ITEM 1. FINANCIAL STATEMENTS (unaudited)
ASHFORD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share amounts) | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 29,827 | | | $ | 37,571 | |
| Restricted cash | 33,724 | | | 34,878 | |
| Restricted investment | 501 | | | 576 | |
| | | |
| Accounts receivable, net | 13,660 | | | 10,502 | |
| Due from affiliates | 289 | | | 165 | |
| Due from Ashford Trust | 3,592 | | | 2,575 | |
| Due from Braemar | 2,939 | | | 1,144 | |
| | | |
| Inventories | 1,746 | | | 1,555 | |
| Prepaid expenses and other | 6,992 | | | 9,490 | |
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| Total current assets | 93,270 | | | 98,456 | |
| Investments in unconsolidated entities | 4,171 | | | 3,581 | |
| Property and equipment, net | 81,042 | | | 83,566 | |
| Operating lease right-of-use assets | 26,049 | | | 26,975 | |
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| Goodwill | 56,622 | | | 56,622 | |
| Intangible assets, net | 238,780 | | | 244,726 | |
| Other assets | 697 | | | 870 | |
| Total assets | $ | 500,631 | | | $ | 514,796 | |
| LIABILITIES | | | |
| Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 27,243 | | | $ | 39,897 | |
| Dividends payable | 43,947 | | | 34,574 | |
| Due to affiliates | 21 | | | — | |
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| Deferred income | 494 | | | 2,937 | |
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| Notes payable, net | 6,943 | | | 6,725 | |
| Finance lease liabilities | 1,092 | | | 1,065 | |
| Operating lease liabilities | 3,602 | | | 3,628 | |
| Other liabilities | 28,710 | | | 25,899 | |
| Total current liabilities | 112,052 | | | 114,725 | |
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| Deferred income | 9,883 | | | 7,968 | |
| Deferred tax liability, net | 31,509 | | | 32,848 | |
| Deferred compensation plan | 3,437 | | | 3,326 | |
| Notes payable, net | 50,319 | | | 52,669 | |
| Finance lease liabilities | 43,243 | | | 43,479 | |
| Operating lease liabilities | 22,573 | | | 23,477 | |
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| Total liabilities | 273,016 | | | 278,492 | |
Commitments and contingencies (note 9) | | | |
| MEZZANINE EQUITY | | | |
Series D Convertible Preferred Stock, $0.001 par value, 19,120,000 shares issued and outstanding as of March 31, 2022 and December 31, 2021 | 478,000 | | | 478,000 | |
| Redeemable noncontrolling interests | 80 | | | 69 | |
| EQUITY (DEFICIT) | | | |
Common stock, 100,000,000 shares authorized, $0.001 par value, 3,171,545 and 3,072,688 shares issued and 3,108,777 and 3,023,002 shares outstanding at March 31, 2022 and December 31, 2021, respectively | 3 | | | 3 | |
| Additional paid-in capital | 294,844 | | | 294,395 | |
| Accumulated deficit | (544,076) | | | (534,999) | |
| Accumulated other comprehensive income (loss) | (798) | | | (1,206) | |
Treasury stock, at cost, 62,768 and 49,686 shares at March 31, 2022 and December 31, 2021, respectively | (816) | | | (596) | |
| Total equity (deficit) of the Company | (250,843) | | | (242,403) | |
| Noncontrolling interests in consolidated entities | 378 | | | 638 | |
| Total equity (deficit) | (250,465) | | | (241,765) | |
| Total liabilities and equity (deficit) | $ | 500,631 | | | $ | 514,796 | |
See Notes to Condensed Consolidated Financial Statements.
ASHFORD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| REVENUE | | | | | | | | | |
| Advisory services fees | | | | | $ | 11,802 | | | $ | 9,927 | | | |
| Hotel management fees | | | | | 7,178 | | | 4,472 | | | |
| Design and construction fees | | | | | 4,524 | | | 1,542 | | | |
| Audio visual | | | | | 24,965 | | | 3,611 | | | |
| Other | | | | | 11,439 | | | 10,629 | | | |
| Cost reimbursement revenue | | | | | 74,051 | | | 32,187 | | | |
| Total revenues | | | | | 133,959 | | | 62,368 | | | |
| EXPENSES | | | | | | | | | |
| Salaries and benefits | | | | | 16,845 | | | 15,776 | | | |
| Cost of revenues for design and construction | | | | | 1,910 | | | 758 | | | |
| Cost of revenues for audio visual | | | | | 17,879 | | | 4,386 | | | |
| Depreciation and amortization | | | | | 7,625 | | | 8,139 | | | |
| General and administrative | | | | | 7,363 | | | 5,268 | | | |
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| Other | | | | | 5,467 | | | 3,611 | | | |
| Reimbursed expenses | | | | | 73,908 | | | 32,115 | | | |
| Total expenses | | | | | 130,997 | | | 70,053 | | | |
| OPERATING INCOME (LOSS) | | | | | 2,962 | | | (7,685) | | | |
| Equity in earnings (loss) of unconsolidated entities | | | | | 190 | | | (114) | | | |
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| Interest expense | | | | | (1,279) | | | (1,267) | | | |
| Amortization of loan costs | | | | | (73) | | | (86) | | | |
| Interest income | | | | | 81 | | | 63 | | | |
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| Realized gain (loss) on investments | | | | | (71) | | | (194) | | | |
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| Other income (expense) | | | | | 147 | | | (113) | | | |
| INCOME (LOSS) BEFORE INCOME TAXES | | | | | 1,957 | | | (9,396) | | | |
| Income tax (expense) benefit | | | | | (1,278) | | | 951 | | | |
| NET INCOME (LOSS) | | | | | 679 | | | (8,445) | | | |
| (Income) loss from consolidated entities attributable to noncontrolling interests | | | | | 260 | | | 95 | | | |
| Net (income) loss attributable to redeemable noncontrolling interests | | | | | 9 | | | 176 | | | |
| NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY | | | | | 948 | | | (8,174) | | | |
| Preferred dividends, declared and undeclared | | | | | (9,373) | | | (8,606) | | | |
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| Amortization of preferred stock discount | | | | | — | | | (316) | | | |
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS | | | | | $ | (8,425) | | | $ | (17,096) | | | |
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| INCOME (LOSS) PER SHARE - BASIC AND DILUTED | | | | | | | | | |
| Basic: | | | | | | | | | |
| Net income (loss) attributable to common stockholders | | | | | $ | (3.00) | | | $ | (6.36) | | | |
| Weighted average common shares outstanding - basic | | | | | 2,809 | | | 2,686 | | | |
| Diluted: | | | | | | | | | |
| Net income (loss) attributable to common stockholders | | | | | $ | (3.00) | | | $ | (6.36) | | | |
| Weighted average common shares outstanding - diluted | | | | | 2,809 | | | 2,686 | | | |
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See Notes to Condensed Consolidated Financial Statements.
ASHFORD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands)
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| | | | | | | | | |
| NET INCOME (LOSS) | | | | | $ | 679 | | | $ | (8,445) | | | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX | | | | | | | | | |
| Foreign currency translation adjustment | | | | | (231) | | | — | | | |
| Unrealized gain (loss) on restricted investment | | | | | — | | | (27) | | | |
| Less reclassification for realized (gain) loss on restricted investment included in net income | | | | | — | | | 194 | | | |
| COMPREHENSIVE INCOME (LOSS) | | | | | 448 | | | (8,278) | | | |
| Comprehensive (income) loss attributable to noncontrolling interests | | | | | 260 | | | 95 | | | |
| Comprehensive (income) loss attributable to redeemable noncontrolling interests | | | | | 9 | | | 176 | | | |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY | | | | | $ | 717 | | | $ | (8,007) | | | |
See Notes to Condensed Consolidated Financial Statements.
ASHFORD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
(unaudited, in thousands)
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| Common Stock | | Additional Paid-in Capital | | Accumulated
Deficit | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Noncontrolling Interests in Consolidated Entities | | Total | | Convertible Preferred Stock | | Redeemable Noncontrolling Interests |
| Shares | | Amount | Shares | | Amount | | Shares | | Amount |
| Balance at December 31, 2021 | 3,023 | | | $ | 3 | | | $ | 294,395 | | | $ | (534,999) | | | $ | (1,206) | | | (49) | | | $ | (596) | | | $ | 638 | | | $ | (241,765) | | | 19,120 | | | $ | 478,000 | | | $ | 69 | |
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| Equity-based compensation | 100 | | | — | | | 693 | | | — | | | — | | | — | | | — | | | — | | | 693 | | | — | | | — | | | 7 | |
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| Forfeiture of restricted common shares | (1) | | | — | | | 2 | | | — | | | — | | | (1) | | | (2) | | | — | | | — | | | — | | | — | | | — | |
| Purchase of treasury stock | (13) | | | — | | | — | | | — | | | — | | | (13) | | | (218) | | | — | | | (218) | | | — | | | — | | | — | |
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| Dividends declared and undeclared - preferred stock | — | | | — | | | — | | | (9,373) | | | — | | | — | | | — | | | — | | | (9,373) | | | — | | | — | | | — | |
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| Employee advances | — | | | — | | | (246) | | | — | | | — | | | — | | | — | | | — | | | (246) | | | — | | | — | | | — | |
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| Redemption value adjustment | — | | | — | | | — | | | (13) | | | — | | | — | | | — | | | — | | | (13) | | | — | | | — | | | 13 | |
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| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | (231) | | | — | | | — | | | — | | | (231) | | | — | | | — | | | — | |
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| Other | — | | | — | | | — | | | (639) | | | 639 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net income (loss) | — | | | — | | | — | | | 948 | | | — | | | — | | | — | | | (260) | | | 688 | | | — | | | — | | | (9) | |
| Balance at March 31, 2022 | 3,109 | | | $ | 3 | | | $ | 294,844 | | | $ | (544,076) | | | $ | (798) | | | (63) | | | $ | (816) | | | $ | 378 | | | $ | (250,465) | | | 19,120 | | | $ | 478,000 | | | $ | 80 | |
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| Common Stock | | Additional Paid-in Capital | | Accumulated
Deficit | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Noncontrolling Interests in Consolidated Entities | | Total | | Convertible Preferred Stock | | Redeemable Noncontrolling Interests |
| Shares | | Amount | Shares | | Amount | | Shares | | Amount |
| Balance at December 31, 2020 | 2,868 | | | $ | 3 | | | $ | 293,597 | | | $ | (491,483) | | | $ | (1,156) | | | (32) | | | $ | (438) | | | $ | (121) | | | $ | (199,598) | | | 19,120 | | | $ | 476,947 | | | $ | 1,834 | |
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| Equity-based compensation | 154 | | | — | | | 1,312 | | | — | | | — | | | — | | | — | | | 2 | | | 1,314 | | | — | | | — | | | — | |
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| Forfeiture of restricted common shares | (1) | | | — | | | 8 | | | — | | | — | | | (1) | | | (8) | | | — | | | — | | | — | | | — | | | — | |
| Purchase of treasury stock | (12) | | | — | | | — | | | — | | | — | | | (12) | | | (102) | | | — | | | (102) | | | — | | | — | | | — | |
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| Amortization of preferred stock discount | — | | | — | | | — | | | (316) | | | — | | | — | | | — | | | — | | | (316) | | | — | | | 316 | | | — | |
| Dividends declared and undeclared - preferred stock | — | | | — | | | — | | | (8,606) | | | — | | | — | | | — | | | — | | | (8,606) | | | — | | | — | | | — | |
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| Deferred compensation plan distribution | 1 | | | — | | | 7 | | | — | | | — | | | — | | | — | | | — | | | 7 | | | — | | | — | | | — | |
| Employee advances | — | | | — | | | 245 | | | — | | | — | | | — | | | — | | | — | | | 245 | | | — | | | — | | | — | |
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| Acquisition of noncontrolling interest in consolidated entities | — | | | — | | | (2,840) | | | 2,562 | | | — | | | — | | | — | | | — | | | (278) | | | — | | | — | | | (1,648) | |
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| Reallocation of carrying value | — | | | — | | | (189) | | | — | | | — | | | — | | | — | | | 189 | | | — | | | — | | | — | | | — | |
| Redemption value adjustment | — | | | — | | | — | | | (27) | | | — | | | — | | | — | | | — | | | (27) | | | — | | | — | | | 27 | |
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| Unrealized gain (loss) on available for sale securities | — | | | — | | | — | | | — | | | (27) | | | — | | | — | | | — | | | (27) | | | — | | | — | | | — | |
| Reclassification for realized loss (gain) on available for sale securities | — | | | — | | | — | | | — | | | 194 | | | — | | | — | | | — | | | 194 | | | — | | | — | | | — | |
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| Net income (loss) | — | | | — | | | — | | | (8,174) | | | — | | | — | | | — | | | (95) | | | (8,269) | | | — | | | — | | | (176) | |
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| Balance at March 31, 2021 | 3,010 | | | $ | 3 | | | $ | 292,140 | | | $ | (506,044) | | | $ | (989) | | | (45) | | | $ | (548) | | | $ | (25) | | | $ | (215,463) | | | 19,120 | | | $ | 477,263 | | | $ | 37 | |
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See Notes to Condensed Consolidated Financial Statements.
ASHFORD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands) | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 | | |
| Cash Flows from Operating Activities | | | | | |
| Net income (loss) | $ | 679 | | | $ | (8,445) | | | |
| Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities: | | | | | |
| Depreciation and amortization | 9,127 | | | 9,615 | | | |
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| Change in fair value of deferred compensation plan | 111 | | | 58 | | | |
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| Equity-based compensation | 749 | | | 1,363 | | | |
| Equity in (earnings) loss in unconsolidated entities | (190) | | | 114 | | | |
| Deferred tax expense (benefit) | (1,339) | | | (607) | | | |
| Change in fair value of contingent consideration | — | | | 23 | | | |
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| (Gain) loss on disposal of assets | 769 | | | 849 | | | |
| Amortization of other assets | 166 | | | 306 | | | |
| Amortization of loan costs | 73 | | | 86 | | | |
| Realized loss on restricted investments | 71 | | | 194 | | | |
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| Other (gain) loss | (155) | | | 9 | | | |
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| Changes in operating assets and liabilities, exclusive of the effect of acquisitions: | | | | | |
| Accounts receivable | (4,592) | | | (509) | | | |
| Due from affiliates | (124) | | | 180 | | | |
| Due from Ashford Trust | (1,017) | | | 11,452 | | | |
| Due from Braemar | (1,795) | | | (1,442) | | | |
| Inventories | (257) | | | (652) | | | |
| Prepaid expenses and other | 2,484 | | | 830 | | | |
| Investment in unconsolidated entities | — | | | 54 | | | |
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| Operating lease right-of-use assets | 926 | | | 909 | | | |
| Other assets | 7 | | | (7) | | | |
| Accounts payable and accrued expenses | (12,773) | | | (13,741) | | | |
| Due to affiliates | 21 | | | (1,389) | | | |
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| Other liabilities | 2,811 | | | (2,889) | | | |
| Operating lease liabilities | (930) | | | (903) | | | |
| Deferred income | (524) | | | (865) | | | |
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| Net cash provided by (used in) operating activities | (5,702) | | | (5,407) | | | |
| Cash Flows from Investing Activities | | | | | |
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| Additions to property and equipment | (1,282) | | | (491) | | | |
| Proceeds from sale of property and equipment, net | 406 | | | 1,853 | | | |
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| Investment in unconsolidated entity | (400) | | | — | | | |
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| Purchase of common stock of related parties | — | | | (873) | | | |
| Acquisition of assets related to RED | (455) | | | (637) | | | |
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| Proceeds from note receivable | 1,380 | | | — | | | |
| Issuance of note receivable | — | | | (2,881) | | | |
| Net cash provided by (used in) investing activities | (351) | | | (3,029) | | | |
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| Three Months Ended March 31, |
| 2022 | | 2021 | | |
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| Cash Flows from Financing Activities | | | | | |
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| Payments on revolving credit facilities | (746) | | | (332) | | | |
| Borrowings on revolving credit facilities | 131 | | | — | | | |
| Proceeds from notes payable | 61 | | | 325 | | | |
| Payments on notes payable | (1,555) | | | (5,126) | | | |
| Payments on finance lease liabilities | (208) | | | (61) | | | |
| Payments of loan costs | (61) | | | — | | | |
| Purchase of treasury stock | (218) | | | (102) | | | |
| Employee advances | (246) | | | 245 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net cash provided by (used in) financing activities | (2,842) | | | (5,051) | | | |
| Effect of foreign exchange rate changes on cash and cash equivalents | (3) | | | (171) | | | |
| Net change in cash, cash equivalents and restricted cash | (8,898) | | | (13,658) | | | |
| Cash, cash equivalents and restricted cash at beginning of period | 72,449 | | | 82,666 | | | |
| Cash, cash equivalents and restricted cash at end of period | $ | 63,551 | | | $ | 69,008 | | | |
| | | | | |
| Supplemental Cash Flow Information | | | | | |
| Interest paid | $ | 989 | | | $ | 1,092 | | | |
| Income taxes paid (refunded), net | (10) | | | (1,061) | | | |
| Supplemental Disclosure of Non-Cash Investing and Financing Activities | | | | | |
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| | | | | |
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| | | | | |
| | | | | |
| Distribution from deferred compensation plan | — | | | 7 | | | |
| Capital expenditures accrued but not paid | 237 | | | 299 | | | |
| | | | | |
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| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Acquisition of noncontrolling interest in consolidated entities with notes payable and common stock | — | | | 1,927 | | | |
| | | | | |
| Supplemental Disclosure of Cash, Cash Equivalents and Restricted Cash | | | | | |
| Cash and cash equivalents at beginning of period | $ | 37,571 | | | $ | 45,270 | | | |
| Restricted cash at beginning of period | 34,878 | | | 37,396 | | | |
| Cash, cash equivalents and restricted cash at beginning of period | $ | 72,449 | | | $ | 82,666 | | | |
| | | | | |
| Cash and cash equivalents at end of period | $ | 29,827 | | | $ | 34,020 | | | |
| Restricted cash at end of period | 33,724 | | | 34,988 | | | |
| Cash, cash equivalents and restricted cash at end of period | $ | 63,551 | | | $ | 69,008 | | | |
See Notes to Condensed Consolidated Financial Statements.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Description of Business
Ashford Inc. (the “Company,” “we,” “us” or “our”) is a Nevada corporation that provides products and services primarily to clients in the hospitality industry, including Ashford Hospitality Trust, Inc. (“Ashford Trust”) and Braemar Hotels & Resorts Inc. (“Braemar”). We became a public company in November 2014, and our common stock is listed on the NYSE American LLC (“NYSE American”).
We provide: (i) advisory services; (ii) asset management services; (iii) hotel management services; (iv) design and construction and architectural services; (v) event technology and creative communications solutions; (vi) mobile room keys and keyless entry solutions; (vii) watersports activities and other travel, concierge and transportation services; (viii) hypoallergenic premium room products and services; (ix) debt placement and related services; (x) real estate advisory and brokerage services; and (xi) wholesaler, dealer manager and other broker-dealer services. We conduct these activities and own substantially all of our assets primarily through Ashford Hospitality Advisors LLC (“Ashford LLC”), Ashford Hospitality Services LLC (“Ashford Services”) and their respective subsidiaries.
We are currently the advisor for Ashford Trust and Braemar. In our capacity as the advisor to Ashford Trust and Braemar, we are responsible for implementing the investment strategies and managing the day-to-day operations of Ashford Trust and Braemar and their respective hotels from an ownership perspective, in each case subject to the respective advisory agreements and the supervision and oversight of the respective boards of directors of Ashford Trust and Braemar. Ashford Trust is focused on investing in full-service hotels in the upscale and upper upscale segments in the United States that have revenue per available room (“RevPAR”) generally less than twice the U.S. national average. Braemar invests primarily in luxury hotels and resorts with RevPAR of at least twice the U.S. national average. Each of Ashford Trust and Braemar is a real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and the common stock of each of Ashford Trust and Braemar is traded on the New York Stock Exchange (the “NYSE”).
We provide the personnel and services that we believe are necessary for each of Ashford Trust and Braemar to conduct their respective businesses. We may also perform similar functions for new or additional platforms. In our capacity as an advisor, we are not responsible for managing the day-to-day operations of the individual hotel properties owned by either Ashford Trust or Braemar, which duties are, and will continue to be, the responsibility of the hotel management companies that operate the hotel properties owned by Ashford Trust and Braemar. Additionally, Remington Lodging & Hospitality, LLC (“Remington”), a subsidiary of the Company, operates certain hotel properties owned by Ashford Trust and Braemar.
