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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-13957 
 RED LION HOTELS CORPORATION
(Exact name of registrant as specified in its charter)
Washington91-1032187
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1550 Market St. #350DenverColorado80202
(Address of principal executive offices)(Zip Code)
Registrant's Telephone Number, Including Area Code: (509459-6100 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $.01 per shareRLHNew York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes      No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes     No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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     No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  Accelerated Filer
Non-accelerated filer  Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes      No  
The aggregate market value of the registrant's common stock as of June 30, 2019 was $178.3 million, of which 81.6% or $145.4 million was held by non-affiliates as of that date.
As of February 24, 2020, there were 25,208,983 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2020 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the registrant's 2019 fiscal year, are incorporated by reference herein in Part III.



TABLE OF CONTENTS
 
Item No.DescriptionPage No.
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16





PART I

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

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

Wholly-owned subsidiaries:
Red Lion Hotels Holdings, Inc.
Red Lion Hotels Franchising, Inc.
Red Lion Hotels Canada Franchising, Inc.
Red Lion Hotels Management, Inc. (RL Management)
Red Lion Hotels Limited Partnership
RL Baltimore LLC (RL Baltimore)
WestCoast Hotel Properties, Inc.
Red Lion Anaheim, LLC
RLabs, Inc.
Joint venture entities:
RL Venture LLC (RL Venture) in which we hold a 55% member interest
RLS Atla Venture LLC (RLS Atla Venture) in which we hold a 55% member interest
RLS DC Venture LLC (RLS DC Venture) in which we hold a 55% member interest

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

Item 1. Business

Available Information

Through our website (www.redlion.com), we make available our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, amendments to these filings and all other reports and documents that we file with the U.S. Securities and Exchange Commission (SEC) pursuant to Section 13(a) of the Securities Exchange Act of 1934.

The SEC also maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Our website also contains our Code of Business Conduct and Ethics, our Corporate Governance Guidelines; Charters for our Audit, Compensation, and Nominating and Corporate Governance Committees, Accounting and Audit Complaints and Concerns Procedures, our Statement of Policy with Respect to Related Party Transactions, Stock Ownership Guidelines for Directors and Executive Officers and information regarding shareholder communications with our board of directors. The contents of our website are not incorporated into this filing.

General

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


1


All our properties strive to highlight friendly service and reflect the local flair of their markets. The midscale RLH Corporation brands of Hotel RL, Red Lion Hotel and Red Lion Inn & Suites offer a unique local spin on the expected travel experience in an environment that allows customers to feel welcome and at home. Our focus is to anticipate guest needs and pleasantly surprise them with our distinctive Pacific Northwest-inspired customer service. Warm and authentic, our commitment to customer service includes a focus on delivering the guest locally inspired, friendly and personalized signature moments. This is intended to position each RLH Corporation brand hotel as an advocate to our traveling guests, creating brand relevance and loyalty, differentiating us from our competition.

Our economy brands are focused on delivering our guests a consistent experience with exceptional comfort, quality and service at an affordable rate, with approximately 1,000 locations in 46 states, the District of Columbia, and two countries outside the United States.

A summary of our open franchise and company operated hotels as of December 31, 2019, including the approximate number of available rooms, is provided below:
Midscale BrandEconomy BrandTotal
HotelsTotal Available RoomsHotelsTotal Available RoomsHotelsTotal Available Rooms
Beginning quantity, January 1, 2019112  15,900  1,215  69,800  1,327  85,700  
Newly opened 700  32  1,600  40  2,300  
Change in brand / adjustments (1)
(1) 100  (30) (1,800) (31) (1,700) 
Terminated properties (23) (3,200) (251) (15,400) (274) (18,600) 
Ending quantity, December 31, 201996  13,500  966  54,200  1,062  67,700  
(1) During the fourth quarter of 2019 we identified a number of errors in our contract tracking system, primarily related to the status of acquired contracts from acquisitions. The impact of these adjustments is reflected on this line.

A summary of our executed franchise agreements for the year ended December 31, 2019 is provided below:
Midscale BrandEconomy BrandTotal
Executed franchise license agreements, year ended December 31, 2019:
New locations16  27  43  
New contracts for existing locations11  115  126  
Total executed franchise license agreements, year ended December 31, 201927  142  169  

In 2017, we announced that we would be marketing for sale 11 of our owned hotels held by our consolidated joint venture, RL Venture. This is consistent with the Company’s previously stated business strategy of moving towards operating as primarily a franchise company. During 2018, nine of the properties were sold. Using proceeds from the sale of the hotels and the release of restricted cash associated with the debt, RL Venture repaid the remaining principal balance outstanding under its loan agreement with Pacific Western Bank in July 2018. In December 2019, we sold an additional RL venture property, the Hotel RL Salt Lake City. Using proceeds from the sale, RL Venture repaid the remaining principal balance outstanding under its loan agreement secured by the Hotel RL Salt Lake City property with Umpqua Bank. As of December 31, 2019, there is one remaining owned hotel held by our consolidated joint venture, RL Venture.

In November 2019, we sold the Red Lion Hotel Atlanta Airport hotel, previously owned by our consolidated joint venture, RLS Atla Venture, LLC. Using the proceeds from the sale, RLH Atlanta LLC, which is wholly-owned by RLS Atla Venture, repaid the remaining principal balance outstanding under its loan agreement with PFP Holding Company IV LLC.

In May 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), and the purchase of certain operating assets from, and assumption of certain liabilities relating to the business of franchising Knights Inn branded hotels to hotel owners from Wyndham Hotel Group Canada, ULC and Wyndham Hotel Group Europe Limited, pursuant to an Amended and Restated Purchase Agreement for an aggregate purchase price of $27.2 million.


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Operations

We operate in two reportable segments:

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

The company operated hotel segment derives revenues primarily from guest room rentals and food and beverage offerings at owned and leased hotels for which we consolidate results. Revenues have also been derived from management fees and related charges for hotels with which we contract to perform management services, however our last management agreement terminated in February 2019.

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

We have two measures of segment performance under generally accepted accounting principles in the United States of America (GAAP): revenue and operating income.

Intersegment revenues are minimal. Certain operating expenses are allocated to the operating segments based upon internally established allocation methodologies. Income tax provision (benefit) and certain corporate operating expenses are neither allocated to the segments nor included in the measures of segment performance. See Non-GAAP Financial Measures within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for information about our non-GAAP measures and reconciliations to the most comparable GAAP measures.

Overview

Company Strategy

Our strategy prioritizes getting "back to basics" with a renewed commitment to franchisees and a tactical focus on growth opportunities. We are focusing on what matters most to our franchisees: the evaluation and implementation of common sense brand standards which focus on return on investment for owners; amplifying marketing spend to increase brand contribution; targeted campaigns with input from franchisees; digital enhancements and expansion; and a commitment to development opportunities in markets that resonate with our brands. Corporate efforts will be rooted in R.O.A.R – Recruit, Onboard, Add value and Retain. We also plan to strategically expand our digital and targeted marketing program, primarily in local and regional markets, putting a larger focus on community engagement, franchisee revenue sources, and with the intent to increase contribution to owners.

Our intention is to grow our brands and profitability by expanding our franchise hotel network with additional hotels. In 2019 we executed 169 franchise agreements. Also during 2019, 274 franchise agreements in our network terminated.

By segmenting our midscale and economy brands with clear distinctions between each offering, we are uniquely positioned to provide an appealing alternative for a variety of owners. Our strategy for our midscale hotel brands is to identify larger urban metropolitan statistical areas (MSAs) that are saturated by larger brands in order to become the conversion brand of choice for owners of established hotels looking for alternatives in those markets. We believe our midscale brands have strong name recognition in the Western U.S. markets, providing us with an opportunity to expand our hotel network into markets across North America where our brands will be a unique and new value proposition for current and potential hotel owners in markets saturated by competitor brands. To assist in our ability to grow our hotel network in larger metropolitan cities, we may consider special incentives, minority equity, joint venture opportunities with hotel owners and investors, or adding additional brand options. Our economy hotel brands have strong national brand name recognition and provide hotel owners an affordable alternative to traditional franchise programs with primarily flat fees, sensible property improvement plans and a wealth of resources and programs to support owners. In addition to conversion from other brands, independently branded hotel operations may also benefit from the RLH Corporation central services programs. For all of our properties, we strive to provide hotel owners leading demand distribution technology and sales support as part of our brand support programs.

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Franchised Hotels

As of December 31, 2019 our network of hotels included 1,056 hotels under franchise agreements, representing approximately 66,700 rooms. We are growing our franchise network of hotels through execution of franchise agreements with hotel owners and through acquisitions of hotel brands and/or companies.

Also included is Canvas Integrated Systems, an all-in-one cloud-based hospitality management suite featuring a collection of seamlessly-integrated tools designed to drive revenue, secure more revenue opportunities, automate channel management and reduce cost and friction for independent hotel owners. Revenues from these agreements are included in Marketing, reservations and reimbursables revenue and associated expenses are included in Marketing, reservations, and reimbursables expense and Selling, general, administrative and other expenses in the Consolidated Statements of Comprehensive Income (Loss).

In May 2018, we acquired the Knights Inn brand and related franchise agreements for approximately 330 hotels operating under the brand. See Note 16 for discussion of Acquisitions and Dispositions within Item 8. Financial Statements and Supplementary Data.

Our focus on providing improved e-commerce revenue generation to our hotel owners includes investing in our rlhco.com website, enhanced and economical guest loyalty program, and improved and targeted digital marketing utilizing information generated through our RevPak reservation and distribution system.

We are also investing in technology and sales and marketing talent to improve our ability to manage the various channels that drive occupancy and average daily rate at our hotels, including transient, group and preferred corporate business. We continue to improve and implement our guest management ecosystem, RevPak, which includes a number of industry revenue generation systems fully integrated to provide comprehensive information on customer acquisition, customer management and customer retention. This suite of products is flexible and dynamic and can be tailored to the needs of individual hotel brands. It also delivers dynamic and personalized communications and promotions tailored to individual guest travel needs and habits.

Company Operated Hotels

Consistent with the Company's previously stated business strategy to move towards operating as primarily a franchise company, in 2017, we announced that we would be marketing for sale 11 of our owned hotels held by our consolidated joint venture, RL Venture. In 2018, nine of the RL Venture properties were sold for $116.5 million. In December 2019, we sold an additional RL Venture property for $33.0 million. In November 2019, we sold the only hotel in our consolidated joint venture, RLS Atla Venture for $12.3 million. Most of the buyers entered into franchise license agreements to retain the Red Lion brand.

We operated six hotels as of December 31, 2019. These include one wholly owned hotel, two hotels owned or operated under a land lease through joint venture (JV) entities, and three hotels operated under land and/or property leases held directly by the Company.

Our Baltimore Hotel RL became a wholly owned hotel in 2018. Previously, the hotel was held in its own JV entity, RLS Balt Venture, LLC, of which we owned 73%, until we purchased the remaining noncontrolling interest in October 2018.

As of December 31, 2019, our Hotel RL Olympia hotel is the only remaining property held in RL Venture, of which we own a 55% interest. In the fourth quarter of 2019, we sold the Hotel RL Salt Lake City, a property previously held in RL Venture.

Also as of December 31, 2019, our Washington DC Hotel RL is held in its own JV entity, RLS DC Venture, LLC, of which we own 55%.

In the fourth quarter of 2019, we sold our Red Lion Hotel Atlanta Airport hotel. The property was previously held in its own JV entity, RLS Atla Venture, LLC, of which we own 55%.

We have leasehold interests in our Anaheim, Seatac, and Kalispell hotel properties. These leases have expiration dates in 2021, 2024, and 2028, respectively. The Anaheim lease has 17 five-year renewal options remaining and the Kalispell lease has three five-year renewal options remaining.


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Revenues
A summary of our reporting segment revenues is provided below (in thousands, except for percentages). For further information regarding our reportable segments, see Note 3, Business Segments within Item 8. Financial Statements and Supplementary Data.

 Years Ended December 31,
20192018
Royalty$22,121  19.4 %$22,309  16.4 %
Marketing, reservations and reimbursables31,375  27.5 %28,239  20.8 %
Other franchise5,749  5.0 %3,246  2.4 %
Company operated hotels55,029  48.1 %82,021  60.4 %
Other14  — %34  — %
Total revenues$114,288  100.0 %$135,849  100.0 %
 
Employees

At December 31, 2019, we employed approximately 285 people on a full-time or part-time basis. Our total number of employees fluctuates seasonally, primarily due to company operated hotel activity. At December 31, 2019, none of our total workforce was covered by collective bargaining agreements. Our employee count has declined over time as we have disposed of a number of our company operated hotels and entered into third party management agreements for many of our remaining company operated hotels. We believe our employee relations are satisfactory.

