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MarketScreener Homepage  >  Equities  >  Nyse  >  Red Lion Hotels Corporation    RLH

RED LION HOTELS CORPORATION

(RLH)
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RED LION HOTELS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/05/2020 | 04:16pm EST
This quarterly report on Form 10-Q includes forward-looking statements,
including statements concerning operational and financial impacts of the
COVID-19 pandemic. We have based these statements on our current expectations,
assumptions, and projections about future events. When words such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "seek,"
"should," "will" and similar expressions or their negatives are used in this
quarterly report, these are forward-looking statements. Many possible events or
factors, including the continuing effects of the COVID-19 pandemic and those
discussed in "Risk Factors" under Item 1A below, under Item 1A of our annual
report on Form 10-K for the year ended December 31, 2019, which we filed with
the Securities and Exchange Commission on February 27, 2020, and in our
subsequent filings with the Securities and Exchange Commission could affect our
future financial results and performance, and could cause actual results or
performance to differ materially from those expressed. You are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this quarterly report. We undertake no obligation to update or
revise any forward-looking statements except as required by law.

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

Wholly owned subsidiaries:
•Red Lion Hotels Holdings, Inc.
•Red Lion Hotels Franchising, Inc.
•Red Lion Hotels Management, Inc. ("RL Management")
•Red Lion Hotels Limited Partnership
•RL Baltimore LLC ("RL Baltimore")
•WestCoast Hotel Properties, Inc.
•Red Lion Anaheim, LLC
•RLabs, Inc.

Joint venture entities:
•RL Venture LLC ("RL Venture") in which we hold a 55% member interest
•RLS Atla Venture LLC ("RLS Atla Venture") in which we hold a 55% member
interest
•RLS DC Venture LLC ("RLS DC Venture") in which we hold a 55% member interest

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


The following discussion and analysis should be read in connection with our
unaudited condensed consolidated financial statements and the condensed notes
thereto and other financial information included elsewhere in this quarterly
report, as well as in conjunction with the consolidated financial statements and
the notes thereto for the year ended December 31, 2019, which are included in
our annual report on Form 10-K for the year ended December 31, 2019.

COVID-19 Update


COVID-19 was first identified in Wuhan, China in December 2019, and subsequently
declared a pandemic by the World Health Organization. To date, COVID-19 has
surfaced in nearly all regions around the world and resulted in travel
restrictions and business slowdowns or shutdowns in affected areas. The economic
impact of the pandemic thus far has been extremely punitive to travel related
businesses across the nation, significantly affecting the operating results of
companies within the hospitality industry, including our operating results and
the operating results of our franchisees. The measures enacted by most
governments to combat the pandemic have included intensive restrictions on
travel, required closure of businesses deemed non-essential, and shelter in
place orders for civilians.

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We have undertaken a series of organizational changes and cost cutting measures
to mitigate the impact of the COVID-19 pandemic on our operating results,
including changes to senior management, a reduction in force and the
consolidation of office space. As our business is reliant in part on the
financial success and cooperation of our franchisees, we have also implemented
policy changes to address the impact of the pandemic on their financial
condition, including the implementation of a fee deferral program to certain of
our franchisees in which billings related to fees for March through June of 2020
could be deferred and paid ratably over the following nine months, temporary fee
reductions for review responses, guest relations fees, and certain other fees,
and a delay in implementation of capital intensive brand standards. These
changes have and will continue to reduce our cash flow, as our franchisees defer
paying royalty fees to future periods and take advantage of temporary fee
reductions. The COVID-19 pandemic has also directly affected revenues, as our
midscale brand hotels typically pay royalties and marketing fees as a percentage
of gross rooms revenue, and revenues at our Company operated hotels have been
adversely effected by the overall reduction in travel. Our financial results
have also been affected and may continue to be effected due to the recognition
of impairment losses on Company operated hotels, and increase in bad debt
reserves, as a result of the negative impacts of COVID-19 on business travel.

The impact of the pandemic is ongoing, and the extent to which the COVID-19
pandemic further impacts our business, operations and financial results will
depend on numerous evolving factors that we are not able to accurately predict,
including the length of travel restrictions and the continuation or new
imposition of government-mandated stay-at-home orders, the duration and spread
of the virus, and the extent to which people are willing to resume travel and
hotel stays, as well as the financial condition and recovery of our franchisees.
Given the dynamic nature of this situation, we cannot reasonably estimate the
impacts of COVID-19 on our financial condition, results of operations or cash
flows for the foreseeable future. However, we expect it will continue to have a
material, adverse impact on future revenue growth as well as overall
profitability.

