Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On September 30, 2016, Red Lion Hotels Corporation (“RLHC” or the “company”) (i) acquired selected assets and assumed certain liabilities of Vantage Hospitality Group, Inc. (“Vantage”), a subsidiary of Thirty-Eight Street, Inc. (“TESI”), for initial cash consideration of $10.4 million and (ii) acquired one brand name asset from TESI for $12.3 million and 690,000 of the company’s common shares valued at $5.8 million. The acquisition remains subject to a working capital adjustment, which is not expected to be significant. A minimum of $1.0 million of additional cash consideration will be paid to TESI on each of the first two anniversaries of the acquisition. Additional consideration may be paid to TESI on each of those anniversaries in the form of cash and additional common shares of RLHC contingent upon the acquired entities reaching certain performance targets in the next two years.
The following unaudited pro forma condensed combined financial statements are based on the company’s historical consolidated financial statements and Vantage’s historical consolidated financial statements as adjusted to give effect to RLHC’s acquisition of selected assets and liabilities of Vantage and TESI. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2016 and the 12 months ended December 31, 2015 give effect to these transactions as if they had occurred on January 1, 2015. The unaudited pro forma condensed combined balance sheet as of June 30, 2016 gives effect to these transactions as if they had occurred on June 30, 2016.
Separate financial statements of TESI are not presented as the one brand name asset acquired did not represent substantially all of the assets of TESI.
The assumptions and estimates underlying the unaudited adjustments to the unaudited pro forma condensed combined financial statements are described in the accompanying notes, which should be read together with the unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements should be read together with the company’s historical financial statements, which are included in the company’s latest annual report on Form 10-K and quarterly report on Form 10-Q, and Vantage’s historical information included herein.
1
RED LION HOTELS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2016
(IN THOUSANDS)
Historical Red Lion Hotels | Historical Vantage | Adjustments forNon- Purchased Vantage Entities | Revenue / Expenses Purchased | Revaluation Adjustments | Pro forma for the acquisition | Reclassification Adjustments | Pro forma for the acquisition and related financing and reclassifications | |||||||||||||||||||||||||
Company operated hotels | $ | 56,358 | $ | — | $ | — | $ | — | $ | — | $ | 56,358 | $ | 56,358 | ||||||||||||||||||
Other revenues from managed properties | 2,766 | — | — | — | — | 2,766 | 2,766 | |||||||||||||||||||||||||
Franchised hotels | 7,427 | — | — | — | — | 7,427 | $ | 16,117 | (g) | 23,544 | ||||||||||||||||||||||
Entertainment | 11,078 | — | — | — | — | 11,078 | 11,078 | |||||||||||||||||||||||||
Other | 25 | — | — | — | — | 25 | 25 | |||||||||||||||||||||||||
Royalty and Reservation Fees | — | 10,360 | — | 10,360 | — | 10,360 | (10,360 | )(g) | — | |||||||||||||||||||||||
Reservation Fees | — | — | — | — | — | — | ||||||||||||||||||||||||||
Marketing and promotion | — | 4,787 | — | 4,787 | — | 4,787 | (4,787 | )(g) | — | |||||||||||||||||||||||
Other membership and conference operations | — | 385 | — | 385 | — | 385 | (385 | )(g) | — | |||||||||||||||||||||||
Initial membership fees | — | 628 | — | 628 | — | 628 | (628 | )(g) | — | |||||||||||||||||||||||
Commissions | — | 268 | (311 | )(c) | (43 | ) | — | (43 | ) | 43 | (g) | — | ||||||||||||||||||||
