CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Red Lion Hotels Corporation ("RLHC", "we", "our", "us" or "our company") is a NYSE-listed hospitality and leisure company (ticker symbol: RLH) primarily engaged in the management, franchising and ownership of hotels under our proprietary brands, including Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse and Settle Inn & Suites (collectively the "RLHC Brands"). All of our hotels currently operate under the RLHC Brands which represent upscale, midscale and economy hotels.
A summary of our properties as of
June 30, 2016
is provided below:
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Hotels
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Total
Available
Rooms
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Company operated hotels
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Majority owned and consolidated
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15
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3,007
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Leased and consolidated
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4
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867
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Managed
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3
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684
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Franchised hotels
|
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92
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|
|
9,980
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|
Total systemwide
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114
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14,538
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We are also engaged in entertainment operations, which derive revenues from promotion and presentation of entertainment productions and ticketing services under the operations of WestCoast Entertainment and TicketsWest. The ticketing service offers online ticket sales, ticketing inventory management systems, call center services, and outlet/electronic distributions for event locations.
We were incorporated in the state of Washington in April 1978.
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2.
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Summary of Significant Accounting Policies
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The unaudited consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Certain information and footnote disclosures normally included in 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, 2015
has been compiled 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, 2015
, filed with the SEC on Form 10-K on March 1, 2016.
In the opinion of management, these unaudited condensed consolidated financial statements contain all of the adjustments of a normal and recurring nature necessary to present fairly our consolidated financial position at
June 30, 2016
, the consolidated statements of operations for the
three and six months ended
June 30, 2016
and
2015
, and the consolidated cash flows for the
six
months ended
June 30, 2016
and
2015
. 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.
Comprehensive income (loss) is the same as net income (loss) for all periods presented. Therefore, a separate statement of comprehensive income (loss) is not included in the accompanying consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include all accounts of RLHC and its wholly and majority-owned subsidiaries. All inter-company and inter-segment transactions and accounts have been eliminated upon consolidation.
The financial statements encompass the accounts of Red Lion Hotels Corporation and all of its consolidated subsidiaries, including:
Wholly-owned subsidiaries:
•
Red Lion Hotels Holdings, Inc.
•
Red Lion Hotels Franchising, Inc.
•
Red Lion Hotels Management, Inc. ("RL Management")
•
Red Lion Hotels Limited Partnership
Joint venture entities:
•
RL Venture LLC ("RL Venture") in which we hold a
55%
member interest
•
RLS Atla Venture LLC ("RLS Atla Venture") in which we hold a
55%
member interest
•
RLS Balt Venture LLC ("RLS Balt Venture") in which we hold a
73%
member interest
•
RLS DC Venture LLC ("RLS DC Venture") in which we hold a
55%
member interest
Cash and Cash Equivalents
All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. At times, cash balances at banks and other financial institutions may be in excess of federal insurance limits.
Restricted Cash
In accordance with our various borrowing arrangements, at
June 30, 2016
cash of
$10.0 million
was held primarily as reserves for debt service (interest only), property improvements, and other requirements from the lenders.
Short-Term Investments
Short-term investments consist of variable rate demand notes with maturities that range from
two
to
thirty-five
years. They are all classified as available-for-sale investments and have been further classified as short term as the investments contain options which allow us to put them to the trustee with one day's to one week's notice. The carrying amounts are reasonable estimates of their fair values due to interest rates which are variable in nature and the put provision at par plus accrued interest.
Allowance for Doubtful Accounts
The ability to collect individual accounts receivable is reviewed on a routine basis. An allowance for doubtful accounts is recorded based on specifically identified amounts believed to be uncollectible. If actual collection experience changes, revisions to the allowance may be required, and, if all attempts to collect a receivable fail, it is recorded against the allowance. The estimate of the allowance for doubtful accounts may be impacted by, among other things, national and regional economic conditions.
The following schedule summarizes the activity in the allowance account for trade accounts receivable:
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Six Months Ended June 30,
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2016
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2015
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(In thousands)
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Allowance for doubtful accounts
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Balance, January 1
|
$
|
657
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$
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303
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Additions to allowance
|
102
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|
103
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Write-offs, net of recoveries
|
11
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|
(110
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)
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Balance, June 30
|
$
|
770
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|
$
|
296
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Inventories
Inventories consist primarily of food and beverage products held for sale at the company-operated restaurants and guest supplies. Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or net realizable value.
Prepaid and other expenses
Prepaid and other expenses include prepaid insurance and taxes and deposits.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. The cost of improvements that extend the life of property and equipment is capitalized. Repairs and maintenance charges are expensed as incurred.
Depreciation is provided using the straight-line method over the estimated useful life of each asset, which ranges as follows:
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Buildings
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25 to 39 years
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Equipment
|
2 to 15 years
|
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Furniture and fixtures
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2 to 15 years
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Landscaping and improvements
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15 years
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Leasehold improvements are capitalized and depreciated over the term of the applicable lease, including renewable periods if reasonably assured, or over the useful lives, whichever is shorter.
Valuation of Long-Lived Assets
We test long-lived asset groups for recoverability when changes in circumstances indicate the carrying value may not be recoverable, for example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, or significant negative industry or economic trends. We also perform a test for recoverability when management has committed to a plan to sell or otherwise dispose of an asset group. We evaluate recoverability of an asset group by comparing its carrying value to the future net undiscounted cash flows that we expect will be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value. When we recognize an impairment loss for assets to be held and used, we depreciate the adjusted carrying amount of those assets over their remaining useful life.
We base our calculations of the estimated fair value of an asset group on the income approach or the market approach. The assumptions and methodology utilized for the income approach are the same as those described in the "Goodwill and Intangible Assets" caption. For the market approach, we use analyses based primarily on market comparables, recent appraisals and assumptions about market capitalization rates, growth rates, and inflation.
Variable Interest Entities
We analyze the investments we make in joint venture entities based on the accounting guidance for variable interest entities ("VIEs"). These joint ventures are evaluated to determine whether (1) sufficient equity at risk exists for the legal entity to finance its activities without additional subordinated financial support or, (2) as a group, the holders of the equity investment at risk lack one of the following characteristics (a) the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance or, (b) the obligation to absorb the expected losses of the legal entity or (c) the right to receive expected residual returns of the legal entity, or (3) the voting rights of some equity investors are not proportional to their obligations to absorb the losses or the right to receive benefits and substantially all of the activities either involve or are conducted on behalf of an investor with disproportionately few voting rights. If any one of the above three conditions are met then the joint venture entities are considered to be VIEs.
We consolidate the results of any such VIE in which we determine that we have a controlling financial interest. We would have a “controlling financial interest” (i.e., be deemed the primary beneficiary) in such an entity if we had both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive the benefits from, the VIE that could be potentially significant to the VIE.
