NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Red Lion Hotels Corporation ("RLH Corporation," "RLHC," "we," "our," "us," or "our company") is a NYSE-listed hospitality and leisure company (ticker symbol: RLH) doing business as RLH Corporation and primarily engaged in the franchising and ownership of hotels under the following proprietary brands: Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse, Settle Inn, Americas Best Value Inn, Canadas Best Value Inn, Signature and Signature Inn, Knights Inn, and Country Hearth Inns & Suites.
A summary of our properties as of September 30, 2019, including the approximate number of available rooms, is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upscale Service Brand ("USB")
|
|
Select Service Brand ("SSB")
|
|
Total
|
|
|
Hotels
|
|
Total Available Rooms
|
|
Hotels
|
|
Total Available Rooms
|
|
Hotels
|
|
Total Available Rooms
|
Beginning quantity, January 1, 2019
|
|
112
|
|
|
15,900
|
|
|
1,215
|
|
|
69,800
|
|
|
1,327
|
|
|
85,700
|
|
Newly opened / acquired properties
|
|
7
|
|
|
600
|
|
|
28
|
|
|
1,400
|
|
|
35
|
|
|
2,000
|
|
Change in brand
|
|
(1
|
)
|
|
(100
|
)
|
|
1
|
|
|
100
|
|
|
—
|
|
|
—
|
|
Terminated properties
|
|
(17
|
)
|
|
(1,900
|
)
|
|
(159
|
)
|
|
(10,100
|
)
|
|
(176
|
)
|
|
(12,000
|
)
|
Ending quantity, September 30, 2019
|
|
101
|
|
|
14,500
|
|
|
1,085
|
|
|
61,200
|
|
|
1,186
|
|
|
75,700
|
|
|
|
2.
|
Summary of Significant Accounting Policies
|
The unaudited condensed consolidated financial statements included herein were prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and in accordance with generally accepted accounting principles in the United States of America ("GAAP"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations.
The Consolidated Balance Sheet as of December 31, 2018 was derived from the audited balance sheet as of such date. We believe the disclosures included herein are adequate; however, they should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2018, filed with the SEC in our annual report on Form 10-K on March 8, 2019.
In the opinion of management, these unaudited condensed consolidated financial statements contain all of the adjustments of a normal and recurring nature necessary to present fairly our Condensed Consolidated Balance Sheets, the Condensed Consolidated Statements of Comprehensive Income (Loss), the Condensed Consolidated Statements of Stockholders' Equity, and the Condensed Consolidated Statements of Cash Flows. The results of operations for the periods presented may not be indicative of that which may be expected for a full year or for any other fiscal period.
Leases
We determine if an arrangement is a lease or contains a lease at inception. If an arrangement is a lease or contains a lease, we then determine whether the lease meets the criteria of a finance lease or an operating lease. Finance leases are included in Property and equipment, net, Other accrued liabilities, and Deferred income and other long-term liabilities in our Condensed Consolidated Balance Sheets. Operating leases are included in Operating lease right-of-use assets, Operating lease liabilities, due within one year, and Operating lease liabilities, due after one year, in our Condensed Consolidated Balance Sheets. We reassess if an arrangement is or contains a lease upon modification of the arrangement.
At the commencement date of a lease, we recognize a lease liability for contractual fixed lease payments and a corresponding right-of-use asset representing our right to use the underlying asset during the lease term. The lease liability is measured initially as the present value of the contractual fixed lease payments during the lease term. The lease term additionally includes renewal periods only if it is reasonably certain that we will exercise the options. Contractual fixed lease payments are discounted at the rate implicit in the lease when readily determinable. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date. For the adoption of Accounting Standards Update ("ASU") 2016-02, we measured our lease liabilities using our incremental borrowing rate as of January 1, 2019. Additionally, we
elected not to recognize leases with lease terms of 12 months or less at the commencement date in our Condensed Consolidated Balance Sheets. The right-of-use asset is recognized at the amount of the lease liability with certain adjustments, if applicable. These adjustments include lease incentives, prepaid rent, and initial direct costs.
New Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments, as amended by multiple subsequent ASUs, which will change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU will replace the current "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For trade and other receivables, held to maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. In October 2019, an update was issued to the standard that deferred the effective date of the guidance to the first quarter of 2023 for smaller reporting companies such as us. We are currently evaluating the effects of this ASU on our financial statements, and such effects have not yet been determined.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which provides modifications to the disclosure requirements over fair value measurements. The ASU is effective in the first quarter of 2020, with early adoption permitted. We are currently evaluating the effects of this ASU on our financial statements, and such effects have not yet been determined.
We have assessed the potential impact of other recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to us or are not anticipated to have a material impact on our consolidated financial statements.
New Accounting Pronouncements Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which we adopted on January 1, 2019. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification effecting the pattern of expense recognition in the income statement. Upon adoption, we applied the package of practical expedients included therein, which allows us to carry forward our historical assessments of whether contracts are leases or contain leases, the lease classification of each existing lease, and recognition of initial direct costs. The standard was adopted using the modified retrospective transition method and we did not apply the standard to the comparative periods presented in the year of adoption.
Due to the existence of certain operating lease obligations as of January 1, 2019, we recognized $51.1 million of ROU assets and corresponding lease liabilities of $52.2 million, with reductions of other accrued liabilities and deferred income and other long-term liabilities of $1.1 million. However, there was no impact to accumulated deficit and the future recognition of lease related expenses will not differ from the previous methodology in the Condensed Consolidated Statements of Comprehensive Income (Loss) for leases that existed at the adoption date.
We have two operating segments: franchised hotels and company operated hotels. The "other" segment consists of miscellaneous revenues and expenses, cash and cash equivalents, certain receivables, certain property and equipment and general and administrative expenses, which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense, income taxes and certain corporate expenses; therefore, they have not been allocated to the operating segments. We allocate selling, general, administrative and other expenses to our operating segments. All balances have been presented after the elimination of inter-segment and intra-segment revenues and expenses.
