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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 June 30, 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 August 3, 2018, there were 24,274,599 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 June 30, 2018 and December 31, 2017
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2018 and 2017
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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
 



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PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements

RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 2018 and December 31, 2017
 
 
June 30,
2018
 
December 31,
2017
 
 
(In thousands, except share data)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents ($6,479 and $6,487 attributable to VIEs)
 
$
26,203

 
$
32,429

Restricted cash ($12,930 and $12,326 attributable to VIEs)
 
13,033

 
12,429

Accounts receivable, net ($2,369 and $3,200 attributable to VIEs)
 
18,420

 
13,143

Accounts receivable from related parties
 

 
1,520

Notes receivable, net
 
1,642

 
1,098

Inventories ($146 and $276 attributable to VIEs)
 
318

 
443

Prepaid expenses and other ($560 and $976 attributable to VIEs)
 
5,193

 
4,862

Assets held for sale ($27,416 and $34,359 attributable to VIEs)
 
27,416

 
34,359

Total current assets
 
92,225

 
100,283

Property and equipment, net ($97,179 and $137,479 attributable to VIEs)
 
126,931

 
167,938

Goodwill
 
17,693

 
9,404

Intangible assets, net
 
66,406

 
50,749

Other assets, net ($275 and $174 attributable to VIEs)
 
7,004

 
1,976

Total assets
 
$
310,259

 
$
330,350

LIABILITIES
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable ($1,241 and $1,810 attributable to VIEs)
 
$
6,036

 
$
4,100

Accrued payroll and related benefits ($950 and $1,453 attributable to VIEs)
 
4,533

 
7,457

Other accrued liabilities ($2,254 and $2,184 attributable to VIEs)
 
6,763

 
4,094

Long-term debt, due within one year ($36,864 and $62,914 attributable to VIEs)
 
38,336

 
62,914

Contingent consideration for acquisition due to related party, due within one year
 
3,000

 
9,289

Total current liabilities
 
58,668

 
87,854

Long-term debt, due after one year, net of debt issuance costs ($25,602 and $48,483 attributable to VIEs)
 
52,924

 
48,483

Deferred income and other long-term liabilities ($624 and $772 attributable to VIEs)
 
1,577

 
1,554

Deferred income taxes
 
1,659

 
2,219

Total liabilities
 
114,828

 
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; 24,246,518 and 23,651,212 shares issued and outstanding
 
242

 
237

Additional paid-in capital, common stock
 
182,192

 
178,028

Accumulated deficit
 
(15,712
)
 
(15,406
)
Total RLH Corporation stockholders' equity
 
166,722

 
162,859

Noncontrolling interest
 
28,709

 
27,381

Total stockholders' equity
 
195,431

 
190,240

Total liabilities and stockholders’ equity
 
$
310,259

 
$
330,350

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

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RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
For the Three and Six Months Ended June 30, 2018 and 2017
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands, except per share data)
Revenue:
 
 
 
 
 
 
 
 
Company operated hotels
 
$
23,904

 
$
32,274

 
$
45,907

 
$
56,970

Other revenues from managed properties
 
1,101

 
1,067

 
1,994

 
1,993

Franchised hotels
 
13,601

 
12,427

 
23,724

 
23,331

Other
 
6

 
61

 
26

 
116

Total revenues
 
38,612

 
45,829

 
71,651

 
82,410

Operating expenses:
 
 
 
 
 
 
 
 
Company operated hotels
 
16,736

 
23,688

 
36,283

 
45,166

Other costs from managed properties
 
1,101

 
1,067

 
1,994

 
1,993

Franchised hotels
 
9,365

 
8,870

 
17,266

 
17,402

Depreciation and amortization
 
4,701

 
4,572

 
9,093

 
9,082

Hotel facility and land lease
 
1,187

 
1,202

 
2,391

 
2,403

Gain on asset dispositions, net
 
(1,855
)
 
(102
)
 
(15,898
)
 
(221
)
General, administrative and other expenses
 
5,711

 
4,052

 
9,190

 
7,715

Acquisition and integration costs
 
1,997

 
186

 
2,101

 
11

Total operating expenses
 
38,943

 
43,535

 
62,420

 
83,551

Operating income (loss)
 
(331
)
 
2,294

 
9,231

 
(1,141
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(1,702
)
 
(2,037
)
 
(3,949
)
 
(3,995
)
Other income (loss), net
 
22

 
49

 
180

 
224

Total other income (expense)
 
(1,680
)
 
(1,988
)
 
(3,769
)
 
