiner Leisure Limited (“Steiner Leisure,” “Steiner,” or “Parent”), Steiner U.S. Holdings, Inc., Nemo (UK) Holdco, Ltd., Steiner UK Limited, Steiner Management Services, LLC, Haymaker Acquisition Corp. (“Haymaker”), OneSpaWorld, Dory US Merger Sub, LLC, Dory Acquisition Sub, Limited, Dory Intermediate LLC, and Dory Acquisition Sub, Inc. (the “Business Combination”), in which Haymaker acquired from Steiner the combined operating business known as OSW Predecessor (“OSW”). Prior to the consummation of the Business Combination, OneSpaWorld was a wholly-owned subsidiary of Steiner Leisure. On the Business Combination Date, OneSpaWorld became the ultimate parent company of the Haymaker and OSW combined company.
Impact of Corona Virus (COVID-19), Liquidity and Management’s Plans
On January 30, 2020, the World Health Organization declared the coronavirus outbreak (“COVID-19”) a “Public Health Emergency of International Concern,” and on March 10, 2020, declared COVID-19 a pandemic. The regional and global outbreak of COVID-19 has negatively impacted and will continue to have a material negative impact on the Company’s operations. The cruise industry in the U.S. is subject to the U.S. Centers for Disease Control and Prevention (“CDC”) No Sail Order, which was extended on April 9, 2020 to continue until the earliest of (i) the expiration of the Secretary of Health and Human Services’ declaration that COVID-19 constitutes a public health emergency, (ii) the date the Director of the CDC rescinds or modifies the No Sail Order or (iii) 100 days after the order appears on the Federal Register, which would be July 24, 2020.
Cruise cancellations and hotel closures resulting in the closure of our onboard and resort spa operations have materially adversely impacted the Company’s operations, financial results and liquidity. On April 30, 2020, the Company announced the definitive agreement to sell $75 million in common equity and warrants to Steiner Leisure Limited (“SLL”) and its affiliates and other investors, including certain funds advised by Neuberger Berman Investment Advisers LLC and members of OSW management and its Board of Directors. (the “Private Placement”). The consummation of this Private Placement is subject to a vote of the Company’s shareholders, which is scheduled to occur on June 10, 2020. If we do not consummate this Private Placement and cannot secure an adequate capital infusion by another means, or cannot amend our credit facilities, it is likely that we will be unable to comply with certain covenants in our existing credit facilities as of June 30, 2020. The Company’s liquidity and operating results will continue to be negatively impacted until cruise and resort industries resume historically normalized operations.
The full extent to which COVID-19 will impact the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the virus and the actions to contain or treat its impact. As a consequence, the Company cannot estimate the impact on the business, or near- or longer-term financial or operational results with reasonable certainty. However, we expect results of operations and cash flows from operations for the second quarter of 2020, and for the remainder of 2020 to be severely negatively impacted.
In light of the cruise industry’s response to the Global COVID-19 pandemic and the No Sail Order issued by the CDC, the Company is taking steps to mitigate the adverse impact of the pandemic, which have included, but are not limited to:
|
•
|
Closed all spas on ships where voyages have been cancelled;
|
|
•
|
Closed all U.S. Caribbean-based and Asian-based destination resort spas;
|
|
•
|
Repatriated 52% of all cruise ship personnel, eliminating all ongoing expenses related to these employees;
|
|
•
|
Continued to work with cruise line partners and governmental authorities to repatriate substantially all remaining cruise ship personnel as soon as is practical;
|
|
•
|
Furloughed 96% of U.S. and Caribbean-based destination resort spa personnel and 38% of corporate personnel;
|
|
•
|
Eliminated all non-essential operating and capital expenditures;
|
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|
•
|
Withdrew its dividend program until further notice and deferred payment of the dividend declared on February 26, 2020 until approved by the Board of Directors;
|
|
•
|
Borrowed $20 million on its revolving credit facility; and
|
|
•
|
Entered into a definitive agreement (“Investment Agreement”) to sell $75 million in common equity and warrants to Steiner Leisure Limited (“SLL”) and its affiliates and other investors, including certain funds advised by Neuberger Berman Investment Advisers LLC and members of the Company’s management and its Board of Directors (See Note 15). Proceeds from the Investment Agreement will be used to fund our operations and to repay a portion of the revolving credit facility, avoiding an event of default.
|
Obtaining equity financing as contemplated through the Investment Agreement is not guaranteed and is largely dependent on market conditions, cruise industry conditions, hospitality industry conditions, among other factors, together with the affirmative vote of the Company’s shareholders. The Company may be required to pursue additional sources of financing to meet its financial obligations. If we are successful implementing these plans, including the consummation of the Private Placement, management believes that the Company will be able to generate sufficient liquidity to satisfy its obligations for the next twelve months. However, we can provide no assurances we will be successful executing these plans. Further, if we do not continue to remain in compliance with covenants in our existing credit facilities, we would have to seek amendments to these covenants from our lenders or evaluate the options to cure the defaults contained in the agreement. However, no assurances can be made that such amendments would be approved by our lenders. If an event of default occurs, the lenders under the existing credit facilities are entitled to take various actions, including the acceleration of amounts due under the credit facilities and all actions permitted to be taken by a secured creditor, subject to customary intercreditor provisions among the first and second lien secured parties, which would have a material adverse impact to our operations and liquidity. Management cannot predict the magnitude and duration of the negative impact from the COVID-19 pandemic; new events beyond management’s control may have incrementally material adverse impact on the Company’s results of operations, financial position and liquidity. Therefore, in light of all of these factors, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year from the date these interim financial statements are issued.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation, Principles of Consolidation and Principles of Combination
The financial information beginning March 20, 2019 is referred to as “Successor” company information and reflects the consolidated financial statements of OneSpaWorld, including the financial statement effects of recording fair value adjustments and the capital structure resulting from the Business Combination. Black lines have been drawn to separate the Successor’s financial information from that of the Predecessor since their financial statements are not comparable as a result of the application of acquisition accounting and the Company’s capital structure resulting from the Business Combination.
In the opinion of management, the accompanying unaudited condensed consolidated and combined financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in quarterly financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to the SEC’s rules and regulations. However, management believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly our unaudited financial position, results of operations and cash flows. The unaudited results of operations and cash flows for the period from January 1 to March 31, 2020 are not necessarily indicative of the results of operations or cash flows that may be expected for the remainder of 2020. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 10-K”).
