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EX-31.1 - EXHIBIT 31.1 - Red Lion Hotels CORPrlhex31110q9-30x2015.htm
EX-32.1 - EXHIBIT 32.1 - Red Lion Hotels CORPrlhex32110q9-30x2015.htm
EX-31.2 - EXHIBIT 31.2 - Red Lion Hotels CORPrlhex31210q9-30x2015.htm
EX-32.2 - EXHIBIT 32.2 - Red Lion Hotels CORPrlhex32210q9-30x2015.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-13957 
 __________________________________________
RED LION HOTELS CORPORATION
(Exact name of registrant as specified in its charter)
  __________________________________________
Washington
 
91-1032187
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
201 W. North River Drive, Suite 100
Spokane Washington
 
99201
(Address of principal executive offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (509) 459-6100 
 __________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
 
o
  
Accelerated filer
 
ý
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  o    No  ý
As of November 2, 2015, there were 20,051,145 shares of the registrant’s common stock outstanding.



TABLE OF CONTENTS
 
 
 
 
Item No.
Description
Page No.
 
 
 
 
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1
 
 
Consolidated Balance Sheets at September 30, 2015 and December 31, 2014
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014
 
Item 2
Item 3
Item 4
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
 



2


PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements

RED LION HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2015 and December 31, 2014
 
 
September 30,
2015
 
December 31,
2014
 
 
(In thousands, except share data)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
75,889

 
$
5,126

Restricted cash
 
13,303

 
225

Short-term investments
 
7,866

 

Accounts receivable, net
 
8,909

 
6,752

Notes receivable, net
 
287

 
2,944

Inventories
 
1,065

 
1,013

Prepaid expenses and other
 
3,753

 
3,671

Deferred income taxes
 
629

 

Assets held for sale
 

 
21,173

Total current assets
 
111,701

 
40,904

Property and equipment, net
 
168,070

 
160,410

Goodwill
 
8,512

 
8,512

Intangible assets
 
15,474

 
7,012

Notes receivable, long term
 
1,685

 
2,340

Other assets, net
 
4,249

 
3,849

Total assets
 
$
309,691

 
$
223,027

LIABILITIES
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
5,632

 
$
2,952

Accrued payroll and related benefits
 
6,767

 
4,567

Other accrued entertainment expenses
 
8,374

 
5,625

Other accrued expenses
 
6,467

 
2,547

Deferred income taxes
 

 
2,778

Total current liabilities
 
27,240

 
18,469

Long-term debt, due after one year, net of discount
 
102,265

 
60,698

Deferred income
 
2,637

 
2,988

Deferred income taxes
 
3,442

 
35

Total liabilities
 
135,584

 
82,190

Commitments and contingencies
 


 


STOCKHOLDERS’ EQUITY
 
 
 
 
Red Lion Hotels Corporation stockholders' equity
 
 
 
 
Preferred stock- 5,000,000 shares authorized; $0.01 par value; no shares issued or outstanding
 

 

Common stock - 50,000,000 shares authorized; $0.01 par value; 20,039,079 and 19,846,508 shares issued and outstanding
 
200

 
198

Additional paid-in capital
 
143,299

 
153,671

Accumulated other comprehensive income (loss)
 

 
(203
)
Retained earnings (accumulated deficit)
 
(3,780
)
 
(12,829
)
Total Red Lion Hotels Corporation stockholders' equity
 
139,719

 
140,837

Noncontrolling interest
 
34,388

 

Total stockholders' equity
 
174,107

 
140,837

Total liabilities and stockholders’ equity
 
$
309,691

 
$
223,027


The accompanying condensed notes are an integral part of the consolidated financial statements.

3


RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
For the Three and Nine Months Ended September 30, 2015 and 2014
 
 
 
Three Months Ended
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In thousands, except per share data)
Revenue:
 
 
 
 
 
 
 
 
Company operated hotels
 
$
36,972

 
$
36,758

 
$
91,092

 
$
94,081

Other revenues from managed properties
 
1,147

 

 
2,274

 

Franchised hotels
 
3,800

 
2,066

 
9,123

 
8,044

Entertainment
 
1,800

 
3,306

 
7,537

 
13,950

Other
 
16

 
14

 
38

 
65

Total revenues
 
43,735

 
42,144

 
110,064

 
116,140

Operating expenses:
 
 
 
 
 
 
 
 
Company operated hotels
 
25,439

 
24,776

 
68,578

 
72,827

Other costs from managed properties
 
1,147

 

 
2,274

 

Franchised hotels
 
3,087

 
1,761

 
8,494

 
5,259

Entertainment
 
1,666

 
3,092

 
7,041

 
11,946

Other
 
10

 
72

 
26

 
237

Depreciation and amortization
 
3,484

 
3,241

 
9,603

 
9,566

Hotel facility and land lease
 
1,894

 
1,167

 
5,089

 
3,492

(Gain) loss on asset dispositions, net
 
(88
)
 
40

 
(16,590
)
 
(3,439
)
General and administrative expenses
 
2,676

 
1,899

 
7,803

 
6,078

Total operating expenses
 
39,315

 
36,048

 
92,318

 
105,966

Operating income (loss)
 
4,420

 
6,096

 
17,746

 
10,174

Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(1,989
)
 
(1,041
)
 
(5,228
)
 
(3,436
)
Loss on early retirement of debt
 

 

 
(1,159
)
 

Other income, net
 
75

 
46

 
380

 
203

Income (loss) from continuing operations before taxes
 
2,506

 
5,101

 
11,739

 
6,941

Income tax expense (benefit)
 
(49
)
 

 
37

 
31

Net income (loss) from continuing operations
 
2,555

 
5,101

 
11,702

 
6,910

Discontinued operations
 
 
 
 
 
 
 
 
Loss from discontinued business units, net of income tax benefit of $0
 

 

 

 
(187
)
Loss on disposal of the assets of discontinued business units, net of income tax benefit of $0
 

 

 

 
(2
)
Net income (loss) from discontinued operations
 

 

 

 
(189
)
Net income (loss)
 
2,555

 
5,101

 
11,702

 
6,721

Net (income) loss attributable to noncontrolling interest
 
(1,746
)
 

 
(2,653
)
 

Net income (loss) attributable to Red Lion Hotels Corporation
 
$
809

 
$
5,101

 
$
9,049

 
$
6,721

Earnings per share - basic
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Red Lion Hotels Corporation
 
$
0.04

 
$
0.26

 
$
0.45

 
$
0.35

Income (loss) from discontinued operations
 
$

 
0.00

 
$

 
$
(0.01
)
Net income (loss) attributable to Red Lion Hotels Corporation
 
$
0.04

 
$
0.26

 
$
0.45

 
$
0.34

Earnings per share - diluted
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Red Lion Hotels Corporation
 
$
0.04

 
$
0.26

 
$
0.45

 
$
0.35

Income (loss) from discontinued operations
 
$

 
$
0.00

 
$

 
$
(0.01
)
Net income (loss) attributable to Red Lion Hotels Corporation
 
$
0.04

 
$
0.26

 
$
0.45

 
$
0.34


The accompanying condensed notes are an integral part of the consolidated financial statements.