Other Developments
On March 10, 2022, the Company entered into a Limited Waiver Under Advisory Agreement (“Braemar Limited Waiver”) with Braemar, Braemar Hospitality Limited Partnership (“Braemar OP”), Braemar TRS Corporation and Ashford LLC. On March 15, 2022, the Company entered into a Limited Waiver Under Advisory Agreement (the “Ashford Trust Limited Waiver” and together with the Braemar Limited Waiver, the “Limited Waivers”) with Ashford Trust, Ashford Hospitality Limited Partnership (“Ashford Trust OP”), Ashford TRS Corporation (“Ashford Trust TRS”) and Ashford LLC. Pursuant to the Limited Waivers, the parties to the Second Amended and Restated Advisory Agreement with Ashford Trust and the Fifth Amended and Restated Advisory Agreement with Braemar waive the operation of any provision such agreement that would otherwise limit the ability of Ashford Trust or Braemar, as applicable, in its discretion, at its cost and expense, to award during the first and second fiscal quarters of calendar year 2022 (the “Waiver Period”), cash incentive compensation to employees and other representatives of the Company; provided that, pursuant to the Ashford Trust Limited Waiver, such awarded cash incentive compensation does not exceed $8,476,000, in the aggregate, during the Waiver Period.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. Significant Accounting Policies
Basis of Presentation and Principles of Consolidation—The accompanying historical unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These condensed consolidated financial statements include the accounts of Ashford Inc., its majority-owned subsidiaries and entities which it controls. All significant intercompany accounts and transactions between these entities have been eliminated in these historical condensed consolidated financial statements. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP in the accompanying unaudited condensed consolidated financial statements. We believe the disclosures made herein are adequate to prevent the information presented from being misleading. However, the condensed consolidated financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in our 2021 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 25, 2022.
Cost reimbursement revenue and reimbursed expenses for the three months ended March 31, 2021 were restated as previously disclosed in the restated condensed consolidated statement of operations for the three months ended March 31, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The restatement related to Remington’s recognition of cost reimbursement revenue and reimbursed expenses for certain insurance costs and the timing of recognition of cost reimbursement revenue and reimbursed expenses for hotel management related salaries and benefits costs that are reimbursed from hotel owners, resulting in a $1.6 million decrease in cost reimbursement revenue and reimbursed expenses for the three months ended March 31, 2021. These costs are reported gross in the Company’s condensed consolidated statements of operations in cost reimbursement revenue with an offsetting amount reported in reimbursed expenses.
The condensed consolidated balance sheet and statement of equity (deficit) as of March 31, 2022, include a correction of an immaterial error which resulted in $639,000 of cumulative unrealized losses on available-for-sale common shares of Ashford Trust and Braemar held by Remington being reclassified from accumulated other comprehensive income to accumulated deficit. Beginning January 1, 2022, unrealized gains and losses on available-for-sale common shares are recorded in other income (expense) in the Company’s condensed consolidated statements of operations.
A variable interest entity (“VIE”) must be consolidated by a reporting entity if the reporting entity is the primary beneficiary because it has (i) the power to direct the VIE’s activities that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. We determine whether we are the primary beneficiary of a VIE upon our initial involvement with the VIE and we reassess whether we are the primary beneficiary of a VIE on an ongoing basis. Our determination of whether we are the primary beneficiary of a VIE is based upon the facts and circumstances for each VIE and requires significant judgment.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Noncontrolling Interests—The following tables present information about noncontrolling interests in our consolidated subsidiaries, including those related to consolidated VIEs, as of March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
| Ashford
Holdings | | | | OpenKey(3) | | Pure
Wellness (4) | | | | |
| Ashford Inc. ownership interest | 99.87 | % | | | | 75.38 | % | | 70.00 | % | | | | |
Redeemable noncontrolling interests(1) (2) | 0.13 | % | | | | — | % | | — | % | | | | |
| Noncontrolling interests in consolidated entities | — | % | | | | 24.62 | % | | 30.00 | % | | | | |
| 100.00 | % | | | | 100.00 | % | | 100.00 | % | | | | |
| | | | | | | | | | | |
| Carrying value of redeemable noncontrolling interests | $ | 80 | | | | | n/a | | n/a | | | | |
| Redemption value adjustment, year-to-date | 13 | | | | | n/a | | n/a | | | | |
| Redemption value adjustment, cumulative | 594 | | | | | n/a | | n/a | | | | |
| Carrying value of noncontrolling interests | n/a | | | | 253 | | | 125 | | | | | |
Assets, available only to settle subsidiary’s obligations (5) | n/a | | | | 1,571 | | | 1,324 | | | | | |
Liabilities (6) | n/a | | | | 383 | | | 1,300 | | | | | |
| | | | | | | | | | | |
Revolving credit facility (6) | n/a | | | | — | | | 50 | | | | | |
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| December 31, 2021 |
| Ashford
Holdings | | | | OpenKey(3) | | Pure
Wellness (4) | | | | |
| Ashford Inc. ownership interest | 99.87 | % | | | | 75.38 | % | | 70.00 | % | | | | |
Redeemable noncontrolling interests(1) (2) | 0.13 | % | | | | — | % | | — | % | | | | |
| Noncontrolling interests in consolidated entities | — | % | | | | 24.62 | % | | 30.00 | % | | | | |
| 100.00 | % | | | | 100.00 | % | | 100.00 | % | | | | |
| | | | | | | | | | | |
| Carrying value of redeemable noncontrolling interests | $ | 69 | | | | | n/a | | n/a | | | | |
| Redemption value adjustment, year-to-date | 96 | | | | | n/a | | n/a | | | | |
| Redemption value adjustment, cumulative | 581 | | | | | n/a | | n/a | | | | |
| Carrying value of noncontrolling interests | n/a | | | | 479 | | | 159 | | | | | |
Assets, available only to settle subsidiary’s obligations (5) | n/a | | | | 2,533 | | | 1,779 | | | | | |
Liabilities (6) | n/a | | | | 424 | | | 1,643 | | | | | |
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Revolving credit facility (6) | n/a | | | | — | | | 100 | | | | | |
________
(1) Redeemable noncontrolling interests are included in the “mezzanine” section of our condensed consolidated balance sheets as they may be redeemed by the holder for cash or registered shares in certain circumstances outside of the Company’s control. The carrying value of the noncontrolling interests is based on the greater of the accumulated historical cost or the redemption value, which is generally fair value.
(2) Redeemable noncontrolling interests in Ashford Hospitality Holdings LLC (“Ashford Holdings”) represent the members’ proportionate share of equity in earnings/losses of Ashford Holdings. Net income/loss attributable to the common unit holders is allocated based on the weighted average ownership percentage of the members’ interest.
(3) Represents ownership interests in OpenKey, Inc. (“OpenKey”), a VIE for which we are considered the primary beneficiary and therefore we consolidate it. OpenKey is a hospitality focused mobile key platform that provides a universal smartphone app for keyless entry into hotel guest rooms. On March 9, 2021, we acquired all of the redeemable noncontrolling interests in OpenKey for a purchase price of approximately $1.9 million. See note 5.
(4) Represents ownership interests in PRE Opco, LLC (“Pure Wellness”), a VIE for which we are considered the primary beneficiary and therefore we consolidate it. Pure Wellness provides hypoallergenic premium rooms in the hospitality and commercial office industry. See note 10.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
(5) Total assets consist primarily of cash and cash equivalents, property and equipment, intangibles and other assets that can only be used to settle the subsidiaries’ obligations.
(6) Liabilities consist primarily of accounts payable, accrued expenses and notes payable for which creditors do not have recourse to Ashford Inc. See note 5.
Investments in Unconsolidated Entities—We hold “investments in unconsolidated entities” in our condensed consolidated balance sheets, which are considered to be variable interests and voting interests in the underlying entities. Certain of our investments in variable interests are not consolidated because we have determined that we are not the primary beneficiary. Certain other investments are not consolidated as the underlying entity does not meet the definition of a VIE and we do not control more than 50% of the voting interests. We review our “investments in unconsolidated entities” for impairment in each reporting period pursuant to the applicable authoritative accounting guidance. An investment is impaired when its estimated fair value is less than the carrying amount of our investment. No such impairment was recorded during the three months ended March 31, 2022 and 2021.
We held an investment in an unconsolidated variable interest entity with a carrying value of $500,000 at March 31, 2022 and December 31, 2021. We account for the investment at estimated fair value based on recent observable transactions as we do not exercise significant influence over the entity. No equity in earnings (loss) of unconsolidated entities due to a change in fair value of the investment was recognized during the three months ended March 31, 2022 and 2021. In the event that the assumptions used to estimate fair value change in the future, we may be required to record an impairment charge related to this investment.
Our investment in Real Estate Advisory Holdings LLC (“REA Holdings”) is accounted for under the equity method as we have significant influence over the voting interest entity. We have an option to acquire an additional 50% of the ownership interests in REA Holdings for $12.5 million beginning on January 1, 2022, which expires on the later of (i) February 28, 2024 and (ii) 30 business days following the completion date of the Company’s preliminary audit for calendar year 2023.
The following table summarizes our carrying value and ownership interest in REA Holdings (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Carrying value of the investment in REA Holdings | $ | 3,021 | | | 2,831 | |
| Ownership interest in REA Holdings | 30 | % | | 30 | % |
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The following table summarizes our equity in earnings (loss) in REA Holdings (in thousands): | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| Equity in earnings (loss) in unconsolidated entities REA Holdings | | | | | $ | 190 | | | $ | (114) | | | |
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Use of Estimates—The preparation of these condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents—Cash and cash equivalents include cash on hand or held in banks and short-term investments with an initial maturity of three months or less at the date of purchase.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Restricted Cash—Restricted cash was comprised of the following (in thousands):
| | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 | | |
| REIT Advisory: | | | | | |
Insurance claim reserves (1) | $ | 27,378 | | | $ | 24,588 | | | |
| | | | | |
| Remington: | | | | | |
Managed hotel properties’ reserves (2) | 3,680 | | | 6,923 | | | |
Insurance claim reserves (3) | 611 | | | 1,312 | | | |
| Total Remington restricted cash | 4,291 | | | 8,235 | | | |
| | | | | |
| INSPIRE: | | | | | |
Debt service related operating reserves (4) | 1,000 | | | 1,000 | | | |
| | | | | |
| Marietta: | | | | | |
Capital improvement reserves (5) | 255 | | | 255 | | | |
Restricted cash held in escrow (6) | 800 | | | 800 | | | |
| Total Marietta restricted cash | 1,055 | | | 1,055 | | | |
| | | | | |
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| | | | | |
| Total restricted cash | $ | 33,724 | | | $ | 34,878 | | | |
| | | | | |
________(1) Ashford Inc.’s Risk Management department collects funds from the Ashford Trust and Braemar properties and their respective management companies in an amount equal to the actuarial forecast of that year’s expected casualty claims and associated fees. These funds are deposited into restricted cash and used to pay casualty claims throughout the year as they are incurred. The claim liability related to the restricted cash balance is included in current “other liabilities” in our condensed consolidated balance sheets.
(2) Cash received from hotel properties managed by Remington is used to pay certain centralized operating expenses as well as hotel employee bonuses. The liability related to the restricted cash balance for centralized billing is primarily included as a payable which is presented net within “due from Ashford Trust” and “due from Braemar” in our condensed consolidated balance sheets. The liability related to the restricted cash balance for hotel employee bonuses is included in “accounts payable and accrued expenses.”
(3) Cash reserves for health insurance claims are collected primarily from Remington’s managed properties as well as certain of Ashford Inc.’s other subsidiaries to cover employee health insurance claims. The liability related to this restricted cash balance is included in current “other liabilities.”
(4) Our subsidiary, Inspire Event Technologies Holdings, LLC (“INSPIRE”), provides event technology and creative communications solutions services. Cash is restricted due to operating reserves required under INSPIRE’s amended credit agreement to service interest expense and projected operating costs. See note 5.
(5) Includes cash reserves for capital improvements associated with renovations at the hotel leased by our consolidated subsidiary, Marietta Leasehold LP, (“Marietta”), which holds the leasehold rights to a single hotel and convention center property in Marietta, Georgia. The liability related to the restricted cash balance for the hotel’s renovations are included in “accounts payable and accrued expenses.”
(6) Restricted cash is held in escrow in accordance with the Marietta lease agreement. The cash held in escrow is funded from hotel cash flows and can only be used for repairs and maintenance or capital improvements at the property.
Accounts Receivable—Accounts receivable consists primarily of receivables from customers of audio visual services. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments for services. The allowance is recorded based on management’s judgment regarding our ability to collect as well as the age of the receivables. Accounts receivable are written off when they are deemed uncollectible. As of March 31, 2022 and December 31, 2021, accounts receivable also includes a note receivable due to Remington of approximately $1.5 million and $2.9 million, respectively.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Property and Equipment, net—Property and equipment, including assets acquired under finance leases, is depreciated using the straight-line method over estimated useful lives or lease terms if shorter. We record property and equipment at cost. As of March 31, 2022 and December 31, 2021, property and equipment, net of accumulated depreciation, included assets related to Marietta’s finance lease of $41.3 million and $41.6 million, enhanced return funding program (“ERFP”) furniture fixture & equipment (“FF&E”) of $11.6 million and $12.4 million, audio visual equipment at INSPIRE of $6.5 million and $7.0 million and marine vessels at RED Hospitality & Leisure, LLC (“RED”) of $12.8 million and $12.8 million, respectively.
Other Liabilities—As of March 31, 2022 and December 31, 2021, other liabilities included reserves in the amount of $27.4 million and $24.6 million, respectively, related primarily to Ashford Trust and Braemar properties’ insurance claims and related fees. The liability for casualty insurance claims and related fees is established based upon an analysis of historical data and actuarial estimates. We record the related funds received from Ashford Trust and Braemar in “restricted cash” in our condensed consolidated balance sheets. As of March 31, 2022 and December 31, 2021, other liabilities also included $1.3 million relating to reserves for Remington health insurance claims.
Revenue Recognition—See note 3.
Income Taxes—We are a taxable corporation for federal and state income tax purposes. Income tax expense includes U.S. federal and state income taxes, Mexico and Dominican Republic income taxes and U.S. Virgin Islands taxes. In accordance with authoritative accounting guidance, we account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between our consolidated financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
The “Income Taxes” topic of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance requires us to determine whether tax positions we have taken or expect to take in a tax return are more likely than not to be sustained upon examination by the appropriate taxing authority based on the technical merits of the positions. Tax positions that do not meet the more likely than not threshold would be recorded as additional tax expense in the current period. We analyze all open tax years, as defined by the statute of limitations for each jurisdiction, which includes the federal jurisdiction and various states. We classify interest and penalties related to underpayment of income taxes as income tax expense. We and our portfolio companies file income tax returns in the U.S. federal jurisdiction and various states and cities, beginning in 2017, in Mexico and the Dominican Republic and, beginning in 2018, in the U.S. Virgin Islands. Tax years 2017 through 2021 remain subject to potential examination by certain federal and state taxing authorities.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law and includes certain income tax provisions relevant to our business. The Company is required to recognize the effect on the consolidated financial statements in the period the law was enacted, which is the period ended March 31, 2020. The CARES Act did not have a material impact on the Company’s consolidated financial statements for the year ended December 31, 2020. The Company filed a claim to carryback the 2018 tax net operating loss to a prior year as provided for by the CARES Act. The Company received the carryback amount of $1.0 million in March of 2021.
On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law and extends several COVID-19 tax related measures passed as part of the CARES Act. Among these is the extension of the deferral period of the remittance of Social Security taxes. The Company is required to recognize the effect on the consolidated financial statements in the period the law was enacted, which is the period ended December 31, 2020. The Company has deferred $1.3 million of Social Security taxes within “accounts payable and accrued expenses” in our consolidated balance sheets as of March 31, 2022 and December 31, 2021 related to the Consolidated Appropriations Act, 2021.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Recently Issued Accounting Standards—In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 sets forth an “expected credit loss” impairment model to replace the current “incurred loss” method of recognizing credit losses. The standard requires measurement and recognition of expected credit losses for most financial assets held. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”). ASU 2019-10 revised the mandatory adoption date for public business entities that meet the definition of a smaller reporting company to be effective for fiscal years beginning after December 15, 2022. Early adoption is permitted. We are currently evaluating the impact ASU 2016-13 and ASU 2019-10 may have on our condensed consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. We are currently evaluating the impact that ASU 2020-06 may have on our condensed consolidated financial statements and related disclosures.
3. Revenues
Revenue Recognition—Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
We determine revenue recognition through the following steps:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, we satisfy a performance obligation
In determining the transaction price, we include variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved.
The following provides detailed information on the recognition of our revenues from contracts with customers:
Advisory Services Fees Revenue
Advisory services fees revenue is reported within our REIT Advisory segment and primarily consists of advisory fees that are recognized when services have been rendered. Advisory fees consist of base fees and incentive fees. For Ashford Trust, from January 1, 2021 through January 14, 2021, the base fee ranged from 0.50% to 0.70% per annum of the total market capitalization ranging from greater than $10.0 billion to less than $6.0 billion plus the Net Asset Fee Adjustment (as defined in the Amended and Restated Advisory Agreement with Ashford Trust, dated June 10, 2015, as amended), subject to certain minimums. On January 14, 2021, the Company entered into the Second Amended and Restated Advisory Agreement with Ashford Trust. The Second Amended and Restated Advisory Agreement amends and restates the terms of the Amended and Restated Advisory Agreement to, among other things, fix the percentage used to calculate the base fee thereunder at 0.70% per annum.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
On January 15, 2021, Ashford Trust and Ashford Trust OP entered into a Credit Agreement (as amended, the “Credit Agreement”) with certain funds and accounts managed by Oaktree Capital Management L.P. (“Oaktree”). In connection with the transactions contemplated by the Credit Agreement, on January 15, 2021, the Company and certain of its affiliates entered into a Subordination and Non-Disturbance Agreement (the “SNDA”) with Ashford Trust, Ashford Trust OP, Ashford Trust TRS and Oaktree pursuant to which the Company agreed to subordinate to the prior repayment in full of all obligations under the Credit Agreement, (1) prior to the later of (i) the second anniversary of the Credit Agreement and (ii) the date accrued interest “in kind” is paid in full, advisory fees (other than reimbursable expenses) in excess of 80% of such fees paid during the fiscal year ended December 31, 2019 (the “Advisory Fee Cap”); (2) any termination fee or liquidated damages amounts under the Second Amended and Restated Advisory Agreement, or any amount owed under any enhanced return funding program in connection with the termination of the Second Amended and Restated Advisory Agreement or sale or foreclosure of assets financed thereunder; and (3) any payments to Lismore Capital II LLC, an indirect consolidated subsidiary of the Company (“Lismore”), in connection with the transactions contemplated by the Credit Agreement.
Prior to the fourth quarter of 2021, advisory fees under the Second Amended and Restated Advisory Agreement earned from Ashford Trust in 2021 in excess of the Advisory Fee Cap were a form of variable consideration that were constrained and deferred until such fees were probable of not being subject to significant reversal. The Advisory Fee Cap is approximately $29.0 million each year as stated in the Credit Agreement. As a result, base advisory fee revenue was recognized each month equal to the lesser of (1) base fees calculated as described above based on Ashford Trust’s market capitalization or (2) 1/12th of $29.0 million.
On October 12, 2021, Ashford Trust and Ashford Trust OP entered into Amendment No. 1 to the Credit Agreement (“Amendment No. 1”) with Oaktree. Amendment No. 1, subject to the conditions set forth therein, among other things, suspended Ashford Trust’s obligation to subordinate fees due under the Second Amended and Restated Advisory Agreement if at any point there is no accrued interest outstanding or any accrued dividends on any of Ashford Trust’s preferred stock and Ashford Trust has sufficient unrestricted cash to repay in full all outstanding loans under the Credit Agreement. In the fourth quarter of 2021, Ashford Trust met the requirements to suspend its obligation to subordinate fees due under the Second Amended and Restated Advisory Agreement and paid the Company $7.2 million for advisory fees that had been deferred in 2021 as a result of the Advisory Fee Cap. The $7.2 million payment was recorded as revenue in “advisory services fees” in the fourth quarter of 2021 in our consolidated statements of operations for the year ended December 31, 2021. Based upon Ashford Trust’s ability to meet the requirements stated in Amendment No. 1, the Company has concluded that base fees from our Second Amended and Restated Advisory Agreement with Ashford Trust which exceed the Advisory Fee Cap are no longer probable of being subject to significant reversal and will be recorded within “advisory services fees” in our condensed consolidated statements of operations based upon the fees calculated from Ashford Trust’s market capitalization as described above.
For Braemar, the base fee is paid monthly and is fixed at 0.70% of Braemar’s total market capitalization plus the Net Asset Fee Adjustment, as defined in our Fifth Amended and Restated Advisory Agreement with Braemar, as amended, subject to certain minimums.
Incentive advisory fees are measured annually in each year that Ashford Trust’s and/or Braemar’s annual total stockholder return exceeds the average annual total stockholder return for each company’s respective peer group, subject to the Fixed Charge Coverage Ratio Condition (the “FCCR Condition”), as defined in the respective advisory agreements. Incentive advisory fees are paid over a three-year period and each payment is subject to the FCCR Condition, which relates to the ratio of adjusted EBITDA to fixed charges for Ashford Trust or Braemar, as applicable. Incentive advisory fees are a form of variable consideration and therefore must be (i) deferred until such fees are probable of not being subject to significant reversal, and (ii) tied to a performance obligation in the contract with the customer so that revenue recognition depicts the transfer of the related advisory services to the customer. Accordingly, the Company does not record incentive advisory fee revenue in interim periods prior to the fourth quarter of the year in which the incentive fee is measured. The first year installment of incentive advisory fees will generally be recognized only upon measurement in the fourth quarter of the first year of the three year period. The second and third year installments of incentive advisory fees are recognized as revenue on a pro-rata basis each quarter subject to meeting the FCCR Condition. Ashford Trust and Braemar’s annual total stockholder return did not meet the relevant incentive fee thresholds during the 2021, 2020 and 2019 measurement periods.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Hotel Management Fees Revenue
Hotel management fees revenue is reported within our Remington segment and primarily consists of base management fees and incentive management fees. Base management fees and incentive management fees are recognized when services have been rendered. For hotels owned by Ashford Trust and Braemar, Remington receives base management fees of 3% of gross hotel revenue for managing the hotel employees and daily operations of the hotels, pursuant to Remington’s hotel management agreements, subject to a specified floor (which is subject to increase annually based on increases in the consumer price index). Remington additionally receives an incentive management fee for hotels owned by Ashford Trust and Braemar equal to the lesser of 1% of each hotel’s annual gross revenue or the amount by which the respective hotel’s gross operating profit exceeds the hotel’s budgeted gross operating profit. The base management fees and incentive management fees that Remington receives for third-party owned hotels vary by property.