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The preparation of consolidated and combined financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Successor:
The accompanying unaudited condensed consolidated financial statements as of and for the period from January 1, 2020 to March 31, 2020 and from March 20, 2019 to March 31, 2019, includes the condensed consolidated balance sheet and statement of operations, comprehensive loss, changes in equity, and cash flows of OneSpaWorld. All significant intercompany items and transactions have been eliminated in consolidation.
Predecessor:
The condensed combined OSW financial statements (the “OSW financial statements”) include the accounts of the wholly-owned and indirect subsidiaries of Steiner Leisure listed in Note 1 to the Consolidated Financial Statements in the 2019 10-K and include the accounts of a company majority-owned by OneSpaWorld Medispa (Bahamas) Limited, in which OneSpaWorld (Bahamas) Limited (100% owner of OneSpaWorld Medispa (Bahamas) Limited) had a controlling interest. The OSW condensed combined financial statements also include the accounts and results of operations associated with the timetospa.com website owned by Elemis USA, Inc at that time. The OSW condensed financial statements do not represent the financial position and results of operations of a legal entity but rather a combination of entities under common control of Steiner Leisure that have been “carved out” of the Steiner Leisure consolidated financial statements and reflect significant assumptions and allocations. All significant intercompany transactions and balances have been eliminated in combination. The accompanying condensed combined OSW financial statements may not be indicative of what they would have been had OSW actually been a separate stand-alone entity.
The accompanying condensed combined OSW financial statements include the equity, revenues and expenses specifically related OSW’s operations. OSW receives services and support from various functions performed by Steiner Leisure and costs associated with these functions have been allocated to OSW. These allocations are necessary to reflect all of the costs of doing business and include costs related to certain Steiner Leisure corporate functions, including, but not limited to, senior management, legal, human resources, finance, IT and other shared services that have been allocated to OSW based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis determined by an estimate of the percentage of time Steiner Leisure employees devoted to OSW, as compared to total time available or by the headcount of employees at Steiner Leisure corporate headquarters that are fully dedicated to the OSW entities in relation to the total employee headcount. These allocated costs are reflected in salary and payroll taxes and administrative expenses in the accompanying condensed combined OSW statements of operations. Management considers these allocations to be a reasonable reflection of the utilization of services by or benefit provided to OSW. However, the allocations may not be indicative of the actual expenses that would have been incurred had OSW operated as an independent, stand-alone entity.
Net Parent investment represents the Steiner Leisure controlling interest in the recorded net assets of OSW, specifically, the cumulative net investment by Steiner Leisure in OSW and cumulative operating results through the date presented. The net effect of the settlement of transactions between OSW, Steiner Leisure, and other affiliates of Steiner Leisure are reflected in the accompanying condensed combined statements of cash flows as a financing activity and in the condensed combined balance sheet as Net Parent investment.
Certain expenses and operating costs were paid by Steiner Leisure on behalf of OSW. The Parent has paid on behalf of OSW expenses associated with the allocation of Steiner Leisure corporate overhead and costs associated with the purchase of products from related parties. Operating cash flows for the predecessor periods exclude OSW expenses and operating costs paid by Steiner Leisure on behalf of OSW. Consequently, OSW’s historical cash flows may not be indicative of cash flows had OSW actually been a separate stand-alone entity or future cash flows of OSW.
Management believes the assumptions and allocations underlying the accompanying condensed combined OSW financial statements and notes to the OSW condensed combined financial statements are reasonable, appropriate and consistently applied for the periods presented. Management believes the accompanying condensed combined OSW financial statements reflect all costs of doing business.
The accompanying OSW condensed combined financial statements have been prepared in conformity with U.S. GAAP.
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Loss Per Share (Successor)
Basic earnings (loss) per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of diluted shares, as calculated under the treasury stock method, which includes the potential effect of dilutive common stock equivalents, such as options and warrants to purchase common shares. If the entity reports a net loss, rather than net income for the period, the computation of diluted loss per share excludes the effect of dilutive common stock equivalents, as their effect would be anti-dilutive.
The following table provides details underlying OneSpaWorld’s loss per basic and diluted share calculation for the three months ended March 31, 2020 and for the period from March 20, 2019 to March 31, 2019 (in thousands):
|
|
Three Months Ended March 31, 2020
|
|
|
March 20, 2019 to
March 31, 2019
|
|
Net loss attributable to common shareholders – basic and diluted (a)
|
|
$
|
(198,662
|
)
|
|
$
|
(22,683
|
)
|
Weighted average shares outstanding – basic and diluted
|
|
|
61,169
|
|
|
|
61,118
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(3.25
|
)
|
|
$
|
(0.37
|
)
|
(a) Calculated as total net loss less amounts attributable to noncontrolling interest.
For the three months ended March 31, 2020 and for the period from March 20, 2019 to March 31, 2019, potential common shares under the treasury stock method and the if-converted method were antidilutive because the Company reported a net loss in these periods. Consequently, the Company did not have any adjustments in these periods between basic and diluted loss per share related to stock options, restricted share units and warrants.
The table below presents the weighted-average number of antidilutive potential common shares that are not considered in the calculation of diluted loss per share (in thousands):
|
|
Successor
|
|
|
|
Three Months Ended March 31, 2020
|
|
|
March 20, 2019 to
March 31, 2019
|
|
Common stock warrants
|
|
|
24,408
|
|
|
|
27,605
|
|
Deferred shares
|
|
|
6,600
|
|
|
|
6,600
|
|
Employee stock options
|
|
|
4,376
|
|
|
|
4,547
|
|
Restricted stock units
|
|
|
201
|
|
|
|
—
|
|
|
|
|
35,585
|
|
|
|
38,752
|
|
Adoption of Accounting Pronouncements
On January 1, 2020, the Company adopted FASB Accounting Standards Update (ASU) 2017-04, Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the requirement to calculate the fair value of the individual assets and liabilities of a reporting unit to measure goodwill impairment (Step 2). Under the new ASU, when required to test goodwill for recoverability, an entity will perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying value (Step 1) and should recognize an impairment charge for the amount by which the carrying value exceeds the fair value of the reporting unit. We have applied this ASU on a prospective basis. As a result of the adoption of this standard, we used step 1 to measure the goodwill impairment charge recognized during the first quarter of 2020. See Note 4 “Goodwill and Intangible Assets” and “Note 13. Fair Value Measurement and Derivatives” for further details.
Recent Accounting Pronouncements
With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to the Company. The following summary of recent accounting pronouncements is not intended to be an exhaustive description of the respective pronouncement.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) to increase transparency and comparability among organizations by recognizing rights and obligations resulting from leases as lease assets and lease liabilities on the balance sheet and disclosing
10
Table of Contents
key information about leasing arrangements. The update requires lessees to recognize for all leases with a term of 12 months or more at the commencement date: (a) a lease liability or a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and (b) a right-of-use asset or a lessee’s right to use or control the use of a specified asset for the lease term. Under the update, lessor accounting remains largely unchanged. The update requires a modified retrospective transition approach for leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements and do not require any transition accounting for leases that expire before the earliest comparative period presented.