Introduction


We are a NYSE-listed hospitality and leisure company (ticker symbol: RLH) doing
business as RLH Corporation and primarily engaged, through our subsidiaries, in
the franchising and ownership of hotels of our proprietary brands, including the
following brands that are being actively sold in the United States and Canada:
Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse Extended Stay,
Americas Best Value Inn ("ABVI"), Canadas Best Value Inn ("CBVI"), Signature and
Signature Inn, and Knights Inn.

We operate in two reportable segments:


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

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

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

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A summary of our open franchise and company operated hotels from January 1, 2020
through September 30, 2020, including the approximate number of available rooms,
is provided below:
                                                 Midscale Brand                              Economy Brand                                      Total
                                                                Total
                                                              Available                                Total Available
                                         Hotels                 Rooms              Hotels                   Rooms                Hotels           Total Available Rooms
Beginning quantity, January 1,
2020                                        96                  13,500               966                      54,200             1,062                   67,700
Newly opened                                 2                     100                22                       1,200                24                    1,300
Change in brand                              1                     100                (1)                       (100)                -                        -
Terminated properties                      (14)                 (2,600)             (116)                     (7,200)             (130)                  (9,800)
Ending quantity, September 30,
2020                                        85                  11,100               871                      48,100               956                   59,200



A summary of activity relating to our open midscale franchise and company
operated hotels by brand from January 1, 2020 through September 30, 2020 is
provided below:
                                                                                     Red Lion Inn and
Midscale Brand Hotels                    Hotel RL           Red Lion Hotels               Suites                Signature             Other               Total
Beginning quantity, January 1,
2020                                          9                    39                            40                   4                   4                   96
Newly opened                                  -                     -                             2                   -                   -                    2

Change in brand                               -                     -                             1                   -                   -                    1
Terminated properties                        (1)                   (7)                           (4)                  -                  (2)                 (14)
Ending quantity, September 30,
2020                                          8                    32                            39                   4                   2                   85

Ending rooms, September 30,
2020                                      1,400                 6,200                         3,000                 300                 200               11,100


A summary of activity relating to our open economy franchise hotels by brand from January 1, 2020 through September 30, 2020 is provided below: Economy Brand Hotels

                        ABVI and CBVI           Knights Inn          Country Hearth           Guest House                  Other    

Total

Beginning quantity, January 1, 2020              657                    232                     47                     19                        11                  966
Newly opened                                      14                      8                      -                      -                         -                   22

Change in brand                                    -                      -                      -                     (1)                        -                   (1)
Terminated properties                            (74)                   (31)                    (4)                    (2)                       (5)                (116)
Ending quantity, September 30, 2020              597                    209                     43                     16                         6                  871

Ending rooms, September 30, 2020              31,600                 12,800                  2,100                  1,200                       400               48,100


A summary of our executed franchise agreements for the nine months ended September 30, 2020 is provided below:

                                                                  Midscale Brand           Economy Brand            Total

Executed franchise license agreements, nine months ended September 30, 2020: New locations

                                                             3                      20                   23
New contracts for existing locations                                      6                     100                  106

Total executed franchise license agreements, nine months
ended September 30, 2020                                                  9                     120                  129



Overview

Consistent with our previously stated business strategy to move towards
operating as primarily a franchise company, in the first quarter of 2020, we
sold two of our remaining company operated hotels. On February 7, 2020, we sold
the only hotel in our consolidated joint venture, RLS DC Venture, for $16.4
million. Using proceeds from the sale, together with the release of $2.3 million
in restricted cash held by CP Business Finance I, LP, RLS DC Venture repaid the
remaining outstanding principal balance and accrued exit fee under the RLH DC
Venture loan agreement of $17.7 million.
                                       24
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On February 27, 2020, we sold our leasehold interest in the Red Lion Anaheim for
$21.5 million. Using net proceeds from the sale, the Company repaid the $10.0
million outstanding principal balance owing under the revolving line of credit
with Deutsche Bank AG New York Branch, and other lenders party thereto (the
"Line of Credit"). Upon repayment of the outstanding balance, the Line of Credit
was terminated and these funds are no longer available to us.

