Document
Table of Contents

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 March 31, 2018
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 April 30, 2018, there were 24,211,174 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
 
 
Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2018 and 2017
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017
 
Notes to Condensed Consolidated Financial Statements
Item 2
Item 3
Item 4
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
 



2

Table of Contents

PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements

RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 2018 and December 31, 2017
 
 
March 31,
2018
 
December 31,
2017
 
 
(In thousands, except share data)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents ($9,236 and $6,487 attributable to VIEs)
 
$
25,426

 
$
32,429

Restricted cash ($13,578 and $12,326 attributable to VIEs)
 
13,681

 
12,429

Accounts receivable, net ($2,927 and $3,200 attributable to VIEs)
 
12,957

 
13,143

Accounts receivable from related parties
 
1,870

 
1,520

Notes receivable, net
 
1,239

 
1,098

Inventories ($233 and $276 attributable to VIEs)
 
406

 
443

Prepaid expenses and other ($849 and $976 attributable to VIEs)
 
5,911

 
4,862

Assets held for sale ($12,446 and $34,359 attributable to VIEs)
 
12,446

 
34,359

Total current assets
 
73,936

 
100,283

Property and equipment, net ($125,882 and $137,479 attributable to VIEs)
 
155,849

 
167,938

Goodwill
 
9,404

 
9,404

Intangible assets, net
 
50,255

 
50,749

Other assets, net ($221 and $174 attributable to VIEs)
 
4,858

 
1,976

Total assets
 
$
294,302

 
$
330,350

LIABILITIES
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable ($1,557 and $1,810 attributable to VIEs)
 
$
5,667

 
$
4,100

Accrued payroll and related benefits ($568 and $1,453 attributable to VIEs)
 
3,113

 
7,457

Other accrued liabilities ($2,431 and $2,184 attributable to VIEs)
 
5,551

 
4,094

Long-term debt, due within one year ($33,924 and $62,914 attributable to VIEs)
 
33,924

 
62,914

Contingent consideration for acquisition due to related party, due within one year
 
5,446

 
9,289

Total current liabilities
 
53,701

 
87,854

Long-term debt, due after one year, net of debt issuance costs ($39,593 and $48,483 attributable to VIEs)
 
39,593

 
48,483

Deferred income and other long-term liabilities ($798 and $772 attributable to VIEs)
 
1,407

 
1,554

Deferred income taxes
 
2,301

 
2,219

Total liabilities
 
97,002

 
140,110

 
 
 
 
 
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; 24,125,600 and 23,651,212 shares issued and outstanding
 
241

 
237

Additional paid-in capital, common stock
 
178,318

 
178,028

Accumulated deficit
 
(13,390
)
 
(15,406
)
Total RLH Corporation stockholders' equity
 
165,169

 
162,859

Noncontrolling interest
 
32,131

 
27,381

Total stockholders' equity
 
197,300

 
190,240

Total liabilities and stockholders’ equity
 
$
294,302

 
$
330,350

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

3

Table of Contents

RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
For the Three Months Ended March 31, 2018 and 2017
 
 
Three Months Ended
 
 
March 31,
 
 
2018
 
2017
 
 
(In thousands, except per share data)
Revenue:
 
 
 
 
Company operated hotels
 
$
22,003

 
$
24,696

Other revenues from managed properties
 
893

 
926

Franchised hotels
 
10,123

 
10,904

Other
 
20

 
55

Total revenues
 
33,039

 
36,581

Operating expenses:
 
 
 
 
Company operated hotels
 
19,547

 
21,478

Other costs from managed properties
 
893

 
926

Franchised hotels
 
7,901

 
8,532

Other
 
(7
)
 
4

Depreciation and amortization
 
4,392

 
4,510

Hotel facility and land lease
 
1,204

 
1,201

Gain on asset dispositions, net
 
(14,043
)
 
(119
)
General and administrative expenses
 
3,486

 
3,659

Acquisition and integration costs
 
104

 
(175
)
Total operating expenses
 
23,477

 
40,016

Operating income (loss)
 
9,562

 
(3,435
)
Other income (expense):
 
 
 
 
Interest expense
 
(2,247
)
 
(1,958
)
Other income (loss), net
 
158

 
175

Total other income (expense)
 
(2,089
)
 
(1,783
)
Income (loss) from continuing operations before taxes
 
7,473

 
(5,218
)
Income tax expense
 
135

 
77

Net income (loss) from continuing operations
 
7,338

 
(5,295
)
Discontinued operations:
 
 
 
 
Income from discontinued business unit, net of income tax expense of $90
 

 
172

Net income (loss) from discontinued operations
 

 
172

Net income (loss)
 
7,338

 
(5,123
)
Net (income) loss attributable to noncontrolling interest
 
(4,750
)
 
1,519

Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
$
2,588

 
$
(3,604
)
 
 
 
 
 
Earnings (loss) per share - basic
 
 
 
 
Income (loss) from continuing operations attributable to RLH Corporation
 
$
0.11

 
$
(0.16
)
Income from discontinued operations
 

 
0.01

Net income (loss) attributable to RLH Corporation
 
$
0.11

 
$
(0.15
)
 
 
 
 
 
Earnings (loss) per share - diluted
 
 
 
 
Income (loss) from continuing operations attributable to RLH Corporation
 
$
0.10

 
$
(0.16
)
Income from discontinued operations
 

 
0.01

Net income (loss) attributable to RLH Corporation
 
$
0.10


$
(0.15
)
 
 
 
 
 
Weighted average shares - basic
 
24,101

 
23,469

Weighted average shares - diluted
 
25,166

 
23,469

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

4

Table of Contents

RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31, 2018 and 2017
 
 
 
Three Months Ended
 
 
March 31,
 
 
2018
 
2017
 
 
(In thousands)
Operating activities:
 
 
 
 
Net income (loss)
 