(3,771
)
Income (loss) from continuing operations before taxes
 
(2,011
)
 
306

 
5,462

 
(4,912
)
Income tax expense (benefit)
 
(348
)
 
193

 
(213
)
 
270

Net income (loss) from continuing operations
 
(1,663
)
 
113

 
5,675

 
(5,182
)
Discontinued operations:
 
 
 
 
 
 
 
 
Income (loss) from discontinued business unit, net of income tax expense (benefit) of ($21) and $69
 

 
(38
)
 

 
134

Net income (loss) from discontinued operations
 

 
(38
)
 

 
134

Net income (loss)
 
(1,663
)
 
75

 
5,675

 
(5,048
)
Net (income) loss attributable to noncontrolling interest
 
(659
)
 
(141
)
 
(5,409
)
 
1,378

Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
$
(2,322
)
 
$
(66
)
 
$
266

 
$
(3,670
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per share - basic
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to RLH Corporation
 
$
(0.10
)
 
$

 
$
0.01

 
$
(0.16
)
Income (loss) from discontinued operations
 

 

 

 

Net income (loss) attributable to RLH Corporation
 
$
(0.10
)
 
$

 
$
0.01

 
$
(0.16
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per share - diluted
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to RLH Corporation
 
$
(0.10
)
 
$

 
$
0.01

 
$
(0.16
)
Income (loss) from discontinued operations
 

 

 

 

Net income (loss) attributable to RLH Corporation
 
$
(0.10
)
 
$

 
$
0.01


$
(0.16
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares - basic
 
24,352

 
23,548

 
24,227

 
23,509

Weighted average shares - diluted
 
24,352

 
23,548

 
25,239

 
23,509

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

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RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2018 and 2017
 
 
Six Months Ended
 
 
June 30,
 
 
2018
 
2017
 
 
(In thousands)
Operating activities:
 
 
 
 
Net income (loss)
 
$
5,675

 
$
(5,048
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
9,093

 
9,139

Amortization of debt issuance costs
 
781

 
596

Gain on disposition of property, equipment and other assets, net
 
(15,850
)
 
(217
)
Deferred income taxes
 
(560
)
 
264

Stock based compensation expense
 
1,736

 
1,494

Provision for doubtful accounts
 
479

 
108

Fair value adjustments to contingent consideration
 
581

 
28

Change in current assets and liabilities, net of business acquired:
 
 
 
 
Accounts receivable, net
 
(2,308
)
 
(3,953
)
Notes receivable, net
 
(7
)
 
(32
)
Inventories
 
(91
)
 
(48
)
Prepaid expenses and other
 
(6,093
)
 
(469
)
Accounts payable
 
1,788

 
(470
)
Other accrued liabilities
 
30

 
515

Net cash provided by (used in) operating activities
 
(4,746
)
 
1,907

Investing activities:
 
 
 
 
Capital expenditures
 
(3,684
)
 
(5,417
)
Contingent consideration paid for Vantage acquisition
 
(4,000
)
 

Acquisition of Knights Inn
 
(27,000
)
 

Net proceeds from disposition of property and equipment
 
59,781

 
21

Collection of notes receivable related to property sales
 

 
200

Advances on notes receivable
 
(537
)
 
(419
)
Net cash provided by (used in) investing activities
 
24,560

 
(5,615
)
Financing activities:
 
 
 
 
Borrowings on long-term debt
 
30,000

 
2,794

Repayment of long-term debt
 
(49,725
)
 
(630
)
Debt issuance costs
 
(1,193
)
 
(29
)
Distributions to noncontrolling interest
 
(4,081
)
 
(666
)
Stock-based compensation awards canceled to settle employee tax withholding
 
(576
)
 
(292
)
Stock option and stock purchase plan issuances, net and other
 
139

 
60

Net cash provided by (used in) financing activities
 
(25,436
)
 
1,237

 
 
 
 
 
Change in cash, cash equivalents and restricted cash:
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
 
(5,622
)
 
(2,471
)
Cash, cash equivalents and restricted cash at beginning of period
 
44,858

 
47,609

Cash, cash equivalents and restricted cash at end of period
 
$
39,236

 
$
45,138

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


 
 
 
 
 

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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 primarily under the following proprietary brands: Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse, Settle Inn, Americas Best Value Inn, Canadas Best Value Inn, Signature and Signature Inn, Country Hearth Inns & Suites, and Knights Inn.