Results of Operations

A summary of our Condensed Consolidated Statements of Comprehensive Loss is provided below (in thousands):

                                                      Three Months Ended 

September 30, Nine Months Ended September 30,

                                                          2020                2019               2020                2019
Total revenues                                        $   13,283$  32,863$   40,777$  87,772
Total operating expenses                                  16,508             37,374              56,455             98,345
Operating loss                                            (3,225)            (4,511)            (15,678)           (10,573)
Other income (expense):
Interest expense                                             (44)            (1,699)               (599)            (3,690)
Loss on early retirement of debt                               -                  -              (1,309)              (164)
Other income, net                                              2                 44                 249                121
Loss before taxes                                         (3,267)            (6,166)            (17,337)           (14,306)
Income tax expense (benefit)                                  18                486                (586)               676
Net loss                                                  (3,285)            (6,652)            (16,751)           (14,982)
Net loss attributable to noncontrolling
interest                                                     148              2,980               1,553              4,040
Net loss and comprehensive loss attributable to
RLH Corporation                                       $   (3,137)         $ 

(3,672) $ (15,198)$ (10,942)


Non-GAAP Financial Measures (1)
EBITDA                                                $     (714)$    (831)$   (9,282)$     576
Adjusted EBITDA                                       $    1,538$   5,899$   (8,517)$  10,624

(1) The definitions of "EBITDA," and "Adjusted EBITDA" and how those measures relate to net income (loss) are discussed and reconciled under Non-GAAP Financial Measures below.


For the three months ended September 30, 2020, we reported a net loss of $3.3
million, which included $0.9 million of transaction and integration costs
relating primarily to fees paid to advisors engaged to review and respond to
bona fide inquiries received from parties considering an investment in or
acquisition of the Company, a $0.7 million asset impairment on our Red Lion
Hotel Seattle Airport as a result of the negative impact of the COVID-19
pandemic on the operating results of that hotel, $0.4 million of bad debt
expense primarily related to terminated agreements, $0.3 million of stock based
compensation, $0.2 million of employee separation costs, a $0.1 million loss on
asset disposition, and $0.1 million of expense related to a non-income tax
assessment.

For the three months ended September 30, 2019, we reported a net loss of $6.7
million, which included a $5.4 million asset impairment on our Hotel RL
Washington DC joint venture property, $0.9 million of stock based compensation,
$0.8 million of bad debt expense and associated legal fees related to a reserve
recognized in the third quarter of 2019 for certain amounts of accounts
receivable, key money, and notes receivable for certain Inner Circle
franchisees, $0.2 million of transaction and integration costs, and $0.2 million
of expense related to a non-income tax assessment.

For the nine months ended September 30, 2020, we reported a net loss of $16.8
million, which included $10.7 million of bad debt expense related to reserves
recognized for accounts receivable, key money, and notes receivable for certain
Inner Circle franchisees and other customer balances determined to be
uncollectible during the nine months ended September 30, 2020, a $2.5 million
asset impairment on our Red Lion Hotel Seattle Airport as a result of the
negative impact of the COVID-19 pandemic on the operating results of that hotel,
$2.3 million of transaction and integration costs relating primarily to fees
paid to advisors engaged to review and respond to bona fide inquiries received
from parties considering an investment in or acquisition of the Company, a $1.3
million loss on early retirement of debt, $1.0 million of employee separation
costs, $0.8 million of stock based compensation, and $0.3 million of expense
related to a non-income tax assessment, partially offset by $7.5 million in
gains primarily from the disposal of two hotel properties.
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For the nine months ended September 30, 2019, we reported a net loss of $15.0
million, which included a $5.4 million asset impairment on our Hotel RL
Washington DC joint venture property, $2.5 million of stock based compensation,
$1.0 million related to a legal settlement, $0.8 million of bad debt expense and
associated legal fees related to a reserve recognized in the third quarter of
2019 for certain amounts of accounts receivable, key money, and notes receivable
for certain Inner Circle franchisees, $0.5 million of expense related to a
non-income tax assessment, $0.4 million of transaction and integration costs,
and a $0.2 million loss on early retirement of debt resulting from the
replacement of a mortgage loan at RLS DC Venture.

For the three months ended September 30, 2020, Adjusted EBITDA was $1.5 million
compared with $5.9 million in 2019. This decrease was due to franchise agreement
terminations and the negative impact of COVID-19 on our operating results, as
well as a decrease in profits resulting from hotels disposed of in the fourth
quarter of 2019 and the first quarter of 2020.