The update is effective retrospectively for annual periods beginning after December 15, 2020, and interim periods beginning after December 15, 2021, with early adoption permitted. We intend to elect the optional transition method, which allows entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company continues to evaluate the effect that the update will have on the Company’s consolidated financial statements. The Company is in the process to start its initial scoping review to identify a complete population of leases to be recorded on the consolidated balance sheet as a lease obligation and right of use asset. The Company expects that the update will have a material effect on our consolidated balance sheets due to the recognition of operating lease assets and operating lease liabilities primarily related to the destination resort agreements and office space which will result in a balance sheet presentation that is not comparable to the prior period in the first year of adoption. Upon adoption, we expect that there will be no cumulative-effect adjustment of initially applying the guidance to our opening balance of retained earnings. We are currently evaluating the impact to our consolidated statements of operations, consolidated statements of cash flows and our debt-covenant compliance under our current agreements on an ongoing basis.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).” This ASU amends the Board’s guidance on the impairment of financial instruments. The ASU adds to GAAP an impairment model (known as the current expected credit losses model) that is based on an expected losses model rather than an incurred losses model. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The ASU is also intended to reduce the complexity of GAAP by decreasing the number of impairment models that entities use to account for debt instruments. The update is effective for fiscal years beginning after December 15, 2020. The Company is currently assessing the impact the adoption of this guidance will have on its consolidated financial statements.
The United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (“LIBOR”), announced in July 2017 its intent to phase out the use of LIBOR by the end of 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, identified the Secured Overnight Financing Rate (“SOFR”) as its preferred benchmark alternative to U.S. dollar LIBOR. SOFR represents a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is calculated based on directly observable U.S. Treasury-backed repurchase transactions. In March 2020, in response to this transition, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financing Reporting (“ASU 2020-04”), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued by reference rate reform, and addresses operational issues likely to arise in modifying contracts to replace discontinued reference rates with new rates. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022. The Company is evaluating the potential impact of the replacement of LIBOR, which ultimately may or may not be the SOFR, from both a risk management and financial reporting perspective, as well as the guidance under ASU 2020-04. Our current portfolio of debt and financial instruments currently tied to LIBOR consists of the Company’s First and Second Lien Term Facilities, both of which are discussed in more detail in Note 5 herein. We do not currently believe that this transition will have a material impact on our consolidated financial statements.
Correction of Immaterial Errors
The Company corrected errors that were immaterial to the previously reported condensed consolidated financial statements as of March 31, 2019. These errors were identified in connection with the preparation of our condensed consolidated financial statements for the second quarter of 2019 and our annual 2019 consolidated financial statements and relate to the period from March 20, 2019 to March 31, 2019 (Successor).
As previously disclosed in the Company’s 2019 10-K, in the second quarter of 2019, goodwill decreased by $23.0 million due to the net effect of adjusting for (i) a decrease of $26.6 million attributable to incorrectly including as consideration transferred change in control payments pursuant to employment agreements entered into in 2016 that were earned upon consummation of the Business Combination for services rendered prior to the Business Combination for which an assumed liability had been recorded in the purchase accounting treatment of the Business Combination; (ii) a decrease of $3.2 million attributable to a receivable due from Parent for the reimbursement of cash payments made by the Company on behalf of the Parent that had not been recorded in the purchase accounting treatment of the Business Combination and (iii) an increase of $6.8 million attributable to contract acquisition costs that had incorrectly been recorded as an intangible asset in the purchase accounting of the Business Combination. Additionally, the Company corrected for $3.7 million of accrued expenses associated with Haymaker that had not been recorded upon consummation of the Business Combination and to reclassify $0.6 million of accumulated other comprehensive loss as additional paid in capital as of March 31, 2019. The effect of correcting these errors decreased additional paid in capital and stockholders’ equity by $24.1 million and $23.5 million, respectively, as of March 31, 2019.
The consolidated statement of cash flows for the period from March 20, 2019 to March 31, 2019 (Successor) has been corrected for the effect of the above referenced balance sheet adjustments and other cash flow presentation items. The effect of correcting i) above resulted in a $26.6 million decrease in Cash Flow Used in Investing Activities attributable to the acquisition of OSW Predecessor, which was further reduced to reflect $14.6 million of cash acquired in the Business Combination (which was previously presented as cash and cash equivalents, beginning of period). The effect of correcting iii) above resulted in a $6.8 million increase in Cash Flow Used In Operating Activities (specifically, to decrease the change in other noncurrent assets), which was offset partially by a correction for $3.0 million associated with payment of accrued expenses. The Company also corrected the presentation of Net Proceeds From Haymaker and Institutional Investors by reducing the amount previously
11
Table of Contents
presented by $25.0 million, the effect of exchange rate changes on cash by reducing it by $0.6 million, and adjusted cash and cash equivalents at beginning of period to $1.7 million, which was the cash held by Haymaker at the Business Combination Date.
Additionally as previously disclosed in the Company’s 2019 10-K, in the fourth quarter of 2019, goodwill decreased by $2.8 million due to the net effect of adjusting for (i) a decrease of $2.3 million attributable to understating inventory acquired at fair value in purchase accounting of the Business Combination; (ii) a decrease of $1.0 million attributable to understating prepaid expenses and other current assets that had not been recorded in purchase accounting of the Business Combination and (iii) an increase of $0.5 million attributable to an understatement of current liabilities in the purchase accounting of the Business Combination. The Company also corrected for $3.9 million of additional accrued expenses associated with Haymaker that had not been recorded upon consummation of the Business Combination and $1.3 million of adjustments incorrectly recorded in additional paid-in capital in consolidation upon consummation of the Business Combination. The effect of correcting these errors decreased additional paid-in capital and stockholders’ equity by $5.2 million as of March 31, 2019.
The corrections of these errors did not have any effect on the condensed consolidated and combined statement of operations for the interim periods previously presented as of March 31, 2019. Additionally, these errors did not have any effect on cash and cash equivalents at March 31, 2019.
The corrections of these errors did not have any effect on the condensed consolidated statements of operations for any of the periods previously presented. Additionally, these errors did not have any effect on cash and cash equivalents at March 31, 2019.