Information about our Executive Officers

NameAgePosition
John J. Russell, Jr.72  Interim President and Chief Executive Officer
Gary Sims61  Executive Vice President, Chief Operating Officer
Julie Shiflett52  Executive Vice President, Chief Financial Officer, Treasurer
Harry G. Sladich59  Executive Vice President, Lodging Development and Franchise Operations
Thomas L. McKeirnan51  Executive Vice President, General Counsel and Secretary

John J. Russell, Jr. Mr. Russell joined RLH Corporation in December 2019 as Interim President and Chief Executive Officer. Mr. Russell previously served as President of Sentry Hospitality and COO with Sentry Companies and concurrently served as Senior Advisor for Ocean Visions, Inc., a 501(c)(3) organization that funds and launches companies that have solutions for problems in our oceans and its sources. With 40 years of hospitality experience, positions Mr. Russell has held have included Chairman and CEO or Senior Executive for companies including: ITT Sheraton, Days Inn of America, Carlson Companies, Benchmark Hospitality, HFS, Cendant, RCI, Yesawich, Pepperdine, Brown and Russell (Partner), NYLO Hotels, MODO Hotels and CampusBrands. Mr. Russell is known as an extremely successful brand builder and innovator of new brands such as Wingate Inns, NYLO and XP by NYLO and MODO Hotels and MODO zip and has accelerated growth of legacy brands such as Days Inn, Ramada, Howard Johnson and Super 8. Mr. Russell was CEO for three management companies: Days Inns Management Company, Colony Hotels and Resorts, and NYLO Hotels. Mr. Russell also launched three start up hospitality companies.

Gary Sims. Mr. Sims joined RLH Corporation in 2018 as Executive Vice President and Chief Operating Officer overseeing all franchise operations, sales, hotel management and human resources. Mr. Sims has over 30 years of experience with notable brands around the globe including over ten years of franchise and management sales experience at Starwood Hotels and Resorts. Prior to joining RLH Corporation, Mr. Sims was managing director at Omni La Costa Resort & Spa in southern California, a 650-room luxury golf resort, from 2013 - 2018. He led all operations and strategy for the resort, driving incremental revenue and exceptional service.


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Julie Shiflett. Ms. Shiflett returns to RLH Corporation after having served as the company’s Vice President of Finance from October 2010 to September 2011, and as Chief Financial Officer from September 2011 to October 2014. Since December 2014, Ms. Shiflett served as Principal of NorthWest CFO, an outsourced financial expert consultancy she founded in 2008, where she provided financial consulting services and support to RLH Corporation for various strategic initiatives. Ms. Shiflett currently serves on the Board of Directors of Northwest Farm Credit Services. Ms. Shiflett holds an MBA from University of Phoenix and a BA from Eastern Washington University.

Harry G. Sladich.   Mr. Sladich serves as Executive Vice President of Lodging Development and Franchise Operations for RLH and is the driving force behind companywide franchise operational and owner initiatives for more than 1,000 hotels nationwide and in three countries. Mr. Sladich recently served on two prominent national industry boards, including the U.S. Travel Association and Destination & Travel Foundation Board of Trustees. Additionally, former Washington State Governor Christine Gregoire appointed Mr. Sladich to the Motion Picture Competitiveness board and to the Washington State Convention Center Board of Directors. He has also served on the board for the Western Association of Convention & Visitors Bureaus (WACVB). A 36-year veteran of the hospitality industry, Mr. Sladich has also served as President and Chief Executive Officer of the Spokane Regional Convention and Visitors Bureau (CVB) where he played a key role in selling the City of Spokane and Washington State to prospective meeting planners, associations and individual travelers. Mr. Sladich has spent 26 years in hotel operations & sales prior to the CVB having served in the capacity of Vice President, Regional Operations Manager, VP of Sales, General Manager, and other front-line positions with extensive experience in rooms division, sales and food and beverage. Mr. Sladich has worked for hotel developers and operators of multiple franchises nationwide including Sterling Hospitality, Sheraton, IHG, Hilton and Choice hotels.

Thomas L. McKeirnan.   Mr. McKeirnan has been with RLH Corporation since 2003 and serves as our Executive Vice President, General Counsel and Secretary. Mr. McKeirnan has been actively involved in executive management since shortly after joining the company. Prior to joining us, Mr. McKeirnan was in private practice for eight years at Riddell Williams P.S. in Seattle, WA and Paine Hamblen Coffin Brooke & Miller, LLP in Spokane, WA, focused on corporate, transactional, real estate and securities law, with an emphasis on the hospitality industry. While in private practice, Mr. McKeirnan represented RLH Corporation as outside counsel on various strategic and transactional matters and also represented WestCoast Hotels, Inc. prior to our acquisition of that company. Mr. McKeirnan earned his law degree with honors from the University of Washington and his MBA from Gonzaga University, both in 1995.


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Item 1A.Risk Factors

We are subject to various risks, including those set forth below, that could have a negative effect on our financial condition and could cause results to differ materially from those expressed in forward-looking statements contained in this report or other RLH Corporation communications.

Our asset-light business model, which relies on revenue from franchise hotel agreements, is subject to a number of risks.

Our business strategy to operate as primarily a franchise company means we are reliant in part on the financial success and cooperation of our franchisees. Our franchise business generates revenue from royalty, marketing, and other fees that are primarily based on a percentage of room revenue, on room count or on transaction count. Therefore, if our franchisees experience flat or declining room revenues, or face challenges which reduce room count, our revenues and margins could be negatively affected as a result.

The size of our largest franchisees creates additional risk due to our dependence on their particular growth, financial and operating performance and cooperation and alignment with our brand standards and initiatives. Should one of these franchisees leave our system, experience financial or other difficulties, or file for bankruptcy, it could have a significant adverse effect on our revenues and financial condition.

In addition, our franchise agreements require that franchisees comply with certain brand standards that help maintain the quality and reputation of our brands. If our franchisees fail to make the investments necessary to maintain or improve their properties in accordance with our brand standards, guest preference for our brands could diminish, which could cause a negative impact on our revenues, ability to recruit new hotels to our brands, and negatively affect our overall results of operations. In addition, if our franchisees fail to observe our brand standards or meet their contractual requirements, we may elect to exercise our termination rights, which would eliminate revenues from these properties and cause us to incur expenses related to terminating these contracts.

In addition, although we should not be liable for the acts of our independently-owned franchisees, it is possible that a court may not recognize the legal distinction between Red Lion Hotels Corporation and its franchisees, and hold us liable for a franchisee’s violation of applicable laws or regulations.

We may be unsuccessful in identifying and completing acquisitions of new franchised hotel agreements, renewal of franchise hotel agreements and expanding our brands through acquisitions, which could limit our ability to implement our growth strategy and result in significant expense.

We are continuing to pursue the expansion of our franchise operations in markets where we currently operate and in selected new markets. We are also pursuing expansion of our RLH Corporation brands into targeted segments. Franchised hotels carry one of the RLH Corporation brands, and we may consider adding additional brand options in the future.

The growth of our franchise business will require considerable management time, as well as expenses for market development before any significant revenues and earnings are generated. There can be no assurance that we will be successful in achieving our objectives with respect to growing the number of franchised hotels in our system or that we will be able to attract qualified franchisees, or that the franchisees we add to our system will be profitable.

The growth in the number of franchised hotels is subject to numerous risks, many of which are beyond our control. Among other risks, the following factors affect our ability to achieve growth in the number of franchised hotels:

Competition with other hotel companies, many of which have more franchised hotels in their systems and more resources to assist owners of new franchised hotels with capital expenditures needed to satisfy brand standards;
Our ability to compete with other hotel companies on franchise and royalty fees;
Our ability to attract and retain qualified franchisees under one or more of our brands;
The recognition in the market and the reputation of the RLH Corporation brands;
Access to financial resources necessary to acquire new brands or hotels;
The ability of the owners of franchised hotels to maintain brand standards and to open and operate additional hotels profitably. Factors affecting the opening of new hotels, or the conversion of existing hotels to RLH Corporation brands, include among others:
The availability of hotel management, staff and other personnel;
The cost and availability of suitable hotel locations;
The availability and cost of capital to allow hotel owners and developers to fund investments;
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Cost effective and timely construction and renovation of hotels (which can be delayed due to, among other reasons, labor and materials availability, labor disputes, local zoning and licensing matters, and weather conditions); and
Securing required governmental permits.
Our ability to continue to maintain and enhance our central reservation system to support additional franchised hotels in a timely, cost-effective manner; and
The effectiveness and efficiency of our development organization.

Our failure to compete successfully for properties to franchise, or to attract and maintain relationships with hotel owners and hotel investors, could adversely affect our ability to expand our system of hotels. An inability to implement our growth strategy could limit our ability to grow our revenue base and otherwise adversely affect our results of operations.

If any franchise or hotel acquisitions fail to perform in accordance with our expectations or if we are unable to effectively integrate new franchisees or hotels into our operations, our results of operations and financial condition may suffer.

Based on our experience, newly acquired, developed or converted hotels typically begin with lower occupancy and room rates, thereby resulting in lower revenue. Any future expansion within our existing markets could adversely affect the financial performance of our hotels in those markets and, as a result, negatively impact our overall results of operations. Expansion into new markets may also present operating and marketing challenges that are different from those we currently encounter in our existing markets. Our inability to anticipate all of the changing demands that expanding operations will impose on our management and management information and reservation systems, or our failure to quickly adapt our systems and procedures to new markets, could result in lost revenue and increased expenses and otherwise have an adverse effect on our results of operations and financial condition.

In addition, our franchise agreements require that franchisees comply with certain brand standards that help maintain the quality and reputation of our brands. These include property improvement plans required at the beginning of the franchise relationship, as well as continuing obligations related to the appearance of the properties and the service levels provided by hotel employees. If our franchisees fail to make the investments necessary to maintain or improve their properties in accordance with our brand standards, guest preference for our brands could diminish and cause a negative impact on our overall results of operations. In addition, if our franchisees fail to observe these brand standards or meet their contractual requirements, we may elect to exercise our termination rights, which would eliminate revenues from these properties and cause us to incur expenses related to terminating these contracts. We may be unable to find suitable or offsetting replacements for any terminated franchise relationships.

If our franchise or management contracts terminate or are not renewed, if new franchisees are unable to effectively integrate their hotels into our system, or if franchisees or owners are unprofitable or go out of business, our franchise or management fee revenue will decline.

Our revenues and operating results are highly dependent upon the ability of our franchisees to generate revenue at their franchised properties. If the revenues of our franchisees decrease, or our franchisees close their hotels, our operating results will be negatively affected.

Our business model depends on our ability to establish and maintain long-term, positive relationships with our franchisees. Franchise agreements generally specify a fixed term and contain an early termination provision for the franchisee to terminate at specific intervals or for specific reasons with or without penalty by providing notice to us. There is no assurance these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms. If we are unable to compete with other hotel companies on franchise and royalty fees or other resources, or our brand reputation declines, we may see an increase in non-renewal of our existing franchise agreements, or early terminations prior to the end of their respective terms. In addition, there can be no assurance that we will be able to replace expired or terminated franchise agreements, or that the provisions of renegotiated or new agreements will be as favorable to us as the expired or terminated agreements. If we fail to maintain and renew existing franchise agreements, we may be unable to expand our franchise business, and our financial condition and revenues could be negatively impacted. In addition, if a franchisee experiences financial or other difficulties, our franchisee may default on their obligations and be unable to satisfy their financial obligations to us, which would adversely affect our revenues and financial condition.




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If owners of hotels that we franchise cannot repay or refinance mortgage loans secured by their properties, our revenues and profits could decrease and our business could be negatively impacted.

The owners of many of our franchised properties have pledged their hotels as collateral for mortgage loans they entered into when those properties were purchased or refinanced. If an owner cannot repay or refinance maturing indebtedness on favorable terms or at all, the lender could declare a default, accelerate the related debt, and repossess the property. Such sales or repossessions could, in some cases, result in the termination of our franchise agreements and eliminate our anticipated income and cash flows, which could negatively affect our results of operations.

We may have disputes with the owners of the hotels that we franchise.

The nature of our responsibilities under our franchise agreements may, in some instances, be subject to interpretation and may give rise to disagreements. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential franchisees, hotel owners and joint venture partners. However, we may not always be able to do so. Failure to resolve such disagreements may result in franchisees or other hotel owners leaving our system of hotels, or in litigation, arbitration or other legal actions.

The lodging industry is highly competitive, which may impact our ability to compete successfully with other hospitality and leisure companies.

