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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-13957 
 
RED LION HOTELS CORPORATION
(Exact name of registrant as specified in its charter)
Washington
 
91-1032187
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1550 Market St. #350
Denver
Colorado
80202
 
(Address of Principal Executive Offices)
 
(Zip Code)
 

(509) 459-6100
Registrant's telephone number, including area code
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
RLH
New York Stock Exchange
__________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer," "accelerated filer,” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  
As of November 4, 2019, there were 25,147,382 shares of the registrant’s common stock outstanding.



TABLE OF CONTENTS
 
 
 
 
Item No.
Description
Page No.
 
 
 
 
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1
 
 
Condensed Consolidated Balance Sheets
3
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
4
 
Condensed Consolidated Statements of Stockholders' Equity
5
 
Condensed Consolidated Statements of Cash Flows
6
 
Notes to Condensed Consolidated Financial Statements
7
Item 2
24
Item 3
33
Item 4
34
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1
35
Item 1A
35
Item 2
35
Item 3
35
Item 4
35
Item 5
35
Item 6
36
 
37



2


PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements

RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
 
September 30,
2019
 
December 31,
2018
 
 
(In thousands, except share data)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents ($4,363 and $4,564 attributable to VIEs)
 
$
18,267

 
$
17,034

Restricted cash ($2,930 and $2,652 attributable to VIEs)
 
2,930

 
2,755

Accounts receivable ($1,405 and $1,064 attributable to VIEs), net of an allowance for doubtful accounts of $3,377 and $2,345, respectively
 
19,496

 
18,575

Notes receivable, net
 
4,188

 
2,103

Other current assets ($716 and $680 attributable to VIEs)
 
4,961

 
6,218

Total current assets
 
49,842

 
46,685

Property and equipment, net ($67,514 and $74,250 attributable to VIEs)
 
107,554

 
115,522

Operating lease right-of-use assets ($10,855 and $0 attributable to VIEs)
 
48,553

 

Goodwill
 
18,595

 
18,595

Intangible assets, net
 
58,233

 
60,910

Other assets, net ($703 and $705 attributable to VIEs)
 
5,085

 
8,075

Total assets
 
$
287,862

 
$
249,787

 
 
 
 
 
LIABILITIES
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable ($890 and $650 attributable to VIEs)
 
$
5,176

 
$
5,322

Accrued payroll and related benefits ($342 and $369 attributable to VIEs)
 
1,868

 
5,402

Other accrued liabilities ($895 and $1,092 attributable to VIEs)
 
5,519

 
4,960

Long-term debt, due within one year ($24,628 and $25,056 attributable to VIEs)
 
24,628

 
25,056

Operating lease liabilities, due within one year ($966 and $0 attributable to VIEs)
 
4,801

 

Total current liabilities
 
41,992

 
40,740

Long-term debt, due after one year, net of debt issuance costs ($16,468 and $0 attributable to VIEs)
 
20,496

 
9,114

Line of credit, due after one year
 
10,000

 
10,000

Operating lease liabilities, due after one year ($11,941 and $0 attributable to VIEs)
 
46,871

 

Deferred income and other long-term liabilities ($330 and $480 attributable to VIEs)
 
1,541

 
2,245

Deferred income taxes
 
1,217

 
772

Total liabilities
 
122,117

 
62,871

 
 
 
 
 
Commitments and contingencies (Note 10)
 


 


 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 
RLH Corporation stockholders' equity:
 
 
 
 
Preferred stock - 5,000,000 shares authorized; $0.01 par value; no shares issued or outstanding
 

 

Common stock - 50,000,000 shares authorized; $0.01 par value; 25,118,512 and 24,570,158 shares issued and outstanding
 
252

 
246

Additional paid-in capital, common stock
 
182,723

 
182,018

Accumulated deficit
 
(26,923
)
 
(16,512
)
Total RLH Corporation stockholders' equity
 
156,052

 
165,752

Noncontrolling interest
 
9,693

 
21,164

Total stockholders' equity
 
165,745

 
186,916

Total liabilities and stockholders’ equity
 
$
287,862

 
$
249,787

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(In thousands, except per share data)
Revenue:
 
 
 
 
 
 
 
 
Royalty
 
$
5,909

 
$
6,530

 
$
17,516

 
$
16,575

Other franchise
 
2,016

 
1,016

 
3,772

 
2,412

Company operated hotels
 
16,633

 
20,857

 
43,839

 
68,758

Marketing, reservations and reimbursables
 
8,300

 
7,591

 
22,632

 
19,874

Other
 
5

 
6

 
13

 
32

Total revenues
 
32,863

 
36,000

 
87,772

 
107,651

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general, administrative and other expenses
 
8,196

 
8,112

 
21,921

 
23,590

Company operated hotels
 
12,673

 
16,051

 
36,750

 
54,924

Marketing, reservations and reimbursables
 
7,080

 
7,453

 
22,088

 
20,226

Depreciation and amortization
 
3,636

 
3,621

 
11,192

 
12,714

Asset impairment
 
5,382

 
7,100

 
5,382

 
7,100

Loss (gain) on asset dispositions, net
 
1

 
(26,196
)
 
45

 
(42,094
)
Transaction and integration costs
 
201

 
95

 
436

 
2,196

Total operating expenses
 
37,169

 
16,236

 
97,814

 
78,656

Operating income (loss)
 
(4,306
)
 
19,764

 
(10,042
)
 
28,995

Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(1,699
)
 
(1,417
)
 
(3,690
)
 
(5,366
)
Loss on early retirement of debt
 

 
(794
)
 
(164
)
 
(794
)
Other income (loss), net
 
44

 
34

 
121

 
214

Total other income (expense)
 
(1,655
)
 
(2,177
)
 
(3,733
)
 
(5,946
)
Income (loss) before taxes
 
(5,961
)
 
17,587

 
(13,775
)
 
23,049

Income tax expense (benefit)
 
486

 
(26
)
 
676

 
(239
)
Net income (loss)
 
(6,447
)
 
17,613

 
(14,451
)
 
23,288

Net (income) loss attributable to noncontrolling interest
 
2,980

 
(8,670
)
 
4,040

 
(14,079
)
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
$
(3,467
)
 
$
8,943

 
$
(10,411
)
 
$
9,209

 
 
 
 
 
 
 
 
 
Earnings (loss) per share - basic
 
$
(0.14
)
 
$
0.36

 
$
(0.42
)
 
$
0.38

Earnings (loss) per share - diluted
 
$
(0.14
)
 
$
0.35

 
$
(0.42
)
 
$
0.36

 
 
 
 
 
 
 
 
 
Weighted average shares - basic
 
25,112

 
24,545

 
24,859

 
24,334

Weighted average shares - diluted
 
25,112

 
25,729

 
24,859

 
25,437


The accompanying notes are an integral part of these condensed consolidated financial statements.

4


RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

 
 
Red Lion Hotels Corporation Stockholders' Equity
 
 
 
 
 
 
Common Stock
 
Retained
Earnings (Accumulated Deficit)
 
RLH Corporation Total Equity
 
Equity Attributable to Noncontrolling Interest
 
 
 
 
Shares
 
Amount
 
Additional
Paid-In Capital
 
 
 
 
Total
Equity
 
 
(In thousands, except share data)
Balances, January 1, 2018
23,651,212

 
$
237

 
$
178,028

 
$
(18,042
)
 
$
160,223

 
$
27,381

 
$
187,604

 
Net income (loss)

 

 

 
2,588

 
2,588

 
4,750

 
7,338

 
Cumulative effect of adopting ASC Topic 606

 

 

 
(427
)
 
(427
)
 

 
(427
)
 
Shared based payment activity
60,388

 

 
294

 

 
294

 

 
294

 
Vantage contingent consideration settled
414,000

 
4

 
(4
)
 

 

 

 

Balances, March 31, 2018
24,125,600

 
241

 
178,318

 
(15,881
)
 
162,678

 
32,131

 
194,809

 
Net income (loss)

 

 

 
(2,322
)
 
(2,322
)
 
659

 
(1,663
)
 
Shared based payment activity
120,918

 
1

 
1,004

 

 
1,005

 

 
1,005

 
Vantage contingent consideration settled

 

 
2,870

 

 
2,870

 

 
2,870

 
Distributions to noncontrolling interests

 

 

 

 

 
(4,081
)
 
(4,081
)
Balances, June 30, 2018
24,246,518

 
242

 
182,192

 
(18,203
)
 
164,231

 
28,709

 
192,940

 
Net income (loss)

 

 

 
8,943

 
8,943

 
8,670

 
17,613

 
Shared based payment activity
28,080

 

 
1,219

 

 
1,219

 

 
1,219

 
Distributions to noncontrolling interests

 

 

 

 

 
(16,891
)
 
(16,891
)
Balances, September 30, 2018
24,274,598

 
242

 
183,411


(9,260
)
 
174,393

 
20,488

 
194,881

 
Net income (loss)

 

 

 
(7,252
)
 
(7,252
)
 
(950
)
 
(8,202
)
 
Shared based payment activity
19,560

 

 
1,018

 

 
1,018

 

 
1,018

 
Vantage contingent consideration settled
276,000

 
4

 
4

 

 
8

 

 
8

 
Buyout of noncontrolling interest

 

 
(2,415
)
 

 
(2,415
)
 
2,111

 
(304
)
 
Distributions to noncontrolling interests

 

 

 

 

 
(485
)
 
(485
)
Balances, December 31, 2018
24,570,158

 
246

 
182,018

 
(16,512
)
 
165,752

 
21,164

 
186,916

 
Net income (loss)

 

 

 
(4,110
)
 
(4,110
)
 
(286
)
 
(4,396
)
 
Shared based payment activity
56,301

 
1

 
685

 

 
686

 

 
686

 
Distributions to noncontrolling interests

 

 

 

 

 
(7,431
)
 
(7,431
)
Balances, March 31, 2019
24,626,459

 
247

 
182,703

 
(20,622
)
 
162,328

 
13,447

 
175,775

 
Net income (loss)

 

 

 
(2,834
)
 
(2,834
)
 
(774
)
 
(3,608
)
 
Shared based payment activity
449,453

 
4

 
(1,034
)
 

 
(1,030
)
 

 
(1,030
)
Balances, June 30, 2019
25,075,912

 
251

 
181,669

 
(23,456
)
 
158,464

 
12,673

 
171,137

 
Net income (loss)

 

 

 
(3,467
)
 
(3,467
)
 
(2,980
)
 
(6,447
)
 
Shared based payment activity
42,600

 
1

 
1,054

 

 
1,055

 

 
1,055

Balances, September 30, 2019
25,118,512

 
$
252

 
$
182,723

 
$
(26,923
)
 
$
156,052

 
$
9,693

 
$
165,745


The accompanying notes are an integral part of these condensed consolidated financial statements.