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Revenue | 77,654 | 16,428 | (311 | ) | 16,117 | — | 93,771 | — | 93,771 | |||||||||||||||||||||||
Cost and expenses: | ||||||||||||||||||||||||||||||||
Company operated hotels | 45,672 | — | — | — | — | 45,672 | 45,672 | |||||||||||||||||||||||||
Other costs from managed properties | 2,766 | — | — | — | — | 2,766 | 2,766 | |||||||||||||||||||||||||
Franchised hotels | 6,820 | — | — | — | — | 6,820 | 14,030 | (g) | 20,850 | |||||||||||||||||||||||
Entertainment | 9,577 | — | — | — | — | 9,577 | 9,577 | |||||||||||||||||||||||||
Other | 21 | — | — | — | — | 21 | 21 | |||||||||||||||||||||||||
Depreciation and amortization | 7,540 | 351 | — | 351 | 63 | (a) | 7,954 | 7,954 | ||||||||||||||||||||||||
Hotel facility and land lease | 2,346 | — | — | — | — | 2,346 | 2,346 | |||||||||||||||||||||||||
(Gain) loss on asset dispositions, net | (629 | ) | — | — | — | — | (629 | ) | (629 | ) | ||||||||||||||||||||||
General and administrative expenses | 5,751 | — | — | — | — | 5,751 | 5,751 | |||||||||||||||||||||||||
Selling, reservation, general and administrative | — | 9,258 | (262 | )(c) | 8,996 | 99 | (f) | 9,094 | (9,094 | )(g) | — | |||||||||||||||||||||
Marketing | — | 5,314 | (11 | )(c) | 5,303 | (521 | )(l) | 4,782 | (4,782 | )(g) | — | |||||||||||||||||||||
Other membership and conference operations | — | 153 | — | 153 | — | 153 | (153 | )(g) | — | |||||||||||||||||||||||
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Operating Expenses | 79,864 | 15,076 | (273 | ) | 14,803 | (359 | ) | 94,308 | — | 94,308 | ||||||||||||||||||||||
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Operating income | (2,210 | ) | 1,352 | (38 | ) | 1,314 | 359 | (537 | ) | — | (537 | ) | ||||||||||||||||||||
Other income (expenses): | ||||||||||||||||||||||||||||||||
Interest expense | (2,948 | ) | (2 | ) | 2 | (c) | — | — | (2,948 | ) | (2,948 | ) | ||||||||||||||||||||
Loss on early retirement of debt | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Other income (expense), net | 52 | — | — | — | (241 | )(e) | (189 | ) | (18 | )(g) | (207 | ) | ||||||||||||||||||||
Interest income | — | 47 | (47 | )(c) | — | — | — | — | ||||||||||||||||||||||||
Equity method income (loss) | — | (614 | ) | 614 | (c) | — | — | — | — | |||||||||||||||||||||||
Miscellaneous income (expenses) | — | (18 | ) | — | (18 | ) | — | (18 | ) | 18 | (g) | — | ||||||||||||||||||||
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Other Income / (Expense) | (2,896 | ) | (587 | ) | 569 | (18 | ) | (241 | ) | (3,155 | ) | — | (3,155 | ) | ||||||||||||||||||
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Income from continuing operations before provision for income taxes and equity in loss of unconsolidated entities | (5,106 | ) | 765 | 531 | 1,296 | 119 | (3,692 | ) | — | (3,692 | ) | |||||||||||||||||||||
Income tax expense (benefit) | 92 | 295 | (275 | )(c) | 20 | (h) | 2 | (h) | 114 | 114 | ||||||||||||||||||||||
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Net income from continuing operations | (5,198 | ) | 470 | 806 | 1,276 | 117 | (3,806 | ) | — | (3,806 | ) | |||||||||||||||||||||
Net loss attributable to noncontrolling interest | 562 | — | — | — | — | 562 | 562 | |||||||||||||||||||||||||
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Net income attributable to common stockholders | $ | (4,636 | ) | $ | 470 | $ | 806 | $ | 1,276 | $ | 117 | $ | (3,244 | ) | $ | — | $ | (3,244 | ) | |||||||||||||
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Earnings per share | ||||||||||||||||||||||||||||||||
Basic | $ | (0.23 | ) | $ | (0.16 | ) | $ | (0.16 | ) | |||||||||||||||||||||||
Diluted | $ | (0.23 | ) | $ | (0.16 | ) | $ | (0.16 | ) | |||||||||||||||||||||||