The lodging industry in general is comprised of numerous national, regional and local hotel companies and is highly competitive.

We compete with other hotel brands and management companies for hotels to add to our network, including through franchise and management agreements. Our competitors include management companies as well as large hotel chains that own and operate their hotels and franchise their brands. As a result, the terms of our prospective franchise and management agreements may not be as favorable as a hotel owner's current agreements. We may also be required to make investments in or guarantee the obligations of third parties or guarantee minimum income to third parties in connection with future franchise or management agreements in order to successfully compete for new franchisees.

Competition for occupancy at the hotels in our network is focused on three major categories of travelers: business travelers, convention and group business travelers and leisure travelers. All three categories are significant occupancy drivers for the hotels in our system and our marketing efforts are geared towards attracting their business. Competition in the industry is primarily based on service quality, range of services, brand name recognition, convenience of location, room rates, guest amenities and quality of accommodations. The hotels in our network compete against national economy, limited and full-service hotel brands and companies, various regional and local hotels in the midscale and economy hotel segments of the industry, and hotel alternatives, such as Airbnb. Many of our competitors have greater name recognition, a larger network of locations and greater marketing and financial resources than we do. Competitors may offer significantly lower rates, greater convenience, services or amenities or superior facilities, which could attract customers away from hotels in our network. New hotels are being built in several markets where we operate, which could adversely affect our business. Changes in demographics and other changes in our markets may also adversely impact the convenience or desirability of our hotel locations. In order to remain competitive and to attract and retain customers, we and the owners of our franchised and managed hotels must be able to differentiate and enhance the quality, value and efficiency of our product and customer service, and we must make additional capital investments to modernize and update our hotels.

If we are unable to compete successfully in these areas, the hotels in our network could experience a decrease in occupancy, average daily rate (ADR) and revenue per available room (RevPAR), which could have a significant negative impact on the portion of our franchise revenues derived from hotel rooms revenues and adversely impact our results of operations and financial condition.

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Our new programs and new brands may not be successful.

We have made a significant investment in RevPak, a guest management system that allows hotel operators to increase their bookings by integrating customer relationship management software, sales force automation processes, translation services, a central guest reservation system, and digital and field marketing capabilities onto a single platform. Additionally, RevPak allows operators to measure results with reputation management, business intelligence, and web analytics capabilities. We believe this technology provides a measurable benefit to our company, our franchisees and other users of RevPak by helping increase hotel patronage and generate strong RevPAR growth. However, we cannot be certain this technology will provide all the benefits we anticipated, that it will be well received by all of our franchisees and hotel owners, or that we will be able to recover the costs we incurred in developing this system. We also cannot assure you that other programs and brands, such as Hotel RL, or any other new programs or brands we may launch in the future will be accepted by hotel owners, potential franchisees, or the traveling public or other customers. We also cannot be certain that we will recover the costs we incurred in developing or acquiring these programs or brands, or that the brands or any new programs will be successful.

The planned sale of joint venture and company owned hotels may not occur in the timeline expected and the company may not be able to replace the Revenue and Adjusted EBITDA from this business in future periods.

In October 2017, our Board of Directors approved a process to market and sell 11 hotel ownership positions maintained in joint venture arrangements. Subsequently, in August 2018, we announced a process to market and sell three additional owned or leased hotels. In December 2018, we also listed a joint venture hotel for sale. This is consistent with our previously stated business strategy to move towards operating as primarily a franchise company. Between October 2017 and December 31, 2019, the company completed the sale of eleven hotel properties. See Note 16 Acquisitions and Dispositions within Item 8. Financial Statements and Supplementary Data for additional information. We expect that the completion of the remaining sales will allow the company to continue to reduce long-term debt and/or to increase cash reserves for future franchise agreement growth initiatives.

It is our intention, subject to market conditions, to sell all of our remaining hotel ownership positions in the next few years. Despite favorable market conditions at the time of the plan, we cannot be certain that the hotel sales will occur according to our preferred timing or at the market prices we anticipated. We cannot be certain that we will be able to replace the revenue and Adjusted EBITDA results from these hotels or other hotel sales with franchise business growth in future periods, or that the profit margins of our franchise business will be as we expected.

Our operating results are subject to conditions affecting the lodging industry.

Our revenues and operating results may be impacted by and fluctuate due to a number of factors, including the following:

Changes in the desirability of the geographic regions in which our hotels are located, or adverse changes in local economies where our hotels are concentrated;
Insufficient available capital to us or our franchise hotel owners to fund renovations and investments needed to maintain our competitive position;
New supply or oversupply of hotel rooms in markets in which we operate due to the cyclical over-building in the hotel industry;
The attractiveness of our hotels to consumers and competition from other hotels and lodging alternatives such as Airbnb;
The need to periodically repair and renovate the hotels in our hotel network, including the ongoing need to refresh hotels to meet current industry standards and guest expectations;
The financial condition of third-party property owners and franchisees, which may impact their ability to fund renovations and meet their financial obligations to us as required under management and franchise agreements;
The quality and performance of the employees of the hotels in our network;
Changes in demand for business, convention, group and leisure traveler rooms and related lodging services, including reductions in business and federal, state and local government travel may result due to budgetary constraints or government shutdowns, increases in the use of video conferencing services, or general economic conditions;
Decreases in the frequency of business travel that may result from alternatives to in-person meetings, including virtual meetings hosted online or over private teleconference networks;
Extended periods of low occupancy demand, which may negatively impact our ability to increase rates;
Changes in travel patterns, extreme weather conditions and cancellation of or changes in events scheduled to occur in our markets;
The impact of internet intermediaries and competitor pricing;
The ability of third-party internet and other travel intermediaries to attract and retain customers;
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Changes in guest expectations with respect to amenities at network hotels that require additional capital to meet;
Improvements in technology that require capital investment by us or our franchise hotel owners in infrastructure to implement and maintain;
The quality of services provided by franchisees;
Transportation and fuel costs, the financial condition of the airline industry and the resulting impacts on travel, including possible cancellation or reduction of scheduled flights into our markets and reductions in our business with airlines crews, which regularly stay at our hotels in many markets;
Increases in operating costs due to inflation and other factors such as minimum wage requirements, overtime, healthcare, working conditions, work permit requirements and other labor-related costs, energy prices, insurance and property taxes, as well as increases in construction or associated renovation costs;
Existing and potential new regulations relating to the preparation and sale of food and beverages, liquor service and health and safety of premises;
Impact of war, actual or threatened terrorist attacks, heightened security measures and other national, regional or international political and geopolitical conditions;
Recent travel bans and other federal regulations that restrict entry into the United States could reduce overall tourist and business travel;
Travelers' fears of exposure to contagious diseases or foodborne illness;
Climate change or availability of natural resources;
Restrictive changes in zoning and similar land use laws and regulations, or in health, safety and environmental laws, rules and regulations; and
Enacted, pending and possible future requirements to make substantial modifications to our hotels to comply with the Americans with Disabilities Act of 1990 or other governmental or regulatory requirements.

Any of these factors could adversely impact our hotel brands, hotel room demand, and/or pricing, reduce occupancy, ADR and RevPAR and reduce franchise revenues, or give rise to government imposed fines or private litigants winning damage awards against us. These items could adversely affect our results of operations and financial condition.

We reported net losses from continuing operations from 2008 through 2013, 2016, 2017 and 2019, and, although we had a net profit in 2014, 2015, and 2018, there is no assurance that we will be profitable in the future.

During the years 2008 through 2013 and in 2016, 2017 and 2019, we reported net losses from continuing operations. Not only did these losses have a direct adverse effect on our financial condition, they also increased our costs of borrowing. Although we have shown a net profit during two of the last five years, the long prior history of net losses could impair our ability to raise capital needed for franchise expansion, hotel investments and other corporate purposes. There is no assurance that we will be able to achieve profitability in the future.

General economic conditions may negatively impact our results and liquidity.

During economic downturns, discretionary travel decreases because of economic pressures, and this in turn hurts the hospitality industry and our company. High unemployment, lower family income, low corporate earnings, lower business investments and lower consumer and government spending all have the effect of reducing the demand for hotel rooms and related lodging services and put pressure on industry room rates and occupancy. A slowdown in economic conditions in 2020 could result in weak hospitality occupancy and rates and adversely affect our revenues and operating results. Negative economic conditions could also negatively impact our ability to obtain future financing and our liquidity in general. While we believe we have adequate sources of liquidity to meet our anticipated requirements for working capital and debt service for the foreseeable future, if our cash flow or capital resources prove inadequate or we do not meet our financial debt covenants, we could potentially face liquidity problems that could have a material adverse effect on our results of operations and financial condition.










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The hotel business is seasonal in nature, and we are likely to experience fluctuations in our results of operations and financial condition.

The hotel business is seasonal in nature, with the period from May through October generally accounting for the greatest portion of our annual company operated hotel revenues, and franchise royalties that are based on a percentage of hotel revenue. Therefore, our results for any quarter may not be indicative of the results that may be achieved for the full year. The seasonal nature of our business increases our vulnerability to risks during this period, including labor force shortages, cash flow problems, economic downturns and poor weather conditions. The adverse impact to our revenues would likely be greater as a result of our seasonal business.

Our expenses may remain constant or increase even if revenues decline.

The expenses of owning and operating a hotel are not necessarily reduced when circumstances such as market factors and competition cause a reduction in its revenues. Accordingly, a decrease in our revenues could result in a disproportionately higher decrease in our earnings because our expenses are unlikely to decrease proportionately. In addition, we continue to invest in sales and marketing, technology, franchising and personnel resources in an effort to position our company for future growth. These investments may not produce the returns we anticipate or the returns may take longer to achieve than expected.

The use of common stock to fund new acquisitions will dilute existing shareholders.

In connection with our acquisition of Vantage Hospitality Group, Inc. in 2016, we issued 690,000 shares of common stock. Future acquisitions of other hotels or brands may also involve the issuance of our equity securities as payment, in part or in full, for the businesses or assets acquired. These future issuances of our equity securities will dilute existing shareholders’ ownership interests.

Joint venture and other acquisition arrangements may not prove successful and could result in operating difficulties and failure to realize anticipated benefits.

We have ownership interests of 55% in each of our joint ventures. We may in the future acquire interests in other properties through joint venture arrangements with other entities. In addition, we may enter into other non-property investment joint ventures through other divisions for marketing or other services. Partnerships, joint ventures and other business structures involving our co-investment with third parties generally include some form of shared control over the operations of the business and create additional risks. Some of these acquisitions may be financed in whole or in part by loans under which we are jointly and severally liable for the entire loan amount along with the other joint venture partners. The terms of these joint venture arrangements may be more favorable to the other party, or parties, than to us. Although we will actively seek to minimize such risks before investing in partnerships, joint ventures or similar structures, investing in a property through such arrangements may subject our investment to risks not present with a wholly owned property, including, among others, the following:

The other owner(s) of the investment might become bankrupt;
The other owner(s) may have economic or business interests or goals that are inconsistent with ours;
The other owner(s) may not have the economic ability to contribute operating funds, if needed, increasing our investment and funding to the joint venture(s);
The other owner(s) may be unable to make required payments or meet guarantor obligations on loans under which we are jointly and severally liable;
The other owner(s) may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, such as selling the property at a time when to do so would have adverse consequences to us;
Actions by the other owner(s) might subject the property to liabilities in excess of those otherwise contemplated by us; and
It may be difficult for us to sell our interest in the property at the time we deem a sale to be in our best interests.


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Failure of the joint venture or joint venture owners to comply with debt covenants could adversely affect our financial results or condition.

During 2015 we entered into a joint venture related to our Washington DC property, in which we own an equity interest of 55%. In connection with this transaction, the joint venture borrowed $16.7 million, which was secured by the hotel property within the joint venture entity. The credit agreement for this loan contains customary affirmative and negative covenants.

In certain periods since 2015, our DC hotel has not generated enough revenues to comply with the debt covenants in place under its then current credit agreement. As a result, from time to time, we have been required to make additional cash contributions to this joint venture entity in the form of preferred capital. The preferred capital will be repaid to us only when the underlying hotel property is sold or when the joint venture is liquidated, plus a preferred return that ranges from 9%-11%. In addition, in December 2018, we agreed to amend the loan agreement for our DC property to cure certain covenant defaults by increasing our principal guarantee to $10.5 million.