Design and Construction Fees Revenue
Design and construction fees revenue (formerly called project management revenue) primarily consists of revenue generated by our subsidiary, Premier Project Management LLC (“Premier”). Premier provides design and construction management services, capital improvements, refurbishment, project management, and other services such as purchasing, interior design, architectural services and freight management at properties. Premier receives fees for these services and recognizes revenue over time as services are provided to the customer.
Audio Visual Revenue
Audio visual revenue primarily consists of revenue generated within our INSPIRE segment by providing event technology services such as audio visual services, audio visual equipment rental, staging and meeting services and event-related communication systems as well as related technical support, to our customers in various venues including hotels and convention centers. Revenue is recognized in the period in which services are provided pursuant to the terms of the contractual arrangements with our customers. We also evaluate whether it is appropriate to present: (i) the gross amount that our customers pay for our services as revenue, and the related commissions paid to the venue as cost of revenue; or (ii) the net amount (gross revenue less the related commissions paid to the venue) as revenue. We are responsible for the delivery of the services, including providing the necessary labor and equipment to perform the services. We are generally subject to inventory risk, have latitude in establishing prices and selecting suppliers and, while in many cases the venue bills the end customer on our behalf, we bear the risk of collection from the customer. The venues’ commissions are not dependent on collections. As a result, our revenue is primarily reported on a gross basis. Cost of revenues for audio visual principally includes commissions paid to venues, direct labor costs, the cost of equipment sub-rentals, depreciation of equipment, amortization of signing bonuses, as well as other costs such as supplies, freight, travel and other overhead from our venue and customer facing operations and any losses on equipment disposal.
Other Revenue
Other revenue includes revenue provided by certain of our products and service businesses, including RED. RED’s revenue is primarily generated through the provision of watersports activities and ferry and excursion services. The revenue is recognized as services are provided based on contractual customer rates. Debt placement and related fees include revenue earned from providing placement, modifications, forbearances or refinancing of certain mortgage debt by Lismore. For certain agreements, the fees are recognized based on a stated percentage of the loan amount when services have been rendered and the subject loan is closed. For other agreements, deferred income related to the various Lismore fees will be recognized over the term of the agreement on a straight line basis as the service is rendered, only to the extent it is probable that a significant reversal of revenue will not occur. Constraints relating to variable consideration are resolved generally upon the closing of a transaction or financing event and the resulting change in the transaction price will be adjusted on a cumulative catch-up basis in the period a transaction or financing event closes.
Cost Reimbursement Revenue
Cost reimbursement revenue is recognized in the period we incur the related reimbursable costs. Under our advisory agreements, we are entitled to be reimbursed for certain costs we incur on behalf of Ashford Trust and Braemar, with no added mark-up. These costs primarily consist of expenses related to Ashford Securities (as defined below), overhead, internal audit, risk management advisory services and asset management services, including compensation, benefits and travel expense reimbursements. We record cost reimbursement revenue for equity grants of Ashford Trust and Braemar common stock and
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
LTIP units awarded to our officers and employees in connection with providing advisory services equal to the fair value of the award in proportion to the requisite service period satisfied during the period.
Under our project management agreements and hotel management agreements, we are entitled to be reimbursed for certain costs we incur on behalf of Ashford Trust, Braemar and other hotel owners, with no added mark-up. Design and construction costs primarily consist of costs for accounting, overhead and project manager services. Hotel management costs primarily consist of the properties’ payroll, payroll taxes and benefits related expenses at managed properties where we are the employer of the employees at the properties as provided for in our contracts with Ashford Trust, Braemar and other hotel owners.
We recognize revenue within “cost reimbursement revenue” in our condensed consolidated statements of operations when the amounts may be billed to Ashford Trust, Braemar and other hotel owners, and we recognize expenses within “reimbursed expenses” in our condensed consolidated statements of operations as they are incurred. This pattern of recognition results in temporary timing differences between the costs incurred for centralized software programs and the related reimbursements we receive from Ashford Trust and Braemar in our operating and net income. Over the long term, these programs and services are not designed to impact our economics, either positively or negatively.
Certain of our consolidated entities enter into contracts with customers that contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our consolidated entities’ overall pricing objectives taking into consideration market conditions and other factors, including the customer and the nature and value of the performance obligations within the applicable contracts.
Practical Expedients and Exemptions
We do not disclose the amount of variable consideration that we expect to recognize in future periods in the following circumstances:
(1) if we recognize the revenue based on the amount invoiced or services performed;
(2) if the consideration is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation, and the terms of the consideration relate specifically to our efforts to transfer, or to a specific outcome from transferring the service.
Deferred Income and Contract Balances
Deferred income primarily consists of customer billings in advance of revenue being recognized from our advisory agreements and other products and services contracts. Generally, deferred income that will be recognized within the next twelve months is recorded as current deferred income and the remaining portion is recorded as noncurrent. The change in the deferred income balance is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by revenue recognized that was included in the deferred income balance at the beginning of the period.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following tables summarize our consolidated deferred income activity (in thousands):
| | | | | | | | | | | | | |
| Deferred Income |
| 2022 | | 2021 | | |
| Balance as of January 1 | $ | 10,905 | | | $ | 21,359 | | | |
| Increases to deferred income | 3,846 | | | 5,912 | | | |
Recognition of revenue (1) | (4,374) | | | (6,752) | | | |
| Balance as of March 31 | $ | 10,377 | | | $ | 20,519 | | | |
________(1) Deferred income recognized in the three months ended March 31, 2022, includes (a) $437,000 of advisory revenue primarily related to our advisory agreements with Ashford Trust and Braemar, (b) $218,000 of audio visual revenue, (c) $2.3 million of other revenue primarily related to Ashford Trust’s agreement with Lismore (see note 14), and (d) $1.4 million of “other services” revenue earned by our products and services companies, excluding Lismore. Deferred income recognized in the three months ended March 31, 2021, includes (a) $535,000 of advisory revenue primarily related to our advisory agreements with Ashford Trust and Braemar, (b) $524,000 of audio visual revenue, (c) $4.3 million of other revenue related to Ashford Trust’s and Braemar’s agreements with Lismore (see note 14) and (d) $1.4 million of “other services” revenue earned by our products and services companies, excluding Lismore.
We do not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was primarily related to (i) reimbursed software costs that will be recognized evenly over the period the software is used to provide advisory services to Ashford Trust and Braemar, (ii) a $5.0 million cash payment received in June 2017 from Braemar in connection with our Fourth Amended and Restated Advisory Agreement with Braemar, which is recognized evenly over the 10-year initial contract period that we are providing Braemar advisory services, and (iii) debt placement and related fees that will be recognized over the term of the agreement on a straight line basis as the service was rendered, only to the extent it was probable that a significant reversal of revenue would not occur. Constraints relating to variable consideration were resolved generally upon the closing of a transaction or financing event and the resulting change in the transaction price was adjusted on a cumulative catch-up basis in the period a transaction or financing event closed. See note 14. Incentive advisory fees that are contingent upon future market performance are excluded as the fees are considered variable and not included in the transaction price at March 31, 2022.
The timing of revenue recognition may differ from the timing of payment by customers. We record a receivable when revenue is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, we record deferred income until the performance obligations are satisfied. We had receivables related to revenues from contracts with customers of $12.2 million and $7.6 million included in “accounts receivable, net” primarily related to our products and services segment, $3.6 million and $2.6 million in “due from Ashford Trust”, and $2.9 million and $1.1 million included in “due from Braemar” related to REIT advisory services at March 31, 2022 and December 31, 2021, respectively. We had no significant impairments related to these receivables during the three months ended March 31, 2022 and 2021. See note 14.
Disaggregated Revenue
Our revenues were comprised of the following for the three months ended March 31, 2022 and 2021, respectively (in thousands):
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| Advisory services fees: | | | | | | | | | |
Base advisory fees | | | | | $ | 11,674 | | | $ | 9,799 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other advisory revenue | | | | | 128 | | | 128 | | | |
| Total advisory services fees revenue | | | | | 11,802 | | | 9,927 | | | |
| | | | | | | | | |
| Hotel management fees: | | | | | | | | | |
| Base fees | | | | | 6,174 | | | 3,857 | | | |
| Incentive fees | | | | | 1,004 | | | 615 | | | |
| Total hotel management fees revenue | | | | | 7,178 | | | 4,472 | | | |
| | | | | | | | | |
| Design and construction fees revenue | | | | | 4,524 | | | 1,542 | | | |
| | | | | | | | | |
| Audio visual revenue | | | | | 24,965 | | | 3,611 | | | |
| | | | | | | | | |
| Other revenue: | | | | | | | | | |
| | | | | | | | | |
Watersports, ferry and excursion services (1) | | | | | 6,045 | | | 4,561 | | | |
Debt placement and related fees (2) | | | | | 2,483 | | | 4,288 | | | |
| Claims management services | | | | | 15 | | | 17 | | | |
| | | | | | | | | |
Other services (3) | | | | | 2,896 | | | 1,763 | | | |
| Total other revenue | | | | | 11,439 | | | 10,629 | | | |
| | | | | | | | | |
| Cost reimbursement revenue | | | | | 74,051 | | | 32,187 | | | |
| | | | | | | | | |
| Total revenues | | | | | $ | 133,959 | | | $ | 62,368 | | | |
| | | | | | | | | |
REVENUES BY SEGMENT (4) | | | | | | | | | |
| REIT advisory | | | | | $ | 19,393 | | | $ | 15,068 | | | |
| Remington | | | | | 70,507 | | | 30,809 | | | |
| Premier | | | | | 6,226 | | | 1,944 | | | |
| INSPIRE | | | | | 25,022 | | | 3,611 | | | |
| RED | | | | | 6,045 | | | 4,561 | | | |
| OpenKey | | | | | 382 | | | 454 | | | |
| Corporate and other | | | | | 6,384 | | | 5,921 | | | |
| Total revenues | | | | | $ | 133,959 | | | $ | 62,368 | | | |
________(1) Watersports, ferry and excursion services revenue is earned by RED, which includes the entity that conducts RED’s legacy U.S. Virgin Islands operations, the Turks and Caicos Islands operations and Sebago, a provider of watersports activities and excursion services based in Key West, Florida.
(2) Debt placement and related fees are earned by Lismore for providing placement, modification, forbearance or refinancing services to Ashford Trust and Braemar.
(3) Other services revenue relates primarily to other hotel services provided by our consolidated subsidiaries OpenKey and Pure Wellness, to Ashford Trust, Braemar and third parties, and the revenue of Marietta, which holds the leasehold rights to a single hotel and convention center property in Marietta, Georgia.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
(4) We have six reportable segments: REIT Advisory, Remington, Premier, INSPIRE, RED and OpenKey. We combine the operating results of Marietta and Pure Wellness into an “all other” category, which we refer to as “Corporate and Other.” See note 16 for discussion of segment reporting.
Geographic Information
Our REIT Advisory, Remington, Premier, OpenKey, and Corporate and Other reporting segments conduct their business primarily within the United States. Our INSPIRE reporting segment conducts business in the United States, Mexico, and the Dominican Republic. RED conducts business in the United States and the Turks and Caicos Islands, a territory of the United Kingdom.
The following table presents revenue from INSPIRE and RED geographically for the three months ended March 31, 2022 and 2021, respectively (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| INSPIRE: | | | | | | | | | |
| United States | | | | | $ | 19,070 | | | $ | 2,915 | | | |
| Mexico | | | | | 4,618 | | | 411 | | | |
| | | | | | | | | |
| Dominican Republic | | | | | 1,334 | | | 285 | | | |
| Total audio visual revenue | | | | | $ | 25,022 | | | $ | 3,611 | | | |
| RED: | | | | | | | | | |
| United States | | | | | $ | 5,265 | | | $ | 4,561 | | | |
| United Kingdom (Turks and Caicos Islands) | | | | | 780 | | | — | | | |
| | | | | | | | | |
| Total watersports, ferry and excursion services | | | | | $ | 6,045 | | | $ | 4,561 | | | |
4. Goodwill and Intangible Assets, net
The carrying amount of goodwill as of March 31, 2022 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remington | | | | | | RED | | Corporate and Other (1) | | Consolidated |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Balance at March 31, 2022 | | $ | 54,605 | | | | | | | $ | 1,235 | | | $ | 782 | | | $ | 56,622 | |
________(1) Corporate and Other includes the goodwill from the Company’s acquisition of Pure Wellness.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Intangible assets, net as of March 31, 2022 and December 31, 2021, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 | |
| | Gross Carrying Amount | | | Accumulated Amortization | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | Net Carrying Amount | |
| Definite-lived intangible assets: | | | | | | | | | | | | |
| Remington management contracts | | $ | 107,600 | | | | $ | (30,953) | | $ | 76,647 | | | $ | 107,600 | | | $ | (28,284) | | $ | 79,316 | | |
| Premier management contracts | | 194,000 | | | | (44,568) | | 149,432 | | | 194,000 | | | (41,619) | | 152,381 | | |
| INSPIRE customer relationships | | 9,319 | | | | (4,689) | | 4,630 | | | 9,319 | | | (4,409) | | 4,910 | | |
| | | | | | | | | | | | |
| RED boat slip rights | | 3,100 | | | | (419) | | 2,681 | | | 3,100 | | | (380) | | 2,720 | | |
| Pure Wellness customer relationships | | 175 | | | | (175) | | — | | | 175 | | | (166) | | 9 | | |
| | | | | | | | | | | | |
| | $ | 314,194 | | | | $ | (80,804) | | $ | 233,390 | | | $ | 314,194 | | | $ | (74,858) | | $ | 239,336 | | |
| | | | | | | | | | | | |
| | Gross Carrying Amount | | | | | | Gross Carrying Amount | | | | |
| Indefinite-lived intangible assets: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Remington trademarks | | $ | 4,900 | | | | | | | $ | 4,900 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| RED trademarks | | 490 | | | | | | | 490 | | | | | |
| | $ | 5,390 | | | | | | | $ | 5,390 | | | | | |
Amortization expense for definite-lived intangible assets was $5.9 million and $6.4 million for the three months ended March 31, 2022 and 2021, respectively. The useful lives of our customer relationships range from 5 to 15 years. Our Remington management contracts, Premier management contracts and boat slip rights intangible assets were assigned useful lives of 22, 30, and 20 years, respectively.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. Notes Payable, net
Notes payable—Notes payable, net consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Indebtedness | | Borrower | | Maturity | | Interest Rate | | March 31, 2022 | | December 31, 2021 |
Term loan (9) | | Ashford Inc. | | March 19, 2024 | | Base Rate (1) + 2.00% to 2.25% or LIBOR (2) (3) +3.00% to 3.25% | | $ | 26,589 | | | $ | 27,271 | |
Note payable (12) | | Ashford Inc. | | February 29, 2028 | | 4.00% | | 1,684 | | | 1,746 | |
Term loan (5) (7) (10) | | INSPIRE | | January 1, 2024 | | Prime Rate (4) + 2.00% | | 19,400 | | | 20,000 | |
Revolving credit facility (5) (7) (10) | | INSPIRE | | January 1, 2024 | | Prime Rate (4) + 2.00% | | 1,304 | | | 1,869 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Revolving credit facility (5) (13) | | Pure Wellness | | On demand | | Prime Rate (4) + 1.00% | | 50 | | | 100 | |
| | | | | | | | | | |
Revolving credit facility (6) (8) (14) | | RED | | August 5, 2022 | | Prime Rate (4) + 1.75% | | — | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
Term loan (5) (8) (15) | | RED | | July 17, 2029 | | 6.00% (15) | | 1,630 | | | 1,641 | |
Term loan (5) (8) | | RED | | July 17, 2023 | | 6.50% | | 541 | | | 607 | |
| | | | | | | | | | |
| | | | | | | | | | |
Term loan (5) (8) (16) | | RED | | August 5, 2029 | | Prime Rate (4) + 2.00% | | 900 | | | 888 | |
Term loan (5) (8) | | RED | | August 5, 2029 | | Prime Rate (4) + 2.00% | | 2,100 | | | 2,143 | |
Term loan (6) (8) | | RED | | August 5, 2029 | | Prime Rate (4) + 1.75% | | 3,266 | | | 3,357 | |
Draw term loan (5) (8) (17) | | RED | | March 17, 2032 | | 5.00% (17) | | 26 | | | — | |
Draw term loan (5) (8) (17) | | RED | | March 17, 2032 | | 5.00% (17) | | 22 | | | — | |
| Total notes payable | | | | | | | | 57,512 | | | 59,622 | |
Capitalized default interest, net (11) | | | | | | | | 255 | | | 290 | |
| Deferred loan costs, net | | | | | | | | (505) | | | (518) | |
| Notes payable including capitalized default interest and deferred loan costs, net | | | | | | | | 57,262 | | | 59,394 | |
| | | | | | | | | | |
| Less current portion | | | | | | | | (6,943) | | | (6,725) | |
| Total notes payable, net - non-current | | | | | | | | $ | 50,319 | | | $ | 52,669 | |
__________________
(1) Base Rate, as defined in the term loan agreement, is the greater of (i) the Prime Rate set by Bank of America, (ii) the federal funds rate plus 0.50%, or (iii) LIBOR plus 1.00%.
(2) Ashford Inc. may elect a 1, 2, 3 or 6 month LIBOR period for each borrowing.
(3) The one-month LIBOR rate was 0.45% and 0.10% at March 31, 2022 and December 31, 2021, respectively.
(4) Prime Rate was 3.50% and 3.25% at March 31, 2022 and December 31, 2021, respectively.
(5) Creditors do not have recourse to Ashford Inc.
(6) Creditors have recourse to Ashford Inc.
(7) INSPIRE’s revolving credit facility is collateralized primarily by INSPIRE’s receivables, including accounts receivable, due from Ashford Trust and due from Braemar, with a total carrying value of $10.0 million and $5.0 million as of March 31, 2022 and December 31, 2021, respectively. INSPIRE’s term loan is collateralized by substantially all of the assets of INSPIRE.
(8) RED’s loans are collateralized primarily by RED’s marine vessels and associated leases with a carrying value of $13.3 million and $12.5 million as of March 31, 2022 and December 31, 2021, respectively.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
(9) On March 29, 2021, the Company amended its Term Loan Agreement (the “Term Loan Agreement”) with Bank of America, N.A. (as so amended, the “Seventh Amendment”). The Seventh Amendment (a) increases the required amortization rate from 1.25% to 2.50% each quarter commencing July 1, 2021, (b) requires the Company to maintain a minimum liquidity of $15.0 million at all times, including pro forma for preferred dividends, and (c) restricts dividends and stock repurchases, other than preferred dividends, so long as there is no default under the Term Loan Agreement. Principal payment amounts are subject to maintaining a fixed charge coverage ratio below specified thresholds, which if not met, increase the principal payment due each quarter from 2.50% to 5.0% of the outstanding principal balance. Upon signing the Seventh Amendment, the Company made a $5.0 million prepayment to Bank of America, N.A. as consideration for their execution and delivery of the Seventh Amendment. The Company is also subject to certain financial covenants. See covenant compliance discussion below. The Term Loan Agreement was repaid April 1, 2022. See our discussion in note 17.
(10) On December 31, 2020, INSPIRE amended its credit agreement dated as of November 1, 2017 (the “INSPIRE Amendment”). The maximum borrowing capacity under the INSPIRE Amendment for the revolving credit facility is $3.0 million. As of March 31, 2022, the amount unused under INSPIRE’s revolving credit facility was $1.7 million. The INSPIRE Amendment provides INSPIRE with an option to elect a one-year extension subject to satisfaction of certain conditions, including a payment of a one-time, permanent principal reduction of the term loan of not less than $2.5 million and other fees as of the date of INSPIRE’s election to extend. Pursuant to the INSPIRE Amendment, INSPIRE’s obligations to comply with certain financial and other covenants were waived until March 31, 2023. Amounts borrowed under the revolving credit facility and the term loan bear interest at the Prime Rate plus a margin of 1.25%, with the margin increasing by 0.25% beginning on July 1, 2021 and at the beginning of each successive quarter thereafter. The INSPIRE Amendment suspended payments of principal under the term loan through December 2021. Commencing January 1, 2022, INSPIRE is required to make monthly payments under the term loan of $200,000 through June 2022, $250,000 through December 2022 and $300,000 thereafter. The INSPIRE amendment requires INSPIRE to maintain an operating reserve account of $1.0 million. INSPIRE holds an interest rate cap with an initial notional amount totaling $5.0 million and a strike rate of 4.0%. The fair value of the interest rate cap at March 31, 2022 and December 31, 2021 was not material.
