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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR 
o
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)
Registrant’s Telephone Number, Including Area Code: (509) 459-6100 
__________________________________________
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  ý    No  o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
 
o
  
Accelerated filer
 
ý
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
 
 
 
 
Emerging growth company
 
o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  ý
As of October 31, 2017, there were 23,626,111 shares of the registrant’s common stock outstanding.


Table of Contents

TABLE OF CONTENTS
 
 
 
 
Item No.
Description
Page No.
 
 
 
 
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1
 
 
Consolidated Balance Sheets at September 30, 2017 and December 31, 2016
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016
 
Item 2
Item 3
Item 4
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
 



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PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements

RED LION HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2017 and December 31, 2016
 
 
September 30,
2017
 
December 31,
2016
 
 
(In thousands, except per share data)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents ($9,599 and $5,134 attributable to VIEs)
 
$
36,179

 
$
38,072

Restricted cash ($12,620 and $9,211 attributable to VIEs)
 
12,946

 
9,537

Accounts receivable, net ($4,236 and $2,811 attributable to VIEs)
 
14,450

 
9,196

Accounts receivable from related parties
 
1,824

 
1,865

Notes receivable, net
 
1,572

 
1,295

Inventories ($455 and $447 attributable to VIEs)
 
631

 
596

Prepaid expenses and other ($1,141 and $1,008 attributable to VIEs)
 
5,156

 
4,244

Assets held for sale
 
4,285

 
5,585

Total current assets
 
77,043

 
70,390

Property and equipment, net ($173,377 and $179,609 attributable to VIEs)
 
204,131

 
210,485

Goodwill
 
9,404

 
9,404

Intangible assets
 
51,306

 
52,848

Other assets, net ($177 and $64 attributable to VIEs)
 
1,843

 
1,408

Total assets
 
$
343,727

 
$
344,535

LIABILITIES
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable ($1,998 and $3,886 attributable to VIEs)
 
$
5,555

 
$
8,479

Accrued payroll and related benefits ($1,076 and $175 attributable to VIEs)
 
5,516

 
4,590

Other accrued entertainment liabilities held for sale
 
6,757

 
11,334

Other accrued liabilities ($2,749 and $1,656 attributable to VIEs)
 
6,087

 
4,063

Long-term debt, due within one year ($24,422 and $1,469 attributable to VIEs)
 
24,422

 
1,469

Contingent consideration for acquisition due to related party, due within one year
 
7,581

 
6,768

Liabilities held for sale
 
739

 
686

Total current liabilities
 
56,657

 
37,389

Long-term debt, due after one year, net of debt issuance costs ($87,040 and $106,862 attributable to VIEs)
 
87,040

 
106,862

Contingent consideration for acquisition due to related party, due after one year
 
4,944

 
4,432

Deferred income and other long-term liabilities ($701 and $841 attributable to VIEs)
 
1,666

 
2,293

Deferred income taxes
 
6,132

 
5,716

Total liabilities
 
156,439

 
156,692

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
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; 23,611,519 and 23,434,480 shares issued and outstanding
 
236

 
234

Additional paid-in capital, common stock
 
173,341

 
171,089

Accumulated deficit
 
(16,901
)
 
(15,987
)
Total RLH Corporation stockholders' equity
 
156,676

 
155,336

Noncontrolling interest
 
30,612

 
32,507

Total stockholders' equity
 
187,288

 
187,843

Total liabilities and stockholders’ equity
 
$
343,727

 
$
344,535

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

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RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
For the Three and Nine Months Ended September 30, 2017 and 2016
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In thousands, except per share data)
Revenue:
 
 
 
 
 
 
 
 
Company operated hotels
 
$
37,244

 
$
37,157

 
$
94,214

 
$
93,515

Other revenues from managed properties
 
1,054

 
1,733

 
3,047

 
4,498

Franchised hotels
 
12,714

 
4,766

 
36,045

 
12,194

Other
 
12

 
16

 
128

 
40

Total revenues
 
51,024

 
43,672

 
133,434

 
110,247

Operating expenses:
 
 
 
 
 
 
 
 
Company operated hotels
 
25,284

 
25,363

 
70,450

 
71,035

Other costs from managed properties
 
1,054

 
1,733

 
3,047

 
4,498

Franchised hotels
 
8,898

 
3,214

 
26,300

 
10,034

Other
 
(9
)
 
9

 
(2
)
 
30

Depreciation and amortization
 
4,660

 
3,771

 
13,742

 
11,209

Hotel facility and land lease
 
1,201

 
1,197

 
3,604

 
3,543

Gain on asset dispositions, net
 
(113
)
 
(100
)
 
(334
)
 
(729
)
General and administrative expenses
 
3,640

 
2,031

 
11,348

 
7,781

Acquisition and integration costs
 
1,235

 
1,413

 
1,246

 
1,653

Total operating expenses
 
45,850

 
38,631

 
129,401

 
109,054

Operating income
 
5,174

 
5,041

 
4,033

 
1,193

Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(2,119
)
 
(1,793
)
 
(6,114
)
 
(4,741
)
Other income (loss), net
 
338

 
169

 
562

 
290

Total other income (expense)
 
(1,781
)
 
(1,624
)
 
(5,552
)
 
(4,451
)
Income (loss) from continuing operations before taxes
 
3,393

 
3,417

 
(1,519
)
 
(3,258
)
Income tax expense
 
174

 
166

 
513

 
258

Net income (loss) from continuing operations
 
3,219

 
3,251

 
(2,032
)
 
(3,516
)
Discontinued operations:
 
 
 
 
 
 
 
 
Income from discontinued business unit, net of income tax benefit of $0
 
408

 
262

 
611

 
1,831

Net income (loss)
 
3,627

 
3,513

 
(1,421
)
 
(1,685
)
Net (income) loss attributable to noncontrolling interest
 
(871
)
 
(1,207
)
 
507

 
(645
)
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
$
2,756

 
$
2,306

 
$
(914
)
 
$
(2,330
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per share - basic
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to RLH Corporation
 
$
0.10

 
$
0.10

 
$
(0.06
)
 
$
(0.21
)
Income from discontinued operations
 
0.02

 
0.01

 
0.02

 
0.09

Net income (loss) attributable to RLH Corporation
 
$
0.12

 
$
0.11

 
$
(0.04
)
 
$
(0.12
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per share - diluted
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to RLH Corporation
 
$
0.10

 
$
0.10

 
$
(0.06
)
 
$
(0.21
)
Income from discontinued operations
 
0.01

 
0.01

 
0.02

 
0.09

Net income (loss) attributable to RLH Corporation
 
$
0.11

 
$
0.11

 
$
(0.04
)

$
(0.12
)
 
 
 
 
 
 
 
 
 
Weighted average shares - basic
 
23,609

 
20,228

 
23,542

 
20,157

Weighted average shares - diluted
 
24,176

 
20,613

 
23,542

 
20,157

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

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RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2017 and 2016
 
 
 
Nine Months Ended
 
 
September 30,
 
 
2017
 
2016
 
 
(In thousands)
Operating activities:
 
 
 
 
Net loss
 
$
(1,421
)
 
$
(1,685
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
13,806

 
11,354

Amortization of debt issuance costs
 
892

 
880

Gain on disposition of property, equipment and other assets, net
 
(328
)
 
(730
)
Deferred income taxes
 
416

 
233

Equity in investments
 

 
(171
)
Stock based compensation expense
 
2,392

 
1,960

Provision for doubtful accounts
 
407

 
212

Fair value adjustments to contingent consideration
 
1,325

 

Change in current assets and liabilities:
 
 
 
 
Accounts receivable
 
(4,345
)
 
(4,664
)
Notes receivable
 
(69
)
 
(68
)
Inventories
 
(32
)
 
63

Prepaid expenses and other
 
(1,324
)
 
(1,959
)
Accounts payable
 
(780
)
 
3,697

Other accrued liabilities
 
(1,936
)
 