5


RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended
 
 
September 30,
 
 
2019
 
2018
 
 
(In thousands)
Operating activities:
 
 
 
 
Net income (loss)
 
$
(14,451
)
 
$
23,288

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
11,192

 
12,714

Noncash PIK interest and amortization of debt issuance costs
 
929

 
892

Amortization of key money and contract costs
 
997

 
535

Amortization of contract liabilities
 
(994
)
 
(563
)
Loss (gain) on asset dispositions, net
 
45

 
(42,094
)
Noncash loss on early retirement of debt
 
67

 
794

Asset impairment
 
5,382

 
7,100

Deferred income taxes
 
445

 
(1,445
)
Stock-based compensation expense
 
2,503

 
2,896

Provision for doubtful accounts
 
1,780

 
651

Fair value adjustments to contingent consideration
 

 
581

Change in operating assets and liabilities, net of business acquired:
 
 
 
 
Accounts receivable
 
(2,148
)
 
(7,293
)
Notes receivable
 
(16
)
 
(7
)
Key money disbursements
 
(665
)
 
(5,420
)
Other current assets
 
1,014

 
(1,740
)
Accounts payable
 
45

 
1,405

Other accrued liabilities
 
(1,170
)
 
79

Net cash provided by (used in) operating activities
 
4,955

 
(7,627
)
Investing activities:
 
 
 
 
Capital expenditures
 
(4,104
)
 
(6,190
)
Acquisition of Knights Inn
 

 
(26,888
)
Net proceeds from disposition of property and equipment
 

 
113,838

Collection of notes receivable
 
262

 

Advances on notes receivable
 
(90
)
 
(537
)
Net cash provided by (used in) investing activities
 
(3,932
)
 
80,223

Financing activities:
 
 
 
 
Borrowings on long-term debt, net of discounts
 
32,935

 
30,000

Repayment of long-term debt and finance leases
 
(22,510
)
 
(107,899
)
Proceeds from line of credit borrowing
 

 
10,000

Debt issuance costs
 
(692
)
 
(1,317
)
Distributions to noncontrolling interest
 
(7,430
)
 
(20,972
)
Contingent consideration paid for Vantage Hospitality acquisition
 

 
(4,000
)
Stock-based compensation awards canceled to settle employee tax withholding
 
(2,135
)
 
(615
)
Stock option and stock purchase plan issuances, net and other
 
217

 
238

Net cash provided by (used in) financing activities
 
385

 
(94,565
)
 
 
 
 
 
Change in cash, cash equivalents and restricted cash:
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
 
1,408

 
(21,969
)
Cash, cash equivalents and restricted cash at beginning of period
 
19,789

 
44,858

Cash, cash equivalents and restricted cash at end of period
 
$
21,197

 
$
22,889


The accompanying notes are an integral part of these condensed consolidated financial statements.


6


RED LION HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
Organization

Red Lion Hotels Corporation ("RLH Corporation," "RLHC," "we," "our," "us," or "our company") is a NYSE-listed hospitality and leisure company (ticker symbol: RLH) doing business as RLH Corporation and primarily engaged in the franchising and ownership of hotels under the following proprietary brands: Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse, Settle Inn, Americas Best Value Inn, Canadas Best Value Inn, Signature and Signature Inn, Knights Inn, and Country Hearth Inns & Suites.

A summary of our properties as of September 30, 2019, including the approximate number of available rooms, is provided below:
 
 
Upscale Service Brand ("USB")
 
Select Service Brand ("SSB")
 
Total
 
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
Beginning quantity, January 1, 2019
 
112

 
15,900

 
1,215

 
69,800

 
1,327

 
85,700

Newly opened / acquired properties
 
7

 
600

 
28

 
1,400

 
35

 
2,000

Change in brand
 
(1
)
 
(100
)
 
1

 
100

 

 

Terminated properties
 
(17
)
 
(1,900
)
 
(159
)
 
(10,100
)
 
(176
)
 
(12,000
)
Ending quantity, September 30, 2019
 
101

 
14,500

 
1,085

 
61,200

 
1,186

 
75,700



2.
Summary of Significant Accounting Policies

The unaudited condensed consolidated financial statements included herein were prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and in accordance with generally accepted accounting principles in the United States of America ("GAAP"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations.

The Consolidated Balance Sheet as of December 31, 2018 was derived from the audited balance sheet as of such date. We believe the disclosures included herein are adequate; however, they should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2018, filed with the SEC in our annual report on Form 10-K on March 8, 2019.

In the opinion of management, these unaudited condensed consolidated financial statements contain all of the adjustments of a normal and recurring nature necessary to present fairly our Condensed Consolidated Balance Sheets, the Condensed Consolidated Statements of Comprehensive Income (Loss), the Condensed Consolidated Statements of Stockholders' Equity, and the Condensed Consolidated Statements of Cash Flows. The results of operations for the periods presented may not be indicative of that which may be expected for a full year or for any other fiscal period.

Leases

We determine if an arrangement is a lease or contains a lease at inception. If an arrangement is a lease or contains a lease, we then determine whether the lease meets the criteria of a finance lease or an operating lease. Finance leases are included in Property and equipment, net, Other accrued liabilities, and Deferred income and other long-term liabilities in our Condensed Consolidated Balance Sheets. Operating leases are included in Operating lease right-of-use assets, Operating lease liabilities, due within one year, and Operating lease liabilities, due after one year, in our Condensed Consolidated Balance Sheets. We reassess if an arrangement is or contains a lease upon modification of the arrangement.

At the commencement date of a lease, we recognize a lease liability for contractual fixed lease payments and a corresponding right-of-use asset representing our right to use the underlying asset during the lease term. The lease liability is measured initially as the present value of the contractual fixed lease payments during the lease term. The lease term additionally includes renewal periods only if it is reasonably certain that we will exercise the options. Contractual fixed lease payments are discounted at the rate implicit in the lease when readily determinable. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date. For the adoption of Accounting Standards Update ("ASU") 2016-02, we measured our lease liabilities using our incremental borrowing rate as of January 1, 2019. Additionally, we

7


elected not to recognize leases with lease terms of 12 months or less at the commencement date in our Condensed Consolidated Balance Sheets. The right-of-use asset is recognized at the amount of the lease liability with certain adjustments, if applicable. These adjustments include lease incentives, prepaid rent, and initial direct costs.

New Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments, as amended by multiple subsequent ASUs, which will change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU will replace the current "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For trade and other receivables, held to maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. In October 2019, an update was issued to the standard that deferred the effective date of the guidance to the first quarter of 2023 for smaller reporting companies such as us. We are currently evaluating the effects of this ASU on our financial statements, and such effects have not yet been determined.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which provides modifications to the disclosure requirements over fair value measurements. The ASU is effective in the first quarter of 2020, with early adoption permitted. We are currently evaluating the effects of this ASU on our financial statements, and such effects have not yet been determined.

We have assessed the potential impact of other recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to us or are not anticipated to have a material impact on our consolidated financial statements.

New Accounting Pronouncements Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which we adopted on January 1, 2019. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification effecting the pattern of expense recognition in the income statement. Upon adoption, we applied the package of practical expedients included therein, which allows us to carry forward our historical assessments of whether contracts are leases or contain leases, the lease classification of each existing lease, and recognition of initial direct costs. The standard was adopted using the modified retrospective transition method and we did not apply the standard to the comparative periods presented in the year of adoption.

Due to the existence of certain operating lease obligations as of January 1, 2019, we recognized $51.1 million of ROU assets and corresponding lease liabilities of $52.2 million, with reductions of other accrued liabilities and deferred income and other long-term liabilities of $1.1 million. However, there was no impact to accumulated deficit and the future recognition of lease related expenses will not differ from the previous methodology in the Condensed Consolidated Statements of Comprehensive Income (Loss) for leases that existed at the adoption date.

3.
Business Segments

We have two operating segments: franchised hotels and company operated hotels. The "other" segment consists of miscellaneous revenues and expenses, cash and cash equivalents, certain receivables, certain property and equipment and general and administrative expenses, which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense, income taxes and certain corporate expenses; therefore, they have not been allocated to the operating segments. We allocate selling, general, administrative and other expenses to our operating segments. All balances have been presented after the elimination of inter-segment and intra-segment revenues and expenses.


8


Selected financial information is provided below (in thousands):
Three Months Ended September 30, 2019
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
16,225

 
$
16,633

 
$
5

 
$
32,863

Operating expenses:
 
 
 
 
 
 
 
 
Segment and other operating expenses
 
10,758

 
13,007

 
4,184

 
27,949

Depreciation and amortization
 
1,015

 
1,777

 
844

 
3,636

Asset impairment
 

 
5,382

 

 
5,382

Loss (gain) on asset dispositions, net
 

 
2

 
(1
)
 
1

Transaction and integration costs
 
(6
)
 
164

 
43

 
201

Operating income (loss)
 
$
4,458

 
$
(3,699
)
 
$
(5,065
)

$
(4,306
)

Three Months Ended September 30, 2018
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
15,137

 
$
20,857

 
$
6

 
$
36,000

Operating expenses:
 
 
 
 
 
 
 
 
Segment and other operating expenses
 
9,220

 
16,999

 
5,397

 
31,616

Depreciation and amortization
 
986

 
2,170

 
465

 
3,621

Asset impairment
 

 
7,100

 

 
7,100

Loss (gain) on asset dispositions, net
 

 
(26,143
)
 
(53
)
 
(26,196
)
Transaction and integration costs
 
95

 

 

 
95

Operating income (loss)
 
$
4,836

 
$
20,731

 
$
(5,803
)

$
19,764



Nine Months Ended September 30, 2019
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
43,920

 
$
43,839

 
$
13

 
$
87,772

Operating expenses:
 
 
 
 
 
 
 
 
Segment and other operating expenses
 
30,138

 
38,331

 
12,290

 
80,759

Depreciation and amortization
 
3,039

 
5,650

 
2,503

 
11,192

Asset impairment
 

 
5,382

 

 
5,382

Loss (gain) on asset dispositions, net
 
(1
)
 
45

 
1

 
45

Transaction and integration costs
 
90

 
164

 
182

 
436

Operating income (loss)
 
$
10,654

 
$
(5,733
)
 
$
(14,963
)
 
$
(10,042
)

Nine Months Ended September 30, 2018
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
38,861

 
$
68,758

 
$
32

 
$
107,651

Operating expenses:
 
 
 
 
 
 
 
 
Segment and other operating expenses
 
26,486

 
57,667

 
14,587

 
98,740

Depreciation and amortization
 
3,044

 
8,328

 
1,342

 
12,714

Asset impairment
 

 
7,100

 

 
7,100

Loss (gain) on asset dispositions, net
 

 
(41,994
)
 
(100
)
 
(42,094
)
Transaction and integration costs
 
2,196

 

 

 
2,196

Operating income (loss)
 
$
7,135

 
$
37,657

 
$
(15,797
)
 
$
28,995




9


4.
Variable Interest Entities

Our joint venture entities have been determined to be variable interest entities ("VIEs") because our voting rights are not proportional to our financial interest and substantially all of each joint venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over two of the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with our joint venture partners, which do not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our equity interest and management fees. As a result, we consolidate the assets, liabilities, and results of operations of (1) RL Venture LLC ("RL Venture"), (2) RLS Atla Venture LLC ("RLS Atla Venture"), and (3) RLS DC Venture LLC ("RLS DC Venture"). The equity interests owned by our joint venture partners are reflected as a noncontrolling interest in the condensed consolidated financial statements.

In October 2018, we purchased the remaining 27% ownership interest in RLS Balt Venture LLC ("RLS Balt Venture") from our joint venture partner, which dissolved the joint venture relationship, thus making the entity a wholly owned subsidiary and no longer a variable interest entity.

The following table includes the ownership percentages for each of our joint ventures as of September 30, 2019 and December 31, 2018:
 
 
RLH Corporation
 
Joint Venture Partner
RL Venture
 
55
%
 
45
%
RLS Atla Venture
 
55
%
 
45
%
RLS DC Venture
 
55
%
 
45
%


There were no cash contributions or distributions by partners to any of the joint venture entities during the three and nine months ended September 30, 2019 or 2018 except as otherwise described below.