4


RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2015 and 2014
 
 
 
Nine Months Ended
 
 
September 30,
 
 
2015
 
2014
 
 
(In thousands)
Operating activities:
 
 
 
 
Net income (loss)
 
$
11,702

 
$
6,721

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
10,150

 
9,566

Gain on disposition of property, equipment and other assets, net
 
(16,592
)
 
(3,437
)
Loss on early retirement of debt
 
1,074

 
170

Deferred income taxes
 

 
7

Equity in investments
 
101

 
34

Stock based compensation expense
 
1,008

 
965

Provision for doubtful accounts
 
580

 
149

Change in current assets and liabilities:
 
 
 
 
Restricted cash
 
(7,922
)
 

Accounts receivable
 
(2,748
)
 
(735
)
Notes receivable
 
(177
)
 
(145
)
Inventories
 
(110
)
 
108

Prepaid expenses and other
 
(899
)
 
(3
)
Accounts payable
 
2,681

 
(717
)
Accrued other
 
8,989

 
4,501

Net cash provided by (used in) operating activities
 
7,837

 
17,184

Investing activities:
 
 
 
 
Purchase of hotels
 
(6,421
)
 

Purchase of GuestHouse International assets
 
(8,855
)
 

Capital expenditures
 
(10,707
)
 
(7,260
)
Proceeds from disposition of property and equipment
 
37,730

 
16,176

Proceeds from sale of joint venture interests
 
21,565

 

Distributions to noncontrolling interests
 
(1,319
)
 

Collection of notes receivable related to property sales
 
3,499

 
200

Purchase of short-term investments
 
(7,866
)
 

Change in restricted cash
 
(5,156
)
 

Advances to Red Lion Hotels Capital Trust
 
(27
)
 
(27
)
Other, net
 

 
62

Net cash provided by (used in) investing activities
 
22,443

 
9,151

Financing activities:
 
 
 
 
Borrowings on long-term debt
 
74,380

 

Repayment of long-term debt
 
(30,528
)
 
(10,958
)
Debt issuance costs
 
(3,479
)
 
(6
)
Other, net
 
110

 
69

Net cash provided by (used in) financing activities
 
40,483

 
(10,895
)
 
 
 
 
 
Change in cash and cash equivalents:
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
70,763

 
15,440

Cash and cash equivalents at beginning of period
 
5,126

 
13,058

Cash and cash equivalents at end of period
 
$
75,889

 
$
28,498


The accompanying condensed notes are an integral part of the consolidated financial statements





5







RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (Continued)
For the Nine Months Ended September 30, 2015 and 2014

 
 
Nine Months Ended
 
 
September 30,
 
 
2015
 
2014
 
 
(In thousands)
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during periods for:
 
 
 
 
Income taxes
 
$
20

 
$
40

Interest on long-term debt
 
$
4,576

 
$
3,315

Non-cash operating, investing and financing activities:
 
 
 
 
Reclassification of property and other assets to assets held for sale
 
$

 
$
17,682

Reclassification between short and long term notes receivable
 
$
2,120

 
$

Exchange of note receivable for real property
 
$

 
$
200

Reclassification between accounts receivable and notes receivable
 
$
51

 
$

      Common stock redeemed
 
$

 
$
155


The accompanying condensed notes are an integral part of the consolidated financial statements.

6


RED LION HOTELS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
Organization

Red Lion Hotels Corporation ("RLHC", "we", "our", "us" or "our company") is a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the management, franchising and ownership of hotels under our proprietary brands, including Hotel RL, Red Lion Hotels, Red Lion Inns & Suites, GuestHouse International, Settle Inn & Suites and Leo Hotel Collection (collectively the "RLHC Brands"). All of our hotels currently operate under the RLHC Brands which represent upper midscale, midscale and economy hotels.

A summary of our properties as of September 30, 2015 is provided below:
 
 
Hotels
 
Total
Available
Rooms
Company operated hotels
 
 
 
 
Majority owned and consolidated
 
13

 
2,660

Leased and consolidated
 
5

 
1,027

Managed
 
2

 
487

Franchised hotels
 
104

 
10,132

Leo Hotel Collection
 
1

 
300

Total systemwide
 
125

 
14,606


We are also engaged in entertainment operations, which derive revenues from promotion and presentation of entertainment productions and ticketing services under the operations of WestCoast Entertainment and TicketsWest. The ticketing service offers online ticket sales, ticketing inventory management systems, call center services, and outlet/electronic distributions for event locations.

We were incorporated in the state of Washington in April 1978, and until 2005 operated hotels under various other brand names including Cavanaughs Hotels and WestCoast Hospitality Corporation. The financial statements encompass the accounts of Red Lion Hotels Corporation and all of its consolidated subsidiaries, including Red Lion Hotels Holdings, Inc., Red Lion Hotels Franchising, Inc., Red Lion Hotels Management, Inc. ("RL Management"), Red Lion Hotels Limited Partnership, RL Venture LLC ("RL Venture"), RLS Balt Venture LLC ("RLS Balt Venture") and RLS Atla Venture LLC ("RLS Atla Venture").

The financial statements include an equity method investment in a 19.9% owned real estate venture, as well as certain cost method investments in various entities included as other assets, over which we do not exercise significant influence. In addition, we hold a 3% common interest in Red Lion Hotels Capital Trust (the “Trust”) that is considered a variable interest entity. We are not the primary beneficiary of the Trust; thus, it is treated as an equity method investment.

2.
Basis of Presentation

The unaudited consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Certain information and footnote disclosures normally included in financial statements have been condensed or omitted as permitted by such rules and regulations.

The consolidated balance sheet as of December 31, 2014 has been compiled from the audited balance sheet as of such date. We believe the disclosures included herein are adequate; however, they should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2014, previously filed with the SEC on Form 10-K.

In the opinion of management, these unaudited consolidated financial statements contain all of the adjustments of a normal and recurring nature necessary to present fairly our consolidated financial position at September 30, 2015, the consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2015 and 2014, and the consolidated cash flows for the nine months ended September 30, 2015 and 2014. The comprehensive income (loss) for the periods presented may not be indicative of that which may be expected for a full year.