A summary of our properties as of June 30, 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
 
1,399

 
87,300

 
14

 
3,100

 
1,413

 
90,400


On October 5, 2017, we announced that we would be marketing for sale 11 of our owned hotels held by our consolidated joint venture, RL Venture, LLC (RL Venture). Through July of 2018, we have sold nine of the 11 properties, with details as follows:
In February 2018, five of the RL Venture properties were sold for an aggregate sale price of $47.2 million.
In April 2018 and May 2018, two additional RL Venture properties sold for $5.5 million and $9.3 million, respectively.
In July 2018, two additional RL Venture properties sold for $54.5 million.

See Notes 19 and 20 for discussion of Assets Held for Sale and Subsequent Events.

On May 14, 2018, Red Lion Hotels Franchising, Inc., a wholly-owned subsidiary of RLH Corporation (RLH Franchising) completed the purchase of all of the issued and outstanding shares of capital stock of Knights Franchise Systems, Inc. (KFS, Knights Inn), and the purchase of certain operating assets from, and assumption of certain liabilities relating to the business of franchising Knights Inn branded hotels from Wyndham Hotel Group Canada, ULC and Wyndham Hotel Group Europe Limited, pursuant to an Amended and Restated Purchase Agreement dated May 1, 2018. The aggregate purchase price of $27.0 million is subject to a post-closing purchase price adjustment mechanism for the cash, unpaid indebtedness, unpaid transaction expenses and working capital of KFS. See Note 17 for discussion of Business Acquisitions.

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 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 June 30, 2018, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2018 and 2017, and the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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.

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

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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, which is recognized in the month the service is provided, 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.
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 and hotel management fees. Revenue is

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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). We use time as the measure of progress to recognize as revenue the fees that are allocated to the period earned per the contract.

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.

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.

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. These fees are recognized in franchise hotel revenue.

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.


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Information below represents the effect of the adoption of ASU 2014-09 on our Condensed Consolidated Balance Sheet as of June 30, 2018 and our Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and six months ended June 30, 2018 (in thousands, except per share data).
 
 
As Reported
 
Adjustment
 
Balances without adoption of topic 606
ASSETS
 
 
 
 
 
 
Prepaid expenses and other
 
$
5,193

 
$
(118
)
 
$
5,075

Other assets, net
 
7,004

 
(768
)
 
6,236

Total assets
 
310,259

 
(886
)
 
309,373

 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
Other accrued liabilities
 
$
6,763

 
$
(565
)
 
$
6,198

Deferred income and other long-term liabilities
 
1,577

 
(1,253
)
 
324

Total liabilities
 
114,828

 
(1,818
)
 
113,010

 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
RLH Corporation stockholders' equity:
 
 
 
 
 
 
Accumulated deficit
 
$
(15,712
)
 
$
932

 
$
(14,780
)
Total RLH Corporation stockholders' equity
 
166,722

 
932

 
167,654

Total stockholders' equity
 
195,431

 
932

 
196,363

Total liabilities and stockholders’ equity
 
310,259

 
(886
)
 
309,373



Three Months Ended June 30, 2018
 
As Reported
 
Adjustment
 
Balances without adoption of topic 606
Revenue:
 
 
 
 
 
 
Franchised hotels
 
$
13,601

 
$
92

 
$
13,693

Total revenues
 
38,612

 
92

 
38,704

 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
Franchised hotels
 
9,365

 
(10
)
 
9,355

Total operating expenses
 
38,943

 
(10
)
 
38,933

Operating income (loss)
 
(331
)
 
102

 
(229
)
 
 
 
 
 
 
 
Income (loss) from continuing operations before taxes
 
(2,011
)
 
102

 
(1,909
)
Income tax expense (benefit)
 
(348
)
 
3

 
(345
)
Net income (loss) from continuing operations
 
(1,663
)
 
99

 
(1,564
)
Net income (loss)
 
(1,663
)
 
99

 
(1,564
)
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
(2,322
)
 
99

 
(2,223
)
 
 
 
 
 
 
 
Basic earnings (loss) per share from continuing operations
 
$
(0.10
)
 
$
0.01

 
$
(0.09
)
Diluted earnings (loss) per share from continuing operations
 
$
(0.10
)
 
$
0.01

 
$
(0.09
)


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Six Months Ended June 30, 2018
 
As Reported
 
Adjustment
 
Balances without adoption of topic 606
Revenue:
 
 
 
 
 
 
Franchised hotels
 
$
23,724

 
$
191

 
$
23,915

Total revenues
 
71,651

 
191

 
71,842

 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
Franchised hotels
 
17,266

 
207

 
17,473

Total operating expenses
 
62,420

 
207

 
62,627

Operating income (loss)
 