$
7,338

 
$
(5,123
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
4,392

 
4,543

Amortization of debt issuance costs
 
592

 
297

Gain on disposition of property, equipment and other assets, net
 
(14,043
)
 
(119
)
Deferred income taxes
 
82

 
113

Stock based compensation expense
 
640

 
696

Provision for doubtful accounts
 
235

 
235

Fair value adjustments to contingent consideration
 
157

 
(234
)
Change in current assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(442
)
 
(3,011
)
Notes receivable, net
 
(6
)
 
(36
)
Inventories
 
(22
)
 

Prepaid expenses and other
 
(4,662
)
 
(1,247
)
Accounts payable
 
1,807

 
(78
)
Other accrued liabilities
 
(2,836
)
 
(9
)
Net cash used in operating activities
 
(6,768
)
 
(3,973
)
 
 
 
 
 
Investing activities:
 
 
 
 
Capital expenditures
 
(1,692
)
 
(3,043
)
Contingent consideration paid for Vantage acquisition
 
(4,000
)
 

Net proceeds from disposition of property and equipment
 
45,662

 

Collection of notes receivable related to property sales
 

 
200

Advances on notes receivable
 
(135
)
 
(154
)
Net cash provided by (used in) investing activities
 
39,835

 
(2,997
)
 
 
 
 
 
Financing activities:
 
 
 
 
Borrowings on long-term debt
 

 
2,232

Repayment of long-term debt
 
(38,472
)
 
(306
)
Debt issuance costs
 

 
(22
)
Stock-based compensation awards canceled to settle employee tax withholding
 
(440
)
 
(224
)
Stock option and stock purchase plan issuances, net
 
94

 
69

Net cash provided by (used in) financing activities
 
(38,818
)
 
1,749

 
 
 
 
 
Change in cash, cash equivalents and restricted cash:
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
 
(5,751
)
 
(5,221
)
Cash, cash equivalents and restricted cash at beginning of period
 
44,858

 
47,609

Cash, cash equivalents and restricted cash at end of period
 
$
39,107

 
$
42,388

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


5

Table of Contents

RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (Continued)
For the Three Months Ended March 31, 2018 and 2017

 
 
Three Months Ended
 
 
March 31,
 
 
2018
 
2017
 
 
(In thousands)
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during periods for:
 
 
 
 
Income taxes
 
$
141

 
$
6

Interest on debt
 
$
2,315

 
$
1,155

Non-cash investing and financing activities:
 
 
 
 
Reclassification of long-term debt to current
 
$
28,990

 
$
130

Property and equipment, purchases not yet paid
 
$
240

 
$
417

Acquisition of property and equipment through capital lease
 
$
216

 
$

Reclassification between current and noncurrent assets
 
$
46

 
$

Contingent consideration shares issued for Vantage acquisition
 
$
4

 
$


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

6

Table of Contents

RED LION HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
Organization

Red Lion Hotels Corporation ("RLH Corporation", "RLHC", "we", "our", "us", or "our company") is a NYSE-listed hospitality and leisure company (ticker symbol: RLH) doing business as RLH Corporation and primarily engaged in the franchising, management and ownership of hotels under the following proprietary brands:
 
Active Brands
 
Supported Brands
 
International Brands
 
Ÿ Hotel RL
 
Ÿ America's Best Inn & Suites
 
Ÿ Value Inn Worldwide
 
Ÿ Red Lion Hotels
 
Ÿ Jameson Inns
 
Ÿ Value Hotel Worldwide
 
Ÿ Red Lion Inn & Suites
 
Ÿ Lexington Hotels & Inns
 
 
 
Ÿ GuestHouse
 
Ÿ 3 Palm Hotels
 
 
 
Ÿ Settle Inn
 
 
 
 
 
Ÿ Americas Best Value Inn
 
 
 
 
 
Ÿ Canadas Best Value Inn
 
 
 
 
 
Ÿ Signature and Signature Inn
 
 
 
 
 
Ÿ Country Hearth Inns & Suites
 
 
 
 

A summary of our properties as of March 31, 2018, including the approximate number of available rooms, is provided below:
 
 
Franchised
 
Company Operated
 
Total Systemwide
 
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
Total
 
1,054

 
65,200

 
16

 
3,300

 
1,070

 
68,500


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 in this quarterly report on Form 10-Q. See Note 18 for discussion of Discontinued Operations.

On October 5, 2017, we announced that we would be marketing for sale 11 of our owned hotels while working to retain franchise agreements on these assets. In February 2018, five of the RL Venture LLC properties were sold for $47.2 million. In April 2018, an additional RL Venture LLC property sold for $5.5 million. See Notes 19 and 20 for discussion of Assets Held for Sale and Subsequent Events.

On April 3, 2018, Red Lion Hotels Franchising, Inc., a wholly-owned subsidiary of RLH Corporation (RLH Franchising) entered into a purchase agreement with Knights Franchise Systems, Inc., a Delaware corporation (KFS), Wyndham Hotel Group, LLC, a Delaware limited liability company and the sole stockholder of KFS (WHG) and the other signatories thereto (such other signatories collectively, the Asset Sellers), pursuant to which RLH Franchising has agreed, subject to the terms and conditions of the Purchase Agreement, to purchase from WHG all of the issued and outstanding shares of capital stock of KFS and certain operating assets from, and assume certain liabilities of, the Asset Sellers relating to the business of franchising Knights Inn branded hotels to hotel owners. The aggregate purchase price of $27 million is subject to adjustment for cash, unpaid indebtedness, unpaid transaction expenses and working capital transferred to RLH Franchising at closing. A non-refundable $3.0 million deposit was made on April 30, 2018. The remaining purchase price will be paid in cash at closing. The transaction is expected to close in the second quarter of 2018, subject to customary closing conditions.

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.