RL Venture

In February 2018, five of the RL Venture properties were sold for an aggregate sales price of $47.2 million. In April 2018, one RL Venture property sold for $5.5 million, in May 2018, one RL Venture property sold for $9.3 million, and in July 2018 two additional RL Venture properties sold for $54.5 million. As of September 30, 2019, RL Venture has two remaining properties.

In March 2019, secured loans with an aggregate principal of $16.6 million were entered into for the two remaining properties. Shortly thereafter the net loan proceeds were distributed to us and our joint venture partner in accordance with our respective ownership percentages. Cash distributions may also be made periodically based on calculated distributable income. During the nine months ended September 30, 2019 and 2018, cash distributions totaled $16.5 million and $46.5 million, of which RLH Corporation received $9.1 million and $25.6 million, respectively.

RLS Atla Venture

In March 2019, $2.8 million of cash previously contributed to RLS Atla Venture by RLH Corporation was classified as preferred capital and will be repaid only when the Atlanta hotel property is sold or when RLS Atla Venture is liquidated. Upon such event, RLH Corporation will receive the $2.8 million plus a preferred return of 9%, compounded annually, prior to any liquidation proceeds being returned to members.

RLS DC Venture

In May 2019, a secured loan with principal and accrued exit fee of $17.4 million was executed by RLS DC Venture. The net loan proceeds were used to pay off the previous debt with a principal balance of approximately $15.9 million. There were no cash distributions resulting from the refinancing.


10


5.
Property and Equipment

Property and equipment is summarized as follows (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Buildings and equipment
 
$
148,100

 
$
150,072

Furniture and fixtures
 
20,071

 
19,746

Landscaping and land improvements
 
2,732

 
2,713

 
 
170,903

 
172,531

Less accumulated depreciation
 
(86,343
)
 
(82,240
)
 
 
84,560

 
90,291

Land
 
19,372

 
19,372

Construction in progress
 
3,622

 
5,859

Property and equipment, net
 
$
107,554

 
$
115,522



During the three months ended September 30, 2019, we entered into individual non-binding sales agreements with third parties for four of our company operated hotels. Due to the potential for disposition within 12 months, we performed a test for recoverability using probability-weighted undiscounted cash flows on each of these four properties, noting only our Hotel RL Washington DC joint venture property did not recover the carrying value of the long-lived asset group. After calculating the fair value of the Hotel RL Washington DC joint venture property long-lived asset group, we recognized an impairment loss of $5.4 million. The fair value was determined based on the contractual selling price less expected costs to sell, which is a Level 3 fair value measurement. The impairment loss was allocated to the assets within the long-lived asset group on a pro rata basis, with $3.4 million applied against the hotel building, included within Property and equipment, net and $2.0 million applied against the Operating lease right-of-use asset on the Condensed Consolidated Balance Sheets. There were no impairments at the other three properties.

During the three months ended September 30, 2018, we recognized a $7.1 million impairment on our Hotel RL Baltimore Inner Harbor joint venture property. The default during the third quarter of 2018 on the RL Baltimore loan coupled with challenging cash flow results for the asset gave rise to the impairment. The fair value of the asset was determined by a third-party valuation that included an analysis of selling prices for similar assets as well as a discounted cash flow analysis, which are Level 3 fair value measurements. Key inputs to the fair value measurement for these assets included forecast revenues expected to be generated by the hotel factoring in the market it serves as well as forecast operating costs and capital expenditure needs based upon our planning and budgeting process. Other inputs included sales data for similarly situated hotels in the market, adjusted to reflect known differences in the assets.

During the three months ended September 30, 2018, we sold two hotel properties and during the nine months ended September 30, 2018, we sold nine hotel properties, for a total gain of $26.0 million and $41.6 million, respectively. There were no hotels sold during the three and nine months ended September 30, 2019.

6.
Goodwill and Intangible Assets

The following table summarizes the balances of goodwill and other intangible assets (in thousands):
 
September 30,
2019
 
December 31,
2018
Goodwill
$
18,595

 
$
18,595

 
 
 
 
Intangible assets
 
 
 
Brand name - indefinite lived
$
41,278

 
$
41,278

Trademarks - indefinite lived
128

 
128

Brand name - finite lived, net
3,735

 
4,326

Customer contracts - finite lived, net
13,092

 
15,178

Total intangible assets, net
$
58,233

 
$
60,910



11



The following table summarizes the balances of amortized customer contracts and finite-lived brand names (in thousands):
 
September 30,
2019
 
December 31,
2018
Customer contracts
$
20,773

 
$
20,773

Brand name - finite lived
5,395

 
5,395

Accumulated amortization
(9,341
)
 
(6,664
)
Net carrying amount
$
16,827

 
$
19,504



7.
Revenue from Contracts with Customers

In July 2019, the parent entities for eight Inner Circle franchisees and the operating entities for two other Inner Circle franchisees all filed for voluntary bankruptcy protection under Chapter 11 of the United Stated Bankruptcy Code.
As of the date of this filing, three of the Inner Circle franchisees whose parent entities entered bankruptcy transferred control of their leasehold interests on their hotel properties to their lenders, and three of the Inner Circle franchisees whose parent entities entered bankruptcy ceased operations until further notice. Those six Inner Circle franchise agreements have been terminated, while the remaining four Inner Circle franchise agreements continue to be in full effect. Additionally, three replacement franchise agreements have been executed with lenders who have taken control of the properties and continue to operate them pending sale proceedings.
As of September 30, 2019, the ten Inner Circle franchisees described above in aggregate owe us the following balances:

Approximately $1.8 million in trade receivables, of which $0.5 million is included in pre-petition filings of Chapter 11 bankruptcies.

Approximately $3.1 million in various collateralized notes receivables and loans, of which $0.6 million is included in pre-petition filings of Chapter 11 bankruptcies. This balance includes $2.3 million of previously unamortized key money that was converted to notes receivable upon termination of the related franchise agreements.

Approximately $2.3 million in unamortized key money contract assets, of which $0.9 million included in pre-petition filings of Chapter 11 bankruptcies. The remaining $2.3 million of unamortized key money could also be converted to notes receivable if the related agreements are terminated.

The collateralized loans are secured by the property purchased with their proceeds. All outstanding receivables, loans, and key money assets are collateralized by an equity interest in one of the leaseholds as well as a personal guarantee of the owner. Given a portion of the franchises continue to have active franchise license agreements with us and given the estimated value of the associated collateral, we have concluded that $6.5 million of the total $7.2 million of contract related balances continue to be supported. As such, we have recognized an allowance of $0.7 million of pre-petition contract balances. These include $0.2 million of accounts receivable, $0.1 million of collateralized notes receivables and loan, and $0.4 million of unamortized key money. The $0.7 million allowance was recognized through bad debt expense included in Selling, general, administrative and other expenses on the Condensed Consolidated Statements of Comprehensive Income (Loss). We will continue to monitor the facts and circumstances surrounding this matter. If more information becomes available in subsequent periods, it could impact our conclusion on the collectability of these balances and on the Company’s future results of operations.


12


The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
 
 
Financial Statement Line Item(s)
 
September 30,
2019
 
December 31,
2018
Accounts receivable
 
Accounts receivable, net
 
$
19,496

 
$
18,575

Key money disbursed
 
Other current assets and Other assets, net
 
4,212

 
6,409

Capitalized contract costs
 
Other current assets and Other assets, net
 
797

 
1,172

Contract liabilities
 
Other accrued liabilities and Deferred income and other long-term liabilities
 
1,415

 
1,981


Significant changes in the key money disbursements, capitalized contract costs, and contract liabilities balances during the period are as follows (in thousands):
 
 
Key Money Disbursed
 
Capitalized Contract Costs
 
Contract Liabilities
Balance as of January 1, 2019
 
$
6,409

 
$
1,172

 
$
1,981

Key money disbursed
 
665

 

 

Key money converted to notes receivable
 
(2,442
)
 

 

Costs incurred to acquire contracts
 

 
202

 

Cash received in advance
 

 

 
428

Revenue or expense recognized that was included in the January 1, 2019 balance
 
(388
)
 
(533
)
 
(905
)
Revenue or expense recognized in the period for the period
 
(32
)
 
(44
)
 
(89
)
Balance as of September 30, 2019
 
$
4,212

 
$
797

 
$
1,415



Estimated revenues and expenses expected to be recognized related to performance obligations that were unsatisfied as of September 30, 2019, including revenues related to application, initiation and other fees were as follows (in thousands):
Year Ending December 31,
 
Contra Revenue
 
Expense
 
Revenue
2019 (remainder)
 
$
96

 
$
67

 
$
153

2020
 
409

 
220

 
474

2021
 
361

 
154

 
309

2022
 
336

 
126

 
223

2023
 
310

 
87

 
130

Thereafter
 
2,700

 
143

 
126

Total
 
$
4,212

 
$
797

 
$
1,415


We did not estimate revenues expected to be recognized related to our unsatisfied performance obligations for our: (i) royalty fees, as they are considered sales-based royalty fees recognized as hotel room sales occur in exchange for licenses of our brand names over the terms of the franchise contracts; and (ii) hotel management fees, since they are allocated entirely to the wholly unsatisfied promise to transfer management services, which form part of a single performance obligation in a series, over the term of the management contract. Therefore, there are no amounts included in the table above related to these revenues.


13


8.
Debt and Line of Credit

The current and noncurrent portions of our debt as of September 30, 2019 and December 31, 2018 are as follows (in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Line of Credit
 
$

 
$
10,000

 
$

 
$
10,000

Senior Secured Term Loan
 

 
4,189

 

 
9,355

RL Venture - Salt Lake City
 

 
11,000

 

 

RL Venture - Olympia
 

 
5,600

 

 

RLH Atla Venture
 
8,171

 

 
9,225

 

RLH DC Venture (PWB)
 

 

 
15,943

 

RLH DC Venture (CPBF)
 
17,520

 

 

 

Total debt
 
25,691

 
30,789

 
25,168

 
19,355

Unamortized debt issuance costs
 
(1,063
)
 
(293
)
 
(112
)
 
(241
)
Debt net of debt issuance costs
 
$
24,628

 
$
30,496

 
$
25,056

 
$
19,114



Each of our debt agreements contain customary reporting, financial and operating covenants. We were in compliance with all the financial covenants of our debt agreements at September 30, 2019.

RL Venture - Salt Lake City

In March 2019, RL Salt Lake, LLC, a subsidiary of RL Venture, executed a secured debt agreement with Umpqua Bank for a term loan with a principal balance of $11.0 million. The loan is fully secured by the Hotel RL Salt Lake City property. The loan has a maturity date of March 18, 2021 and a variable interest rate of LIBOR plus 2.25%, payable monthly. The borrower has the option to exercise two six-month extensions upon maturity of the loan. There are no principal repayment requirements prior to the maturity date and the loan includes a financial covenant to be calculated semi-annually in which the property must maintain a minimum debt service coverage ratio of not less than 1.6 to 1.0. We incurred approximately $54,000 of debt discounts and debt issuance costs in connection with the issuance of the loan.

RL Venture - Olympia

In March 2019, RL Olympia, LLC, a subsidiary of RL Venture, executed a secured debt agreement with Umpqua Bank for a term loan with a principal balance of $5.6 million. The loan is fully secured by the Hotel RL Olympia property. The loan has a maturity date of March 18, 2021 and a variable interest rate of LIBOR plus 2.25%, payable monthly. The borrower has the option to exercise two six-month extensions upon maturity of the loan. There are no principal repayment requirements prior to the maturity date and the loan includes a financial covenant to be calculated semi-annually in which the property must maintain a minimum debt service coverage ratio of not less than 1.6 to 1.0. We incurred approximately $33,000 of debt discounts and debt issuance costs in connection with the issuance of the loan.