Business Combinations
On the date of acquisition, the assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree are recorded at their fair values. The acquiree's results of operations are also included as of the date of acquisition in our consolidated results. Intangible assets that arise from contractual/legal rights, or are capable of being separated are measured and recorded at fair value, and amortized over the estimated useful life. If practicable, assets acquired and liabilities assumed arising from contingencies are measured and recorded at fair value. If not practicable, such assets and liabilities are measured and recorded when it is probable that a gain or loss has occurred and the amount can be reasonably estimated. The residual balance of the purchase price, after fair value allocations to all identified assets and liabilities, represents goodwill. Acquisition-related costs are expensed as incurred. Restructuring costs associated with an acquisition are generally expensed in periods subsequent to the acquisition date, and changes in deferred tax asset valuation allowances and acquired income tax uncertainties, including penalties and interest, after the measurement period are recognized as a component of the provision for income taxes. Our acquisitions may include contingent consideration, which require us to recognize the fair value of the estimated liability at the time of the acquisition.
Subsequent changes in the estimate of the amount to be paid under the contingent consideration arrangement are recognized in the consolidated statements of operations. Cash payments for contingent or deferred consideration up to the amount of liability recognized on the acquisition date are classified within cash flows from financing activities within the consolidated statements of cash flows and any excess is classified as cash flows from operating activities.
Goodwill and Intangible Assets
Goodwill and intangible assets may result from our business acquisitions. Intangible assets may also result from the purchase of assets and intellectual property in a transaction that does not qualify as a business combination. We use estimates, including estimates of useful lives of intangible assets, the amount and timing of related future cash flows, and fair values of the related operations, in determining the value assigned to goodwill and intangible assets. Our finite-lived intangible assets are amortized over their expected useful lives based on estimated discounted cash flows. Our brand name and trademark assets are considered indefinite-lived intangible assets and are not subject to amortization. Finite-lived intangible assets are tested for impairment at the asset group level when events or changes in circumstances indicate the carrying value may not be recoverable. Indefinite-lived intangible assets are tested for impairment annually, when events or changes in circumstances indicate the asset may be impaired, or at the time when their useful lives are determined to be no longer indefinite.
Goodwill is assigned to our reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics, including the forecast discounted cash flows associated with each reporting unit. The reporting units are aligned with our reporting segments.
We test goodwill for impairment each year as of October 1, or more frequently should a significant impairment indicator occur. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with the two-step impairment test. The impairment test involves comparing the fair values of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss amount. This second step determines the current fair values of all assets and liabilities of the reporting unit and then compares the implied fair value of the reporting unit's goodwill to the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We forecast discounted future cash flows at the reporting unit level using risk-adjusted discount rates and estimated future revenues and operating costs, which take into consideration factors, such as expectations of competitive and economic environments. We also identify similar publicly traded companies and develop a correlation, referred to as a multiple, to apply to the operating results of the reporting units. These combined fair values are then reconciled to the aggregate market value of our common stock on the date of valuation, while considering a reasonable control premium.
Notes Receivable
We carry notes receivable at their estimated collection amount, and they are classified as either current or long-term depending on the expected collection date. Interest income on notes receivable is recognized using the interest method.
Other Assets
Other assets primarily consist of key money arrangements and IT system implementation costs, both of which are associated with our franchisees. We recognize key money paid in conjunction with entering into long-term franchise agreements as prepaid expenses and amortize the amount paid as a reduction of revenue over the term of the franchise agreements. IT system implementation costs represent costs incurred to implement RevPAK applications for new franchises and are amortized over the initial term of the software license arrangement.
Fair Value Measurements
Applicable accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure our assets and liabilities using inputs from the following three levels of the fair value hierarchy:
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•
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Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
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•
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Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
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•
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Level 3 includes unobservable inputs that reflect assumptions about what factors market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.
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Deferred Income
In 2003, we sold a hotel to an unrelated party in a sale-operating leaseback transaction. The pre-tax gain on the transaction of approximately
$7.0 million
was deferred and is being amortized into income over the period of the lease term, which expires in November 2018 and is renewable for
three
,
five
-year terms at our option. During the
six
months ended
June 30, 2016
and
2015
, we recognized income of approximately
$0.2 million
each period for the amortization of the deferred gain. The remaining balance at
June 30, 2016
, was
$1.1 million
.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning, and results of recent operations. At
June 30, 2016
and
December 31, 2015
, a valuation allowance has been recorded to reduce our deferred tax assets to an amount that is more likely than not to be realized. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We classify any interest expense and penalties related to underpayment of taxes and any interest income on tax overpayments as components of income tax expense.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. See Note 10.
Revenue Recognition
Revenue is generally recognized as services are provided. When payments from customers are received before services have been performed, the amount received is recorded as deferred revenue until the service has been completed. We recognize revenue from the following sources:
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•
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Company-Operated Hotels
- Room rental and food and beverage sales from majority owned and leased hotels and management fees from hotels under management contract. Revenues are recognized when services have been performed, generally at the time of the hotel stay or guest's visit to the restaurant or at the time the management services are provided. We recognize other revenue and costs from managed properties when we incur the related reimbursable costs. These costs primarily consist of payroll and related expenses at managed properties where we are the employer. As these costs have no added markup, the revenue and related expense have no impact on either our operating or net income.
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•
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Franchised Hotels
- Fees received in connection with the franchise and marketing of our brand names. Franchise revenues are recognized as earned in accordance with the contractual terms of the franchise agreements.
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•
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Entertainment
- Online ticketing services, ticketing inventory management systems, promotion of Broadway-style shows and other special events. Where we act as an agent and receive a net fee or commission, revenue is recognized in the period the services are performed. When we are the promoter of an event and are at-risk for the production, revenues and expenses are recorded in the period of the event performance.
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Advertising and Promotion
Costs associated with advertising and promotional efforts are generally expensed as incurred. During the
six
months ended
June 30, 2016
and
2015
we incurred approximately
$3.1 million
and
$2.3 million
in advertising expense.
Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share attributable to RLHC is computed by dividing income (loss) attributable to RLHC by the weighted-average number of shares outstanding during the period. Diluted earnings (loss) per share attributable to RLHC gives effect to all dilutive potential shares that are outstanding during the period and include outstanding stock options, other outstanding employee equity grants and warrants, by increasing the weighted-average number of shares outstanding by their effect. When we report a net loss during the period, basic and diluted earnings (loss) per share are the same. See Note 12.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates.
Restatement for Cash Flow Misclassification
During the fourth quarter of 2015, we identified a cash flow misclassification related to the proceeds from the sales of interests in our joint venture entities during the periods ended March 31 and June 30, 2015. This error did not affect net income, stockholders' equity, cash flows from operations or the net increase or decrease in cash and cash equivalents for the period. The classification error incorrectly included these cash inflows as investing activities when they should have been classified as inflows from financing activities in the Consolidated Statement of Cash Flows for the six months ended June 30, 2015. In accordance with the SEC Staff Accounting Bulletin (SAB) No. 99, "Materiality," and SAB No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements," we evaluated the materiality of the error from qualitative and quantitative perspectives and concluded that the error was immaterial to the current and prior interim period. Consequently, the Consolidated Statement of Cash Flows contained in this Report has been restated for the six months ended June 30, 2015. This change resulted in a decrease of
$19.1 million
from cash flows provided by investing activities and a corresponding increase to cash inflows from financing activities.