Selected financial information is provided below (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Franchised Hotels
|
|
Company Operated Hotels
|
|
Other
|
|
Total
|
Revenue
|
|
$
|
16,225
|
|
|
$
|
16,633
|
|
|
$
|
5
|
|
|
$
|
32,863
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Segment and other operating expenses
|
|
10,758
|
|
|
13,007
|
|
|
4,184
|
|
|
27,949
|
|
Depreciation and amortization
|
|
1,015
|
|
|
1,777
|
|
|
844
|
|
|
3,636
|
|
Asset impairment
|
|
—
|
|
|
5,382
|
|
|
—
|
|
|
5,382
|
|
Loss (gain) on asset dispositions, net
|
|
—
|
|
|
2
|
|
|
(1
|
)
|
|
1
|
|
Transaction and integration costs
|
|
(6
|
)
|
|
164
|
|
|
43
|
|
|
201
|
|
Operating income (loss)
|
|
$
|
4,458
|
|
|
$
|
(3,699
|
)
|
|
$
|
(5,065
|
)
|
|
$
|
(4,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Franchised Hotels
|
|
Company Operated Hotels
|
|
Other
|
|
Total
|
Revenue
|
|
$
|
15,137
|
|
|
$
|
20,857
|
|
|
$
|
6
|
|
|
$
|
36,000
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Segment and other operating expenses
|
|
9,220
|
|
|
16,999
|
|
|
5,397
|
|
|
31,616
|
|
Depreciation and amortization
|
|
986
|
|
|
2,170
|
|
|
465
|
|
|
3,621
|
|
Asset impairment
|
|
—
|
|
|
7,100
|
|
|
—
|
|
|
7,100
|
|
Loss (gain) on asset dispositions, net
|
|
—
|
|
|
(26,143
|
)
|
|
(53
|
)
|
|
(26,196
|
)
|
Transaction and integration costs
|
|
95
|
|
|
—
|
|
|
—
|
|
|
95
|
|
Operating income (loss)
|
|
$
|
4,836
|
|
|
$
|
20,731
|
|
|
$
|
(5,803
|
)
|
|
$
|
19,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Franchised Hotels
|
|
Company Operated Hotels
|
|
Other
|
|
Total
|
Revenue
|
|
$
|
43,920
|
|
|
$
|
43,839
|
|
|
$
|
13
|
|
|
$
|
87,772
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Segment and other operating expenses
|
|
30,138
|
|
|
38,331
|
|
|
12,290
|
|
|
80,759
|
|
Depreciation and amortization
|
|
3,039
|
|
|
5,650
|
|
|
2,503
|
|
|
11,192
|
|
Asset impairment
|
|
—
|
|
|
5,382
|
|
|
—
|
|
|
5,382
|
|
Loss (gain) on asset dispositions, net
|
|
(1
|
)
|
|
45
|
|
|
1
|
|
|
45
|
|
Transaction and integration costs
|
|
90
|
|
|
164
|
|
|
182
|
|
|
436
|
|
Operating income (loss)
|
|
$
|
10,654
|
|
|
$
|
(5,733
|
)
|
|
$
|
(14,963
|
)
|
|
$
|
(10,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
Franchised Hotels
|
|
Company Operated Hotels
|
|
Other
|
|
Total
|
Revenue
|
|
$
|
38,861
|
|
|
$
|
68,758
|
|
|
$
|
32
|
|
|
$
|
107,651
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Segment and other operating expenses
|
|
26,486
|
|
|
57,667
|
|
|
14,587
|
|
|
98,740
|
|
Depreciation and amortization
|
|
3,044
|
|
|
8,328
|
|
|
1,342
|
|
|
12,714
|
|
Asset impairment
|
|
—
|
|
|
7,100
|
|
|
—
|
|
|
7,100
|
|
Loss (gain) on asset dispositions, net
|
|
—
|
|
|
(41,994
|
)
|
|
(100
|
)
|
|
(42,094
|
)
|
Transaction and integration costs
|
|
2,196
|
|
|
—
|
|
|
—
|
|
|
2,196
|
|
Operating income (loss)
|
|
$
|
7,135
|
|
|
$
|
37,657
|
|
|
$
|
(15,797
|
)
|
|
$
|
28,995
|
|
|
|
4.
|
Variable Interest Entities
|
Our joint venture entities have been determined to be variable interest entities ("VIEs") because our voting rights are not proportional to our financial interest and substantially all of each joint venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over two of the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with our joint venture partners, which do not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our equity interest and management fees. As a result, we consolidate the assets, liabilities, and results of operations of (1) RL Venture LLC ("RL Venture"), (2) RLS Atla Venture LLC ("RLS Atla Venture"), and (3) RLS DC Venture LLC ("RLS DC Venture"). The equity interests owned by our joint venture partners are reflected as a noncontrolling interest in the condensed consolidated financial statements.
In October 2018, we purchased the remaining 27% ownership interest in RLS Balt Venture LLC ("RLS Balt Venture") from our joint venture partner, which dissolved the joint venture relationship, thus making the entity a wholly owned subsidiary and no longer a variable interest entity.
The following table includes the ownership percentages for each of our joint ventures as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
RLH Corporation
|
|
Joint Venture Partner
|
RL Venture
|
|
55
|
%
|
|
45
|
%
|
RLS Atla Venture
|
|
55
|
%
|
|
45
|
%
|
RLS DC Venture
|
|
55
|
%
|
|
45
|
%
|
There were no cash contributions or distributions by partners to any of the joint venture entities during the three and nine months ended September 30, 2019 or 2018 except as otherwise described below.
RL Venture
In February 2018, five of the RL Venture properties were sold for an aggregate sales price of $47.2 million. In April 2018, one RL Venture property sold for $5.5 million, in May 2018, one RL Venture property sold for $9.3 million, and in July 2018 two additional RL Venture properties sold for $54.5 million. As of September 30, 2019, RL Venture has two remaining properties.
In March 2019, secured loans with an aggregate principal of $16.6 million were entered into for the two remaining properties. Shortly thereafter the net loan proceeds were distributed to us and our joint venture partner in accordance with our respective ownership percentages. Cash distributions may also be made periodically based on calculated distributable income. During the nine months ended September 30, 2019 and 2018, cash distributions totaled $16.5 million and $46.5 million, of which RLH Corporation received $9.1 million and $25.6 million, respectively.
RLS Atla Venture
In March 2019, $2.8 million of cash previously contributed to RLS Atla Venture by RLH Corporation was classified as preferred capital and will be repaid only when the Atlanta hotel property is sold or when RLS Atla Venture is liquidated. Upon such event, RLH Corporation will receive the $2.8 million plus a preferred return of 9%, compounded annually, prior to any liquidation proceeds being returned to members.