For the nine months ended September 30, 2020, Adjusted EBITDA was $(8.5) million
compared with $10.6 million in 2019. This decrease was due to franchise
agreement terminations and the negative impact of COVID-19 on our operating
results, along with $10.7 million of bad debt expense recognized to establish
reserves for certain Inner Circle franchisees in bankruptcy and other customer
balances determined to be uncollectible during the nine months ended September
30, 2020. Adjusted EBITDA was also negatively impacted by a decrease in profits
resulting from hotels disposed of in the fourth quarter of 2019 and the first
quarter of 2020.

Non-GAAP Financial Measures

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

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

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

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The following is a reconciliation of EBITDA and Adjusted EBITDA to net loss for the periods presented (in thousands):

                                                Three Months Ended September 30,       Nine Months Ended September 30,
                                                    2020                2019               2020                2019
Net loss                                        $   (3,285)$  (6,652)$  (16,751)$ (14,982)
Depreciation and amortization                        2,509              3,636               7,456             11,192
Interest expense                                        44              1,699                 599              3,690
Income tax expense (benefit)                            18                486                (586)               676
EBITDA                                                (714)              (831)             (9,282)               576
Stock-based compensation (1)                           265                941                 840              2,503
Asset impairment (2)                                   729              5,382               2,489              5,382
Transaction and integration costs (3)                  860                201               2,260                436
Employee separation and transition costs
(4)                                                    227                  -               1,023                 35
Loss on early retirement of debt (5)                     -                  -               1,309                164
Loss (gain) on asset dispositions (6)                  107                  1              (7,454)                45

Legal settlement expense (7)                             -                  -                   -                952
Non-income tax expense assessment (8)                   64                205                 298                531
Adjusted EBITDA                                      1,538              5,899              (8,517)            10,624
Adjusted EBITDA attributable to
noncontrolling interests                                32               (660)                 76             (1,665)

Adjusted EBITDA attributable to RLH Corporation$ 1,570$ 5,239$ (8,441)$ 8,959


(1) Costs represent total stock-based compensation for each period. These costs are included within Selling, general,
administrative and other expenses and Marketing, reservations and reimbursables on the Condensed Consolidated
Statements of Comprehensive Loss.
(2) In the first and third quarters of 2020, we recognized impairments on our Red Lion Hotel Seattle Airport leased
property. In the third quarter of 2019 we recognized an impairment on our Hotel RL Washington DC joint venture
property.
(3) Transaction and integration costs incurred in 2020 relate primarily to fees paid to advisors engaged to review and
respond to bona fide inquiries received from parties considering an investment in or acquisition of the Company.
(4) The costs recognized in 2020 relate to the accrual of severance payments due to our Chief Financial Officer upon
her departure in March 2020 and to our Chief Operating Officer upon the announcement of his departure in September
2020, along with two reductions in force that were implemented in the first and second quarters of 2020. The costs
recognized in 2019 relate to a reduction in force that was implemented in the second quarter of 2019. These costs are
included within Selling, general, administrative and other expenses and Marketing, reservations and reimbursables on
the Condensed Consolidated Statements of Comprehensive Loss.
(5) The Loss on early retirement of debt recognized in 2020 relates to unamortized deferred debt issuance costs and
prepayment fees incurred related to the payoff of a secured debt agreement at RL Venture - Olympia and the outstanding
balance on our Line of Credit. The loss recognized in 2019 relates to unamortized deferred debt issuance costs and
prepayment fees incurred related to the payoff of a mortgage loan at RLS DC Venture, which was replaced through a new
mortgage loan with a different lender.
(6) The gain primarily relates to the sale of two properties during the first quarter of 2020. There was no material
activity during the nine months ended September 30, 2019 or the second and third quarters of 2020.
(7) Legal settlement expense relates to a settlement agreement with former hotel workers regarding a wage dispute in
California. This expense is included in Company operated hotels expense on the Condensed Consolidated Statements of
Comprehensive Loss.
(8) Costs relate to estimated non-income taxes we have concluded we are probable of being assessed. We accrued these
estimated taxes in Selling, general, administrative and other expenses on the Condensed Consolidated Statements of
Comprehensive Loss.