(2,046
)
Net cash provided by operating activities
 
9,003

 
7,076

Investing activities:
 
 
 
 
Capital expenditures
 
(8,024
)
 
(30,266
)
Acquisition of Vantage Hospitality
 

 
(22,694
)
Proceeds from disposition of property and equipment
 
28

 
434

Collection of notes receivable related to property sales
 
200

 
1,781

Advance of note receivable
 
(408
)
 
(328
)
Proceeds from sales of short-term investments
 

 
18,060

Other, net
 

 
78

Net cash used in investing activities
 
(8,204
)
 
(32,935
)
Financing activities:
 
 
 
 
Borrowings on long-term debt
 
3,237

 
19,547

Repayment of long-term debt
 
(959
)
 

Debt issuance costs
 
(35
)
 
(192
)
Proceeds from sale of interests in joint ventures
 

 
3,194

Distributions to noncontrolling interest
 
(1,388
)
 
(3,594
)
Stock-based compensation awards cancelled to settle employee tax withholding
 
(332
)
 
(343
)
Other, net
 
194

 
156

Net cash provided by financing activities
 
717

 
18,768

 
 
 
 
 
Change in cash, cash equivalents and restricted cash:
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
 
1,516

 
(7,091
)
Cash, cash equivalents and restricted cash at beginning of period
 
47,609

 
35,202

Cash, cash equivalents and restricted cash at end of period
 
$
49,125

 
$
28,111


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



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RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (Continued)
For the Nine Months Ended September 30, 2017 and 2016

 
 
Nine Months Ended
 
 
September 30,
 
 
2017
 
2016
 
 
(In thousands)
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during periods for:
 
 
 
 
Income taxes
 
$
154

 
$
22

Interest on debt
 
5,199

 
4,187

Non-cash investing and financing activities:
 
 
 
 
Reclassification of long-term debt to current
 
$
22,953

 
$
5,912

Reclassification of current and noncurrent assets to assets held for sale
 
4,285

 
3,936

Reclassification of current and noncurrent liabilities to liabilities held for sale
 
739

 

Reclassification of long-term note receivable to short-term
 
339

 
25

Property and equipment, purchases not yet paid
 
210

 
59

Accrual of contingent consideration for Vantage acquisition
 

 
11,077

Shares issued for Vantage acquisition
 

 
5,755

Reclassification of current assets to noncurrent assets
 

 
14


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

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RED LION HOTELS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
Organization

Red Lion Hotels Corporation ("RLH Corporation", "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 management, franchising and ownership of hotels under the following proprietary brands:
 
Ÿ Hotel RL
Ÿ America's Best Inn & Suites
 
Ÿ Red Lion Hotels
Ÿ Signature Inn
 
Ÿ Red Lion Inn & Suites
Ÿ Jameson Inns
 
Ÿ GuestHouse
Ÿ Country Hearth Inns & Suites
 
Ÿ Settle Inn
Ÿ 3 Palm Hotels
 
Ÿ Americas Best Value Inn
Ÿ Value Inn Worldwide
 
Ÿ Canadas Best Value Inn
Ÿ Value Hotel Worldwide
 
Ÿ Lexington Hotels & Inns
 

A summary of our hotels and available rooms as of September 30, 2017 is provided below:
 
 
Company Operated
 
Franchised
 
Total Systemwide
 
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
Total
 
20

 
4,200

 
1,082

 
66,600

 
1,102

 
70,800

 
 
 
 
 
 
 
 
 
 
 
 
 

On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our Entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the Entertainment segment are reported as discontinued operations, and the assets and liabilities are classified as held for sale for all periods presented in this quarterly report on Form 10-Q. See Note 17.

We were incorporated in the state of Washington in April 1978. The Company's corporate headquarters are located in Denver, Colorado, with regional offices in Spokane, Washington, and Coral Springs, Florida.

We are authorized to issue 50 million shares of common stock, par value $0.01 per share, and five million shares of preferred stock, par value $0.01 per share. As of September 30, 2017, there were 23,611,519 shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding. The board of directors has the authority, without action by the shareholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of the common stock.

Each holder of common stock is entitled to one vote for each share held on all matters to be voted upon by the shareholders with no cumulative voting rights. Holders of common stock are entitled to receive ratably the dividends, if any, which may be declared from time to time by the board of directors out of funds legally available for that purpose. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future.

2.
Summary of Significant Accounting Policies

The unaudited consolidated financial statements included herein have been 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, 2016 has been 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

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statements and the notes thereto for the year ended December 31, 2016, filed with the SEC in our annual report on Form 10-K on March 31, 2017.

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 Consolidated Balance Sheet at September 30, 2017, the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017 and 2016, and the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016. 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.

Principles of Consolidation

The financial statements encompass the accounts of RLH Corporation and all of its consolidated subsidiaries, including:
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
TicketsWest.com, 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 Balt Venture LLC (RLS Balt Venture) in which we hold a 73% member interest
RLS DC Venture LLC (RLS DC Venture) in which we hold a 55% member interest

All inter-company and inter-segment transactions and accounts have been eliminated upon consolidation.

Cash and Cash Equivalents

All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. At times, cash balances at banks and other financial institutions may be in excess of federal insurance limits.

Restricted Cash

In accordance with our various borrowing arrangements, at September 30, 2017 and December 31, 2016 cash of $12.9 million and $9.5 million, respectively, was held primarily as reserves for debt service (interest only), property improvements, and other requirements from the lenders.

In our Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, we include restricted cash with cash and cash equivalents when reconciling the beginning and ending balances for each period. The balances included in the Consolidated Statements of Cash Flows for the periods ended are as follows (in thousands):

 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Cash and cash equivalents
 
$
36,179

 
$
18,930

Restricted cash
 
12,946

 
9,181

Cash, cash equivalents and restricted cash
 
$
49,125

 
$
28,111


Allowance for Doubtful Accounts

The ability to collect individual accounts receivable is reviewed on a routine basis. An allowance for doubtful accounts is recognized based on specifically identified amounts believed to be uncollectible. If actual collection experience changes, revisions to the allowance may be required, and, if all attempts to collect a receivable fail, it is recorded against the allowance. The estimate of the allowance for doubtful accounts may be impacted by, among other things, national and regional economic conditions. Acquired accounts receivable from business acquisitions are recorded at fair value, based on amounts expected to be collected. Therefore no allowance for doubtful accounts related to these accounts is recorded at the acquisition date.

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The following schedule summarizes the activity in the allowance account for trade accounts receivable (in thousands):
 
 
2017
 
2016
Allowance for doubtful accounts
 
 
Balance, January 1
 
$
944

 
$
657

Additions to allowance
 
385

 
212

Write-offs, net of recoveries
 
(1
)
 
(67
)
Balance, September 30
 
$
1,328

 
$
802


Accounts Receivable from Related Parties

Amounts receivable from related parties relate to outstanding amounts billed to the owners of hotels we manage for reimbursement of costs of the operations of those hotels. We have a related party relationship with these owners, and there is no allowance for doubtful accounts associated with these receivables.

Notes Receivable

We carry notes receivable at their estimated collection amount, and they are classified as either current or long-term depending on the expected collection date. Interest income on notes receivable is recognized using the interest method.

Inventories

Inventories consist primarily of food and beverage products held for sale at the company operated restaurants and guest supplies. Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or net realizable value.

Prepaid and other expenses

Prepaid and other expenses include prepaid insurance, prepaid taxes, deposits, advertising costs and prepaid costs related to our brand conferences.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. The cost of improvements that extend the life of property and equipment is capitalized. Repairs and maintenance charges are expensed as incurred.

Depreciation is provided using the straight-line method over the estimated useful life of each asset, which ranges as follows:
 
 
Buildings
25 to 39 years
Equipment
2 to 15 years
Furniture and fixtures
2 to 15 years
Landscaping and improvements
15 years
 

Leasehold improvements are capitalized and depreciated over the term of the applicable lease, including renewable periods if reasonably assured, or over the useful lives, whichever is shorter.