(11) The INSPIRE Amendment was considered a troubled debt restructuring due to terms that allowed for deferred interest and the forgiveness of default interest and late charges. As a result of the troubled debt restructuring, $427,000 of accrued default interest and late charges were capitalized into the INSPIRE term loan balance upon commencement and are amortized over the remaining term of the loan using the effective interest method.
(12) On March 9, 2021, we acquired all of the redeemable noncontrolling interests in OpenKey for a purchase price of approximately $1.9 million. Pursuant to the agreement, the purchase price will be paid to the seller in equal monthly installments over a seven year term and will include interest in arrears at an annualized rate of 4.0%. The purchase price is payable in Ashford Inc. common stock, including a 10% premium or cash at our sole discretion.
(13) As of March 31, 2022, the amount unused under Pure Wellness’s revolving credit facility was $200,000.
(14) As of March 31, 2022, the amount unused under RED’s revolving credit facility was $250,000.
(15) The interest rate for the term loan is 6.0% for the first five years. After five years, the interest rate is equal to the Prime Rate plus 0.5% with a floor of 6.0%.
(16) RED is not required to make any payments of principal until May 5, 2022.
(17) On March 17, 2022, in connection with the purchase and construction of marine vessels, RED entered into two closed-end non-revolving line of credit loans of $1.5 million each which convert to term loans once fully drawn. Each loan bears an interest rate of 5.0% for the first three years. After three years, the interest rate is equal to the Prime Rate plus 0.5% with a floor of 5.0%. As of March 31, 2022, the amount unused under RED’s non-revolving line of credit loans were $1.5 million and $1.5 million, respectively.
We are required to maintain certain financial ratios under various debt and related agreements. If we violate covenants in any debt or related agreement, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in the inability of our portfolio companies to borrow unused amounts under their respective lines of credit. As of March 31, 2022, our Term Loan Agreement was in compliance with all covenants or other requirements and debt held by our subsidiaries was in compliance with all covenants or other requirements.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses were comprised of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| | | |
| Accounts payable | $ | 12,956 | | | $ | 11,682 | |
| Accrued payroll expense | 10,000 | | | 23,648 | |
| Accrued vacation expense | 3,669 | | | 3,427 | |
| Accrued interest | 325 | | | 259 | |
| Other accrued expenses | 293 | | | 881 | |
| | | |
| Total accounts payable and accrued expenses | $ | 27,243 | | | $ | 39,897 | |
7. Fair Value Measurements
Fair Value Hierarchy—Our assets and liabilities measured at fair value, either on a recurring or a non-recurring basis, are classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs in the market place as discussed below:
•Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.
•Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
•Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| Quoted Market Prices (Level 1) | | Significant Other
Observable Inputs (Level 2) | | Significant Unobservable Inputs
(Level 3) | | Total | |
| March 31, 2022 | | | | | | | | |
| Assets | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Restricted Investment: | | | | | | | | |
| Ashford Trust common stock | $ | 131 | | (1) | $ | — | | | $ | — | | | $ | 131 | | |
| Braemar common stock | 370 | | (1) | — | | | — | | | 370 | | |
| Total | $ | 501 | | | $ | — | | | $ | — | | | $ | 501 | | |
| Liabilities | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Subsidiary compensation plan | $ | — | | | $ | (6) | | (1) | $ | — | | | $ | (6) | | |
| Deferred compensation plan | (3,437) | | | — | | | — | | | (3,437) | | |
| | | | | | | | |
| | | | | | | | |
| Total | $ | (3,437) | | | $ | (6) | | | $ | — | | | $ | (3,443) | | |
| Net | $ | (2,936) | | | $ | (6) | | | $ | — | | | $ | (2,942) | | |
| | | | | | | | |
| | | | | | | | |
__________________
(1) The restricted investment includes shares of common stock of Ashford Trust and Braemar purchased by Remington on the open market and held for the purpose of providing compensation to certain employees. The compensation agreement liability is based on ratably accrued vested shares through March 31, 2022, which are exercisable upon vesting. The liability is the total accrued vested shares multiplied by the fair value of the quoted market price of the underlying investment.
| | | | | | | | | | | | | | | | | | | | | | | | |
| Quoted Market Prices (Level 1) | | Significant Other
Observable Inputs (Level 2) | | Significant Unobservable Inputs
(Level 3) | | Total | |
| December 31, 2021 | | | | | | | | |
| Assets | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Restricted Investment: | | | | | | | | |
| Ashford Trust common stock | $ | 150 | | (1) | $ | — | | | $ | — | | | $ | 150 | | |
| Braemar common stock | 426 | | (1) | — | | | — | | | 426 | | |
| Total | $ | 576 | | | $ | — | | | $ | — | | | $ | 576 | | |
| Liabilities | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Subsidiary compensation plan | — | | | (164) | | (1) | — | | | (164) | | |
| Deferred compensation plan | (3,326) | | | — | | | — | | | (3,326) | | |
| | | | | | | | |
| | | | | | | | |
| Total | $ | (3,326) | | | $ | (164) | | | $ | — | | | $ | (3,490) | | |
| Net | $ | (2,750) | | | $ | (164) | | | $ | — | | | $ | (2,914) | | |
__________________
(1) The restricted investment includes shares of common stock of Ashford Trust and Braemar purchased by Remington on the open market and held for the purpose of providing compensation to certain employees. The compensation agreement liability is based on ratably accrued vested shares through December 31, 2021, which are exercisable upon vesting. The liability is the total accrued vested shares multiplied by the fair value of the quoted market price of the underlying investment.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Effect of Fair Value Measured Assets and Liabilities on Our Condensed Consolidated Statements of Operations
The following table summarizes the effect of fair value measured assets and liabilities on our condensed consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | Gain (Loss) Recognized |
| | Three Months Ended March 31, |
| | | | 2022 | | 2021 | | |
| Assets | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Unrealized gain (loss) on investment: (1) | | | | | | | | | |
| Ashford Trust common stock | | | | | $ | 110 | | | $ | — | | | |
| Braemar common stock | | | | | 57 | | | — | | | |
Realized gain (loss) on investment: (2) | | | | | | | | | |
| Ashford Trust common stock | | | | | (94) | | | (175) | | | |
| Braemar common stock | | | | | 23 | | | (19) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total | | | | | $ | 96 | | | $ | (194) | | | |
| Liabilities | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Contingent consideration (3) | | | | | $ | — | | | $ | (23) | | | |
Subsidiary compensation plan (4) | | | | | (47) | | | 118 | | | |
Deferred compensation plan (4) | | | | | (111) | | | (58) | | | |
| Total | | | | | $ | (158) | | | $ | 37 | | | |
| Net | | | | | $ | (62) | | | $ | (157) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
__________________
(1) Represents the unrealized gain (loss) on shares of common stock of Ashford Trust and Braemar purchased by Remington on the open market and held for the purpose of providing compensation to certain employees. Reported as a component of “other income (expense)” in our condensed consolidated statements of operations.
(2) Represents the realized gain (loss) on shares of common stock of Ashford Trust and Braemar purchased by Remington on the open market and held for the purpose of providing compensation to certain employees.
(3) Represents the changes in fair value of the contingent consideration liabilities related to the level of achievement of certain performance targets and stock consideration collars associated with the acquisition of BAV Services Inc. Changes in the fair value of contingent consideration are reported within “other” operating expense in our condensed consolidated statements of operations.
(4) Reported as a component of “salaries and benefits” in our condensed consolidated statements of operations.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Restricted Investment
The historical cost and approximate fair values, together with gross unrealized gains and losses, of securities restricted for use in our subsidiary compensation plan are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Historical Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Available-for-sale securities: | | | | | | | |
| March 31, 2022 | | | | | | | |
Equity securities (1) | $ | 825 | | | $ | — | | | $ | (324) | | | $ | 501 | |
__________________
(1) Distributions of $359,000 of available-for-sale securities occurred in the three months ended March 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Historical Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Available-for-sale securities: | | | | | | | |
| December 31, 2021 | | | | | | | |
Equity securities (1) | $ | 1,068 | | | $ | — | | | $ | (492) | | | $ | 576 | |
__________________
(1) Distributions of $855,000 of available-for-sale securities occurred as of December 31, 2021.
8. Summary of Fair Value of Financial Instruments
Certain of our financial instruments are not measured at fair value on a recurring basis. The estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold or settled. The carrying amounts and estimated fair values of financial instruments were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | Carrying
Value | | Estimated
Fair Value | | Carrying
Value | | Estimated
Fair Value |
| Financial assets measured at fair value: | | | | | | | | |
| Restricted investment | | $ | 501 | | | $ | 501 | | | $ | 576 | | | $ | 576 | |
| Financial liabilities measured at fair value: | | | | | | | | |
| | | | | | | | |
| Deferred compensation plan | | $ | 3,437 | | | $ | 3,437 | | | $ | 3,326 | | | $ | 3,326 | |
| | | | | | | | |
| | | | | | | | |
| Financial assets not measured at fair value: | | | | | | | | |
| Cash and cash equivalents | | $ | 29,827 | | | $ | 29,827 | | | $ | 37,571 | | | $ | 37,571 | |
| Restricted cash | | 33,724 | | | 33,724 | | | 34,878 | | | 34,878 | |
| Accounts receivable, net | | 12,160 | | | 12,160 | | | 7,622 | | | 7,622 | |
| Notes receivable | | 1,500 | | | 1,500 | | | 2,880 | | | 2,880 | |
| Due from affiliates | | 289 | | | 289 | | | 165 | | | 165 | |
| Due from Ashford Trust | | 3,592 | | | 3,592 | | | 2,575 | | | 2,575 | |
| Due from Braemar | | 2,939 | | | 2,939 | | | 1,144 | | | 1,144 | |
| Investments in unconsolidated entities | | 4,171 | | | 4,171 | | | 3,581 | | | 3,581 | |
| Financial liabilities not measured at fair value: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 27,243 | | | $ | 27,243 | | | $ | 39,897 | | | $ | 39,897 | |
| Dividends payable | | 43,947 | | | 43,947 | | | 34,574 | | | 34,574 | |
| Due to affiliates | | 21 | | | 21 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| Other liabilities | | 28,710 | | | 28,710 | | | 25,899 | | | 25,899 | |
| Notes payable | | 57,512 | | | 54,636 to 60,388 | | 59,622 | | | 56,641 to 62,603 |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Restricted investment. These financial assets are carried at fair value based on quoted market prices of the underlying investments. This is considered a Level 1 valuation technique.
Deferred compensation plan. The liability resulting from the deferred compensation plan is carried at fair value based on the closing prices of the underlying investments. This is considered a Level 1 valuation technique.
Cash, cash equivalents and restricted cash. These financial assets bear interest at market rates and have maturities of less than 90 days. The carrying values approximate fair value due to the short-term nature of these financial instruments. This is considered a Level 1 valuation technique.
Accounts receivable, net, due from affiliates, due from Ashford Trust, due from Braemar, notes receivable, accounts payable and accrued expenses, dividends payable, due to affiliates and other liabilities. The carrying values of these financial instruments approximate their fair values due primarily to the short-term nature of these financial instruments. This is considered a Level 1 valuation technique.
Investments in unconsolidated entities. The carrying value of the assets resulting from investment in unconsolidated entities approximates fair value based on recent observable transactions. This is considered a level 2 valuation technique. See note 2.
Notes payable. The fair value of notes payable is based on credit spreads on observable transactions of a similar nature and is considered a Level 2 valuation technique.
9. Commitments and Contingencies
Purchase Commitment—As of March 31, 2022, we had approximately $11.4 million of remaining purchase commitments related to our Ashford Trust ERFP Agreement which, under the Extension Agreement with Ashford Trust, must be fulfilled by December 31, 2022. See note 14 for further discussion of our ERFP Agreement with Ashford Trust.
Litigation—On December 20, 2016, a class action lawsuit was filed against one of the Company’s subsidiaries in The Superior Court of the State of California in and for the County of Contra Costa alleging violations of certain California employment laws. The court has entered an order granting class certification with respect to: (i) a statewide class of non-exempt employees who were allegedly deprived of rest breaks as a result of the subsidiary’s previous written policy requiring employees to stay on premises during rest breaks; and (ii) a derivative class of non-exempt former employees who were not paid for allegedly missed breaks upon separation from employment. While we believe it is reasonably possible that we may incur a loss associated with this litigation, because there remains uncertainty under California law with respect to a significant legal issue, discovery relating to class members continues, and the trial judge retains discretion to award lower penalties than set forth in the applicable California employment laws, we do not believe that any potential loss to the Company is reasonably estimable at this time. As of March 31, 2022, no amounts have been accrued.
We are also engaged in other legal proceedings that have arisen but have not been fully adjudicated. To the extent the claims giving rise to these legal proceedings are not covered by insurance, they relate to the following general types of claims: employment matters, tax matters, matters relating to compliance with applicable law (for example, the ADA and similar state laws), and other general matters. The likelihood of loss for these legal proceedings is based on definitions within contingency accounting literature. We recognize a loss when we believe the loss is both probable and reasonably estimable. Legal costs associated with loss contingencies are expensed as incurred. Based on the information available to us relating to these legal proceedings and/or our experience in similar legal proceedings, we do not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect on our consolidated financial position, results of operations, or cash flow. However, our assessment may change depending upon the development of these legal proceedings, and final results of these legal proceedings cannot be predicted with certainty. If we do not prevail in one or more of these legal matters, and the associated realized losses exceed our current estimates of the range of potential losses, our consolidated financial position, results of operations, or cash flows could be materially adversely affected in future periods.
10. Equity (Deficit)
Noncontrolling Interests in Consolidated Entities—See note 2 for details regarding ownership interests, carrying values and allocations related to noncontrolling interests in our consolidated subsidiaries.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the (income) loss allocated to noncontrolling interests for each of our consolidated entities (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| (Income) loss allocated to noncontrolling interests: | | | | | | | | | |
| | | | | | | | | |
| OpenKey | | | | | $ | 226 | | | $ | 203 | | | |
| RED | | | | | — | | | (97) | | | |
| Pure Wellness | | | | | 34 | | | (11) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total net (income) loss allocated to noncontrolling interests | | | | | $ | 260 | | | $ | 95 | | | |
11. Mezzanine Equity
Redeemable Noncontrolling Interests—Redeemable noncontrolling interests are included in the mezzanine section of our condensed consolidated balance sheets as the ownership interests are redeemable for cash or registered shares outside of the Company’s control. See note 2 for tables summarizing the redeemable noncontrolling ownership interests and carrying values.
The following table summarizes the net (income) loss allocated to our redeemable noncontrolling interests (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| Net (income) loss allocated to redeemable noncontrolling interests: | | | | | | | | | |
| Ashford Holdings | | | | | $ | 9 | | | $ | 24 | | | |
| | | | | | | | | |
| | | | | | | | | |
| OpenKey | | | | | — | | | 152 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total net (income) loss allocated to redeemable noncontrolling interests | | | | | $ | 9 | | | $ | 176 | | | |
| | | | | | | | | |
Convertible Preferred Stock—Our convertible preferred stock is included in the mezzanine section of our condensed consolidated balance sheets as the ownership interests are redeemable for cash or registered shares outside of the Company’s control.
Each share of Series D Convertible Preferred Stock: (i) has a liquidation value of $25 per share; (ii) accrues cumulative dividends at the rate of: (a) 6.59% per annum until November 6, 2020; (b) 6.99% per annum from November 6, 2020 until November 6, 2021; and (c) 7.28% per annum thereafter; (iii) participates in any dividend or distribution on the common stock in addition to the preferred dividends; (iv) is convertible into voting common stock at $117.50 per share; and (v) provides for customary anti-dilution protections. In the event the Company fails to pay the dividends on the Series D Convertible Preferred Stock for two consecutive quarterly periods (a “Preferred Stock Breach”), then until such arrearage is paid in cash in full: (A) the dividend rate on the Series D Convertible Preferred Stock will increase to 10.00% per annum until no Preferred Stock Breach exists; (B) no dividends on the Company’s common stock may be declared or paid, and no other distributions or redemptions may be made, on the Company’s common stock; and (C) the Board will be increased by two seats and the holders of 55% of the outstanding Series D Convertible Preferred Stock will be entitled to fill such newly created seats. The Series D Convertible Preferred Stock is held primarily by Mr. Monty J. Bennett, the Chairman of our Board and our Chief Executive Officer, Mr. Archie Bennett, Jr., who is Mr. Monty J. Bennett’s father, one of our other executive officers and several other individuals.
To the extent not paid on April 15, July 15, October 15 and January 15 of each calendar year in respect of the quarterly periods ending on March 31, June 30, September 30 and December 31, respectively (each such date, a “Dividend Payment Date”), all accrued dividends on any share shall accumulate and compound on the applicable Dividend Payment Date whether or not declared by the Board and whether or not funds are legally available for the payment thereof. All accrued dividends shall remain accumulated, compounding dividends until paid in cash or converted to common shares.
The Series D Convertible Preferred Stock is entitled to vote alongside our voting common stock on an as-converted basis, subject to applicable voting limitations.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
So long as any shares of Series D Convertible Preferred Stock are outstanding, the Company is prohibited from taking specified actions without the consent of the holders of 55% of the outstanding Series D Convertible Preferred Stock, including: (i) modifying the terms, rights, preferences, privileges or voting powers of the Series D Convertible Preferred Stock; (ii) altering the rights, preferences or privileges of any capital stock of the Company so as to affect adversely the Series D Convertible Preferred Stock; (iii) issuing any security senior to the Series D Convertible Preferred Stock, or any shares of Series D Convertible Preferred Stock other than pursuant to the Combination Agreement dated May 31, 2019 between us, the Bennetts, Remington Holdings, L.P. and certain other parties, as amended (the “Combination Agreement”); (iv) entering into any agreement that expressly prohibits or restricts the payment of dividends on the Series D Convertible Preferred Stock or the common stock of the Company or the exercise of the Change of Control Put Option (as defined in the Combination Agreement); or (v) other than the payment of dividends on the Series D Convertible Preferred Stock or payments to purchase any of the Series D Convertible Preferred Stock, transferring all or a substantial portion of the Company’s or its subsidiaries’ cash balances or other assets to a person other than the Company or its subsidiaries, other than by means of a dividend payable by the Company pro rata to the holders of the Company common stock (together with a corresponding dividend payable to the holders of the Series D Convertible Preferred Stock).
After June 30, 2026, we will have the option to purchase all or any portion of the Series D Convertible Preferred Stock, in $25.0 million increments, on a pro rata basis among all holders of the Series D Convertible Preferred Stock (subject to the ability of the holders to provide for an alternative allocation amongst themselves), at a price per share equal to: (i) $25.125; plus (ii) all accrued and unpaid dividends (provided any holder of Series D Convertible Preferred Stock shall be entitled to exercise its right to convert its shares of Series D Convertible Preferred Stock into common stock not fewer than five business days before such purchase is scheduled to close).
Under the applicable authoritative accounting guidance, the increasing dividend rate feature of the Series D Convertible Preferred Stock results in a discount that must be reflected in the fair value of the preferred stock, which was reflected in “Series D Convertible Preferred Stock, net of discount” on our condensed consolidated balance sheets. For the three months ended March 31, 2022 and 2021, we recorded $0 and $316,000, respectively, of amortization related to preferred stock discounts.
The Company declared dividends which were due with respect to its Series D Convertible Preferred Stock of $8.4 million for each of the first and third quarters of 2021 which were paid on April 15, 2021 and October 15, 2021, respectively. On March 9, 2022, the Company declared a dividend of $8.7 million with respect to its Series D Convertible Preferred Stock for the first quarter of 2022. The Company did not declare dividends with respect to its Series D Convertible Preferred Stock for the second and fourth quarters of 2020 and the second and fourth quarters of 2021. As of March 31, 2022, the Company had aggregate undeclared preferred stock dividends of approximately $35.2 million, which relates to the second and fourth quarters of 2020 and the second and fourth quarters of 2021. All dividends, declared and undeclared, are recorded as a reduction in net income (loss) attributable to common stockholders in the period incurred in our consolidated statements of operations. All accrued dividends accumulate and compound until paid in cash or converted into common stock of the Company pursuant to the Certificate of Designation for the Series D Convertible Preferred Stock. Unpaid dividends, declared and undeclared, totaling $43.9 million and $34.6 million at March 31, 2022 and December 31, 2021, respectively, are recorded as a liability in our condensed consolidated balance sheets as “dividends payable.” See note 17.