Franchise and Marketing, Reservations and Reimbursables Revenues

                                                Three Months Ended September 30,        Nine Months Ended September 30,
                                                                             (in thousands)
                                                     2020                2019               2020                2019

Royalty                                         $     4,058$   5,909$   11,999$  17,516
Marketing, reservations and reimbursables             5,271              8,300              15,549             22,632
Other franchise                                         692              2,016               2,167              3,772



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Royalty revenue decreased $1.9 million or 31% and $5.5 million or 31%, and
revenues from Marketing, reservations, and reimbursables revenue decreased by
$3.0 million or 36% and $7.1 million or 31%, during the three and nine months
ended September 30, 2020 compared to the three and nine months ended September
30, 2019, respectively. These decreases were primarily due to terminated
franchise agreements in 2019 and the first nine months of 2020, along with the
negative impact of COVID-19 on our midscale brand hotels that typically pay
royalties and marketing fees as a percentage of gross rooms revenue. Our economy
hotels comprise 91% of total franchised properties and generally pay a fixed fee
per room per month and therefore are less dependent on the effects that COVID-19
has on occupancy. Economy hotels represented 71% and 75% of our total royalty
revenue for the three and nine months ended September 30, 2020, respectively.

Other franchise revenues decreased $1.3 million or 66% and $1.6 million or 43%
for the three and nine months ended September 30, 2020 compared to the three and
nine months ended September 30, 2019, respectively, primarily due to the impact
of terminated agreements, along with temporary fee reductions provided to our
franchisees in response to COVID-19.

Company Operated Hotels Revenues

                                                Three Months Ended September 30,          Nine Months Ended September 30,
                                                                            (in thousands)
                                                    2020                   2019               2020                2019
Company operated hotels revenues             $          3,262          $  

16,633 $ 11,062$ 43,839

Three months ended September 30, 2020 and 2019


During the three months ended September 30, 2020, revenue from our Company
operated hotels segment decreased $13.4 million or 80% compared with the same
period in 2019. The decrease was driven primarily by the disposal of two company
operated hotel properties in the fourth quarter of 2019 and two additional
company operated hotel properties in the first quarter of 2020. There were no
hotel properties sold during the second or third quarter of 2020.

Revenues for the four company operated hotels held during the entirety of both
periods decreased by $4.4 million, to $3.3 million in the third quarter of 2020
compared to $7.7 million in the third quarter of 2019. This decrease was
primarily due to the negative impact of the COVID-19 pandemic on hotel
occupancy.

Nine months ended September 30, 2020 and 2019


During the nine months ended September 30, 2020, revenue from our Company
operated hotels segment decreased $32.8 million or 75% compared with the same
period in 2019. The decrease was driven primarily by the disposal of two company
operated hotel properties in the fourth quarter of 2019 and disposal of two
additional company operated hotel properties in the first quarter of 2020.

Revenues for the four company operated hotels held during the entirety of both
periods decreased by $9.6 million, to $8.7 million for the nine months ended
September 30, 2020, compared to $18.3 million for the nine months ended
September 30, 2019. This decrease was primarily due to the negative impact of
the COVID-19 pandemic on hotel occupancy.
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Operating Expenses

Selling, General, Administrative and Other Expenses


                                                 Three Months Ended September 30,        Nine Months Ended September 30,
                                                                              (in thousands)
                                                      2020                2019               2020                2019
Franchise development and operations,
including labor                                  $     1,136$   2,346$    4,268$   6,707
General and administrative labor and
labor-related costs                                    1,214              1,681               4,435              5,182
Stock-based compensation                                 104                504                 354              1,266
Non-income tax expense assessment                         64                205                 298                531
Bad debt expense                                         428              1,295              10,745              1,752
Legal fees                                               348                577               1,314              1,598
Professional fees and outside services                   317                322               1,043                955
Facility lease                                           131                243                 548                717
Information technology costs                             219                193                 651                628
Other                                                    787              1,035               2,127              3,116
Total Selling, general, administrative and
other expenses                                   $     4,748$   8,401$   25,783$  22,452

Three months ended September 30, 2020 and 2019


Selling, general, administrative and other expenses decreased by $3.7 million or
43% for the three months ended September 30, 2020 compared with three months
ended September 30, 2019.

Franchise development and operations, including labor, General and administrative labor and labor-related costs, and Stock-based compensation decreased primarily as a result of reduced costs after the significant reduction in force implemented at the beginning of the second quarter of 2020 and executive terminations in the fourth quarter of 2019, partially offset by severance costs paid to employees.


Bad debt expense decreased primarily due to bad debt expense recognized related
to a reserve established in the third quarter of 2019 for $0.8 million of
accounts receivable, key money and notes receivable for certain Inner Circle
franchisees. See Note 7. Revenue from Contracts with Customers within Item 8.
Financial Statements for additional detail.