7


Management makes estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the disclosures of contingent liabilities. Actual results could materially differ from those estimates and interim results may not be indicative of fiscal year performance because of seasonal and short-term variations.

Changes to Significant Accounting Policies

We recognize other revenue and costs from managed properties when we incur the related reimbursable costs. These costs primarily consist of payroll and related expenses at managed properties where we are the employer. As these costs have no added markup, the revenue and related expense have no impact on either our operating or net income.

We recognize key money paid in conjunction with entering into long-term franchise agreements as prepaid expenses and amortize the amount paid against revenue over the term of the franchise agreements.

Short-term investments consist of variable rate demand notes with maturities that range from two to thirty-five years. They are all classified as available-for-sale. The carrying amounts are reasonable estimates of their fair values due to interest rates which are variable in nature and a put provision at par plus accrued interest.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Except as otherwise described, these reclassifications had no material effect on net income/loss, total assets, total liabilities, total stockholders’ equity, or net cash flows as previously reported.

3.
Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption beginning January 1, 2017. We are in the process of evaluating this guidance and our method of adoption.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which changes the consolidation analysis for both the variable interest model and for the voting model for limited partnerships and similar entities. ASU 2015-02 is effective for annual and interim periods beginning after December 15, 2015 and early application is permitted. ASU 2015-02 provides for one of two methods of transition: retrospective application to each prior period presented; or recognition of the cumulative effect of retrospective application of the new standard in the period of initial application. We are in the process of evaluating this guidance and our method of adoption.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015 and early application is permitted. We early adopted this guidance in the first quarter of 2015. We utilized retrospective application of the new standard and reclassified prior period balances of prepaid debt fees to debt discount.

In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for annual and interim reporting periods beginning after December 15, 2015. We are in the process of evaluating this guidance and our method of adoption.

Management has assessed the potential impact of other recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to our company, or are not anticipated to have a material impact on our consolidated financial statements.


8


4.     Variable Interest Entities

RL Venture

In January 2015, we transferred 12 of our wholly-owned hotels into RL Venture, a newly created entity that was initially wholly-owned by us. Subsequently, we sold a 45% ownership stake in RL Venture to Shelbourne Falcon RLHC Hotel Investors LLC ("Shelbourne Falcon"), an entity that is led by Shelbourne Capital LLC ("Shelbourne"). We maintain a 55% interest in RL Venture and the 12 hotels are managed by RL Management, one of our wholly-owned subsidiaries, subject to a management agreement. RL Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RL Venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we maintain a majority financial position, (b) we maintain management of the properties, and (c) the properties remain branded with RLHC Brands. As a result, we consolidate all of the activities of RL Venture. The equity interest owned by Shelbourne Falcon is reflected as noncontrolling interest in the consolidated financial statements. We recognized a $12.3 million loss on the sale of the equity interests as a reduction to additional paid in capital.

Cash distributions are made periodically based on calculated distributable income. During the third quarter of 2015, RL Venture made its first cash distribution of $2.9 million, of which we received $1.6 million.

RL Venture is considered a significant subsidiary; therefore the following condensed financial statements are presented to satisfy disclosure requirements of Rule 3-05 of Regulation S-X. The liabilities of RL Venture, other than its long-term debt, are non-recourse to our general credit and assets. The long-term debt is non-recourse as to RL Venture, but several investors in RL Venture, including us, are guarantors regarding completion of certain improvements to the hotels, environmental covenants in the loan agreement, losses incurred by the lender and any event of bankruptcy involving RL Venture or any of its subsidiaries.

Condensed Balance Sheet
September 30, 2015
Assets:
 
Cash and restricted cash
$
15,422

Accounts receivable, net
2,445

Inventories
476

Prepaid expenses and other assets
439

Property and equipment, net
107,991

Total assets
$
126,773

 
 
Liabilities:
 
Accounts payable
$
2,298

Accrued payroll and related benefits
1,869

Other accrued expenses
2,062

Long-term debt
53,678

Total liabilities
59,907

Shareholders' equity
66,866

Total liabilities and stockholders' equity
$
126,773



9


Condensed Statement of Income (Loss)
Three months ended
 
Nine months ended
 
September 30, 2015
 
September 30, 2015
Hotel revenue
$
23,821

 
$
57,573

Hotel operating expenses
14,700

 
37,772

Depreciation and amortization
1,979

 
5,640

General and administrative expenses
1,960

 
5,149

Other expenses
17

 
58

Operating income (loss)
5,165

 
8,954

Interest expense
874

 
2,474

Net income (loss)
$
4,291

 
$
6,480


RLS Balt Venture

In April 2015, we sold a 21% member interest in our wholly-owned RLS Balt Venture to Shelbourne Falcon Charm City Investors LLC ("Shelbourne Falcon II"), an entity led by Shelbourne. Shelbourne Falcon II has an option exercisable until December 31, 2015 to purchase an additional 24% member interest for $2.3 million. RL Baltimore, LLC ("RL Baltimore"), which is wholly-owned by RLS Balt Venture, owns the Hotel RL Baltimore Inner Harbor, which is managed by RL Management. RLS Balt Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RLS Balt Venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we maintain a majority financial position, (b) we maintain management of the property, and (c) the property remains branded with a RLHC Brand. As a result, we consolidate all of the activities of RLS Balt Venture. The equity interest owned by Shelbourne Falcon II is reflected as a noncontrolling interest in the consolidated financial statements.

Cash distributions are made periodically based on calculated distributable income. There were no cash distributions made during the three or nine months ended September 30, 2015.

RLS Atla Venture

In September 2015, we formed a joint venture, RLS Atla Venture, with Shelbourne Falcon Big Peach Investors LLC ("Shelbourne Falcon III"), an entity led by Shelbourne. We own a 55% interest in the joint venture and Shelbourne Falcon III owns a 45% interest. RLH Atlanta LLC ("RLH Atlanta"), which is wholly-owned by RLS Atla Venture, owns a hotel adjacent to the Atlanta International Airport that is expected to open in the first quarter of 2016 as the Red Lion Hotel Atlanta International Airport. RLS Atla Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RLS Atla Venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we maintain a majority financial position, (b) we maintain management of the property, and (c) the property remains branded with a RLHC Brand. As a result, we consolidate all of the activities of RLS Atla Venture. The equity interest owned by Shelbourne Falcon III is reflected as a noncontrolling interest in the consolidated financial statements.

Cash distributions are made periodically based on calculated distributable income. There were no cash distributions made during the three or nine months ended September 30, 2015.