7

Table of Contents

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 March 31, 2018, there were 24,125,600 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 condensed 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 Condensed Consolidated Balance Sheet as of December 31, 2017 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 statements and the notes thereto for the year ended December 31, 2017, filed with the SEC in our annual report on Form 10-K on April 2, 2018.

In the opinion of management, these unaudited condensed consolidated financial statements contain all of the adjustments of a normal and recurring nature necessary to present fairly our Condensed Consolidated Balance Sheet at March 31, 2018, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2018 and 2017, and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017. 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
Joint venture entities:
RL Venture LLC (RL 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 Atla Venture LLC (RLS Atla Venture) in which we hold a 55% member interest
RLS DC Venture LLC (RLS DC Venture) in which we hold a 55% member interest

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 March 31, 2018 and December 31, 2017 cash of $13.7 million and $12.4 million, respectively, was held primarily as reserves for debt service (interest only), property improvements, and other requirements from the lenders.


8

Table of Contents

In our Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017, we include restricted cash with cash and cash equivalents when reconciling the beginning and ending balances for each period. The balances included in the Condensed Consolidated Statements of Cash Flows for the periods ended March 31 are as follows (in thousands):

 
 
2018
 
2017
Cash and cash equivalents
 
$
25,426

 
$
31,689

Restricted cash
 
13,681

 
10,699

Cash, cash equivalents and restricted cash
 
$
39,107

 
$
42,388


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.

The following schedule summarizes the activity in the allowance account for trade accounts receivable for continuing operations (in thousands):
 
 
2018
 
2017
Allowance for doubtful accounts
 
 
Balance, January 1
 
$
1,436

 
$
944

Additions to allowance
 
235

 
217

Write-offs, net of recoveries
 
(10
)
 
28

Balance, March 31
 
$
1,661

 
$
1,189


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.

9

Table of Contents


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.

Assets Held for Sale

We consider a property to be an asset held for sale when all of the following criteria are met:
management commits to a plan to sell the property;
it is unlikely that the disposal plan will be significantly modified or discontinued;
the property is available for immediate sale in its present condition;
actions required to complete the sale of the property have been initiated;
sale of the property is probable, we expect the completed sale will occur within one year; and
the property is actively being marketed for sale at a price that is reasonable given its current market value.

Upon designation as an asset held for sale, we record the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and cease depreciation.

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.


10

Table of Contents

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 recognized as incurred. Restructuring costs associated with an acquisition are generally recognized 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 Condensed 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 Condensed 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 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, on October 1, 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. 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.

11

Table of Contents


Other Assets

Other assets primarily consist of key money disbursements, certain direct capitalized contract acquisition costs, and IT system implementation and license costs, for both our franchisees and our company operated hotels. Contract assets relate to incentive capital expenditure or renovation funding paid to third party hotel owners at or near the inception of a long-term franchise agreement and are amortized over the term of the franchise agreement. Certain direct contract acquisition costs include primarily commissions related to our management or franchise contracts and are recognized over the term of the contracts. IT system and implementation 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.

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 three months ended March 31, 2018 and 2017 we recognized income of approximately $0.1 million each period for the amortization of the deferred gain. The remaining balances at March 31, 2018 and December 31, 2017 were $0.3 million and $0.4 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 March 31, 2018 and December 31, 2017, a partial 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 14.

12

Table of Contents


Revenue Recognition

Revenue is generally recognized as services are provided. Revenues are primarily derived from franchise contracts with third-party hotel owners, as well as from individual hotel guests and corporate patrons at our owned and leased hotels. Revenues are also derived from management of third-party owned hotels. The majority of compensation received for our performance obligations is variable consideration from our management and franchise contracts or fixed transactional guest consideration through our owned and leased hotels. We recognize the variable fees as the services to which they relate are delivered, applying the prescribed variable consideration allocation guidance. In certain circumstances we defer consideration and recognize consideration over time as the related performance obligations are satisfied.

Franchised hotel revenues

We identified the following services as one performance obligation in connection with our franchise contracts:

Intellectual Property (IP) licenses grant a non-exclusive, limited revocable license to the RLH trademarks and hotel names.
Manual and Training Services provide operational assistance unique to the RLH brands, business model and standards.
Reservation Services are provided through direct or indirect system access.
Marketing Services and Arrangements benefit the overall hotel network and include brand promotions, direct guest marketing, brand name marketing and various other programs targeted at advertising to guests.
Brand Conference is provided typically annually for third party owners to gather and attend educational seminars and brand informational presentations.

The performance obligation related to franchise revenues is delivered over time. While the underlying services may vary from day to day, the nature of the promises are the same each day, other than the Brand Conference, and the property owner can independently benefit from each day's services. Franchise fees are typically based on the sales or usage of the underlying hotel, with the exception of fixed upfront fees that usually represent an insignificant portion of the transaction price.

Franchised hotel revenues represent fees earned in connection with the licensing of one of our brands, usually under long-term contracts with the property owner, and include the following:

Royalty fees are generally based on a percentage of a hotel's monthly gross room revenue or a fixed monthly fee based on room count. These fees are typically billed and collected monthly, and revenue is generally recognized at the same time the fees are billed.
Application, initiation and other fees are charged when: (i) new hotels enter our system; (ii) there is a change of ownership; or (iii) contracts with properties already in our system are extended or modified. These fees are typically fixed and collected upfront and are recognized as revenue over the term of the franchise contract.
Reservations services/marketing expenses/other are associated with our brands and shared services, which are paid from fees collected by us from the franchised properties. Revenue is generally recognized on a gross basis as fees are billed, which are based on the underlying hotel's sales or usage (e.g., gross room revenues and number of reservations processed) and expenses are expected to equal the revenues over time.

Any consideration paid or anticipated to be paid to incentivize hotel owners to enter into franchise contracts is capitalized and reduces revenues as amortized. The commission or directs costs of acquiring the contract or modification are recorded as contract acquisition costs and are recognized in franchise costs when amortized.