3. BUSINESS COMBINATION
As discussed in Note 1, Organization, on March 19, 2019, OneSpaWorld consummated a business combination. The Business Combination was accounted for using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). Haymaker was deemed to be the accounting acquirer and OSW the accounting acquiree. As a result of applying pushdown accounting, the post-Business Combination financial statements of OneSpaWorld reflect the new basis of accounting for OSW. Total consideration transferred to Steiner in connection with the Business Combination was $858,386,000.
The Company’s purchase price allocation was final as of December 31, 2019. Measurement period adjustments were applied retrospectively to the Business Combination Date. Goodwill of $174.2 million and $15.9 million was assigned to the Maritime and Destination Resorts reporting units, respectively, based on expected benefits from the combination as of the Business Combination Date.
The following information represents the unaudited supplemental pro forma results of the Company’s condensed consolidated statement of operations as if the Business Combination occurred on January 1, 2019, after giving effect to certain adjustments, including depreciation and amortization of the assets acquired and liabilities assumed based on their estimated fair values and changes in interest expense resulting from changes in debt (in thousands):
|
|
Three Months
Ended
|
|
|
|
March 31, 2019
|
|
Revenues
|
|
$
|
137,466
|
|
Net loss
|
|
$
|
(46,506
|
)
|
The pro forma information does not purport to be indicative of what the Company’s results of operations would have been if the Business Combination had in fact occurred at the beginning of the period presented and is not intended to be a projection of the Company’s future results of operations. Financial information prior to the Business Combination Date is referred to as “Predecessor” company information, which reflects the combined financial statements of OSW prepared using OSW’s previous combined basis of accounting.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of the effect of COVID-19 on our expected future operating cash flows and our evaluation of the current economic and market conditions, and its impact on the Company’s common share price, we concluded it is more likely than not that the trade name indefinite-lived intangible asset and goodwill are impaired and performed, including work performed by third-party valuation specialists, interim impairment tests as of March 31, 2020.
We performed a fair value test applying the relief of royalty method and determined that the estimated fair value of our trade name is less than carrying value as of March 31, 2020. As a result, we recognized an impairment charge of $0.7 million during the three months ended March 31, 2020 (Successor).
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Goodwill represents the purchase price in excess of the fair value of the net assets acquired and liabilities assumed in connection with the Business Combination (See Note 3). We performed discounted cash flow analyses and determined that the estimated fair values of our Maritime and Destination Resorts segment reporting units no longer exceeded their carrying values as of March 31, 2020. As a result, we concluded that the goodwill associated with these reporting units was fully impaired. We recognized goodwill impairment charges of approximately $190 million for these reporting units during the three months ended March 31, 2020 (Successor) (see Note 13).
The changes in the carrying amount of goodwill for each unit for the three months ended March 31, 2020 (Successor) were as follows (in thousands):
|
Maritime
|
|
|
Destination Resorts
|
|
|
Total
|
|
Balance at December 31, 2019
|
$
|
174,150
|
|
|
$
|
15,927
|
|
|
$
|
190,077
|
|
Impairment
|
|
(174,150
|
)
|
|
|
(15,927
|
)
|
|
|
(190,077
|
)
|
Balance at March 31, 2020
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Intangible assets consist of finite and indefinite life assets. The following is a summary of the Company’s intangible assets as of March 31, 2020 (in thousands, except amortization period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor:
|
Cost
|
|
|
Accumulated Amortization and Impairment
|
|
|
Net Balance
|
|
|
Amortization Period (in years)
|
Retail concession agreements
|
$
|
604,700
|
|
|
$
|
(16,042
|
)
|
|
$
|
588,658
|
|
|
39
|
Destination resort agreements
|
|
17,900
|
|
|
|
(1,205
|
)
|
|
|
16,695
|
|
|
15
|
Trade name
|
|
6,200
|
|
|
|
(700
|
)
|
|
|
5,500
|
|
|
Indefinite-life
|
Licensing agreement
|
|
1,000
|
|
|
|
(122
|
)
|
|
|
878
|
|
|
8
|
|
$
|
629,800
|
|
|
$
|
(18,069
|
)
|
|
$
|
611,731
|
|
|
|
The following is a summary of the Company’s intangible assets as of December 31, 2019 (in thousands, except amortization period):
Successor:
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net Balance
|
|
|
Amortization Period (in years)
|
Retail concession agreements
|
$
|
604,700
|
|
|
$
|
(12,165
|
)
|
|
$
|
592,535
|
|
|
39
|
Destination resort agreements
|
|
17,900
|
|
|
|
(907
|
)
|
|
|
16,993
|
|
|
15
|
Trade name
|
|
6,200
|
|
|
|
-
|
|
|
|
6,200
|
|
|
Indefinite-life
|
Licensing agreement
|
|
1,000
|
|
|
|
(91
|
)
|
|
|
909
|
|
|
8
|
|
$
|
629,800
|
|
|
$
|
(13,163
|
)
|
|
$
|
616,637
|
|
|
|
The Company amortizes intangible assets with definite lives on a straight-line basis over their estimated useful lives. Amortization expense for the three months ended March 31, 2020 (Successor), for the period from March 20, 2019 to March 31, 2019 (Successor) and for the period from January 1, 2019 to March 19, 2019 (Predecessor) was $4.2 million, $0.6 million and $0.8 million, respectively. Amortization expense is estimated to be $16.8 million in each of the next five years beginning in 2020.
5. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands, except interest rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate As of
|
|
|
|
|
As of
|
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
Maturities Through
|
|
March 31,
2020
|
|
|
|
December 31,
2019
|
|
First lien term loan facility
|
|
5.4%
|
|
|
5.5%
|
|
|
2026
|
|
$
|
202,457
|
|
|
|
$
|
202,457
|
|
Second lien term loan facility
|
|
9.1%
|
|
|
9.3%
|
|
|
2027
|
|
|
25,000
|
|
|
|
|
25,000
|
|
First lien revolving facility
|
|
5.4%
|
|
|
-
|
|
|
2024
|
|
|
20,000
|
|
|
|
|
-
|
|
Total debt
|
|
|
|
|
|
|
|
|
|
|
|
$
|
247,457
|
|
|
|
$
|
227,457
|
|
Less: unamortized debt Issuance cost
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,794
|
)
|
|
|
|
(6,050
|
)
|
Total debt, net of unamortized debt Issuance cost
|
|
|
|
|
|
|
|
|
|
|
|
$
|
241,663
|
|
|
|
$
|
221,407
|
|
13
Table of Contents
On March 19, 2019, the Company entered into (i) senior secured first lien credit facilities (the “First Lien Credit Facilities”) with Goldman Sachs Lending Partners LLC, as administrative agent, and certain lenders, consisting of (x) a term loan facility of $208.5 million (of which $20 million was borrowed by a subsidiary of the Company) (the “First Lien Term Loan Facility”), (y) a revolving loan facility of up to $20 million (the “First Lien Revolving Facility”) and (z) a delayed draw term loan facility of $5 million (the “First Lien Delayed Draw Facility”), and (ii) a senior secured second lien term loan facility of $25 million with Cortland Capital Market Services LLC, as administrative agent, and Neuberger Berman Alternative Funds, Neuberger Berman Long Short Fund, as lender (the “Second Lien Term Loan Facility” and, together with the First Lien Term Loan Facility, the “Term Loan Facilities”; the New Term Loan Facilities, together with the First Lien Revolving Facility and the First Lien Delayed Draw Facility, are referred to as the “New Credit Facilities”). The First Lien Revolving Facility includes borrowing capacity available for letters of credit up to $5 million. Any issuance of letters of credit reduces the amount available under the New First Lien Revolving Facility. The First Lien Term Loan Facility matures seven years after March 19, 2019, the First Lien Revolving Facility matures five years after March 19, 2019 and the Second Lien Term Loan Facility matures eight years after March 19, 2019.