10


5.    Property and Equipment

Property and equipment is summarized as follows (in thousands):
 
 
September 30,
2015
 
December 31,
2014
Buildings and equipment
 
$
182,919

 
$
182,273

Landscaping and land improvements
 
7,174

 
6,943

Furniture and fixtures
 
32,241

 
31,910

 
 
222,334

 
221,126

Less accumulated depreciation
 
(124,650
)
 
(117,968
)
 
 
97,684

 
103,158

Land
 
38,891

 
39,087

Construction in progress
 
31,495

 
18,165

Property and equipment, net
 
$
168,070

 
$
160,410


The table above excludes the property and equipment balances of assets held for sale. See Note 6 for further discussion.

6.    Assets Held for Sale

As of September 30, 2015, there were no properties classified as assets held for sale. The properties classified as assets held for sale on December 31, 2014 were the Red Lion Hotel Bellevue in Bellevue, Washington ("Bellevue property") and the Red Lion Hotel Wenatchee in Wenatchee, Washington ("Wenatchee property"), both of which were sold during the first quarter of 2015 as follows:
In January 2015, we sold the Wenatchee property for $4.1 million and concurrently entered into a franchise agreement with the new owner. We recognized a gain of $0.2 million on the sale.
In February 2015, we sold the Bellevue property for $35.4 million and concurrently entered into a management agreement with the new owner. We recognized a gain of $16.2 million on the sale.

The property and equipment of these properties that are classified as assets held for sale on the December 31, 2014 consolidated balance sheet are detailed in the table below (in thousands):
 
 
December 31,
2014
Buildings and equipment
 
$
16,339

Landscaping and land improvements
 
345

Furniture and fixtures
 
1,948

 
 
18,632

Less accumulated depreciation and amortization
 
(8,537
)
 
 
10,095

Land
 
11,066

Construction in progress
 
12

Assets held for sale
 
$
21,173


7.    Discontinued Operations

There were no discontinued operations for the three or nine months ended September 30, 2015. Discontinued operations for the three and nine months ended September 30, 2014, includes the Red Lion Hotel Eugene in Eugene, Oregon which we ceased operating when we assigned our lease to a third party. Accordingly, all operations of this property have been classified as discontinued operations since the fourth quarter of 2013.

11



The following table summarizes the results of discontinued operations for the periods indicated (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues
 
$

 
$

 
$

 
$
133

Operating expenses
 

 

 

 
(298
)
Hotel facility and land lease
 

 

 

 
(30
)
Loss from operations of discontinued business units
 

 

 

 
(195
)
Loss on disposal and impairment of the assets of the discontinued business units
 

 

 

 
(2
)
Loss from discontinued operations
 
$

 
$

 
$

 
$
(197
)

8.     Goodwill and Intangible Assets

Goodwill represents the excess of the estimated fair value of the net assets acquired during business combinations over the net tangible and identifiable intangible assets acquired. Goodwill was recorded in prior years in connection with the acquisitions of franchises and entertainment businesses.

The Red Lion and GuestHouse International brand names are identifiable, indefinite-lived intangible assets that represents the separable legal right to a trade name and associated trademarks. We acquired the Red Lion brand name in a business combination we entered into in 2001. We purchased the GuestHouse International and Settle Inn & Suites brand names from GuestHouse International LLC in April 2015 and have allocated a preliminary purchase price of $5.4 million.

In the table below, the customer contracts represent the franchise license agreements acquired with the GuestHouse International brand. We have allocated a preliminary purchase price of $3.4 million. Franchise license agreements are amortized over 10 years which represents the period of expected cash flows, using an accelerated amortization method that matches the economic benefit of the agreements.

In the third quarter of 2015, we determined the contingent consideration due to the sellers of GuestHouse International had not been earned and reduced our allocation of the purchase price by $1.5 million.

We estimated the fair value of our customer contracts and brand names purchased from GuestHouse International using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. See Note 15 for additional information.

We assess goodwill and the other intangible assets for potential impairments annually as of October 1, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the assets. We did not impair any goodwill or intangible assets during the nine months ended September 30, 2015 or 2014.

The following table summarizes the balances of goodwill and other intangible assets (in thousands):
 
September 30, 2015
 
December 31, 2014
Goodwill
$
8,512

 
$
8,512

Intangible assets
 
 
 
Brand names
$
12,314

 
$
6,878

Customer contracts
3,026

 

Trademarks
134

 
134

Total intangible assets
$
15,474

 
$
7,012


12


     
Goodwill and other intangible assets attributable to each of our business segments were as follows (in thousands):  
 
September 30, 2015
 
December 31, 2014
 
 
 
Other
 
 
 
Other
 
Goodwill
 
Intangibles
 
Goodwill
 
Intangibles
Company operated hotels
$

 
$
4,659

 
$

 
$
4,659

Franchised hotels
5,351

 
10,809

 
5,351

 
2,347

Entertainment
3,161

 
6

 
3,161

 
6

Total
$
8,512

 
$
15,474

 
$
8,512

 
$
7,012


The following table summarizes the balances of amortized customer contracts (in thousands):
 
September 30, 2015

 
December 31, 2014

Historical cost
$
3,420

 
$

Accumulated amortization
(394
)
 

Net carrying amount
$
3,026

 
$


As of September 30, 2015, estimated future amortization expenses related to intangible assets is as follows (in thousands):
Year Ending December 31,
Amount
2015
$
174

2016
625

2017
531

2018
433

2019
366

Thereafter
897

Total
$
3,026



9. Long-Term Debt
The current and non-current portions of long-term debt and capital lease obligations as of September 30, 2015 and December 31, 2014 are as follows:
 
 
September 30, 2015
 
December 31, 2014
 
 
Current
 
Non-Current
 
Current
 
Non-Current
RL Venture
 
$

 
$
53,678

 
$

 
$

RL Baltimore
 

 
12,030

 

 

RLH Atlanta
 

 
5,732

 

 

Wells Fargo
 

 

 

 
29,873

Debentures due Red Lion Hotels Capital Trust
 

 
30,825

 

 
30,825

Total
 
$

 
$
102,265

 
$

 
$
60,698

RL Venture
    
In January 2015, RL Venture Holding LLC, a wholly-owned subsidiary of RL Venture, and each of its 12 wholly-owned subsidiaries entered into a loan agreement with Pacific Western Bank. The original principal amount of the loan was $53.8 million with an additional $26.2 million to be drawn over a two-year period to cover improvements related to the 12 hotels. We drew $1.9 million in the nine months ended September 30, 2015. At September 30, 2015, there were unamortized debt issuance fees of $2.0 million.