RLS DC Venture
In May 2019, a secured loan with principal and accrued exit fee of $17.4 million was executed by RLS DC Venture. The net loan proceeds were used to pay off the previous debt with a principal balance of approximately $15.9 million. There were no cash distributions resulting from the refinancing.
|
|
5.
|
Property and Equipment
|
Property and equipment is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Buildings and equipment
|
|
$
|
148,100
|
|
|
$
|
150,072
|
|
Furniture and fixtures
|
|
20,071
|
|
|
19,746
|
|
Landscaping and land improvements
|
|
2,732
|
|
|
2,713
|
|
|
|
170,903
|
|
|
172,531
|
|
Less accumulated depreciation
|
|
(86,343
|
)
|
|
(82,240
|
)
|
|
|
84,560
|
|
|
90,291
|
|
Land
|
|
19,372
|
|
|
19,372
|
|
Construction in progress
|
|
3,622
|
|
|
5,859
|
|
Property and equipment, net
|
|
$
|
107,554
|
|
|
$
|
115,522
|
|
During the three months ended September 30, 2019, we entered into individual non-binding sales agreements with third parties for four of our company operated hotels. Due to the potential for disposition within 12 months, we performed a test for recoverability using probability-weighted undiscounted cash flows on each of these four properties, noting only our Hotel RL Washington DC joint venture property did not recover the carrying value of the long-lived asset group. After calculating the fair value of the Hotel RL Washington DC joint venture property long-lived asset group, we recognized an impairment loss of $5.4 million. The fair value was determined based on the contractual selling price less expected costs to sell, which is a Level 3 fair value measurement. The impairment loss was allocated to the assets within the long-lived asset group on a pro rata basis, with $3.4 million applied against the hotel building, included within Property and equipment, net and $2.0 million applied against the Operating lease right-of-use asset on the Condensed Consolidated Balance Sheets. There were no impairments at the other three properties.
During the three months ended September 30, 2018, we recognized a $7.1 million impairment on our Hotel RL Baltimore Inner Harbor joint venture property. The default during the third quarter of 2018 on the RL Baltimore loan coupled with challenging cash flow results for the asset gave rise to the impairment. The fair value of the asset was determined by a third-party valuation that included an analysis of selling prices for similar assets as well as a discounted cash flow analysis, which are Level 3 fair value measurements. Key inputs to the fair value measurement for these assets included forecast revenues expected to be generated by the hotel factoring in the market it serves as well as forecast operating costs and capital expenditure needs based upon our planning and budgeting process. Other inputs included sales data for similarly situated hotels in the market, adjusted to reflect known differences in the assets.
During the three months ended September 30, 2018, we sold two hotel properties and during the nine months ended September 30, 2018, we sold nine hotel properties, for a total gain of $26.0 million and $41.6 million, respectively. There were no hotels sold during the three and nine months ended September 30, 2019.
|
|
6.
|
Goodwill and Intangible Assets
|
The following table summarizes the balances of goodwill and other intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Goodwill
|
$
|
18,595
|
|
|
$
|
18,595
|
|
|
|
|
|
Intangible assets
|
|
|
|
Brand name - indefinite lived
|
$
|
41,278
|
|
|
$
|
41,278
|
|
Trademarks - indefinite lived
|
128
|
|
|
128
|
|
Brand name - finite lived, net
|
3,735
|
|
|
4,326
|
|
Customer contracts - finite lived, net
|
13,092
|
|
|
15,178
|
|
Total intangible assets, net
|
$
|
58,233
|
|
|
$
|
60,910
|
|
The following table summarizes the balances of amortized customer contracts and finite-lived brand names (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Customer contracts
|
$
|
20,773
|
|
|
$
|
20,773
|
|
Brand name - finite lived
|
5,395
|
|
|
5,395
|
|
Accumulated amortization
|
(9,341
|
)
|
|
(6,664
|
)
|
Net carrying amount
|
$
|
16,827
|
|
|
$
|
19,504
|
|
|
|
7.
|
Revenue from Contracts with Customers
|
In July 2019, the parent entities for eight Inner Circle franchisees and the operating entities for two other Inner Circle franchisees all filed for voluntary bankruptcy protection under Chapter 11 of the United Stated Bankruptcy Code.
As of the date of this filing, three of the Inner Circle franchisees whose parent entities entered bankruptcy transferred control of their leasehold interests on their hotel properties to their lenders, and three of the Inner Circle franchisees whose parent entities entered bankruptcy ceased operations until further notice. Those six Inner Circle franchise agreements have been terminated, while the remaining four Inner Circle franchise agreements continue to be in full effect. Additionally, three replacement franchise agreements have been executed with lenders who have taken control of the properties and continue to operate them pending sale proceedings.
As of September 30, 2019, the ten Inner Circle franchisees described above in aggregate owe us the following balances:
|
|
•
|
Approximately $1.8 million in trade receivables, of which $0.5 million is included in pre-petition filings of Chapter 11 bankruptcies.
|
|
|
•
|
Approximately $3.1 million in various collateralized notes receivables and loans, of which $0.6 million is included in pre-petition filings of Chapter 11 bankruptcies. This balance includes $2.3 million of previously unamortized key money that was converted to notes receivable upon termination of the related franchise agreements.
|
|
|
•
|
Approximately $2.3 million in unamortized key money contract assets, of which $0.9 million included in pre-petition filings of Chapter 11 bankruptcies. The remaining $2.3 million of unamortized key money could also be converted to notes receivable if the related agreements are terminated.
|
The collateralized loans are secured by the property purchased with their proceeds. All outstanding receivables, loans, and key money assets are collateralized by an equity interest in one of the leaseholds as well as a personal guarantee of the owner. Given a portion of the franchises continue to have active franchise license agreements with us and given the estimated value of the associated collateral, we have concluded that $6.5 million of the total $7.2 million of contract related balances continue to be supported. As such, we have recognized an allowance of $0.7 million of pre-petition contract balances. These include $0.2 million of accounts receivable, $0.1 million of collateralized notes receivables and loan, and $0.4 million of unamortized key money. The $0.7 million allowance was recognized through bad debt expense included in Selling, general, administrative and other expenses on the Condensed Consolidated Statements of Comprehensive Income (Loss). We will continue to monitor the facts and circumstances surrounding this matter. If more information becomes available in subsequent periods, it could impact our conclusion on the collectability of these balances and on the Company’s future results of operations.