Weighted average number of shares | ||||||||||||||||||||||||||||||||
Basic | 20,121,344 | 690,000 | (i) | 20,811,344 | 20,811,344 | |||||||||||||||||||||||||||
Diluted | 20,121,344 | 690,000 | (i) | 20,811,344 | 20,811,344 |
2
RED LION HOTELS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
TWELVE MONTHS ENDED DECEMBER 31, 2015
(IN THOUSANDS)
Historical Red Lion Hotels | Historical Vantage | Adjustments for Non- Purchased Vantage Entities | Revenue / Expenses Purchased | Revaluation Adjustments | Pro forma for the acquisition | Reclassification Adjustments | Pro forma for the acquisition and related financing and reclassifications | |||||||||||||||||||||||||
Company operated hotels | $ | 116,187 | $ | — | $ | — | $ | — | $ | — | $ | 116,187 | $ | 116,187 | ||||||||||||||||||
Other revenues from managed properties | 3,586 | — | — | — | — | 3,586 | 3,586 | |||||||||||||||||||||||||
Franchised hotels | 12,039 | — | — | — | — | 12,039 | $ | 33,203 | (g) | 45,242 | ||||||||||||||||||||||
Entertainment | 11,057 | — | — | — | — | 11,057 | 11,057 | |||||||||||||||||||||||||
Other | 51 | — | — | — | — | 51 | 51 | |||||||||||||||||||||||||
Royalty and Reservation Fees | — | 21,436 | — | 21,436 | — | 21,436 | (21,436 | )(g) | — | |||||||||||||||||||||||
Reservation Fees | — | — | — | — | — | |||||||||||||||||||||||||||
Marketing and promotion | — | 9,422 | — | 9,422 | — | 9,422 | (9,422 | )(g) | — | |||||||||||||||||||||||
Other membership and conference operations | — | 1,443 | — | 1,443 | — | 1,443 | (1,443 | )(g) | — | |||||||||||||||||||||||
Initial membership fees | — | 902 | — | 902 | — | 902 | (902 | )(g) | — | |||||||||||||||||||||||
Commissions | — | 713 | (713 | )(c) | — | — | — | — | ||||||||||||||||||||||||
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Revenue | 142,920 | 33,916 | (713 | ) | 33,203 | — | 176,123 | — | 176,123 | |||||||||||||||||||||||
Cost and expenses: | ||||||||||||||||||||||||||||||||
Company operated hotels | 92,057 | — | — | — | — | 92,057 | 92,057 | |||||||||||||||||||||||||
Other costs from managed properties | 3,586 | — | — | — | — | 3,586 | 3,586 | |||||||||||||||||||||||||
Franchised hotels | 11,233 | — | — | — | — | 11,233 | 28,248 | (g) | 39,481 | |||||||||||||||||||||||
Entertainment | 10,118 | — | — | — | — | 10,118 | 10,118 | |||||||||||||||||||||||||
Other | 35 | — | — | — | — | 35 | 35 | |||||||||||||||||||||||||
Depreciation and amortization | 13,315 | 694 | — | 694 | 125 | (a) | 14,134 | 14,134 | ||||||||||||||||||||||||
Hotel facility and land lease | 6,569 | — | — | — | — | 6,569 | 6,569 | |||||||||||||||||||||||||
(Gain) loss on asset dispositions, net | (17,692 | ) | — | — | — | — | (17,692 | ) | (17,692 | ) | ||||||||||||||||||||||
General and administrative expenses | 9,819 | — | — | — | — | 9,819 | 9,819 | |||||||||||||||||||||||||
Selling, reservation, general and administrative | — | 18,858 | (775 | )(c) | 18,083 | (201 | )(f) | 17,882 | (17,882 | )(g) | — | |||||||||||||||||||||
Marketing | — | 10,114 | (43 | )(c) | 10,071 | (1,004 | )(l) | 9,067 | (9,067 | )(g) | — | |||||||||||||||||||||
Other membership and conference operations | — | 1,299 | — | 1,299 | — | 1,299 | (1,299 | )(g) | — | |||||||||||||||||||||||
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Operating Expenses | 129,040 | 30,965 | (818 | ) | 30,147 | �� | (1,080 | ) | 158,107 | — | 158,107 | |||||||||||||||||||||
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Operating income | 13,880 | 2,951 | 105 | 3,056 | 1,080 | 18,016 | — | 18,016 | ||||||||||||||||||||||||
Other income (expenses): | ||||||||||||||||||||||||||||||||
Interest expense | (6,979 | ) | (17 | ) | 17 | (c) | — | — | (6,979 | ) | (6,979 | ) | ||||||||||||||||||||