13


The loan matures in January 2019 and has a one-year extension option. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 4.75%. Fixed monthly principal payments begin in January 2017 in an amount that would repay the outstanding principal balance over a twenty-five year amortization period.

The loan requires us to comply with customary reporting and operating covenants applicable to RL Venture, including requirements relating to debt service loan coverage ratios. It also includes customary events of default. We were in compliance with these covenants at September 30, 2015.

RL Baltimore

In April 2015, RL Baltimore obtained a new mortgage loan from PFP Holding Company IV LLC, an affiliate of Prime Finance, secured by the Hotel RL Baltimore Inner Harbor. The initial principal amount of the loan was $10.1 million, and the lender agreed to advance an additional $3.2 million to cover expenses related to improvements to the hotel. We drew $2.6 million in the nine months ended September 30, 2015. At September 30, 2015, there were unamortized debt issuance fees of $0.7 million.

The loan matures in May 2018 and has two one-year extension options. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 6.25%. No principal payments are required during the initial term of the loan. Principal payments of $16,000 per month are required beginning in May 2018 if the extension option is exercised.

The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default. The liability of RL Baltimore under the loan agreement is generally non-recourse.  However, the lender may obtain a monetary judgment against RL Baltimore if the lender suffers losses under certain circumstances listed in the loan agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations.  RLHC has guaranteed these recourse obligations of RL Baltimore and agreed to customary reporting and operating covenants. We were in compliance with these covenants at September 30, 2015.

RLH Atlanta

In September 2015, RLH Atlanta obtained a new mortgage loan from PFP Holding Company IV LLC, an affiliate of Prime Finance, secured by a hotel adjacent to the Atlanta International Airport which is expected to open in the first quarter of 2016 as the Red Lion Hotel Atlanta International Airport. The initial principal amount of the loan was $6.0 million, and the lender has agreed to advance an additional $3.4 million to cover expenses related to improvements to the hotel. We drew no additional funds in the nine months ended September 30, 2015. At September 30, 2015, there were unamortized debt issuance fees of $0.3 million.

The loan matures in September 2018 and has two one-year extension options. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 6.35%. No principal payments are required during the initial term of the loan.

The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default. The liability of RLH Atlanta under the loan agreement is generally non-recourse.  However, the lender may obtain a monetary judgment against RL Atlanta if the lender suffers losses under certain circumstances listed in the loan agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations.  RLHC has guaranteed these recourse obligations of RL Atlanta and agreed to customary reporting and operating covenants. We were in compliance with these covenants at September 30, 2015.
Wells Fargo
In January 2015, in connection with the RL Venture transaction, we repaid the outstanding balance of our Wells Fargo term loan. We recognized a $1.2 million "Loss on early retirement of debt" on the Consolidated Statement of Comprehensive Income (Loss) related to termination fees and write-off of the previously recorded prepaid debt fees and unamortized debt discount balances.
In January 2015, in connection with the sale of the Bellevue property, we terminated the $10 million revolving credit facility associated with the term loan. There was no impact on our financial statements.
Debentures due Red Lion Hotels Capital Trust
Together with the Trust, we completed a public offering of $46.0 million of trust preferred securities in 2004. The securities are listed on the New York Stock Exchange and entitle holders to cumulative cash distributions at a 9.5% annual rate with maturity in February 2044. The cost of the offering totaled $2.3 million, which the Trust paid through an advance by us. The advance to the Trust is included with other noncurrent assets on our consolidated balance sheets.

14


We simultaneously borrowed all of the proceeds from the offering, including our original 3% trust common investment of $1.4 million, and issued 9.5% debentures to the Trust that are included as a long-term liability on our consolidated balance sheets. The debentures mature in 2044 and their payment terms mirror the distribution terms of the trust securities. The debenture agreement required the mandatory repayment of 35% of the then-outstanding debentures at a 5% premium if we completed an offering of common shares with gross proceeds of at least $50 million. In accordance therewith and in connection with a common stock offering in May 2006, we repaid approximately $16.6 million of the debentures. As required by the terms of the trust securities, the Trust then redeemed 35% of the outstanding trust preferred securities and trust common securities at a price of $26.25 per share, a 5% premium over their issuance price. Of the $16.6 million, approximately $0.5 million was received back by us for our trust common securities and was reflected as a reduction of our investment in the Trust. At September 30, 2015 and December 31, 2014, debentures due the Trust totaled $30.8 million.

10.    Derivative Financial Instruments

We do not enter into derivative transactions for trading purposes, but rather to hedge our exposure to interest rate fluctuations. We manage our floating rate debt using interest rate caps in order to reduce our exposure to the impact of changing interest rates and future cash outflows for interest.

RL Venture

As required under our RL Venture loan, we entered into an interest rate cap with Commonwealth Bank of Australia to cap our interest rate exposure. The cap had an original notional amount of $80.0 million and caps the LIBOR reference rate at 5.0%. The cap expires in January 2018.

We estimate the fair value of this interest rate cap using standard calculations that use as their basis readily available observable market parameters. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service. At September 30, 2015, the valuation of the interest rate cap resulted in the recognition of an asset totaling $8,000, which is included in "Other assets, net" on the Consolidated Balance Sheet.

RL Baltimore

As required under our RL Baltimore loan, we entered into an interest rate cap with Commonwealth Bank of Australia to cap our interest rate exposure. The cap had an original notional amount of $13.3 million and caps the LIBOR reference rate at 3.0%. The cap expires in May 2018.

We estimate the fair value of this interest rate cap using standard calculations that use as their basis readily available observable market parameters. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service. At September 30, 2015, the valuation of the interest rate cap resulted in the recognition of an asset totaling $8,000, which is included in "Other assets, net" on the Consolidated Balance Sheet.

RLH Atlanta

As required under our RLH Atlanta loan, we entered into an interest rate cap with SMBC Capital Markets, Inc. to cap our interest rate exposure. The cap had an original notional amount of $9.4 million and caps the LIBOR reference rate at 3.0%. The cap expires in September 2018.

We estimate the fair value of this interest rate cap using standard calculations that use as their basis readily available observable market parameters. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service. At September 30, 2015, the valuation of the interest rate cap resulted in the recognition of an asset totaling $10,000, which is included in "Other assets, net" on the Consolidated Balance Sheet.

Wells Fargo

In January 2015, in connection with the early retirement of the Wells Fargo credit facility, we settled and terminated the associated interest rate swap with Wells Fargo. The outstanding notional amount at the time of the termination was approximately $16.2 million. Of the $1.2 million "Loss on early retirement of debt" on the Consolidated Statement of Comprehensive Income (Loss) resulting from the termination of the credit facility and the swap, $0.4 million was attributable to termination of the swap. See Note 9 for additional information.