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Statement Line Item(s)
|
|
September 30,
2019
|
|
December 31,
2018
|
Accounts receivable
|
|
Accounts receivable, net
|
|
$
|
19,496
|
|
|
$
|
18,575
|
|
Key money disbursed
|
|
Other current assets and Other assets, net
|
|
4,212
|
|
|
6,409
|
|
Capitalized contract costs
|
|
Other current assets and Other assets, net
|
|
797
|
|
|
1,172
|
|
Contract liabilities
|
|
Other accrued liabilities and Deferred income and other long-term liabilities
|
|
1,415
|
|
|
1,981
|
|
Significant changes in the key money disbursements, capitalized contract costs, and contract liabilities balances during the period are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Money Disbursed
|
|
Capitalized Contract Costs
|
|
Contract Liabilities
|
Balance as of January 1, 2019
|
|
$
|
6,409
|
|
|
$
|
1,172
|
|
|
$
|
1,981
|
|
Key money disbursed
|
|
665
|
|
|
—
|
|
|
—
|
|
Key money converted to notes receivable
|
|
(2,442
|
)
|
|
—
|
|
|
—
|
|
Costs incurred to acquire contracts
|
|
—
|
|
|
202
|
|
|
—
|
|
Cash received in advance
|
|
—
|
|
|
—
|
|
|
428
|
|
Revenue or expense recognized that was included in the January 1, 2019 balance
|
|
(388
|
)
|
|
(533
|
)
|
|
(905
|
)
|
Revenue or expense recognized in the period for the period
|
|
(32
|
)
|
|
(44
|
)
|
|
(89
|
)
|
Balance as of September 30, 2019
|
|
$
|
4,212
|
|
|
$
|
797
|
|
|
$
|
1,415
|
|
Estimated revenues and expenses expected to be recognized related to performance obligations that were unsatisfied as of September 30, 2019, including revenues related to application, initiation and other fees were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Contra Revenue
|
|
Expense
|
|
Revenue
|
2019 (remainder)
|
|
$
|
96
|
|
|
$
|
67
|
|
|
$
|
153
|
|
2020
|
|
409
|
|
|
220
|
|
|
474
|
|
2021
|
|
361
|
|
|
154
|
|
|
309
|
|
2022
|
|
336
|
|
|
126
|
|
|
223
|
|
2023
|
|
310
|
|
|
87
|
|
|
130
|
|
Thereafter
|
|
2,700
|
|
|
143
|
|
|
126
|
|
Total
|
|
$
|
4,212
|
|
|
$
|
797
|
|
|
$
|
1,415
|
|
We did not estimate revenues expected to be recognized related to our unsatisfied performance obligations for our: (i) royalty fees, as they are considered sales-based royalty fees recognized as hotel room sales occur in exchange for licenses of our brand names over the terms of the franchise contracts; and (ii) hotel management fees, since they are allocated entirely to the wholly unsatisfied promise to transfer management services, which form part of a single performance obligation in a series, over the term of the management contract. Therefore, there are no amounts included in the table above related to these revenues.
|
|
8.
|
Debt and Line of Credit
|
The current and noncurrent portions of our debt as of September 30, 2019 and December 31, 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Current
|
|
Noncurrent
|
|
Current
|
|
Noncurrent
|
Line of Credit
|
|
$
|
—
|
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
10,000
|
|
Senior Secured Term Loan
|
|
—
|
|
|
4,189
|
|
|
—
|
|
|
9,355
|
|
RL Venture - Salt Lake City
|
|
—
|
|
|
11,000
|
|
|
—
|
|
|
—
|
|
RL Venture - Olympia
|
|
—
|
|
|
5,600
|
|
|
—
|
|
|
—
|
|
RLH Atla Venture
|
|
8,171
|
|
|
—
|
|
|
9,225
|
|
|
—
|
|
RLH DC Venture (PWB)
|
|
—
|
|
|
—
|
|
|
15,943
|
|
|
—
|
|
RLH DC Venture (CPBF)
|
|
17,520
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total debt
|
|
25,691
|
|
|
30,789
|
|
|
25,168
|
|
|
19,355
|
|
Unamortized debt issuance costs
|
|
(1,063
|
)
|
|
(293
|
)
|
|
(112
|
)
|
|
(241
|
)
|
Debt net of debt issuance costs
|
|
$
|
24,628
|
|
|
$
|
30,496
|
|
|
$
|
25,056
|
|
|
$
|
19,114
|
|
Each of our debt agreements contain customary reporting, financial and operating covenants. We were in compliance with all the financial covenants of our debt agreements at September 30, 2019.
RL Venture - Salt Lake City
In March 2019, RL Salt Lake, LLC, a subsidiary of RL Venture, executed a secured debt agreement with Umpqua Bank for a term loan with a principal balance of $11.0 million. The loan is fully secured by the Hotel RL Salt Lake City property. The loan has a maturity date of March 18, 2021 and a variable interest rate of LIBOR plus 2.25%, payable monthly. The borrower has the option to exercise two six-month extensions upon maturity of the loan. There are no principal repayment requirements prior to the maturity date and the loan includes a financial covenant to be calculated semi-annually in which the property must maintain a minimum debt service coverage ratio of not less than 1.6 to 1.0. We incurred approximately $54,000 of debt discounts and debt issuance costs in connection with the issuance of the loan.
RL Venture - Olympia
In March 2019, RL Olympia, LLC, a subsidiary of RL Venture, executed a secured debt agreement with Umpqua Bank for a term loan with a principal balance of $5.6 million. The loan is fully secured by the Hotel RL Olympia property. The loan has a maturity date of March 18, 2021 and a variable interest rate of LIBOR plus 2.25%, payable monthly. The borrower has the option to exercise two six-month extensions upon maturity of the loan. There are no principal repayment requirements prior to the maturity date and the loan includes a financial covenant to be calculated semi-annually in which the property must maintain a minimum debt service coverage ratio of not less than 1.6 to 1.0. We incurred approximately $33,000 of debt discounts and debt issuance costs in connection with the issuance of the loan.
Senior Secured Term Loan
In March 2019, we transferred approximately $4.2 million, which comprises a portion of the net proceeds received from the RL Venture loans, as calculated and required by the provisions of the Senior Secured Term Loan, into a cash collateral account. The account is controlled by Deutsche Bank AG New York Branch, on behalf of the lenders, and the balance is required by the debt agreement to be applied against the outstanding principal balance of the Senior Secured Term Loan at the lender's discretion. This balance was applied against the outstanding principal balance in April 2019.
In September 2019 we made a voluntary prepayment on the Senior Secured Term Loan of $1.0 million. We anticipate the remainder of the outstanding principal balance will be paid off using proceeds from hotel sales.
RLH DC Venture
In May 2019, RLH DC executed a new mortgage loan agreement with CP Business Finance I, LP ("RLH DC Venture - CPBF"), secured by the Hotel RL Washington DC and a $10.5 million principal guarantee by RLH Corporation. The initial principal amount of the loan was $16.5 million. The proceeds from the loan were immediately used to pay off the existing mortgage loan on the
property held by Pacific Western Bank ("RLH DC Venture - PWB"), which had an outstanding principal balance of $15.9 million at the time of closing.
The RLH DC Venture - CPBF loan had an initial maturity date of June 21, 2019, with a first extension option through May 31, 2020 that was exercised in June 2019, and a second extension option through May 31, 2021. The RLH DC Venture - CPBF loan has a cash interest rate of 7.0% in addition to PIK interest of 3.0% through May 31, 2020, which increases to 7.0% if the second extension option is exercised.