Loss on early retirement of debt | (2,847 | ) | — | — | — | — | (2,847 | ) | (2,847 | ) | ||||||||||||||||||||||
Other income, net | 47 | — | — | — | — | 47 | (4 | )(g) | 43 | |||||||||||||||||||||||
Interest income | — | 92 | (92 | )(c) | — | — | — | — | ||||||||||||||||||||||||
Equity method income (loss) | — | 659 | (659 | )(c) | — | — | — | — | ||||||||||||||||||||||||
Miscellaneous income (expenses) | — | 6 | (10 | )(c) | (4 | ) | — | (4 | ) | 4 | (g) | — | ||||||||||||||||||||
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Other Income / (Expense) | (9,779 | ) | 740 | (744 | ) | (4 | ) | — | (9,783 | ) | — | (9,783 | ) | |||||||||||||||||||
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Income from continuing operations before provision for income taxes and equity in loss of unconsolidated entities | 4,101 | 3,691 | (639 | ) | 3,052 | 1,080 | 8,233 | — | 8,233 | |||||||||||||||||||||||
Income tax expense (benefit) | 85 | 1,439 | (1392 | )(c) | 47 | (h) | 17 | (h) | 149 | 149 | ||||||||||||||||||||||
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Net income from continuing operations | 4,016 | 2,252 | 753 | 3,005 | 1,064 | 8,084 | — | 8,084 | ||||||||||||||||||||||||
Net loss attributable to noncontrolling interest | (1,297 | ) | — | — | — | — | (1,297 | ) | (1,297 | ) | ||||||||||||||||||||||
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Net income attributable to common stockholders | $ | 2,719 | $ | 2,252 | $ | 753 | $ | 3,005 | $ | 1,064 | $ | 6,787 | $ | — | $ | 6,787 | ||||||||||||||||
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Earnings per share | ||||||||||||||||||||||||||||||||
Basic | $ | 0.14 | $ | 0.33 | $ | 0.33 | ||||||||||||||||||||||||||
Diluted | $ | 0.13 | $ | 0.32 | $ | 0.32 | ||||||||||||||||||||||||||
Weighted average number of shares | ||||||||||||||||||||||||||||||||
Basic | 19,982,708 | 690,000 | (i) | 20,592,708 | 20,592,708 | |||||||||||||||||||||||||||
Diluted | 20,200,423 | 690,000 | (i) | 20,890,423 | 20,890,423 |
3
RED LION HOTELS
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2016
(IN THOUSANDS)
Historical Red Lion Hotels | Historical Vantage | Adjustments for Non- Purchased Vantage Entities | Non- Purchased Asset / Liability Adjustments | Assets / Liabilities Purchased | Revaluation Adjustments | Transaction Financing | Pro forma for the acquisition and related financing | Reclassification Adjustments | Pro forma for the acquisition and related financing and reclassifications | |||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 27,426 | $ | 4,078 | $ | (216 | )(j) | $ | (3,862 | )(j) | $ | — | $ | — | $ | (22,695 | ) | $ | 4,731 | $ | 4,731 | |||||||||||||||||||
Restricted cash | 10,048 | — | — | — | — | — | — | 10,048 | 10,048 | |||||||||||||||||||||||||||||||
Short-term investments | 12,695 | — | — | — | — | — | — | 12,695 | 12,695 | |||||||||||||||||||||||||||||||
Accounts receivable, net | 10,513 | 2,389 | (9 | )(j) | — | 2,380 | (649 | )(k) | — | 12,244 | 12,244 | |||||||||||||||||||||||||||||
Accounts receivable (related parties) | — | — | 210 | (j) | (210 | )(d) | — | — | — | — | — | |||||||||||||||||||||||||||||
Notes receivable, net | 1,214 | — | — | — | — | — | — | 1,214 | 1,214 | |||||||||||||||||||||||||||||||
Notes receivable - current portion (related parties) | — | 376 | — | (376 | )(d) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Inventories | 658 | — | — | — | — | — | — | 658 | 658 | |||||||||||||||||||||||||||||||
Prepaid expenses and other | 2,779 | 813 | (3 | )(j) | (384 | )(d) | 426 | 260 | (k) | — | 3,465 | 3,465 | ||||||||||||||||||||||||||||
Assets held for sale ($3,942 and $0 attributable to VIEs) | 3,942 | — | — | — | — | — | — | 3,942 | 3,942 | |||||||||||||||||||||||||||||||