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Valuation of Long-Lived Assets

We test long-lived asset groups for recoverability when changes in circumstances indicate the carrying value may not be recoverable, for example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, or significant negative industry or economic trends. We also perform a test for recoverability when management has committed to a plan to sell or otherwise dispose of an asset group. We evaluate recoverability of an asset group by comparing its carrying value to the future net undiscounted cash flows that we expect will be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value. When we recognize an impairment loss for assets to be held and used, we depreciate the adjusted carrying amount of those assets over their remaining useful life.

We base our calculations of the estimated fair value of an asset group on the income approach or the market approach. The assumptions and methodology utilized for the income approach are the same as those described in the "Goodwill and Intangible Assets" caption. For the market approach, we use analyses based primarily on market comparables, recent appraisals and assumptions about market capitalization rates, growth rates, and inflation.

Variable Interest Entities

We analyze the investments we make in joint venture entities based on the accounting guidance for variable interest entities (VIEs). These joint ventures are evaluated to determine whether (1) sufficient equity at risk exists for the legal entity to finance its activities without additional subordinated financial support or, (2) as a group, the holders of the equity investment at risk lack one of the following characteristics (a) the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance or, (b) the obligation to absorb the expected losses of the legal entity or (c) the right to receive expected residual returns of the legal entity, or (3) the voting rights of some equity investors are not proportional to their obligations to absorb the losses or the right to receive benefits and substantially all of the activities either involve or are conducted on behalf of an investor with disproportionately few voting rights. If any one of the above three conditions are met then the joint venture entities are considered to be VIEs.

We consolidate the results of any such VIE in which we determine that we have a controlling financial interest. We would have a “controlling financial interest” (i.e., be deemed the primary beneficiary) in such an entity if we had both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive the benefits from, the VIE that could be potentially significant to the VIE.

Business Combinations

On the date of acquisition, the assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree are recorded at their fair values. The acquiree's results of operations are also included as of the date of acquisition in our consolidated results. Intangible assets that arise from contractual/legal rights, or are capable of being separated are measured and recorded at fair value, and amortized over the estimated useful life. If practicable, assets acquired and liabilities assumed arising from contingencies are measured and recorded at fair value. If the valuation of any contingent assets or liabilities is not practicable, such assets and liabilities are measured and recorded when it is probable that a gain or loss has occurred and the amount can be reasonably estimated. The residual balance of the purchase price, after fair value allocations to all identified assets and liabilities, represents goodwill. Acquisition-related costs are expensed as incurred. Restructuring costs associated with an acquisition are generally expensed in periods subsequent to the acquisition date, and changes in deferred tax asset valuation allowances and acquired income tax uncertainties, including penalties and interest, after the measurement period are recognized as a component of the provision for income taxes. Our acquisitions may include contingent consideration, which require us to recognize the fair value of the estimated liability at the time of the acquisition. Subsequent changes in the estimate of the amount to be paid under the contingent consideration arrangement are recognized in the Consolidated Statements of Comprehensive Income (Loss). Cash payments for contingent or deferred consideration up to the amount of liability recognized on the acquisition date are classified within cash flows from financing activities within the Consolidated Statements of Cash Flows and any excess is classified as cash flows from operating activities.

Goodwill and Intangible Assets

Goodwill and intangible assets may result from our business acquisitions. Intangible assets may also result from the purchase of assets and intellectual property in a transaction that does not qualify as a business combination. We use estimates, including estimates of useful lives of intangible assets, the amount and timing of related future cash flows, and fair values of the related operations, in determining the value assigned to goodwill and intangible assets. Our finite-lived intangible assets, which include

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customer contracts and certain brand names that we do not expect to maintain indefinitely, are amortized over their expected useful lives based on estimated discounted cash flows. The remaining brand name and trademark assets are considered indefinite-lived intangible assets and are not subject to amortization. Finite-lived intangible assets are tested for impairment at the asset group level when events or changes in circumstances indicate the carrying value may not be recoverable. Indefinite-lived intangible assets are tested for impairment annually, when events or changes in circumstances indicate the asset may be impaired, or at the time when their useful lives are determined to be no longer indefinite.

Goodwill is assigned to our reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics, including the forecast discounted cash flows associated with each reporting unit. The reporting units are aligned with our reporting segments.

We test goodwill for impairment each year as of October 1, or more frequently should a significant impairment indicator occur. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with the two-step impairment test. The impairment test involves comparing the fair values of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss amount. This second step determines the current fair values of all assets and liabilities of the reporting unit and then compares the implied fair value of the reporting unit's goodwill to the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.

In assessing the qualitative factors, we assess relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances, and how these may impact a reporting unit's fair value or carrying amount, involves significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, RLH Corporation-specific events, and share price trends, and making the assessment as to whether each relevant factor would impact the impairment test positively or negatively and the magnitude of any such impact.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We forecast discounted future cash flows at the reporting unit level using risk-adjusted discount rates and estimated future revenues and operating costs, which take into consideration factors, such as expectations of competitive and economic environments. We also identify similar publicly traded companies and develop a correlation, referred to as a multiple, to apply to the operating results of the reporting units. These combined fair values are then reconciled to the aggregate market value of our common stock on the date of valuation, while considering a reasonable control premium.

Other Assets

Other assets primarily consist of key money arrangements with certain of our franchisees and IT system implementation and license costs, for both our franchisees and our company operated hotels. We recognize key money paid in conjunction with entering into long-term franchise agreements as prepaid expenses and amortize the amount paid as a reduction of revenue over the term of the franchise agreements. IT system implementation and license costs represent costs incurred to implement and operate RevPak, our proprietary guest management system application and are amortized over the initial term of the software license arrangement or the current license period, as applicable.

Fair Value Measurements

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 following three levels of the fair value hierarchy:
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 includes unobservable inputs that reflect assumptions about what factors market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.

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Deferred Income

In 2003, we sold a hotel to an unrelated party in a sale-operating leaseback transaction. The pre-tax gain on the transaction of approximately $7.0 million was deferred and is being amortized into income over the period of the lease term, which expires in November 2018 and is renewable for three, five-year terms at our option. During the nine months ended September 30, 2017 and 2016, we recognized income of approximately $0.4 million each period for the amortization of the deferred gain. The remaining balances at September 30, 2017 and December 31, 2016 were $0.5 million and $0.9 million.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning, and results of recent operations. At September 30, 2017 and December 31, 2016, a valuation allowance has been recorded to reduce our deferred tax assets to an amount that is more likely than not to be realized. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

We classify any interest expense and penalties related to underpayment of taxes and any interest income on tax overpayments as components of income tax expense.

We record uncertain tax positions in accordance with Accounting Standards Codification 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. See Note 13.

Discontinued Operations and Held For Sale

When an asset group meets the criteria to be classified as held-for-sale, and the asset group represents a component of our business or an entire reportable segment, we classify the results of operations as discontinued operations in our consolidated statements of comprehensive income for all periods presented. An asset considered a held-for-sale is reported at the lower of the asset's carrying amount or fair value. Cash flows from the Company's discontinued operations are included in the Consolidated Statements of Cash Flows. See Note 17 for further discussion of our discontinued operations.

Revenue Recognition

Revenue is generally recognized as services are provided. When payments from customers are received before services have been performed, the amount received is recorded as deferred revenue until the service has been completed. We recognize revenue from the following sources:

Company Operated Hotels - Room rental and food and beverage sales from majority owned and leased hotels and management fees from hotels under management contract. Revenues are recognized when services have been performed, generally at the time of the hotel stay or guest's visit to the restaurant or at the time the management services are provided. We recognize other revenue and costs from managed properties when we incur the related reimbursable costs. These costs primarily consist of payroll and related expenses at managed properties where we are the employer. As these costs have no added markup, the revenue and related expense have no impact on either our operating or net income.

Franchised Hotels - Fees received in connection with the franchise and marketing of our brand names. Franchise revenues are recognized as earned in accordance with the contractual terms of the franchise agreements.