11.    Business Segments

15



As of September 30, 2015, we had three reporting segments: company operated hotels, franchised hotels and entertainment. The “other” segment consists of miscellaneous revenues and expenses, cash and cash equivalents, certain receivables and certain property and equipment which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense and income taxes; therefore, those two items have not been allocated to the segments. All balances have been presented after the elimination of inter-segment and intra-segment revenues and expenses.

Selected financial information is provided below (in thousands):
Three months ended September 30, 2015
 
Company Operated Hotels
 
Franchised Hotels
 
Entertainment
 
Other
 
Total
Revenue
 
$
38,119

 
$
3,800

 
$
1,800

 
$
16

 
$
43,735

 
 
 
 
 
 
 
 
 
 
 
Segment operating expenses
 
$
26,586

 
$
3,087

 
$
1,666

 
$
10

 
$
31,349

Depreciation and amortization
 
2,897

 
247

 
61

 
279

 
3,484

Other expenses
 
1,778

 

 

 
2,704

 
4,482

Operating income (loss)
 
6,858

 
466

 
73

 
(2,977
)
 
4,420

Interest expense
 
(1,257
)
 

 

 
(732
)
 
(1,989
)
Other income
 
25

 
1

 

 
49

 
75

Income tax expense
 

 

 

 
49

 
49

Net Income (loss)
 
5,626

 
467

 
73

 
(3,611
)
 
2,555

Less net (income) loss attributable to noncontrolling interest
 
(1,746
)
 

 

 

 
(1,746
)
Net income (loss) attributable to RLHC
 
$
3,880

 
$
467

 
$
73

 
$
(3,611
)
 
$
809

 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
9,077

 
$
7

 
$
(73
)
 
$
214

 
$
9,225

Identifiable assets as of September 30, 2015
 
$
274,319

 
$
20,557

 
$
4,517

 
$
10,298

 
$
309,691

Three months ended September 30, 2014
 
Company Operated Hotels
 
Franchise Hotels
 
Entertainment
 
Other
 
Total
Revenue
 
$
36,758

 
$
2,066

 
$
3,306

 
$
14

 
$
42,144

 
 
 
 
 
 
 
 
 
 
 
Segment operating expenses
 
$
24,776

 
$
1,761

 
$
3,092

 
$
72

 
$
29,701

Depreciation and amortization
 
2,860

 
12

 
78

 
291

 
3,241

Other expenses
 
1,198

 

 

 
1,908

 
3,106

Operating income (loss)
 
7,924

 
293

 
136

 
(2,257
)
 
6,096

Interest expense
 

 

 

 
(1,041
)
 
(1,041
)
Other income
 

 

 

 
46

 
46

Income (loss) from continuing operations
 
7,924

 
293

 
136

 
(3,252
)
 
5,101

Discontinued operations
 

 

 

 

 

Net income (loss) attributable to RLHC
 
$
7,924

 
$
293

 
$
136

 
$
(3,252
)
 
$
5,101

 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
1,714

 
$
4

 
$
78

 
$
119

 
$
1,915

Identifiable assets as of December 31, 2014
 
$
190,332

 
$
9,807

 
$
6,161

 
$
16,727

 
$
223,027



16


Nine months ended September 30, 2015
 
Company Operated Hotels
 
Franchised Hotels
 
Entertainment
 
Other
 
Total
Revenue
 
$
93,366

 
$
9,123

 
$
7,537

 
$
38

 
$
110,064

 
 
 
 
 
 
 
 
 
 
 
Segment operating expenses
 
$
70,852

 
$
8,494

 
$
7,041

 
$
26

 
$
86,413

Depreciation and amortization
 
8,431

 
426

 
197

 
549

 
9,603

Other expenses
 
(11,606
)
 

 

 
7,908

 
(3,698
)
Operating income (loss)
 
25,689

 
203

 
299

 
(8,445
)
 
17,746

Interest expense
 
(2,982
)
 

 

 
(2,246
)
 
(5,228
)
Loss on early retirement of debt
 

 

 

 
(1,159
)
 
(1,159
)
Other income
 

 
10

 
46

 
324

 
380

Income tax expense
 

 

 

 
(37
)
 
(37
)
Net Income (loss)
 
22,707

 
213

 
345

 
(11,563
)
 
11,702

Less net (income) loss attributable to noncontrolling interest
 
(2,653
)
 

 

 

 
(2,653
)
Net income (loss) attributable to RLHC
 
$
20,054

 
$
213

 
$
345

 
$
(11,563
)
 
$
9,049

 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
15,775

 
$
14

 
$
16

 
$
1,323

 
$
17,128

Identifiable assets as of September 30, 2015
 
$
274,319

 
$
20,557

 
$
4,517

 
$
10,298

 
$
309,691


Nine months ended September 30, 2014
 
Company Operated Hotels
 
Franchise Hotels
 
Entertainment
 
Other
 
Total
Revenue
 
$
94,081

 
$
8,044

 
$
13,950

 
$
65

 
$
116,140

 
 
 
 
 
 
 
 
 
 
 
Segment operating expenses
 
$
72,827

 
$
5,259

 
$
11,946

 
$
237

 
$
90,269

Depreciation and amortization
 
8,552

 
37

 
245

 
732

 
9,566

Other expenses
 
44

 

 

 
6,087

 
6,131

Operating income (loss)
 
12,658

 
2,748

 
1,759

 
(6,991
)
 
10,174

Interest expense
 

 

 

 
(3,436
)
 
(3,436
)
Other income
 

 
1

 
17

 
185

 
203

Income tax (expense) benefit
 

 

 

 
(31
)
 
(31
)
Income (loss) from continuing operations
 
12,658

 
2,749

 
1,776

 
(10,273
)
 
6,910

Discontinued operations
 
(1
)
 

 

 
(188
)
 
(189
)
Net income (loss) attributable to RLHC
 
$
12,657

 
$
2,749

 
$
1,776

 
$
(10,461
)
 
$
6,721

 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
6,894

 
$
20

 
$
241

 
$
105

 
$
7,260

Identifiable assets as of December 31, 2014
 
$
190,332

 
$
9,807

 
$
6,161

 
$
16,727

 
$
223,027



17


12.    Earnings (Loss) Per Share

The following table presents a reconciliation of the numerators and denominators used in the basic and diluted net income (loss) per share computations for the three and nine months ended September 30, 2015 and 2014 (in thousands, except per share amounts):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Numerator - basic and diluted:
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
2,555