Deferred tax asset | — | 213 | — | (213 | )(j) | — | — | — | — | — | ||||||||||||||||||||||||||||||
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Total current assets | 69,275 | 7,869 | (18 | ) | (5,045 | ) | 2,805 | (389 | ) | (22,695 | ) | 48,997 | — | 48,997 | ||||||||||||||||||||||||||
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Property and equipment, net | 204,959 | 682 | — | — | 682 | (169 | )(k) | — | 205,472 | 205,472 | ||||||||||||||||||||||||||||||
Goodwill | 8,512 | — | — | — | — | 312 | (b) | — | 8,824 | 8,824 | ||||||||||||||||||||||||||||||
Intangible Assets | 15,291 | — | — | — | — | 38,395 | (a) | — | 53,686 | 53,686 | ||||||||||||||||||||||||||||||
Notes receivable, long term | 1,658 | — | — | — | — | — | — | 1,658 | 1,658 | |||||||||||||||||||||||||||||||
Other assets, net | 1,230 | — | — | — | — | — | — | 1,230 | 1,230 | |||||||||||||||||||||||||||||||
Security deposits | — | 62 | (2 | )(j) | — | 60 | (60 | )(k) | — | — | — | |||||||||||||||||||||||||||||
Deferred tax asset | — | 95 | — | (95 | )(j) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Cash surrender value of life insurance | — | 45 | — | (45 | )(j) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Notes receivable - net of current portion (related parties) | — | 4,243 | — | (4,243 | )(d) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Investments (Related Party) | — | 520 | — | (520 | )(d) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Other intangibles, net of accumulated amortization | — | 1,961 | — | (1,961 | )(j) | — | — | — | — | — | ||||||||||||||||||||||||||||||
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Total assets | 300,925 | 15,477 | (20 | ) | (11,909 | ) | 3,547 | 38,089 | (22,695 | ) | 319,867 | — | 319,867 | |||||||||||||||||||||||||||
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Accounts Payable | 13,974 | — | — | — | — | — | — | 13,974 | 13,974 | |||||||||||||||||||||||||||||||
Accounts payable - related parties | — | 790 | — | (358 | )(d) | 432 | — | 432 | 432 | |||||||||||||||||||||||||||||||
Accounts payable and accrued expenses | — | 2,482 | (31 | )(j) | (439 | )(j) | 2,012 | (924 | )(k) | — | 1,088 | 1,088 | ||||||||||||||||||||||||||||
Accrued payroll and related benefits | 3,969 | — | — | — | — | — | — | 3,969 | 3,969 | |||||||||||||||||||||||||||||||
Other accrued entertainment liabilities | 9,021 | — | — | — | — | — | — | 9,021 | 9,021 | |||||||||||||||||||||||||||||||
Other accrued liabilities | 4,359 | — | — | — | — | 1,796 | (e) | — | 6,155 | $ | 589 | (g) | 6,744 | |||||||||||||||||||||||||||
Contingent consideration liability | — | — | — | — | — | — | 11,077 | 11,077 | 11,077 | |||||||||||||||||||||||||||||||
Deferred revenue | — | 571 | (21 | )(j) | — | 550 | 39 | (k) | — | 589 | (589 | )(g) | — | |||||||||||||||||||||||||||
Note payable, current portion (related parties) | — | 113 | — | (113 | )(d) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Long-term debt, due within one year ($5,838 and $0 attributable to VIEs) | 5,838 | — | — | — | — | — | — | 5,838 | — | 5,838 | ||||||||||||||||||||||||||||||
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Total current liabilities | 37,161 | 3,956 | (52 | ) | (909 | ) | 2,995 | 911 | 11,077 | 52,144 | — | 52,144 | ||||||||||||||||||||||||||||
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Long-term debt, due after one year, net of debt issuance costs | 94,531 | — | — | — | — | — | — | 94,531 | 94,531 | |||||||||||||||||||||||||||||||
Deferred income | 1,428 | — | — | — | — | — | — | 1,428 | 1,428 | |||||||||||||||||||||||||||||||
Deferred income taxes | 2,940 | — | — | — | (j) | — | — | — | 2,940 | 2,940 | ||||||||||||||||||||||||||||||