Senior Secured Term Loan

In March 2019, we transferred approximately $4.2 million, which comprises a portion of the net proceeds received from the RL Venture loans, as calculated and required by the provisions of the Senior Secured Term Loan, into a cash collateral account. The account is controlled by Deutsche Bank AG New York Branch, on behalf of the lenders, and the balance is required by the debt agreement to be applied against the outstanding principal balance of the Senior Secured Term Loan at the lender's discretion. This balance was applied against the outstanding principal balance in April 2019.

In September 2019 we made a voluntary prepayment on the Senior Secured Term Loan of $1.0 million. We anticipate the remainder of the outstanding principal balance will be paid off using proceeds from hotel sales.

RLH DC Venture

In May 2019, RLH DC executed a new mortgage loan agreement with CP Business Finance I, LP ("RLH DC Venture - CPBF"), secured by the Hotel RL Washington DC and a $10.5 million principal guarantee by RLH Corporation. The initial principal amount of the loan was $16.5 million. The proceeds from the loan were immediately used to pay off the existing mortgage loan on the

14


property held by Pacific Western Bank ("RLH DC Venture - PWB"), which had an outstanding principal balance of $15.9 million at the time of closing.

The RLH DC Venture - CPBF loan had an initial maturity date of June 21, 2019, with a first extension option through May 31, 2020 that was exercised in June 2019, and a second extension option through May 31, 2021. The RLH DC Venture - CPBF loan has a cash interest rate of 7.0% in addition to PIK interest of 3.0% through May 31, 2020, which increases to 7.0% if the second extension option is exercised.

There was a fee of $330,000 to exercise the first extension option and there is a fee of $825,000 plus a required $2.0 million principal pay down to exercise the second extension option. The RLH DC Venture - CPBF loan may be paid off in full prior to maturity at any point. The RLH DC Venture - CPBF loan contains an exit fee equal to 5.0% of the outstanding principal balance if the loan is paid off prior to or at May 31, 2020, or an exit fee equal to 4.0% of the outstanding principal balance if the loan is paid off between June 1, 2020 and May 31, 2021. Additionally, if the loan is paid down prior to May 31, 2020, a prepayment premium must be paid. The prepayment premium is equal to the remaining cash and PIK interest that would have been payable from the prepayment date through May 31, 2020.

As the exit fee is payable regardless of loan repayment prior to or at maturity, we have accrued the projected exit fee of $851,000 as part of the outstanding debt balance with an offsetting debt discount. Inclusive of the accrued exit fee, we have incurred cumulative debt discounts and debt issuance costs of $1.4 million, which will be amortized to interest expense through the first extended maturity date of May 31, 2020.

The loan agreement contains customary requirements for lender approval of annual operating and capital budgets, under certain conditions. In also includes customary events of default as well as financial covenants for maintaining a minimum property EBITDA, a minimum consolidated fixed coverage ratio for RLH, a maximum consolidated total net leverage ratio for RLH, and a cross default provision with our Line of Credit and Senior Secured Term Loan.

CP Business Finance I, LP, the lender of the RLH DC - CPBF loan, is an affiliate of Columbia Pacific Opportunity Fund, LP, who currently holds 500,000 shares of RLH common stock. Additionally, Alexander B. Washburn, who served as a member of our Board of Directors from May 2015 to April 2019, is one of the managing members of Columbia Pacific Advisor, LLC, which serves as the investment manager of Columbia Pacific Opportunity Fund, LP.

RLH Atla Venture

In September 2019, RLH Atlanta executed an amendment to the existing mortgage loan with PFP Holding Company IV LLC, an affiliate of Prime Finance, which extended the maturity date from September 9, 2019 to November 9, 2019. In connection with the amendment, we paid $1.0 million of principal balance and incurred approximately $81,000 of debt discounts and debt issuance costs. As the amendment represents a modification to the original debt, these costs will be amortized to interest expense through the extended maturity date of November 9, 2019.

On November 7, 2019, RLH Atlanta executed an additional amendment, which extended the maturity date from November 9, 2019 to January 9, 2020. In connection with the amendment, we paid $0.5 million of principal balance and incurred approximately $40,000 of debt discounts and debt issuance costs, and pledged the net proceeds (after required payments on our Senior Secured Term Loan) of our unlevered wholly owned Red Lion Anaheim property to pay down the debt should that sale occur before completion of a sale of the Red Lion Hotel Atlanta.

9.
Leases

We lease equipment and land and/or property at certain company operated hotel properties as well as office space for our headquarters through operating leases. We have elected the practical expedient so that leases with an initial term of 12 months or less are not recorded on the balance sheet.

We are obligated under finance leases for certain hotel equipment at our company operated hotel locations. The finance leases typically have a five year term.

Balance sheet information related to our leases is included in the following table (in thousands):

15


Operating Leases
 
September 30, 2019
Operating lease right-of-use assets
 
$
48,553

 
 
 
Operating lease liabilities, due within one year
 
$
4,801

Operating lease liabilities, due after one year
 
46,871

     Total operating lease liabilities
 
$
51,672

Finance Leases
 
September 30, 2019
Property and equipment
 
$
660

Less accumulated depreciation
 
(402
)
Property and equipment, net
 
$
258

 
 
 
Other accrued liabilities
 
$
154

Deferred income and other long-term liabilities
 
123

Total finance lease liabilities
 
$
277



The components of lease expense during the three and nine months ended September 30, 2019 are included in the following table (in thousands):
 
 
Financial Statement Line Item(s)
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Operating lease expense
 
Selling, general, administrative and other expenses, and Company operated hotels
 
$
1,168

 
$
3,444

Short-term lease expense
 
Selling, general, administrative and other expenses, and Company operated hotels
 
167

 
572

Finance lease expense
 
 
 
 
 
 
     Amortization of finance right-of-use assets
 
Depreciation and amortization
 
35

 
104

     Interest on lease liabilities
 
Interest expense
 
7

 
23

Total finance lease expense
 
 
 
42

 
127

 
 
 
 
 
 
 
Total lease expense
 
 
 
$
1,377

 
$
4,143



16


Supplemental cash flow information for our leases is included in the following table (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
 
Nine Months Ended September 30, 2019
Cash used in operating activities for operating leases
 
$
3,547

Cash used in operating activities for finance leases
 
23

Cash used in financing activities for finance leases
 
104



During the second quarter of 2019, we recognized ROU assets of $181,000 and associated operating lease liabilities of $202,000 upon commencement of leases for space in our Spokane office. There were no new finance lease assets or associated liabilities during the three and nine months ended September 30, 2019.

Information related to the weighted average remaining lease terms and discount rates for our leases as of September 30, 2019 is included in the following table:
 
 
September 30, 2019
Weighted average remaining lease term (in years)
 
 
     Operating leases
 
69

     Finance leases
 
2

Weighted average discount rate
 
 
     Operating leases
 
7.2
%
     Finance leases
 
9.5
%


The future maturities of lease liabilities at September 30, 2019, are as indicated below (in thousands):
Years Ending December 31,
 
Operating Leases
 
Finance Leases
2019 (remainder)
 
$
1,197

 
$
43

2020
 
4,809

 
149

2021
 
4,813

 
75

2022
 
4,776

 
38

2023
 
4,739

 
11

Thereafter
 
248,844

 

Total lease payments
 
269,178

 
316

Less: imputed interest
 
217,506

 
39

 
 
$
51,672

 
$
277



The future maturities of lease liabilities in the table above do not differ materially from future minimum rental payments under the previous leasing standard.

Two leases comprise $246.3 million of future operating lease maturities beyond 2023. One is a ground lease for our Hotel RL Washington DC property with a term through 2080 and the other is a ground lease for our Red Lion Anaheim property with a lease term through 2021 but includes renewal options through 2106 that are reasonably assured to be exercised.

10.
Commitments and Contingencies

At any given time, we are subject to claims and actions incidental to the operations of our business. In the second quarter of 2019, we accrued approximately $952,000 for a settlement over a wage dispute with former hotel employees related to the calculation of pay for certain rest, break, meal, and other periods that are required under California laws. The related expense has been recognized during the second quarter in Company operated hotels expense in the Condensed Consolidated Statements of Comprehensive Income (Loss).


17


11.
Stock Based Compensation

Stock Incentive Plans

The 2015 Stock Incentive Plan ("2015 Plan") authorizes the grant or issuance of various stock options including restricted stock units, and other stock-based compensation. The 2015 Plan was approved by our shareholders in 2015, and amended in 2017, and as amended provides for awards of 2.9 million shares, subject to adjustments for stock splits, stock dividends and similar events. As of September 30, 2019, there were 451,140 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2015 Plan, as amended.

Stock based compensation expense reflects the fair value of stock-based awards measured at grant date, including an estimated forfeiture rate, and is recognized over the relevant service period. For the three and nine months ended September 30, 2019 and 2018 stock-based compensation expense is as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Restricted stock units
 
$
581

 
$
841

 
$
1,871

 
$
2,033

Unrestricted stock awards
 
158

 
105

 
417

 
334

Performance stock units
 
172

 
184

 
123

 
445

Stock options
 
22

 
17

 
65

 
51

Employee stock purchase plan
 
8

 
13

 
27

 
33

Total stock-based compensation
 
$
941

 
$
1,160

 
$
2,503

 
$
2,896



Restricted Stock Units

Restricted stock units granted to executive officers and other key employees typically vest 25% each year for four years on each anniversary of the grant date. Under the terms of the plans upon issuance, we deliver a net settlement of distributable shares to employees after consideration of individual employees' tax withholding obligations, at the election of each employee. The fair value of restricted stock that vested during the nine months ended September 30, 2019 and 2018 was approximately $5.8 million and $2.1 million, respectively. We expect to recognize an additional $4.3 million in compensation expense over the remaining weighted average vesting periods of 22 months.

A summary of restricted stock unit activity for the nine months ended September 30, 2019, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
January 1, 2019
 
1,288,714

 
$
8.47

Granted
 
361,360

 
$
8.24

Vested
 
(728,014
)
 
$
7.49

Forfeited
 
(183,516
)
 
$
8.96

September 30, 2019
 
738,544

 
$
9.22



Performance Stock Units, Shares Issued as Compensation

We grant performance stock units ("PSUs") to certain of our executives under the 2015 Plan, as amended. These PSUs include both performance and service vesting conditions. Each performance condition has a minimum, a target and a maximum share amount based on the level of attainment of the performance condition. Compensation expense, net of estimated forfeitures, is calculated based on the estimated attainment of the performance conditions during the performance period and recognized on a straight-line basis over the performance and service periods. The remaining compensation expense related to PSUs of approximately $1.3 million will be recognized over the next 28 months.


18


A summary of performance stock unit activity for the nine months ended September 30, 2019, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
January 1, 2019
 
209,201

 
$
8.23

Granted
 
218,437

 
$
8.08

Forfeited
 
(112,954
)
 
$
9.75

September 30, 2019
 
314,684

 
$
7.58



Unrestricted Stock Awards

Unrestricted stock awards are granted to members of our Board of Directors as part of their compensation. Awards are fully vested, and expense is recognized when granted. The fair value of unrestricted stock awards is the market close price of our common stock on the date of the grant.