New and Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers
, which is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption beginning January 1, 2017. We are continuing our evaluation of this guidance, and its amendments, and our method of adoption.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The ASU is designed to improve the accounting for share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment awards are simplified with this ASU, including income tax consequences, classification of awards as equity or liabilities and classification on the statement of cash flows. ASU 2016-09 will be effective for public business entities for annual periods beginning
after December 15, 2016, and interim periods within those fiscal years. We plan to adopt ASU 2016-09 effective January 1, 2017 and will provide the necessary disclosures beginning with our Form 10-Q for the period ending March 31, 2017. We do not anticipate the adoption of ASU 2016-09 will have a material impact on our financial condition or results of operations.
We have assessed the potential impact of other recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to us or are not anticipated to have a material impact on our consolidated financial statements.
3. Business Segments
As of
June 30, 2016
, we had
three
reporting segments: company operated hotels, franchised hotels and entertainment. The "other" segment consists of miscellaneous revenues and expenses, cash and cash equivalents, certain receivables, certain property and equipment and general and administrative expenses, which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense, income taxes and certain corporate expenses; therefore, they have not been allocated to the operating segments. All balances have been presented after the elimination of inter-segment and intra-segment revenues and expenses.
Selected financial information is provided below (in thousands):
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|
Three months ended June 30, 2016
|
|
Company Operated Hotels
|
|
Franchised Hotels
|
|
Entertainment
|
|
Other
|
|
Total
|
|
Revenue
|
|
$
|
33,789
|
|
|
$
|
4,131
|
|
|
$
|
7,047
|
|
|
$
|
12
|
|
|
$
|
44,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating expenses
|
|
$
|
25,652
|
|
|
$
|
3,464
|
|
|
$
|
6,140
|
|
|
$
|
9
|
|
|
$
|
35,265
|
|
|
Depreciation and amortization
|
|
3,545
|
|
|
100
|
|
|
49
|
|
|
343
|
|
|
4,037
|
|
|
Other operating expenses and gains on asset dispositions
|
|
1,066
|
|
|
1
|
|
|
—
|
|
|
2,301
|
|
|
3,368
|
|
|
Operating income (loss)
|
|
$
|
3,526
|
|
|
$
|
566
|
|
|
$
|
858
|
|
|
$
|
(2,641
|
)
|
|
$
|
2,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
12,844
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
1,017
|
|
|
$
|
13,868
|
|
|
Identifiable assets as of June 30, 2016
|
|
$
|
264,460
|
|
|
$
|
21,222
|
|
|
$
|
5,238
|
|
|
$
|
10,005
|
|
|
$
|
300,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2015
|
|
Company Operated Hotels
|
|
Franchise Hotels
|
|
Entertainment
|
|
Other
|
|
Total
|
|
Revenue
|
|
$
|
31,312
|
|
|
$
|
3,229
|
|
|
$
|
2,060
|
|
|
$
|
12
|
|
|
$
|
36,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating expenses
|
|
$
|
23,182
|
|
|
$
|
3,031
|
|
|
$
|
2,249
|
|
|
$
|
9
|
|
|
$
|
28,471
|
|
|
Depreciation and amortization
|
|
2,773
|
|
|
168
|
|
|
62
|
|
|
141
|
|
|
3,144
|
|
|
Other operating expenses and gains on asset dispositions
|
|
1,506
|
|
|
—
|
|
|
—
|
|
|
2,800
|
|
|
4,306
|
|
|
Operating income (loss)
|
|
$
|
3,851
|
|
|
$
|
30
|
|
|
$
|
(251
|
)
|
|
$
|
(2,938
|
)
|
|
$
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
4,848
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
814
|
|
|
$
|
5,670
|
|
|
Identifiable assets as of December 31, 2015
|
|
$
|
255,876
|
|
|
$
|
20,180
|
|
|
$
|
5,256
|
|
|
$
|
5,906
|
|
|
$
|
287,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2016
|
|
Company Operated Hotels
|
|
Franchised Hotels
|
|
Entertainment
|
|
Other
|
|
Total
|
|
Revenue
|
|
$
|
59,124
|
|
|
$
|
7,427
|
|
|
$
|
11,078
|
|
|
$
|
25
|
|
|
$
|
77,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating expenses
|
|
$
|
48,438
|
|
|
$
|
6,820
|
|
|
$
|
9,577
|
|
|
$
|
21
|
|
|
$
|
64,856
|
|
|
Depreciation and amortization
|
|
6,864
|
|
|
14
|
|
|
103
|
|
|
559
|
|
|
7,540
|
|
|
Other operating expenses and gains on asset dispositions
|
|
2,111
|
|
|
1
|
|
|
—
|
|
|
5,356
|
|
|
7,468
|
|
|
Operating income (loss)
|
|
$
|
1,711
|
|
|
$
|
592
|
|
|
$
|
1,398
|
|
|
$
|
(5,911
|
)
|
|
$
|
(2,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
19,911
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
1,127
|
|
|
$
|
21,042
|
|
|
Identifiable assets as of June 30, 2016
|
|
$
|
264,460
|
|
|
$
|
21,222
|
|
|
$
|
5,238
|
|
|
$
|
10,005
|
|
|
$
|
300,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2015
|
|
Company Operated Hotels
|
|
Franchise Hotels
|
|
Entertainment
|
|
Other
|
|
Total
|
|
Revenue
|
|
$
|
55,247
|
|
|
$
|
5,322
|
|
|
$
|
5,736
|
|
|
$
|
23
|
|
|
$
|
66,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating expenses
|
|
$
|
44,266
|
|
|
$
|
5,407
|
|
|
$
|
5,375
|
|
|
$
|
17
|
|
|
$
|
55,065
|
|
|
Depreciation and amortization
|
|
5,534
|
|
|
179
|
|
|
136
|
|
|
270
|
|
|
6,119
|
|
|
Other operating expenses and gains on asset dispositions
|
|
(13,384
|
)
|
|
—
|
|
|
—
|
|
|
5,202
|
|
|
(8,182
|
)
|
|
Operating income (loss)
|
|
$
|
18,831
|
|
|
$
|
(264
|
)
|
|
$
|
225
|
|
|
$
|
(5,466
|
)
|
|
$
|
13,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
6,577
|
|
|
$
|
8
|
|
|
$
|
88
|
|
|
$
|
1,109
|
|
|
$
|
7,782
|
|
|
Identifiable assets as of December 31, 2015
|
|
$
|
255,876
|
|
|
$
|
20,180
|
|
|
$
|
5,256
|
|
|
$
|
5,906
|
|
|
$
|
287,218
|
|
4. Variable Interest Entities
Our joint venture entities have been determined to be variable interest entities ("VIEs"), and RLHC has been determined to be the primary beneficiary of each VIE. Therefore, we consolidate the assets, liabilities, and results of operations of (1) RL Venture, (2) RLS Balt Venture, (3) RLS Atla Venture and (4) RLS DC Venture. See Note 2 for discussion of the significant judgments and assumptions made by us in determining whether an entity is a VIE and if we are the primary beneficiary and therefore must consolidate the VIE. See Note 7 for further discussion of the terms of the long-term debt at each of the joint venture entities.