Note payable, net of current portion (related parties) | — | 56 | — | (56 | )(j) | — | — | — | — | — | ||||||||||||||||||||||||||||||
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Total liabilities | 136,060 | 4,012 | (52 | ) | (965 | ) | 2,995 | 911 | 11,077 | 151,043 | — | 151,043 | ||||||||||||||||||||||||||||
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Stockholders’ equity | — | 11,465 | 32 | (j) | (11,497 | )(m) | — | — | — | — | — | |||||||||||||||||||||||||||||
Preferred Stock | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Common stock | 202 | — | — | — | — | — | 7 | 209 | 209 | |||||||||||||||||||||||||||||||
Additional paid-in capital, common stock | 145,504 | — | — | — | — | — | 5,748 | 151,252 | 151,252 | |||||||||||||||||||||||||||||||
Retained earnings (accumulated deficit) | (14,746 | ) | — | — | — | — | (1,796 | )(e) | — | (16,542 | ) | (16,542 | ) | |||||||||||||||||||||||||||
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Total stockholders’ equity (RLHC) | 130,960 | 11,465 | 32 | (11,497 | ) | — | (1,796 | ) | 5,755 | 134,919 | — | 134,919 | ||||||||||||||||||||||||||||
Noncontrolling interest | 33,905 | — | — | — | — | — | — | 33,905 | 33,905 | |||||||||||||||||||||||||||||||
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Total stockholders’ equity | 164,865 | 11,465 | 32 | (11,497 | ) | — | (1,796 | ) | 5,755 | 168,824 | — | 168,824 | ||||||||||||||||||||||||||||
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Total liabilities and stockholders’ equity | $ | 300,925 | $ | 15,477 | $ | (20 | ) | $ | (12,462 | ) | $ | 2,995 | $ | (885 | ) | $ | 16,832 | $ | 319,867 | $ | — | $ | 319,867 | |||||||||||||||||
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4
Notes to Unaudited Pro Forma Condensed Combined Financial Information
(in thousands, except per share information)
Note 1 — Basis of presentation
The historical consolidated financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the business combination, (2) factually supportable and (3) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the business combination.
The business combination was accounted for under the acquisition method of accounting in accordance with ASC Topic 805,Business Combinations. As the acquirer for accounting purposes, the company has estimated the fair value of the brand name from TESI and Vantage’s assets acquired and liabilities assumed and conformed the accounting policies of Vantage to its own accounting policies.
The unaudited pro forma condensed combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors
The unaudited pro forma condensed combined financial information does not reflect the realization of any expected cost savings or other synergies from the acquisition of selected assets or liabilities of Vantage as a result of restructuring activities and other planned cost savings initiatives following the completion of the business combination.
Note 2 — The transaction
The company completed the acquisition of selected assets and liabilities of Vantage and the brand name from TESI for initial consideration of cash of $22.7 million, 690,000 shares of RLHC common stock, and the assumption of liabilities of approximately $1.0 million. Additional contingent consideration, dependent upon the achievement of certain milestones in the next two years, consists of a minimum of $1.0 million and up to $7.0 million in cash and up to an additional 690,000 shares of RLHC common stock. The additional consideration has been preliminarily estimated to have a fair value of $10.1 million as of the acquisition date.
The total consideration is approximately $39.5 million, consisting of the initial consideration of approximately $29.4 million and the fair value of the additional consideration of approximately $10.1 million.