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Entertainment - Online ticketing services, ticketing inventory management systems, promotion of Broadway-style shows and other special events. Where we act as an agent and receive a net fee or commission, revenue is recognized in the period the services are performed. When we are the promoter of an event and are at-risk for the production, revenues and expenses are recorded in the period of the event performance. As the result of the sale of the Entertainment business on October 3, 2017, all revenues earned have been classified as discontinued operations for all periods presented.

Advertising and Promotion

Costs associated with advertising and promotional efforts are generally expensed as incurred. During the nine months ended September 30, 2017 and 2016 we incurred approximately $5.1 million and $4.3 million, respectively in advertising expense.

Basic and Diluted Earnings (Loss) Per Share

Basic earnings (loss) per share attributable to RLH Corporation is computed by dividing income (loss) attributable to RLH Corporation by the weighted‑average number of shares outstanding during the period. Diluted earnings (loss) per share attributable to RLH Corporation gives effect to all dilutive potential shares that are outstanding during the period and include outstanding stock options, other outstanding employee equity grants, warrants and amounts contingently issuable in association with the Vantage acquisition contingent consideration, by increasing the weighted-average number of shares outstanding by their effect. See Note 12.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates.

Reclassifications

Effective for the year ended December 31, 2016, we early adopted Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. We have revised the Consolidated Statement of Cash Flows for the nine months ended September 30, 2016 to reflect the adoption of this new standard. As the result, the total change in cash flows for the first nine months of 2016 was a decrease of $2.1 million of cash inflows, of which $1.1 million was an increase for operating activities, and $3.2 million was a decrease for investing activities. The change was the result of the net transfer of restricted cash to cash for completed property improvements, partially offset by the net transfer of cash to restricted cash as part of our joint venture debt arrangements.

New and Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for us on January 1, 2018. Upon adoption utilizing the modified retrospective method, we will recognize a cumulative adjustment to retained earnings as opposed to retrospectively adjusting prior periods, and our financial statements will include expanded disclosures related to contracts with customers. We are continuing our assessment of our various revenue arrangements to ensure we account for them in accordance with this new guidance upon adoption. We do not expect a material impact to revenue from our company operated hotels segment. Within our franchise business, we will recognize application fee revenue and the related deal commission expense over the initial contract period, rather than immediately upon the signing of the franchise agreement.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We had $81.8 million of operating lease obligations as of September 30, 2017 (see Note 9) and upon the adoption of the standard will record an ROU asset and lease liability for present value of these leases, which will have

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a material impact on the Consolidated Balance Sheet. However, the Consolidated Statement of Comprehensive Income (Loss) recognition of lease expenses is not expected to change from the current methodology.

The FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments to address diversity in practice for eight specific topics: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. This guidance is effective for us beginning January 1, 2018. As this ASU is clarifying only presentation matters within the statement of cash flows, we do not expect it to have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (ASU 2017-01), which narrows the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If this initial test is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output. ASU 2017-01 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We do not expect the adoption of this standard to have a material impact on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test that requires the determination of the fair value of individual assets and liabilities of a reporting unit. ASU 2017-04 requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. Upon adoption, we will follow the guidance in this standard for goodwill impairment testing.

In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.  The amendments clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments also define the term in substance nonfinancial asset. The amendments clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets. The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The guidance is effective for us as of January 1, 2018 in conjunction with our adoption of ASU 2014-09. Entities may use either a full or modified approach to adopt the ASU. We are assessing the impact of the adoption of this new guidance on our financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The guidance is effective on January 1, 2018 for us, and we would apply the amendments prospectively to an award modified on or after the adoption date.

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.


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3.
Business Segments

We have two operating segments: company operated hotels and franchised 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. All balances have been presented after the elimination of inter-segment and intra-segment revenues and expenses.

The results of operations of the Entertainment segment were treated as discontinued operations, due to the sale of the business completed on October 3, 2017. As a result, the revenue and operating expenses of the Entertainment segment are excluded from the segment disclosures below.

Selected financial information is provided below (in thousands):
Three Months Ended September 30, 2017
 
Company Operated Hotels
 
Franchised Hotels
 
Other
 
Total
Revenue
 
$
38,298

 
$
12,714

 
$
12

 
$
51,024

Operating expenses:
 
 
 
 
 
 
 
 
Segment operating expenses
 
26,338

 
8,898

 
(9
)
 
35,227

Depreciation and amortization
 
3,755

 
594

 
311

 
4,660

Other operating expenses, acquisition costs and gains on asset dispositions
 
1,090

 
1,235

 
3,638

 
5,963

Operating income (loss)
 
$
7,115

 
$
1,987


$
(3,928
)

$
5,174

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
1,073

 
$
188

 
$
998

 
$
2,259

Identifiable assets as of September 30, 2017
 
$
251,620

 
$
70,500

 
$
21,607

 
$
343,727


Three Months Ended September 30, 2016
 
Company Operated Hotels
 
Franchised Hotels
 
Other
 
Total
Revenue
 
$
38,890

 
$
4,766

 
$
16

 
$
43,672

Operating expenses:
 
 
 
 
 
 
 
 
Segment operating expenses
 
27,096

 
3,214

 
9

 
30,319

Depreciation and amortization
 
3,444

 
101

 
226

 
3,771

Other operating expenses, acquisition costs and gains on asset dispositions
 
1,097

 
1,413

 
2,031

 
4,541

Operating income (loss)
 
$
7,253

 
$
38


$
(2,250
)

$
5,041

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
9,007

 
$

 
$
787

 
$
9,794

Identifiable assets as of December 31, 2016
 
$
260,583

 
$
66,601

 
$
17,351

 
$
344,535



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Nine Months Ended September 30, 2017
 
Company Operated Hotels
 
Franchised Hotels
 
Other
 
Total
Revenue
 
$
97,261

 
$
36,045

 
$
128

 
$
133,434

 
 
 
 
 
 
 
 
 
Segment operating expenses
 
73,497

 
26,300

 
(2
)
 
99,795

Depreciation and amortization
 
11,096

 
1,721

 
925

 
13,742

Other operating expenses, acquisition costs and gains on asset dispositions
 
3,258

 
1,144

 
11,462

 
15,864

Operating income (loss)
 
$
9,410

 
$
6,880

 
$
(12,257
)
 
$
4,033

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
3,281

 
$
626

 
$
2,089

 
$
5,996

Identifiable assets as of September 30, 2017
 
$
251,620

 
$
70,500

 
$
21,607

 
$
343,727


Nine Months Ended September 30, 2016
 
Company Operated Hotels
 
Franchised Hotels
 
Other
 
Total
Revenue
 
$
98,013

 
$
12,194

 
$
40

 
$
110,247

 
 
 
 
 
 
 
 
 
Segment operating expenses
 
75,533

 
10,034

 
30

 
85,597

Depreciation and amortization
 
10,308

 
115

 
786

 
11,209

Other operating expenses, acquisition costs and gains on asset dispositions
 
3,208

 
1,654

 
7,386

 
12,248

Operating income (loss)
 
$
8,964

 
$
391

 
$
(8,162
)
 
$
1,193

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
28,917

 
$

 
$
1,919

 
$
30,836

Identifiable assets as of December 31, 2016
 
$
260,583

 
$
66,601

 
$
17,351

 
$
344,535


4.
Variable Interest Entities

Our joint venture entities have been determined to be variable interest entities (VIEs), and RLH Corporation has been determined to be the primary beneficiary of each VIE. Therefore, we consolidate the assets, liabilities, and results of operations of (1) RL Venture, (2) RLS Balt Venture, (3) RLS Atla Venture and (4) RLS DC Venture. See Note 2 for discussion of the significant judgments and assumptions made by us in determining whether an entity is a VIE and if we are the primary beneficiary and therefore must consolidate the VIE. See Note 7 for further discussion of the terms of the long-term debt at each of the joint venture entities.