While we believe that our joint ventures have stabilized and that they will be able to continue to comply with their terms of their credit agreements, there can be no assurance that we won’t be required to make additional capital contributions or increase guarantees in the future. Any failure of our joint ventures to comply with the terms of their loan covenants, or our inability to cure defaults by making additional capital contributions or increasing our principal guarantees, could result in a demand for immediate repayment of the loans, which could result in one or more of these hotels being foreclosed upon and otherwise adversely affect our results of operations and financial condition, and limit our ability to obtain financing. For additional information, see Note 8 Debt and Line of Credit within Item 8. Financial Statements and Supplementary Data.

We have incurred debt financing and may incur increased indebtedness in connection with acquisitions, capital expenditures, other corporate purposes or growth of our system of hotels.

Neither our Articles of Incorporation nor our Bylaws limit the amount of indebtedness that we may incur. Subject to limitations in our debt instruments, we may incur additional debt in the future to finance hotel renovations, repairs and replacements, for general corporate purposes or for hotel acquisitions. If our leverage increases, the resulting debt service could adversely affect our operating cash flow. The degree to which we are leveraged could also increase our vulnerability to and reduce our flexibility to respond to, general adverse economic and lodging industry conditions, including increases in interest rates, and could impair our ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise. Increasing leverage could also place our company at a competitive disadvantage as compared to our competitors that are not as highly leveraged. Our indebtedness is, and will likely continue to be, secured by our existing assets. If we are not able to meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure. Economic conditions could result in higher interest rates, which would increase debt service on our variable rate credit facilities and could reduce the amount of cash available for general corporate purposes. For additional information on our outstanding debt, see Note 8 Debt and Line of Credit within Item 8. Financial Statements and Supplementary Data.

Increases in interest rates could adversely affect our business and financial results.

We have exposure to increases in interest rates under our DB Credit Facility. Outstanding amounts under the Line of Credit will bear interest at our election of 1-month, 2- month, 3-month, or 6-month LIBOR plus 3.00% with interest payable at the end of each elected 1-month, 2-month, 3-month, or 6-month elected term. Any significant increase in interest rates would have a material adverse effect on our financing costs and our future results of operations and cash flows.

In addition, the DB Credit Facility uses LIBOR as a benchmark for establishing the interest rate. LIBOR is the subject of recent proposals for reform, and in July 2017, the United Kingdom’s Financial Conduct Authority, which regulated LIBOR, announced that it intends to phase out LIBOR by the end of 2021, which is prior to the 2023 maturity date of our DB Credit Agreement. The DB Credit Agreement provides that if LIBOR is unavailable, the interest rate will be based upon a comparable or successor rate, which is approved by the administrative agent. At this time, the consequences of the phase out of LIBOR are unknown, however, the substitution of a comparable or successor rate could result in an increase in the cost of our variable interest rate(s) under the DB Credit Facility.

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Our existing leverage may limit our ability to borrow additional funds or take certain actions we believe are beneficial to our business operations.

As of December 31, 2019, our total debt outstanding was $33.2 million, including $10.0 million outstanding under the Line of Credit through the DB Credit Agreement. We have no further borrowing capacity under the Line of Credit. Various limitations in our DB Credit Agreement may reduce our ability to incur additional debt, to engage in some transactions and to capitalize on business opportunities. In particular, the DB Credit Agreement contains certain affirmative and negative covenants, including the maintenance of certain financial ratios and restrictions that may prevent us from engaging in certain beneficial transactions, such as limitations on incurring additional debt, entering into mergers, consolidations and sales of assets, making investments or dispositions, granting liens, declaring dividends or repurchasing any of our outstanding common stock. These restrictive covenants may prevent us from pursuing acquisitions, making capital expenditures or pursuing other business opportunities we believe are beneficial to the company and its shareholders. Failure to comply with the affirmative or restrictive covenants would be an event of default under our DB Credit Agreement. For additional information on our outstanding debt, see Note 8 Debt and Line of Credit within Item 8. Financial Statements and Supplementary Data.

Our business requires capital for ongoing hotel maintenance, modernization and renovation, as well as for any asset or brand acquisitions or development projects we may want to undertake. If needed capital is not available, our ability to successfully compete with hotels in our scale categories may be adversely impacted.

We are committed to keeping our company owned properties well-maintained and attractive to our customers in order to maintain our competitiveness within the industry and keep our hotels properly positioned in their markets. We are also focused on working with our franchise hotel owners so that they maintain their properties to the same standards. This requires ongoing access to capital for both us and our franchisees for replacement of outdated furnishings as well as for facility repair, modernization and renovation. To the extent we or our franchisees cannot fund these expenditures from cash generated from operations, funds must be borrowed or otherwise obtained. If these funds cannot be obtained, the expenditures have to be deferred to a later period. Without needed investments, we may need to cancel the agreement with the franchisee or move the hotel to a lower classification, both of which would likely have a negative impact on our franchise revenue stream.

In the recent past, our levels of capital expenditures for our company operated hotels have been lower than normal due to the marketing of our hotels for sale. Customers may not view our capital investments and improvements as significant enough to allow us to charge higher room rates, and this could negatively impact our hotel revenues and operating results. There are likely to be similar adverse effects if our franchisees are unable to make comparable investments in their properties. Without needed investments, we may have to move the hotel to a lower classification, which would likely have a negative impact on our hotel revenue stream.

Hotel maintenance, brand acquisitions, hotel acquisitions and new project development are subject to a number of risks, including:

Availability of capital;
Construction delays and cost overruns;
Unavailability of rooms or meeting space for revenue generating activities during modernization and renovation projects;
Numerous federal, state and local government regulations affecting the lodging industry, including building and zoning requirements and other required governmental permits and authorizations;
Uncertainties as to market demand or a loss of market demand after capital improvements have begun; and
Potential environmental problems.

Whether capital for new investments and maintenance of existing hotels will be available to us and our franchisees depends on a number of factors, including our cash reserves, profitability, degree of leverage, the value of assets, borrowing restrictions that may be imposed by lenders and conditions in the capital markets. The condition of the capital markets and liquidity factors are outside our control, so there is no assurance that we or our franchisees will be able to obtain financing as needed.

If we need to raise capital through issuance of additional common stock, preferred stock or convertible debt, current shareholders may experience significant dilution. Moreover, there is no assurance that we could raise money through equity issuances.

If we seek to raise additional capital through financing, our leverage may increase. If our leverage increases, the resulting debt service could adversely affect our operating cash flow. Our continuing indebtedness could increase our vulnerability to general economic and lodging industry conditions, including increases in interest rates.

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Any unanticipated delays or expenses incurred in connection with hotel maintenance and renovation, hotel acquisitions and new project development could impact expected revenues and availability of funds, negatively affect our reputation among hotel customers, owners and franchisees and otherwise adversely impact our results of operations and financial condition, including the carrying costs of our assets.

We are subject to various obligations and restrictions under the leases governing our leased properties. In addition, we may not be able to renew these leases on favorable terms or at all.

Four of our company operated hotels, three of which are owned hotels and one of which is owned through a joint venture entity, and all of our corporate offices are subject to leases. In addition to the requirement to pay rent, the leases for these properties generally impose various maintenance and other obligations on us and may also require us to obtain the consent of the landlord before taking certain actions such as modifications to the properties. These lease provisions may limit our flexibility with the leased properties, delay modifications or other actions we may wish to take, or result in disputes with the landlords. In addition, the terms of the leases for three of our leased properties will expire in the period from 2021 through 2028. There can be no assurance that any of our landlords will be willing to extend these leases and, even if they are willing to extend, it is possible that the lease costs will increase, which would adversely impact the hotel operations and our expenses. If some of our office leases are not renewed for any reason, we could incur additional costs and expenses associated with negotiating a new lease agreement and moving our offices to a new location.

The results of some of our hotels are significantly impacted by group contract business and other large customers, and the loss of such customers for any reason could harm our operating results.

Group contract business and other large customers, or large events, can significantly impact the results of operations of some of the hotels in our network. These contracts and customers vary from hotel to hotel and change from time to time. Contracts with large customers such as airlines and railroads are typically for a limited period of time, after which they may be eligible for competitive bidding. The impact and timing of group business and large events are not always predictable and are often episodic in nature. The operating results for hotels in our network can fluctuate as a result of these factors, possibly in adverse ways, and these fluctuations can harm our overall operating results.

The increasing use of third-party travel websites by consumers may adversely affect our profitability.

A significant percentage of hotel rooms for individual guests are booked through internet travel intermediaries like Priceline, Expedia, or Travelocity, to whom we commit to pay various commissions and transaction fees for sales of our rooms through their systems. As internet bookings now represent the majority of hotel reservations in the industry, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us or our franchisees.

Moreover, some of these internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as "three-star downtown hotel") at the expense of brand identification. We believe that these internet intermediaries hope that consumers will eventually develop brand loyalties to their reservation systems. Although most of the business for our hotels is expected to be derived from traditional channels, if the amount of sales made through internet intermediaries increases significantly, our profitability may be adversely affected.

We rely on our central reservation system and other technologies for occupancy at hotels in our network and a lack of investment in upgrades or new technologies or any failures in the system could negatively affect our revenues and cash flows.

The hospitality industry requires the use of technology and systems for property management, procurement, reservations, operation of customer loyalty programs, distribution and other purposes. These technologies can be expected to change guests' expectations, and there is the risk that advanced new technologies will be introduced requiring further investment capital. We maintain a hotel reservation system that allows us to manage our hotel network's rooms inventory through various distribution channels, including our website, and execute rate management strategies. As part of our marketing strategy, we encourage guests to book on our website, which guarantees the lowest rate available compared to third-party travel websites.

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The development and maintenance of our central reservation system and other technologies may require significant capital. There can be no assurances that, as various systems and technologies become outdated or new technology is required, we will be able to replace or introduce them as quickly as our competition or within budgeted costs and time frames. Further, there can be no assurance that we will achieve the benefits that may have been anticipated from any new technology or system. If our systems fail, whether as a result of a deliberate cyber-attack or an unintentional event that causes interruptions or delays in our ability to process reservations, our ability to conduct business and generate revenue will be negatively impacted. If our systems fail to achieve anticipated benefits, or if we fail to keep up with technological or competitive advances, our revenues and cash flows could suffer.

Our central reservation system includes a third-party operated call center that enables guests to make reservations on a 24/7 basis. Poor performance by the third party provider, disputes with the third party provider, increased costs of the call center or our inability to renew or extend our agreement with the third party on favorable terms could adversely impact the hotel operations and our expenses as well as those of our franchised and managed hotels.

Failure to maintain the security of internal or customer data could adversely affect us.

Our operations require us to collect and retain large volumes of internal and customer data, including credit card numbers and other personally identifiable information of our customers, which are entered into, processed by, summarized by and reported by our various information systems and those of our service providers. We also maintain personally identifiable information about our employees. Our franchise hotel owners also maintain similar personally identifiable information on systems that we do not control. The security of this data may potentially be breached due to a number of risks, including cyber-attack, system failure, computer virus, or unauthorized or fraudulent use by customers, company employees, franchisees or employees of third party vendors. Although we employ systems to protect data, no system is impenetrable. A theft, loss or fraudulent use of customer, employee or company data by us or our franchise hotel owners could adversely impact our reputation and could result in significant remedial and other costs, fines and litigation.

We also rely on a variety of direct marketing techniques to reach guests and potential guests, including email marketing, telemarketing and postal mailings. Changes in laws and regulations regarding direct marketing and solicitation could adversely affect the effectiveness of these marketing techniques and could force us to make changes to our marketing strategies. Our failure to comply with laws and regulations regarding direct marketing could result in fines or place restrictions on our business.

If we fail to comply with data privacy and security laws and regulations, we could be subject to fines or other restrictions on our business.

We collect and maintain information relating to our guests for various business purposes, including credit card information and information on guest preferences that we use to enhance customer service and for marketing and promotional purposes. A number of states have enacted data privacy laws and regulations that govern the collection, use, storage and protection of this type of sensitive personal information. These data privacy laws, such as the California Consumer Privacy Act (“CCPA”), continue to evolve, and compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to service our guests and market our products, properties and services. In addition, noncompliance with applicable privacy and security regulations, either by us or in some circumstances by third parties engaged by us or our franchise hotel owners, could expose us to substantial penalties for violations, impose significant costs for investigations and compliance, open us to the risk of private class-action litigation and/or adverse publicity and could negatively affect our operating results and business.

Disruption or malfunction in our information systems could adversely affect our business.

Our information technology systems are vulnerable to damage or interruption from:

Earthquakes, fires, floods and other natural disasters;
Power losses, computer system failures, internet and telecommunications or data network failures, operator negligence, improper operation by or supervision of employees, physical and electronic losses of data and similar events; 
Third party provider disruptions in service; and
Computer viruses, penetration by individuals seeking to disrupt operations or misappropriate information, and other breaches of security.