9,231

 
(16
)
 
9,215

 
 
 
 
 
 
 
Income (loss) from continuing operations before taxes
 
5,462

 
(16
)
 
5,446

Income tax expense (benefit)
 
(213
)
 
1

 
(212
)
Net income (loss) from continuing operations
 
5,675

 
(17
)
 
5,658

Net income (loss)
 
5,675

 
(17
)
 
5,658

Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
266

 
(17
)
 
249

 
 
 
 
 
 
 
Basic earnings (loss) per share from continuing operations
 
$
0.01

 
$

 
$
0.01

Diluted earnings (loss) per share from continuing operations
 
$
0.01

 
$

 
$
0.01


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. We are still assessing the potential impact that ASU 2016-02 will have on our financial statements and disclosures. We had $77.8 million of operating lease obligations as of June 30, 2018 (see Note 10) and upon the adoption of the standard we expect to 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.

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.


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Selected financial information is provided below (in thousands):
Three Months Ended June 30, 2018
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
13,601

 
$
25,005

 
$
6

 
$
38,612

Operating expenses:
 
 
 
 
 
 
 
 
Segment operating expenses
 
9,365

 
17,837

 

 
27,202

Depreciation and amortization
 
1,224

 
3,035

 
442

 
4,701

Other operating expenses, acquisition costs and gains on asset dispositions
 
1,997

 
(620
)
 
5,663

 
7,040

Operating income (loss)
 
$
1,015

 
$
4,753

 
$
(6,099
)

$
(331
)
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
65

 
$
981

 
$
1,351

 
$
2,397

Identifiable assets as of June 30, 2018
 
$
105,091

 
$
188,558

 
$
16,610

 
$
310,259


Three Months Ended June 30, 2017
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
12,427

 
$
33,341

 
$
61

 
$
45,829

Operating expenses:
 
 
 
 
 
 
 
 
Segment operating expenses
 
8,870

 
24,755

 

 
33,625

Depreciation and amortization
 
569

 
3,674

 
329

 
4,572

Other operating expenses, acquisition costs and gains on asset dispositions
 
185

 
1,084

 
4,069

 
5,338

Operating income (loss)
 
$
2,803

 
$
3,828

 
$
(4,337
)

$
2,294

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
69

 
$
1,667

 
$
778

 
$
2,514

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

 
$
241,659

 
$
18,656

 
$
330,350


Six Months Ended June 30, 2018
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
23,724

 
$
47,901

 
$
26

 
$
71,651

Operating expenses:
 
 
 
 
 
 
 
 
Segment operating expenses
 
17,266

 
38,277

 

 
55,543

Depreciation and amortization
 
2,057

 
6,158

 
878

 
9,093

Other operating expenses, acquisition costs and gains on asset dispositions
 
2,100

 
(13,460
)
 
9,144

 
(2,216
)
Operating income (loss)
 
$
2,301

 
$
16,926

 
$
(9,996
)
 
$
9,231

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
84

 
$
1,582

 
$
2,398

 
$
4,064

Identifiable assets as of June 30, 2018
 
$
105,091

 
$
188,558

 
$
16,610

 
$
310,259



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Table of Contents

Six Months Ended June 30, 2017
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
23,331

 
$
58,963

 
$
116

 
$
82,410

Operating expenses:
 
 
 
 
 
 
 
 
Segment operating expenses
 
17,402

 
47,159

 

 
64,561

Depreciation and amortization
 
1,127

 
7,341

 
614

 
9,082

Other operating expenses, acquisition costs and gains on asset dispositions
 
(91
)
 
2,168

 
7,831

 
9,908

Operating income (loss)
 
$
4,893

 
$
2,295

 
$
(8,329
)
 
$
(1,141
)
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
438

 
$
2,208

 
$
1,091

 
$
3,737

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

 
$
241,659

 
$
18,656

 
$
330,350


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 LLC (RLS Balt Venture), (3) RLS Atla Venture LLC (RLS Atla Venture) and (4) RLS DC Venture LLC (RLS DC Venture). See Note 8 for further discussion of the terms of the long-term debt at each of the joint venture entities.

RL Venture

We maintain a 55% interest in RL Venture, with the remaining 45% owned by Shelbourne Falcon RLHC Hotel Investors LLC (Shelbourne Falcon), an entity that is led by Shelbourne Capital LLC (Shelbourne). 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.