 
$
5,101

 
$
11,702

 
$
6,910

Less: net (income) loss attributable to noncontrolling interest
 
(1,746
)
 

 
(2,653
)
 

Income (loss) from continuing operations attributable to Red Lion Hotels Corporation
 
809

 
5,101

 
9,049

 
6,910

Income (loss) from discontinued operations
 

 

 

 
(189
)
Net income (loss) attributable to Red Lion Hotels Corporation
 
$
809

 
$
5,101

 
$
9,049

 
$
6,721

Denominator:
 
 
 
 
 
 
 
 
Weighted average shares - basic
 
20,028

 
19,822

 
19,960

 
19,765

Weighted average shares - diluted
 
20,607

 
19,866

 
20,131

 
19,839

Earnings (loss) per share - basic
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Red Lion Hotels Corporation
 
$
0.04

 
$
0.26

 
$
0.45

 
$
0.35

Income (loss) from discontinued operations
 

 

 

 
(0.01
)
Net income (loss) attributable to Red Lion Hotels Corporation
 
$
0.04

 
$
0.26

 
$
0.45

 
$
0.34

Earnings (loss) per share - diluted
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Red Lion Hotels Corporation
 
$
0.04

 
$
0.26

 
$
0.45

 
$
0.35

Income (loss) from discontinued operations
 

 

 

 
(0.01
)
Net income (loss) attributable to Red Lion Hotels Corporation
 
$
0.04

 
$
0.26

 
$
0.45

 
$
0.34


For the three months ended September 30, 2015, 70,934 of the 71,676 options to purchase common shares, 719,147 of the 1,219,700 restricted stock units outstanding, and 364,633of the 442,533 warrants to purchase common shares were not included in the diluted per share calculation as they were antidilutive. For the three months ended September 30, 2014, 94,991 of the 96,036 options to purchase common shares and 364,489 of the 407,338 restricted stock units outstanding were not included in the diluted per share calculation as they were antidilutive.

For the nine months ended September 30, 2015, all of the 71,676 options to purchase common shares, 1,080,280 of the 1,219,700 restricted stock units outstanding, and 410,693 of the 442,533 warrants to purchase common shares were not included in the diluted per share calculation as they were antidilutive. For the nine months ended September 30, 2014, 94,871 of the 96,036 options to purchase common shares and 334,116 of the 407,338 restricted stock units outstanding were not included in the diluted per share calculation as they were antidilutive.

13.    Income Taxes

For the nine months ended September 30, 2015 and 2014, we reported an income tax expense of $37,000 and $31,000, respectively. There was an income tax benefit of $49,000 for the three months ended September 30, 2015 and no income tax benefit or provision for the three months ended September 30, 2014. The income tax provision varies from the statutory rate primarily due to a full valuation allowance against our deferred assets.

We have federal operating loss carryforwards, which will expire beginning in 2033, state operating loss carryforwards, which will expire beginning in 2017, and tax credit carryforwards, which will begin to expire in 2024.

18



14.    Stockholders' Equity

Stock Incentive Plans

The 2006 Stock Incentive Plan authorizes the grant or issuance of various option and other awards including restricted stock units and other stock-based compensation. The plan was approved by our shareholders and allowed awards of 2.0 million shares, subject to adjustments for stock splits, stock dividends and similar events. As of September 30, 2015, there were 12,727 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2006 plan.

The 2015 Stock Incentive Plan authorizes the grant or issuance of various option and other awards including restricted stock units and other stock-based compensation. The plan was approved by our shareholders and allows awards of 1.4 million shares, subject to adjustments for stock splits, stock dividends and similar events. As of September 30, 2015, there were 854,352 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2015 plan.

Stock Options

In the nine months ended September 30, 2015 and 2014 we recognized no compensation expense related to options.

A summary of stock option activity for the nine months ended September 30, 2015, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Exercise
Price
Balance, December 31, 2014
 
75,176

 
$
10.27

Options granted
 

 

Options exercised
 
(3,500
)
 
7.46

Options forfeited
 

 

Balance, September 30, 2015
 
71,676

 
$
10.41

Exercisable, September 30, 2015
 
71,676

 
$
10.41


Additional information regarding stock options outstanding and exercisable as of September 30, 2015, is as follows:
Exercise
Price
 
Number
Outstanding
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Expiration
Date
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value(1)
 
Number
Exercisable
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$8.74
 
40,836

 
2.64
 
2018
 
8.74

 

 
40,836

 
8.74

 
$

$12.21
 
15,195

 
1.14
 
2016
 
12.21

 

 
15,195

 
12.21

 

$13.00
 
15,645

 
1.63
 
2017
 
13.00

 

 
15,645

 
13.00

 

 
 
71,676

 
2.10
 
2015-2018
 
$
10.41

 
$

 
71,676

 
$
10.41

 
$

__________ 
(1)
The aggregate intrinsic value is before applicable income taxes and represents the amount option recipients would have received if all options had been fully vested and exercised on the last trading day of the first nine months of 2015, or September 30, 2015, based upon our closing stock price on that date of $8.50.

Restricted Stock Units, Shares Issued as Compensation

As of September 30, 2015 and 2014, there were 1,219,700 and 407,338 unvested restricted stock units outstanding. Since we began issuing restricted stock units, approximately 22.0% of total units granted have been forfeited. In the third quarter of 2015, we recognized approximately $0.5 million in compensation expense related to restricted stock units compared to $0.2 million in the comparable period in 2014. As the restricted stock units vest, we expect to recognize approximately $6.1 million in additional compensation expense over a weighted average period of 40 months, including $0.5 million during the remainder of 2015.


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A summary of restricted stock unit activity for the nine months ended September 30, 2015, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Balance, December 31, 2014
 
398,513

 
$
7.32

Granted
 
984,383

 
$
7.17

Vested
 
(131,929
)
 
$
5.39

Forfeited
 
(31,267
)
 
$
6.00

Balance, September 30, 2015
 
1,219,700

 
$
6.94


Employee Stock Purchase Plan

In January 2008, we adopted the 2008 employee stock purchase plan (the “2008 ESPP”) upon the expiration of its predecessor plan. Under the 2008 ESPP, a total of 300,000 shares of common stock are authorized for purchase by eligible employees at a discount through payroll deductions. No employee may purchase more than $25,000 worth of shares in any calendar year, or more than 10,000 shares during any six-month purchase period under the plan. As allowed under the 2008 ESPP, a participant may elect to withdraw from the plan, effective for the purchase period in progress at the time of the election with all accumulated payroll deductions returned to the participant at the time of withdrawal. During the nine months ended September 30, 2015 and 2014, 10,614 and 7,405 shares were issued to participants under the terms of the plan, respectively.