There was a fee of $330,000 to exercise the first extension option and there is a fee of $825,000 plus a required $2.0 million principal pay down to exercise the second extension option. The RLH DC Venture - CPBF loan may be paid off in full prior to maturity at any point. The RLH DC Venture - CPBF loan contains an exit fee equal to 5.0% of the outstanding principal balance if the loan is paid off prior to or at May 31, 2020, or an exit fee equal to 4.0% of the outstanding principal balance if the loan is paid off between June 1, 2020 and May 31, 2021. Additionally, if the loan is paid down prior to May 31, 2020, a prepayment premium must be paid. The prepayment premium is equal to the remaining cash and PIK interest that would have been payable from the prepayment date through May 31, 2020.
As the exit fee is payable regardless of loan repayment prior to or at maturity, we have accrued the projected exit fee of $851,000 as part of the outstanding debt balance with an offsetting debt discount. Inclusive of the accrued exit fee, we have incurred cumulative debt discounts and debt issuance costs of $1.4 million, which will be amortized to interest expense through the first extended maturity date of May 31, 2020.
The loan agreement contains customary requirements for lender approval of annual operating and capital budgets, under certain conditions. In also includes customary events of default as well as financial covenants for maintaining a minimum property EBITDA, a minimum consolidated fixed coverage ratio for RLH, a maximum consolidated total net leverage ratio for RLH, and a cross default provision with our Line of Credit and Senior Secured Term Loan.
CP Business Finance I, LP, the lender of the RLH DC - CPBF loan, is an affiliate of Columbia Pacific Opportunity Fund, LP, who currently holds 500,000 shares of RLH common stock. Additionally, Alexander B. Washburn, who served as a member of our Board of Directors from May 2015 to April 2019, is one of the managing members of Columbia Pacific Advisor, LLC, which serves as the investment manager of Columbia Pacific Opportunity Fund, LP.
RLH Atla Venture
In September 2019, RLH Atlanta executed an amendment to the existing mortgage loan with PFP Holding Company IV LLC, an affiliate of Prime Finance, which extended the maturity date from September 9, 2019 to November 9, 2019. In connection with the amendment, we paid $1.0 million of principal balance and incurred approximately $81,000 of debt discounts and debt issuance costs. As the amendment represents a modification to the original debt, these costs will be amortized to interest expense through the extended maturity date of November 9, 2019.
On November 7, 2019, RLH Atlanta executed an additional amendment, which extended the maturity date from November 9, 2019 to January 9, 2020. In connection with the amendment, we paid $0.5 million of principal balance and incurred approximately $40,000 of debt discounts and debt issuance costs, and pledged the net proceeds (after required payments on our Senior Secured Term Loan) of our unlevered wholly owned Red Lion Anaheim property to pay down the debt should that sale occur before completion of a sale of the Red Lion Hotel Atlanta.
We lease equipment and land and/or property at certain company operated hotel properties as well as office space for our headquarters through operating leases. We have elected the practical expedient so that leases with an initial term of 12 months or less are not recorded on the balance sheet.
We are obligated under finance leases for certain hotel equipment at our company operated hotel locations. The finance leases typically have a five year term.
Balance sheet information related to our leases is included in the following table (in thousands):
|
|
|
|
|
|
Operating Leases
|
|
September 30, 2019
|
Operating lease right-of-use assets
|
|
$
|
48,553
|
|
|
|
|
Operating lease liabilities, due within one year
|
|
$
|
4,801
|
|
Operating lease liabilities, due after one year
|
|
46,871
|
|
Total operating lease liabilities
|
|
$
|
51,672
|
|
|
|
|
|
|
|
Finance Leases
|
|
September 30, 2019
|
Property and equipment
|
|
$
|
660
|
|
Less accumulated depreciation
|
|
(402
|
)
|
Property and equipment, net
|
|
$
|
258
|
|
|
|
|
Other accrued liabilities
|
|
$
|
154
|
|
Deferred income and other long-term liabilities
|
|
123
|
|
Total finance lease liabilities
|
|
$
|
277
|
|
The components of lease expense during the three and nine months ended September 30, 2019 are included in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Statement Line Item(s)
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
Operating lease expense
|
|
Selling, general, administrative and other expenses, and Company operated hotels
|
|
$
|
1,168
|
|
|
$
|
3,444
|
|
Short-term lease expense
|
|
Selling, general, administrative and other expenses, and Company operated hotels
|
|
167
|
|
|
572
|
|
Finance lease expense
|
|
|
|
|
|
|
Amortization of finance right-of-use assets
|
|
Depreciation and amortization
|
|
35
|
|
|
104
|
|
Interest on lease liabilities
|
|
Interest expense
|
|
7
|
|
|
23
|
|
Total finance lease expense
|
|
|
|
42
|
|
|
127
|
|
|
|
|
|
|
|
|
Total lease expense
|
|
|
|
$
|
1,377
|
|
|
$
|
4,143
|
|
Supplemental cash flow information for our leases is included in the following table (in thousands):
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Nine Months Ended September 30, 2019
|
Cash used in operating activities for operating leases
|
|
$
|
3,547
|
|
Cash used in operating activities for finance leases
|
|
23
|
|
Cash used in financing activities for finance leases
|
|
104
|
|
During the second quarter of 2019, we recognized ROU assets of $181,000 and associated operating lease liabilities of $202,000 upon commencement of leases for space in our Spokane office. There were no new finance lease assets or associated liabilities during the three and nine months ended September 30, 2019.
Information related to the weighted average remaining lease terms and discount rates for our leases as of September 30, 2019 is included in the following table:
|
|
|
|
|
|
|
September 30, 2019
|
Weighted average remaining lease term (in years)
|
|
|
Operating leases
|
|
69
|
|
Finance leases
|
|
2
|
|
Weighted average discount rate
|
|
|
Operating leases
|
|
7.2
|
%
|
Finance leases
|
|
9.5
|
%
|
The future maturities of lease liabilities at September 30, 2019, are as indicated below (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
Operating Leases
|
|
Finance Leases
|
2019 (remainder)
|
|
$
|
1,197
|
|
|
$
|
43
|
|
2020
|
|
4,809
|
|
|
149
|
|
2021
|
|
4,813
|
|
|
75
|
|
2022
|
|
4,776
|
|
|
38
|
|
2023
|
|
4,739
|
|
|
11
|
|
Thereafter
|
|
248,844
|
|
|
—
|
|
Total lease payments
|
|
269,178
|
|
|
316
|
|
Less: imputed interest
|
|
217,506
|
|
|
39
|
|
|
|
$
|
51,672
|
|
|
$
|
277
|
|
The future maturities of lease liabilities in the table above do not differ materially from future minimum rental payments under the previous leasing standard.