Loans outstanding under the First Lien Credit Facilities will accrue interest at a rate per annum equal to LIBOR plus a margin of 4.00%, with one step down to 3.75% upon achievement of a certain leverage ratio, and undrawn amounts under the First Lien Revolving Facility will accrue a commitment fee at a rate per annum of 0.50% on the average daily undrawn portion of the commitments thereunder, with one step down to 0.325% upon achievement of a certain leverage ratio. Loans outstanding under the Second Lien Term Loan Facility will accrue interest at a rate per annum equal to LIBOR plus 7.50%.
The obligations under the New Credit Facilities are guaranteed by the Company and each of its direct or indirect wholly-owned subsidiaries organized under the laws of the United States and the Commonwealth of The Bahamas, in each case, other than certain excluded subsidiaries, including, but not limited to, immaterial subsidiaries, non-profit subsidiaries, and any other subsidiary with respect to which the burden or cost of providing a guarantee is excessive in view of the benefits to be obtained by the lenders therefrom.
The Term Loan Facilities require the Company to make certain mandatory prepayments, with (i) 100% of net cash proceeds of all non-ordinary course asset sales or other dispositions of property, subject to the ability to reinvest such proceeds and certain other exceptions, and subject to step downs if certain leverage ratios are met and (ii) 100% of the net cash proceeds of any debt incurrence, other than debt permitted under the definitive agreements (but excluding debt incurred to refinance the New Credit Facilities). The Company also is required to make quarterly amortization payments equal to 0.25% of the original principal amount of the First Lien Term Loan Facility commencing after the first full fiscal quarter after the closing date of the New Credit Facilities (subject to reductions by optional and mandatory prepayments of the loans). The Company may prepay (i) the First Lien Credit Facilities at any time without premium or penalty, subject to payment of customary breakage costs and a customary “soft call,” and (ii) the Second Lien Term Loan Facility at any time without premium or penalty, subject to a customary make-whole premium for any voluntary prepayment prior to the date that is 30 months following the closing date of the New Credit Facilities (the “Callable Date”), following by a call premium of (x) 4.00% on or prior to the first anniversary of the Callable Date, (y) 2.50% after the first anniversary but on or prior to the second anniversary of the Callable Date, and (z) 1.50% after the second anniversary but on or prior to the third anniversary of the Callable Date.
The New Credit Facilities contain a financial covenant related to the maintenance of a leverage ratio and a number of customary negative covenants including covenants related to the following subjects: consolidations, mergers, and sales of assets; limitations on the incurrence of certain liens; limitations on certain indebtedness; limitations on the ability to pay dividends; and certain affiliate transactions.
The New Credit Facilities also contain certain customary representations and warranties, affirmative covenants and events of default. As of March 31, 2020, and December 31, 2019, the Company was in compliance with all of the covenants contained in the New Credit Facilities.
As discussed in Note 1, management’s plans provide no assurances that we will maintain sufficient liquidity and mitigate the risk of a future event of default. It is probable that we will be unable to comply with certain covenants in our existing credit facilities if we are not able to execute such further actions. If we do not continue to remain in compliance with these covenants, we would have to seek amendments to these covenants from our lenders or evaluate the options to cure the defaults contained in the credit agreements. However, no assurances can be made that such amendments would be approved by our lenders. If an event of default occurs, the lenders under the New Credit Facilities are entitled to take various actions, including the acceleration of amounts due under the New Credit Facilities and all actions permitted to be taken by a secured creditor, subject to customary intercreditor provisions among the first and second lien secured parties, which would have a material adverse impact to our operations and liquidity.
The Following are scheduled principal repayments on long-term as of March 31, 2020 for each of the next five years (in thousands):
14
Table of Contents
|
|
|
|
|
Year
|
|
Amount
|
|
2020
|
|
$
|
-
|
|
2021
|
|
|
-
|
|
2022
|
|
|
1,776
|
|
2023
|
|
|
2,085
|
|
2024
|
|
|
22,085
|
|
Thereafter Total
|
|
|
221,511
|
|
|
|
$
|
247,457
|
|
|
|
|
|
|
Borrowing Capacity:
As of March 31, 2020, the Company had fully drawn the $20 million available under the First Lien Revolving Facility.
6. EQUITY
Common Shares
The Company is authorized to issue 250,000,000 common shares with a par value of $0.0001 per share. Holders of the Company’s common stock are entitled to one vote for each share. At March 31, 2020, there were 61,218,151 shares of OneSpaWorld common stock issued and outstanding.
Dividends Declared Per Common Share
On March 24, 2020, the Company announced that it is deferring payment of its dividend declared on February 26, 2020, for payment on May 29, 2020, to shareholders of record on April 10, 2020, until the Board of Directors reapproves its payment; and withdrawing its dividend program until further notice.
Public and Private Warrants
During the first quarter of 2020 the Company repurchased 348,521 warrants for a total of $0.9 million in open market transactions. As of March 31, 2020, 24,150,379 warrants were issued and outstanding.
7. STOCK-BASED EMPLOYEE COMPENSATION
Successor:
Restricted Share Units
On January 21, 2020, the Company granted 181,521 time-based restricted share unit awards to certain employees which vest in equal installments over three years.
