Net loss was $2.3 million for the three months ended June 30, 2018 compared to a net loss of $66,000 in the prior year period. The increased loss was tied to the lost income from seven hotels that have been sold in the first half of 2018.

The Company reported Adjusted EBITDA of $5.6 million for the three months ended June 30, 2018 and $6.0 million for the six months ended June 30, 2018. These results are in line with the Company’s expectations for the first six months of 2018. The second half of the year is expected to be positively affected by the Knights Inn acquisition which closed on May 15, 2018 and from reductions in costs associated with the Company transitioning out of the hotel ownership business and concentrating on growing more profitable franchise operations.

Through July 2018, the Company has completed the sales of nine of the 11 hotels previously identified for disposal with eight of the buyers entering into new franchise agreements. These sales are expected to generate a gain of approximately $40 million. The sales to date have generated gross proceeds of more than $116 million and the prices achieved are in line with the guidance we provided earlier in the year. The $73 million of debt held by the joint venture at December 31, 2017 was repaid fully with the proceeds. The Company also received a joint venture distribution of more than $20 million that will be used strategically to reduce debt.

Given continued strong market conditions, the Company decided to market three additional hotels in Anaheim, Atlanta and Kalispell and anticipates gross proceeds in excess of $40 million.

The Company expects the completed hotel sales will provide cash reserves that can be used to execute additional franchise acquisitions in the future.

The Company has executed 93 franchise agreements through the date of this release against its target of 150 to 200 for 2018, excluding the 361 Knights Inn franchises strategically acquired in May 2018.

Midscale Franchise RevPAR increased 1.2 percent. Approximately eighty percent of the Company’s franchised hotels have a fixed fee representing an important hedge against an economic downturn and providing stability of its base franchise revenues and cash flow.

The Company focused efforts on rationalizing and reducing the costs of running franchise operations with the goal of increasing its divisional margins in 2018 by more than 600 basis points compared to 2017. These cost rationalization efforts began in November 2017 and are expected to continue throughout 2018. The Company recently closed its office in Florida and has consolidated most of those resources into the Denver office with the objective of improving productivity. In addition, the Company’s outside website operations has been consolidated into an internal department to handle development and operating costs internally with targeted strategic benefits and annual operating savings of $2 million.

2018 midscale system-wide RevPAR expected to increase 1 percent to 3 percent year- over-year.

Franchise divisional profit expected to be between $19 million and $20 million.

Franchise divisional profit margin is expected to increase from 28.3 percent in 2017 to between 34 percent and 35 percent.

General and administrative expenses are expected to be $15.5 million to $16.5 million, consistent with the prior year.

With our increased focus on our franchising operations, the Company expects to reduce Franchise division costs by $4 million to $5 million on an annualized basis and these cost reduction efforts will be ongoing.

The Company expects to execute between 150 and 200 license agreements in 2018 excluding the acquisition of Knights Inn. Knights Inn acquisition closed on May 15, 2018 and we have now integrated 361 franchised properties.

The aggregate Adjusted EBITDA contribution for the five hotels currently being marketed for sale was $8.7 million for 2017 and $4.2 million for the year to date for 2018. The 2018 Adjusted EBITDA for each of these five hotels will be included in reported results through the dates of each of the respective hotel sales.

The 2018 Adjusted EBITDA for the nine hotels sold to date in 2018 was $3.1 million through the earlier of their respective sales dates or June 30, 2018. The Adjusted EBITDA for these nine hotels was $14.5 million for fiscal 2017.

Revenue:

Company operated hotels

Other revenues from managed properties

Franchised hotels

Other

Total revenues

Operating expenses:

Company operated hotels

Other costs from managed properties

Franchised hotels

Depreciation and amortization

Hotel facility and land lease

Gain on asset dispositions, net

General, administrative and other expenses

Acquisition and integration costs

Total operating expenses

Operating income (loss)

Other income (expense):

Interest expense

Other income (loss), net

Total other income (expense)

Income (loss) from continuing operations before taxes

Income tax expense (benefit)

Net income (loss) from continuing operations

Discontinued operations:

Income (loss) from discontinued business unit, net of income tax expense (benefit) of ($21) and $69

Net income (loss)

Net (income) loss attributable to noncontrolling interest

Net income (loss) and comprehensive income (loss) attributable to RLH Corporation

Earnings (loss) per share - basic

Income (loss) from continuing operations attributable to RLH Corporation

Income (loss) from discontinued operations

Net income (loss) attributable to RLH Corporation

Earnings (loss) per share - diluted

Income (loss) from continuing operations attributable to RLH Corporation

Income (loss) from discontinued operations

Net income (loss) attributable to RLH Corporation

Weighted average shares - basic

Weighted average shares - diluted

Non-GAAP Financial Measures ⁽¹⁾

EBITDA from continuing operations

Adjusted EBITDA from continuing operations

The definitions of “EBITDA” and “Adjusted EBITDA” and how those measures relate to net income (loss) are discussed further in this release under Reconciliation of Non-GAAP Financial Measures.