RL Venture
In January 2015, we transferred
12
of our wholly-owned hotels into RL Venture, a newly created entity that was initially wholly-owned by us. Subsequently, we sold a
45%
ownership stake in RL Venture to Shelbourne Falcon RLHC Hotel Investors LLC ("Shelbourne Falcon"), an entity that is led by Shelbourne Capital LLC ("Shelbourne"). We maintain a
55%
interest in RL Venture, and the
12
hotels are managed by RL Management, one of our wholly-owned subsidiaries, subject to a management agreement. RL Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RL Venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over two of the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon, which does not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our
55%
equity interest and management fees. As a result, we consolidate RL Venture. The equity interest owned by Shelbourne Falcon is reflected as noncontrolling interest in the consolidated financial statements. When ownership changes without a loss of control, GAAP requires the difference between consideration received and the carrying amount of a noncontrolling interest to be recorded in equity. Accordingly, we recognized
$12.4 million
upon sale of the equity interests as a reduction to RLHC's additional paid in capital.
Cash distributions are made periodically based on calculated distributable income. In 2016, RL Venture made cash distributions during the
second
quarter totaling
$4.0 million
, of which we received
$2.2 million
. There were
no
cash distributions during the first quarter of 2016.
Refer to Note 7 for further discussion of the long-term debt of RL Venture.
RLS Balt Venture
In April 2015, we sold a
21%
member interest in our wholly-owned RLS Balt Venture to Shelbourne Falcon Charm City Investors LLC ("Shelbourne Falcon II"), an entity led by Shelbourne. Shelbourne Falcon II had an option exercisable until December 31, 2015 to purchase an additional
24%
member interest for
$2.3 million
. In December 2015, Shelbourne Falcon II elected to purchase additional member interests of
6%
based on an aggregate purchase price of
$560,000
. With the sale of additional member interest without a corresponding change in control,
$0.1 million
was recognized as an increase in RLHC's additional paid in capital. RL Baltimore, LLC ("RL Baltimore"), which is wholly-owned by RLS Balt Venture, owns the Hotel RL Baltimore Inner Harbor, which is managed by RL Management. RLS Balt Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RLS Balt Venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon II , which does not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our
73%
equity interest and management fees. As a result, we consolidate RLS Balt Venture. The equity interest owned by Shelbourne Falcon II is reflected as a noncontrolling interest in the consolidated financial statements.
In October 2015, RLHC provided
$1.5 million
to RLS Balt Venture to fund renovation costs and for operating losses. This funding was not treated as a loan or as a capital contribution. Rather, it is a long-term obligation of RLS Balt Venture and will be repaid only when the Baltimore hotel property is sold or when RLS Balt Venture is liquidated. Upon such an event, RLHC will receive the
$1.5 million
plus a preferred return of
11%
, compounded annually, prior to any liquidation proceeds being returned to the members.
Cash distributions are made periodically based on calculated distributable income. There were
no
cash distributions made during the
six
months ended
June 30, 2016
.
Refer to Note 7 for further discussion of the long-term debt of RLS Balt Venture.
RLS Atla Venture
In September 2015, we formed a joint venture, RLS Atla Venture, with Shelbourne Falcon Big Peach Investors LLC ("Shelbourne Falcon III"), an entity led by Shelbourne. We own a
55%
interest in the joint venture and Shelbourne Falcon III owns a
45%
interest. RLH Atlanta LLC ("RLH Atlanta"), which is wholly-owned by RLS Atla Venture, owns a hotel adjacent to the Atlanta International Airport that opened in April 2016 as the Red Lion Hotel Atlanta International Airport. RLS Atla Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RLS Atla Venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon III, which does not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our
55%
equity interest and management fees. As a result, we consolidate RLS Atla Venture. The equity interest owned by Shelbourne Falcon III is reflected as a noncontrolling interest in the consolidated financial statements.
Cash distributions are made periodically based on calculated distributable income. There were
no
cash distributions made during the
six
months ended
June 30, 2016
.
Refer to Note 7 for further discussion of the long-term debt of RLS Atla Venture.
RLS DC Venture
In October 2015, we formed a joint venture, RLS DC Venture, with Shelbourne Falcon DC Investors LLC ("Shelbourne Falcon IV"), an entity led by Shelbourne. Initially, we owned an
86%
interest in the joint venture, and Shelbourne Falcon IV owned a
14%
interest. On October 29, 2015, RLH DC LLC ("RLH DC"), which is wholly-owned by RLS DC Venture, acquired
100%
of The Quincy, an existing hotel business now operated as the Hotel RL Washington DC, in a business combination. The property is managed by RL Management. RLS DC Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest, and substantially all of RLS DC Venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon IV, which does not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our equity interest and management fees. As a result, we consolidate RLS DC Venture. The equity interest owned by Shelbourne Falcon IV is reflected as a noncontrolling interest in the consolidated financial statements.
As part of the organization of RLS DC Venture, Shelbourne Falcon IV had an option to purchase from us up to an additional
31%
of the member interests. On February 3, 2016, Shelbourne Falcon IV elected to purchase from us an additional
15%
of the member interests of RLS DC Venture, based on an aggregate purchase price of
$1.5 million
. With the sale of the additional member interest without a corresponding change in control
$0.2 million
was recognized as an increase in additional paid in capital in February 2016. On April 1, 2016, Shelbourne Falcon IV exercised the remaining option and purchased from us an additional
16%
of the member interests of RLS DC Venture for
$1.7 million
, which resulted in a further increase of
$0.3 million
was recognized as a reduction to RLHC's additional paid in capital, as we continue to consolidate RLS DC Venture since we are the primary beneficiary. Following the April 1, 2016 transaction, we now own
55%
of RLS DC Venture, and Shelbourne Falcon IV owns
45%
. Shelbourne Falcon IV is still considered a noncontrolling interest in the consolidated financial statements.
Cash distributions are made periodically based on calculated distributable income. There were
no
cash distributions made during the
six
months ended
June 30, 2016
.
Refer to Note 7 for further discussion of the long-term debt of RLS DC Venture.
5. Property and Equipment and Assets Held for Sale
Property and equipment is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
Buildings and equipment
|
|
$
|
235,531
|
|
|
$
|
217,787
|
|
|
Furniture and fixtures
|
|
35,485
|
|
|
32,821
|
|
|
Landscaping and land improvements
|
|
7,571
|
|
|
7,253
|
|
|
|
|
278,587
|
|
|
257,861
|
|
|
Less accumulated depreciation
|
|
(128,473
|
)
|
|
(123,084
|
)
|
|
|
|
150,114
|
|
|
134,777
|
|
|
Land
|
|
43,194
|
|
|
43,242
|
|
|
Construction in progress
|
|
11,651
|
|
|
17,371
|
|
|
Property and equipment, net
|
|
$
|
204,959
|
|
|
$
|
195,390
|
|
As of June 30, 2016 the Red Lion Hotel Coos Bay property, in Coos Bay, Oregon (which is part of our company operated hotels segment) was classified as an asset held for sale based on our expectation to sell the property before the end of 2016. The property and equipment is included in the classification of assets held for sale on the consolidated balance sheets, the premises and equipment classification details are in the table below, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
Buildings and equipment
|
|
$
|
2,907
|
|
|
Furniture and fixtures
|
|
1,002
|
|
|
Landscaping and land improvements
|
|
74
|
|
|
|
|
3,983
|
|
|
Less accumulated depreciation
|
|
(2,137
|
)
|
|
|
|
1,846
|
|
|
Land
|
|
2,055
|
|
|
Construction in progress
|
|
41
|
|
|
Property and equipment, net
|
|
$
|
3,942
|
|
6. Goodwill and Intangible Assets
Goodwill represents the excess of the estimated fair value of the net assets acquired during business combinations over the net tangible and identifiable intangible assets acquired. Goodwill was recorded in prior years in connection with the acquisitions of franchises and entertainment businesses.