Two leases comprise $246.3 million of future operating lease maturities beyond 2023. One is a ground lease for our Hotel RL Washington DC property with a term through 2080 and the other is a ground lease for our Red Lion Anaheim property with a lease term through 2021 but includes renewal options through 2106 that are reasonably assured to be exercised.
|
|
10.
|
Commitments and Contingencies
|
At any given time, we are subject to claims and actions incidental to the operations of our business. In the second quarter of 2019, we accrued approximately $952,000 for a settlement over a wage dispute with former hotel employees related to the calculation of pay for certain rest, break, meal, and other periods that are required under California laws. The related expense has been recognized during the second quarter in Company operated hotels expense in the Condensed Consolidated Statements of Comprehensive Income (Loss).
|
|
11.
|
Stock Based Compensation
|
Stock Incentive Plans
The 2015 Stock Incentive Plan ("2015 Plan") authorizes the grant or issuance of various stock options including restricted stock units, and other stock-based compensation. The 2015 Plan was approved by our shareholders in 2015, and amended in 2017, and as amended provides for awards of 2.9 million shares, subject to adjustments for stock splits, stock dividends and similar events. As of September 30, 2019, there were 451,140 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2015 Plan, as amended.
Stock based compensation expense reflects the fair value of stock-based awards measured at grant date, including an estimated forfeiture rate, and is recognized over the relevant service period. For the three and nine months ended September 30, 2019 and 2018 stock-based compensation expense is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Restricted stock units
|
|
$
|
581
|
|
|
$
|
841
|
|
|
$
|
1,871
|
|
|
$
|
2,033
|
|
Unrestricted stock awards
|
|
158
|
|
|
105
|
|
|
417
|
|
|
334
|
|
Performance stock units
|
|
172
|
|
|
184
|
|
|
123
|
|
|
445
|
|
Stock options
|
|
22
|
|
|
17
|
|
|
65
|
|
|
51
|
|
Employee stock purchase plan
|
|
8
|
|
|
13
|
|
|
27
|
|
|
33
|
|
Total stock-based compensation
|
|
$
|
941
|
|
|
$
|
1,160
|
|
|
$
|
2,503
|
|
|
$
|
2,896
|
|
Restricted Stock Units
Restricted stock units granted to executive officers and other key employees typically vest 25% each year for four years on each anniversary of the grant date. Under the terms of the plans upon issuance, we deliver a net settlement of distributable shares to employees after consideration of individual employees' tax withholding obligations, at the election of each employee. The fair value of restricted stock that vested during the nine months ended September 30, 2019 and 2018 was approximately $5.8 million and $2.1 million, respectively. We expect to recognize an additional $4.3 million in compensation expense over the remaining weighted average vesting periods of 22 months.
A summary of restricted stock unit activity for the nine months ended September 30, 2019, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
January 1, 2019
|
|
1,288,714
|
|
|
$
|
8.47
|
|
Granted
|
|
361,360
|
|
|
$
|
8.24
|
|
Vested
|
|
(728,014
|
)
|
|
$
|
7.49
|
|
Forfeited
|
|
(183,516
|
)
|
|
$
|
8.96
|
|
September 30, 2019
|
|
738,544
|
|
|
$
|
9.22
|
|
Performance Stock Units, Shares Issued as Compensation
We grant performance stock units ("PSUs") to certain of our executives under the 2015 Plan, as amended. These PSUs include both performance and service vesting conditions. Each performance condition has a minimum, a target and a maximum share amount based on the level of attainment of the performance condition. Compensation expense, net of estimated forfeitures, is calculated based on the estimated attainment of the performance conditions during the performance period and recognized on a straight-line basis over the performance and service periods. The remaining compensation expense related to PSUs of approximately $1.3 million will be recognized over the next 28 months.
A summary of performance stock unit activity for the nine months ended September 30, 2019, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
January 1, 2019
|
|
209,201
|
|
|
$
|
8.23
|
|
Granted
|
|
218,437
|
|
|
$
|
8.08
|
|
Forfeited
|
|
(112,954
|
)
|
|
$
|
9.75
|
|
September 30, 2019
|
|
314,684
|
|
|
$
|
7.58
|
|
Unrestricted Stock Awards
Unrestricted stock awards are granted to members of our Board of Directors as part of their compensation. Awards are fully vested, and expense is recognized when granted. The fair value of unrestricted stock awards is the market close price of our common stock on the date of the grant.
The following table summarizes unrestricted stock award activity for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Shares of unrestricted stock granted
|
|
22,075
|
|
|
9,210
|
|
|
52,986
|
|
|
32,961
|
|
Weighted average grant date fair value per share
|
|
$
|
7.19
|
|
|
$
|
11.40
|
|
|
$
|
7.89
|
|
|
$
|
10.14
|
|
|
|
12.