The following is a summary of restricted share unit activity for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
Restricted Share Units Activity
|
|
Number of Awards
|
|
|
Weighted-Average Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested share units as of December 31, 2019
|
|
|
60,902
|
|
|
$
|
15.60
|
|
|
Granted
|
|
|
181,521
|
|
|
|
15.67
|
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
Non-Vested share units as of March 31, 2020
|
|
|
242,423
|
|
|
$
|
15.65
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Table of Contents
Performance Share Units
On January 21, 2020, the Company granted 181,521 performance share unit awards to certain employees which vest upon the achievement of certain pre-established performance target established for the 2020 calendar year and the satisfaction of an additional time-based vesting requirement that generally requires continued employment through January 21, 2023. Performance share units are converted into shares of common stock upon vesting on a one-for-one basis. The Company estimates the fair value of each performance share when the grant is authorized, and the related service period has commenced. The Company recognizes compensation cost over the vesting period based on the probability of the performance conditions being achieved. If the specified service and performance conditions are not met, compensation expense is not recognized, and any previously recognized compensation expense will be reversed.
The following is a summary of performance share unit activity for the three months ended March 31, 2020:
Performance Share Unit Activity
|
|
Number of Awards
|
|
|
Weighted-Average Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Non-Vested share units as of December 31, 2020
|
|
|
|
|
|
|
|
|
Granted
|
|
|
181,521
|
|
|
$
|
15.67
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
Non-Vested share units as of March 31, 2020
|
|
|
181,521
|
|
|
$
|
15.67
|
|
The share-based compensation expense for the three months ended March 31, 2020 (Successor) and for the period from March 20, 2019 to March 31, 2019 (Successor) was $0.4 million and $20.4 million, respectively, which is included as a component of salary and payroll taxes in the accompanying condensed consolidated and combined statements of operations. There was no share-based compensation expense for the period from January 1, 2019 to March 19, 2019 (Predecessor).
8. NONCONTROLLING INTEREST
As of December 31, 2019, the Company had a 60% controlling interest and a third party has a 40% noncontrolling interest of Medispa Limited, a Bahamian entity that is a subsidiary of the Company. The operations of MediSpa Limited relate to the delivery of non-invasive aesthetic services, provision of related services, and the sale of related products onboard passenger cruise ships and at hotel and resort spas outside the tax jurisdiction of the U.S. (Successor). On February 14, 2020, the Company purchased the 40% noncontrolling interest for $12.3 million in a combination of $10.8 million in cash and 98,753 shares of the Company’s common stock at a share price of $15.26. As a result of the transaction, the difference between the carrying value of the noncontrolling interest purchased and the consideration given was recorded as additional paid-in capital.
Total equity was adjusted during the three months ended March 31, 2020 (Successor) due to the purchase of noncontrolling interest by the Company as follows (in thousands):
|
|
Three Months Ended March 31, 2020
|
|
Decrease in noncontrolling interest
|
|
|
$(4,113
|
)
|
Decrease in additional paid-in capital
|
|
|
(6,697
|
)
|
9. REVENUE RECOGNITION
The Company's revenue generating activities include the following:
Service Revenues
Service revenues consist primarily of sales of health, wellness and beauty services, including a full range of massage treatments, facial treatments, nutritional/weight management consultations, teeth whitening, mindfulness services and medi-spa services to cruise ship passengers and destination resort guests. Each service or consultation represents a separate performance obligation and revenues are generally recognized immediately upon the completion of our service. Given the short duration of our performance obligation, although some services are recognized over time, there is no difference in the timing of recognition.
16
Table of Contents
Product Revenues
Product revenues consist primarily of sales of health and wellness products, such as facial skincare, body care, hair care, orthotics and nutritional supplements to cruise ship passengers, destination resort guests and timetospa.com customers. Our Shop & Ship program provides guests the ability to buy retail products onboard and have products shipped directly to their home. Each product unit represents a separate performance obligation. Our performance obligations are satisfied, and revenue is recognized when the customer obtains control of the product, which occurs either at the point of sale for retail sales and at the time of shipping for Shop & Ship and timetospa.com product sales. The Company provides no warranty on products sold. Shipping and handling fees charged to customers are included in net sales.
Gift Cards
The Company only offers no-fee, non-expiring gift cards to its customers. At the time gift cards are sold, no revenue is recognized; rather, the Company records a contract liability to customers. The liability is relieved, and revenue is recognized equal to the amount redeemed at the time gift cards are redeemed for products or services. The Company records revenue from unredeemed gift cards (breakage) in net sales on a pro-rata basis over the time period gift cards are redeemed. At least three years of historical data, updated annually, is used to determine actual redemption patterns. The liability for unredeemed gift cards is included in “Other current liabilities” on the Company's consolidated balance sheets and was $0.6 million and $0.8 million as of March 31, 2020 and December 31, 2019, respectively.
Customer Loyalty Rewards Program
The Company initiated a customer loyalty program during October 2019 in which customers earn points based on their spending on timetospa.com. The Company recognizes the estimated net amount of the rewards that will be earned and redeemed as a reduction to net sales at the time of the initial transaction and as tender when the points are subsequently redeemed by a customer. The liability for customer loyalty programs was not material as of March 31, 2020 and December 31, 2019.
Contract Balances (in thousands)
Receivables from the Company’s contracts with customers are included within accounts receivables, net. Such amounts are typically remitted to us by our cruise line or destination resort partners, except for online sales, and are net of commissions they withhold. Although paid by our cruise line partners, customers are typically required to pay with major credit cards, reducing our credit risk to individual customers. Amounts are billed immediately, and our cruise line and destination resort partners typically remit payments to us within 30 days. As of March 31, 2020, and December 31, 2019, our receivables from contracts with customers were $16,128 and $30,513, respectively. Our contract liabilities for gift cards and customer loyalty programs are described above.
Disaggregation of Revenue and Segment Reporting
The Company operates facilities on cruise ships and in destination resorts, where we provide health and wellness, fitness and beauty services and sell related products. The Company’s Maritime and Destination Resorts operating segments are aggregated into a single reportable segment based upon similar economic characteristics, products, services, customers and delivery methods. Additionally, the Company’s operating segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief executive officer, who is the Company’s chief operating decision maker (CODM), in determining how to allocate the Company’s resources and evaluate performance. The following table disaggregates the Company’s revenues by revenue source and operating segment (in thousands):
|
Successor
|
|
|
|
Predecessor
|
|
|
Consolidated
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
March 20, 2019 to March 31, 2019
|
|
|
|
January 1, 2019 to March 19, 2019
|
|
Service Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Maritime
|
$
|
80,814
|
|
$
|
13,083
|
|
|
|
$
|
81,170
|
|
Destination resorts
|
|
8,759
|
|
|
1,630
|
|
|
|
|
10,110
|
|
Total service revenues
|
|
89,573
|
|
|
14,713
|
|
|
|
|
91,280
|
|
Product revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Maritime
|
|
23,387
|
|
|
4,078
|
|
|
|
|
25,794
|
|
Destination resorts
|
613
|
|
|
103
|
|
|
|
|
633
|
|
Timetospa.com
|
734
|
|
|
120
|
|
|
|
|
745
|
|
Total product revenues
|
|
24,734
|
|
|
4,301
|
|
|
|
|
27,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
114,307
|
|
$
|
19,014
|
|
|
|
$
|
118,452
|
|
17
Table of Contents
10. RELATED PARTY TRANSACTIONS
Predecessor:
The Company receives services and support from various functions performed by Parent. These expenses relate to allocations of Parent corporate overhead.