5
Note 3 — Preliminary Estimated Purchase price allocation
The company has performed a preliminary valuation of the fair value of assets acquired and liabilities assumed from Vantage and TESI. The following table summarizes the preliminary allocation of the purchase price as of the acquisition date (in thousands):
Accounts receivable | $ | 1,731 | ||
Prepaid assets | 687 | |||
Fixed assets | 513 | |||
Identifiable intangible assets | 38,395 | |||
Goodwill | 312 | |||
Accounts payable, accrued expenses | (1,522 | ) | ||
Deferred revenue | (589 | ) | ||
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Total consideration | $ | 39,527 | ||
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The preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma condensed combined financial statements. Upon completion of the fair value assessment after the acquisition, it is anticipated that the ultimate purchase price allocation will differ from the preliminary assessment outlined above.
Note 4 — Pro forma adjustments
The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:
(a) | Reflects the adjustment of intangible assets acquired by the company to their estimated fair values. As part of the valuation analysis, the company identified intangible assets, specifically brand names and customer relationships. The preliminary estimate of fair value of the identifiable intangible assets is determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows. |
The following table summarizes the preliminary estimated fair values of Vantage’s identifiable intangible assets and their estimated useful lives (in thousands):
Estimated Fair Value | Estimated Useful Life in Years | Year Ended December 31, 2015 Amortization Expense | Six Months Ended June 30, 2016 Amortization Expense | |||||||||||||
Brand Names | $ | 29,128 | Indefinite(a) | N/A | N/A | |||||||||||
Customer Relationships | 8,400 | 15 | $ | 560 | $ | 280 | ||||||||||
Tradenames | 867 | 3 - 10 | 131 | 65 | ||||||||||||
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Total Intangibles | $ | 38,395 | 691 | 345 | ||||||||||||
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Historical amortization expense | (551 | ) | (273 | ) | ||||||||||||
Pro forma adjustments to amortization expense | $ | 140 | $ | 72 |
(a) | The company is still evaluating the expected useful lives of the brand name assets. |
This adjustment also reduces depreciation expense by $15 and $9 for the year ended December 31, 2015 and the six months ended June 30, 2016, respectively.
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(b) | Reflects adjustment to record goodwill of $0.3 million associated with the acquisition as shown in Note 3. |
(c) | These adjustments reflect the income statement effects of the assets and liabilities and related results of operations which were not acquired/assumed in the business combination, and also interest income on notes receivable, interest expense on notes payable, and income or loss from equity method investments. |
(d) | These adjustments reflect certain Vantage transactions with related parties which will not recur subsequent to the business combination. |
(e) | These adjustments reflect the elimination of nonrecurring transaction costs of $241 from the income statement for the period ended June 30, 2016 that are directly related to the acquisition, and the adjustment of $1,796 to the balance sheet as of June 30, 2016 for transaction costs which were incurred subsequent to June 30, 2016. |
(f) | These adjustments reflect increased compensation arrangements with two executives in connection with the acquisition, offset by the compensation of Vantage employees who did not transfer to the company on the acquisition date. |
(g) | These adjustments are to conform the classification of Vantage’s historical financial statements to the classification to be used by the company. |
(h) | Reflects the income tax effect of pro forma adjustments based on the estimated blended federal and state effective tax rate of 1.54%. |
(i) | Represents the increase in the weighted average shares in connection with the issuance of 690,000 common shares to purchase the assets. The contingent shares to be issued upon the achievement of certain goals have been excluded from the earnings per share calculations as the number of shares would be based upon a forecast. |
(j) | Amount represents asset not acquired or liability not assumed as a result of the transaction. In addition, all income tax related balances were excluded from the transaction. |
(k) | Amount represents an adjustment due to the change in the balance between the June 30, 2016 balance and the balance at the transaction close date of September 30, 2016. |
(l) | This adjustment represents the elimination of royalty expense paid by Vantage related to the brand name owned by TESI. Royalty expense will no longer be recorded as the company now owns both the customer contract and the brand name asset. |
(m) | As the transaction is an asset purchase, the equity of the sellers is not acquired. |
7