Cash distributions may be made periodically based on calculated distributable income. During the second quarter of 2018, RL Venture made a cash distribution totaling $9.0 million, of which RLH Corporation received $5.0 million. During the second quarter of 2017, RL Venture made distributions totaling $1.5 million, of which RLH Corporation received $0.8 million. There were no cash distributions made during the first quarter of 2018 or 2017.

Subsequent to the second quarter of 2018, RL Venture made a cash distribution totaling $37.5 million, of which RLH Corporation received $20.6 million. Under our credit agreement with Deutsche Bank AG New York Branch (DB), Capital One, National Association and Raymond Jame Bank, N.A., as lenders and DB as the administrative agent (DB Credit Agreement), these funds may be used to pay down the principal outstanding on the Senior Secured Term Loan. See Note 8, Long-Term Debt for discussion of the Senior Secured Term Loan.

In February 2018, five of the RL Venture properties were sold for an aggregate sale price of $47.2 million. In April 2018, one of the RL Venture properties sold for $5.5 million. In May 2018, an additional RL Venture property sold for $9.3 million. In July 2018, two additional RL Venture properties sold for $54.5 million. As of July 31, 2018, RL Venture has two remaining properties, both of which are being marketed for sale. See Notes 19 and 20 for discussion of Assets Held for Sale and Subsequent Events.

RLS Balt Venture

We own a 73% interest in RLS Balt Venture, with the remaining 27% owned by Shelbourne Falcon Charm City Investors LLC (Shelbourne Falcon II), an entity led by Shelbourne. 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

12

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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 May 2017 and 2018, RLH Corporation provided an additional $2.8 million and $2.0 million, respectively, 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 preferred capital plus a preferred return of 9% on the May 2017 preferred capital and 11% on the May 2018 preferred capital, 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 six months ended June 30, 2018 or 2017.

RLS Atla Venture

We own a 55% interest in RLS Atla Venture and Falcon Big Peach Investors LLC (Shelbourne Falcon III), an entity led by Shelbourne, 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 six months ended June 30, 2018 or 2017.

RLS DC Venture

We own 55% of RLS DC Venture, and Shelbourne Falcon DC Investors LLC (Shelbourne Falcon IV), an entity led by Shelbourne, 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 55% 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. In May 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 preferred capital plus a preferred return of 9% on the May 2017 preferred capital and 11% on the May 2018 preferred capital, compounded annually, prior to any liquidation proceeds being returned to the members. Also in the May 2018, 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.

Cash distributions may be made periodically based on calculated distributable income. There were no cash distributions made during the six months ended June 30, 2018 or 2017.


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5.
Property and Equipment

Property and equipment is summarized as follows (in thousands):
 
 
June 30,
2018
 
December 31,
2017
Buildings and equipment
 
$
156,975

 
$
216,618

Furniture and fixtures
 
21,127

 
29,132

Landscaping and land improvements
 
3,091

 
5,104

 
 
181,193

 
250,854

Less accumulated depreciation
 
(79,603
)
 
(118,888
)
 
 
101,590

 
131,966

Land
 
21,571

 
31,710

Construction in progress
 
3,770

 
4,262

Property and equipment, net
 
$
126,931

 
$
167,938


6.
Goodwill and Intangible Assets

On May 14, 2018 we acquired substantially all of the assets and assumed certain liabilities of KFS, including customer contracts and the brand name (see Note 17).

The following table summarizes the balances of goodwill and other intangible assets (in thousands):
 
June 30,
2018
 
December 31,
2017
Goodwill
$
17,693

 
$
9,404

 
 
 
 
Intangible assets
 
 
 
Brand name - indefinite lived
$
46,860

 
$
39,160

Brand name - finite lived, net
2,560

 
2,814

Customer contracts, net
16,858

 
8,647

Trademarks
128

 
128

Total intangible assets, net
$
66,406

 
$
50,749


Goodwill and other intangible assets attributable to each of our business segments at June 30, 2018 and December 31, 2017 were as follows (in thousands):  
 
June 30, 2018
 
December 31, 2017
 
 
 
Intangible
 
 
 
Intangible
 
Goodwill
 
Assets
 
Goodwill
 
Assets
Company operated hotels
$

 
$
4,660

 
$

 
$
4,660

Franchised hotels
17,693

 
61,746

 
9,404

 
46,089

Total
$
17,693

 
$
66,406

 
$
9,404

 
$
50,749


The following table summarizes the balances of amortized customer contracts and finite-lived brand names (in thousands):
 
June 30,
2018
 
December 31,
2017
Customer contracts
$
20,773

 
$
11,673

Brand name - finite lived
3,295

 
3,295

Accumulated amortization
(4,650
)
 