Company operated hotels revenue

We identified the following performance obligations in connection with our owned and leased hotel revenues, for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services to the hotel customer or guest:

Room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs.
Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest.

13

Table of Contents

Hotel management fees represent fees earned from hotels that we manage, usually under long-term contracts with the property owner and are generally based on a percentage of a hotel's monthly gross revenue. Base fees are typically billed and collected monthly, and revenue is generally recognized at the same time the fees are billed.

Company operated hotels revenue primarily consist of hotel room rentals, revenue from accommodations sold in conjunction with other services(e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking) related to owned, leased and consolidated non-wholly owned (joint venture) hotel properties. Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. The management fees from third-party hotel owners earned under the contract relate to a specific outcome of providing the services (e.g., hotel room sales) or to RLH’s efforts (e.g., costs) to satisfy the performance obligations. We use time as the measure of progress to recognize as revenue the fees that are allocated to the period earned per the contract or to the period when the reimbursable costs are incurred.

Revenue from managed properties

Other revenue from managed properties includes direct reimbursements including payroll and related costs and certain other operating costs of the managed properties’ operations, which are contractually reimbursed to us by the property owners as expenses are incurred. Revenue is recognized based on the amount of expenses incurred by us and are presented as other expenses from managed hotels in our Condensed Consolidated Statements of Comprehensive Income (Loss). These expenses are then reimbursed by the property owner typically on a monthly basis, which results in no net effect on operating income (loss) or net income (loss).

Other revenues

Other revenues include revenues generated by the incidental support of hotel operations for owned, leased, managed and franchised hotels, including purchasing operations, and other operating income. Purchasing revenues include any amounts received for vendor rebate arrangements that we participate in as a manager of hotel properties.

Taxes and fees collected on behalf of governmental agencies

We are required to collect certain taxes and fees from customers on behalf of governmental agencies and remit these back to the applicable governmental agencies on a periodic basis. We have a legal obligation to act as a collection agent. We do not retain these taxes and fees and, therefore, they are not included in our measurement of transaction prices. We have elected to present revenue net of sales taxes and other similar taxes. We record a liability when the amounts are collected and relieve the liability when payments are made to the applicable taxing authority or other appropriate governmental agency.

Discontinued operations revenue

Prior to October 3, 2017, we earned revenue from online ticketing services, ticketing inventory management systems, promotion of Broadway-style shows and other special events. In the transactions we acted as an agent and received a net fee or commission, revenue was recognized in the period the services were performed. When we were the promoter of an event and were at-risk for the production, revenues and expenses were recorded in the period of the event performance. As the result of the sale of the entertainment segment 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 recognized as incurred. During the three months ended March 31, 2018 and 2017 we incurred approximately $0.8 million and $1.1 million, respectively, in advertising expense.

Discontinued Operations

When an asset group meets the criteria to be classified as held-for-sale or is disposed of by sale, and the disposal represents a significant shift that has or will have a major impact on our financial statements, we classify the results of operations as discontinued operations in our Condensed Consolidated Statements of Comprehensive Income (Loss) for all periods presented.

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. The transaction represented a strategic shift that had a major impact on our financial statements. In accordance with this strategic shift, the results

14

Table of Contents

of the entertainment segment are reported as discontinued operations for all periods presented in this quarterly report on Form 10-Q. See Note 18 for discussion of Discontinued Operations associated with the transaction.

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 13.

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.

New and Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. We adopted the requirements of ASU 2014-09 on January 1, 2018 using the modified retrospective method, as permitted by the standard, resulting in a cumulative adjustment to accumulated deficit of $0.6 million. In implementation, we applied the transition guides to franchise agreements originated by us. No contract liability was recorded for franchise contracts that were acquired in prior business combinations or asset purchases.

The provisions of ASU 2014-09 affected our revenue recognition as follows:

Application, initiation and other fees are recognized over the term of the franchise contract based on the first penalty free termination date, rather than upon execution of the contract.

Certain contract acquisition costs related to our management and franchise contracts are recognized over the term of the contracts rather than upon execution of the contract. The amortization of these costs is recognized in franchised hotel expenses.


15

Table of Contents

Information below represents the effect of the adoption of ASU 2014-09 on our Condensed Consolidated Balance Sheet as of March 31, 2018 and our Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2018 (in thousands, except per share data).

 
 
As Reported
 
Adjustment
 
Balances without adoption of topic 606
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
25,426

 
$

 
$
25,426

Restricted cash
 
13,681

 

 
13,681

Accounts receivable, net
 
12,957

 

 
12,957

Accounts receivable from related parties
 
1,870

 

 
1,870

Notes receivable, net
 
1,239

 

 
1,239

Inventories
 
406

 

 
406

Prepaid expenses and other
 
5,911

 

 
5,911

Assets held for sale
 
12,446

 

 
12,446

Total current assets
 
73,936

 

 
73,936

Property and equipment, net
 
155,849

 

 
155,849

Goodwill
 
9,404

 

 
9,404

Intangible assets, net
 
50,255

 

 
50,255

Other assets, net
 
4,858

 
509

 
5,367

Total assets
 
$
294,302

 
$
509

 
$
294,811

LIABILITIES
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
5,667

 
$

 
$
5,667

Accrued payroll and related benefits
 
3,113

 

 
3,113

Other accrued liabilities
 
5,551

 

 
5,551

Long-term debt, due within one year
 
33,924

 

 
33,924

Contingent consideration for acquisition due to related party, due within one year
 
5,446

 

 
5,446

Total current liabilities
 
53,701

 

 
53,701

Long-term debt, due after one year, net of debt issuance costs
 
39,593

 

 
39,593

Deferred income and other long-term liabilities
 
1,407

 

 
1,407

Deferred income taxes
 
2,301

 

 
2,301

Total liabilities
 
97,002

 

 
97,002

STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
RLH Corporation stockholders' equity:
 
 
 
 
 
 
Preferred stock
 

 