|
Earnings (Loss) Per Share
|
The following table presents a reconciliation of the numerators and denominators used in the basic and diluted net income (loss) per share computations for the three and nine months ended September 30, 2019 and 2018 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator - basic and diluted:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(6,447
|
)
|
|
$
|
17,613
|
|
|
$
|
(14,451
|
)
|
|
$
|
23,288
|
|
Net (income) loss attributable to noncontrolling interest
|
|
2,980
|
|
|
(8,670
|
)
|
|
4,040
|
|
|
(14,079
|
)
|
Net income (loss) attributable to RLH Corporation
|
|
$
|
(3,467
|
)
|
|
$
|
8,943
|
|
|
$
|
(10,411
|
)
|
|
$
|
9,209
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares - basic
|
|
25,112
|
|
|
24,545
|
|
|
24,859
|
|
|
24,334
|
|
Weighted average shares - diluted
|
|
25,112
|
|
|
25,729
|
|
|
24,859
|
|
|
25,437
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic
|
|
$
|
(0.14
|
)
|
|
$
|
0.36
|
|
|
$
|
(0.42
|
)
|
|
$
|
0.38
|
|
Earnings (loss) per share - diluted
|
|
$
|
(0.14
|
)
|
|
$
|
0.35
|
|
|
$
|
(0.42
|
)
|
|
$
|
0.36
|
|
The following table presents options to purchase common shares, restricted stock units outstanding, performance stock units outstanding, and warrants to purchase common shares included in the earnings per share calculation, as well as the amount excluded from the dilutive earnings per share calculation if they were considered antidilutive, for the three and nine months ended September 30, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Stock Options(1)
|
|
|
|
|
|
|
|
|
Dilutive awards outstanding
|
|
—
|
|
|
20,504
|
|
|
—
|
|
|
12,097
|
|
Antidilutive awards outstanding
|
|
81,130
|
|
|
60,626
|
|
|
81,130
|
|
|
69,033
|
|
Total awards outstanding
|
|
81,130
|
|
|
81,130
|
|
|
81,130
|
|
|
81,130
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units(2)
|
|
|
|
|
|
|
|
|
Dilutive awards outstanding
|
|
—
|
|
|
854,604
|
|
|
—
|
|
|
808,934
|
|
Antidilutive awards outstanding
|
|
738,544
|
|
|
521,348
|
|
|
738,544
|
|
|
567,018
|
|
Total awards outstanding
|
|
738,544
|
|
|
1,375,952
|
|
|
738,544
|
|
|
1,375,952
|
|
|
|
|
|
|
|
|
|
|
Performance Stock Units(3)
|
|
|
|
|
|
|
|
|
Dilutive awards outstanding
|
|
—
|
|
|
101,793
|
|
|
—
|
|
|
106,743
|
|
Antidilutive awards outstanding
|
|
314,684
|
|
|
196,728
|
|
|
314,684
|
|
|
191,778
|
|
Total awards outstanding
|
|
314,684
|
|
|
298,521
|
|
|
314,684
|
|
|
298,521
|
|
|
|
|
|
|
|
|
|
|
Warrants(4)
|
|
|
|
|
|
|
|
|
Dilutive awards outstanding
|
|
—
|
|
|
207,444
|
|
|
—
|
|
|
174,846
|
|
Antidilutive awards outstanding
|
|
442,533
|
|
|
235,089
|
|
|
442,533
|
|
|
267,687
|
|
Total awards outstanding
|
|
442,533
|
|
|
442,533
|
|
|
442,533
|
|
|
442,533
|
|
(1) All stock options for the three and nine months ended September 30, 2019 were anti-dilutive as a result of the net loss attributable to RLH Corporation for these periods. If we had reported net income for the three and nine months ended September 30, 2019, no stock options would have been dilutive as a result of the RLH Corporation weighted average share price during the reporting periods.
(2) Restricted stock units were anti-dilutive for the three and nine months ended September 30, 2019 due to our net loss in the reporting periods. If we had reported net income for the three and nine months ended September 30, 2019 then 12,771 and 337,035 units, respectively, would have been dilutive.
(3) Performance stock units are not included in the weighted average diluted shares outstanding until the performance targets are met. PSU’s were anti-dilutive for three and nine months ended September 30, 2019 as no performance targets had been achieved during those periods. Had performance targets been met for the three and nine months ended September 30, 2019 then 96,141 and 92,907 units, respectively, would have been dilutive.
(4) All warrants for the three and nine months ended September 30, 2019 were anti-dilutive due to the net loss attributable to RLH in each reporting period. If we had reported net income for the three and nine months ended September 30, 2019, 0 and 47,831 warrants, respectively, would have been dilutive.
We recognized an income tax provision (benefit) of $486,000 and $(26,000) for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018 we recognized an income tax provision (benefit) of $676,000 and $(239,000), respectively. The income tax provision varies from the statutory rate primarily due to a partial valuation allowance against our deferred tax assets, as well as deferred tax expense associated with our acquired indefinite-lived intangible assets, which are amortized for tax purposes but not for GAAP purposes.
We have state operating loss carryforwards, which expire beginning in 2019, and both federal and state tax credit carryforwards, which begin to expire in 2024.
Applicable accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure our assets and liabilities using inputs from the Level 1, Level 2 and Level 3 of the fair value hierarchy.
Cash, Restricted cash and Accounts receivable carrying values approximate fair value due to the short-term nature of these items. We estimate the fair value of our Notes receivable using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. We estimate the fair value of our Long-term debt and Operating lease obligations using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. The fair values provided below are not necessarily indicative of the amounts we or the debt holders could realize in a current market exchange. In addition, potential income tax ramifications related to the realization of gains and losses that would be incurred in an actual sale or settlement have not been taken into consideration. Estimated fair values of financial instruments are shown in the table below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Financial assets:
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
$
|
4,188
|
|
|
$
|
4,188
|
|
|
$
|
2,103
|
|
|
$
|
2,103
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
56,480
|
|
|
$
|
55,063
|
|
|
$
|
44,523
|
|
|
$
|
43,880
|
|
Total finance lease obligations
|
|
277
|
|
|
277
|
|
|
378
|
|
|
378
|
|
|
|
15.
|
Related Party Transactions
|
All three of our current joint ventures - RL Venture, RLS Atla Venture, and RLS DC Venture, and our former joint venture RLS Balt Venture, which was dissolved in October 2018 - have agreed to pay to Shelbourne Capital, LLC ("Shelbourne Capital") an investor relations fee each month equal to 0.50% of its total aggregate revenue. Shelbourne Capital is the entity that leads Shelbourne Falcon, Shelbourne Falcon II, Shelbourne Falcon III and Shelbourne Falcon IV, the noncontrolling interest holder in these joint ventures. The amount Shelbourne Capital earned from all four joint ventures during the three months ended September 30, 2019 and 2018 totaled $14,000 and $40,000, respectively. The amount Shelbourne Capital earned from all four joint ventures during the nine months ended September 30, 2019 and 2018 totaled $68,000 and $187,000, respectively. Columbia Pacific Opportunity Fund, LP ("CP"), previously one of our largest shareholders, is an investor in Shelbourne Falcon, our joint venture partner in RL Venture. During the three months ended September 30, 2019 and 2018, Shelbourne Capital earned $8,000 and $28,000, respectively, from RL Venture. During the nine months ended September 30, 2019 and 2018, Shelbourne Capital earned $50,000 and $145,000, respectively, from RL Venture. We did not pay any investor relations fees to Shelbourne Capital related to the RLS Balt Venture after October 2018.
Effective March 2016, our wholly owned subsidiary, RL Management, entered into a one-year contract to manage the Hudson Valley Resort and Spa, a hotel located in Kerhonkson, New York. Following the initial one-year term, we continued to manage the property on a month-to-month basis until October 2018. The hotel is owned by HNA Hudson Valley Resort & Training Center LLC, an affiliate of HNA RLH Investments LLC ("HNA"), previously one of our largest shareholders. Under that contract, our subsidiary is entitled to a monthly management fee equal to $8,333 or 3% of the hotel’s gross operating revenues, whichever is greater. During the three and nine months ended September 30, 2018, we recognized management fee revenue from HNA Hudson Valley Resort & Training Center LLC of $25,000 and $75,000, respectively. On June 12, 2018, HNA sold their common shares in RLH to a third party, no longer making them a related party.