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We rely on our systems to perform functions critical to our ability to operate, including our central reservation system. Accordingly, an extended interruption in the systems' function could significantly curtail, directly and indirectly, our ability to conduct our business and generate revenue.

We identified material weaknesses in our internal controls over financial reporting during the years ended December 31, 2017 and 2016. We remediated these material weaknesses as of December 31, 2018, however if we fail to continue to maintain an effective system of internal controls, we may not be able to accurately report our financial results, prevent fraud, or maintain investor confidence.

Effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act. In addition, Section 404 under the Sarbanes-Oxley Act requires that our auditors attest to the design and operating effectiveness of our controls over financial reporting. Our compliance with the annual internal control report requirement for each year will depend on the effectiveness of our financial reporting, data systems, and controls across our operating subsidiaries. Furthermore, a part of our growth strategy has been, and may continue to be, the acquisition of complementary businesses, and we expect these systems and controls to become increasingly complex to the extent that we integrate acquisitions and our business grows. Likewise, the complexity of our transactions, systems, and controls may become more difficult to manage. We cannot be certain that these measures will ensure that we design, implement, and maintain adequate controls over our financial processes and reporting in the future, especially for acquisition targets that may not have been required to be in compliance with Section 404 of the Sarbanes-Oxley Act at the date of acquisition.

During our evaluation of the effectiveness of the internal controls over financial reporting as of December 31, 2017, we identified material weaknesses in each of the following areas: Control Environment, Risk Assessment, Monitoring and Financial Closing and Reporting.

In particular, controls related to the following were not designed to operate effectively:

Control Environment
We did not maintain a sufficient complement of personnel with the appropriate knowledge, experience and/or training in application of GAAP commensurate with our financial reporting requirements.

We did not maintain adequate qualified personnel with regard to certain significant complex transactions and technical accounting matters.

Risk Assessment
We did not design and maintain internal controls that were effective in identifying, assessing and addressing risks that significantly impact the financial statements or the effectiveness of the internal controls over financial reporting. We did not modify our controls to sufficiently address changes in risks of material misstatement as a result of changes in our operations, organizational structure and operating environment, specifically the expansion of activities related to recent acquisitions.

Monitoring
We did not design and maintain effective monitoring of compliance with established accounting policies, procedures and controls. This weakness included the failure to design and operate effective procedures and controls whose purpose is to evaluate and monitor effectiveness of the individual control activities.

Financial Closing and Reporting
We did not design and maintain effective controls over the financial closing and reporting process with sufficient precision to mitigate a potential material misstatement.

These deficiencies were pervasive in nature and created a reasonable possibility that a material misstatement of the annual or interim financial statements would not have been prevented or detected on a timely basis.

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During 2018, management executed a remediation plan that included significant changes to our company's accounting and internal audit staffing. Remediation efforts included a formal risk assessment performed by internal audit and senior management and included an internal review of all internal control processes, which resulted in the identification of new internal controls to address design gaps, the re-design of certain existing controls, and the elimination of redundant or unnecessary controls. During 2018, we completed our remediation plan and successfully completed testing of the new control environment. As a result of our internal control testing, we concluded that the material weaknesses were remediated as of December 31, 2018. Additionally, there were no material weaknesses in internal controls as of December 31, 2019.

Any material weaknesses in the future could cause harm to our operating results or cause us to fail to meet our financial reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.

Any failure to protect our trademarks could have a negative impact on the value of our brand names.

The success of our business depends in part upon our continued ability to use our trademarks, increase brand awareness and further develop our brands. We have registrations with the U.S. Patent and Trademark Office of various formulations of certain trademarks, including but not limited to the following: Red Lion, Hotel RL, Red Lion Inn & Suites, GuestHouse & Design, Settle Inn, Settle Inn & Suites, Signature & Design, Signature Inn, Knights Inn, Americas Best Value Inn, ABVI, Value Inn Worldwide, Vantage & Design, 3 Palms Hotels & Resorts & Design, America’s Best Inns & Suites, Country Hearth Inn & Suites, Jameson Inn, Lexington, Canadas Best Value Inn & Design, CBVI, Cavanaughs and Cascadia Soapery, Hello Rewards, MAKE IT #WORTH IT, PROJECT WAKE UP CALL, RLHC and RLH.

We have also registered various formulations of the Red Lion trademark and others in several international jurisdictions including for example, Canada, Mexico, China, India, Australia, the European Union and a number of other countries in Asia. We cannot be assured that the measures we have taken to protect our trademarks will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brands and their market acceptance, competitive advantages or goodwill, which could adversely affect our business.

Departures of senior executives or other key employees could adversely affect our business.

We have seen significant turnover among our senior executives over the past five years. Our Chief Executive Officer resigned in November 2019 after five years at the company, and we are currently operating with an interim CEO while we search for a permanent replacement. Our current Chief Financial Officer was hired in January 2019 to replace her predecessor, who was hired in 2017 and announced his departure for personal reasons in October 2018. We hired a new Chief Operating Officer in June 2018, after the departure of our prior Chief Operating Officer and President of Global Development in May 2018, and our Chief Marketing Officer departed the Company in May 2019. Turnover of senior management can adversely impact our stock price, our results of operations, our relationships with our franchisees and may make recruiting for future management positions more difficult. Further, we may incur significant expenses related to any executive transition costs that may impact our operating results. For example, in 2019 we recorded charges of $1.1 million related to executive and management transition, which included severance payments and other incremental expenses. Additional losses of senior team members could have a material adverse impact on our financial condition or results of operations. We currently do not carry key person insurance on members of our senior management team.

We place substantial reliance on the lodging industry experience and the institutional knowledge of the members of our senior management team. We compete for qualified personnel with this experience against companies with greater financial resources than ours. In order to successfully recruit qualified employees, we will likely need to offer a combination of base salary and equity compensation. These future issuances of our equity securities will dilute existing shareholders’ ownership interests. Finding suitable replacements for senior management and other key employees can be difficult, and there can be no assurance we will continue to be successful in retaining or attracting qualified personnel in the future.

To be properly integrated into our company, new executives and employees must spend a significant amount of time learning our business model and management system, in addition to performing their regular duties. As a result, the integration of new personnel may result in some disruption to our ongoing operations, and the lack of continuity among our executive team could have a material adverse effect on our business, financial condition and results of operations.

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We are exposed to impairment risk of goodwill, intangibles and other long-lived assets.

Financial and credit market volatility directly impacts fair value measurement through our company's estimated weighted average cost of capital used to determine discount rates, and through our common stock price that is used to determine market capitalization. During times of volatility, significant judgment must be applied to determine whether credit or stock price changes are a short-term swing or a longer-term trend.

Market conditions in the future could adversely impact the fair value of one or both of our franchise or hotel reporting units, which could result in future impairments of their goodwill, intangibles and other long-lived assets.

The assessment for possible impairment requires us to make judgments, including:

Estimated future cash flows from the respective properties or business units, which are dependent upon internal forecasts;
Estimation of the long-term rate of growth for our business;
The useful life over which our cash flows will occur;
The determination of real estate and prevailing market values;
Asset appraisals; and
Current estimated net sales proceeds from pending offers or net sales proceeds from previous, comparable transactions, if available and appropriate.

In accordance with the guidance for the impairment of long-lived assets, if the expected undiscounted future cash flows are less than net book value, the excess of net book value over estimated fair value of the assets is charged to current earnings. Changes in our estimates and assumptions as they relate to valuation of goodwill, intangibles and other long-lived assets could affect, potentially materially, our financial condition or results of operations in the future. In 2019, we recognized an impairment charge of $5.4 million on our Hotel RL Washington DC joint venture property and impairment charges of $8.7 million on our Americas Best Value Inn and Knights Inn brand name intangible assets. In 2018 we recognized an impairment charge of $7.1 million on our Hotel RL Baltimore Inner Harbor joint venture property and an impairment charge of $3.5 million in our Guesthouse brand name intangible asset. For additional information, see Note 6 Goodwill and Intangible Assets within Item 8. Financial Statements and Supplementary Data.

Risks associated with real estate ownership may adversely affect revenue or increase expenses.

We are subject to varying degrees of risk that generally arise from the ownership of real property. Revenue and cash flow from our hotels and other real estate may be adversely affected by, and costs may increase or market values may decrease as a result of changes beyond our control, including but not limited to:

Changes in national, regional and local economic conditions;
Changes in local real estate market conditions;
Opening of other competing hotels in the region;
Increases in interest rates and other changes in the availability, cost and terms of financing and capital leases;
Increases in property and other taxes;
The impact of present or future environmental legislation;
Adverse changes in other governmental regulations, insurance and zoning laws; and
Condemnation or taking of properties by governments or related entities.

These adverse conditions could potentially cause the terms of our borrowings to change unfavorably. Unfavorable changes in one or more of these conditions could also result in unanticipated expenses and higher operating costs, thereby reducing operating margins and otherwise adversely affecting our results of operations and financial condition.









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The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our hotels and harm our financial condition.

Real estate investments are relatively illiquid, and therefore we and the joint ventures in which we participate have a limited ability to promptly sell one or more hotels in response to changing economic, financial or investment conditions. The real estate market, including the market for hotels, is affected by general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. In addition, it may be difficult or impossible to convert hotels to alternative uses if they become unprofitable due to competition, age of improvements, decreased demand or other factors. The conversion of a hotel to an alternative use would also generally require substantial capital expenditures. This inability to respond promptly to changes in the performance of our hotels could adversely affect our financial condition and results of operations as well as our ability to service debt. In addition, sales of appreciated real property could generate material adverse tax consequences, which may make it disadvantageous for us to sell certain of our hotels.

Sales of a substantial number of shares of our common stock in the public market, or the perception in the public markets that these sales may occur, may depress our stock price.

If our shareholders sell substantial amounts of our common shares in the public market, the market price of our common shares could decrease. Because our common stock is relatively thinly traded, a sale of a large block of shares in the public market by any major shareholder would likely result in a significant decline in our stock price. Our stock price may also fluctuate materially based on announcements by large shareholders disclosing acquisitions or sales of our common stock, by such shareholders expressing their views with respect to actions they believe should be taken by our company, or by such shareholders taking actions designed to impact our corporate policy and strategy, such as attempting to obtain control of our board of directors or initiating or substantially assisting an unsolicited takeover attempt.

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares.

Large shareholders could seek to impact our corporate policy and strategy, and their interests may differ from those of other shareholders.

As of February 24, 2020, Coliseum Capital Management (Coliseum) held 17% of our outstanding shares of common stock. Coliseum, or one or more other large shareholders, may take actions designed to impact our corporate policy and strategy, and their interests may differ from those of other shareholders. Such actions could include, among other things, attempting to obtain control of our board of directors through a proxy contest or initiating or substantially assisting an unsolicited takeover attempt. Responding to proxy contests and reacting to demands of activist shareholders can be costly and time-consuming, and disruptive to our operations by diverting the attention of management and our employees. The uncertainty that can result from such actions may also lead to the loss of potential business opportunities, and harm our ability to attract new management, employees, franchisees, investors and other strategic partners

The market price for our common stock may be volatile.

In the past, the market price for our common stock experienced significant fluctuations and it may do so in the future. Many factors could cause the market price of our common stock to rise or fall, some of which are unrelated to our operating performance, including but not limited to:

Shortfalls in, or changes in our expectations about earnings, revenue, EBITDA or other key performance metrics;
Changes in financial estimates, expectations of future financial performance or recommendations by analysts;
Actual or anticipated variations in our quarterly results of operations;
Changes in market valuations of companies in the hospitality industry;
Changes in general economic conditions, and subsequent fluctuations in stock market prices and volumes;
Issuances of additional common stock or other securities;
Announcements by our shareholders disclosing acquisitions or sales of our common stock or expressing their views with respect to actions they believe should be taken by our company;
Hiring or departure of management
Low daily trading volume of our stock; and
Announcements by us or our competitors of, or speculation with respect to, acquisitions, investments or strategic alliances.


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We are not currently paying dividends and will likely not pay dividends for the foreseeable future.

We have never paid or declared any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, contractual restrictions and other factors that our board of directors deems relevant.

Our properties are subject to risks relating to natural disasters, terrorist activity and war, and any such event could materially adversely affect our operating results without adequate insurance coverage or preparedness.

Our financial and operating performance may be adversely affected by acts of God, such as natural disasters, particularly in locations where our properties are located. Our properties are generally covered by comprehensive liability, public area liability, fire, boiler and machinery, extended coverage and rental loss insurance. However, certain types of catastrophic losses, such as those from earthquake, volcanic activity, flood, terrorism and environmental hazards, may exceed or not be covered by the insurance. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. Similarly, threatened or actual terrorist activity, war, epidemics, travel-related accidents, geopolitical uncertainty, international conflict and similar events that impact domestic and international travel have caused in the past, and may cause in the future, our results to differ materially from anticipated results. In addition, depending on the severity, a major incident or crisis may prevent operational continuity at hotels in our network and consequently impact the value of our brands or the reputation of our business.