The following table summarizes unrestricted stock award activity for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Shares of unrestricted stock granted
 
22,075

 
9,210

 
52,986

 
32,961

Weighted average grant date fair value per share
 
$
7.19

 
$
11.40

 
$
7.89

 
$
10.14



12.
Earnings (Loss) Per Share

The following table presents a reconciliation of the numerators and denominators used in the basic and diluted net income (loss) per share computations for the three and nine months ended September 30, 2019 and 2018 (in thousands, except per share data):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Numerator - basic and diluted:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(6,447
)
 
$
17,613

 
$
(14,451
)
 
$
23,288

Net (income) loss attributable to noncontrolling interest
 
2,980

 
(8,670
)
 
4,040

 
(14,079
)
Net income (loss) attributable to RLH Corporation
 
$
(3,467
)
 
$
8,943

 
$
(10,411
)
 
$
9,209

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average shares - basic
 
25,112

 
24,545

 
24,859

 
24,334

Weighted average shares - diluted
 
25,112

 
25,729

 
24,859

 
25,437

 
 
 
 
 
 
 
 
 
Earnings (loss) per share - basic
 
$
(0.14
)
 
$
0.36

 
$
(0.42
)
 
$
0.38

Earnings (loss) per share - diluted
 
$
(0.14
)
 
$
0.35

 
$
(0.42
)
 
$
0.36



The following table presents options to purchase common shares, restricted stock units outstanding, performance stock units outstanding, and warrants to purchase common shares included in the earnings per share calculation, as well as the amount excluded from the dilutive earnings per share calculation if they were considered antidilutive, for the three and nine months ended September 30, 2019 and 2018.

19


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Stock Options(1)
 
 
 
 
 
 
 
 
Dilutive awards outstanding
 

 
20,504

 

 
12,097

Antidilutive awards outstanding
 
81,130

 
60,626

 
81,130

 
69,033

Total awards outstanding
 
81,130

 
81,130

 
81,130

 
81,130

 
 
 
 
 
 
 
 
 
Restricted Stock Units(2)
 
 
 
 
 
 
 
 
Dilutive awards outstanding
 

 
854,604

 

 
808,934

Antidilutive awards outstanding
 
738,544

 
521,348

 
738,544

 
567,018

Total awards outstanding
 
738,544

 
1,375,952

 
738,544

 
1,375,952

 
 
 
 
 
 
 
 
 
Performance Stock Units(3)
 
 
 
 
 
 
 
 
Dilutive awards outstanding
 

 
101,793

 

 
106,743

Antidilutive awards outstanding
 
314,684

 
196,728

 
314,684

 
191,778

Total awards outstanding
 
314,684

 
298,521

 
314,684

 
298,521

 
 
 
 
 
 
 
 
 
Warrants(4)
 
 
 
 
 
 
 
 
Dilutive awards outstanding
 

 
207,444

 

 
174,846

Antidilutive awards outstanding
 
442,533


235,089


442,533


267,687

Total awards outstanding
 
442,533

 
442,533

 
442,533

 
442,533

(1) All stock options for the three and nine months ended September 30, 2019 were anti-dilutive as a result of the net loss attributable to RLH Corporation for these periods. If we had reported net income for the three and nine months ended September 30, 2019, no stock options would have been dilutive as a result of the RLH Corporation weighted average share price during the reporting periods.
(2) Restricted stock units were anti-dilutive for the three and nine months ended September 30, 2019 due to our net loss in the reporting periods. If we had reported net income for the three and nine months ended September 30, 2019 then 12,771 and 337,035 units, respectively, would have been dilutive.
(3) Performance stock units are not included in the weighted average diluted shares outstanding until the performance targets are met. PSU’s were anti-dilutive for three and nine months ended September 30, 2019 as no performance targets had been achieved during those periods. Had performance targets been met for the three and nine months ended September 30, 2019 then 96,141 and 92,907 units, respectively, would have been dilutive.
(4) All warrants for the three and nine months ended September 30, 2019 were anti-dilutive due to the net loss attributable to RLH in each reporting period. If we had reported net income for the three and nine months ended September 30, 2019, 0 and 47,831 warrants, respectively, would have been dilutive.
13.
Income Taxes

We recognized an income tax provision (benefit) of $486,000 and $(26,000) for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018 we recognized an income tax provision (benefit) of $676,000 and $(239,000), respectively. The income tax provision varies from the statutory rate primarily due to a partial valuation allowance against our deferred tax assets, as well as deferred tax expense associated with our acquired indefinite-lived intangible assets, which are amortized for tax purposes but not for GAAP purposes.

We have state operating loss carryforwards, which expire beginning in 2019, and both federal and state tax credit carryforwards, which begin to expire in 2024.

14.
Fair Value

Applicable accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure our assets and liabilities using inputs from the Level 1, Level 2 and Level 3 of the fair value hierarchy.


20


Cash, Restricted cash and Accounts receivable carrying values approximate fair value due to the short-term nature of these items. We estimate the fair value of our Notes receivable using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. We estimate the fair value of our Long-term debt and Operating lease obligations using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. The fair values provided below are not necessarily indicative of the amounts we or the debt holders could realize in a current market exchange. In addition, potential income tax ramifications related to the realization of gains and losses that would be incurred in an actual sale or settlement have not been taken into consideration. Estimated fair values of financial instruments are shown in the table below (in thousands).
 
 
September 30, 2019
 
December 31, 2018
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
Notes receivable
 
$
4,188

 
$
4,188

 
$
2,103

 
$
2,103

Financial liabilities:
 
 
 
 
 
 
 
 
Debt
 
$
56,480

 
$
55,063

 
$
44,523

 
$
43,880

Total finance lease obligations
 
277

 
277

 
378

 
378



15.
Related Party Transactions

All three of our current joint ventures - RL Venture, RLS Atla Venture, and RLS DC Venture, and our former joint venture RLS Balt Venture, which was dissolved in October 2018 - have agreed to pay to Shelbourne Capital, LLC ("Shelbourne Capital") an investor relations fee each month equal to 0.50% of its total aggregate revenue. Shelbourne Capital is the entity that leads Shelbourne Falcon, Shelbourne Falcon II, Shelbourne Falcon III and Shelbourne Falcon IV, the noncontrolling interest holder in these joint ventures. The amount Shelbourne Capital earned from all four joint ventures during the three months ended September 30, 2019 and 2018 totaled $14,000 and $40,000, respectively. The amount Shelbourne Capital earned from all four joint ventures during the nine months ended September 30, 2019 and 2018 totaled $68,000 and $187,000, respectively. Columbia Pacific Opportunity Fund, LP ("CP"), previously one of our largest shareholders, is an investor in Shelbourne Falcon, our joint venture partner in RL Venture. During the three months ended September 30, 2019 and 2018, Shelbourne Capital earned $8,000 and $28,000, respectively, from RL Venture. During the nine months ended September 30, 2019 and 2018, Shelbourne Capital earned $50,000 and $145,000, respectively, from RL Venture. We did not pay any investor relations fees to Shelbourne Capital related to the RLS Balt Venture after October 2018.

Effective March 2016, our wholly owned subsidiary, RL Management, entered into a one-year contract to manage the Hudson Valley Resort and Spa, a hotel located in Kerhonkson, New York. Following the initial one-year term, we continued to manage the property on a month-to-month basis until October 2018. The hotel is owned by HNA Hudson Valley Resort & Training Center LLC, an affiliate of HNA RLH Investments LLC ("HNA"), previously one of our largest shareholders. Under that contract, our subsidiary is entitled to a monthly management fee equal to $8,333 or 3% of the hotel’s gross operating revenues, whichever is greater. During the three and nine months ended September 30, 2018, we recognized management fee revenue from HNA Hudson Valley Resort & Training Center LLC of $25,000 and $75,000, respectively. On June 12, 2018, HNA sold their common shares in RLH to a third party, no longer making them a related party.

On September 30, 2016, we acquired the operating assets and assumed certain liabilities relating to specified hotel brands and brand extensions from Thirty-Eight Street, Inc. ("TESI") and Vantage Hospitality Group, Inc. From the date of the acquisition, our board appointed Bernard T. Moyle, as our Executive Vice President and Chief Operating Officer and Roger J. Bloss as our Executive Vice President and President of Global Development. Messrs. Moyle and Bloss are shareholders of TESI and Vantage Hospitality.

Effective May 31, 2018, Messrs. Moyle and Bloss entered into consulting agreements through December 31, 2020, ending their employment with the Company and no longer making them a related party after the effective date. On May 21, 2018, the Company entered into a letter agreement (Letter Agreement) and a First Amendment (First Amendment) to the TESI and Vantage Hospitality purchase agreement. In accordance with the Letter Agreement and First Amendment, after the first anniversary of the closing date, we issued $4.0 million in cash and 414,000 shares of the Company’s common stock to TESI in January 2018. The Company understands that Mr. Bloss and Mr. Moyle each own 50% of the outstanding shares of TESI.

Messrs. Bloss and Moyle each additionally indirectly own a 5.7% equity interest in a limited liability company that owns the Lexington Hotel and Conference Center in Jacksonville, Florida. During the period ended May 31, 2018, the Company billed the property approximately $161,000 for franchise fees and related services, including royalty and marketing. This hotel, along with the Lexington Inn & Suites, Daytona Beach and the ABVI Las Vegas, are managed by Cal-Vegas, Ltd. ("Cal-Vegas"), of which

21


TESI (owned by Messrs. Bloss and Moyle) is the General Partner and holds a 2% general partner interest, and Mr. Moyle serves as the Chief Operating Officer and Chief Financial Officer. The Company and Cal-Vegas are not parties to any agreement with respect to these properties, as the management contracts are between Cal-Vegas and the Company’s franchisees, who are unrelated third parties. Cal-Vegas is also the lessee of the ABVI Las Vegas hotel. Franchise fees billed by the Company to each of these properties for the period ended May 31, 2018 were as follows: Lexington Inn & Suites, Daytona Beach, $35,000, and ABVI Las Vegas, $1,000.

During the fourth quarter of 2018, we transitioned management of our company operated Hotel RL Baltimore Inner Harbor and Hotel RL Washington DC from RL Management, Inc., to HEI Hotels and Resorts, of which one of the members of our Board of Directors, Ted Darnall, is currently the Chief Executive Officer. Additionally, during the first quarter of 2019, management of our company operated hotel Red Lion Hotel Seattle Airport was also transitioned from RL Management, Inc. to HEI Hotels and Resorts. During the three and nine months ended September 30, 2019, we paid $307,000 and $847,000, respectively, in management fees to HEI Hotels and Resorts for management of these properties.

On January 14, 2019, the Company announced the appointment of Julie Shiflett as Chief Financial Officer of RLH. Prior to this appointment, the Company paid consulting fees to NorthWest CFO, a consulting firm of which Ms. Shiflett is a Principal. Payments made to NorthWest CFO for consulting fees during the three months ended September 30, 2019 and 2018 totaled $0 and $59,000, respectively and during the nine months ended September 30, 2019 and 2018 totaled $49,000 and $289,000, respectively. The payments made during 2019 were for services rendered by NorthWest CFO in 2018. No services have been performed by NorthWest CFO on behalf of RLH subsequent to Ms. Shiflett being appointed Chief Financial Officer.

As noted in Note 8 Debt and Line of Credit, on May 31, 2019 we executed a mortgage loan with a principal and accrued exit fee of $17.5 million with CP Business Finance I, LP, an affiliate of Columbia Pacific Opportunity Fund, LP, who currently holds 500,000 shares of RLH common stock. Additionally, Alexander B. Washburn, who served as a member of our Board of Directors from May 2015 to April 2019, is one of the managing members of Columbia Pacific Advisor, LLC, which serves as the investment manager of Columbia Pacific Opportunity Fund, LP.