 

Common stock
 
241

 

 
241

Additional paid-in capital, common stock
 
178,318

 

 
178,318

Accumulated deficit
 
(13,390
)
 
509

 
(12,881
)
Total RLH Corporation stockholders' equity
 
165,169

 
509

 
165,678

Noncontrolling interest
 
32,131

 

 
32,131

Total stockholders' equity
 
197,300

 
509

 
197,809

Total liabilities and stockholders’ equity
 
$
294,302

 
$
509

 
$
294,811



16

Table of Contents

 
 
As Reported
 
Adjustment
 
Balances without adoption of topic 606
Revenue:
 
 
 
 
 
 
Company operated hotels
 
$
22,003

 
$

 
$
22,003

Other revenues from managed properties
 
893

 

 
893

Franchised hotels
 
10,123

 
99

 
10,222

Other
 
20

 

 
20

Total revenues
 
33,039

 
99

 
33,138

Operating expenses:
 
 
 
 
 

Company operated hotels
 
19,547

 

 
19,547

Other costs from managed properties
 
893

 

 
893

Franchised hotels
 
7,901

 
217

 
8,118

Other
 
(7
)
 

 
(7
)
Depreciation and amortization
 
4,392

 

 
4,392

Hotel facility and land lease
 
1,204

 

 
1,204

Gain on asset dispositions, net
 
(14,043
)
 

 
(14,043
)
General and administrative expenses
 
3,486

 

 
3,486

Acquisition and integration costs
 
104

 

 
104

Total operating expenses
 
23,477

 
217

 
23,694

Operating income (loss)
 
9,562

 
(118
)
 
9,444

Other income (expense):
 
 
 
 
 

Interest expense
 
(2,247
)
 

 
(2,247
)
Other income (loss), net
 
158

 

 
158

Total other income (expense)
 
(2,089
)
 

 
(2,089
)
Income (loss) from continuing operations before taxes
 
7,473

 
(118
)
 
7,355

Income tax expense
 
135

 
(2
)
 
133

Net income (loss) from continuing operations
 
7,338

 
(116
)
 
7,222

Net (income) loss attributable to noncontrolling interest
 
(4,750
)
 

 
(4,750
)
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
$
2,588

 
$
(116
)
 
$
2,472

 
 
 
 
 
 
 
Basic earnings (loss) per share from continuing operations
 
$
0.11

 
$
(0.01
)
 
$
0.10

Diluted earnings (loss) per share from continuing operations
 
$
0.10

 
$

 
$
0.10


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 $76.3 million of operating lease obligations as of March 31, 2018 (see Note 10) and upon the adoption of the standard will record an ROU asset and lease liability for present value of these leases, which will have a material impact on the Condensed Consolidated Balance Sheet. However, the Condensed Consolidated Statement of Comprehensive Income (Loss) recognition of lease expenses is not expected to materially change from the current methodology.

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

17

Table of Contents

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 implemented with the modified retrospective approach and there is no impact on our financial statements.

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.

3.
Business Segments

We have two operating segments: franchised hotels and company operated hotels. The "other" segment consists of miscellaneous revenues and expenses, cash and cash equivalents, certain receivables, certain property and equipment and general and administrative expenses, which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense, income taxes and certain corporate expenses; therefore, they have not been allocated to the operating segments. 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 March 31, 2018
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
10,123

 
$
22,896

 
$
20

 
$
33,039

 
 
 
 
 
 
 
 
 
Segment operating expenses
 
7,901

 
20,440

 
(7
)
 
28,334

Depreciation and amortization
 
834

 
3,123

 
435

 
4,392

Other operating expenses, acquisition costs and gains on asset dispositions
 
104

 
(12,840
)
 
3,487

 
(9,249
)
Operating income (loss)
 
$
1,284

 
$
12,173

 
$
(3,895
)
 
$
9,562

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
19

 
$
600

 
$
1,048

 
$
1,667

Identifiable assets as of March 31, 2018
 
$
71,141

 
$
204,849

 
$
18,312

 
$
294,302


Three Months Ended March 31, 2017
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
10,904

 
$
25,622

 
$
55

 
$
36,581

 
 
 
 
 
 
 
 
 
Segment operating expenses
 
8,532

 
22,404

 
4

 
30,940

Depreciation and amortization
 
558

 
3,667

 
285

 
4,510

Other operating expenses, acquisition costs and gains on asset dispositions
 
(276
)
 
1,084

 
3,758

 
4,566

Operating income (loss)
 
$
2,090

 
$
(1,533
)
 
$
(3,992
)
 
$
(3,435
)
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
369

 
$
541

 
$
313

 
$
1,223

Identifiable assets as of December 31, 2017
 
$
70,035

 
$
241,659

 
$
18,656

 
$
330,350



18

Table of Contents

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 8 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). In 2016, we disposed of one hotel, leaving 11 properties owned by RL Venture. We maintain a 55% interest in RL Venture, and the hotels owned by RL Venture 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 condensed consolidated financial statements. When ownership changes without a loss of control, GAAP requires the difference between consideration received and the carrying amount of a noncontrolling interest to be recorded in equity. Accordingly, we recognized $12.4 million upon sale of the equity interests as a reduction to RLH Corporation's additional.

Cash distributions may be made periodically based on calculated distributable income. There were no cash distributions made during the three months ended March 31, 2018 or 2017.

Subsequent to the first quarter of 2018, RL Venture made a cash distribution totaling $9.0 million, of which RLH Corporation received $5.0 million.

October 5, 2017, we announced that we would be marketing for sale the remaining 11 RL Venture owned hotels while working to retain franchising agreements on these assets. In February 2018, five of the RL Venture properties were sold for $47.2 million. In April 2018, one of the RL Venture properties sold for $5.5 million. See Notes 19 and 20 for Assets Held for Sale and Subsequent Events.

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 condensed 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.