Our international operations are subject to political and monetary risks.

We currently have franchised hotels operating outside of the United States, including in Canada and South Korea. We may also in the future enter into new joint venture or franchise agreements with foreign hotel operators. International operations generally are subject to greater economic, geopolitical and other risks that are not present in United States operations. These risks include not only administrative and logistical difficulties in managing worldwide operations, but also risks of war, terrorism or civil unrest, political instability, exposure to local economic conditions, and adverse changes in the diplomatic relations between foreign countries and the United States.

Sales in international jurisdictions typically are made in local currencies, which exposes us to risks associated with currency fluctuations. Fluctuations in currency exchange rates may significantly increase the amount of translated U.S. dollars required for expenses outside the United States, or significantly decrease the U.S. dollars received from foreign currency revenues. We also face exposure to currency translation risk because we transact certain business outside of the United States in local currency, and then translate those results to U.S. dollars for inclusion in our consolidated financial statements. As a result, changes between the foreign exchange rates and the U.S. dollar will affect the recorded amounts of our foreign assets, liabilities, revenues and expenses, and could have a negative impact on our financial results. To date we have not entered into foreign exchange hedging agreements to reduce our exposure to fluctuations in currency exchange rates, but even if we enter into these hedging agreements in the future, they may not eliminate foreign currency risk entirely, and will involve risks of their own in the form of transaction costs and counterparty risk.

In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. As a result, the steps we have taken to protect our trademarks and brands in foreign countries may not be sufficient to prevent the unauthorized use or the imitation of our trademarks by others, which could reduce the value of our brand and its goodwill, which could adversely affect our business. As we continue to expand internationally, the risks related to our international operations will become more significant.

Government regulation could impact our franchise business.

The Federal Trade Commission (FTC), various states and certain foreign jurisdictions, where we market franchises, regulate the sale of franchises. The FTC requires franchisors to make extensive disclosure to prospective franchisees but does not require registration. A number of states in which our franchisees operate require registration or disclosure in connection with franchise offers and sales. In addition, several states in which our franchisees operate have "franchise relationship laws" or "business opportunity laws" that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While our business has not been materially affected by such regulation, there can be no assurance that this will continue or that future regulation or legislation will not have such an effect.
21


We are subject to environmental regulations.

Our results of operations may be affected by the costs of complying with existing and future environmental laws, ordinances and regulations. Under federal, state and local environmental laws, ordinances and regulations, as an owner, operator or previous owner or operator of real property, we may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in the property we own or previously owned. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate a contaminated property properly, may prevent us from selling a property, using it as collateral for a loan, or affect the operation of businesses at the property. The costs of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could have an adverse effect on our results of operations and financial condition.

Two of our previously owned properties located in Port Angeles, WA and Salt Lake City, UT, had known contamination on the property in excess of applicable cleanup levels. At Port Angeles, a Phase II environmental site assessment conducted in 2013 revealed that fill material from an unknown source was placed at the property prior to construction of the existing buildings. This fill material contained petroleum hydrocarbons, benzene and PAHs at concentrations greater than applicable cleanup levels. At the time of the sale of our Port Angeles property in July 2018, no exposure pathways existed from the property due to caps on the soil consisting of asphalt or structures. There can be no assurance that remediation will not be required in the future, however, and as a prior owner of the Port Angeles property we may retain some liability for the costs of remediation. Our Salt Lake City hotel property, which we sold in December 2019, was exposed to a toxic substance spill that migrated from a neighboring property. We completed a site cleanup on the property and believe the contamination has been remediated. However, there can be no assurance that additional cleanup will not be required in the future, and as a prior owner of the Salt Lake City property we may retain some liability for the costs of remediation.

We currently own a small parcel of land adjacent to the hotel in Salt Lake City that we sold in December 2019. It was discovered in 2019 that the parcel had contamination resulting from prior uses of the land. The contamination has been reported to the State of Utah – Department of Environmental Quality. Investigations as to the scope and mitigation are ongoing.

We face risks relating to litigation.

At any given time, we are subject to claims and actions incidental to the operation of our business. The outcome of these proceedings cannot be predicted. If a plaintiff were successful in a claim against us, we could be faced with the payment of a material sum of money, and we may not be insured for such a loss. If this were to occur, it could have an adverse effect on our financial condition and results of operations.

In addition, our financial condition may be adversely impacted by legal or governmental proceedings brought by or on behalf of our employees or customers. In recent years, a number of hospitality companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination, accessibility and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits in the future may be instituted against us, and we may incur material damages and expenses, which could have an adverse effect on our results of operations and financial condition.

In addition, in recent years there has been increasing activity by patent holding companies (so-called patent "trolls") that do not use technology but whose sole business is to enforce patents for monetary gain against companies in a wide variety of businesses and industries. These efforts typically involve proposing licenses in exchange for a substantial sum of money and may also include the threat or actual initiation of litigation for that purpose. Any such litigation can be quite costly to defend, even if infringement is unsubstantiated or speculative. We have been threatened with one such claim and two claims have actually been filed against us. Each claim is related to separate technology, but we believe that each such technology is non-proprietary. Both filed claims have been resolved. If we are ultimately found to have violated a patent, our operations could be negatively impacted and/or we might be subject to substantial financial penalties, licensing fees and attorneys' fees. It is not possible to predict the potential impact on our business and operations of any future claims of this type that may be asserted against us.






22


Washington law contains provisions that could deter takeover attempts.

Our company is incorporated in the State of Washington and subject to Washington state law. The Washington State Anti­takeover Act could interfere with or restrict takeover bids or other change-in-control events affecting us. For example, one statutory provision prohibits us, except under specified circumstances, from engaging in any significant business transaction, such as a merger, with any shareholder who owns 10% or more of our common stock (which shareholder, under the statute, would be considered an "acquiring person") for a period of five years following the time that such shareholder becomes an acquiring person.

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Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

Company Operated Properties

Company operated properties are those properties that we own, lease, or operate through a management contract. A number of our owned and leased properties are operated by third party management companies. The table below reflects our six company operated hotel properties and locations, as well as total available rooms per hotel, as of December 31, 2019.
Total
Available
PropertyLocationRooms
Company operated properties
Red Lion Hotel Kalispell (1)
Kalispell, Montana170  
Red Lion Hotel Seattle Airport (2)
Seattle, Washington144  
Red Lion Anaheim (2)
Anaheim, California308  
Hotel RL Olympia (3)
Olympia, Washington193  
Hotel RL Baltimore Inner Harbor (4)
Baltimore, Maryland130  
Hotel RL Washington DC (5)
Washington, DC99  
Company operated properties (6 properties)1,044  
__________ 
(1) Leased and operated by RLH
(2) Leased by RLH and operated by a third party management company
(3) Owned by RL Venture and operated by a third party management company
(4) Wholly owned and operated by a third party management company
(5) Leased by RLS DC Venture, LLC and operated by a third party management company

Franchised Hotels

Under our franchise agreements, we receive royalties for the use of the RLH Corporation brands and marketing funds for the promotion of the RLH Corporation brands. We also make available certain services to those hotels including reservation systems, advertising and national sales, our guest loyalty program, revenue management tools, quality inspections and brand standards, as well as administer central services programs for the benefit of all the hotels in our network. At December 31, 2019, our franchised operations consisted of 1,056 hotels with an approximate room count of 66,700.

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Item 3.Legal Proceedings

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

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

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

Along with many of its competitors, the Company has been named as a defendant in litigation matters filed in state and federal courts, alleging statutory and common law claims related to purported incidents of sex trafficking at certain franchised hotel facilities. As of February 21, 2020, the Company is aware of approximately 7 cases filed naming the Company. The Company is in various stages of seeking voluntary dismissal on the basis that the Company did not own, operate or manage the hotels at issue, and intends to vigorously defend the lawsuits.

At any given time, we are subject to additional claims and actions incidental to the operation of our business. While the outcome of these proceedings cannot be predicted, it is the opinion of management that none of such proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows or results of operations. See Note 10 Commitments and Contingencies within Item 8. Financial Statements and Supplementary Data.

Item 4.Mine Safety Disclosures

Not applicable.

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PART II

Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information for Common Stock

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol RLH.

Holders

At February 24, 2020, there were 105 shareholders of record of our common stock.

Dividends

Historically, we have not paid any cash dividends on our common stock. The board of directors periodically reviews our dividend policy and our longer-term objectives of maximizing shareholder value. Any determination to pay cash dividends in the future will be at the discretion of our board.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2019 on plans under which equity securities may be issued to employees, directors or consultants. All of our equity compensation plans have been approved by our shareholders.
(a)(b)(c)
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
Equity Compensation Plans Approved by Security Holders:
2006 Stock Incentive Plan—  $—  —  
2015 Stock Incentive Plan(1)
60,848  $8.20  1,135,724  
2008 Employee Stock Purchase Plan—  $—  282,739  
Total60,848  $8.20  1,418,463  
__________

(1) Excludes 599,655 of unvested restricted stock units granted under the 2015 Stock Incentive Plan.


Item 6.Selected Financial Data

Pursuant to Item 301(c) of Regulation S-K (§ 229.301(c)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).


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Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with Item 8. Financial Statements and Supplementary Data.

Introduction

We are 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: Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse, Settle Inn, Americas Best Value Inn, Canadas Best Value Inn, Signature and Signature Inn, Knights Inn, and Country Hearth Inns & Suites.

A summary of our open franchise and company operated hotels as of December 31, 2019, including the approximate number of available rooms, is provided below:
Midscale BrandEconomy BrandTotal
HotelsTotal Available RoomsHotelsTotal Available RoomsHotelsTotal Available Rooms
Beginning quantity, January 1, 2019112  15,900  1,215  69,800  1,327  85,700  
Newly opened 700  32  1,600  40  2,300  
Change in brand / adjustments (1)
(1) 100  (30) (1,800) (31) (1,700) 
Terminated properties(23) (3,200) (251) (15,400) (274) (18,600) 
Ending quantity, December 31, 201996  13,500  966  54,200  1,062  67,700  
(1) During the fourth quarter of 2019 we identified a number of errors in our contract tracking system, primarily related to the status of acquired contracts from acquisitions. The impact of these adjustments is reflected on this line.

A summary of activity relating to our open midscale franchise and company operated hotels by brand from January 1, 2019 through December 31, 2019 is provided below:
Midscale Brand HotelsHotel RLRed Lion HotelRed Lion Inns and SuitesSignatureOtherTotal
Beginning quantity, January 1, 2019 46  43   13  112  
Newly opened —    —   
Change in brand / adjustments—    —  (3) (1) 
Terminated properties—  (8) (9) —  (6) (23) 
Ending quantity, December 31, 2019 39  40    96  
Ending rooms, December 31, 20191,400  8,000  3,300  300  500  13,500  

A summary of activity relating to our open economy franchise hotels by brand from January 1, 2019 through December 31, 2019 is provided below:
Economy Brand HotelsABVI and CBVIKnights InnCountry HearthGuest HouseSignature InnOtherTotal
Beginning quantity, January 1, 2019777  332  53  27   24  1,215  
Newly opened28     —  —  32  
Change in brand / adjustments (1)
(7) (20) —  —  —  (3) (30) 
Terminated properties(141) (82) (7) (9) (2) (10) (251) 
Ending quantity, December 31, 2019657  232  47  19  —  11  966  
Ending rooms, December 31, 201934,900  14,100  2,300  1,300  —  1,600  54,200  
(1) During the fourth quarter of 2019 we identified a number of errors in our contract tracking system, primarily related to the status of acquired contracts from acquisitions. The impact of these adjustments is reflected on this line.

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A summary of our executed franchise agreements for the year ended December 31, 2019 is provided below:
Midscale BrandEconomy BrandTotal
Executed franchise license agreements, year ended December 31, 2019:
New locations16  27  43  
New contracts for existing locations11  115  126  
Total executed franchise license agreements, year ended December 31, 201927  142  169  

We operate in two reportable segments:

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

The company operated hotel segment derives revenues primarily from guest room rentals and food and beverage offerings at owned and leased hotels for which we consolidate results. Revenues have also been derived from management fees and related charges for hotels with which we contract to perform management services, however our last management agreement terminated in February 2019.