(3,507
)
Net carrying amount
$
19,418

 
$
11,461



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Table of Contents

7.
Revenue from Contracts with Customers

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
 
 
June 30, 2018
Accounts receivable
 
$
18,420

Key money disbursed
 
6,106

Capitalized contract costs
 
1,032

Contract liabilities
 
1,889


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

 
$
750

 
$
1,444

Key money disbursed
 
5,163

 

 

Costs incurred to acquire contracts
 

 
430

 

Cash received in advance
 

 

 
782

Revenue or expense recognized that was included in the January 1, 2018 balance
 
(45
)
 
(136
)
 
(286
)
Revenue or expense recognized in the period for the period
 
(160
)
 
(12
)
 
(51
)
Balance as of June 30, 2018
 
$
6,106

 
$
1,032

 
$
1,889


 
 
Key Money Disbursed
 
Capitalized Contract Costs
 
Contract Liabilities
Balance as of March 31, 2018
 
$
4,726

 
$
1,005

 
$
1,663

Key money disbursed
 
1,545

 

 

Costs incurred to acquire contracts
 

 
104

 

Cash received in advance
 

 

 
403

Revenue or expense recognized that was included in the January 1, 2018 balance
 
(26
)
 
(68
)
 
(135
)
Revenue or expense recognized in the period for the period
 
(139
)
 
(9
)
 
(42
)
Balance as of June 30, 2018
 
$
6,106

 
$
1,032

 
$
1,889


Estimated revenues and expenses expected to be recognized related to performance obligations that were unsatisfied as of June 30, 2018, including revenues related to application, initiation and other fees were as follows (in thousands):
Year ending December 31,
 
 Revenue
 
Contra Revenue
 
 Expense
2018 (remainder)
 
$
407

 
$
225

 
$
193

2019
 
546

 
442

 
240

2020
 
365

 
444

 
184

2021
 
245

 
407

 
123

2022
 
177

 
390

 
91

Thereafter
 
149

 
4,198

 
201

Total
 
$
1,889

 
$
6,106

 
$
1,032


As of June 30, 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.


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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 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 June 30, 2018 and December 31, 2017 are as follows (in thousands):
 
 
June 30, 2018
 
December 31, 2017
 
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Senior Secured Term Loan
 
$
1,472

 
$
28,528

 
$

 
$

RL Venture
 
14,221

 
9,934

 
40,602

 
32,625

RL Baltimore
 
13,284

 

 
13,300

 

RLH Atlanta
 
9,300

 

 
9,360

 

RLH DC
 
342

 
15,716

 
332

 
16,303

Total debt
 
38,619

 
54,178

 
63,594

 
48,928

Unamortized debt issuance costs
 
(283
)
 
(1,254
)
 
(680
)
 
(445
)
Long-term debt net of debt issuance costs
 
$
38,336

 
$
52,924

 
$
62,914

 
$
48,483


Each of our debt agreements contain customary reporting, financial and operating covenants. We were in compliance with all of the covenants at June 30, 2018.

Senior Secured Term Loan

In May 2018, RLH Corporation and certain of its direct and indirect wholly-owned subsidiaries entered into a credit agreement with Deutsche Bank AG New York Branch (DB), Capital One, National Association and Raymond James Bank, N.A., as lenders and DB as the administrative agent (DB Credit Agreement). The DB Credit Agreement provided for a $30.0 million senior secured term loan facility (Senior Secured Term Loan) and a $10.0 million senior secured revolving credit facility (Revolving Credit Facility). The principal amount of the Senior Secured Term Loan was distributed at closing to fund the KFS acquisition. At June 30, 2018, there were unamortized debt issuance fees of $1.2 million and no amounts outstanding on the Revolving Credit Facility.

The loans and credit commitments mature in May 2023. Principal payments equal to 1.25% of the Senior Secured Term Loan, or $375,000, will be paid quarterly beginning in September 2018, with the balance due upon maturity. Outstanding amounts under the DB Credit Agreement will bear interest at adjusted LIBOR plus 3.00%.

In addition, the DB Credit Agreement includes mandatory prepayment of the Senior Secured Term Loan using any proceeds from incurred or issued indebtedness, and, starting with the full fiscal quarter ending March 31, 2019, requires prepayments in an amount equal to (x) 50% of all distributions received by RLH Corporation or its subsidiary guarantors from their respective subsidiaries and joint venture interests during any such fiscal quarter, minus (y) the amount of the amortization payment required to be made by RLH Corporation for such fiscal quarter, capped at $5.0 million. In addition, all net proceeds received by RLH Corporation from non-ordinary course asset sales and other specified dispositions of property, including the RL Venture property sales, must be maintained in a cash collateral account controlled by DB, subject to the right of RLH Corporation to prepay the Senior Secured Term Loan in whole or in part at any time with such proceeds. 