19

Table of Contents

In May 2017, RLH Corporation provided an additional $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.

Subsequent to the first quarter of 2018, RLH Corporation agreed to allow RLS Balt Venture to transfer $2.0 million of costs owed to RLH Corporation for management fees and other operating costs into a preferred capital balance. The balance would be repaid to RLH Corporation only when the Baltimore hotel property is sold or when RLS Balt Venture is liquidated. Upon such an event, RLH Corporation will receive the $2.0 million plus a preferred return of 11%, 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 three months ended March 31, 2018 or 2017.

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 condensed consolidated financial statements.

Cash distributions may be made periodically based on calculated distributable income. There were no cash distributions made during the three months ended March 31, 2018 or 2017.

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 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 condensed consolidated financial statements.

In May 2017, RLH Corporation provided $950,000 to RLS DC Venture to fund restricted cash required by the loan agreement with Pacific Western Bank. See Note 8. 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

20

Table of Contents

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 three months ended March 31, 2018 or 2017.

Subsequent to the first quarter of 2018, RLH Corporation provided approximately $450,000 to RLS DC Venture to be used as a principal payment on the debt to Pacific Western Bank to bring the loan into compliance with the loan to value debt covenant requirement of 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 $450,000 plus a preferred return of 15%, compounded annually, prior to any liquidation proceeds being returned to the members. The loan was also amended to add a $4.5 million principal guarantee by RLH Corporation. The amendment also allows future debt service coverage ratio covenant defaults to be cured by an increase in the RLH Corporation principal guarantee. This option can be exercised a maximum of two times during the remaining term of the loan.

5.
Property and Equipment

Property and equipment is summarized as follows (in thousands):
 
 
March 31,
2018
 
December 31,
2017
Buildings and equipment
 
$
205,231

 
$
216,618

Furniture and fixtures
 
27,282

 
29,132

Landscaping and land improvements
 
4,480

 
5,104

 
 
236,993

 
250,854

Less accumulated depreciation
 
(113,612
)
 
(118,888
)
 
 
123,381

 
131,966

Land
 
28,914

 
31,710

Construction in progress
 
3,554

 
4,262

Property and equipment, net
 
$
155,849

 
$
167,938


On October 5, 2017, we announced that we would be marketing for sale 11 of our owned hotels while working to retain franchise agreements on these assets. In February 2018, five of the RL Venture properties were sold for $47.2 million. In April 2018, one of the RL Venture properties sold for $5.5 million. During the three months ended March 31, 2018, we recognized a gain related to the hotel sales of $13.9 million. See Notes 19 and 20 for Assets Held for Sale and Subsequent Events.

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 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 17). 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, 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. We also allocated $4.1 million of the purchase price to goodwill. During 2017 it was determined that one of the indefinite-lived brand names would have a finite

21

Table of Contents

life, and the brand name was reclassified to finite-lived. As of March 31, 2018, we have allocated $26.7 million to indefinite-lived brand names, and $3.3 million to finite-lived brand names, with a weighted average remaining useful life of 7.5 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 three months ended March 31, 2018 or 2017.

The following table summarizes the balances of goodwill and other intangible assets (in thousands):
 
March 31,
2018
 
December 31,
2017
Goodwill
$
9,404

 
$
9,404

 
 
 
 
Intangible assets
 
 
 
Brand name - indefinite lived
$
39,160

 
$
39,160

Brand name - finite lived, net
2,687

 
2,814

Customer contracts, net
8,280

 
8,647

Trademarks
128

 
128

Total intangible assets, net
$
50,255

 
$
50,749


Goodwill and other intangible assets attributable to each of our business segments at March 31, 2018 and December 31, 2017 were as follows (in thousands):
 
March 31, 2018
 
December 31, 2017
 
 
 
Intangible
 
 
 
Intangible
 
Goodwill
 
Assets
 
Goodwill
 
Assets
Company operated hotels
$

 
$
4,660

 
$

 
$
4,660

Franchised hotels
9,404

 
45,595

 
9,404

 
46,089

Total
$
9,404

 
$
50,255

 
$
9,404

 
$
50,749


The following table summarizes the balances of amortized customer contracts and finite-lived brand names (in thousands):
 
March 31,
2018
 
December 31,
2017
Customer contracts
$
11,673

 
$
11,673

Brand name - finite lived
3,295

 
3,295

Accumulated amortization
(4,001
)
 
(3,507
)
Net carrying amount
$
10,967

 
$
11,461



22

Table of Contents

As of March 31, 2018, estimated future amortization expenses related to our customer contracts and finite-lived brand names is as follows (in thousands):
Year ending December 31,
Amount
2018 (remainder)
$
1,464

2019
1,730

2020
1,527

2021
1,326

2022
1,163

Thereafter
3,757

Total
$
10,967


7.
Revenue from Contracts with Customers

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
 
 
March 31, 2018
Accounts receivable
 
$
12,957

Key money costs
 
4,726

Capitalized contract costs
 
1,005

Contract liabilities
 
1,663


Significant changes in the key money costs, capitalized contract costs, and contract liabilities balances during the period are as follows (in thousands):
 
 
Key Money Costs
 
Capitalized Contract Costs
 
Contract Liabilities
Balance as of January 1, 2018
 
$
1,148

 
$
750

 
$
1,444

Key money funded
 
3,618

 

 

Costs incurred to acquire contracts
 

 
326

 

Cash received in advance and not recognized as revenue
 

 

 
379

Revenue or expense recognized that was included in the January 1, 2018 balance
 
(19
)
 
(68
)
 
(151
)
Revenue or expense recognized in the period for the period
 
(21
)
 
(3
)
 
(9
)
Balance as of March 31, 2018
 
$
4,726

 
$
1,005

 
$
1,663


Estimated revenues and expenses expected to be recognized related to performance obligations that were unsatisfied as of March 31, 2018, including revenues related to application, initiation and other fees were as follows (in thousands):
Year ending December 31,
 
 Revenue
 
 Expense
2018 (remainder)
 
$
460

 
$
512

2019
 
441

 
614

2020
 
292

 
567

2021
 
207

 
516

2022
 
147

 
479

Thereafter
 
116

 
3,043

Total
 
$
1,663

 
$
5,731


As of March 31, 2018, we had $0.1 million of deferred revenues related to unsatisfied performance obligations under our customer loyalty award program, which are not included in the table above. Revenue will be recognized as the benefits are redeemed or expire over their one-year life.