16.
Acquisitions

Knights Inn Acquisition

On May 14, 2018, Red Lion Hotels Franchising, Inc. completed the purchase of all of the issued and outstanding shares of capital stock of Knights Franchise Systems, Inc. ("KFS"), and the purchase of certain operating assets from, and assumption of certain liabilities relating to the business of franchising Knights Inn branded hotels to hotel owners from Wyndham Hotel Group Canada, ULC and Wyndham Hotel Group Europe Limited, pursuant to the Amended and Restated Purchase Agreement, dated May 1, 2018, for an aggregate purchase price of $27.2 million.

The following reflects our purchase price allocation (in thousands):
 
 
Fair Value
Current assets
 
$
1,288

Intangible assets
 
16,800

Goodwill
 
9,191

Total assets acquired
 
27,279

 
 

Current liabilities
 
30

Total liabilities acquired
 
30

 
 

Total net assets acquired
 
$
27,249



Current assets are comprised of $4.6 million in contractual value of acquired receivables, less a fair value adjustment of $3.3 million based on expected collectability.

Intangible assets acquired are as follows (in thousands):

22


 
Fair Value
 
Useful Life
Brand names
$
7,700

 
Indefinite
Customer contracts
9,100

 
15 years
Total intangible assets
$
16,800

 
 


We recognized $9.2 million in goodwill as the result of the acquisition, recorded within our franchise reporting segment. The goodwill is deductible for income tax purposes. The factors that make up the goodwill are primarily expected synergies from combining the operations of Knights Inn with our own.

The following supplemental pro forma results are based on the individual historical results of RLH Corporation and KFS, with adjustments to give effect to the combined operations as if the acquisition had been consummated on January 1, 2018 (in thousands, except per share data) (unaudited):
 
 
 
Nine Months Ended September 30, 2018
Revenue
 
 
$
110,280

Net income (loss)
 
 
25,219

Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
 
11,140

Earnings (loss) per share attributable to RLH Corporation - basic
 
 
$
0.46

Earnings (loss) per share attributable to RLH Corporation - diluted
 
 
$
0.44




17.
Subsequent Events

Subsequent to the balance sheet date, the due diligence periods for the sales agreement on our Red Lion Hotel Atlanta property concluded, making the agreement binding. The closing for the sale of the hotel is expected before the end of the year.

23



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report on Form 10-Q includes forward-looking statements. We have based these statements on our current expectations and projections about future events. When words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will” and similar expressions or their negatives are used in this quarterly report, these are forward-looking statements. Many possible events or factors, including those discussed in “Risk Factors” under Item 1A of our annual report on Form 10-K for the year ended December 31, 2018, which we filed with the Securities and Exchange Commission on March 8, 2019, could affect our future financial results and performance, and could cause actual results or performance to differ materially from those expressed. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report. We undertake no obligation to update or revise any forward-looking statements except as required by law.

In this report, "we," "our," "us," "our company," "RLHC," and "RLH Corporation" refer to Red Lion Hotels Corporation, doing business as RLH Corporation, and as the context requires all, of its consolidated subsidiaries as follows:

Wholly owned subsidiaries:
Red Lion Hotels Holdings, Inc.
Red Lion Hotels Franchising, Inc.
Red Lion Hotels Canada Franchising, Inc.
Red Lion Hotels Management, Inc. ("RL Management")
Red Lion Hotels Limited Partnership
RL Baltimore LLC ("RL Baltimore")
WestCoast Hotel Properties, Inc.
Red Lion Anaheim, LLC
RLabs, Inc.

Joint venture entities:
RL Venture LLC ("RL Venture") in which we hold a 55% member interest
RLS Atla Venture LLC ("RLS Atla Venture") in which we hold a 55% member interest
RLS DC Venture LLC ("RLS DC Venture") in which we hold a 55% member interest

The terms "the network," "systemwide hotels," "system of hotels," or "network of hotels" refer to our entire group of owned, managed and franchised hotels.

The following discussion and analysis should be read in connection with our unaudited condensed consolidated financial statements and the condensed notes thereto and other financial information included elsewhere in this quarterly report, as well as in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2018, which are included in our annual report on Form 10-K for the year ended December 31, 2018.

Introduction

We are a NYSE-listed hospitality and leisure company (ticker symbol: RLH) doing business as RLH Corporation and primarily engaged in the franchising and ownership of hotels under the following proprietary brands: Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse, Settle Inn, Americas Best Value Inn ("ABVI"), Canadas Best Value Inn ("CBVI"), Signature and Signature Inn, Knights Inn, and Country Hearth Inn & Suites ("Country Hearth").

We operate in two reportable segments:

The franchised hotels segment is engaged primarily in licensing our brands to franchisees. This segment generates revenue from royalty, marketing, and other fees that are primarily based on a percentage of room revenue or on room count or on transaction count and are charged to hotel owners in exchange for the use of our brand and access to our marketing and central services programs. These central services and marketing programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards. Additionally, this segment includes our initial contracts for Canvas Integrated Systems, discussed further below, as we begin to grow this new offering.

The company operated hotel segment derives revenues primarily from guest room rentals and food and beverage offerings at owned and leased hotels for which we consolidate results. Revenues have also been derived from management

24


fees and related charges for hotels with which we contract to perform management services, however our last management agreement terminated in February 2019.

Our remaining activities, none of which constitutes a reportable segment, are aggregated into "other."

A summary of activity relating to our owned or franchised properties by type from January 1, 2019 through September 30, 2019, including the approximate number of available rooms, is provided below:
 
 
USB
 
SSB
 
Total
 
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
Beginning quantity, January 1, 2019
 
112

 
15,900

 
1,215

 
69,800

 
1,327

 
85,700

Newly opened / acquired properties
 
7

 
600

 
28

 
1,400

 
35

 
2,000

Change in brand
 
(1
)
 
(100
)
 
1

 
100

 

 

Terminated properties
 
(17
)
 
(1,900
)
 
(159
)
 
(10,100
)
 
(176
)
 
(12,000
)
Ending quantity, September 30, 2019
 
101

 
14,500

 
1,085

 
61,200

 
1,186

 
75,700


A summary of activity relating to our USB hotels by brand from January 1, 2019 through September 30, 2019 is provided below:
USB Brand Hotels
 
Hotel RL
 
Red Lion Hotels
 
Red Lion Inn and Suites
 
Signature
 
Other
 
Total
Beginning quantity, January 1, 2019
 
8

 
46

 
43

 
2

 
13

 
112

Newly opened / acquired properties
 

 

 
5

 
2

 

 
7

Change in brand
 
1

 

 

 

 
(2
)
 
(1
)
Terminated properties
 

 
(5
)
 
(7
)
 

 
(5
)
 
(17
)
Ending quantity, September 30, 2019
 
9

 
41

 
41

 
4

 
6

 
101

 
 
 
 
 
 
 
 
 
 
 
 
 
Ending rooms, September 30, 2019
 
1,800

 
8,400

 
3,400

 
200

 
700

 
14,500


A summary of activity relating to our SSB hotels by brand from January 1, 2019 through September 30, 2019 is provided below:
SSB Brand Hotels
 
ABVI and CBVI
 
Knights Inn
 
Country Hearth
 
Guest House
 
Signature Inn
 
Other
 
Total
Beginning quantity, January 1, 2019
 
777

 
332

 
53

 
27

 
2

 
24

 
1,215

Newly opened / acquired properties
 
24

 
2

 
1

 
1

 

 

 
28

Change in brand
 
1

 
(1
)
 
5

 

 

 
(4
)
 
1

Terminated properties
 
(89
)
 
(49
)
 
(6
)
 
(6
)
 
(2
)
 
(7
)
 
(159
)
Ending quantity, September 30, 2019
 
713

 
284

 
53

 
22

 

 
13

 
1,085

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending rooms, September 30, 2019
 
38,100

 
16,900

 
2,500

 
1,500

 

 
2,200

 
61,200


A summary of our executed agreements for the nine months ended September 30, 2019 is provided below:
 
 
USB
 
SSB
 
Total
Executed franchise license agreements, nine months ended September 30, 2019:
 
 
 
 
 
 
New locations
 
14

 
26

 
40

New contracts for existing locations
 
9

 
94

 
103

Total executed franchise license agreements, nine months ended September 30, 2019
 
23

 
120

 
143


Overview

During 2018 we continued the growth of our franchise segment by acquiring approximately 350 franchise agreements through our acquisition of the Knights Inn franchise.

25



During 2019, we announced the creation of RLabs, a travel technology-based innovator that houses and builds on the groundbreaking technology platform the company has created, including RevPak. RLabs focuses on new revenue verticals, and on developing unique technology and system offerings for the hospitality industry including software, robotics, and artificial intelligence. The first offering from RLabs is Canvas Integrated Systems, an all-in-one cloud-based hospitality management suite featuring a collection of seamlessly integrated tools designed to drive revenue, secure more revenue opportunities, automate channel management and reduce cost and friction for independent hotel owners. Revenues from these agreements are included in Marketing, reservations and reimbursables revenue and associated expenses are included in Marketing, reservations, and reimbursables expense and Selling, general, administrative and other expenses in the Condensed Consolidated Statements of Comprehensive Income (Loss).

During the three months ended September 30, 2019, we entered into individual non-binding sales agreements with third parties for four of our company operated hotels. The sales of all four hotels are expected by the end of Q1 2020.

Results of Operations

A summary of our Condensed Consolidated Statements of Comprehensive Income (Loss) is provided below (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Total revenues
 
$
32,863

 
$
36,000

 
$
87,772

 
$
107,651

Total operating expenses
 
37,169

 
16,236

 
97,814

 
78,656

Operating income (loss)
 
(4,306
)
 
19,764

 
(10,042
)
 
28,995

Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(1,699
)
 
(1,417
)
 
(3,690
)
 
(5,366
)
Loss on early retirement of debt
 

 
(794
)
 
(164
)
 
(794
)
Other income (loss), net
 
44

 
34

 
121

 
214

Income (loss) before taxes
 
(5,961
)
 
17,587

 
(13,775
)
 
23,049

Income tax expense (benefit)
 
486

 
(26
)
 
676

 
(239
)
Net income (loss)
 
(6,447
)
 
17,613

 
(14,451
)
 
23,288

Net (income) loss attributable to noncontrolling interest
 
2,980

 
(8,670
)
 
4,040

 
(14,079
)
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
$
(3,467
)
 
$
8,943

 
$
(10,411
)
 
$
9,209

 
 
 
 
 
 
 
 
 
Non-GAAP Financial Measures (1)
 
 
 
 
 
 
 
 
EBITDA
 
$
(626
)
 
$
22,625

 
$
1,107

 
$
41,129

Adjusted EBITDA
$
5,899

 
$
5,751

 
$
10,624

 
$
13,458

(1) The definitions of "EBITDA," and "Adjusted EBITDA" and how those measures relate to net income (loss) are discussed and reconciled under Non-GAAP Financial Measures below.

For the three months ended September 30, 2019, we reported a net loss of $6.4 million, which included a $5.4 million asset impairment on our Hotel RL Washington DC joint venture property, $0.9 million of stock based compensation, $0.2 million of transaction and integration costs, and $0.8 million of bad debt expense and associated legal fees related to a reserve recognized in the third quarter of 2019 for certain amounts of accounts receivable, key money, and notes receivable outstanding for a large franchise customer in bankruptcy.

For the three months ended September 30, 2018, we reported net income of $17.6 million, which included a $26.0 million gain on asset dispositions related to the sale of two hotels, a $7.1 million asset impairment on our Hotel RL Baltimore Inner Harbor joint venture property, $1.2 million of stock based compensation, a $0.8 million loss on early retirement of debt resulting from an early payment on our Senior Secured Term Loan using proceeds from an RL Venture distribution following two hotel sales, and $0.1 million of transaction and integration costs.