Successor:
OSW Predecessor entered into an Executive Services Agreement, concurrent with the closing of the Business Combination, with Nemo Investor Aggregator, Limited (“Nemo”), the parent company of Steiner Leisure, which became effective at the time of the closing. The agreement provides that after the closing of the Business Combination, Leonard Fluxman and Stephen Lazarus are to be made available to provide certain transition services to Nemo until December 31, 2020 in exchange for $850,000. During the three months ended March 31, 2020, the Company recorded approximately $0.2 million as a reduction of salaries and payroll taxes on the condensed consolidated statement of operations.
Predecessor and Successor:
OSW Predecessor entered into a Management Agreement, dated May 25, 2018 and amended and restated on October 25, 2018, with Bliss World LLC, an indirect subsidiary of Steiner Leisure, which became effective at the time of the closing of the Business Combination. The agreement provides that OSW Predecessor will manage the operation of nine U.S. health and wellness centers on behalf of Bliss World LLC in exchange for approximately $1.25 million in the aggregate for the year ended December 31, 2019. Subject to certain customary early termination rights, the agreement terminates, with respect to each health and wellness center, upon expiration or termination of the respective lease for each such health and wellness center. During the three months ended March 31, 2020, the Company was billed approximately $0.1 million. This amount was recorded in service revenues on the condensed consolidated statement of operations.
On August 3, 2018, the Company entered into a lease of office space in Coral Gables, Florida (the “Coral Gables Lease”) with an initial lease term of twelve years and options to renew for two periods of five years each. Additionally, on August 3, 2018, the Company entered into a sublease of the Coral Gables Lease with SMS, with an initial term of five years with an annual rent amount of approximately $480,000. During the three months ended March 31, 2020, the Company was billed approximately $0.1 million. This amount was recorded in administrative expense on the condensed consolidated statement of operations.
11. SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates facilities on cruise ships and in destination resort health and wellness centers, which provide health and wellness services and sell beauty products onboard cruise ships and in destination resort health and wellness centers. The Company’s Maritime and Destination Resorts operating segments are aggregated into a single reportable segment based upon similar economic characteristics, products, services, customers and delivery methods. Additionally, the Company’s operating segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief executive officer, who is the Company’s chief operating decision maker (CODM), in determining how to allocate the Company’s resources and evaluate performance.
The basis for determining the geographic information below is based on the countries in which the Company operates. The Company is not able to identify the country of origin for the customers to which revenues from cruise ship operations relate. Geographic information is as follows (in thousands):
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Three Months Ended
|
|
March 20, 2019 to
|
|
|
|
January 1, 2019
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
|
|
March 19, 2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
7,336
|
|
$
|
707
|
|
|
|
$
|
6,008
|
|
Not connected to a country
|
|
|
101,672
|
|
|
17,012
|
|
|
|
|
106,886
|
|
Other
|
|
|
5,299
|
|
|
1,295
|
|
|
|
|
5,558
|
|
Total
|
|
$
|
114,307
|
|
$
|
19,014
|
|
|
|
$
|
118,452
|
|
18
Table of Contents
|
As of
|
|
|
March 31,
2020
|
|
|
|
December 31,
2019
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
8,778
|
|
|
|
$
|
9,965
|
|
Not connected to a country
|
|
7,802
|
|
|
|
|
6,826
|
|
Other
|
|
5,612
|
|
|
|
|
5,950
|
|
Total
|
$
|
22,192
|
|
|
|
$
|
22,741
|
|
19
Table of Contents
12. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2020 (Successor), for the periods from March 20, 2019 to March 31, 2019 (Successor) and from January 1, 2019 to March 19, 2019 (Predecessor), respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
Accumulated Other Comprehensive Income (Loss) for the Three Months Ended March 31, 2020
|
|
|
Accumulated Other Comprehensive Income (Loss) for the period from January 20, 2019 to March 31, 2019 (2)
|
|
|
|
Accumulated Other Comprehensive Income (Loss) for the period from January 1, 2019 to March 19, 2019 (2)
|
|
|
|
Foreign Currency Translation Adjustments
|
|
|
Changes Related to Cash Flow Derivative Hedge (1)
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
Foreign Currency Translation Adjustments
|
|
|
|
Foreign Currency Translation Adjustments
|
|
|
Accumulated other comprehensive (loss) income, beginning of the period
|
$
|
(183
|
)
|
|
$
|
902
|
|
|
$
|
719
|
|
|
$
|
-
|
|
|
|
$
|
(649
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
|
(493
|
)
|
|
|
(5,955
|
)
|
|
|
(6,448
|
)
|
|
|
(261
|
)
|
|
|
|
(165
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
-
|
|
|
|
(38
|
)
|
|
|
(38
|
)
|
|
|
-
|
|
|
|
|
-
|
|
|
Net current period other comprehensive loss
|
|
(493
|
)
|
|
|
(5,993
|
)
|
|
|
(6,486
|
)
|
|
|
(261
|
)
|
|
|
|
(165
|
)
|
|
Ending balance
|
$
|
(676
|
)
|
|
$
|
(5,091
|
)
|
|
$
|
(5,767
|
)
|
|
$
|
(261
|
)
|
|
|
$
|
(814
|
)
|
|
(2)
|
For the period from January 20, 2019 to March 19, 2019 (Successor) and for the period from January 1, 2019 to February 19, 2019 (Predecessor), the only component of other comprehensive income (loss) was foreign currency translation adjustments.
|
13. FAIR VALUE MEASUREMENTS AND DERIVATIVES
Fair Value Measurements
The Company’s outstanding long-term debt as of March 31, 2020 (Successor) was recently originated and bears variable interest rates. As a result, the Company believes that the fair value of long-term debt as of March 31, 2020 and December 31, 2019, respectively, approximates its carrying amount. As the fair value estimate of the long-term debt, generally requires the use of a discounted cash flow analysis based on current market interest rates for debt issuances with similar remaining years-to-maturity and adjusted for credit risk, the Company concluded that this fair value estimate represents a Level 3 measurement in the fair value hierarchy.