23

Table of Contents

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

8.
Long-Term Debt
The current and noncurrent portions of long-term debt as of March 31, 2018 and December 31, 2017 are as follows (in thousands):
 
 
March 31, 2018
 
December 31, 2017
 
 
Current
 
Noncurrent
 
Current
 
Noncurrent
RL Venture
 
$
11,274

 
$
23,583

 
$
40,602

 
$
32,625

RL Baltimore
 
13,300

 

 
13,300

 

RLH Atlanta
 
9,330

 

 
9,360

 

RLH DC
 
337

 
16,225

 
332

 
16,303

Total debt
 
34,241

 
39,808

 
63,594

 
48,928

Unamortized debt issuance costs
 
(317
)
 
(215
)
 
(680
)
 
(445
)
Long-term debt net of debt issuance costs
 
$
33,924

 
$
39,593

 
$
62,914

 
$
48,483


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. In 2016, 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 original 12 hotels owned by the subsidiaries. There were no draws on the loan during the three months ended March 31, 2018. At March 31, 2018, there were unamortized debt issuance fees of $0.3 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 all financial covenants at March 31, 2018.

On October 5, 2017, we announced that we would be marketing for sale the 11 RL Venture owned hotels while working to retain franchise agreements on these assets. In February 2018, five of the RL Venture properties were sold for $47.2 million. Immediately following the sales of the five hotels, our consolidated subsidiary RL Venture repaid $38.2 million in principal balance outstanding under the loan agreement with Pacific Western Bank, as required by the terms of the agreement. In April 2018, an additional RL Venture property sold for $5.5 million. Immediately following the sale of the hotel, RL Venture repaid $3.8 million in principal balance outstanding was paid under the loan agreement with Pacific Western Bank, as required by the terms of the agreement. See Note 20 for discussion of the April sale and associated debt repayment.


24

Table of Contents

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 March 31, 2018, there were unamortized debt issuance fees of $25,000.

Subsequent to quarter end, RL Baltimore executed the first one-year extension for this loan with a $67,000 fee. In connection with this extension, RLH Corporation agreed to allow RLS Balt Venture to transfer $2.0 million of costs owed to RLH Corporation for management fees and other operating costs into a preferred capital balance. The loan matures in May 2019 and has two additional one-year extension options. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 6.25%. Principal payments of $16,000 per month are required beginning in May 2018. See Note 4.

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 non-recourse. 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 March 31, 2018.

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 during the first quarter of 2016. At March 31, 2018, there were unamortized debt issuance fees of $35,000.

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 non-recourse. 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 March 31, 2018.

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 December 31, 2016 the funds on the loan were fully disbursed. At March 31, 2018, there were unamortized debt issuance costs of $0.2 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 began 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 non-recourse. 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. Subsequent to quarter end, RLH DC was not in compliance with certain financial loan covenants. An amendment to the loan was obtained on May 9, 2018. With the amendment, RLH Corporation provided approximately $450,000 to RLS DC Venture to be used as a principal payment on the debt to bring the loan into compliance with the loan to value debt covenant requirement. This funding was treated as preferred capital of RLS DC Venture. The loan was also

25

Table of Contents

amended to add a $4.5 million principal guarantee by RLH Corporation. The amendment also allows future debt service coverage ratio covenant defaults to be cured by an increase in the RLH Corporation principal guarantee. This option can be exercised a maximum of two times during the remaining term of the loan. See Note 4.

Contractual maturities for long-term debt outstanding at March 31, 2018, for the next five years are summarized by the year as follows (in thousands):
Year ending December 31,
 
Amount
2018 (remainder)
 
$
33,988

2019
 
16,994

2020
 
23,067

2021
 

2022
 

Thereafter
 

Total
 
$
74,049


9.
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 Condensed Consolidated Statements of Comprehensive Income (Loss). At March 31, 2018 and December 31, 2017, 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 Condensed 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
RLH 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

The RL Venture interest rate cap expired in January 2018. We were in compliance with all requirements for RLH Baltimore, RLH Atlanta and RLH DC as of March 31, 2018. We received a waiver of compliance for RL Venture as of March 31, 2018. See Notes 19 and 20 for Assets Held for Sale and Subsequent Events.

10.
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 and are recorded in Other accrued liabilities and Deferred income and other long-term liabilities on the Condensed Consolidated Balance Sheets. The equipment assets are included within our property and equipment balance and are depreciated over the lease term.


26

Table of Contents

Total future minimum payments due under all current term operating and capital leases at March 31, 2018, are as indicated below (in thousands):
Year ending December 31,
 
Total Lease Obligation
 
Operating Lease Obligation
 
Capital Lease Obligation
2018 (remainder)
 
$
4,194

 
$
3,871

 
$
323

2019
 
4,849

 
4,503

 
346

2020
 
4,550

 
4,224

 
326

2021
 
2,846

 
2,676

 
170

2022
 
1,761

 
1,678

 
83

Thereafter
 
59,380

 
59,380

 

Total
 
$
77,580

 
$
76,332

 
$
1,248


Total rent expense from continuing operations, under leases for the three months ended March 31, 2018 and 2017 were $1.5 million and $1.6 million, respectively, which represents the total of amounts shown within Hotel facility and land lease expense, as well as amounts included within Operating expenses for Franchised hotel, General and Administrative expenses, and within Discontinued operations on our Condensed Consolidated Statements of Comprehensive Income (Loss).