Warrants

In January 2015, in connection with Shelbourne Falcon’s purchase of equity interests in RL Venture, we issued Shelbourne a warrant to purchase 442,533 shares of common stock. The warrant has a five year term from the date of issuance and a per share exercise price of $6.78. The warrant is classified as equity due to share settlement upon exercise. Accordingly, the estimated fair value of the warrant was recorded in additional paid in capital upon issuance and we do not recognize subsequent changes in fair value in our financial statements.

15.    Fair Value of Financial Instruments

Applicable accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure our assets and liabilities using inputs from the following three levels of the fair value hierarchy:

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 includes unobservable inputs that reflect assumptions about what factors market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.

Estimated fair values of financial instruments (in thousands) are shown in the table below. The carrying amounts for cash and cash equivalents, accounts receivable and current liabilities are reasonable estimates of their fair values due to their short maturities. The carrying amounts for short-term investments are reasonable estimates of their fair values due to interest rates which are variable in nature and a put provision at par plus accrued interest. We estimate the fair value of our notes receivable using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. We estimate the fair value of our long-term debt using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. The debentures are valued at the closing price on September 30, 2015, of the underlying trust preferred securities on the New York Stock Exchange, which was a directly observable Level 1 input. The fair values provided below are not necessarily indicative of the amounts we or the debt holders could realize in a current market exchange. In addition, potential income tax ramifications related to the realization of gains and losses that would be incurred in an actual sale or settlement have not been taken into consideration.

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September 30, 2015
 
December 31, 2014
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents and restricted cash(1)
 
$
89,192

 
$
89,192

 
$
5,351

 
$
5,351

Short-term investments
 
$
7,866

 
$
7,866

 

 

Accounts receivable(1)
 
$
8,909

 
$
8,909

 
$
6,752

 
$
6,752

Notes receivable
 
$
1,972

 
$
1,972

 
$
5,284

 
$
5,284

Financial liabilities:
 
 
 
 
 
 
 
 
Current liabilities, excluding debt(1)
 
$
27,240

 
$
27,240

 
$
18,469

 
$
18,469

Total debt, excluding debentures
 
$
71,440

 
$
78,130

 
$
29,873

 
$
30,683

Debentures
 
$
30,825

 
$
31,578

 
$
30,825

 
$
31,639

__________
(1)
Includes the cash, accounts receivable, and current liabilities of discontinued operations held for sale as of December 31, 2014.

16.    Commitments and Contingencies

At any given time we are subject to claims and actions incidental to the operations of our business. Based on information currently available, we do not expect that any sums we may receive or have to pay in connection with any legal proceeding would have a materially adverse effect on our consolidated financial position or net cash flow.

Due to our equity method investment in a 19.9% owned real estate venture, we are considered a guarantor of the mortgage for the building associated with that investment. We would be obligated to pay a portion of this mortgage in the event the real estate venture were unable to meet its principal or interest payment obligations. As of September 30, 2015, the maximum amount payable under this guarantee was approximately $1.8 million, which represents 19.9% of the outstanding mortgage balance. At each reporting date, it was not probable that we would be required to pay any of this amount; thus we have not accrued a liability for any portion of this obligation in our September 30, 2015 or December 31, 2014 financial statements.

Our lease for the Red Lion Hotel Vancouver (at the Quay) requires us to pay a fee of $3.0 million on December 31, 2015 or any earlier termination of the lease. This payment is secured by cash in escrow, which is included in "Restricted cash" on the Consolidated Balance Sheet.

17. Related Party Transactions

RL Venture has agreed to pay to Shelbourne Falcon an investor relations fee each month equal to 0.50% of its total aggregate revenue. Columbia Pacific Opportunity Fund, LP, one of our company's largest shareholders, is an investor in Shelbourne Falcon. During the three and nine months ended September 30, 2015, Shelbourne Falcon earned $119,000 and $287,000, respectively.

RL Venture has also agreed to pay CPA Development, LLC, an affiliate of Columbia Pacific Opportunity Fund, LP, a construction management fee of $200,000. During the three and nine months ended September 30, 2015, RL Venture paid $33,300 and $55,500, respectively, of this fee.

In May 2015, we entered into a management agreement with the LLC that owns Red Lion Hotel Woodlake Conference Center Sacramento. A member of our board of directors is a 50% owner of the entity that serves as the manager of that LLC. During the three and nine months ended September 30, 2015 we recognized management fee revenue from the LLC of $31,000 and $46,000, respectively.


18. Subsequent Events

On October 8, 2015, we terminated the lease at the Red Lion Hotel Vancouver (at the Quay), effective November 13, 2015. A termination fee of $3 million, which is currently held in escrow as restricted cash, will be paid on November 13, 2015.

On October 16, 2015, we sold our equity method investment in a 19.9% owned real estate venture.


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On October 21, 2015, we provided $1.5 million of funding to RLS Balt Venture. The funding was provided in return for a right to receive a priority return equal to the amount of the funding plus 11% interest compounded annually to occur after the sale, liquidation, other disposal or refinancing of Hotel RL Baltimore Inner Harbor or just prior to the final partnership distribution.

On October 29, we formed a joint venture, RLS DC Venture LLC ("RLS DC Venture"), of which we own 86%, and acquired The Quincy hotel in downtown Washington D.C. for $22.5 million. Shelbourne Falcon DC Investors LLC ("Shelbourne Falcon IV"), an entity led by Shelbourne, owns 14% of the joint venture and has an option exercisable until January 31, 2016 to purchase up to an additional 31% member interest for $103.18376 per 0.001% ownership interest. RLH DC LLC, ("RLH DC") which is wholly-owned by RLS DC Venture, assumed a land lease agreement that expires in December 2080. RLH DC has secured financing with Pacific Western Bank to complete a renovation of the property. The initial principal amount of the loan was $15.2 million and the lender has agreed to advance an additional $2.3 million to cover expenses related to improvements to the hotel. The loan has a two-year term with a one-year extension option, and interest under the advanced portions of the loan will be calculated at LIBOR plus 4.55%. Interest only payments are due monthly commencing November 2015. Monthly principal payments of $58,333 are required beginning in October 2018. In the event of any prepayment, we are required to pay the lender interest that would have been paid through the maturity date. As required under the loan, we entered into an interest rate cap with Commonwealth Bank of Australia to hedge our interest rate exposure. The cap had an original notional amount of $17.5 million and caps the LIBOR reference rate at 3.0%. The loan agreement contains customary reporting and operating covenants applicable to the joint venture, including requirements for lender approval of annual operating and capital budgets, under certain conditions.


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