For the nine months ended September 30, 2019, we reported a net loss of $14.5 million, which included $2.5 million of stock based compensation, a $5.4 million asset impairment on our Hotel RL Washington DC joint venture property, $1.0 million related to a legal settlement, $0.4 million of transaction and integration costs, a $0.2 million loss on early retirement of debt resulting

26


from the replacement of a mortgage loan at RLS DC Venture, and $0.8 million of bad debt expense and associated legal fees related to a reserve recognized in the third quarter of 2019 for certain amounts of accounts receivable, key money, and notes receivable outstanding for a large franchise customer in bankruptcy.

For the nine months ended September 30, 2018, we reported net income of $23.3 million, which included a $41.6 million gain on asset dispositions related to the sale of nine hotels, a $7.1 million asset impairment on our Hotel RL Baltimore Inner Harbor joint venture property, $2.9 million of stock based compensation, a $0.8 million loss on early retirement of debt resulting from an early payment on our Senior Secured Term Loan using proceeds from an RL Venture distribution following two hotel sales, $2.2 million of transaction and integration costs, and $1.0 million of employee separation costs.

For the three months ended September 30, 2019, Adjusted EBITDA was $5.9 million compared with $5.8 million in 2018. This increase was primarily due to reductions in operating costs, and overall compensation expense including payroll, variable compensation and stock compensation, partially offset by the aforementioned increase in bad debt expense arising from a large franchise customer bankruptcy as well as a decrease in profits resulting from hotels disposed of in the third quarter of 2018.

For the nine months ended September 30, 2019, Adjusted EBITDA was $10.6 million compared with $13.5 million in 2018. The decrease is primarily due to the sale of nine hotels and expiration of a lease on a hotel in 2018 and the aforementioned increase in bad debt expense arising from a large franchise customer bankruptcy, partially offset by additional profits from the acquisition of Knights Inn franchised hotels in May 2018, along with reductions in operating costs and overall compensation expense including payroll, variable compensation and stock compensation.

Non-GAAP Financial Measures

EBITDA is defined as net income (loss), before interest, taxes, depreciation and amortization. We believe it is a useful financial performance measure due to the significance of our long-lived assets and level of indebtedness.

Adjusted EBITDA is an additional measure of financial performance. We believe that the inclusion or exclusion of certain special items, such as gains and losses on asset dispositions and impairments and discontinued operations, is necessary to provide the most accurate measure of core operating results and as a means to evaluate comparative results.

During the fourth quarter of 2018, we modified the definition of Adjusted EBITDA as used in prior periods to exclude the effect of stock compensation expense. We believe that the exclusion of this item is consistent with the purposes of the measure described below and we have applied this modification to all prior periods presented.

EBITDA and Adjusted EBITDA are commonly used measures of performance in our industry. We utilize these measures because management finds them a useful tool to calculate more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. Our board of directors and executive management team consider Adjusted EBITDA to be a key performance metric and compensation measure. We believe they are a complement to reported operating results. EBITDA and Adjusted EBITDA are not intended to represent net income (loss) defined by generally accepted accounting principles in the United States of America ("GAAP"), and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP. In addition, other companies in our industry may calculate EBITDA and, in particular, Adjusted EBITDA differently than we do or may not calculate them at all, limiting the usefulness of EBITDA and Adjusted EBITDA as comparative measures.


27


The following is a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) for the periods presented (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Net income (loss)
 
$
(6,447
)
 
$
17,613

 
$
(14,451
)
 
$
23,288

Depreciation and amortization
 
3,636

 
3,621

 
11,192

 
12,714

Interest expense
 
1,699

 
1,417

 
3,690

 
5,366

Income tax expense (benefit)
 
486

 
(26
)
 
676

 
(239
)
EBITDA
 
(626
)
 
22,625

 
1,107

 
41,129

Stock-based compensation (1)
 
941

 
1,160

 
2,503

 
2,896

Asset impairment (2)
 
5,382

 
7,100

 
5,382

 
7,100

Transaction and integration costs (3)
 
201

 
95

 
436

 
2,196

Employee separation and transition costs (4)
 

 

 
35

 
975

Loss on early retirement of debt (5)
 

 
794

 
164

 
794

Loss (gain) on asset dispositions (6)
 
1

 
(26,023
)
 
45

 
(41,632
)
Legal settlement expense (7)
 

 

 
952

 

Adjusted EBITDA
 
5,899

 
5,751

 
10,624

 
13,458

Adjusted EBITDA attributable to noncontrolling interests
 
(660
)
 
(53
)
 
(1,665
)
 
(1,915
)
Adjusted EBITDA attributable to RLH Corporation
$
5,239

 
$
5,698

 
$
8,959

 
$
11,543

 
 
 
 
 
 
 
 
 
(1)  Costs represent total stock-based compensation for each period. These costs are included within Selling, general, administrative and other expenses, Company operated hotels and Marketing, reservations and reimbursables on the Condensed Consolidated Statements of Comprehensive Income (Loss).
(2) In the three months ended September 30, 2019 we recognized an impairment on our Hotel RL Washington DC joint venture property. In the three months ended September 30, 2018 we recognized an impairment on our Hotel RL Baltimore Inner Harbor joint venture property.
(3)  Transaction and integration costs include incremental expenses incurred for potential and executed acquisitions and dispositions of assets.
(4) The costs recognized in 2019 relate to a reduction in force that was implemented in the second quarter of 2019. The costs recognized in 2018 relate to employee separation, primarily for severance agreements with our Chief Operating Officer, and President of Global Development in May 2018. These costs are included within Selling, general, administrative and other expenses on the Condensed Consolidated Statements of Comprehensive Income (Loss).
(5)  In 2019, the Loss on early retirement of debt relates to unamortized deferred debt issuance costs and prepayment fees incurred related to the payoff of a mortgage loan at RLS DC Venture, which was replaced through a new mortgage loan with a different lender. In 2018, the Loss on early retirement of debt arose primarily on a $20.6 million early payment of our Senior Secured Term Loan. The debt was repaid using proceeds from a distribution from RL Venture after the sales of our Red Lion Hotel Port Angeles and Hotel RL Spokane.
(6)  The gains relate to the sale of nine properties during the nine months ended September 30, 2018, two of which were sold during the three months ended September 30, 2018. There is no comparable activity during the nine months ended September 30, 2019.
(7)  Legal settlement expense relates to a settlement agreement with former hotel workers regarding a wage dispute in California. This expense is included in Company operated hotels expense on the Condensed Consolidated Statements of Comprehensive Income (Loss).

Franchise and Marketing, Reservations and Reimbursables Revenues
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Royalty
 
$
5,909

 
$
6,530

 
$
17,516

 
$
16,575

Other franchise
 
2,016

 
1,016

 
3,772

 
2,412

Marketing, reservations and reimbursables
 
8,300

 
7,591

 
22,632

 
19,874


Three months ended September 30, 2019 and 2018

Royalty revenue decreased $0.6 million or 10%. This decrease is primarily due to terminated agreements in our SSB brand hotels. Revenues from Marketing, reservations, and reimbursables revenue increased by $0.7 million or 9%, and Other franchise revenues increased $1.0 million or 98% for the three months ended September 30, 2019 compared with the same period in 2018 primarily due to an increase in various fees, partially offset by the impact of terminated agreements.

28



Nine months ended September 30, 2019 and 2018

Royalty revenue increased $0.9 million or 6%, revenues from Marketing, reservations and reimbursables increased $2.8 million or 14%, and Other franchise revenues increased $1.4 million or 56% for the nine months ended September 30, 2019 compared with the same period in 2018. These increases are primarily due to additional revenues from the acquisition of Knights Inn franchised hotels in May 2018 plus an increase in reservation and other miscellaneous fees, partially offset by the impact from terminated agreements.

Company Operated Hotels Revenues
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
(in thousands)
 
 
2019
 
2018
 
2019
 
2018
Company operated hotels
 
$
16,633

 
$
20,857

 
$
43,839

 
$
68,758


Three months ended September 30, 2019 and 2018

During the three months ended September 30, 2019, revenue from our Company operated hotels segment decreased $4.2 million or 20% compared with the same period in 2018. The decrease was driven primarily by the expiration of a company operated hotel property lease in the fourth quarter of 2018, along with the disposal of two hotel properties during the third quarter of 2018. There were no hotel properties sold during the three months ended September 30, 2019.

Nine months ended September 30, 2019 and 2018

During the nine months ended September 30, 2019, revenue from our Company operated hotels segment decreased $24.9 million or 36% compared with the same period in 2018. The decrease was driven primarily by the disposal of nine hotel properties during 2018, along with the expiration of a company operated hotel property lease in the fourth quarter of 2018. There were no hotel properties sold during the nine months ended September 30, 2019.

Operating Expenses

Operating expenses generally include direct operating expenses for each of the operating segments, selling, general, administrative and expenses, depreciation and amortization, asset impairment, gain or loss on asset dispositions and acquisition and integration costs.

Our operating expenses for the three and nine months ended September 30, 2019 and 2018 were as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Marketing, reservations and reimbursables
 
$
7,080

 
$
7,453

 
$
22,088

 
$
20,226

Company operated hotels
 
12,673

 
16,051

 
36,750

 
54,924

Selling, general, administrative and other expenses
 
8,196

 
8,112

 
21,921

 
23,590

Depreciation and amortization
 
3,636

 
3,621

 
11,192

 
12,714

Asset impairment
 
5,382

 
7,100

 
5,382

 
7,100

Loss (gain) on asset dispositions, net
 
1

 
(26,196
)
 
45

 
(42,094
)
Transaction and integration costs
 
201

 
95

 
436

 
2,196

Total operating expenses
 
$
37,169

 
$
16,236

 
$
97,814

 
$
78,656


Three months ended September 30, 2019 and 2018

Marketing, reservations and reimbursables expenses decreased by $0.4 million or 5%. This decrease was primarily due to the timing of marketing expenditures and a decrease in reservation volume.


29


Company operated hotels expenses decreased by $3.4 million or 21%. This decrease was driven primarily by the disposal of two properties during the three months ended September 30, 2018. There were no hotel properties sold during the three months ended September 30, 2019.

Selling, general, administrative and other expenses increased by $0.1 million or 1% for the three months ended September 30, 2019 compared with three months ended September 30, 2018. The increase was primarily driven by bad debt expense and associated legal costs recognized related to a reserve established in the third quarter of 2019 for certain amounts of accounts receivable, key money and notes receivable outstanding for a large franchise customer in bankruptcy. This increase was partially offset by a reduction in operation expenses, as well a reduction in overall compensation expense including payroll, variable compensation and stock compensation.

We recognized an Asset impairment of $5.4 million on our Hotel RL Washington DC joint venture property in the third quarter of 2019 and an Asset impairment of $7.1 million on our Hotel RL Baltimore Inner Harbor joint venture property in the third quarter of 2018. See Note 5 Property and Equipment within Item 1. Financial Statements for additional detail.

We recognized a net Gain on asset dispositions of $26.2 million primarily from the disposal of two hotel properties during the third quarter of 2018 with no comparable activity in 2019.

Nine months ended September 30, 2019 and 2018

Marketing, reservations and reimbursables expenses increased by $1.9 million or 9% during the nine months ended September 30, 2019. This increase was primarily due to supporting the growth in our mid-scale hotels as well as additional expenses related to our Knights Inn acquisition. The expense increase is consistent with the increase in Marketing, reservations and reimbursables revenues.