Declared convertible preferred stock cumulative dividends for all issued and outstanding shares were as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| | | | | | | | | |
| Preferred dividends - declared | | | | | $ | 8,700 | | | $ | 8,353 | | | |
| Preferred dividends per share - declared | | | | | $ | 0.4550 | | | $ | 0.4369 | | | |
Aggregate undeclared convertible preferred stock cumulative dividends (in thousands, except per share amounts):
| | | | | | | | | | | | | |
| |
| March 31, 2022 | | December 31, 2021 | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Aggregate preferred dividends - undeclared | $ | 35,248 | | | $ | 34,574 | | | |
| | | | | |
| Aggregate preferred dividends - undeclared per share | $ | 1.8435 | | | $ | 1.8083 | | | |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. Equity-Based Compensation
Equity-based compensation expense is primarily recorded in “salaries and benefits expense” and REIT equity-based compensation expense is primarily recorded in “reimbursed expenses” in our condensed consolidated statements of operations. The components of equity-based compensation expense for the three months ended March 31, 2022 and 2021 are presented below by award type (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| Equity-based compensation | | | | | | | | | |
Class 2 LTIP Units and stock option amortization (1) | | | | | $ | 354 | | | $ | 1,006 | | | |
Employee equity grant expense (2) | | | | | 341 | | | 232 | | | |
Director and other non-employee equity grants expense (3) | | | | | 54 | | | 125 | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total equity-based compensation | | | | | $ | 749 | | | $ | 1,363 | | | |
| | | | | | | | | |
| Other equity-based compensation | | | | | | | | | |
REIT equity-based compensation (4) | | | | | $ | 4,329 | | | $ | 3,337 | | | |
| | | | | $ | 5,078 | | | $ | 4,700 | | | |
________
(1) As of March 31, 2022, the Company had approximately $384,000 of total unrecognized compensation expense related to Class 2 Long-Term Incentive Partnership Units (the “Class 2 LTIP Units”) that will be recognized over a weighted average period of 3.0 years.
(2) As of March 31, 2022, the Company had approximately $3.8 million of total unrecognized compensation expense related to restricted shares and LTIP units that will be recognized over a weighted average period of 2.1 years. In March 2022, approximately 39,000 Long-Term Incentive Plan units (the “LTIP units”) with a fair value of approximately $627,000 were issued to one of our executive officers as compensation. The LTIP units have a vesting period of three years. Each LTIP unit once vested can be converted by the holder into one common limited partnership unit of Ashford Holdings which can then be redeemed for cash or, at our election, settled in our common stock.
(3) Grants of stock, restricted stock and stock units to independent directors and other non-employees are recorded at fair value based on the market price of our shares at grant date, and this amount is expensed in “general and administrative” expense.
(4) REIT equity-based compensation expense is primarily recorded in “reimbursed expenses” and is associated with equity grants of Ashford Trust’s and Braemar’s common stock and LTIP units awarded to our officers and employees.
13. Deferred Compensation Plan
We administer a non-qualified deferred compensation plan (“DCP”) for certain executive officers. The plan allowed participants to defer up to 100% of their base salary and bonus and select an investment fund for measurement of the deferred compensation obligation. For the periods the DCP was administered by Ashford Trust, the participants elected Ashford Trust common stock as their investment option. In accordance with the applicable authoritative accounting guidance, the deferred amounts and any dividends earned received equity treatment and were included in additional paid-in capital. In connection with our spin-off and the assumption of the DCP obligation by the Company, the DCP was modified to give the participants various investment options, including Ashford Inc. common stock, for measurement that can be changed by the participant at any time. These modifications resulted in the DCP obligation being recorded as a liability in accordance with the applicable authoritative accounting guidance. Distributions under the DCP are made in cash, unless the participant has elected Ashford Inc. common stock as the investment option, in which case any such distributions would be made in Ashford Inc. common stock. Additionally, the DCP obligation is carried at fair value with changes in fair value reflected in “salaries and benefits” in our condensed consolidated statements of operations and comprehensive income (loss).
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the DCP activity (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| Change in fair value | | | | | | | | | |
| Unrealized gain (loss) | | | | | $ | (94) | | | $ | (58) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Distributions | | | | | | | | | |
Fair value (1) | | | | | $ | — | | | $ | 7 | | | |
Shares (1) | | | | | — | | | 1 | | | |
________
(1) Distributions made to one participant.
As of March 31, 2022 and December 31, 2021, the carrying value of the DCP liability was $3.4 million and $3.3 million, respectively.
14. Related Party Transactions
As an asset manager providing advisory services to Ashford Trust and Braemar, as well as holding an ownership interest in other businesses providing products and services to the hospitality industry, including Ashford Trust and Braemar, related party transactions are inherent in our business. Details of our related party transactions are presented below.
Ashford Trust—We are party to the Second Amended and Restated Advisory Agreement with Ashford Trust. See note 3 for a description of the Second Amended and Restated Advisory Agreement.
Premier is party to a master project management agreement with Ashford Trust OP and Ashford Trust TRS, a subsidiary of Ashford Trust OP, and certain of its affiliates to provide comprehensive and cost-effective design, development, architectural, and project management services and a related mutual exclusivity agreement with Ashford Trust and Ashford Trust OP.
Remington is party to a master hotel management agreement with Ashford Trust and certain of its affiliates to provide hotel management services. Ashford Trust pays the Company a monthly hotel management fee equal to the greater of $15,000 per hotel (increased annually based on consumer price index adjustments) or 3% of gross revenue (the “base fee”) as well as annual incentive hotel management fees, if certain operational criteria are met, and other general and administrative expense reimbursements. Ashford Trust pays the base fee and reimburses all expenses for Remington-managed hotels on a weekly basis for the preceding week.
On July 1, 2020, Lismore and Ashford Trust amended and restated the Ashford Trust Agreement with an effective date of April 6, 2020 to negotiate the refinancing, modification or forbearance of the existing mortgage and mezzanine debt on Ashford Trust’s hotels (the “Ashford Trust Agreement”). The Ashford Trust Agreement terminated effective April 6, 2022. For the three months ended March 31, 2022 and 2021, the Company recognized revenue of $2.3 million and $3.4 million, respectively. The three month period ended March 31, 2021 includes a $1.1 million cumulative catch-up adjustment to revenue which was previously considered constrained. As of March 31, 2022 and December 31, 2021, the Company recorded $0 and $2.4 million, respectively, as deferred income. The deferred income related to the various Lismore fees described above was recognized over the 24 month term of the agreement on a straight line basis as the service was rendered, only to the extent it was probable that a significant reversal of revenue would not occur. Constraints relating to variable consideration were resolved generally upon the closing of a transaction or financing event and the resulting change in the transaction price was adjusted on a cumulative catch-up basis in the period a transaction or financing event closed. See the table below for details of the revenue recognized by the Company and note 3 for additional discussion of the related deferred income.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the revenues and expenses related to Ashford Trust (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| REVENUES BY TYPE | | | | | | | | | |
| Advisory services fees: | | | | | | | | | |
Base advisory fees (1) | | | | | $ | 8,735 | | | $ | 7,254 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Hotel management fees: | | | | | | | | | |
| Base management fees | | | | | 5,002 | | | 3,377 | | | |
| Incentive management fees | | | | | 783 | | | 536 | | | |
Total hotel management fees revenue (2) | | | | | 5,785 | | | 3,913 | | | |
| | | | | | | | | |
Design and construction fees revenue (3) | | | | | 2,472 | | | 403 | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other revenue | | | | | | | | | |
| | | | | | | | | |
Watersports, ferry and excursion services (5) | | | | | 43 | | | — | | | |
Debt placement and related fees (6) | | | | | 2,293 | | | 3,435 | | | |
| | | | | | | | | |
Claims management services (7) | | | | | 14 | | | 16 | | | |
| | | | | | | | | |
| | | | | | | | | |
Other services (8) | | | | | 348 | | | 359 | | | |
| Total other revenue | | | | | 2,698 | | | 3,810 | | | |
| | | | | | | | | |
| Cost reimbursement revenue | | | | | 58,306 | | | 25,988 | | | |
| | | | | | | | | |
| Total revenues | | | | | $ | 77,996 | | | $ | 41,368 | | | |
| | | | | | | | | |
REVENUES BY SEGMENT (9) | | | | | | | | | |
| REIT advisory | | | | | $ | 13,006 | | | $ | 10,554 | | | |
| Remington | | | | | 58,129 | | | 26,372 | | | |
| Premier | | | | | 3,606 | | | 648 | | | |
| INSPIRE | | | | | 38 | | | — | | | |
| RED | | | | | 43 | | | — | | | |
| OpenKey | | | | | 34 | | | 30 | | | |
| Corporate and other | | | | | 3,140 | | | 3,764 | | | |
| Total revenues | | | | | $ | 77,996 | | | $ | 41,368 | | | |
| | | | | | | | | |
| COST OF REVENUES | | | | | | | | | |
Cost of revenues for audio visual (4) | | | | | $ | 1,448 | | | $ | 136 | | | |
| | | | | | | | | |
| | | | | | | | | |
| SUPPLEMENTAL REVENUE INFORMATION | | | | | | | | | |
Audio visual revenue from guests at REIT properties (4) | | | | | $ | 3,350 | | | $ | 303 | | | |
| | | | | | | | | |
________
(1) Advisory fees earned from Ashford Trust during the 2021 quarter excluded $1.5 million of advisory fees that were deferred as a result of the $29.0 million annual Advisory Fee Cap. See note 3 for discussion of the advisory services revenue recognition policy.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
(2) Hotel management fees revenue is reported within our Remington segment. Base management fees and incentive management fees are recognized when services have been rendered. Remington receives base management fees of 3% of gross hotel revenue for managing the hotel employees and daily operations of the hotels, subject to a specified floor (which is subject to increase annually based on increases in the consumer price index). Remington receives an incentive management fee equal to the lessor of 1% of each hotel’s annual gross revenues or the amount by which the respective hotel’s gross operating profit exceeds the hotel’s budgeted gross operating profit. See note 3 for discussion of the hotel management fees revenue recognition policy.
(3) Design and construction fees revenue primarily consists of revenue generated within our Premier segment by providing design, development, architectural, and project management services for which Premier receives fees. See note 3 for discussion of the design and construction fees revenue recognition policy.
(4) INSPIRE and RED primarily contract directly with customers to whom they provide services. INSPIRE and RED recognize the gross revenue collected from their customers by the hosting hotel or venue. Commissions retained by the hotel or venue, including Ashford Trust, for INSPIRE and RED are recognized in “cost of revenues for audio visual” and “other” operating expense, respectively, in our condensed consolidated statements of operations. See note 3 for discussion of the revenue recognition policy.
(5) Watersports, ferry and excursion services revenue includes revenue that is earned by RED for providing services directly to Ashford Trust rather than contracting with third-party customers.
(6) Debt placement and related fees are earned by Lismore for providing debt placement, modification, forbearance and refinancing services.
(7) Claims management services include revenue earned from providing insurance claim assessment and administration services.
(8) Other services revenue is primarily associated with other hotel products and services, such as mobile key applications and hypoallergenic premium rooms, provided to Ashford Trust by our consolidated subsidiaries, OpenKey and Pure Wellness.
(9) See note 16 for discussion of segment reporting.
Braemar—We are also a party to an amended and restated advisory agreement with Braemar and its operating subsidiary Braemar OP.
Premier is party to a master project management agreement with Braemar OP and Braemar TRS Yountville LLC, a wholly owned subsidiary of Braemar OP, to provide comprehensive and cost-effective design, development, architectural, and project management services and a related mutual exclusivity agreement with Braemar and Braemar OP.
Remington is party to a master hotel management agreement with Braemar and certain of its affiliates to provide hotel management services. Braemar pays the Company a monthly hotel management fee equal to the greater of $15,000 per hotel (increased annually based on consumer price index adjustments) or 3% of gross revenue (the “base fee”) as well as annual incentive hotel management fees, if certain operational criteria are met and other general and administrative expense reimbursements. Braemar pays the base fee and reimburses all expenses for Remington-managed hotels on a weekly basis for the preceding week.
On March 20, 2020, Lismore entered into an agreement with Braemar to negotiate the refinancing, modification or forbearance of the existing mortgage and mezzanine debt on Braemar’s hotels (the “Braemar Agreement”). The Braemar Agreement terminated effective March 20, 2021. For the three months ended March 31, 2022 and 2021, the Company recognized revenue of $0 and $853,000, respectively, related to the Braemar Agreement.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the revenues and expenses related to Braemar (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| REVENUES BY TYPE | | | | | | | | | |
| Advisory services fees: | | | | | | | | | |
| Base advisory fees | | | | | $ | 2,939 | | | $ | 2,545 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Other advisory revenue (1) | | | | | 128 | | | 128 | | | |
| Total advisory services fees revenue | | | | | 3,067 | | | 2,673 | | | |
| | | | | | | | | |
| Hotel management fees: | | | | | | | | | |
| Base management fees | | | | | 700 | | | 331 | | | |
| Incentive management fees | | | | | 202 | | | 79 | | | |
Total hotel management fees revenue (2) | | | | | 902 | | | 410 | | | |
| | | | | | | | | |
Design and construction fees revenue (3) | | | | | 1,320 | | | 271 | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other revenue | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Watersports, ferry and excursion services (5) | | | | | 583 | | | 532 | | | |
Debt placement and related fees (6) | | | | | 190 | | | 853 | | | |
| | | | | | | | | |
Claims management services (7) | | | | | 1 | | | 1 | | | |
| | | | | | | | | |
| | | | | | | | | |
Other services (8) | | | | | 42 | | | 51 | | | |
| Total other revenue | | | | | 816 | | | 1,437 | | | |
| | | | | | | | | |
| Cost reimbursement revenue | | | | | 11,045 | | | 4,504 | | | |
| | | | | | | | | |
| Total revenues | | | | | $ | 17,150 | | | $ | 9,295 | | | |
| | | | | | | | | |
REVENUES BY SEGMENT (9) | | | | | | | | | |
| REIT advisory | | | | | $ | 6,388 | | | $ | 4,514 | | | |
| Remington | | | | | 7,062 | | | 2,640 | | | |
| Premier | | | | | 1,831 | | | 362 | | | |
| INSPIRE | | | | | 19 | | | — | | | |
| RED | | | | | 583 | | | 532 | | | |
| OpenKey | | | | | 9 | | | 10 | | | |
| Corporate and other | | | | | 1,258 | | | 1,237 | | | |
| Total revenues | | | | | $ | 17,150 | | | $ | 9,295 | | | |
| | | | | | | | | |
| COST OF REVENUES | | | | | | | | | |
Cost of revenues for audio visual (4) | | | | | $ | 701 | | | $ | 23 | | | |
Other (5) | | | | | 86 | | | 85 | | | |
| | | | | | | | | |
| SUPPLEMENTAL REVENUE INFORMATION | | | | | | | | | |
Audio visual revenues from guests at REIT properties (5) | | | | | $ | 1,671 | | | $ | 52 | | | |
Watersports, ferry and excursion services from guests at REIT properties (5) | | | | | 612 | | | 257 | | | |
________
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
(1) In connection with our Fourth Amended and Restated Braemar Advisory Agreement, a $5.0 million cash payment was made by Braemar upon approval by Braemar’s stockholders, which is recognized over the 10-year initial term.
(2) Hotel management fees revenue is reported within our Remington segment. Base management fees and incentive management fees are recognized when services have been rendered. Remington receives base management fees of 3% of gross hotel revenue for managing the hotel employees and daily operations of the hotels, subject to a specified floor (which is subject to increase annually based on increases in the consumer price index). Remington receives an incentive management fee equal to the lessor of 1% of each hotel’s annual gross revenues or the amount by which the respective hotel’s gross operating profit exceeds the hotel’s budgeted gross operating profit. See note 3 for discussion of the hotel management fees revenue recognition policy.
(3) Design and construction fees revenue primarily consists of revenue generated within our Premier segment by providing design, development, architectural, and project management services for which Premier receives fees. See note 3 for discussion of the design and construction fees revenue recognition policy.
(4) INSPIRE and RED primarily contract directly with third-party customers to whom they provide services. INSPIRE and RED recognize the gross revenue collected from their customers by the hosting hotel or venue. Commissions retained by the hotel or venue, including Braemar, for INSPIRE and RED are recognized in “cost of revenues for audio visual” and “other” operating expense, respectively, in our consolidated statements of operations. See note 3 for discussion of the revenue recognition policy.
(5) Watersports, ferry and excursion services revenue includes revenue that is earned by RED for providing services directly to Braemar rather than contracting with third-party customers.
(6) Debt placement and related fees are earned by Lismore for providing debt placement, modification, forbearance and refinancing services.
(7) Claims management services include revenue earned from providing insurance claim assessment and administration services.
(8) Other services revenue is primarily associated with other hotel products and services, such as mobile key applications and hypoallergenic premium rooms, provided to Braemar by our consolidated subsidiaries, OpenKey and Pure Wellness.
(9) See note 16 for discussion of segment reporting.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
ERFP Commitments—On June 26, 2018, the Company entered into the Ashford Trust ERFP Agreement with Ashford Trust. The independent members of the board of directors of each of the Company and Ashford Trust, with the assistance of separate and independent legal counsel, engaged to negotiate the Ashford Trust ERFP Agreement on behalf of the Company and Ashford Trust, respectively. On January 15, 2019, the Company entered into the Braemar ERFP Agreement (collectively with the Ashford Trust ERFP Agreement, the “ERFP Agreements”) with Braemar. The independent members of the board of directors of each of the Company and Braemar, with the assistance of separate and independent legal counsel, engaged to negotiate the Braemar ERFP Agreement on behalf of the Company and Braemar, respectively. Under the ERFP Agreements, the Company agreed to provide $50 million (each, an “Aggregate ERFP Amount” and collectively, the “Aggregate ERFP Amounts”) to each of Ashford Trust and Braemar (collectively, the “REITs”), respectively, in connection with each such REIT’s acquisition of hotels recommended by us, with the option to increase each Aggregate ERFP Amount to up to $100 million upon mutual agreement by the parties to the respective ERFP Agreement. Under each of the ERFP Agreements, the Company paid each REIT 10% of each acquired hotel’s purchase price in exchange for furniture, fixtures and equipment (“FF&E”) at a property owned by such REIT, which were subsequently leased by us to such REIT rent-free. Each of the REITs must provide reasonable advance notice to the Company to request ERFP funds in accordance with the respective ERFP Agreement. The ERFP Agreements required that the Company acquire the related FF&E either at the time of the property acquisition or at any time generally within two years of the respective REITs’ acquisition of the hotel property. The Company recognized the related depreciation tax deduction at the time such FF&E was purchased by the Company and placed into service at the respective REIT’s hotel properties. However, the timing of the FF&E purchased and placed into service was subject to uncertainties outside of the Company’s control that could delay the realization of any tax benefit associated with the purchase of FF&E.
In the first quarter of 2021, Ashford Trust purchased FF&E from the Company at the fair market value of $82,000 upon expiration of the underlying leases of the FF&E under the Ashford Trust ERFP Agreement. The Company recorded a loss on sale of the FF&E of $107,000 which is included within “other” operating expense in our condensed consolidated statements of operations. Additionally, on January 20, 2021, Ashford Trust sold the Le Meridien hotel in Minneapolis, Minnesota. The hotel contained FF&E with a net book value of $399,000 which was owned by the Company and leased to Ashford Trust rent-free pursuant to the Ashford Trust ERFP Agreement. The Company recorded a loss on disposal of FF&E of $271,000 within “other” operating expense in our condensed consolidated statements of operations. Pursuant to the agreement, Ashford Trust provided replacement FF&E to the Company in the third quarter of 2021 equal to the fair market value of the sold FF&E with a fair market value of $128,000, which was subsequently leased back to Ashford Trust rent-free.
On April 20, 2021, the Company received written notice from Ashford Trust of Ashford Trust’s intention not to renew the Ashford Trust ERFP Agreement. As a result, the Ashford Trust ERFP Agreement terminated in accordance with its terms on June 26, 2021. The expiration of the Ashford Trust ERFP Agreement has no impact on the Extension Agreement, which continues in full force and effect in accordance with its terms. See note 9.
On November 8, 2021, the Company delivered written notice to Braemar of the Company’s intention not to renew the Braemar ERFP Agreement. As a result, the Braemar ERFP Agreement terminated in accordance with its terms on January 15, 2022.
In the first quarter of 2022, Ashford Trust purchased FF&E with a net book value of $1.1 million from the Company at the fair market value of $406,000 upon expiration of the underlying leases of the FF&E under the Ashford Trust ERFP Agreement (which continue to survive following the termination of such agreement). The Company recorded a loss on sale of the FF&E of $706,000 which is included within “other” operating expense in our condensed consolidated statement of operations for the three months ended March 31, 2022.
Ashford Securities—On September 25, 2019, the Company announced the formation of Ashford Securities LLC (“Ashford Securities”) to raise capital in order to grow the Company’s existing and future advised platforms. In conjunction with the formation of Ashford Securities, Ashford Trust and Braemar entered into a contribution agreement (the “Initial Contribution Agreement”) with Ashford Inc. pursuant to which Ashford Trust and Braemar agreed to a combined contribution of up to $15.0 million to fund the operations of Ashford Securities. These costs were allocated initially to Ashford Trust and Braemar based on an allocation percentage of 75% to Ashford Trust and 25% Braemar. Upon reaching the earlier of $400 million in aggregate non-listed preferred equity offerings or other debt or equity offerings through Ashford Securities or June 10, 2023, there will be a true up (the “Initial True-Up Date”) between Ashford Trust and Braemar whereby the actual expense reimbursements paid by each company will be based on the actual amount of capital raised by Ashford Trust and Braemar, respectively.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
On December 31, 2020, an Amended and Restated Contribution Agreement (the “Amended and Restated Contribution Agreement”) was entered into by the Company, Ashford Trust and Braemar with respect to expenses to be reimbursed by Ashford Securities. The Initial True-Up Date did not occur, and beginning on the effective date of the Amended and Restated Contribution Agreement, costs will be allocated based upon an allocation percentage of 50% to the Company, 50% to Braemar and 0% to Ashford Trust. Upon reaching the earlier of $400 million in aggregate non-listed preferred equity offerings or other debt or equity offerings through Ashford Securities or June 10, 2023, there will be an amended and restated true up (the “Amended and Restated True-Up Date”) among the Company, Ashford Trust and Braemar whereby the actual expense reimbursement paid by each company will be based on the actual amount of capital raised by the Company, Ashford Trust and Braemar, respectively, through Ashford Securities. After the Amended and Restated True-Up Date, the expense reimbursements will be allocated among the Company, Ashford Trust and Braemar quarterly based on the actual capital raised through Ashford Securities. On January 27, 2022, the Company entered into a Second Amended and Restated Contribution Agreement with Ashford Trust and Braemar which provided for an additional $18 million in expenses to be reimbursed with all expenses allocated 10% to the Company, 45% to Ashford Trust, and 45% to Braemar.