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, cross-default provisions, and restrictions on payment of dividends. RLH Corporation has also agreed to customary reporting, financial and operating covenants. Our obligations under the DB Credit Agreement are (i) guaranteed by all of our direct and indirect wholly-owned subsidiaries, and (ii) secured by all of the present and after-acquired accounts, inventory, equipment, intellectual property, contractual rights and other tangible or intangible assets of RLH Corporation and the subsidiary guarantors. 

RL Venture

On July 10, 2018, the RL Venture debt was repaid in full using the proceeds from the sale of hotels within RL Venture.

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Table of Contents


RL Baltimore

In May 2018, RL Baltimore executed a three-month extension for this loan. 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 August 2018 and we have commenced negotiations with our joint venture partner and the lender to evaluate options to address the maturity including, but not limited to, extending the agreement, amending the agreement, or paying off the loan with currently available cash.

RLH DC

In May 2018 the loan was amended. With the amendment, RLH Corporation provided approximately $450,000 to RLS DC Venture to be used as a principal payment on the debt. This funding was treated as preferred capital of RLS DC Venture. 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.

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 June 30, 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)
 
 
 
 
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 Atlanta and RLH DC as of June 30, 2018. We received a waiver of compliance for RL Venture as of June 30, 2018.

10.
Operating and Capital Lease Commitments

We have both operating and capital leases in the normal course of business. The operating leases primarily relate to five of our company operated hotel properties and our headquarters. 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.


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Table of Contents

Total future minimum payments due under all current term operating and capital leases at June 30, 2018, are as indicated below (in thousands):
Year ending December 31,
 
Total Lease Obligation
 
Operating Lease Obligation
 
Capital Lease Obligation
2018 (remainder)
 
$
2,852

 
$
2,573

 
$
279

2019
 
5,145

 
4,842

 
303

2020
 
4,892

 
4,587

 
305

2021
 
3,337

 
3,162

 
175

2022
 
2,577

 
2,466

 
111

Thereafter
 
60,131

 
60,120

 
11

Total
 
$
78,934

 
$
77,750

 
$
1,184


Total rent expense from continuing operations, under leases for the three and six months ended June 30, 2018 was $1.5 million and $3.0 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). Total rent expense under leases for the three and six months ended June 30, 2017 was $1.6 million and $3.2 million, respectively.

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

Stock Incentive Plans

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 June 30, 2018, there were 867,843 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2015 Plan.

Stock based compensation expense reflects the fair value of stock based awards measured at grant date, including an estimated forfeiture rate, and is recognized over the relevant service period. For the three and six months ended June 30, 2018 and 2017 stock-based compensation expense is as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Restricted stock units
 
$
775

 
$
638

 
$
1,192

 
$
1,204

Unrestricted stock awards
 
114

 
110

 
229

 
215

Performance stock units
 
184

 
25

 
261

 
25

Stock options
 
17

 
17

 
34

 
34

Employee stock purchase plan
 
6

 
8

 
20

 
16

Total stock-based compensation
 
$
1,096

 
$
798

 
$
1,736

 
$
1,494


Restricted Stock Units

During the six months ended June 30, 2018 and 2017, we granted 499,362 and 458,020 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. As of June 30, 2018 and 2017, there were 1,438,723 and 1,335,450 unvested restricted stock units outstanding, respectively.

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Table of Contents


A summary of restricted stock unit activity for the six months ended June 30, 2018, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Balance, January 1, 2018
 
1,246,966

 
$
7.27

Granted
 
499,362

 
$
10.40

Vested
 
(195,430
)
 
$
7.03

Forfeited
 
(112,175
)
 
$
7.21

Balance, June 30, 2018
 
1,438,723

 
$
8.36


We issued 195,430 shares of common stock to employees during the first six months of 2018 as their restricted stock units vested. Under the terms of the plans upon issuance, we deliver a net settlement of distributable shares to employees after consideration of individual employees' tax withholding obligations, at the election of each employee. The fair value of restricted stock that vested during the six months ended June 30, 2018 and 2017 was approximately $1.9 million and $0.9 million, respectively.