Company operated hotels expenses decreased by $18.2 million or 33% and Depreciation and amortization expense decreased $1.5 million or 12%. The decreases were driven primarily by the disposal of nine properties during the nine months ended September 30, 2018. There were no hotel properties sold during the nine months ended September 30, 2019. The decrease in Depreciation and amortization was partially offset by additional amortization recognized from finite-lived intangible assets acquired as part of the Knights Inn acquisition in 2018 and other fixed assets placed in service during the remainder of 2018 and the first nine months of 2019.

Selling, general, administrative and other expenses decreased by $1.7 million or 7% for the nine months ended September 30, 2019 compared with nine months ended September 30, 2018. The decrease was driven by a reduction in franchise development and franchise operation expenses, as well a reduction in overall compensation expense including payroll, variable compensation and stock compensation. These decreases were partially offset by bad debt expense and associated legal costs recognized related to to a reserve established in the third quarter of 2019 for certain amounts of accounts receivable, key money and notes receivable outstanding for a large franchise customer in bankruptcy.

We recognized an Asset impairment of $5.4 million on our Hotel RL Washington DC joint venture property in the third quarter of 2019 and an Asset impairment of $7.1 million on our Hotel RL Baltimore Inner Harbor joint venture property in the third quarter of 2018. See Note 5 Property and Equipment within Item 1. Financial Statements for additional detail.

We recognized a net Gain on asset dispositions of $42.1 million primarily from the disposal of nine hotel properties during the nine months ended September 30, 2018 with no comparable activity in 2019.

Transaction and integration costs decreased by $1.8 million for the nine months ended September 30, 2019 compared with 2018. There were no acquisitions completed in 2019, while Knights Inn was acquired in the second quarter of 2018. Costs incurred in 2019 relate to integration activities for the Knights Inn acquisition that continued into the current year, in addition to due diligence costs incurred for other potential sales and acquisitions.

Interest Expense

Interest expense increased $0.3 million in the third quarter of 2019 compared to the third quarter of 2018. This increase was primarily due to the two term loans we executed at each of the two properties held by RL Venture in 2019, increasing our outstanding debt balance compared to the third quarter of 2018.


30


Interest expense decreased $1.7 million during the nine months ended September 30, 2019 compared with the same period in 2018. The decrease was primarily due to hotel sales and the related reduction in our average debt outstanding during 2019 as compared to 2018.

Income Taxes

For the three and nine months ended September 30, 2019, we reported income tax expense of $486,000 and $676,000 compared with income tax benefit of $(26,000) and $(239,000) for the same periods in 2018. The income tax provisions vary from the statutory rate primarily due to a partial valuation allowance against our deferred tax assets. See Note 13 Income Taxes within Item 1. Financial Statements.

Liquidity and Capital Resources

Our principal source of liquidity is cash flow from operations. Cash flows may fluctuate and are sensitive to many factors including changes in working capital and the timing and magnitude of capital expenditures and payments on debt. Working capital, which represents current assets less current liabilities, was $7.9 million and $5.9 million as of September 30, 2019 and December 31, 2018, respectively. We believe that we have sufficient liquidity to fund our operations at least through November 2020.

We may seek to raise additional funds through public or private financings, strategic relationships, sales of assets or other arrangements. We cannot assure that such funds, if needed, will be available on terms attractive to us, or at all. If we sell additional assets, these sales may result in future impairments or losses on the final sale. Finally, any additional equity financings may be dilutive to shareholders and debt financing, if available, may involve covenants that place substantial restrictions on our business.

We are committed to keeping our properties well maintained and attractive to our customers in order to maintain our competitiveness within the industry and keep our hotels properly positioned in their markets. This requires ongoing access to capital for replacement of outdated furnishings as well as for facility repair, modernization and renovation for our owned properties.

Sources and Uses of our Cash, Cash Equivalents, and Restricted Cash

The following table summarizes our net cash flows for operating, investing, and financing activities (in thousands):
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
Net cash provided by (used in) operating activities
 
$
4,955

 
$
(7,627
)
Net cash provided by (used in) investing activities
 
(3,932
)
 
80,223

Net cash provided by (used in) financing activities
 
385

 
(94,565
)

Operating Activities

Net cash provided by operating activities totaled $5.0 million during the first nine months of 2019 compared with cash used in operating activities of $7.6 million during the same period in 2018. The primary drivers of the change in cash flows were an improvement in net loss excluding Loss (gain) on asset dispositions, net of approximately $4.4 million and a $4.8 million reduction in key money disbursed for the nine months ended September 30, 2019 compared to the prior period.

Investing Activities

Net cash used in investing activities totaled $3.9 million during the first nine months of 2019 compared with cash provided by investing activities of $80.2 million during the same period in 2018. Cash spent for capital expenditures was reduced by $2.1 million during the nine months ended September 30, 2019 compared with the same period in 2018. During the nine months ended September 30, 2018 we had cash outflows of $26.9 million for the acquisition of Knights Inn and we disposed of nine hotels from our company operated hotels portfolio, generating cash proceeds of $113.8 million.


31


Financing Activities

Net cash provided by financing activities was $0.4 million during the first nine months of 2019 compared with cash used in financing activities of $94.6 million in the first nine months of 2018. During the nine months ended September 30, 2019 we executed new mortgage loans for three company operated hotel properties while paying off one. Some of the loan proceeds were distributed to joint venture partners and used to pay down a portion of the outstanding principal on our Senior Secured Term Loan. During the nine months ended September 30, 2018 we executed the Senior Secured Term Loan to finance our acquisition of Knights Inn and we repaid outstanding debt on mortgage loans related to the nine hotel properties disposed of during the period.

Debt

As of September 30, 2019, we had outstanding total debt, excluding unamortized deferred financing costs and discounts, of $56.5 million.

During the nine months ended September 30, 2019 we executed term loans at each of the two properties held by RL Venture for a total principal amount of $16.6 million. Proceeds from the loans were distributed to the Partners of RL Venture in accordance with ownership interest percentage. We transferred $4.2 million of the proceeds received into a cash collateral account, which is included in Restricted cash on the Condensed Consolidated Balance Sheets as of March 31, 2019. In April 2019, the $4.2 million in the cash collateral account was applied against the outstanding principal balance of the Senior Secured Term Loan.

We also executed a new mortgage loan agreement at the RLH DC Venture property for a total principal and accrued exit fee of $17.5 million. The proceeds from the loan were immediately used to pay off the existing mortgage loan on the property, which had an outstanding principal balance of $15.9 million at the time of closing.

See Note 8 Debt and Line of Credit within Item 1. Financial Statements of this quarterly report on Form 10-Q, for further additional information about our debt obligations.

Contractual Obligations

Other than the issuance of two term loans for the remaining properties in RL Venture and the replacement of a mortgage loan by RLS DC Venture as described in Note 8 Debt and Line of Credit within Item 1. Financial Statements of this quarterly report on Form 10-Q, there were no material changes to our contractual obligations from what we previously disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2018.

Off-Balance Sheet Arrangements

As of September 30, 2019, we had no off-balance sheet arrangements which have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that effect: (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. We consider a critical accounting policy to be one that is both important to the portrayal of our financial condition and results of operations and requires management's most subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Since the date of our annual report on Form 10-K for the fiscal year ended December 31, 2018, we have made no material changes to our critical accounting policies or the methodologies or assumptions that we apply under them, other than those described in Note 2 Summary of Significant Accounting Policies within Item 1. Financial Statements of this quarterly report on Form 10-Q.

New and Recent Accounting Pronouncements

See Note 2 Summary of Significant Accounting Policies within Item 1. Financial Statements of this quarterly report on Form 10-Q for information on new and recent GAAP accounting pronouncements.

32




Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Our earnings and cash flows are subject to fluctuations due to changes in interest rates, primarily from outstanding debt. As of September 30, 2019, our outstanding line of credit and debt, excluding unamortized origination fees, was $56.5 million. Of this total debt, $39.0 million of the debt is subject to variable rates based on the LIBOR index.

We enter into derivative transactions to hedge our exposure to interest rate fluctuations, and not for trading purposes. Historically, we have entered into interest rate caps, which effectively cap the associated LIBOR reference rates and reduce our exposure to the impact of changing interest rates and future cash flows for interest. As of September 30, 2019, none of our outstanding debt was subject to interest rate caps as the cap associated with the RLH Atla Venture loan expired in September 2019. For additional information, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of our annual report on Form 10-K for the year ended December 31, 2018. Our exposures to market risk have not changed materially since December 31, 2018.

A 100 basis point change in the underlying interest rates on our $39.0 million of variable rate debt would result in approximately a $0.4 million increase or decrease in annual interest expense.

We do not foresee any changes of significance in our exposure to fluctuations in interest rates, although we will continue to manage our exposure to this risk by monitoring available financing alternatives.

The below table summarizes the principal payment requirements on our debt obligations at September 30, 2019 on our Condensed Consolidated Balance Sheets (in thousands):
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
 
Fair Value
Total Debt
 
$
25,691

 
$

 
$
16,600

 
$

 
$
14,189

 
$

 
$
56,480

 
$
55,063

Average interest rate
 
 
 
 
 
 
 
 
 
 
 
 
 
7.0
%
 
 

33



Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2019, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective to ensure that material information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within time periods specified in SEC rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in the company’s internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), during the nine months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



34


PART II – OTHER INFORMATION

Item 1.
Legal Proceedings

On September 26, 2018, Radisson Hotels International, Inc. filed a complaint against RLH Corporation and our subsidiary Red Lion Hotels Franchising, Inc. in the United States District Court for the Eastern District of Washington. The complaint alleges tortious interference with agreements between Radisson and several franchisees controlled by Inner Circle Investments and seeks damages in an undetermined amount. RLH Corporation believes this complaint is without merit and we intend to defend it vigorously.

On October 31, 2018, the Company's lease for the Red Lion River Inn expired. The landlord filed a lawsuit against the Company on January 24, 2019 in Spokane Superior Court, alleging breach of the lease agreement and tort claims relating to the condition of the hotel. The Company filed its Answer on January 25, 2019, denying all allegations and asserting various affirmative defenses. RLH Corporation believes this complaint is without merit and we intend to defend it vigorously.

In the second quarter of 2019, we accrued approximately $952,000 for a settlement over a wage dispute with former hotel employees related to the calculation of pay for certain rest, break, meal, and other periods that are required under California laws.

At any given time, we are subject to additional claims and actions incidental to the operation of our business. While the outcome of these proceedings cannot be predicted, it is the opinion of management that none of such proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows or results of operations. See Note 10 Commitments and Contingencies within Item 1. Financial Statements.

Item 1A.
Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in our annual report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results. The risks described in our annual report may not be the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results in the future.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

None.

35


Item 6.
Exhibits

Index to Exhibits

Exhibit
Number
 
Description
 
 
 
 
Amendment to Julie Shiflett Offer Letter dated October 8, 2019
 
 
 
 
Amendment to Paul Sacco Promotion Letter dated October 8, 2019
 
 
 
 
Amendment to Gary L. Sims Offer Letter dated October 8, 2019
 
 
 
 
Certification of Principal Financial Officer & Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)
 
 
 
 
Certification of Principal Financial Officer & Principal Executive Officer pursuant to Exchange Act Rule 13a-14(b)
 
 
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
 
 
 
101.SCH
 
Inline XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document


36


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Red Lion Hotels Corporation
Registrant
 
Signature
 
Title
 
Date
 
 
 
 
 
 
 
By:
 
/s/ Julie Shiflett
 
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Executive Officer)
 
November 12, 2019
 
 
Julie Shiflett
 
 
 


37
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