As of March 31, 2022, Ashford Trust and Braemar have funded approximately $4.0 million and $4.1 million, respectively. The Company recognized $527,000 and $0 of cost reimbursement revenue from Ashford Trust for the three months ended March 31, 2022 and 2021, respectively, in our condensed consolidated statements of operations. The Company recognized $1.0 million and $344,000 of cost reimbursement revenue from Braemar for the three months ended March 31, 2022 and 2021, respectively, in our condensed consolidated statements of operations. Cost reimbursement revenue for the three months ended March 31, 2022 includes $405,000 of dealer manager fees earned by Ashford Securities for the placement of Braemar’s non-listed preferred equity offerings.
Other Related Party Transactions—The Company leases office space from Remington Hotel Corporation (“RHC”), an affiliate owned by the Bennetts, at our corporate headquarters in Dallas, Texas. For the three months ended March 31, 2022 and 2021, we recorded $839,000 and $837,000, respectively, in rent expense related to our corporate office lease with RHC.
Ashford Inc.’s Risk Management department collects funds from the Ashford Trust and Braemar properties and their respective management companies in an amount equal to the actuarial forecast of that year’s expected casualty claims and associated fees. These funds are deposited into restricted cash and used to pay casualty claims throughout the year as they are incurred. The claim liability related to the restricted cash balance is included in current “other liabilities” in our condensed consolidated balance sheets. See note 2.
Ashford Trust held a 16.65% noncontrolling interest in OpenKey as of March 31, 2022 and December 31, 2021, and Braemar held a 7.77% noncontrolling interest in OpenKey as of March 31, 2022 and December 31, 2021.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
15. Income (Loss) Per Share
The following table reconciles the amounts used in calculating basic and diluted income (loss) per share (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| Net income (loss) attributable to common stockholders – basic and diluted: | | | | | | | | | |
| Net income (loss) attributable to the Company | | | | | $ | 948 | | | $ | (8,174) | | | |
Less: Dividends on preferred stock, declared and undeclared (1) | | | | | (9,373) | | | (8,606) | | | |
| Less: Amortization of preferred stock discount | | | | | — | | | (316) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Undistributed net income (loss) allocated to common stockholders | | | | | (8,425) | | | (17,096) | | | |
| | | | | | | | | |
| Distributed and undistributed net income (loss) - basic | | | | | $ | (8,425) | | | $ | (17,096) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Distributed and undistributed net income (loss) - diluted | | | | | $ | (8,425) | | | $ | (17,096) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | | |
| Weighted average common shares outstanding – basic | | | | | 2,809 | | | 2,686 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Weighted average common shares outstanding – diluted | | | | | 2,809 | | | 2,686 | | | |
| | | | | | | | | |
| Income (loss) per share – basic: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net income (loss) allocated to common stockholders per share | | | | | $ | (3.00) | | | $ | (6.36) | | | |
| Income (loss) per share – diluted: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net income (loss) allocated to common stockholders per share | | | | | $ | (3.00) | | | $ | (6.36) | | | |
| | | | | | | | | |
________(1) Undeclared dividends were deducted to arrive at net income (loss) attributable to common stockholders. See note 11.
Due to their anti-dilutive effect, the computation of diluted income (loss) per share does not reflect the adjustments for the following items (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 | | |
| Net income (loss) allocated to common stockholders is not adjusted for: | | | | | | | | | |
| | | | | | | | | |
| Net income (loss) attributable to redeemable noncontrolling interests in Ashford Holdings | | | | | $ | (9) | | | $ | (24) | | | |
| Net income (loss) attributable to redeemable noncontrolling interests in subsidiary common stock | | | | | — | | | (152) | | | |
| | | | | | | | | |
| | | | | | | | | |
| Dividends on preferred stock, declared and undeclared | | | | | 9,373 | | | 8,606 | | | |
| Amortization of preferred stock discount | | | | | — | | | 316 | | | |
| Total | | | | | $ | 9,364 | | | $ | 8,746 | | | |
| Weighted average diluted shares are not adjusted for: | | | | | | | | | |
| | | | | | | | | |
| Effect of unvested restricted shares | | | | | 97 | | | 22 | | | |
| | | | | | | | | |
| Effect of assumed conversion of Ashford Holdings units | | | | | 8 | | | 4 | | | |
| Effect of incremental subsidiary shares | | | | | 104 | | | 221 | | | |
| | | | | | | | | |
| Effect of assumed conversion of preferred stock | | | | | 4,365 | | | 4,208 | | | |
| Total | | | | | 4,574 | | | 4,455 | | | |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
16. Segment Reporting
Our operating segments include: (a) REIT Advisory, which provides asset management and advisory services to other entities; (b) Remington, which provides hotel management services; (c) Premier, which provides comprehensive and cost-effective design, development, architectural, and project management services; (d) INSPIRE, which provides event technology and creative communications solutions services; (e) OpenKey, a hospitality focused mobile key platform that provides a universal smartphone app for keyless entry into hotel guest rooms; (f) RED, a provider of watersports activities and other travel and transportation services; (g) Marietta, which holds the leasehold rights to a single hotel and convention center property in Marietta, Georgia; and (h) Pure Wellness, which provides hypoallergenic premium rooms in the hospitality and commercial office industry. For 2022, OpenKey, RED, Marietta and Pure Wellness do not meet the aggregation criteria or the quantitative thresholds to individually qualify as reportable segments. However, we have elected to disclose RED and OpenKey as reportable segments. Accordingly, we have six reportable segments: REIT Advisory, Remington, Premier, INSPIRE, RED and OpenKey. We combine the operating results of Marietta and Pure Wellness into an “all other” seventh reportable segment, which we refer to as “Corporate and Other.” See footnote 3 for details of our segments’ material revenue generating activities.
Our chief operating decision maker’s (“CODM”) primary measure of segment profitability is net income. Our CODM currently reviews assets at the consolidated level and does not currently review segment assets to make key decisions on resource allocations. Since such asset information by segment is not reviewed by our CODM, segment assets are not available for disclosure.
Certain information concerning our segments for the three months ended March 31, 2022 and 2021 are presented in the following tables (in thousands). Consolidated subsidiaries are reflected as of their respective acquisition dates or as of the date we were determined to be the primary beneficiary of variable interest entities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| REIT Advisory | | Remington | | Premier | | INSPIRE | | RED | | OpenKey | | Corporate and Other | | Ashford Inc. Consolidated |
| REVENUE | | | | | | | | | | | | | | | |
| Advisory services fees | $ | 11,802 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 11,802 | |
| Hotel management fees | — | | | 7,178 | | | — | | | — | | | — | | | — | | | — | | | 7,178 | |
| Design and construction fees | — | | | — | | | 4,524 | | | — | | | — | | | — | | | — | | | 4,524 | |
| | | | | | | | | | | | | | | |
| Audio visual | — | | | — | | | — | | | 24,965 | | | — | | | — | | | — | | | 24,965 | |
| Other | 15 | | | 181 | | | — | | | — | | | 6,045 | | | 378 | | | 4,820 | | | 11,439 | |
Cost reimbursement revenue (1) | 7,576 | | | 63,148 | | | 1,702 | | | 57 | | | — | | | 4 | | | 1,564 | | | 74,051 | |
| Total revenues | 19,393 | | | 70,507 | | | 6,226 | | | 25,022 | | | 6,045 | | | 382 | | | 6,384 | | | 133,959 | |
| EXPENSES | | | | | | | | | | | | | | | |
| Depreciation and amortization | 853 | | | 2,696 | | | 2,962 | | | 468 | | | 112 | | | 4 | | | 530 | | | 7,625 | |
| | | | | | | | | | | | | | | |
Other operating expenses (2) | 706 | | | 4,308 | | | 2,995 | | | 22,371 | | | 5,069 | | | 1,295 | | | 12,720 | | | 49,464 | |
Reimbursed expenses (1) | 7,433 | | | 63,148 | | | 1,702 | | | 57 | | | — | | | 4 | | | 1,564 | | | 73,908 | |
| Total operating expenses | 8,992 | | | 70,152 | | | 7,659 | | | 22,896 | | | 5,181 | | | 1,303 | | | 14,814 | | | 130,997 | |
| OPERATING INCOME (LOSS) | 10,401 | | | 355 | | | (1,433) | | | 2,126 | | | 864 | | | (921) | | | (8,430) | | | 2,962 | |
| Equity in earnings (loss) of unconsolidated entities | — | | | — | | | — | | | — | | | — | | | — | | | 190 | | | 190 | |
| Interest expense | — | | | — | | | — | | | (240) | | | (159) | | | — | | | (880) | | | (1,279) | |
| Amortization of loan costs | — | | | — | | | — | | | (35) | | | (16) | | | — | | | (22) | | | (73) | |
| Interest income | — | | | 70 | | | — | | | — | | | — | | | — | | | 11 | | | 81 | |
| Realized gain (loss) on investments | — | | | (71) | | | — | | | — | | | — | | | — | | | — | | | (71) | |
| Other income (expense) | — | | | 167 | | | — | | | 14 | | | (37) | | | — | | | 3 | | | 147 | |
| INCOME (LOSS) BEFORE INCOME TAXES | 10,401 | | | 521 | | | (1,433) | | | 1,865 | | | 652 | | | (921) | | | (9,128) | | | 1,957 | |
| Income tax (expense) benefit | (2,451) | | | (133) | | | 341 | | | (994) | | | (341) | | | — | | | 2,300 | | | (1,278) | |
| NET INCOME (LOSS) | $ | 7,950 | | | $ | 388 | | | $ | (1,092) | | | $ | 871 | | | $ | 311 | | | $ | (921) | | | $ | (6,828) | | | $ | 679 | |
________
(1) Our segments are reported net of eliminations upon consolidation. Approximately $2.9 million of hotel management fees revenue, cost reimbursement revenue and reimbursed expenses were eliminated in consolidation primarily for overhead expenses reimbursed to Remington including rent, payroll, office supplies, travel and accounting.
(2) Other operating expenses includes salaries and benefits, costs of revenues for design and construction, cost of revenues for audio visual, general and administrative expenses and other expenses.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| REIT Advisory | | Remington | | Premier | | INSPIRE | | RED | | OpenKey | | Corporate and Other | | Ashford Inc. Consolidated |
| REVENUE | | | | | | | | | | | | | | | |
| Advisory services fees | $ | 9,927 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,927 | |
| Hotel management fees | — | | | 4,472 | | | — | | | — | | | — | | | — | | | — | | | 4,472 | |
| Design and construction fees | — | | | — | | | 1,542 | | | — | | | — | | | — | | | — | | | 1,542 | |
| Audio visual | — | | | — | | | — | | | 3,611 | | | — | | | — | | | — | | | 3,611 | |
| Other | 17 | | | 20 | | | — | | | — | | | 4,561 | | | 454 | | | 5,577 | | | 10,629 | |
Cost reimbursement revenue (1) | 5,124 | | | 26,317 | | | 402 | | | — | | | — | | | — | | | 344 | | | 32,187 | |
| Total revenues | 15,068 | | | 30,809 | | | 1,944 | | | 3,611 | | | 4,561 | | | 454 | | | 5,921 | | | 62,368 | |
| EXPENSES | | | | | | | | | | | | | | | |
| Depreciation and amortization | 989 | | | 3,034 | | | 3,056 | | | 467 | | | 92 | | | 4 | | | 497 | | | 8,139 | |
| | | | | | | | | | | | | | | |
Other operating expenses (2) | 352 | | | 3,289 | | | 1,679 | | | 6,818 | | | 3,546 | | | 1,247 | | | 12,868 | | | 29,799 | |
Reimbursed expenses (1) | 5,052 | | | 26,317 | | | 402 | | | — | | | — | | | — | | | 344 | | | 32,115 | |
| Total operating expenses | 6,393 | | | 32,640 | | | 5,137 | | | 7,285 | | | 3,638 | | | 1,251 | | | 13,709 | | | 70,053 | |
| OPERATING INCOME (LOSS) | 8,675 | | | (1,831) | | | (3,193) | | | (3,674) | | | 923 | | | (797) | | | (7,788) | | | (7,685) | |
| Equity in earnings (loss) of unconsolidated entities | — | | | — | | | — | | | — | | | — | | | — | | | (114) | | | (114) | |
| Interest expense | — | | | — | | | — | | | (203) | | | (154) | | | — | | | (910) | | | (1,267) | |
| Amortization of loan costs | — | | | — | | | — | | | (29) | | | (3) | | | — | | | (54) | | | (86) | |
| Interest income | — | | | 61 | | | — | | | — | | | — | | | — | | | 2 | | | 63 | |
| Realized gain (loss) on investments | — | | | (194) | | | — | | | — | | | — | | | — | | | — | | | (194) | |
| Other income (expense) | — | | | — | | | — | | | (121) | | | 1 | | | (1) | | | 8 | | | (113) | |
| INCOME (LOSS) BEFORE INCOME TAXES | 8,675 | | | (1,964) | | | (3,193) | | | (4,027) | | | 767 | | | (798) | | | (8,856) | | | (9,396) | |
| Income tax (expense) benefit | (1,954) | | | (263) | | | 768 | | | 820 | | | (260) | | | — | | | 1,840 | | | 951 | |
| NET INCOME (LOSS) | $ | 6,721 | | | $ | (2,227) | | | $ | (2,425) | | | $ | (3,207) | | | $ | 507 | | | $ | (798) | | | $ | (7,016) | | | $ | (8,445) | |
________
(1) Our segments are reported net of eliminations upon consolidation. Approximately $2.0 million of hotel management fees revenue, cost reimbursement revenue and reimbursed expenses were eliminated in consolidation primarily for overhead expenses reimbursed to Remington including rent, payroll, office supplies, travel and accounting.
(2) Other operating expenses includes salaries and benefits, costs of revenues for design and construction, cost of revenues for audio visual, general and administrative expenses and other expenses.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
17. Subsequent Events
On April 1, 2022, the Company entered into a Credit Agreement (the “Credit Agreement”) with Mustang Lodging Funding LLC, as administrative agent, and the lenders from time to time party thereto. The Credit Agreement evidences a senior secured term loan facility (the “Credit Facility”) in the amount of $100 million, including a $50 million term loan funded on the closing date of the Credit Facility (the “Closing Date”) and commitments to fund up to an additional $50 million of term loans in up to five separate borrowings within 24 months after the Closing Date, subject to certain conditions. The Company used a portion of the proceeds from the Credit Agreement to pay off the remaining $26.6 million balance of the Company’s existing Term Loan Agreement as of March 31, 2022 and pay dividends to the holders of the Series D Convertible Preferred Stock as stated below. On April 18, 2022, the Company drew an additional $20.0 million on the Credit Facility. The Credit Facility is a five-year interest-only facility with all outstanding principal due at maturity, with three successive one-year extension options subject to an increase in the interest rate during each extension period. Borrowings under the Credit Agreement will bear interest, at the Company’s option, at either the Eurodollar Rate (defined as LIBOR or a comparable or successor rate, with a floor of 0.25%) plus an applicable margin, or the base rate (defined as the highest of the federal funds rate plus 0.50%, the prime rate or the Eurodollar Rate plus 1.00%, with a floor of 1.25%) plus an applicable margin. The applicable margin for borrowings under the Credit Agreement for Eurodollar loans will be 7.35% per annum and the applicable margin for base rate loans will be 6.35% per annum, with increases to both applicable margins of 0.50%, 0.75% and 1.00% per annum during each of the three extension periods, respectively. The remaining undrawn balance of the Credit Facility is subject to an unused fee of 1.0%.
The Credit Facility does not require the maintenance of financial covenants, but if the ratio (the “Leverage Ratio”) of consolidated funded indebtedness that is recourse to the Company or any guarantor (less unrestricted cash) to consolidated EBITDA of the Company and its subsidiaries is greater than 4.00 to 1.00 as of the end of any fiscal quarter during the term of the loan, including any extension period, then the Company is required to apply 100% of the excess cash flow generated during such fiscal quarter to prepay the term loans. During any extension period, the Company is also required to apply 100% of the excess cash flow generated during such period to prepay the term loans. The Company may not pay dividends on the Company’s shares of common stock or preferred stock if the Leverage Ratio is greater than 3.00 to 1.00 after giving effect to the payment of such dividends. The Credit Agreement is guaranteed by the Company, Ashford LLC, and certain subsidiaries of the Company, and secured by, among other things, all of the assets of Ashford LLC and each guarantor and a pledge of the equity interests in Ashford LLC and each guarantor.
On April 10, 2022, the Company’s board of directors (the “Board”) declared a cash dividend on the Company’s Series D Convertible Preferred Stock for accrued and unpaid dividends for the quarters ending June 30, 2020 and December 31, 2020 to stockholders of record as of April 11, 2022. The Company paid the dividend of approximately $17.8 million, or $0.932 per share of Series D Convertible Preferred Stock, on April 15, 2022. Dividends for the Series D Convertible Preferred Stock remain in arrears for the quarters ending June 30, 2021 and December 31, 2021. On April 15, 2022, the Company additionally paid $8.7 million of dividends previously declared by the Board with respect to the Company’s Series D Convertible Preferred Stock for the first quarter of 2022.
On April 15, 2022, the Company acquired privately held Chesapeake Hospitality (“Chesapeake”), a premier third-party hotel management company. The Company paid to the seller $6.3 million in cash, subject to certain adjustments, and issued to the seller 378,000 Series CHP Convertible Preferred Units of Ashford Holdings (the “Series CHP Units”) at $25 per Unit, for a total value of $9.45 million. The seller also has the ability to earn up to $10.25 million of additional consideration based on its base management fee contribution for the trailing twelve month periods ending March 2024 and March 2025, respectively, for a total potential consideration of $26 million, subject to certain adjustments. The first $6.3 million of such additional consideration is payable in cash and any amounts payable in excess of such $6.3 million may be satisfied by the issuance of shares of common stock of the Company, common units of Ashford Holdings or additional Series CHP Units, as determined by the Company in its sole discretion. Each Series CHP Unit will (i) have a liquidation value of $25 per share, (ii) be entitled to cumulative dividends at the rate of 7.28% per annum, payable quarterly in arrears, (iii) participate in any dividend or distribution on the common stock of the Company in addition to the preferred dividends, (iv) be convertible into common units of Ashford Holdings at $117.50 per unit, which common units of Ashford Holdings will then be exchangeable into common stock of the Company on a 1:1 ratio and (v) provide for customary anti-dilution protections. In the event the Company fails to pay the required dividends on the Series CHP Units for two consecutive quarterly periods (a “Preferred Unit Breach”), then until such arrearage is paid in cash in full, the dividend rate on the Series CHP Units will increase to 10.00% per annum until no Preferred Unit Breach exists. Except with respect to certain protective provisions, no holder of Series CHP Units will have voting rights in its capacity as such. As long as any Series CHP Units are outstanding, the Company is prohibited from taking specified actions without the consent of at least 50% of the holders of Series CHP Units, including (i) modifying the terms,
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
rights, preferences, privileges or voting powers of the Series CHP Units or (ii) altering the rights, preferences or privileges of any Units of Ashford Holdings so as to adversely affect the Series CHP Units.
On April 15, 2022, the Company and Ashford Services agreed with Jeremy Welter, the Chief Operating Officer of the Company, that, effective July 15, 2022 (the “Resignation Date”), Mr. Welter would terminate employment with and service to the Company, Ashford Services and their affiliates. Mr. Welter is also the Chief Operating Officer of Ashford Trust and Braemar and accordingly his service as Chief Operating Officer of each of Ashford Trust and Braemar will also end effective as of the Resignation Date.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As used in this Quarterly Report on Form 10-Q, unless the context otherwise indicates, the references to “we,” “us,” “our,” and the “Company” refer to Ashford Inc., a Nevada corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Advisors LLC, a Delaware limited liability company, which we refer to as “Ashford LLC” or “our operating company”; Ashford Hospitality Holdings LLC, a Delaware limited liability company, which we refer to as “Ashford Holdings”; Ashford Hospitality Services LLC, a Delaware limited liability company, which we refer to as “Ashford Services”; Premier Project Management LLC, a Maryland limited liability company, which we refer to as “Premier Project Management,” or “Premier”; and Remington Lodging & Hospitality, LLC, a Delaware limited liability company, which we refer to as “Remington.”“Braemar” refers to Braemar Hotels & Resorts Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Braemar Hospitality Limited Partnership, a Delaware limited partnership, which we refer to as “Braemar OP.” “Ashford Trust” or “AHT” refers to Ashford Hospitality Trust, Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Limited Partnership, a Delaware limited partnership and Ashford Trust’s operating partnership, which we refer to as “Ashford Trust OP.”