RL Venture

In January 2015, we transferred 12 of our wholly-owned hotels into RL Venture, a newly created entity that was initially wholly-owned by us, and immediately sold a 45% ownership stake in RL Venture to Shelbourne Falcon RLHC Hotel Investors LLC (Shelbourne Falcon), an entity that is led by Shelbourne Capital LLC (Shelbourne). Subsequently we disposed of one hotel, leaving 11 properties owned by RL Venture. We maintain a 55% interest in RL Venture, and the 11 hotels are managed by RL Management, one of our wholly-owned subsidiaries, subject to a management agreement. RL Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RL 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 Shelbourne Falcon, which does 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 55% equity interest and management fees. As a result, we consolidate RL Venture. The equity interest owned by Shelbourne Falcon is reflected as a noncontrolling interest in the consolidated financial statements.

Cash distributions may be made periodically based on calculated distributable income. During the third quarter of 2017, RL Venture made a cash distribution totaling $1.6 million, of which RLH Corporation received $0.9 million. During the third quarter of 2016, RL Venture made distributions totaling $4.0 million, of which RLH Corporation received $2.2 million. During the nine months ended September 30, 2017 and 2016, cash distributions totaled $3.1 million and $8.0 million, of which RLH Corporation received $1.7 million and $4.4 million, respectively.

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Subsequent to the third quarter of 2017, RL Venture made a cash distribution totaling $1.9 million, of which RLH Corporation received $1.0 million.

In October 2017, we listed the 11 properties in the RL Venture entity for sale through a commercial real estate broker.

RLS Balt Venture

In April 2015, we sold a 21% member interest in our wholly-owned RLS Balt Venture to Shelbourne Falcon Charm City Investors LLC (Shelbourne Falcon II), an entity led by Shelbourne. Shelbourne Falcon II had an option exercisable until December 31, 2015 to purchase up to an additional 24% member interest for $2.3 million. In December 2015, Shelbourne Falcon II elected to purchase additional member interests of 6% based on an aggregate purchase price of $560,000. With the sale of additional member interest without a corresponding change in control, $0.1 million was recognized as an increase in RLH Corporation's additional paid in capital. RL Baltimore, LLC (RL Baltimore), which is wholly-owned by RLS Balt Venture, owns the Hotel RL Baltimore Inner Harbor, which is managed by RL Management. RLS Balt Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RLS Balt 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 the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon II, which does 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 73% equity interest and management fees. As a result, we consolidate RLS Balt Venture. The equity interest owned by Shelbourne Falcon II is reflected as a noncontrolling interest in the consolidated financial statements.

In October 2015, RLH Corporation provided $1.5 million to RLS Balt Venture to fund renovation costs and for operating losses. This funding was not treated as a loan or as a capital contribution. Rather, it is preferred capital of RLS Balt Venture and will be repaid only when the Baltimore hotel property is sold or when RLS Balt Venture is liquidated. Upon such an event, RLH Corporation will receive the $1.5 million plus a preferred return of 11%, compounded annually, prior to any liquidation proceeds being returned to the members.

In May 2017, RLH Corporation provided $2.8 million to RLS Balt Venture to fund operating losses. This funding was not treated as a loan or as a capital contribution. Rather, it is preferred capital of RLS Balt Venture and will be repaid only when the Baltimore hotel property is sold or when RLS Balt Venture is liquidated. Upon such an 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 the members.

Cash distributions may be made periodically based on calculated distributable income. There were no cash distributions made during the nine months ended September 30, 2017 or 2016.

RLS Atla Venture

In September 2015, we formed a joint venture, RLS Atla Venture, with Shelbourne Falcon Big Peach Investors LLC (Shelbourne Falcon III), an entity led by Shelbourne. We own a 55% interest in the joint venture and Shelbourne Falcon III owns a 45% interest. RLH Atlanta LLC (RLH Atlanta), which is wholly-owned by RLS Atla Venture, owns a hotel adjacent to the Atlanta International Airport that opened in April 2016 as the Red Lion Hotel Atlanta International Airport. RLS Atla Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RLS Atla 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 the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon III, which does 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 55% equity interest and management fees. As a result, we consolidate RLS Atla Venture. The equity interest owned by Shelbourne Falcon III is reflected as a noncontrolling interest in the consolidated financial statements.

Cash distributions may be made periodically based on calculated distributable income. There were no cash distributions made during the nine months ended September 30, 2017 or 2016.

RLS DC Venture

In October 2015, we formed a joint venture, RLS DC Venture, with Shelbourne Falcon DC Investors LLC (Shelbourne Falcon IV), an entity led by Shelbourne. Initially, we owned an 86% interest in the joint venture, and Shelbourne Falcon IV owned a 14% interest. On October 29, 2015, RLH DC LLC (RLH DC), which is wholly-owned by RLS DC Venture, acquired 100% of The

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Quincy, an existing hotel business now operated as the Hotel RL Washington DC, in a business combination. The property is managed by RL Management.

As part of the organization of RLS DC Venture, Shelbourne Falcon IV had an option to purchase from us up to an additional 31% of the member interests. On February 3, 2016, Shelbourne Falcon IV elected to purchase from us an additional 15% of the member interests of RLS DC Venture, based on an aggregate purchase price of $1.5 million. With the sale of the additional member interest without a corresponding change in control $0.2 million was recognized as an increase in additional paid in capital in February 2016. On April 1, 2016, Shelbourne Falcon IV exercised the remaining option and purchased from us an additional 16% of the member interests of RLS DC Venture for $1.7 million, which resulted in a further increase of $0.3 million to RLH Corporation's additional paid in capital. Following the April 1, 2016 transaction, we now own 55% of RLS DC Venture, and Shelbourne Falcon IV owns 45%. RLS DC Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest, and substantially all of RLS DC 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 the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon IV, which does 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 RLS DC Venture. The equity interest owned by Shelbourne Falcon IV is reflected as a noncontrolling interest in the consolidated financial statements.

In May 2017, RLH Corporation provided $950,000 to RLS DC Venture to fund restricted cash required by the loan agreement. This funding was not treated as a loan or as a capital contribution. Rather, it is preferred capital of RLS DC Venture and will be repaid only when the DC hotel property is sold, when RLS DC Venture is liquidated, or the restricted cash is released per the loan agreement. Upon such an event, RLH Corporation will receive the $950,000 plus a preferred return of 9%, compounded annually, prior to any liquidation proceeds being returned to the members.

Cash distributions may be made periodically based on calculated distributable income. There were no cash distributions made during the nine months ended September 30, 2017 or 2016.

5.
Property and Equipment

Property and equipment is summarized as follows (in thousands):
 
 
September 30,
2017
 
December 31,
2016
Buildings and equipment
 
$
252,615

 
$
248,132

Furniture and fixtures
 
37,486

 
37,743

Landscaping and land improvements
 
7,878

 
7,928

 
 
297,979

 
293,803

Less accumulated depreciation
 
(142,368
)
 
(130,876
)
 
 
155,611

 
162,927

Land
 
43,192

 
43,193

Construction in progress
 
5,328

 
4,365

Property and equipment, net
 
$
204,131

 
$
210,485


6.
Goodwill and Intangible Assets

Goodwill represents the excess of the estimated fair value of the net assets acquired as a result of business combinations over the net tangible and identifiable intangible assets acquired. Goodwill was recorded in prior years in connection with the acquisitions of certain franchise and entertainment businesses.

The Red Lion, GuestHouse and Settle Inn & Suites brand names are identifiable, indefinite-lived intangible assets that represent the separable legal right to trade names and associated trademarks. We acquired the Red Lion brand name in a business combination we entered into in 2001. We purchased the GuestHouse and Settle Inn & Suites brand names from GuestHouse International LLC in April 2015 and have allocated $5.5 million of the final purchase price to the brand names.