Other expenses decreased primarily due to various efficiencies and cost cutting initiatives implemented by management.

Nine months ended September 30, 2020 and 2019

                                       29
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Selling, general, administrative and other expenses increased by $3.3 million or
15% for the nine months ended September 30, 2020 compared with nine months ended
September 30, 2019.

Franchise development and operations, including labor, General and administrative labor and labor-related costs, and Stock-based compensation decreased primarily as a result of reduced costs after the significant reduction in force implemented at the beginning of the second quarter of 2020 and executive terminations in the fourth quarter of 2019, partially offset by severance costs paid to employees.


Bad debt expense increased primarily due to $6.3 million of expense recognized
in the first quarter of 2020 arising from a reserve recognized for accounts
receivable, key money, and notes receivable for certain Inner Circle
franchisees. The remaining increase relates primarily to reserves recognized for
accounts and notes receivable related to large balances under legal dispute,
aged balances from terminated agreements, or aged balances placed with third
party collections. See Note 7. Revenue from Contracts with Customers within Item
8. Financial Statements for additional detail.

Other expenses decreased primarily due to various efficiencies and cost cutting initiatives implemented by management.

Company Operated Hotels Expenses

                                                    Three Months Ended September 30,          Nine Months Ended September 30,
                                                                                (in thousands)
                                                        2020                   2019               2020                2019

Company operated hotels expenses                 $          2,961          

$ 12,673$ 11,778$ 36,750

Three months ended September 30, 2020 and 2019


Company operated hotels expenses decreased by $9.7 million or 77%. The decrease
was driven primarily by the disposal of two company operated hotel properties in
the fourth quarter of 2019 and two additional company operated hotel properties
in the first quarter of 2020.

Operating expenses for the four company operated hotels held during the entirety
of both periods decreased by $2.8 million, to $3.0 million in the third quarter
of 2020 compared to $5.8 million in the third quarter of 2019, primarily due to
the impact of COVID-19 on hotel operations and other cost cutting initiatives
implemented by management.

Nine months ended September 30, 2020 and 2019


Company operated hotels expenses decreased by $25.0 million or 68%. The decrease
was driven primarily by the disposal of two company operated hotel properties in
the fourth quarter of 2019 and two additional company operated hotel properties
in the first quarter of 2020.

Operating expenses for the four company operated hotels held during the entirety
of both periods decreased by $6.3 million, to $9.4 million for the nine months
ended September 30, 2020 compared to $15.7 million for the nine months ended
September 30, 2019, primarily due to the impact of COVID-19 on hotel operations
and other cost cutting initiatives implemented by management.

Marketing, Reservations and Reimbursables Expenses

                                                  Three Months Ended September 30,        Nine Months Ended September 30,
                                                                               (in thousands)
                                                       2020                2019               2020                2019
Marketing, reservations and reimbursables
expenses                                          $     4,594$   7,080$   14,143$  22,088




Marketing, reservations and reimbursables expenses decreased by $2.5 million or
35% and $7.9 million or 36% during the three and nine months ended September 30,
2020, respectively. This decrease was primarily driven by terminated franchise
agreements as well as a decrease in reservation volume due to the impact of
COVID-19 and is consistent with the decrease in Marketing, reservations and
reimbursables revenues.
                                       30
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Depreciation and Amortization

                                                Three Months Ended September 30,           Nine Months Ended September 30,
                                                                                (in thousands)
                                                     2020                2019                  2020                   2019

Depreciation and amortization                   $     2,509$   3,636          $          7,456          $  11,192




Depreciation and amortization expense decreased $1.1 million or 31% and $3.7
million or 33% for the three and nine months ended September 30, 2020 compared
to the three and nine months ended September 30, 2019, respectively. These
decreases were driven primarily by the disposal of two company operated hotel
properties in the fourth quarter of 2019 and two additional company operated
hotel properties in the first quarter of 2020. This decrease was partially
offset by additional depreciation recognized from other fixed assets placed in
service during the remainder of 2019 and the first nine months of 2020.

Asset Impairment

                                                      Three Months Ended September 30,          Nine Months Ended September 30,
                                                                                   (in thousands)
                                                          2020                  2019                2020                2019

Asset impairment                                    $          729          $   5,382$     2,489$   5,382



We recognized impairment losses totaling $2.5 million on our Red Lion Hotel
Seattle Airport leased property during the first and third quarters of 2020 and
an impairment loss of $5.4 million on our Hotel RL Washington DC joint venture
property in the third quarter of 2019. See Note 5. Property and Equipment within
Item 8. Financial Statements for additional detail.