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

Major Transactions During Reporting Periods Presented

In May 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), and the purchase of certain operating assets including franchise agreements for approximately 330 hotels from, and assumption of certain liabilities relating to the business of franchising Knights Inn branded hotels to hotel owners from Wyndham Hotel Group Canada, ULC and Wyndham Hotel Group Europe Limited, pursuant to an Amended and Restated Purchase Agreement, for an aggregate purchase price of $27.2 million. See Note 16 Acquisitions and Dispositions within Item 8. Financial Statements and Supplementary Data.

Consistent with the Company's previously stated business strategy to move towards operating as primarily a franchise company, in 2017, we announced that we would be marketing for sale 11 of our owned hotels held by our consolidated joint venture, RL Venture. In 2018, nine of the RL Venture properties were sold for $116.5 million. In December 2019, we sold an additional RL Venture property for $33.0 million. In November 2019, we sold the only hotel in our consolidated joint venture, RLS Atla Venture for $12.3 million. Most of the buyers entered into franchise license agreements to retain the Red Lion brand.

It is our intention, subject to market conditions, to sell all of our hotel ownership positions in the next few years so that we can focus on our hotel franchise business, which is less capital intensive and generates higher profit margins than the hotel ownership business. We anticipate that the completion of these sales will allow the Company to continue to significantly reduce or eliminate long-term debt and to increase cash reserves for future franchise agreement growth initiatives.

For further discussion on these transactions, see Note 16, Acquisitions and Dispositions within Item 8. Financial Statements and Supplementary Data.

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Results of Operations

A summary of our Consolidated Statements of Comprehensive Income (Loss) is provided below (in thousands):
 Years Ended December 31,
 20192018
Total revenues$114,288  $135,849  
Total operating expenses129,584  114,715  
Operating income (loss)(15,296) 21,134  
Other income (expense):
Interest expense(5,157) (6,209) 
Loss on early retirement of debt(428) (794) 
Other income, net161  265  
Total other income (expense)(5,424) (6,738) 
Income (loss) before taxes(20,720) 14,396  
Income tax expense (benefit)253  (71) 
Net income (loss) (20,973) 14,467  
Net (income) loss attributable to noncontrolling interest1,944  (13,129) 
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation$(19,029) $1,338  
Non-GAAP Financial Measures: (1)
EBITDA $(996) $37,608  
Adjusted EBITDA $11,592  $15,766  
_________
(1) The definitions of "EBITDA," and "Adjusted EBITDA" and how those measures relate to net income (loss) are discussed and reconciled under Non-GAAP Financial Measures below.

For the year ended December 31, 2019, we reported a net loss attributable to RLH Corporation of $19.0 million or $(0.76) per weighted average basic share, which includes $14.1 million in impairment losses related to our Washington DC joint venture property as well as our Americas Best Value Inn and Knights Inn brand name intangible assets, $7.1 million in gains primarily from the disposal of two hotel properties, $0.6 million of expense related to a non-income tax expense assessment, $1.8 million of stock based compensation, $1.0 million of expense related to a legal settlement, $1.1 million in employee separation costs, $0.8 million of bad debt expense and associated legal fees related to a reserve recognized in the second half of 2019 for certain amounts of accounts receivable, key money, and notes receivable outstanding for a large customer in bankruptcy, $0.6 million in transaction and integration costs, and a $0.4 million loss on early retirement of debt.

For the year ended December 31, 2018, we reported net income attributable to RLH Corporation of $1.3 million or $0.05 per weighted average share, which included $41.5 million in gains from the disposal of nine hotel properties, $10.6 million in impairment losses related to our Baltimore joint venture property and GuestHouse brand name intangible asset, $4.0 million of stock based compensation, $2.2 million in transaction and integration related costs, $1.5 million in employee separation costs, $0.6 million of expense related to a non-income tax expense assessment, and a $0.8 million loss on early retirement of debt resulting from an early repayment on our Senior Secured Term Loan using proceeds from an RL Venture distribution following two hotel sales.

For the year ended December 31, 2019, Adjusted EBITDA was $11.6 million compared to $15.8 million for the year ended December 31, 2018.

Non-GAAP Financial Measures

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

Adjusted EBITDA is an additional measure of financial performance. We believe that the inclusion or exclusion of certain special items, such as gains and losses on asset dispositions and impairments, is necessary to provide the most accurate measure of core operating results and as a means to evaluate comparative results. Adjusted EBTIDA also excludes the effect of non-cash
29


stock compensation expense. We believe that the exclusion of this item is consistent with the purposes of the measure described below.

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

The following is a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
Years Ended December 31,
20192018
(In thousands)
Net income (loss)$(20,973) $14,467  
Depreciation and amortization14,567  17,003  
Interest expense5,157  6,209  
Income tax expense (benefit)253  (71) 
EBITDA (996) 37,608  
Stock-based compensation (1)
1,780  3,955  
Asset impairment (2)
14,128  10,582  
Transaction and integration costs (3)
632  2,219  
Employee separation and transition costs (4)
1,101  1,509  
Loss on early retirement of debt 428  794  
Gain on asset dispositions (5)
(7,067) (41,520) 
Legal settlement expense (6)
952  —  
Non-income tax expense assessment (7)
634  619  
Adjusted EBITDA 11,592  15,766  
Adjusted EBITDA attributable to noncontrolling interests(1,457) (1,806) 
Adjusted EBITDA attributable to RLH Corporation$10,135  $13,960  
(1) Costs represent total stock-based compensation for each period. These costs are included within Selling, general, administrative and other expenses, Company operated hotels and Marketing, reservations and reimbursables on the Consolidated Statements of Comprehensive Income (Loss).
(2) During 2019, we recognized impairments on our Hotel RL Washington DC joint venture property, and on our Americas Best Value Inn and Knights Inn brand name intangible assets. During 2018, we recognized impairments on our Hotel RL Baltimore Inner Harbor joint venture property and on our Guesthouse brand name intangible asset. All are included within Asset impairment on the Consolidated Statements of Comprehensive Income (Loss).
(3) Transaction and integration costs include incremental expenses incurred for potential and executed acquisitions and dispositions of assets.
(4) The costs recognized relate to employee separation. In 2019, the costs primarily relate to severance agreements with our Chief Executive Officer and other executives in November 2019. The costs recognized in 2018 primarily relate to severance agreements with our Chief Operating Officer, and President of Global Development in May 2018 and our Chief Marketing Officer in December 2018. These costs are included within Selling, general, administrative and other expenses and Marketing, reservations and reimbursables expense on the Consolidated Statements of Comprehensive Income (Loss).
(5) Gains relate primarily to the sale of two properties in the fourth quarter of 2019 and nine properties during 2018, which are included within Gain on asset dispositions, net on the Consolidated Statements of Comprehensive Income (Loss).
(6) Legal settlement expense relates to a settlement agreement with former hotel workers regarding a wage dispute in California. This expense is included in Company operated hotels expense on the Consolidated Statements of Comprehensive Income (Loss).
(7) During the fourth quarter of 2019, we concluded that we are probable of being assessed non-income taxes in additional states of $0.6 million for each of the years ended December 31, 2019 and 2018. We accrued these estimated taxes in Selling, general, administrative and other expenses on the Consolidated Statements of Comprehensive Income (Loss), with a revision to our 2018 Consolidated Statement of Comprehensive Income (Loss) to reflect the prior period adjustment. For further discussion, see Note 2, Summary of Significant Accounting Policies within Item 8. Financial Statements and Supplementary Data.

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Revenues

Franchise and Marketing, Reservations and Reimbursables Revenues
 Years Ended December 31,
20192018
(In thousands)
Royalty$22,121  $22,309  
Marketing, reservations and reimbursables31,375  28,239  
Other franchise5,749  3,246  

2019 Compared to 2018

Revenues from royalties decreased slightly by $0.2 million or 1%. This decrease is primarily due to terminated agreements in our economy brand hotels, partially offset by a full year of royalties in 2019 from our acquired Knights Inn agreements compared to the partial year in 2018. Marketing, reservations, and reimbursables revenue increased $3.1 million or 11% and Other franchise revenues increased by $2.5 million or 77%. These increases are primarily due to the additional revenue provided by the acquisition of the Knights Inn franchised hotels in May 2018 plus an increase in reservation and other miscellaneous fees, partially offset by the impact of terminated agreements.

Company Operated Hotels Revenues

 Years Ended December 31,
20192018
(In thousands)
Company operated hotel revenues$55,029  $82,021  

2019 Compared to 2018

Company operated hotels revenue decreased by $27.0 million or 33%. This decrease was primarily due to the disposal of nine hotel properties from our company operated hotels segment during 2018 and an additional two hotel disposals in the fourth quarter of 2019, along with the expiration of a company operated hotel property lease in the fourth quarter of 2018.

Revenues for the six company operated hotels held during the entirety of both periods increased by $0.2 million, to $41.4 million in 2019 compared to $41.2 million in 2018.


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Operating Expenses

Selling, General, Administrative and Other Expenses

Years Ended December 31,
20192018
(In thousands)
Franchise development and operations, including labor$8,618  $9,908  
General and administrative labor and labor-related costs7,260  9,036  
Stock-based compensation651  2,169  
Non-income tax expense assessment634  619  
Bad debt expense3,221  872  
Legal fees2,023  1,697  
Professional fees and outside services1,099  1,560  
Facility lease941  844  
Information technology costs814  967  
Other4,159  4,009  
Total Selling, general, administrative and other expenses$29,420  $31,681  

2019 Compared to 2018

Total Selling, general, administrative and other expenses decreased by $2.3 million or 7%. The following fluctuations occurred within Selling, general, administrative and other expenses period over period:

Franchise development and operations expenses decreased primarily due to lower overall compensation expense in 2019 as compared to 2018. This decrease in compensation expense was driven by a reduction in variable compensation due to lower than expected growth in the current year, along with a decrease in average headcount.

Labor and labor-related costs decreased primarily due to a reduction in variable compensation due to lower than expected growth in the current year, along with decreased headcount and overall benefit costs. Stock-based compensation decreased primarily due to the reversal of previously recognized expense resulting from forfeitures due to several executive terminations in the fourth quarter of 2019, along with the determination that the achievement of performance vesting conditions associated with certain outstanding performance stock units was no longer probable.

Due to a non-income tax audit that was initiated in 2019, during the fourth quarter of 2019 we engaged a third party expert to assist management in a study that concluded we are probable of being assessed non-income taxes in additional states related to billings from 2016 through 2019. The total estimated non-income tax liability for all periods was estimated at $2.0 million, which includes penalties and interest of $0.3 million. There is significant subjectivity as to whether non-income taxes can be assessed on certain of our franchise billings. In order to mitigate our potential exposure, the company has requested acceptance into voluntary disclosure agreements with multiple states that comprise the majority of our exposure.

We have the ability and right to bill and collect a reimbursement of the incremental non-income tax, excluding penalties and interest, from our franchisees. However, as the amounts included significant judgment, cover multiple periods, and as we lack a history of collecting these types of non-income taxes, we have concluded we will not recognize an asset for potential reimbursement and therefore we have recognized the 2016 and 2017 impact of $0.7 million as a decrease in Accumulated deficit and an increase to Other accrued liabilities as of January 1, 2018, as well as recognizing $0.6 million in Selling, general, administrative and other expenses in 2019 and 2018, respectively. For further discussion on this item and the associated immaterial revisions of prior period financial information, see Note 2, Summary of Significant Accounting Policies within Item 8. Financial Statements and Supplementary Data.

Bad debt expense increased due to increased terminations reducing the likelihood of collection of outstanding amounts as well as a reserve established in the second half of 2019 for certain amounts of accounts receivable, key money, and notes receivable outstanding for a large customer in bankruptcy.

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Professional fees and outside services decreased primarily due to various efficiencies and cost cutting initiatives implemented by management.


Company Operated Hotels Expenses
 Years Ended December 31,
 20192018
(In thousands)
Company operated hotel expenses$48,612  $67,314  

2019 Compared to 2018

Company operated hotels expenses decreased by $18.7 million or 28%. This decrease was primarily due to the disposal of nine hotel properties from our company operated hotels segment during 2018, along with the expiration of a company operated hotel property lease in the fourth quarter of 2018.

Operating expenses for the six company operated hotels held during the entirety of both periods increased by $2.1 million, to $36.7 million in 2019 compared to $34.6 million in 2018, primarily due to a $0.9 million increase in third party management fees as most of our hotels were transitioned from internal management to external management during late 2018 and early 2019 as we continue to focus resources on our franchising segment.