The Red Lion and GuestHouse brand names are identifiable, indefinite-lived intangible assets that represent the separable legal right to a trade name and associated trademarks. We acquired the Red Lion brand name in a business combination we entered into in 2001. We purchased the GuestHouse and Settle Inn & Suites brand names from GuestHouse International LLC in April 2015 and allocated to them
$5.5 million
of the total purchase price potentially payable in that transaction.
In the table below, the customer contracts represent the franchise license agreements acquired with the GuestHouse International transaction. We allocated
$3.3 million
of the total purchase price to these contracts. Franchise license agreements are amortized over
10 years
which represents the period of expected cash flows, using an accelerated amortization method that matches the economic benefit of the agreements.
In the third quarter of 2015, we determined that the
$1.5 million
of contingent consideration potentially payable to GuestHouse International LLC had not been earned and reduced our allocation of the purchase price by that amount.
We estimated the fair value of our customer contracts and brand names purchased from GuestHouse International using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. See Note 13 for additional information.
We assess goodwill and the other intangible assets for potential impairments annually as of October 1, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the assets. We did not impair any goodwill or intangible assets during the
six months ended
June 30, 2016
or
2015
.
The following table summarizes the balances of goodwill and other intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Goodwill
|
$
|
8,512
|
|
|
$
|
8,512
|
|
|
Intangible assets
|
|
|
|
|
Brand names
|
$
|
12,460
|
|
|
$
|
12,314
|
|
|
Customer contracts
|
2,697
|
|
|
2,853
|
|
|
Trademarks
|
134
|
|
|
134
|
|
|
Total intangible assets
|
$
|
15,291
|
|
|
$
|
15,301
|
|
Goodwill and other intangible assets attributable to each of our business segments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
|
|
|
Other
|
|
|
|
Other
|
|
|
Goodwill
|
|
Intangibles
|
|
Goodwill
|
|
Intangibles
|
|
Company operated hotels
|
$
|
—
|
|
|
$
|
4,659
|
|
|
$
|
—
|
|
|
$
|
4,659
|
|
|
Franchised hotels
|
5,351
|
|
|
10,626
|
|
|
5,351
|
|
|
10,636
|
|
|
Entertainment
|
3,161
|
|
|
6
|
|
|
3,161
|
|
|
6
|
|
|
Total
|
$
|
8,512
|
|
|
$
|
15,291
|
|
|
$
|
8,512
|
|
|
$
|
15,301
|
|
The following table summarizes the balances of amortized customer contracts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
|
Historical cost
|
$
|
3,273
|
|
|
$
|
3,420
|
|
|
Accumulated amortization
|
(576
|
)
|
|
(567
|
)
|
|
Net carrying amount
|
$
|
2,697
|
|
|
$
|
2,853
|
|
As of
June 30, 2016
, estimated future amortization expenses related to intangible assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Amount
|
|
2016 (remainder)
|
$
|
295
|
|
|
2017
|
531
|
|
|
2018
|
433
|
|
|
2019
|
366
|
|
|
2020
|
307
|
|
|
Thereafter
|
765
|
|
|
Total
|
$
|
2,697
|
|
7. Long-Term Debt
The current and non-current portions of long-term debt as of
June 30, 2016
and
December 31, 2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
|
|
Current
|
|
Non-Current
|
|
Current
|
|
Non-Current
|
|
RL Venture Holding
|
|
$
|
5,838
|
|
|
$
|
59,029
|
|
|
$
|
—
|
|
|
$
|
56,307
|
|
|
RL Baltimore
|
|
—
|
|
|
13,300
|
|
|
—
|
|
|
13,300
|
|
|
RLH Atlanta
|
|
—
|
|
|
9,400
|
|
|
—
|
|
|
6,000
|
|
|
RLH DC
|
|
—
|
|
|
15,530
|
|
|
—
|
|
|
15,165
|
|
|
Total debt
|
|
5,838
|
|
|
97,259
|
|
|
—
|
|
|
90,772
|
|
|
Unamortized debt issuance costs
|
|
—
|
|
|
(2,728
|
)
|
|
—
|
|
|
(3,215
|
)
|
|
Total debt net of unamortized debt issuance costs
|
|
$
|
5,838
|
|
|
$
|
94,531
|
|
|
$
|
—
|
|
|
$
|
87,557
|
|
The collateral for each of the borrowings within the joint venture entities is the assets and proceeds of each respective entity.
RL Venture
In January 2015, RL Venture Holding LLC, a wholly-owned subsidiary of RL Venture, and each of its
12
wholly-owned subsidiaries entered into a loan agreement with Pacific Western Bank. The original principal amount of the loan was
$53.8 million
with an additional
$26.2 million
to be drawn over a
two
-year period to cover property improvements related to the
12
hotels owned by the subsidiaries. We drew
$2.5 million
during the year ended December 31, 2015 and
$8.6 million
in the
six
months ended
June 30, 2016
. At
June 30, 2016
, the remaining amount of funds available to draw on the loan was
$15.1 million
, and the property improvement work must be completed by January 15, 2017. There were unamortized debt issuance fees of
$1.6 million
at
June 30, 2016
.
The loan matures in January 2019 and has a
one
-year extension option. Interest under the advanced portions of the loan is payable monthly at LIBOR plus
4.75%
. Fixed monthly principal payments begin in January 2017 in an amount that will repay the outstanding principal balance over a
twenty-five
year amortization period. The amount classified as current was
$5.8 million
, which includes an estimated
$5.2 million
of debt, which must be repaid upon the sale of the Coos Bay property, in accordance with the repayment requirements of the debt agreement. The estimate is based upon the expected proceeds from the sale of the property multiplied by the required repayment percentage.
The liabilities of RL Venture, other than its debt, are non-recourse to our general credit and assets. The debt is non-recourse as to RLHC, but several investors in RL Venture, including us, are guarantors regarding completion of certain improvements to the hotels, environmental covenants in the loan agreement, losses incurred by the lender and in the event of a voluntary bankruptcy filing involving RL Venture, any of its subsidiaries or the guarantors. RLHC has no other obligation to provide financial support to RL Venture.
The loan requires us to comply with customary reporting and operating covenants applicable to RL Venture, including requirements relating to debt service loan coverage ratios. It also includes customary events of default. We were in compliance with these covenants at
June 30, 2016
.
At
June 30, 2016
, we classified
$5.2 million
of debt to current based on the expected sale of the Coos Bay property, in accordance with the repayment requirements of the loan agreement.