On September 30, 2016, we acquired the operating assets and assumed certain liabilities relating to specified hotel brands and brand extensions from Thirty-Eight Street, Inc. ("TESI") and Vantage Hospitality Group, Inc. From the date of the acquisition, our board appointed Bernard T. Moyle, as our Executive Vice President and Chief Operating Officer and Roger J. Bloss as our Executive Vice President and President of Global Development. Messrs. Moyle and Bloss are shareholders of TESI and Vantage Hospitality.
Effective May 31, 2018, Messrs. Moyle and Bloss entered into consulting agreements through December 31, 2020, ending their employment with the Company and no longer making them a related party after the effective date. On May 21, 2018, the Company entered into a letter agreement (Letter Agreement) and a First Amendment (First Amendment) to the TESI and Vantage Hospitality purchase agreement. In accordance with the Letter Agreement and First Amendment, after the first anniversary of the closing date, we issued $4.0 million in cash and 414,000 shares of the Company’s common stock to TESI in January 2018. The Company understands that Mr. Bloss and Mr. Moyle each own 50% of the outstanding shares of TESI.
Messrs. Bloss and Moyle each additionally indirectly own a 5.7% equity interest in a limited liability company that owns the Lexington Hotel and Conference Center in Jacksonville, Florida. During the period ended May 31, 2018, the Company billed the property approximately $161,000 for franchise fees and related services, including royalty and marketing. This hotel, along with the Lexington Inn & Suites, Daytona Beach and the ABVI Las Vegas, are managed by Cal-Vegas, Ltd. ("Cal-Vegas"), of which
TESI (owned by Messrs. Bloss and Moyle) is the General Partner and holds a 2% general partner interest, and Mr. Moyle serves as the Chief Operating Officer and Chief Financial Officer. The Company and Cal-Vegas are not parties to any agreement with respect to these properties, as the management contracts are between Cal-Vegas and the Company’s franchisees, who are unrelated third parties. Cal-Vegas is also the lessee of the ABVI Las Vegas hotel. Franchise fees billed by the Company to each of these properties for the period ended May 31, 2018 were as follows: Lexington Inn & Suites, Daytona Beach, $35,000, and ABVI Las Vegas, $1,000.
During the fourth quarter of 2018, we transitioned management of our company operated Hotel RL Baltimore Inner Harbor and Hotel RL Washington DC from RL Management, Inc., to HEI Hotels and Resorts, of which one of the members of our Board of Directors, Ted Darnall, is currently the Chief Executive Officer. Additionally, during the first quarter of 2019, management of our company operated hotel Red Lion Hotel Seattle Airport was also transitioned from RL Management, Inc. to HEI Hotels and Resorts. During the three and nine months ended September 30, 2019, we paid $307,000 and $847,000, respectively, in management fees to HEI Hotels and Resorts for management of these properties.
On January 14, 2019, the Company announced the appointment of Julie Shiflett as Chief Financial Officer of RLH. Prior to this appointment, the Company paid consulting fees to NorthWest CFO, a consulting firm of which Ms. Shiflett is a Principal. Payments made to NorthWest CFO for consulting fees during the three months ended September 30, 2019 and 2018 totaled $0 and $59,000, respectively and during the nine months ended September 30, 2019 and 2018 totaled $49,000 and $289,000, respectively. The payments made during 2019 were for services rendered by NorthWest CFO in 2018. No services have been performed by NorthWest CFO on behalf of RLH subsequent to Ms. Shiflett being appointed Chief Financial Officer.
As noted in Note 8 Debt and Line of Credit, on May 31, 2019 we executed a mortgage loan with a principal and accrued exit fee of $17.5 million with CP Business Finance I, LP, an affiliate of Columbia Pacific Opportunity Fund, LP, who currently holds 500,000 shares of RLH common stock. Additionally, Alexander B. Washburn, who served as a member of our Board of Directors from May 2015 to April 2019, is one of the managing members of Columbia Pacific Advisor, LLC, which serves as the investment manager of Columbia Pacific Opportunity Fund, LP.
Knights Inn Acquisition
On May 14, 2018, Red Lion Hotels Franchising, Inc. completed the purchase of all of the issued and outstanding shares of capital stock of Knights Franchise Systems, Inc. ("KFS"), and the purchase of certain operating assets from, and assumption of certain liabilities relating to the business of franchising Knights Inn branded hotels to hotel owners from Wyndham Hotel Group Canada, ULC and Wyndham Hotel Group Europe Limited, pursuant to the Amended and Restated Purchase Agreement, dated May 1, 2018, for an aggregate purchase price of $27.2 million.
The following reflects our purchase price allocation (in thousands):
|
|
|
|
|
|
|
|
Fair Value
|
Current assets
|
|
$
|
1,288
|
|
Intangible assets
|
|
16,800
|
|
Goodwill
|
|
9,191
|
|
Total assets acquired
|
|
27,279
|
|
|
|
|
Current liabilities
|
|
30
|
|
Total liabilities acquired
|
|
30
|
|
|
|
|
Total net assets acquired
|
|
$
|
27,249
|
|
Current assets are comprised of $4.6 million in contractual value of acquired receivables, less a fair value adjustment of $3.3 million based on expected collectability.
Intangible assets acquired are as follows (in thousands):
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life
|
Brand names
|
$
|
7,700
|
|
|
Indefinite
|
Customer contracts
|
9,100
|
|
|
15 years
|
Total intangible assets
|
$
|
16,800
|
|
|
|
We recognized $9.2 million in goodwill as the result of the acquisition, recorded within our franchise reporting segment. The goodwill is deductible for income tax purposes. The factors that make up the goodwill are primarily expected synergies from combining the operations of Knights Inn with our own.
The following supplemental pro forma results are based on the individual historical results of RLH Corporation and KFS, with adjustments to give effect to the combined operations as if the acquisition had been consummated on January 1, 2018 (in thousands, except per share data) (unaudited):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
Revenue
|
|
|
$
|
110,280
|
|
Net income (loss)
|
|
|
25,219
|
|
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
|
|
|
11,140
|
|
Earnings (loss) per share attributable to RLH Corporation - basic
|
|
|
$
|
0.46
|
|
Earnings (loss) per share attributable to RLH Corporation - diluted
|
|
|
$
|
0.44
|
|
Subsequent to the balance sheet date, the due diligence periods for the sales agreement on our Red Lion Hotel Atlanta property concluded, making the agreement binding. The closing for the sale of the hotel is expected before the end of the year.