RED LION HOTELS CORPORATION 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 endedDecember 31, 2019 , which we filed with theSecurities and Exchange Commission onFebruary 27, 2020 , and in our subsequent filings with theSecurities 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 toRed Lion Hotels Corporation , doing business asRLH 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. •RedLion 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 endedDecember 31, 2019 , which are included in our annual report on Form 10-K for the year endedDecember 31, 2019 .
COVID-19 Update
COVID-19 was first identified inWuhan, China inDecember 2019 , and subsequently declared a pandemic by theWorld 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. 22 -------------------------------------------------------------------------------- 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 asRLH 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 inthe United States andCanada :Hotel RL ,Red Lion Hotels ,Red Lion Inn & Suites , GuestHouse Extended Stay,Americas Best Value Inn ("ABVI"),Canadas Best Value Inn ("CBVI"), Signature andSignature Inn , andKnights 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 inFebruary 2019 .
Our remaining activities, none of which constitutes a reportable segment, are aggregated into "other."
23
--------------------------------------------------------------------------------
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
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
Midscale Brand Economy Brand Total
Executed franchise license agreements, nine months ended
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
--------------------------------------------------------------------------------
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
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)
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 endedSeptember 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 ourRed 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 endedSeptember 30, 2019 , we reported a net loss of$6.7 million , which included a$5.4 million asset impairment on ourHotel 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 certainInner 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 endedSeptember 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 certainInner Circle franchisees and other customer balances determined to be uncollectible during the nine months endedSeptember 30, 2020 , a$2.5 million asset impairment on ourRed 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. 25 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2019 , we reported a net loss of$15.0 million , which included a$5.4 million asset impairment on ourHotel 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 certainInner 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 endedSeptember 30, 2020 , Adjusted EBITDA was$1.5 million compared with$5.9 million in 2019. This decrease was due to franchise agreement terminations and the negative impact of COVID-19 on our operating results, as well as a decrease in profits resulting from hotels disposed of in the fourth quarter of 2019 and the first quarter of 2020. For the nine months endedSeptember 30, 2020 , Adjusted EBITDA was$(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 certainInner Circle franchisees in bankruptcy and other customer balances determined to be uncollectible during the nine months endedSeptember 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 inthe 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. 26 --------------------------------------------------------------------------------
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
(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 ourRed Lion Hotel Seattle Airport leased property. In the third quarter of 2019 we recognized an impairment on ourHotel 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 inMarch 2020 and to our Chief Operating Officer upon the announcement of his departure inSeptember 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 atRL 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 endedSeptember 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 inCalifornia . 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
27-------------------------------------------------------------------------------- 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 endedSeptember 30, 2020 compared to the three and nine months endedSeptember 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 endedSeptember 30, 2020 , respectively. Other franchise revenues decreased$1.3 million or 66% and$1.6 million or 43% for the three and nine months endedSeptember 30, 2020 compared to the three and nine months endedSeptember 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
Three months ended
During the three months endedSeptember 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
During the nine months endedSeptember 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 endedSeptember 30, 2020 , compared to$18.3 million for the nine months endedSeptember 30, 2019 . This decrease was primarily due to the negative impact of the COVID-19 pandemic on hotel occupancy. 28 --------------------------------------------------------------------------------
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
Selling, general, administrative and other expenses decreased by$3.7 million or 43% for the three months endedSeptember 30, 2020 compared with three months endedSeptember 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 certainInner 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
29
--------------------------------------------------------------------------------
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 certainInner 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
Three months ended
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
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 endedSeptember 30, 2020 compared to$15.7 million for the nine months endedSeptember 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
--------------------------------------------------------------------------------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
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 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 endedSeptember 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. 31 --------------------------------------------------------------------------------
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 theHotel RL Washington DC joint venture property and our leasehold interest in the RedLion 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 endedSeptember 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 endedSeptember 30, 2020 is principally related to the provisions of the CARES Act. The income tax expense recognized for the three months endedSeptember 30, 2020 and the three and nine months endedSeptember 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 ofSeptember 30, 2020 andDecember 31, 2019 , respectively. As ofSeptember 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 throughNovember 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 --------------------------------------------------------------------------------
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
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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 ofSeptember 30, 2020 , we had outstanding total debt, excluding unamortized deferred financing costs and discounts, of$5.6 million . This outstanding debt is secured by theHotel 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 ofJune 30, 2020 . Due to the contractual cure period provisions the debt will not be called due prior to the maturity date inMarch 2021 . We continue to pursue options to address the debt prior to maturity, such as the sale of property or alternative financing. 33 -------------------------------------------------------------------------------- InFebruary 2020 , we sold theHotel 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 lenderCP 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 RedLion 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
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 endedDecember 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--------------------------------------------------------------------------------
© Edgar Online, source