On October 5, 2017, we announced that we would be marketing for sale 11 of our owned hotels while working to retain franchise agreements on these assets. In February 2018, five of the RL Venture properties were sold and in April 2018, one of the RL Venture properties sold. There are $0.9 million of capital leases in the table related to the remaining hotels that are being marketed for sale. See Notes 19 and 20 for Assets Held for Sale and Subsequent Events.

11.
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.

12.
Stock Based Compensation and Warrants

Stock Incentive Plans

The 2006 Stock Incentive Plan (2006 Plan) authorizes the grant or issuance of various option and other awards including restricted stock units and other stock-based compensation. The 2006 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 March 31, 2018, there were 1,170,792 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2015 Plan.


27

Table of Contents

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 months ended March 31, 2018 and 2017 stock-based compensation expense is as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Stock options
 
$
17

 
$
17

Restricted stock units
 
417

 
566

Performance stock units
 
77

 

Unrestricted stock awards
 
115

 
105

Employee stock purchase plan
 
14

 
8

Total stock-based compensation
 
$
640

 
$
696


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 three months ended March 31, 2018 and 2017 there were no stock options granted.

A summary of stock option activity for the three months ended March 31, 2018, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Exercise
Price
Balance, January 1, 2018
 
90,827

 
$
8.26

Options granted
 

 

Options exercised
 

 

Options forfeited
 
(4,432
)
 
$
8.74

Balance, March 31, 2018
 
86,395

 
$
8.23

Exercisable, March 31, 2018
 
45,831

 
$
8.26


Additional information regarding stock options outstanding and exercisable as of March 31, 2018, 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

 
7.99
 
2026
 
$
8.20

 
$
126

 
40,566

 
$
8.20

 
$
63

$
8.74

 
5,265

 
0.14
 
2018
 
$
8.74

 
5

 
5,265

 
$
8.74

 
5

 
 
86,395

 
7.51
 
2018-2026
 
$
8.23

 
$
131

 
45,831

 
$
8.26

 
$
68

(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 three months of 2018, or March 29, 2018, based upon our closing stock price of $9.75.

Restricted Stock Units, Shares Issued as Compensation

During the three months ended March 31, 2018 and 2017, we granted 251,913 and 318,815 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 March 31, 2018 and 2017, there were 1,324,927 and 1,235,035 unvested restricted stock units outstanding, respectively. Since we began issuing restricted stock units, approximately 21% of total restricted stock units granted have been forfeited.


28

Table of Contents

A summary of restricted stock unit activity for the three months ended March 31, 2018, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Balance, January 1, 2018
 
1,246,966

 
$
7.27

Granted
 
251,913

 
$
9.87

Vested
 
(146,348
)
 
$
7.22

Forfeited
 
(27,604
)
 
$
7.30

Balance, March 31, 2018
 
1,324,927

 
$
7.73


We issued 146,348 shares of common stock to employees during the first three months of 2018 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 three months ended March 31, 2018 and 2017 was approximately $1.4 million and $0.7 million, respectively.

During the three months ended March 31, 2018 and 2017, we recognized $0.4 million and $0.6 million, respectively, in compensation expense related to these grants, and expect to recognize an additional $6.3 million in compensation expense over the remaining weighted average vesting periods of 34 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. Based on these assumptions, PSU compensation expense recognized during the three months ended March 31, 2018 was $0.1 million. There was no PSU compensation expense recognized during the three months ended March 31, 2017. The remaining compensation expense related to PSUs of approximately $0.5 million will be recognized over the next 23 months. 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 three months ended March 31, 2018, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Balance, January 1, 2018
 
256,976

 
$
6.45

Granted
 
295,065

 
$
9.75

Vested
 

 

Forfeited
 

 

Canceled
 
(84,983
)
 
$
6.45

Balance, March 31, 2018
 
467,058

 
$
8.53



29

Table of Contents

Unrestricted Stock Awards

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

The following table summarizes unrestricted stock award activity for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Shares of unrestricted stock granted
 
11,689

 
12,426

Weighted average grant date fair value per share
 
$
9.80

 
$
8.45


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 March 31, 2018, 329,501 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 March 31, 2018 and 2017, there were 15,346 and 12,554 shares, respectively, issued, and approximately $14,000 and $8,000 was recognized in compensation expense related to the discount associated with the plan in each year, respectively.

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Shares of stock sold to employees
 
15,346

 
12,554

Weighted average fair value per ESPP award
 
$
6.29

 
$
6.00


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 recognized in additional paid in capital upon issuance, and we do not recognize subsequent changes in fair value in our financial statements. As of March 31, 2018, all warrants were still outstanding.


30

Table of Contents

13.
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 months ended March 31, 2018 and 2017 (in thousands, except per share data):
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Numerator - basic and diluted:
 
 
 
 
Net income (loss) from continuing operations
 
$
7,338

 
$
(5,295
)
Less: net (income) loss attributable to noncontrolling interests
 
(4,750
)
 
1,519

Net income (loss) from continuing operations attributable to RLH Corporation
 
2,588

 
(3,776
)
Net income from discontinued operations
 

 
172

Net income (loss) attributable to RLH Corporation for diluted earnings (loss) per share (1)
 
$
2,588

 
$
(3,604
)
 
 
 
 
 
Denominator:
 
 
 
 
Weighted average shares - basic
 
24,101

 
23,469

Weighted average shares - diluted
 
25,166

 
23,469

 
 
 
 
 
Earnings (loss) per share - basic
 
 
 
 
Net income (loss) from continuing operations attributable to RLH Corporation
 
$
0.11

 
$
(0.16
)
Net income from discontinued operations
 

 
0.01

Net income (loss) attributable to RLH Corporation
 
$
0.11

 
$
(0.15
)
 
 
 
 
 
Earnings (loss) per share - diluted (1)