RL Baltimore
In April 2015, RL Baltimore obtained a new mortgage loan from PFP Holding Company IV LLC, an affiliate of Prime Finance, secured by the Hotel RL Baltimore Inner Harbor. The initial principal amount of the loan was
$10.1 million
, and the lender agreed to advance an additional
$3.2 million
to cover expenses related to improvements to the hotel, which we drew during the year ended December 31, 2015. At
June 30, 2016
, there were unamortized debt issuance fees of
$0.6 million
.
The loan matures in May 2018 and has
two
one
-year extension options. Interest under the advanced portions of the loan is payable monthly at LIBOR plus
6.25%
. No principal payments are required during the initial term of the loan. Principal payments of
$16,000
per month are required beginning in May 2018 if the extension option is exercised.
The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default. The liability of RL Baltimore under the loan agreement is generally non-recourse. However, the lender may obtain a monetary judgment against RL Baltimore if the lender suffers losses under certain
circumstances listed in the loan agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations. RLHC has guaranteed these recourse obligations of RL Baltimore and agreed to customary reporting and operating covenants. We were in compliance with these covenants at
June 30, 2016
.
RLH Atlanta
In September 2015, RLH Atlanta obtained a new mortgage loan from PFP Holding Company IV LLC, secured by a hotel adjacent to the Atlanta International Airport, which opened in April 2016 as the Red Lion Hotel Atlanta International Airport. The initial principal amount of the loan was
$6.0 million
, and the lender agreed to advance an additional
$3.4 million
to cover expenses related to improvements to the hotel, which we drew in the
six
months ended
June 30, 2016
, and resulted in the loan being fully disbursed. At
June 30, 2016
, there were unamortized debt issuance fees of
$0.2 million
.
The loan matures in September 2018 and has
two
one
-year extension options. Interest under the advanced portions of the loan is payable monthly at LIBOR plus
6.35%
. No principal payments are required during the initial term of the loan.
The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default. The liability of RLH Atlanta under the loan agreement is generally non-recourse. However, the lender may obtain a monetary judgment against RLH Atlanta if the lender suffers losses under certain circumstances listed in the loan agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations. RLHC has guaranteed these recourse obligations of RLH Atlanta and agreed to customary reporting and operating covenants. We were in compliance with these covenants at
June 30, 2016
.
RLH DC
In October 2015, RLH DC obtained a new mortgage loan from Pacific Western Bank secured by the Hotel RL Washington DC. The initial principal amount of the loan was
$15.2 million
, and the lender agreed to advance an additional
$2.3 million
to cover expenses related to improvements to the hotel. We drew
$0.4 million
in additional funds during the
six
months ended
June 30, 2016
. At
June 30, 2016
, the remaining amount of funds available to draw on the loan was
$1.9 million
, and there were unamortized debt issuance costs of
$0.4 million
.
The loan matures in October 2019 and has a
one
-year extension option. Interest under the advanced portions of the loan is payable monthly at LIBOR plus
4.55%
. Fixed monthly principal payments begin in October 2018 in an amount that will repay the outstanding principal balance over an amortization period of
twenty-five years
.
The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default. The liability of RLH DC under the loan agreement is generally non-recourse. However, the lender may obtain a monetary judgment against RLH DC if the lender suffers losses under certain circumstances listed in the loan agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations. RLHC has guaranteed these recourse obligations of RLH DC and agreed to customary reporting and operating covenants. We were in compliance with these covenants at
June 30, 2016
.
Wells Fargo
In January 2015, in connection with the RL Venture transaction, we repaid the outstanding balance of our Wells Fargo term loan. We recognized a
$1.1 million
"Loss on early retirement of debt" on the Consolidated Statement of Operations related to termination fees and write-off of the previously recorded prepaid debt fees and unamortized debt discount balances.
In January 2015, in connection with the sale of the Bellevue property, we terminated the
$10 million
revolving credit facility associated with the term loan. There was no impact on our financial statements.
Debentures
In December 2015, Red Lion Hotels Capital Trust (the "Trust") redeemed
$29.9 million
of its issued and outstanding
9.5%
Trust Preferred Securities and all
$0.9 million
of its issued and outstanding
9.5%
Trust Common Securities for a total redemption price of
$30.8 million
. The redemptions occurred concurrently with our redemption of all
$30.8 million
of our
9.5%
Junior Subordinated Debentures due 2044, all of which were held by the Trust.
8. Derivative Financial Instruments
We do not enter into derivative transactions for trading purposes, but rather to hedge our exposure to interest rate fluctuations. We manage our floating rate debt using interest rate caps in order to reduce our exposure to the impact of changing interest rates and future cash outflows for interest. We estimate the fair value of our interest rate caps via standard calculations that use as their basis readily available observable market parameters. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service, which is a Level 2 input. Changes in fair value of these instruments are recognized in interest expense on the Consolidated Statements of Operations.
RL Venture
As required under our RL Venture loan, we entered into an interest rate cap with Commonwealth Bank of Australia to cap our interest rate exposure. The cap had an original notional amount of
$80.0 million
and caps the LIBOR reference rate at
4.0%
. The cap expires in January 2018. At
June 30, 2016
, the valuation of the interest rate cap resulted in the recognition of an asset with minimal value, which is included in "Other assets, net" on the Consolidated Balance Sheets.
RL Baltimore
As required under our RL Baltimore loan, we entered into an interest rate cap with Commonwealth Bank of Australia to cap our interest rate exposure. The cap had an original notional amount of
$13.3 million
and caps the LIBOR reference rate at
3.0%
. The cap expires in May 2018. At
June 30, 2016
, the valuation of the interest rate cap resulted in the recognition of an asset with minimal value, which is included in "Other assets, net" on the Consolidated Balance Sheets.
RLH Atlanta
As required under our RLH Atlanta loan, we entered into an interest rate cap with SMBC Capital Markets, Inc. to cap our interest rate exposure. The cap had an original notional amount of
$9.4 million
and caps the LIBOR reference rate at
3.0%
. The cap expires in September 2018. At
June 30, 2016
, the valuation of the interest rate cap resulted in the recognition of an asset totaling
$1,000
, which is included in "Other assets, net" on the Consolidated Balance Sheets.
RLH DC
As required under our RLH DC loan, we entered into an interest rate cap with Commonwealth Bank of Australia to cap our interest rate exposure. The cap had an original notional amount of
$17.5 million
and caps the LIBOR reference rate at
3.0%
. The cap expires in November 2018. At
June 30, 2016
, the valuation of the interest rate cap resulted in the recognition of an asset totaling
$2,000
, which is included in "Other assets, net" on the Consolidated Balance Sheets.
Wells Fargo
In January 2015, in connection with the early retirement of the Wells Fargo credit facility, we settled and terminated the associated interest rate swap with Wells Fargo. The outstanding notional amount at the time of the termination was approximately
$16.2 million
. The "Loss on early retirement of debt" on the Consolidated Statement of Operations of
$1.2 million
resulted from the termination of the credit facility and the swap, including
$0.2 million
attributable to termination of the swap. See Note 7 for additional information.
9. Commitments and Contingencies
At any given time we are subject to claims and actions incidental to the operations of our business. Based on information currently available, we do not expect that any sums we may receive or have to pay in connection with any legal proceeding would have a materially adverse effect on our consolidated financial position or net cash flow.