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements that are subject to risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Additionally, statements regarding the following subjects are forward-looking by their nature:
•the impact of the ongoing COVID-19 pandemic, including the resurgence of cases relating to the spread of the Delta, Omicron or other potential variants, on our business, financial condition, liquidity and results of operations;
•the impact of numerous governmental travel restrictions and other orders related to COVID-19 on our clients’ and our business, including one or more possible recurrences of COVID-19 case surges that could cause state and local governments to reinstate travel restrictions;
•our business and investment strategy;
•our projected operating results;
•our ability to obtain future financing arrangements;
•our ability to maintain compliance with the NYSE American LLC (the “NYSE American”) continued listing standards;
•our understanding of our competition;
•market trends;
•the future success of recent acquisitions, including the 2018 acquisition of Premier and the 2019 acquisition of Remington;
•the future success of recent business initiatives with Ashford Trust and Braemar;
•projected capital expenditures; and
•the impact of technology on our operations and business.
Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, taking into account all information currently available to us, our actual results and performance could differ materially from those set forth in our forward-looking statements. Factors that could have a material adverse effect on our forward-looking statements include, but are not limited to:
•the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 25, 2022, including under the sections captioned “Item 1. Business,” “Item 1A. Risk Factors,” “Item 3. Legal Proceedings,” and “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” as supplemented by our subsequent Quarterly Reports on Form 10-Q and other filings under the Exchange Act;
•adverse effects of the COVID-19 pandemic, including a significant reduction in business and personal travel and potential travel restrictions in regions where our clients’ hotels are located, and one or more possible recurrences of
COVID-19 case surges causing a further reduction in business and personal travel and potential reinstatement of travel restrictions by state or local governments;
•extreme weather conditions may cause property damage or interrupt business;
•actions by our clients’ lenders to accelerate loan balances and foreclose on our clients’ hotel properties that are security for our clients’ loans that are in default;
•uncertainty associated with the ability of the Company to remain in compliance with all covenants in our Credit Agreement and our subsidiaries to remain in compliance with the covenants of their debt and related agreements;
•general volatility of the capital markets, the general economy or the hospitality industry, whether the result of market events or otherwise, and the market price of our common stock;
•availability, terms and deployment of capital;
•changes in our industry and the market in which we operate, interest rates or the general economy;
•the degree and nature of our competition;
•actual and potential conflicts of interest with or between Ashford Trust and Braemar, our executive officers and our non-independent directors;
•availability of qualified personnel;
•changes in governmental regulations, accounting rules, tax rates and similar matters;
•our ability to implement effective internal controls to address the material weakness identified in this report;
•legislative and regulatory changes;
•the possibility that we may not realize any or all of the anticipated benefits from transactions to acquire businesses, including the 2018 acquisition of Premier and the 2019 acquisition of Remington, and the possibility we will be required to record additional goodwill impairments relating to Remington as a result of the impact of the COVID-19 pandemic on our clients’, and our business;
•the possibility that the lodging industry may not fully recover to pre-pandemic levels as a result of the acceptance of “work-from-home” business practices and potentially lasting increased adoption of remote meeting and collaboration technologies;
•the possibility that we may not realize any or all of the anticipated benefits from our business initiatives;
•the failure to make full dividend payments on our Series D Convertible Preferred Stock in consecutive quarters, which would result in a higher interest rate and the right of Mr. Monty J. Bennett and Mr. Archie Bennett, Jr. to each have the right to appoint one member to the Board until such arrearages are paid in full;
•disruptions relating to the acquisition or integration of Premier, Remington or any other business we invest in or acquire, which may harm relationships with customers, employees and regulators; and
•unexpected costs of further goodwill impairments relating to the acquisition or integration of Remington or any other business we invest in or acquire.
When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements under “Item 1A. Risk Factors” of our Annual Report and this Quarterly Report, the discussion in this Management’s Discussion and Analysis of Financial Conditions and Results of Operations, and elsewhere which could cause our actual results and performance to differ significantly from those contained in our forward-looking statements. Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 outbreak and the numerous government travel restrictions imposed in response thereto. The extent to which COVID-19 impacts us will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Accordingly, we cannot guarantee future results or performance. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Form 10-Q. Furthermore, we do not intend to update any of our forward-looking statements after the date of this Form 10-Q to conform these statements to actual results and performance, except as may be required by applicable law.
Overview
Ashford Inc. is a Nevada corporation that provides products and services primarily to clients in the hospitality industry, including Ashford Trust and Braemar. We became a public company in November 2014, and our common stock is listed on the NYSE American. As of May 9, 2022, Mr. Monty J. Bennett, Ashford Inc.’s Chairman and Chief Executive Officer and the Chairman of Ashford Trust and Braemar, and his father, Mr. Archie Bennett, Jr., Chairman Emeritus of Ashford Trust, owned approximately 610,246 shares of our common stock, which represented an approximately 19.6% ownership interest in Ashford Inc., and owned 18,758,600 shares of our Series D Convertible Preferred Stock (the “Series D Convertible Preferred Stock”), which is convertible at a price of $117.50 per share into an additional approximate 3,991,191 shares of Ashford Inc. common stock, which if exercised as of May 9, 2022 would have increased Mr. Monty J. Bennett and Mr. Archie Bennett, Jr.’s ownership interest in Ashford Inc. to approximately 64.8%.
We provide: (i) advisory services; (ii) asset management services; (iii) hotel management services; (iv) design and construction and architectural services; (v) event technology and creative communications solutions; (vi) mobile room keys and keyless entry solutions; (vii) watersports activities and other travel, concierge and transportation services; (viii) hypoallergenic premium room products and services; (ix) debt placement and related services; (x) real estate advisory and brokerage services; and (xi) wholesaler, dealer manager and other broker-dealer services. We conduct these activities and own substantially all of our assets primarily through Ashford LLC, Ashford Services and their respective subsidiaries.
We seek to grow through the implementation of two primary strategies: (i) increasing our assets under management; and (ii) pursuing third-party business to grow our other products and services businesses.
We are currently the advisor for Ashford Trust and Braemar. In our capacity as the advisor to Ashford Trust and Braemar, we are responsible for implementing the investment strategies and managing the day-to-day operations of Ashford Trust and Braemar and their respective hotels from an ownership perspective, in each case subject to the respective advisory agreements and the supervision and oversight of the respective boards of directors of Ashford Trust and Braemar. Ashford Trust is focused on investing in full-service hotels in the upscale and upper upscale segments in the United States that have RevPAR generally less than twice the U.S. national average. Braemar invests primarily in luxury hotels and resorts with RevPAR of at least twice the U.S. national average. Each of Ashford Trust and Braemar is a REIT as defined in the Internal Revenue Code, and the common stock of each of Ashford Trust and Braemar is traded on the NYSE.
Recent Developments
On March 10, 2022, the Company entered into a Limited Waiver Under Advisory Agreement (“Braemar Limited Waiver”) with Braemar, Braemar Hospitality Limited Partnership (“Braemar OP”), Braemar TRS Corporation and Ashford LLC. On March 15, 2022, the Company entered into a Limited Waiver Under Advisory Agreement (the “Ashford Trust Limited Waiver” and together with the Braemar Limited Waiver, the “Limited Waivers”) with Ashford Trust, Ashford Hospitality Limited Partnership (“Ashford Trust OP”), Ashford TRS Corporation (“Ashford Trust TRS”) and Ashford LLC. Pursuant to the Limited Waivers, the parties to the Second Amended and Restated Advisory Agreement with Ashford Trust and the Fifth Amended and Restated Advisory Agreement with Braemar waive the operation of any provision such agreement that would otherwise limit the ability of Ashford Trust or Braemar, as applicable, in its discretion, at its cost and expense, to award during the first and second fiscal quarters of calendar year 2022 (the “Waiver Period”), cash incentive compensation to employees and other representatives of the Company; provided that, pursuant to the Ashford Trust Limited Waiver, such awarded cash incentive compensation does not exceed $8,476,000, in the aggregate, during the Waiver Period.
As of March 31, 2022, the Company had aggregate undeclared preferred stock dividends of approximately $35.2 million, which relates to the second and fourth quarters of 2020 and the second and fourth quarters of 2021. On April 10, 2022, the Board declared a cash dividend on the Company’s Series D Convertible Preferred Stock for accrued and unpaid dividends for the quarters ending June 30, 2020 and December 31, 2020 to stockholders of record as of April 11, 2022. The Company paid the dividend of approximately $17.8 million, or $0.932 per share of Series D Convertible Preferred Stock, on April 15, 2022. Dividends for the Series D Convertible Preferred Stock remain in arrears for the quarters ending June 30, 2021 and December 31, 2021. On April 15, 2022, the Company additionally paid $8.7 million of dividends previously declared by the Board with respect to the Company’s Series D Convertible Preferred Stock for the first quarter of 2022.
On April 1, 2022, the Company entered into the Credit Agreement with Mustang Lodging Funding LLC, as administrative agent, and the lenders from time to time party thereto. The Credit Agreement evidences the Credit Facility in the amount of $100 million, including a $50 million term loan funded upon closing and commitments to fund up to an additional $50 million of term loans in up to five separate borrowings within 24 months after the Closing Date, subject to certain conditions. The Company used a portion of the proceeds from the Credit Agreement to pay off the remaining $26.6 million balance of the Company’s existing Term Loan Agreement as of March 31, 2022 and pay dividends to the holders of the Series D Convertible Preferred Stock as stated above. On April 18, 2022, the Company drew an additional $20.0 million on the Credit Facility.
On April 15, 2022, the Company acquired privately held Chesapeake Hospitality (“Chesapeake”), a premier third-party hotel management company. The Company paid to the seller $6.3 million in cash, subject to certain adjustments, and issued to the seller 378,000 Series CHP Convertible Preferred Units of Ashford Holdings (the “Series CHP Units”) at $25 per Unit, for a total value of $9.45 million. The seller also has the ability to earn up to $10.25 million of additional consideration based on its base management fee contribution for the trailing twelve month periods ending March 2024 and March 2025, respectively, for a total potential consideration of $26 million, subject to certain adjustments. The first $6.3 million of such additional consideration is payable in cash and any amounts payable in excess of such $6.3 million may be satisfied by the issuance of shares of common stock of the Company, common units of Ashford Holdings or additional Series CHP Units, as determined by the Company in its sole discretion. Each Series CHP Unit will (i) have a liquidation value of $25 per share, (ii) be entitled to cumulative dividends at the rate of 7.28% per annum, payable quarterly in arrears, (iii) participate in any dividend or distribution on the common stock of the Company in addition to the preferred dividends, (iv) be convertible into common units of Ashford Holdings at $117.50 per unit, which common units of Ashford Holdings will then be exchangeable into common stock of the Company on a 1:1 ratio and (v) provide for customary anti-dilution protections. In the event the Company fails to pay the required dividends on the Series CHP Units for two consecutive quarterly periods (a “Preferred Unit Breach”), then until such arrearage is paid in cash in full, the dividend rate on the Series CHP Units will increase to 10.00% per annum until no Preferred Unit Breach exists. Except with respect to certain protective provisions, no holder of Series CHP Units will have voting rights in its capacity as such. As long as any Series CHP Units are outstanding, the Company is prohibited from taking specified actions without the consent of at least 50% of the holders of Series CHP Units, including (i) modifying the terms, rights, preferences, privileges or voting powers of the Series CHP Units or (ii) altering the rights, preferences or privileges of any Units of Ashford Holdings so as to adversely affect the Series CHP Units.
On April 15, 2022, the Company and Ashford Services agreed with Jeremy Welter, the Chief Operating Officer of the Company, that, effective July 15, 2022 (the “Resignation Date”), Mr. Welter would terminate employment with and service to the Company, Ashford Services and their affiliates. Mr. Welter is also the Chief Operating Officer of Ashford Trust and Braemar and accordingly his service as Chief Operating Officer of each of Ashford Trust and Braemar will also end effective as of the Resignation Date.
Discussion of Presentation
The discussion below relates to the financial condition and results of operations of Ashford Inc. and entities which it controls. The historical financial information is not necessarily indicative of our future results of operations, financial position and cash flows.
RESULTS OF OPERATIONS
Cost reimbursement revenue and reimbursed expenses for the three months ended March 31, 2021, were restated as previously disclosed in the restated condensed consolidated statement of operations for the three months ended March 31, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. See discussion in note 2 to our condensed consolidated financial statements.
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
The following table summarizes the changes in key line items from our condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Favorable (Unfavorable) |
| 2022 | | 2021 | | | | $ Change | | % Change |
| REVENUE | | | | | | | | | |
| Advisory services fees | $ | 11,802 | | | $ | 9,927 | | | | | $ | 1,875 | | | 18.9 | % |
| Hotel management fees | 7,178 | | | 4,472 | | | | | 2,706 | | | 60.5 | % |
| Design and construction fees | 4,524 | | | 1,542 | | | | | 2,982 | | | 193.4 | % |
| Audio visual | 24,965 | | | 3,611 | | | | | 21,354 | | | 591.4 | % |
| Other | 11,439 | | | 10,629 | | | | | 810 | | | 7.6 | % |
| Cost reimbursement revenue | 74,051 | | | 32,187 | | | | | 41,864 | | | 130.1 | % |
| Total revenues | 133,959 | | | 62,368 | | | | | 71,591 | | | 114.8 | % |
| EXPENSES | | | | | | | | | |
| Salaries and benefits | 16,845 | | | 15,776 | | | | | (1,069) | | | (6.8) | % |
| Cost of revenues for design and construction | 1,910 | | | 758 | | | | | (1,152) | | | (152.0) | % |
| Cost of revenues for audio visual | 17,879 | | | 4,386 | | | | | (13,493) | | | (307.6) | % |
| Depreciation and amortization | 7,625 | | | 8,139 | | | | | 514 | | | 6.3 | % |
| General and administrative | 7,363 | | | 5,268 | | | | | (2,095) | | | (39.8) | % |
| | | | | | | | | |
| Other | 5,467 | | | 3,611 | | | | | (1,856) | | | (51.4) | % |
| Reimbursed expenses | 73,908 | | | 32,115 | | | | | (41,793) | | | (130.1) | % |
| Total expenses | 130,997 | | | 70,053 | | | | | (60,944) | | | (87.0) | % |
| OPERATING INCOME (LOSS) | 2,962 | | | (7,685) | | | | | 10,647 | | | 138.5 | % |
| Equity in earnings (loss) of unconsolidated entities | 190 | | | (114) | | | | | 304 | | | 266.7 | % |
| | | | | | | | | |
| | | | | | | | | |
| Interest expense | (1,279) | | | (1,267) | | | | | (12) | | | (0.9) | % |
| Amortization of loan costs | (73) | | | (86) | | | | | 13 | | | 15.1 | % |
| Interest income | 81 | | | 63 | | | | | 18 | | | 28.6 | % |
| | | | | | | | | |
| | | | | | | | | |
| Realized gain (loss) on investments | (71) | | | (194) | | | | | 123 | | | 63.4 | % |
| | | | | | | | | |
| Other income (expense) | 147 | | | (113) | | | | | 260 | | | 230.1 | % |
| INCOME (LOSS) BEFORE INCOME TAXES | 1,957 | | | (9,396) | | | | | 11,353 | | | 120.8 | % |
| Income tax (expense) benefit | (1,278) | | | 951 | | | | | (2,229) | | | (234.4) | % |
| NET INCOME (LOSS) | 679 | | | (8,445) | | | | | 9,124 | | | 108.0 | % |
| (Income) loss from consolidated entities attributable to noncontrolling interests | 260 | | | 95 | | | | | 165 | | | 173.7 | % |
| Net (income) loss attributable to redeemable noncontrolling interests | 9 | | | 176 | | | | | (167) | | | (94.9) | % |
| NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY | 948 | | | (8,174) | | | | | 9,122 | | | 111.6 | % |
| Preferred dividends, declared and undeclared | (9,373) | | | (8,606) | | | | | (767) | | | (8.9) | % |
| Amortization of preferred stock discount | — | | | (316) | | | | | 316 | | | 100.0 | % |
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | (8,425) | | | $ | (17,096) | | | | | $ | 8,671 | | | 50.7 | % |
Net Income (Loss) Attributable to Common Stockholders. Net loss attributable to common stockholders decreased $8.7 million to a $8.4 million loss for the three months ended March 31, 2022 (“the 2022 quarter”) compared to the three months ended March 31, 2021 (“the 2021 quarter”) as a result of the factors discussed below.
Total Revenues. Total revenues increased by $71.6 million, or 114.8%, to $134.0 million for the 2022 quarter compared to the 2021 quarter due to the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Favorable (Unfavorable) | | | | |
| 2022 | | 2021 | | | | $ Change | | % Change | | | | | | |
| Advisory services fees: | | | | | | | | | | | | | | | |
Base advisory fees (1) | $ | 11,674 | | | $ | 9,799 | | | | | $ | 1,875 | | | 19.1 | % | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Other advisory revenue (2) | 128 | | | 128 | | | | | — | | | — | % | | | | | | |
| Total advisory services fees revenue | 11,802 | | | 9,927 | | | | | 1,875 | | | 18.9 | % | | | | | | |
| | | | | | | | | | | | | | | |
| Hotel management fees: | | | | | | | | | | | | | | | |
| Base management fees | 6,174 | | | 3,857 | | | | | 2,317 | | | 60.1 | % | | | | | | |
| Incentive management fees | 1,004 | | | 615 | | | | | 389 | | | 63.3 | % | | | | | | |
Total hotel management fees revenue (3) | 7,178 | | | 4,472 | | | | | 2,706 | | | 60.5 | % | | | | | | |
| | | | | | | | | | | | | | | |
Design and construction fees revenue (4) | 4,524 | | | 1,542 | | | | | 2,982 | | | 193.4 | % | | | | | | |
| | | | | | | | | | | | | | | |
Audio visual revenue (5) | 24,965 | | | 3,611 | | | | | 21,354 | | | 591.4 | % | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Other revenue: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Watersports, ferry and excursion services (6) | 6,045 | | | 4,561 | | | | | 1,484 | | | 32.5 | % | | | | | | |
Debt placement and related fees (7) | 2,483 | | | 4,288 | | | | | (1,805) | | | (42.1) | % | | | | | | |
| | | | | | | | | | | | | | | |
Claims management services (8) | 15 | | | 17 | | | | | (2) | | | (11.8) | % | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Other services (9) | 2,896 | | | 1,763 | | | | | 1,133 | | | 64.3 | % | | | | | | |
| Total other revenue | 11,439 | | | 10,629 | | | | | 810 | | | 7.6 | % | | | | | | |
| | | | | | | | | | | | | | | |
Cost reimbursement revenue (10) | 74,051 | | | 32,187 | | | | | 41,864 | | | 130.1 | % | | | | | | |
| | | | | | | | | | | | | | | |
| Total revenues | $ | 133,959 | | | $ | 62,368 | | | | | $ | 71,591 | | | 114.8 | % | | | | | | |
| | | | | | | | | | | | | | | |
REVENUES BY SEGMENT (11) | | | | | | | | | | | | | | | |
| REIT advisory | $ | 19,393 | | | $ | 15,068 | | | | | $ | 4,325 | | | 28.7 | % | | | | | | |
| Remington | 70,507 | | | 30,809 | | | | | 39,698 | | | 128.9 | % | | | | | | |
| Premier | 6,226 | | | 1,944 | | | | | 4,282 | | | 220.3 | % | | | | | | |
| INSPIRE | 25,022 | | | 3,611 | | | | | 21,411 | | | 592.9 | % | | | | | | |
| RED | 6,045 | | | 4,561 | | | | | 1,484 | | | 32.5 | % | | | | | | |
| OpenKey | 382 | | | 454 | | | | | (72) | | | (15.9) | % | | | | | | |
| Corporate and other | 6,384 | | | 5,921 | | | | | 463 | | | 7.8 | % | | | | | | |
| Total revenues | $ | 133,959 | | | $ | 62,368 | | | | | $ | 71,591 | | | 114.8 | % | | | | | | |
________
(1)The increase in base advisory fees is primarily due to higher revenue of $1.5 million from Ashford Trust and higher revenue of $394,000 from Braemar. Advisory fees earned from Ashford Trust during the 2021 quarter excluded $1.5 million of advisory fees that were deferred as a result of the $29.0 million annual Advisory Fee Cap. See note 3 for discussion of the advisory services revenue recognition policy.
(2) Other advisory revenue from Braemar is a result of the $5.0 million cash payment received upon stockholder approval of the Fourth Amended and Restated Braemar Advisory Agreement in June 2017. The payment is included in “deferred income” on our condensed consolidated balance sheet and is being recognized evenly over the initial ten-year term of the agreement.
(3) The increase in hotel management fees revenue is primarily due to increases in incentive management fees of $247,000 and $123,000 from Ashford Trust and Braemar, respectively, and higher base management fees from Ashford Trust, Braemar
and third parties of $1.6 million and $369,000 and $323,000, respectively, due to increased demand compared to the 2021 quarter as the industry recovers from COVID-19.
(4) The increase in design and construction fees revenue is due to higher revenue from Ashford Trust and Braemar of $2.1 million and $1.0 million, respectively, due to increased capital expenditures by our clients as the industry continues to recover from COVID-19.
(5) The $21.4 million increase in audio visual revenue is due to a recovery in operations as the industry recovers from COVID-19.