ASSETS

Current assets:

Cash and cash equivalents

Restricted cash

Accounts receivable, net

Accounts receivable from related parties

Notes receivable, net

Inventories

Prepaid expenses and other

Assets held for sale

Total current assets

Property and equipment, net

Goodwill

Intangible assets, net

Other assets, net

Total assets

LIABILITIES

Current liabilities:

Accounts payable

Accrued payroll and related benefits

Other accrued liabilities

Long-term debt, due within one year

Contingent consideration for acquisition due to related party, due within one year

Total current liabilities

Long-term debt, due after one year, net of debt issuance costs

Deferred income and other long-term liabilities

Deferred income taxes

Total liabilities

Commitments and contingencies

STOCKHOLDERS’ EQUITY

RLH 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; 24,246,518 and 23,651,212 shares issued and outstanding

Additional paid-in capital, common stock

Accumulated deficit

Total RLH Corporation stockholders’ equity

Noncontrolling interest

Total stockholders’ equity

Total liabilities and stockholders’ equity

Operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

Amortization of debt issuance costs

Gain on disposition of property, equipment and other assets, net

Deferred income taxes

Stock based compensation expense

Provision for doubtful accounts

Fair value adjustments to contingent consideration

Change in current assets and liabilities, net of business acquired:

Accounts receivable, net

Notes receivable, net

Inventories

Prepaid expenses and other

Accounts payable

Other accrued liabilities

Net cash provided by (used in) operating activities

Investing activities:

Capital expenditures

Contingent consideration paid for Vantage acquisition

Acquisition of Knights Inn

Net proceeds from disposition of property and equipment

Collection of notes receivable related to property sales

Advances on notes receivable

Net cash provided by (used in) investing activities

Financing activities:

Borrowings on long-term debt

Repayment of long-term debt

Debt issuance costs

Distributions to noncontrolling interest

Stock-based compensation awards canceled to settle employee tax withholding

Stock option and stock purchase plan issuances, net and other

Net cash provided by (used in) financing activities

Change in cash, cash equivalents and restricted cash:

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

Cash, cash equivalents and restricted cash at end of period

Beginning quantity, January 1, 2018

Newly opened/acquired properties

Terminated properties⁽¹⁾

Change from company operated to franchised

Ending quantity, June 30, 2018

Executed franchise license and management agreements, six months ended June 30, 2018:

New franchise / management agreements

Renewals / changes of ownership

Change from company operated to franchised

Total executed franchise license and management agreements, six months ended June 30, 2018

Comparable Hotel Statistics⁽¹⁾

Systemwide - Midscale

Systemwide - Midscale

Systemwide - Midscale

Systemwide - Midscale

Certain operating results for the periods included in this report are shown on a comparable hotel basis. Comparable hotels are defined as hotels that were in the system for at least one full calendar year as of the beginning of the current year under materially similar operations.

Average occupancy represents total paid rooms divided by total available rooms. Total available rooms represents the number of rooms available multiplied by the number of days in the reported period and includes rooms taken out of service for renovation.

Average daily rate (ADR) represents total room revenues divided by the total number of paid rooms occupied by hotel guests.

Revenue per available room (RevPAR) represents total room and related revenues divided by total available rooms.

Company operated hotel revenue

less: revenue from sold and closed hotels

less: revenue from managed properties

Comparable company operated hotel revenue

Company operated hotel operating expenses

less: operating expenses from sold and closed hotels

less: operating expenses from managed properties

Comparable company operated hotel operating expenses

Company operated hotel direct operating profit

less: operating profit (loss) from sold and closed hotels

less: operating profit (loss) from managed properties

Comparable company operated hotel direct operating profit

Comparable company operated hotel direct margin %

Net income (loss)

Depreciation and amortization

Interest expense

Income tax expense (benefit)

Net (income) loss from discontinued operations ⁽¹⁾

EBITDA from continuing operations

Acquisition and integration costs ⁽²⁾

Employee separation and transition costs ⁽³⁾

Gain on asset dispositions ⁽⁴⁾

Adjusted EBITDA from continuing operations

Net income (loss) from discontinued operations ⁽¹⁾

Depreciation and amortization of discontinued operations

Income tax expense (benefit) from discontinued operations

Adjusted EBITDA from discontinued operations

Adjusted EBITDA from continuing & discontinued operations

Adjusted EBITDA attributable to noncontrolling interests

Adjusted EBITDA attributable to RLH Corporation

On October 3, 2017, the Company completed the sale of its entertainment segment. Based on this sale, the results of operations of the entertainment segment are reported as discontinued operations for all periods presented.

Net expenses for 2018 are associated with the Knights Inn and Vantage acquisitions. Net expenses for 2017 are associated with the Vantage acquisition. All acquisition costs and changes in the fair value and probability of contingent consideration are included within Acquisition and integration costs on the Condensed Consolidated Statements of Comprehensive Income (Loss).

The costs recognized in 2018 relate to employee separation, and the costs recognized in 2017 consisted of legal and consulting services associated with the CFO transition.

On October 5, 2017, we announced that we would be marketing for sale 11 of our owned hotels. In February 2018, five of the RL Venture properties sold, and in April and May two of the RL Venture properties sold.