On September 30, 2016 we acquired substantially all of the assets and assumed certain liabilities of Vantage Hospitality Group, Inc. (Vantage), including customer contracts and brand names (see Note 16). The brand names include: Americas Best Value Inn, Canadas Best Value Inn, Lexington Hotels & Inns, America's Best Inns & Suites, Jameson Inns, Country Hearth Inns & Suites,

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Vantage Hotels, Value Inn Worldwide, Value Hotel Worldwide, 3 Palms Hotels and Resorts and Signature Inn. Based on our purchase price allocation, we allocated $30.0 million to brand names. Based on our intent with the brands acquired, we determined that certain of the brands are indefinite-lived based on our intent to hold and maintain the brands. The total of the purchase price allocated to indefinite-lived brand names was $27.2 million. We also acquired certain brand names that we intend to sunset in the future. The total of the purchase price allocated to finite-lived brand names was $2.8 million, with a weighted average remaining useful life of 7.9 years.

In the table below, the customer contracts represent the franchise license agreements acquired with the GuestHouse and Vantage acquisitions. For GuestHouse, we allocated $3.3 million of the final purchase price to the customer contracts. GuestHouse franchise license agreements are amortized over 10 years, which represents the period of expected cash flows, using an accelerated amortization method that matches the economic benefit of the agreements. For Vantage, we allocated $8.4 million to customer contracts and are amortizing them over 15 years, which represents the period of expected cash flows, using an accelerated amortization method that matches the economic benefit of the agreements.

Certain of our brand names and trademarks are considered to have indefinite lives. We assess goodwill and the other indefinite lived intangible assets for potential impairments annually as of October 1, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the assets. We did not impair any goodwill or intangible assets during the nine months ended September 30, 2017 or 2016.

In connection with the sale of the Entertainment business, $3.2 million of goodwill and $6,000 of intangible assets have been classified as held for sale. See Note 17 for further information.

The following table summarizes the balances of goodwill and other intangible assets (in thousands):
 
September 30,
2017
 
December 31,
2016
Goodwill
$
9,404

 
$
9,404

 
 
 
 
Intangible assets
 
 
 
Brand name - indefinite lived
$
39,704

 
$
39,704

Brand name - finite lived, net
2,403

 
2,664

Customer contracts, net
9,071

 
10,352

Trademarks
128

 
128

Total intangible assets
$
51,306

 
$
52,848


Goodwill and other intangible assets attributable to each of our business segments at September 30, 2017 and December 31, 2016 were as follows (in thousands):  
 
September 30, 2017
 
December 31, 2016
 
 
 
Intangible
 
 
 
Intangible
 
Goodwill
 
Assets
 
Goodwill
 
Assets
Company operated hotels
$

 
$
4,660

 
$

 
$
4,660

Franchised hotels
9,404

 
46,646

 
9,404

 
48,188

Total
$
9,404

 
$
51,306

 
$
9,404

 
$
52,848


The following table summarizes the balances of amortized customer contracts and finite-lived brand names (in thousands):
 
September 30,
2017
 
December 31,
2016
Customer contracts
$
11,673

 
$
11,673

Brand name - finite lived
2,751

 
2,751

Accumulated amortization
(2,950
)
 
(1,408
)
Net carrying amount
$
11,474

 
$
13,016



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As of September 30, 2017, estimated future amortization expenses related to our customer contracts and finite-lived brand names is as follows (in thousands):
Year ending December 31,
Amount
2017 (remainder)
$
511

2018
1,798

2019
1,610

2020
1,419

2021
1,261

Thereafter
4,875

Total
$
11,474


7.
Long-Term Debt
The current and noncurrent portions of long-term debt as of September 30, 2017 and December 31, 2016 are as follows (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
 
Current
 
Noncurrent
 
Current
 
Noncurrent
RL Venture
 
$
1,430

 
$
72,074

 
$
1,375

 
$
69,841

RL Baltimore
 
13,300

 

 

 
13,300

RLH Atlanta
 
9,390

 

 
40

 
9,360

RLH DC
 
302

 
16,379

 
54

 
16,628

Total debt
 
24,422

 
88,453

 
1,469

 
109,129

Unamortized debt issuance costs
 

 
(1,413
)
 

 
(2,267
)
Long-term debt net of debt issuance costs
 
$
24,422

 
$
87,040

 
$
1,469

 
$
106,862


The collateral for each of the borrowings within the joint venture entities is the assets and proceeds of each respective entity.

RL Venture
    
In January 2015, RL Venture Holding LLC, a wholly-owned subsidiary of RL Venture, and each of its 12 wholly-owned subsidiaries entered into a loan agreement with Pacific Western Bank, which is secured by the hotels owned by RL Venture. Subsequently we disposed of one hotel, leaving 11 properties owned by RL Venture. The original principal amount of the loan was $53.8 million with an additional $26.2 million to be drawn over a two-year period to cover improvements related to the 12 hotels owned by the subsidiaries. We drew $0.4 million and $3.2 million during the three and nine months ended September 30, 2017. At September 30, 2017, there were unamortized debt issuance fees of $0.9 million.

The loan matures in January 2019 and has a one-year extension option. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 4.75%. Monthly principal payments began in January 2017 in an amount that would repay the outstanding principal balance over a 25-year amortization period.

The liabilities of RL Venture, other than its long-term debt, are nonrecourse to our general credit and assets. The long-term debt is nonrecourse as to RLH Corporation, but several investors in RL Venture, including us, are guarantors regarding completion of certain improvements to the hotels, environmental covenants in the loan agreement, or losses incurred by the lender in the event of a voluntary bankruptcy filing involving RL Venture, any of its subsidiaries or the guarantors. RLH Corporation has no other obligation to provide financial support to RL Venture.

The loan requires us to comply with customary reporting and operating covenants applicable to RL Venture, including requirements relating to debt service loan coverage ratios. It also includes customary events of default. We were in compliance with these covenants at September 30, 2017.


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RL Baltimore

In April 2015, RL Baltimore obtained a new mortgage loan from PFP Holding Company IV LLC, an affiliate of Prime Finance, secured by the Hotel RL Baltimore Inner Harbor. The initial principal amount of the loan was $10.1 million, and the lender agreed to advance an additional $3.2 million to cover expenses related to improvements to the hotel, which we drew during the year ended December 31, 2015. At September 30, 2017 the funds on the loan were fully disbursed. At September 30, 2017, there were unamortized debt issuance fees of $0.2 million.

The balance is payable at maturity of the loan in May 2018. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 6.25%.

The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default. The liability of RL Baltimore under the loan agreement is generally nonrecourse.  However, the lender may obtain a monetary judgment against RL Baltimore if the lender suffers losses under certain circumstances listed in the loan agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations.  RLH Corporation has guaranteed these recourse obligations of RL Baltimore and agreed to customary reporting and operating covenants. We were in compliance with these covenants at September 30, 2017.

RLH Atlanta

In September 2015, RLH Atlanta obtained a mortgage loan from PFP Holding Company IV LLC, an affiliate of Prime Finance, secured by a hotel adjacent to the Atlanta International Airport, which opened in April 2016 as the Red Lion Hotel Atlanta International Airport. The initial principal amount of the loan was $6.0 million, and the lender agreed to advance an additional $3.4 million to cover expenses related to improvements to the hotel, which we drew in the three months ended March 31, 2016. At September 30, 2017 the funds on the loan were fully disbursed. At September 30, 2017, there were unamortized debt issuance fees of $0.1 million.

The loan matures in September 2018 and has two one-year extension options. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 6.35%. Monthly principal payments of $10,000 began in September 2017.

The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default. The liability of RLH Atlanta under the loan agreement is generally nonrecourse.  However, the lender may obtain a monetary judgment against RLH Atlanta if the lender suffers losses under certain circumstances listed in the loan agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations.  RLH Corporation has guaranteed these recourse obligations of RLH Atlanta and agreed to customary reporting and operating covenants. We were in compliance with these covenants at September 30, 2017.