Loss (Gain) on Asset Dispositions, net

                                                     Three Months Ended September 30,            Nine Months Ended September 30,
                                                                                  (in thousands)
                                                         2020                   2019                 2020                2019

Loss (gain) on asset dispositions, net            $        107$        1$    (7,454)$      45

We recognized a net gain on asset dispositions of $7.5 million for the nine months ended September 30, 2020, primarily from the disposal of two hotel properties during the first quarter of 2020. There was no material activity during the nine months ended September 30, 2019.

Transaction and Integration Costs


                                                   Three Months Ended September 30,            Nine Months Ended September 30,
                                                                                (in thousands)
                                                        2020                   2019                2020                2019

Transaction and integration costs               $             860          

$ 201$ 2,260$ 436




Transaction and integration costs incurred during the current year primarily
relate to fees paid to advisors engaged to review and respond to bona fide
inquiries received from parties considering an investment in or acquisition of
the Company.

Interest Expense

Interest expense decreased $1.7 million in the third quarter of 2020 compared to
the third quarter of 2019 and $3.1 million during the nine months ended
September 30, 2020 compared with the same period in 2019. This decrease is
primarily due to hotel sales and the related reduction in our average corporate
and hotel-specific debt outstanding in 2020 as compared to 2019.

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Loss on Early Retirement of Debt


In the first quarter of 2020, we recognized a Loss on early retirement of debt
of $1.3 million related to the early payoff of our Line of Credit and a secured
debt agreement at RLH DC Venture. These loans were paid off using proceeds from
the sale of the Hotel RL Washington DC joint venture property and our leasehold
interest in the Red Lion Anaheim. In the second quarter of 2019, we recognized a
Loss on early retirement of debt of $0.2 million for unamortized deferred debt
issuance costs and prepayment fees incurred related to the payoff of a mortgage
loan at RLH DC Venture, which was replaced through a new mortgage loan with a
different lender.

Income Taxes

For the three and nine months ended September 30, 2020, we reported income tax
expense (benefit) of $18,000 and $(586,000) compared with income tax expense of
$486,000 and $676,000 for the same periods in 2019. The income tax benefit
recognized for the nine months ended September 30, 2020 is principally related
to the provisions of the CARES Act. The income tax expense recognized for the
three months ended September 30, 2020 and the three and nine months ended
September 30, 2019 varies from the statutory rate primarily due to a partial
valuation allowance against our deferred tax assets. See Note 13. Income Taxes
within Item 1. Financial Statements.

Liquidity and Capital Resources


Our principal source of liquidity is cash flow from operations. Cash flows may
fluctuate and are sensitive to many factors including changes in working capital
and the timing and magnitude of capital expenditures and payments on debt. We
believe the ongoing effects of COVID-19 on our operations have had, and will
continue to have, a material impact on our ability to generate cash from our
operations and our financial results, and the impact may continue beyond the
containment of the outbreak. We cannot assure you that our assumptions used to
estimate our liquidity requirements will be correct given the dynamic nature of
the situation.

Working capital, which represents current assets less current liabilities, was
$32.4 million and $23.0 million as of September 30, 2020 and December 31, 2019,
respectively. As of September 30, 2020, we had cash and cash equivalents of
$34.0 million and debt of $5.6 million. In order to preserve sufficient
liquidity during these uncertain times, we implemented certain cost saving
measures at the end of the first quarter of 2020, which included a reduction in
force of approximately 40%, company-wide compensation reductions, which have
since been substantially reinstated, consolidation of office space and a
reduction in 2020 capital expenditures and key money commitments. Based upon our
current liquidity position, and assumptions regarding the impact of COVID-19,
including its duration, economic impact and impact on travel, we believe that we
have sufficient liquidity to fund our operations at least through November 2021.
However, given the uncertain nature of the COVID-19 pandemic on our operations,
we cannot assure you that our assumptions used to estimate our liquidity
requirements will be correct.

We may seek to raise additional funds through public or private financings,
strategic relationships, sales of assets or other arrangements. We cannot assure
that such funds, if needed, will be available on terms attractive to us, or at
all. If we seek to raise capital through the sale of additional assets, sales
prices may be negatively impacted by the effect of COVID-19 on the hospitality
industry, and result in future impairments or losses on the final sale. Finally,
any additional equity financings may be dilutive to shareholders and debt
financing, if available, may involve covenants that place substantial
restrictions on our business.