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Table of Contents
Assets and liabilities that are recorded at fair value have been categorized based upon the fair value hierarchy. The following table presents information about the Company’s financial instruments recorded at fair value on a recurring basis (in thousands):
|
|
|
|
Fair Value Measurements at March 31, 2020 Using
|
|
|
Fair Value Measurements at December 31, 2019 Using
|
|
Description
|
|
Balance Sheet Location
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments (1)
|
|
Other current assets
|
|
$
|
-
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
250
|
|
|
$
|
-
|
|
|
$
|
250
|
|
|
$
|
-
|
|
Derivative financial instruments (1)
|
|
Other non-current assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
652
|
|
|
|
-
|
|
|
|
652
|
|
|
|
-
|
|
Total Assets
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
902
|
|
|
|
-
|
|
|
|
902
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments (1)
|
|
Other current liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
1,623
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Derivative financial instruments (1)
|
|
Other long term liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
3,469
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Liabilities
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,092
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consists of an interest rate swap.
|
Derivatives
Successor:
Market risk associated with the Company’s long-term floating rate debt is the potential increase in interest expense from an increase in interest rates. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements.
The Company assesses whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the cash flow of its hedged forecasted transactions. The Company uses regression analysis for this hedge relationship and high effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the fair values of the derivative and the hedged forecasted transaction. Cash flows from the derivatives are classified in the same category as the cash flows from the underlying hedged transaction. The Company classifies derivative instrument cash flows from hedges of benchmark interest rate as operating activities due to the nature of the hedged item. If it is determined that the hedged forecasted transaction is no longer probable of occurring, then the amount recognized in accumulated other comprehensive income (loss) is released to earnings.
The Company monitors concentrations of credit risk associated with financial and other institutions with which the Company conducts significant business. Credit risk, including, but not limited to, counterparty nonperformance under derivatives, is not considered significant, as the Company primarily conducts business with large, well-established financial institutions with which the Company has established relationships, and which have credit risks acceptable to the Company. The Company does not anticipate non-performance by its counterparty. The amount of the Company’s credit risk exposure is equal to the fair value of the derivative when any of the derivatives are in a net gain position.
In September 2019, the Company entered into a floating-to-fixed interest rate swap agreement to make a series of payments based on a fixed interest rate of 1.457% and receive a series of payments based on the greater of 1 Month USD LIBOR or Strike which is used to hedge the Company’s exposure to changes in cash flows associated with its variable rate Term Loan Facilities and has designated this derivative as a cash flow hedge. Both the fixed and floating payment streams are based on a notional amount of $174.7 million at the inception of the contract.
The interest rate swap agreement has a maturity date of September 19, 2024. As of March 31, 2020 and December 31, 2019, the notional amount is $168.0 million and $173.9 million, respectively. There was no ineffectiveness related to the interest rate swaps. The gain or loss on the derivative is recorded as a component of accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. The Company expects to reclassify $0.2 million of income from accumulated other comprehensive income (loss) into interest expense within the next twelve months.
The fair value of the interest rate swap contract is measured on a recurring basis by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates (forward curves)
21
Table of Contents
derived from observable market interest rate curves. The interest rate swap contract was categorized as Level 2 in the fair value hierarchy. The Company is not required to post cash collateral related to this derivative instrument.
The effect of the interest rate swap contract designated as cash flows hedging instrument on the condensed consolidated financial statements was as follows (in thousands):
Derivative
|
|
Amount of Loss Recognized in Accumulated Other Comprehensive Income (Loss) on Derivative
|
|
|
Location of Gain Reclassified From Accumulated Other Comprehensive Income (Loss) into Income
|
|
Amount of Loss Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2020 to March 31, 2020
|
|
|
|
|
January 1, 2020 to March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
(5,955
|
)
|
|
Interest expense
|
|
$
|
(38
|
)
|
|
Total
|
|
$
|
(5,955
|
)
|
|
|
|
$
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor:
During the period from January 1, 2019 to March 19, 2019, the Company did not enter into or transact any derivative contracts designated as cash flows hedges.
Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis
Valuation of Goodwill and Trade Name
(Successor):
We recognized goodwill impairment charges of $190 million for these two segment reporting units and an impairment charge of $0.7 million for the trade name during the three months ended March 31, 2020 (see Note 4). The determination of our reporting units' goodwill and trade name fair values includes numerous assumptions that are subject to various risks and uncertainties.
We applied the income approach to estimate the fair value of the reporting units. The income approach estimates the fair value by discounting each reporting unit’s estimated future cash flows using the company estimate of the discount rate, or expected return, that a market participant would have required as of the valuation date. Significant assumptions in the income approach, all of which are considered Level 3 inputs, include the estimated future net annual cash flows for each reporting unit and the discount rate. The discount rates utilized to value the reporting units were approximately 14% and 12.5%, depending on the risk and uncertainty inherent in the respective reporting unit.
The trade name was valued through application of the relief from royalty method and significant assumptions are considered Level 3 inputs. Under this method, a royalty rate is applied to the revenues associated with the trade name to capture value associated with use of the name as if licensed. The resulting royalty savings are then discounted to present fair value at rates reflective of the risk and return expectations of the interests to derive its fair value as of the impairment testing date.
14. INCOME TAXES
The Company recorded an income tax expense of approximately $1.8 million, $0.7 million and $0.1 million for the three months ended March 31, 2020 (Successor), period from March 20, 2019 to March 31, 2019 (Successor) and period from January 1, 2019 to March 19, 2019 (Predecessor), respectively. For the three months ended March 31, 2020, the Company recorded a $1.9 million income tax expense relating to the establishment of a valuation allowance in jurisdictions where the Company has concluded that it is more likely than not that the deferred tax assets are not realizable.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted in the U.S. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. While the Company is still assessing the impact of the legislation, we do not expect there to be a material impact to our consolidated financial statements at this time.
15. SUBSEQUENT EVENTS
On April 30, 2020, we announced a definitive agreement to sell $75 million in common equity and warrants to SLL and its affiliates and other investors, including certain funds advised by Neuberger Berman Investment Advisers LLC and members of the Company’s management and its Board of Directors. The issuance of 18.8 million common shares and five million warrants were unanimously approved by the Board of Directors of the Company. The transaction is subject to shareholder approval. Each of the Company’s management and directors who have made a
22
Table of Contents
commitment in the transaction have agreed to vote their existing shares in favor of the transaction. Proceeds from this investment will be used for general, corporate and working capital purposes and to pay transaction fees and expenses.
23
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