Marketing, Reservations and Reimbursables Expenses
Years Ended December 31,
20192018
(In thousands)
Marketing, reservations and reimbursable expenses$29,292  $27,937  

2019 Compared to 2018

Marketing, reservations and reimbursables expenses increased by $1.4 million or 5%. This increase was primarily due to supporting growth in our midscale hotels as well as a full year of expenses related to Knights Inn, which was acquired in May 2018. This increase is consistent with the increase in Marketing, reservations and reimbursables revenues.

Depreciation and Amortization
Years Ended December 31,
20192018
(In thousands)
Depreciation and amortization$14,567  $17,003  

2019 Compared to 2018

Depreciation and amortization expense decreased $2.4 million or 14%. This decrease was primarily due to the disposal of nine hotel properties from our company operated hotels segment during the year ended December 31, 2018. The decrease in depreciation and amortization from hotel sales was partially offset by additional amortization from acquired intangible assets that were part of the Knights Inn acquisition in May 2018 and other fixed assets placed in service during the remainder of 2018 and 2019.


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Asset Impairment
Years Ended December 31,
20192018
(In thousands)
Asset impairment$14,128  $10,582  

2019 Compared to 2018

We recognized an impairment loss of $5.4 million on our Hotel RL Washington DC joint venture property in the third quarter of 2019 and an impairment loss of $7.1 million on our Hotel RL Baltimore Inner Harbor joint venture property in the third quarter of 2018. See Note 5. Property and Equipment within Item 8. Financial Statements for additional detail. Additionally, we recognized an impairment loss of $7.4 million on our Americas Best Value Inn brand name intangible asset and an impairment loss of $1.3 million on our Knights Inn brand name intangible asset in the fourth quarter of 2019. We recognized an impairment loss of $3.5 million on our GuestHouse brand name intangible asset in the fourth quarter of 2018. See Note 6 Goodwill and Intangible Assets within Item 8. Financial Statements for additional detail.

Gain on Asset Dispositions, net
Years Ended December 31,
20192018
(In thousands)
Gain on asset dispositions, net$(7,067) $(42,021) 

2019 Compared to 2018

For the year ended December 31, 2019, we recognized a Gain on asset dispositions, net of $7.1 million primarily from the disposal of two hotel properties during the fourth quarter. We recognized a Gain on asset dispositions, net of $42.0 million primarily from the disposal of nine hotel properties during the year ended December 31, 2018.

Transaction and Integration Costs
Years Ended December 31,
20192018
(In thousands)
Transaction and integration costs$632  $2,219  

2019 Compared to 2018

Transaction and integration costs decreased by $1.6 million or 72% There were no acquisitions completed in 2019, while Knights Inn was acquired in the second quarter of 2018. Costs incurred in 2019 relate to integration activities for the Knights Inn acquisition that continued into the current year, in addition to due diligence costs incurred for other potential sales and acquisitions.

Interest Expense

Interest expense decreased $1.1 million or 17% in 2019 compared with 2018. This decrease is primarily due to hotel sales and the related reduction in our average corporate and hotel-specific debt outstanding during 2019 as compared to 2018.


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Loss on Early Retirement of Debt

In the second quarter of 2019, we recognized a Loss on early retirement of debt of $0.2 million for unamortized deferred debt issuance costs and prepayment fees incurred related to the payoff of a mortgage loan at RLS DC Venture, which was replaced through a new mortgage loan with a different lender. In the fourth quarter of 2019, we recognized an additional Loss on early retirement of debt of $0.3 million related to the early payoff of our Senior Secured Term Loan and a secured debt agreement at RL Venture - Salt Lake City. These loans were paid off using proceeds from the sales of the Hotel RL Salt Lake City and Red Lion Hotel Atlanta Airport.

In 2018, the Loss on early retirement of debt arose primarily from a $20.6 million early payment of our Senior Secured Term Loan. The debt was repaid using proceeds from a distribution from RL Venture after the sales of our Red Lion Hotel Port Angeles and Hotel RL Spokane.

See Note 8, Debt and Line of Credit within Item 8. Financial Statements and Supplementary Data for additional information.

Income Taxes

We reported income tax expense of $0.3 million in 2019, compared with an income tax benefit of $0.1 million in 2018. The income tax provisions vary from the statutory rate primarily due to a partial valuation allowance against our gross deferred tax assets. See Note 13, Income Taxes within Item 8. Financial Statements and Supplementary Data.

Liquidity and Capital Resources

Overview

Our principal source of liquidity is cash flows from operations. Cash flows may fluctuate and are sensitive to many factors including changes in working capital and the timing and magnitude of capital expenditures and payments on debt. Working capital, which represents current assets less current liabilities, was $23.0 million and $4.6 million at December 31, 2019 and 2018. We believe that we have sufficient liquidity to fund our operations at least through February 2021.

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

We are committed to maintaining our infrastructure for systems and services we provide to our franchisees. This requires ongoing access to capital investments in technology and related assets.
Years Ended December 31,
20192018
 (In thousands)
Net cash provided by (used in) operating activities$5,382  $(3,514) 
Net cash provided by (used in) investing activities39,391  76,898  
Net cash provided by (used in) financing activities(32,754) (98,453) 

Operating Activities

Net cash provided by operating activities totaled $5.4 million in 2019 compared with net cash used in operating activities of $3.5 million during 2018. This increase of $8.9 million from 2018 was primarily due to an increase of $7.2 million in cash flows from working capital accounts, driven by the disbursement of significant amounts of key money in 2018.

Investing Activities

Net cash provided by investing activities totaled $39.4 million and $76.9 million for the years ended December 31, 2019 and 2018, respectively. Cash flows decreased $37.5 million in 2019 compared to 2018 primarily due to lower proceeds from hotel sales in the current year, partially offset by the acquisition of the Knights Inn brand and related franchise agreements in 2018.

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Financing Activities

Net cash flows used by financing activities were $32.8 million during 2019, compared with $98.5 million in 2018. In 2019, we had borrowings on long-term debt of $32.9 million, made repayments of $45.9 million on long-term debt, and paid $17.6 million in distributions to noncontrolling interest. In 2018, we had borrowings on long-term debt of $30.0 million, drew $10.0 million on our line of credit, made repayments of $108.0 million on long-term debt, paid $7.0 million in contingent consideration from the Vantage Hospitality, Inc. acquisition that occurred in 2016 and paid $21.5 million in distributions to noncontrolling interest.

Debt

As of December 31, 2019, we had outstanding total debt, excluding unamortized deferred financing costs and discounts, of $33.2 million.

During 2019, we executed term loans at the Olympia and Salt Lake City properties held by RL Venture for a total principal amount of $16.6 million. Proceeds from the loans were distributed to the partners of RL Venture in accordance with ownership interest percentage. We transferred $4.2 million of the proceeds received into a cash collateral account, and in April 2019, the $4.2 million in the cash collateral account was applied against the outstanding principal balance of the Senior Secured Term Loan.

In the fourth quarter of 2019, using the net proceeds from the sales of our Hotel RL Salt Lake City joint venture property and Red Lion Hotel Atlanta International Airport joint venture property, we repaid the remaining outstanding principal balance on our Senior Secured Term Loan of $4.2 million.

In December 2019, using proceeds from the sale of the Hotel RL Salt Lake City, RL Venture repaid the $11.0 million outstanding principal balance under the term loan executed at the Salt Lake City property. The remaining outstanding debt balance for the term loan executed at the Olympia property was $5.6 million of December 31, 2019.

In May 2019, we executed a new mortgage loan agreement at the RLH DC Venture property for a total principal and accrued exit fee of $17.4 million. The proceeds from the loan were immediately used to pay off the existing mortgage loan on the property, which had an outstanding principal balance of $15.9 million at the time of closing.

In September 2019, RLH Atlanta executed several amendments to the existing mortgage loan with PFP Holding Company IV, LLC ("PFP"), an affiliate of Prime Finance, extending the maturity date from September 9, 2019 to January 9, 2020. In November 2019, using proceeds from the sale of the Red Lion Hotel Atlanta International Airport joint venture property, RLH Atlanta repaid the $8.2 million outstanding principal balance under the loan agreement with PFP.

See Note 8, Debt and Line of Credit within Item 8. Financial Statements and Supplementary Data of this annual report on Form 10-K, for additional information about our debt obligations.

Off-Balance Sheet Arrangements

As of December 31, 2019, we had no off-balance sheet arrangements, which have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Seasonality

Our business has historically been subject to seasonal fluctuations, with more revenues and profits realized from May through October than during the rest of the year. Due to the large amount of acquisitions and dispositions undertaken by the Company during the periods presented, this seasonality is not as apparent as it would be in a steady state.
 

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Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. We consider a critical accounting policy to be one that is both important to the portrayal of our financial condition and results of operations and requires management's most subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies within Item 8. Financial Statements and Supplementary Data; however, we have also identified our most critical accounting policies and estimates below. Management has discussed the development and selection of our critical accounting policies and estimates with the audit committee of our board of directors, and the audit committee has reviewed the disclosures presented below.

Revenue Recognition and Receivables

Revenue is generally recognized as our performance obligations are satisfied. We recognize revenue from the following sources:

Franchised Hotels - royalty, marketing and other fees are received in connection with licensing our brands to franchisees. See Note 2, Summary of Significant Accounting Policies for further discussion, within Item 8. Financial Statements and Supplementary Data.

Company-Operated Hotels - Room rental and food and beverage sales from majority owned and leased hotels and management fees from hotels under management contract. Revenues are recognized when services have been performed, generally at the time of the hotel stay or guests visit to the restaurant and at the time the management services are provided. We also recognize other revenue and costs from managed properties when we incur the related reimbursable costs. These costs primarily consist of payroll and related expenses at managed properties where we are the employer.

We review the ability to collect individual accounts receivable on a routine basis. We recognize an allowance for doubtful accounts based on a combination of reserves calculated based on underlying characteristics of receivables (such as the age of the related receivable) as well as specifically identified amounts believed to be uncollectible. A receivable is written off against the allowance for doubtful accounts if collection attempts fail.

Goodwill

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. Goodwill is not amortized, but we test goodwill for impairment each year as of October 1, or more frequently should facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than the carrying amount. 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 a quantitative assessment. The quantitative assessment involves calculating an estimated fair value of each reporting unit based on projected future cash flows, and comparing the estimated fair values of the reporting units to their carrying amounts, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, including goodwill, no impairment is recognized. However, if the carrying amount of a reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to the excess, limited to the total goodwill balance of the reporting unit.

We have not recognized any impairment on goodwill during the years ended December 31, 2019 and 2018.


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Indefinite-Lived Intangible Assets

Through prior business combinations we have obtained intangible assets related to our Americas Best Value Inn, Canadas Best Value Inn, Guesthouse, Knights Inn, and Red Lion brands. At the time of each acquisition, the brands were assigned a fair value based on the relief from royalty method. As there are no limitations on the useful lives of these assets, we have determined they are indefinite-lived intangible assets that will not be amortized. Annually, on October 1, we reassess the useful lives of each asset to determine if they should continue to be classified as indefinite and we additionally test the assets for impairment. Impairment may also be tested at any point in which facts and circumstances indicate that it is more likely than not that the fair value of the asset is less than the carrying amount. 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 the asset is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with a quantitative assessment. The quantitative assessment involves calculating an estimated fair value of the asset using the relief from royalty method, and comparing the estimated fair value of the asset to its carrying amount. If the estimated fair value of the asset exceeds its carrying value, no impairment is recognized. However, if the carrying amount of the asset exceeds its fair value, an impairment loss is recognized in an amount equal to the excess.

On October 1, 2019, we recognized impairment losses on the Americas Best Value Inn and Knights Inn brand name indefinite-lived intangible assets of $7.4 million and $1.3 million, respectively. On October 1, 2018, we recognized an impairment loss on the Guesthouse brand name indefinite-lived intangible asset of $3.5 million and reclassified the $2.1 million remaining fair value from an indefinite-lived intangible asset to a finite-lived intangible asset. The impairment losses are included in Asset impairment in the Consolidated Statements of Comprehensive Income (Loss). See further discussion of the impairments and reclassification at Note 6, Goodwill and Intangible Assets within Item 8. Financial Statements and Supplementary Data.

Valuation of Long-Lived Assets Including Finite-Lived Intangible Assets

We test long-lived asset groups, including finite-lived intangible assets, 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.

During the year ended December 31, 2019, we recognized an impairment loss on our Hotel RL Washington DC joint venture property of $5.4 million. During the year ended December 31, 2018, we recognized an impairment loss on our Baltimore joint venture property of $7.1 million. These impairment losses are included in Asset impairment in the Consolidated Statements of Comprehensive Income (Loss). See further discussion of the impairment at Note 5, Property and Equipment within Item 8. Financial Statements and Supplementary Data.

Variable Interest Entities