During the three months ended June 30, 2018 and 2017, we recognized $0.8 million and $0.6 million, respectively in compensation expense related to these grants. During the six months ended June 30, 2018 and 2017, we recognized $1.2 million in each period in compensation expense related to these grants, and expect to recognize an additional $8.0 million in compensation expense over the remaining weighted average vesting periods of 37 months.

Performance Stock Units, Shares Issued as Compensation

We grant performance stock units (PSUs) to certain of our executives under the 2015 Plan. These PSUs include both performance and service vesting conditions. Each performance condition has a minimum, a target and a maximum share amount based on the level of attainment of the performance condition. Compensation expense, net of estimated forfeitures, is calculated based on the estimated attainment of the performance conditions during the performance period and recognized on a straight-line basis over the performance and service periods. Based on these assumptions, PSU compensation expense recognized during the three months ended June 30, 2018 and 2017 was $0.2 million and $25,000, respectively. PSU compensation expense recognized during the six months ended June 30, 2018 and 2017 was $0.3 million and $25,000, respectively. The remaining compensation expense related to PSUs of approximately $1.7 million will be recognized over the next 38 months.

A summary of performance stock unit activity for the six months ended June 30, 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
 

 

Canceled
 
(126,559
)
 
$
7.53

Forfeited
 
(31,903
)
 
$
6.45

Balance, June 30, 2018
 
393,579

 
$
8.58



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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 and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Shares of unrestricted stock granted
 
12,062

 
15,822

 
23,751

 
28,248

Weighted average grant date fair value per share
 
$
9.50

 
$
6.95

 
$
9.65

 
$
7.61


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 and six months ended June 30, 2018 and 2017 (in thousands, except per share data):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Numerator - basic and diluted:
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
(1,663
)
 
$
113

 
$
5,675

 
$
(5,182
)
Less: net (income) loss attributable to noncontrolling interests
 
(659
)
 
(141
)
 
(5,409
)
 
1,378

Net income (loss) from continuing operations attributable to RLH Corporation
 
(2,322
)
 
(28
)
 
266

 
(3,804
)
Net income (loss) from discontinued operations
 

 
(38
)
 

 
134

Net income (loss) attributable to RLH Corporation for diluted earnings (loss) per share
 
$
(2,322
)
 
$
(66
)
 
$
266

 
$
(3,670
)
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average shares - basic
 
24,352

 
23,548

 
24,227

 
23,509

Weighted average shares - diluted 
 
24,352

 
23,548

 
25,239

 
23,509

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

 
$
0.01

 
$
(0.16
)
Net income (loss) from discontinued operations
 

 

 

 

Net income (loss) attributable to RLH Corporation
 
$
(0.10
)
 
$

 
$
0.01

 
$
(0.16
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per share - diluted 
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations attributable to RLH Corporation
 
$
(0.10
)
 
$

 
$
0.01

 
$
(0.16
)
Net income (loss) from discontinued operations
 

 

 

 

Net income (loss) attributable to RLH Corporation
 
$
(0.10
)
 
$

 
$
0.01

 
$
(0.16
)

The following table presents options to purchase common shares, restricted stock units outstanding, performance stock units outstanding, warrants to purchase common shares and contingently issuable shares included in the earnings per share calculation, as well as the amount excluded from the dilutive earnings per share calculation if they were considered antidilutive, for the three and six months ended June 30, 2018 and 2017.

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Table of Contents

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Stock Options(1)
 
 
 
 
 
 
 
 
Dilutive awards outstanding
 

 

 
5,815

 

Antidilutive awards outstanding
 
81,130

 
115,358

 
75,315

 
115,358

Total awards outstanding
 
81,130

 
115,358

 
81,130

 
115,358

 
 
 
 
 
 
 
 
 
Restricted Stock Units(2)
 
 
 
 
 
 
 
 
Dilutive awards outstanding
 

 

 
752,936

 

Antidilutive awards outstanding
 
1,438,723

 
1,335,450

 
685,787

 
1,335,450

Total awards outstanding
 
1,438,723

 
1,335,450

 
1,438,723

 
1,335,450

 
 
 
 
 
 
 
 
 
Performance Stock Units(3)
 
 
 
 
 
 
 
 
Dilutive awards outstanding
 

 

 
98,532

 

Antidilutive awards outstanding
 
298,521

 
168,141

 
199,989

 
168,141

Total awards outstanding
 
298,521

 
168,141

 
298,521

 
168,141

 
 
 
 
 
 
 
 
 
Warrants(4)
 
 
 
 
 
 
 
 
Dilutive awards outstanding
 

 

 
154,733

 

Antidilutive awards outstanding
 
442,533


442,533


287,800


442,533

Total awards outstanding