10. Income Taxes
We recognized an income tax provision of
$34,000
for the three months ended
June 30, 2016
and a
$25,000
income tax benefit for the three months ended
June 30, 2015
. For
six
months ended
June 30, 2016
and
2015
we recognized an income tax provision of
$92,000
and
$87,000
, respectively. The income tax provision varies from the statutory rate primarily due to a full valuation allowance against our deferred assets.
We have federal operating loss carryforwards, which will expire beginning in 2033, state operating loss carryforwards, which will expire beginning in 2017, and tax credit carryforwards, which will begin to expire in 2024.
11. Stockholders' Equity
We are authorized to issue
50 million
shares of common stock, par value
$0.01
per share, and
5 million
shares of preferred stock, par value
$0.01
per share. As of
June 30, 2016
, there were
20,176,911
shares of common stock issued and outstanding and
no
shares of preferred stock issued and outstanding. The board of directors has the authority, without action by the shareholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of the common stock.
Each holder of common stock is entitled to one vote for each share held on all matters to be voted upon by the shareholders with no cumulative voting rights. Holders of common stock are entitled to receive ratably the dividends, if any, that are declared from time to time by the board of directors out of funds legally available for that purpose. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future.
Stock Incentive Plans
The 2006 Stock Incentive Plan authorizes the grant or issuance of various option and other awards including restricted stock units and other stock-based compensation. The plan was approved by our shareholders and allowed awards of
2.0 million
shares, subject to adjustments for stock splits, stock dividends and similar events. As of
June 30, 2016
, there were
no
shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2006 plan.
The 2015 Stock Incentive Plan authorizes the grant or issuance of various option and other awards including restricted stock units and other stock-based compensation. The plan was approved by our shareholders and allows awards of
1.4 million
shares, subject to adjustments for stock splits, stock dividends and similar events. As of
June 30, 2016
, there were
556,244
shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2015 plan.
Stock based compensation expense reflects the fair value of stock based awards measured at grant date, including an estimated forfeiture rate, and is recognized over the relevant service period. For
three and six
months ended
June 30,
stock-based compensation expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
(In thousands)
|
|
|
Stock options
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
|
Restricted stock units
|
|
531
|
|
|
268
|
|
|
1,027
|
|
|
498
|
|
|
|
Unrestricted stock awards
|
|
105
|
|
|
105
|
|
|
210
|
|
|
227
|
|
|
|
ESPP
|
|
7
|
|
|
3
|
|
|
14
|
|
|
7
|
|
|
|
Total stock-based compensation
|
|
$
|
660
|
|
|
$
|
376
|
|
|
$
|
1,268
|
|
|
$
|
732
|
|
|
Stock Options
Stock options issued are valued based upon the Black-Scholes option pricing model and we recognize this value as an expense over the periods in which the options vest. Use of the Black-Scholes option-pricing model requires that we make certain assumptions, including expected volatility, forfeiture rate, risk-free interest rate, expected dividend yield and expected life of the options, based on historical experience. Volatility is based on historical information with terms consistent with the expected life of the option. The risk free interest rate is based on the quoted daily treasury yield curve rate at the time of grant, with terms consistent with the expected life of the option.
For the six months ended June 30, 2016
and
2015
the stock options granted were
81,130
and
no
shares, respectively.
Stock option fair value assumptions are as follows for stock options granted during the
six
months ended
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Volatility
|
|
Forfeiture Rate
|
|
Risk-free Interest Rate
|
|
Dividend Yield
|
|
Expected Life (Years)
|
|
March 28, 2016
|
|
61.12%
|
|
21.07%
|
|
1.37%
|
|
—%
|
|
5
|
A summary of stock option activity for the
six months ended June 30, 2016
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Balance, December 31, 2015
|
|
71,676
|
|
|
$
|
10.41
|
|
|
Options granted
|
|
81,130
|
|
|
8.20
|
|
|
Options exercised
|
|
—
|
|
|
—
|
|
|
Options forfeited
|
|
(1,332
|
)
|
|
8.74
|
|
|
Balance, June 30, 2016
|
|
151,474
|
|
|
$
|
9.24
|
|
|
Exercisable, June 30, 2016
|
|
70,344
|
|
|
$
|
10.44
|
|
Additional information regarding stock options outstanding and exercisable as of
June 30, 2016
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
Price
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Expiration
Date
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
(1)
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
(1)
|
|
$8.20
|
|
81,130
|
|
|
9.74
|
|
2026
|
|
$
|
8.20
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$8.74
|
|
39,504
|
|
|
1.89
|
|
2018
|
|
8.74
|
|
|
—
|
|
|
39,504
|
|
|
8.74
|
|
|
—
|
|
|
$12.21
|
|
15,195
|
|
|
0.39
|
|
2016
|
|
12.21
|
|
|
—
|
|
|
15,195
|
|
|
12.21
|
|
|
—
|
|
|
$13.00
|
|
15,645
|
|
|
0.88
|
|
2017
|
|
13.00
|
|
|
—
|
|
|
15,645
|
|
|
13.00
|
|
|
—
|
|
|
|
|
151,474
|
|
|
5.84
|
|
2016-2026
|
|
$
|
9.24
|
|
|
$
|
—
|
|
|
70,344
|
|
|
$
|
10.44
|
|
|
$
|
—
|
|
|
|
|
|
(1)
|
The aggregate intrinsic value is before applicable income taxes and represents the amount option recipients would have received if all options had been fully vested and exercised on the last trading day of the first
six
months of
2016
, or
June 30, 2016
, based upon our closing stock price on that date of
$7.26
.
|
Restricted Stock Units, Shares Issued as Compensation
As of
June 30, 2016
and
2015
, there were
1,159,814
and
1,270,848
unvested restricted stock units outstanding. Since we began issuing restricted stock units, approximately
22.1%
of total units granted have been forfeited. In the
second
quarter of
2016
, we recognized approximately
$0.5 million
in compensation expense related to restricted stock units compared to
$0.3 million
in the comparable period in
2015
. As the restricted stock units vest, we expect to recognize approximately
$6.3 million
in additional compensation expense over a weighted average period of
36
months, including
$1.1 million
during the remainder of
2016
.
A summary of restricted stock unit activity for the
six months ended June 30, 2016
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Balance, January 1, 2016
|
|
1,224,920
|
|
|
$
|
6.95
|
|
|
Granted
|
|
282,989
|
|
|
$
|
8.17
|
|
|
Vested
|
|
(122,417
|
)
|
|
$
|
6.79
|
|
|
Forfeited
|
|
(225,678
|
)
|
|
$
|
7.14
|
|
|
Balance, June 30, 2016
|
|
1,159,814
|
|
|
$
|
7.22
|
|
During the first
six
months of 2016,
122,417
shares of common stock were issued to employees as their restricted stock units vested. Under the terms of the 2006 and 2015 plans and upon issuance, we authorized a net settlement of distributable shares to employees after consideration of individual employees' tax withholding obligations, at the election of each employee. The fair value of restricted stock that vested during
six months ended June 30, 2016
and
2015
was approximately
$0.9 million
and
$0.7 million
, respectively.
Unrestricted Stock Awards
Unrestricted stock awards are granted to members of our board of directors as part of their compensation. Awards are fully vested and expensed when granted. The fair value of unrestricted stock awards is the market close price of our common stock on the date of the grant.