RLH DC

In October 2015, RLH DC obtained a new mortgage loan from Pacific Western Bank secured by the Hotel RL Washington DC. The initial principal amount of the loan was $15.2 million, and the lender agreed to advance an additional $2.3 million to cover expenses related to improvements to the hotel. We drew $1.5 million in additional funds during the year ended December 31, 2016. At September 30, 2017 the funds on the loan were fully disbursed. At September 30, 2017, there were unamortized debt issuance costs of $0.3 million.

The loan matures in October 2019 and has a one-year extension option. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 4.55%. Monthly principal payments begin in November 2017 in an amount that will repay the outstanding principal balance over a 25-year amortization period.

The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default. The liability of RLH DC under the loan agreement is generally nonrecourse.  However, the lender may obtain a monetary judgment against RLH DC if the lender suffers losses under certain circumstances listed in the loan agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations.  RLH Corporation has guaranteed these recourse obligations of RLH DC and agreed to customary reporting and operating covenants. We were in compliance with these covenants at September 30, 2017.


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Contractual maturities for long-term debt outstanding at September 30, 2017, for the next five years are summarized by the year as follows (in thousands):
Year ending December 31,
 
Amount
2017 (remainder)
 
$
434

2018
 
24,442

2019
 
87,999

2020
 

2021
 

Thereafter
 

Total
 
$
112,875


8.
Derivative Financial Instruments

We enter into derivative transactions to hedge our exposure to interest rate fluctuations, and not for trading purposes. We manage our floating rate debt using interest rate caps in order to reduce our exposure to the impact of changing interest rates and future cash outflows for interest. We estimate the fair value of our interest rate caps via calculations that use as their basis readily available observable market parameters. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service, which is a Level 2 input. Changes in fair value of these instruments are recognized in interest expense on the Consolidated Statements of Comprehensive Income (Loss). At September 30, 2017 and December 31, 2016, the valuation of the interest rate caps resulted in the recognition of assets with minimal values both individually and in the aggregate, which are included within Other assets, net on the Consolidated Balance Sheets.
Subsidiary
 
Institution
 
Original Notional Amount
 
LIBOR Reference Rate Cap
 
Expiration
 
 
 
 
(In millions)
 
 
 
 
RL Venture
 
Commonwealth Bank of Australia
 
$
80.0

 
4
%
 
January 2018
RL Baltimore
 
Commonwealth Bank of Australia
 
$
13.3

 
3
%
 
May 2018
RLH Atlanta
 
SMBC Capital Markets, Inc.
 
$
9.4

 
3
%
 
September 2018
RLH DC
 
Commonwealth Bank of Australia
 
$
17.5

 
3
%
 
November 2018

9.
Operating and Capital Lease Commitments

We have both operating and capital leases in the normal course of business. The operating leases relate to five of our company operated hotel properties and our three administrative offices. We are obligated under capital leases for certain hotel equipment at our company operated hotel locations. The capital leases typically have a five-year term. The equipment assets are included within our property and equipment balance and are depreciated over the lease term.

Total future minimum payments due under all current term operating and capital leases at September 30, 2017, are as indicated below (in thousands):
Year ending December 31,
 
Total Lease Obligation
 
Operating Lease Obligation
 
Capital Lease Obligation
2017 (remainder)
 
$
1,545

 
$
1,476

 
$
69

2018
 
5,573

 
5,293

 
280

2019
 
4,853

 
4,571

 
282

2020
 
4,551

 
4,294

 
257

2021
 
2,889

 
2,752

 
137

Thereafter
 
63,458

 
63,453

 
5

Total
 
$
82,869

 
$
81,839

 
$
1,030



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Total rent expense under leases for the three and nine months ended September 30, 2017 was $1.6 million and $4.8 million, respectively, which represents the total of amounts shown within Hotel facility and land lease expense, as well as amounts included within Franchise and General and Administrative operating expenses, and Discontinued Operations on our Consolidated Statements of Comprehensive Income (Loss). Total rent expense under leases for the three and nine months ended September 30, 2016 was $1.5 million and $4.2 million, respectively.

10.
Commitments and Contingencies

At any given time we are subject to claims and actions incidental to the operations of our business. Based on information currently available, we do not expect that any sums we may receive or have to pay in connection with any legal proceeding would have a materially adverse effect on our consolidated financial position or net cash flow.

11.
Stock Based Compensation

Stock Incentive Plans

The 2006 Stock Incentive Plan authorizes the grant or issuance of various option and other awards including restricted stock units and other stock-based compensation. The plan was approved by our shareholders and allowed awards of 2.0 million shares, subject to adjustments for stock splits, stock dividends and similar events. No further stock option grants or other awards are permitted under the terms of the 2006 plan.

The 2015 Stock Incentive Plan (2015 Plan) authorizes the grant or issuance of various option and other awards including restricted stock units and other stock-based compensation. The 2015 Plan was approved by our shareholders in 2015 and provided for awards of 1.4 million shares, subject to adjustments for stock splits, stock dividends and similar events. In May 2017, our shareholders approved an amendment to the 2015 Plan to authorize an additional 1.5 million shares, for a total authorized of 2.9 million shares. As of September 30, 2017, there were 1,370,596 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2015 Plan.

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, 2017 and 2016 stock-based compensation expense is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In thousands)
Stock options
 
$
17

 
$
17

 
$
51

 
$
34

Restricted stock units
 
687

 
561

 
1,891

 
1,588

Performance stock units
 
76

 

 
101

 

Unrestricted stock awards
 
104

 
105

 
319

 
315

Employee Stock Purchase Plan
 
14

 
11

 
30

 
25

Total stock-based compensation
 
$
898

 
$
694

 
$
2,392

 
$
1,962


Stock Options

Stock options issued are valued based upon the Black-Scholes option pricing model and we recognize this value as an expense over the periods in which the options vest. Use of the Black-Scholes option-pricing model requires that we make certain assumptions, including expected volatility, forfeiture rate, risk-free interest rate, expected dividend yield and expected life of the options, based on historical experience. Volatility is based on historical information with terms consistent with the expected life of the option. The risk free interest rate is based on the quoted daily treasury yield curve rate at the time of grant, with terms consistent with the expected life of the option. For the nine months ended September 30, 2017 there were no stock options granted. For the nine months ended September 30, 2016 there were 81,130 shares granted.


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Stock option fair value assumptions are as follows for stock options granted during the nine months ended September 30, 2016:
Grant Date
 
Volatility
 
Forfeiture Rate
 
Risk-free Interest Rate
 
Dividend Yield
 
Expected Life (Years)
March 28, 2016
 
61.12%
 
21.07%
 
1.37%
 
—%
 
5

A summary of stock option activity for the nine months ended September 30, 2017, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Exercise
Price
Balance, January 1, 2017
 
132,868

 
$
8.91

Options granted
 

 

Options exercised
 

 

Options forfeited
 
(18,890
)
 
$
12.27

Balance, September 30, 2017
 
113,978

 
$
8.36

Exercisable, September 30, 2017
 
53,131

 
$
8.53


Additional information regarding stock options outstanding and exercisable as of September 30, 2017, is presented below:
Exercise
Price
 
Number
Outstanding
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Expiration
Date
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value(1)
 
Number
Exercisable
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value(1)
$8.20
 
81,130

 
8.49
 
2026
 
$
8.20

 
$
37

 
20,283

 
$
8.20

 
$
9

$8.74
 
32,848

 
0.64
 
2018
 
$
8.74

 

 
32,848

 
$
8.74

 

 
 
113,978

 
6.23
 
2018-2026
 
$
8.36

 
$
37

 
53,131

 
$
8.53

 
$
9

(1) The aggregate intrinsic value, in thousands, is before applicable income taxes and represents the amount option recipients would have received if all options had been exercised on the last trading day of the first nine months of 2017, or September 30, 2017, based upon our closing stock price on that date of $8.65.