We are committed to maintaining our infrastructure for systems and services we
provide to our franchisees. This requires ongoing access to capital investments
in technology and related assets.

                                       32
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Sources and Uses of our Cash, Cash Equivalents, and Restricted Cash

The following table summarizes our net cash flows for operating, investing, and financing activities (in thousands):

Nine Months Ended September 30,

                                                                             2020                2019
Net cash provided by (used in) operating activities                     $    (4,567)$   4,955
Net cash provided by (used in) investing activities                          35,121             (3,932)
Net cash provided by (used in) financing activities                         (28,288)               385



Operating Activities

Net cash used in operating activities totaled $4.6 million during the first nine
months of 2020 compared with cash provided by operating activities of $5.0
million during the same period in 2019. The primary driver of the change in cash
flows was an increase in net loss excluding Loss (gain) on asset dispositions,
net, Asset impairment, and Provision for doubtful accounts of approximately $3.2
million to $11.0 million for the nine months ended September 30, 2020 compared
to $7.8 million for the nine months ended September 30, 2019. Additionally,
there was a decrease in cash flows from operating asset and liability accounts
of approximately $1.3 million.

Investing Activities


Net cash provided by investing activities totaled $35.1 million during the first
nine months of 2020 compared with cash used in investing activities of $3.9
million during the same period in 2019. Cash flows increased for the nine months
ended September 30, 2020 primarily due to net proceeds from hotel sales of $36.9
million during the first quarter of 2020. Additionally, cash spent for capital
expenditures was reduced by $2.5 million during the nine months ended September
30, 2020 compared with the same period in 2019.

Financing Activities


Net cash used in financing activities was $28.3 million during the first nine
months of 2020 compared with cash provided by financing activities of $0.4
million in the first nine months of 2019. During the nine months ended September
30, 2020 we paid off an outstanding loan for one company operated property along
with the outstanding balance on our Line of Credit. Additionally, we borrowed
and repaid approximately $4.2 million under the PPP loan program in the second
quarter of 2020. During the nine months ended September 30, 2019, we executed
new mortgage loans for three company operated hotel properties while paying off
one. Some of the loan proceeds were distributed to joint venture partners and
used to pay down a portion of the outstanding principal on our Senior Secured
Term Loan.

Debt

As of September 30, 2020, we had outstanding total debt, excluding unamortized
deferred financing costs and discounts, of $5.6 million. This outstanding debt
is secured by the Hotel RL Olympia and the debt agreement includes financial
covenants that the hotel property is required to meet. Primarily due to the
negative economic impact of the COVID-19 pandemic, the property failed to meet
the minimum required financial covenants as of the semi-annual calculation of
June 30, 2020. Due to the contractual cure period provisions the debt will not
be called due prior to the maturity date in March 2021. We continue to pursue
options to address the debt prior to maturity, such as the sale of property or
alternative financing.

                                       33
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In February 2020, we sold the Hotel RL Washington DC for $16.4 million. Using
proceeds from the sale, together with the release of $2.3 million in restricted
cash held by the lender CP Business Finance I, LP, RLH DC Venture repaid the
remaining outstanding principal balance and accrued exit fee under the loan
agreement of $17.7 million, plus a prepayment penalty of $0.6 million.

Also in February of 2020, using the net proceeds from the sale of our leasehold
interest in the Red Lion Anaheim, we repaid the outstanding Line of Credit
balance of $10.0 million. Upon repayment of the outstanding balance, the Line of
Credit was terminated and these funds are no longer available to us.

See Note 8. Debt and Line of Credit within Item 1. Financial Statements of this
quarterly report on Form 10-Q, for further additional information about our debt
obligations.

Off-Balance Sheet Arrangements

As of September 30, 2020, we had no off-balance sheet arrangements which have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates


The preparation of condensed consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that effect:
(i) the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements, and (ii) the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ materially from those estimates. We consider a critical
accounting policy to be one that is both important to the portrayal of our
financial condition and results of operations and requires management's most
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. Since the date of our
annual report on Form 10-K for the fiscal year ended December 31, 2019, we have
made no material changes to our critical accounting policies or the
methodologies or assumptions that we apply under them.

New and Recent Accounting Pronouncements

See Note 2. Summary of Significant Accounting Policies within Item 1. Financial Statements of this quarterly report on Form 10-Q for information on new and recent GAAP accounting pronouncements.

                                       34

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