The following table summarizes unrestricted stock award activity for the
three and six
months ended
June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Shares of unrestricted stock granted
|
|
12,294
|
|
|
15,600
|
|
|
27,228
|
|
|
34,885
|
|
|
Weighted average grant date fair value per share
|
|
$
|
8.54
|
|
|
$
|
6.60
|
|
|
$
|
7.71
|
|
|
$
|
6.46
|
|
Employee Stock Purchase Plan
In 2008, we adopted a new employee stock purchase plan ("ESPP") upon expiration of our previous plan. Under the ESPP,
300,000
shares of common stock are authorized for purchase by eligible employees at a
15%
discount through payroll deductions. No employee may purchase more than
$25,000
worth of shares, or more than
10,000
total shares, in any calendar year. As allowed under the ESPP, a participant may elect to withdraw from the plan, effective for the purchase period in progress at the time of the election with all accumulated payroll deductions returned to the participant at the time of withdrawal. Shares issued to employees and the weighted average fair value per ESPP share for the
three and six months ended
June 30, 2016
and
2015
were, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
Shares of stock sold to employees
|
|
12,735
|
|
|
10,614
|
|
|
12,735
|
|
|
10,614
|
|
|
|
Weighted average fair value per ESPP share
|
|
$
|
5.96
|
|
|
$
|
4.64
|
|
|
$
|
5.96
|
|
|
$
|
4.64
|
|
|
Warrant
In January 2015, in connection with Shelbourne Falcon’s purchase of equity interests in RL Venture, we issued Shelbourne a warrant to purchase
442,533
shares of common stock. The warrant has a
five
year term from the date of issuance and a per share exercise price of
$6.78
. The warrant has been classified as equity due to required share settlement upon exercise. Accordingly, the estimated fair value of the warrant was recorded in additional paid in capital upon issuance, and we do not recognize subsequent changes in fair value in our financial statements. As of
June 30, 2016
all shares of common stock included in the warrant were still outstanding.
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 six months ended
June 30, 2016
and
2015
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Numerator - basic and diluted:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
622
|
|
|
$
|
(986
|
)
|
|
$
|
(5,198
|
)
|
|
$
|
9,146
|
|
|
Less: net (income) loss attributable to noncontrolling interests
|
|
(459
|
)
|
|
(936
|
)
|
|
562
|
|
|
(906
|
)
|
|
Net income (loss) attributable to RLHC
|
|
$
|
163
|
|
|
$
|
(1,922
|
)
|
|
$
|
(4,636
|
)
|
|
$
|
8,240
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average shares - basic
|
|
20,155
|
|
|
19,955
|
|
|
20,121
|
|
|
19,926
|
|
|
Weighted average shares - diluted
|
|
20,649
|
|
|
19,955
|
|
|
20,121
|
|
|
20,116
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - diluted
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.41
|
|
For the three months ended
June 30, 2016
,
all
of the
151,474
options to purchase common shares,
720,135
of the
1,159,814
restricted stock units outstanding, and
387,676
of the
442,533
warrants to purchase common shares were not included in the diluted per share calculation as they were antidilutive. For the three months ended
June 30, 2015
,
all
of the
75,176
options to purchase common shares,
all
of the
1,270,848
restricted stock units outstanding, and
all
of the
442,533
warrants to purchase common shares were not included in the diluted per share calculation as they were antidilutive.
For the six months ended June 30, 2016,
all
of the
151,474
options to purchase common shares,
all
of the
1,159,814
restricted stock units outstanding, and all of the
442,533
warrants to purchase common shares were not included in the diluted per share calculation as they were antidilutive. For the six months ended June 30, 2015,
all
of the
75,176
options to purchase common shares,
1,080,136
of the
1,270,848
restricted stock units outstanding, and
all
of the
442,533
warrants to purchase common shares were not included in the diluted per share calculation as they were antidilutive.
13. Fair Value of Financial Instruments
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.
Estimated fair values of financial instruments (in thousands) are shown in the table below. The carrying amounts for cash and cash equivalents, accounts receivable and current liabilities are reasonable estimates of their fair values due to their short maturities. The carrying amounts for short-term investments are reasonable estimates of their fair values due to interest rates which are variable in nature and a put provision at par plus accrued interest. 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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Financial assets:
|
|
(in thousands)
|
|
Cash and cash equivalents and restricted cash
|
|
$
|
37,474
|
|
|
$
|
37,474
|
|
|
$
|
35,202
|
|
|
$
|
35,202
|
|
|
Short-term investments
|
|
$
|
12,695
|
|
|
$
|
12,695
|
|
|
$
|
18,085
|
|
|
$
|
18,085
|
|
|
Accounts receivable
|
|
$
|
10,513
|
|
|
$
|
10,513
|
|
|
$
|
8,164
|
|
|
$
|
8,164
|
|
|
Notes receivable
|
|
$
|
2,872
|
|
|
$
|
2,872
|
|
|
$
|
2,605
|
|
|
$
|
2,605
|
|
|
Interest rate caps
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
42
|
|
|
$
|
42
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
103,097
|
|
|
$
|
106,214
|
|
|
$
|
90,772
|
|
|
$
|
94,029
|
|
14. Related Party Transactions
RL Venture has agreed to pay to Shelbourne Falcon an investor relations fee each month equal to
0.50%
of its total aggregate revenue. Columbia Pacific Opportunity Fund, LP, one of our company's largest shareholders, is an investor in Shelbourne Falcon. During the three months ended
June 30, 2016
and
2015
, Shelbourne Falcon earned
$107,000
and
$83,000
, respectively. During the
six
months ended
June 30, 2016
and
2015
, Shelbourne Falcon earned
$208,000
and
$97,000
, respectively.
RL Venture has also agreed to pay CPA Development, LLC, an affiliate of Columbia Pacific Opportunity Fund, LP, a construction management fee of
$200,000
. During the three months ended
June 30, 2016
and
2015
, RL Venture paid
$33,000
and
$22,000
, respectively, of this fee. During the
six months ended
June 30, 2016
and
2015
, RL Venture paid
$67,000
and
$56,000
, respectively, of this fee.
In May 2015, we entered into a management agreement with the LLC that owns Red Lion Hotel Woodlake Conference Center Sacramento. A member of our board of directors is a
50%
owner of the entity that serves as the manager of that LLC. During the three months ended
June 30, 2016
and
2015
, we recognized management fee revenue from the LLC of
$32,000
and
$6,000
, respectively. During the
six
months ended
June 30, 2016
and
2015
we recognized management fee revenue from the LLC of
$62,000
and
$15,000
, respectively.
Effective March 29, 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. The hotel is owned by HNA Hudson Valley Resort & Training Center LLC, an affiliate of HNA RLH Investments LLC, one of our largest shareholders, and is controlled by HNA Group North America LLC, for which Enrico Marini Fichera, one of our directors, serves as the Head of Investments. Under that contract, our subsidiary is entitled to a monthly management fee equal to
$8,333
or
three
percent of the hotel’s gross operating revenues, whichever is larger. During the three and six months ended
June 30, 2016
, we recognized management fee revenue from the LLC of
$30,000
.