Restricted Stock Units, Shares Issued as Compensation

During the nine months ended September 30, 2017 and 2016, we granted 458,020 and 282,989 unvested restricted stock units, respectively, to executive officers and other key employees, which typically vest 25% each year for four years on each anniversary of the grant date. While all of the shares are considered granted, they are not considered issued or outstanding until vested. As of September 30, 2017 and 2016, there were 1,288,752 and 1,095,719 unvested restricted stock units outstanding, respectively. Since we began issuing restricted stock units, approximately 21% of total restricted stock units granted have been forfeited.

A summary of restricted stock unit activity for the nine months ended September 30, 2017, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Balance, January 1, 2017
 
1,036,680

 
$
7.27

Granted
 
458,020

 
$
6.95

Vested
 
(148,674
)
 
$
6.93

Forfeited
 
(57,274
)
 
$
7.19

Balance, September 30, 2017
 
1,288,752

 
$
7.20



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We issued 148,674 shares of common stock to employees during the first nine months of 2017 as their restricted stock units vested. Under the terms of the 2006 and 2015 plans and upon issuance, we authorized 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, 2017 and 2016 was approximately $1.0 million and $1.1 million, respectively.

During the three months ended September 30, 2017 and 2016, we recognized $0.7 million and $0.6 million, respectively in compensation expense related to these grants. During the nine months ended September 30, 2017 and 2016, we recognized $1.9 million and $1.6 million, respectively, in compensation expense related to these grants, and expect to recognize an additional $5.8 million in compensation expense over the remaining weighted average vesting periods of 30 months.

Performance Stock Units, Shares Issued as Compensation

In May 2017, we granted performance stock units (PSUs) to certain of our executives under the 2015 Plan. These PSUs include both performance vesting conditions and a service vesting condition. The performance vesting conditions are based on (1) an annual earnings goal tied to Adjusted EBITDA, with a 70% weighting, and (2) a goal tied to the number of signed franchise license agreements in the year, with a 30% weighting. 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 full year attainment of the performance conditions during the performance period and recognized on a straight-line basis over the performance and service periods. The PSUs vest upon achievement of the performance and service conditions, provided participants are employed by RLH Corporation at the end of the service periods. For the PSUs granted in May 2017, the service period ends in March 2020.

A summary of performance stock unit activity for the nine months ended September 30, 2017, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Balance, January 1, 2017
 

 

Granted
 
274,882

 
$
6.45

Vested
 

 

Forfeited
 
(17,906
)
 
$
6.45

Balance, September 30, 2017
 
256,976

 
$
6.45


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 expensed 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, 2017 and 2016:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Shares of unrestricted stock granted
 
14,184

 
14,868

 
42,432

 
42,096

Weighted average grant date fair value per share
 
$
7.40

 
$
7.06

 
$
7.54

 
$
7.48



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Employee Stock Purchase Plan

In 2008, we adopted a new employee stock purchase plan (ESPP) upon expiration of our previous plan. Under the ESPP as approved in 2008, 300,000 shares of common stock were authorized for purchase by eligible employees. In May 2017, our shareholders authorized an additional 300,000 shares for a total of 600,000 shares authorized under the ESPP plan. As of September 30, 2017, 344,847 shares were available for grant. Eligible employees may purchase shares of our common stock at a 15% discount through payroll deductions. No employee may purchase more than $25,000 worth of shares, or more than 10,000 total shares, in any calendar year. As allowed under the ESPP, a participant may elect to withdraw from the plan, effective for the purchase period in progress at the time of the election with all accumulated payroll deductions returned to the participant at the time of withdrawal. During the three months ended September 30, 2017 and 2016, there were 21,371 and 17,060 shares issued and approximately $14,000 and $11,000 was recognized in compensation expense related to the discount associated with the plan in each year, respectively. During the nine months ended September 30, 2017 and 2016, 33,925 and 29,795 shares were issued, and $30,000 and $25,000 were recognized in compensation expense related to the discount associated with the plan in each year, respectively.

 
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Shares of stock sold to employees
 
21,371

 
17,060

 
33,925

 
29,795

Weighted average fair value per ESPP award
 
$
6.25

 
$
5.98

 
$
6.16

 
$
5.97


Warrants

In January 2015, in connection with Shelbourne Falcon’s purchase of equity interests in RL Venture, we issued Shelbourne warrants to purchase 442,533 shares of common stock. The warrants have a five-year term from the date of issuance and a per share exercise price of $6.78. The warrants have been classified as equity due to required share settlement upon exercise. Accordingly, the estimated fair value of the warrants was recorded in additional paid in capital upon issuance, and we do not recognize subsequent changes in fair value in our financial statements. As of September 30, 2017, all warrants were still outstanding.


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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, 2017 and 2016 (in thousands, except per share data):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Numerator - basic and diluted:
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
3,219

 
$
3,251

 
$
(2,032
)
 
$
(3,516
)
Less: net (income) loss attributable to noncontrolling interests
 
(871
)
 
(1,207
)
 
507

 
(645
)
Net income (loss) from continuing operations attributable to RLH Corporation
 
2,348

 
2,044

 
(1,525
)
 
(4,161
)
Income from discontinued operations
 
408

 
262

 
611

 
1,831

Net income (loss) attributable to RLH Corporation
 
2,756

 
2,306

 
(914
)
 
(2,330
)
Fair value adjustment of share component of contingent consideration (1)
 
987

 

 
567

 

Net income (loss) attributable to RLH Corporation for diluted earnings (loss) per share (1)
 
$
3,743

 
$
2,306

 
$
(347
)
 
$
(2,330
)
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average shares - basic
 
23,609

 
20,228

 
23,542

 
20,157

Weighted average shares - diluted (1)
 
24,176

 
20,613

 
23,542

 
20,157

 
 
 
 
 
 
 
 
 
Earnings (loss) per share - basic
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations attributable to RLH Corporation
 
$
0.10

 
$
0.10

 
$
(0.06
)
 
$
(0.21
)
Income from discontinued operations
 
0.02

 
0.01

 
0.02

 
0.09

Net income (loss) attributable to RLH Corporation
 
$
0.12

 
$
0.11

 
$
(0.04
)
 
$
(0.12
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per share - diluted (1)
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations attributable to RLH Corporation
 
$
0.10

 
$
0.10

 
$
(0.06
)
 
$
(0.21
)
Income from discontinued operations
 
0.01

 
0.01

 
0.02

 
0.09

Net income (loss) attributable to RLH Corporation
 
$
0.11

 
$
0.11

 
$
(0.04
)
 
$
(0.12
)
(1) For the three and nine months ended September 30, 2017, the effect of the fair value adjustment of share component of contingent consideration is excluded from the calculation of diluted earnings per share as it would be antidilutive.

For the three months ended September 30, 2017, we recognized $1.0 million of expense related to the change in fair value of the share component of the contingent consideration (classified within Acquisition and integration costs on our Consolidated Statement of Comprehensive Income (Loss)), as the result of the $1.30 per share increase in our stock price from June 30, 2017 to September 30, 2017.

For the nine months ended September 30, 2017, we recognized $0.6 million of income related to the change in fair value of the share component of the contingent consideration (classified within Acquisition and integration costs on our Consolidated Statement of Comprehensive Income (Loss)), as the result of the $0.30 per share increase in our stock price from December 31, 2016 to September 30, 2017.

The following table presents options to purchase common shares, restricted stock units outstanding, performance stock units outstanding, warrants to purchase common shares and contingently issuable 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 three and nine months ended September 30, 2017 and 2016.

27

Table of Contents

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Stock Options(1)
 
 
 
 
 
 
 
 
Dilutive awards outstanding
 

 

 

 

Antidilutive awards outstanding
 
113,978

 
149,858

 
113,978

 
149,858

Total awards outstanding
 
113,978

 
149,858

 
113,978

 
149,858

 
 
 
 
 
 
 
 
 
Restricted Stock Units(2)
 
 
 
 
 
 
 
 
Dilutive awards outstanding
 
535,035

 
342,321

 

 

Antidilutive awards outstanding
 
753,717

 
753,398

 
1,288,752

 
1,095,719

Total awards outstanding
 
1,288,752