(6) The $1.5 million increase in watersports, ferry and excursion services revenue is due to $780,000 in revenue from RED’s expansion in the Turks and Caicos Islands in the third quarter of 2021 and increased demand for RED’s recreational services in the U.S. Virgin Islands and Key West, Florida as the U.S. travel and hospitality industry continues to recover from COVID-19.
(7) The decrease in debt placement and related fee revenue is due to lower revenue of $1.1 million from Ashford Trust and lower revenue of $663,000 from Braemar. Debt placement and related fees are earned by Lismore for providing debt placement, modification, forbearance and refinancing services. The 2022 quarter does not include revenue from the Braemar Agreement with Lismore which expired in March 2021.
(8) Claims management services include revenue earned from providing insurance claim assessment and administration services to Ashford Trust and Braemar.
(9) The increase in other services revenue is primarily due to higher revenue of $1.1 million in the 2022 quarter from Marietta due to a recovery in the 2022 quarter compared to the 2021 quarter. Other services revenue relates to other hotel services provided by our consolidated subsidiaries, OpenKey and Pure Wellness, to Ashford Trust, Braemar and other third parties and also includes Marietta.
(10) The increase in cost reimbursement revenue is primarily due to an increase in Remington’s cost reimbursement revenue of $36.8 million in the 2022 quarter due a recovery in operations in the 2022 quarter compared to the 2021 quarter and an increase of $2.5 million in cost reimbursement revenue in the 2022 quarter related to reimbursable advisory expenses for Ashford Trust and Braemar.
(11) See note 16 to our condensed consolidated financial statements for discussion of segment reporting.
Salaries and Benefits Expense. Salaries and benefits expense increased by $1.1 million, or 6.8%, to $16.8 million for the 2022 quarter compared to the 2021 quarter. The change in salaries and benefits expense consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | | | | | | |
| | | | | | | 2022 | | 2021 | | | | $ Change | | | |
| Salaries and benefits: | | | | | | | | | | | | | | | | |
Salary expense (1) | | | | | | | $ | 9,628 | | | $ | 8,706 | | | | | $ | 922 | | | | |
| Bonus expense | | | | | | | 4,244 | | | 4,271 | | | | | (27) | | | | |
| Benefits related expenses | | | | | | | 2,163 | | | 1,503 | | | | | 660 | | | | |
| Total salaries and benefits | | | | | | | 16,035 | | | 14,480 | | | | | 1,555 | | | | |
| Non-cash equity-based compensation: | | | | | | | | | | | | | | | | |
Stock option grants (2) | | | | | | | 354 | | | 1,006 | | | | | (652) | | | | |
| Employee equity grant expense | | | | | | | 345 | | | 232 | | | | | 113 | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Total equity-based compensation | | | | | | | 699 | | | 1,238 | | | | | (539) | | | | |
Non-cash (gain) loss in deferred compensation plan (3) | | | | | | | 111 | | | 58 | | | | | 53 | | | | |
| Total salaries and benefits | | | | | | | $ | 16,845 | | | $ | 15,776 | | | | | $ | 1,069 | | | | |
________
(1) The increase in salary expense is primarily due to an increase in corporate employees at both the Company’s corporate office and our subsidiaries’ corporate offices compared to the 2021 quarter as the industry continues to recover from COVID-19. The increase is additionally due to an increase in RED’s corporate employees compared to 2021 as RED began operating in Turks and Caicos in the third quarter of 2021.
(2) The decrease in stock option grant related expense in the 2022 quarter primarily relates to the Company not issuing stock option grants beginning in 2020 (when the Company began to issue restricted stock in lieu of stock options under its equity incentive program).
(3) The DCP obligation is recorded as a liability at fair value with changes in fair value reflected in earnings. The loss in the
2022 quarter and in the 2021 quarter are primarily attributable to increases in the fair value of the DCP obligation which is based on the Company’s common stock price. See note 13 to our condensed consolidated financial statements.
Cost of Revenues for Design and Construction. Cost of revenues for design and construction increased $1.2 million, or 152.0% to $1.9 million during the 2022 quarter compared to $758,000 for the 2021 quarter due to increased capital expenditures by our clients as the industry recovers from COVID-19.
Cost of Revenues for Audio Visual. Cost of revenues for audio visual increased $13.5 million, or 307.6%, to $17.9 million during the 2022 quarter compared to $4.4 million for the 2021 quarter, primarily due to increased operations as the industry recovers from COVID-19.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased by $514,000, or 6.3%, to $7.6 million for the 2022 quarter compared to the 2021 quarter, primarily due to a decrease in FF&E related to the respective ERFP agreements with Ashford Trust and Braemar compared to the 2021 quarter. Depreciation and amortization expense for the 2022 quarter and the 2021 quarter excludes depreciation expense related to audio visual equipment of $1.2 million and $1.3 million, respectively, which is included in “cost of revenues for audio visual” and also excludes depreciation expense for the 2022 quarter and the 2021 quarter related to marine vessels in the amount of $286,000 and $220,000, respectively, which are included in “other” operating expense.
General and Administrative Expense. General and administrative expenses increased by $2.1 million, or 39.8%, to $7.4 million for the 2022 quarter compared to the 2021 quarter. The change in general and administrative expense consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | | | | | | |
| | | | | | | 2022 | | 2021 | | | | $ Change | | | |
| Professional fees | | | | | | | $ | 2,097 | | | $ | 1,778 | | | | | $ | 319 | | | | |
Office expense (1) | | | | | | | 2,441 | | | 1,834 | | | | | 607 | | | | |
| Public company costs | | | | | | | 227 | | | 170 | | | | | 57 | | | | |
| Director costs | | | | | | | 397 | | | 447 | | | | | (50) | | | | |
Travel and other expense (2) | | | | | | | 1,986 | | | 961 | | | | | 1,025 | | | | |
| Non-capitalizable - software costs | | | | | | | 215 | | | 78 | | | | | 137 | | | | |
| Total general and administrative | | | | | | | $ | 7,363 | | | $ | 5,268 | | | | | $ | 2,095 | | | | |
________
(1) The increase in office expenses in the 2022 quarter is primarily due to increases within INSPIRE related to the industry’s recovery from COVID-19 compared to the 2021 quarter.
(2) The increase in travel and other expense is primarily due to increases in the Company’s business travel in the 2022 quarter as the Company’s subsidiaries’ operations accelerated compared to the 2021 quarter. The increase is also due to an increase in advertising expense at INSPIRE associated with their strategic rebranding from JSAV to INSPIRE.
Other. Other operating expense increased $1.9 million, or 51.4%, to $5.5 million for the 2022 quarter compared to the 2021 quarter. The increase was primarily caused by operating expenses associated with RED and Marietta as their operations increased due to their respective recoveries from COVID-19’s impact on their operations. Other operating expenses for the 2022 quarter also includes a loss on sale of FF&E previously leased to Ashford Trust of $706,000. Other operating expense also includes cost of goods sold, royalties and operating expenses associated with OpenKey and Pure Wellness.
Reimbursed Expenses. Reimbursed expenses increased $41.8 million to $73.9 million during the 2022 quarter compared to $32.1 million for the 2021 quarter primarily due to an increase in hotel management reimbursed expenses incurred by Remington due to a recovery in hotel operations in the 2022 quarter compared to the 2021 quarter.
Reimbursed expenses may vary from cost reimbursement revenue recognized in the period due to timing differences between the costs we incur for centralized software programs and the related reimbursements we receive from our clients. Over the long term, these timing differences are not designed to impact our economics, either positively or negatively. The timing differences consisted of the following shown below (in thousands):
| | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | |
| 2022 | | 2021 | | $ Change | |
| Cost reimbursement revenue | $ | 74,051 | | | $ | 32,187 | | | $ | 41,864 | | |
| Reimbursed expenses | 73,908 | | | 32,115 | | | 41,793 | | |
| Net total | $ | 143 | | | $ | 72 | | | $ | 71 | | |
Equity in Earnings (Loss) of Unconsolidated Entities. Equity in earnings (loss) of unconsolidated entities were earnings of $190,000 and a loss of $114,000 for the 2022 quarter and the 2021 quarter, respectively. Equity in earnings (loss) of unconsolidated entities primarily represents earnings (loss) in our equity method investment in REA Holdings. See note 2 to our condensed consolidated financial statements.
Interest Expense. Interest expense remained steady for the 2022 quarter compared to the 2021 quarter. Interest expense relates to our Term Loan Agreement and notes payable, lines of credit and finance leases held by our consolidated subsidiaries. See notes 2 and 5 to our condensed consolidated financial statements.
Amortization of Loan Costs. Amortization of loan costs was $73,000 and $86,000 for the 2022 quarter and the 2021 quarter, respectively, related to our Term Loan Agreement and notes payable held by our consolidated subsidiaries. See notes 2 and 5 to our condensed consolidated financial statements.
Interest Income. Interest income was $81,000 and $63,000 for the 2022 quarter and the 2021 quarter, respectively. See note 2 to our condensed consolidated financial statements.
Realized Gain (Loss) on Investments. Realized loss on investments was $71,000 and $194,000 for the 2022 quarter and the 2021 quarter, respectively. The realized loss on investments for the 2022 quarter and the 2021 quarter primarily relate to realized losses on shares of common stock of Ashford Trust and Braemar purchased by Remington on the open market and held for the purpose of providing compensation to certain employees. See note 7 to our condensed consolidated financial statements.
Other Income (Expense). Other income (expense) was income of $147,000 and expense of $113,000 in the 2022 quarter and the 2021 quarter, respectively.
Income Tax (Expense) Benefit. Income tax (expense) benefit changed by $2.2 million from a $951,000 benefit in the 2021 quarter to $1.3 million of expense in the 2022 quarter due to an increase in operations. Current income tax expense changed by $2.9 million from a $343,000 benefit in the 2021 quarter to $2.6 million in expense in the 2022 quarter. Deferred income tax benefit changed by $731,000 from a $607,000 benefit in the 2021 quarter to a $1.3 million benefit in the 2022 quarter.
(Income) Loss from Consolidated Entities Attributable to Noncontrolling Interests. The noncontrolling interests in consolidated entities were allocated a loss of $260,000 in the 2022 quarter and a loss of $95,000 in the 2021 quarter. See notes 2 and 10 to our condensed consolidated financial statements for more details regarding ownership interests, carrying values and allocations.
Net (Income) Loss Attributable to Redeemable Noncontrolling Interests. The redeemable noncontrolling interests were allocated a loss of $9,000 in the 2022 quarter and loss of $176,000 in the 2021 quarter. The change in the 2022 quarter compared to the 2021 quarter is due primarily to the Company’s acquisition of all of the redeemable noncontrolling interests in OpenKey in the 2021 quarter. Redeemable noncontrolling interests represents ownership interests in Ashford Holdings and, in the 2021 quarter, OpenKey. For a summary of ownership interests, carrying values and allocations, see notes 2 and 11 to our condensed consolidated financial statements.
Preferred Dividends, Declared and Undeclared. Preferred dividends, declared and undeclared, increased $767,000 to $9.4 million during the 2022 quarter compared to $8.6 million for the 2021 quarter due to the increase in the dividend rate of the Series D Convertible Preferred Stock which occurred on November 6, 2021 and due to accumulating and compounding dividends related to undeclared preferred stock dividends. See note 11 to our condensed consolidated financial statements.
Amortization of Preferred Stock Discount. The amortization of preferred stock discount decreased $316,000 to $0 during the 2022 quarter compared to $316,000 from the 2021 quarter due to the ending of the amortization period on the dividend rate of the Series D Convertible Preferred Stock on November 6, 2021. See note 11 to our condensed consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The prolonged presence of COVID-19 has continued to impact the Company’s operating results and cash flows. However, the Company has taken significant steps to improve its operating results and liquidity. We continue to see improvement in the operations of our clients, Ashford Trust and Braemar, and our subsidiaries as the industry continues to recover from COVID-19. Ashford Trust previously disclosed that it expects to achieve pre-pandemic hotel operating levels by 2024. Additionally, Braemar has previously disclosed that it expects to achieve pre-pandemic hotel operating levels by 2023. Facts and circumstances related to COVID-19 could change in the future that are outside of management’s control, such as changes in Ashford Trust’s and Braemar’s financial position and liquidity, that could impact future operating results, future cash flows and our ability to pay dividends on the Series D Convertible Preferred Stock.
Loan Agreements—On April 1, 2022, the Company entered into the Credit Agreement with Mustang Lodging Funding LLC, as administrative agent, and the lenders from time to time party thereto. The Credit Agreement evidences the Credit Facility in the amount of $100 million, including a $50 million term loan funded upon closing and commitments to fund up to an additional $50 million of term loans in up to five separate borrowings within 24 months after the Closing Date, subject to certain conditions. The Company used a portion of the proceeds from the Credit Agreement to pay off the remaining $26.6 million balance of the Company’s existing Term Loan Agreement as of March 31, 2022 and pay dividends to the holders of the Series D Convertible Preferred Stock as stated below. On April 18, 2022, the Company drew an additional $20.0 million on the Credit Facility. The Credit Facility is a five-year interest-only facility with all outstanding principal due at maturity, with three successive one-year extension options subject to an increase in the interest rate during each extension period. Borrowings under the Credit Agreement will bear interest, at the Company’s option, at either the Eurodollar Rate (defined as LIBOR or a comparable or successor rate, with a floor of 0.25%) plus an applicable margin, or the base rate (defined as the highest of the federal funds rate plus 0.50%, the prime rate or the Eurodollar Rate plus 1.00%, with a floor of 1.25%) plus an applicable margin. The applicable margin for borrowings under the Credit Agreement for Eurodollar loans will be 7.35% per annum and the applicable margin for base rate loans will be 6.35% per annum, with increases to both applicable margins of 0.50%, 0.75% and 1.00% per annum during each of the three extension periods, respectively. The remaining undrawn balance of the Credit Facility is subject to an unused fee of 1.0%.
The Credit Facility does not require the maintenance of financial covenants, but if the ratio (the “Leverage Ratio”) of consolidated funded indebtedness that is recourse to the Company or any guarantor (less unrestricted cash) to consolidated EBITDA of the Company and its subsidiaries is greater than 4.00 to 1.00 as of the end of any fiscal quarter during the term of the loan, including any extension period, then the Company is required to apply 100% of the excess cash flow generated during such fiscal quarter to prepay the term loans. During any extension period, the Company is also required to apply 100% of the excess cash flow generated during such period to prepay the term loans. The Company may not pay dividends on the Company’s shares of common stock or preferred stock if the Leverage Ratio is greater than 3.00 to 1.00 after giving effect to the payment of such dividends. The Credit Agreement is guaranteed by the Company, Ashford LLC, and certain subsidiaries of the Company, and secured by, among other things, all of the assets of Ashford LLC and each guarantor and a pledge of the equity interests in Ashford LLC and each guarantor. As of March 31, 2022, our Credit Agreement was in compliance with all covenants or other requirements and debt held by our subsidiaries was in compliance with all covenants or other requirements. The Company does not expect our Credit Agreement and debt held by our subsidiaries to violate any loan covenants within one year of the issuance of the financial statements.
Certain segments of our business are capital intensive and may require additional financing from time to time. Any additional financings, if and when pursued, may not be available on favorable terms or at all, which could have a negative impact on our liquidity and capital resources. Aggregate portfolio companies’ notes payable, net were $29.2 million and $30.6 million as of March 31, 2022 and December 31, 2021, respectively. For further discussion see note 5 to our condensed consolidated financial statements.
Preferred stock dividends—The independent members of the Board plan to revisit the dividend payment policy with respect to the Series D Convertible Preferred Stock on an ongoing basis. The independent members of the Board believe that the deferral of certain preferred dividends will provide the Company with additional funds to meet its ongoing liquidity needs.
As of March 31, 2022, the Company had aggregate undeclared preferred stock dividends of approximately $35.2 million, which relates to the second and fourth quarters of 2020 and the second and fourth quarters of 2021. On April 10, 2022, the Board declared a cash dividend on the Company’s Series D Convertible Preferred Stock for accrued and unpaid dividends for the quarters ending June 30, 2020 and December 31, 2020 to stockholders of record as of April 11, 2022. The Company paid the dividend of approximately $17.8 million, or $0.932 per share of Series D Convertible Preferred Stock, on April 15, 2022. Dividends for the Series D Convertible Preferred Stock remain in arrears for the quarters ending June 30, 2021 and December 31, 2021. On April 15, 2022, the Company additionally paid $8.7 million of dividends previously declared by the Board with respect to the Company’s Series D Convertible Preferred Stock for the first quarter of 2022.
Each share of Series D Convertible Preferred Stock: (i) has a liquidation value of $25 per share; (ii) accrues cumulative dividends at the rate of: (a) 6.59% per annum until November 6, 2020; (b) 6.99% per annum from November 6, 2020 until November 6, 2021; and (c) 7.28% per annum thereafter; (iii) participates in any dividend or distribution on the common stock in addition to the preferred dividends; (iv) is convertible into voting common stock at $117.50 per share; and (v) provides for customary anti-dilution protections. In the event the Company fails to pay the dividends on the Series D Convertible Preferred Stock for two consecutive quarterly periods (a “Preferred Stock Breach”), then until such arrearage is paid in cash in full: (A) the dividend rate on the Series D Convertible Preferred Stock will increase to 10.00% per annum until no Preferred Stock Breach exists; (B) no dividends on the Company’s common stock may be declared or paid, and no other distributions or redemptions may be made, on the Company’s common stock; and (C) the Board will be increased by two seats and the holders of 55% of the outstanding Series D Convertible Preferred Stock will be entitled to fill such newly created seats. The Series D Convertible Preferred Stock is held primarily by Mr. Monty J. Bennett, the Chairman of our Board and our Chief Executive Officer, Mr. Archie Bennett, Jr., who is Mr. Monty J. Bennett’s father, one of our other executive officers and several other individuals.
To the extent not paid on April 15, July 15, October 15 and January 15 of each calendar year in respect of the quarterly periods ending on March 31, June 30, September 30 and December 31, respectively (each such date, a “Dividend Payment Date”), all accrued dividends on any share shall accumulate and compound on the applicable Dividend Payment Date whether or not declared by the Board and whether or not funds are legally available for the payment thereof. All accrued dividends shall remain accumulated, compounding dividends until paid in cash or converted to common shares. See also note 11 to our condensed consolidated financial statements.
ERFP Commitments—On June 26, 2018, the Company entered into the Ashford Trust ERFP Agreement with Ashford Trust. The independent members of the board of directors of each of the Company and Ashford Trust, with the assistance of separate and independent legal counsel, engaged to negotiate the Ashford Trust ERFP Agreement on behalf of the Company and Ashford Trust, respectively. On January 15, 2019, the Company entered into the Braemar ERFP Agreement (collectively with the Ashford Trust ERFP Agreement, the “ERFP Agreements”) with Braemar. The independent members of the board of directors of each of the Company and Braemar, with the assistance of separate and independent legal counsel, engaged to negotiate the Braemar ERFP Agreement on behalf of the Company and Braemar, respectively. Under the ERFP Agreements, the Company agreed to provide $50 million (each, an “Aggregate ERFP Amount” and collectively, the “Aggregate ERFP Amounts”) to each of Ashford Trust and Braemar (collectively, the “REITs”), respectively, in connection with each such REIT’s acquisition of hotels recommended by us, with the option to increase each Aggregate ERFP Amount to up to $100 million upon mutual agreement by the parties to the respective ERFP Agreement. Under each of the ERFP Agreements, the Company paid each REIT 10% of each acquired hotel’s purchase price in exchange for FF&E at a property owned by such REIT, which were subsequently leased by us to such REIT rent-free. Each of the REITs must provide reasonable advance notice to the Company to request ERFP funds in accordance with the respective ERFP Agreement. The ERFP Agreements required that the Company acquire the related FF&E either at the time of the property acquisition or at any time generally within two years of the respective REITs’ acquisition of the hotel property. The Company recognized the related depreciation tax deduction at the time such FF&E was purchased by the Company and placed into service at the respective REIT’s hotel properties. However, the timing of the FF&E purchased and placed into service was subject to uncertainties outside of the Company’s control that could delay the realization of any tax benefit associated with the purchase of FF&E.
On March 13, 2020, the Company entered into an Extension Agreement related to the Ashford Trust ERFP Agreement. Under the terms of the Extension Agreement, the deadline to fund the remaining ERFP commitment under the Ashford Trust ERFP Agreement of $11.4 million, was extended from January 22, 2021 to December 31, 2022. As of March 31, 2022, the Company has no remaining ERFP commitment to Braemar under the Braemar ERFP Agreement. See note 9 to our condensed consolidated financial statements.
On April 20, 2021, the Company received written notice from Ashford Trust of Ashford Trust’s intention not to renew the Ashford Trust ERFP Agreement. As a result, the Ashford Trust ERFP Agreement terminated in accordance with its terms on June 26, 2021. The expiration of the Ashford Trust ERFP Agreement has no impact on the Extension Agreement, which continues in full force and effect in accordance with its terms.
On November 8, 2021, the Company delivered written notice to Braemar of the Company’s intention not to renew the Braemar ERFP Agreement. As a result, the Braemar ERFP Agreement terminated in accordance with its terms on January 15, 2022.
Other liquidity considerations—On December 5, 2017, the Board approved a stock repurchase program pursuant to which the Board granted a repurchase authorization to acquire shares of the Company’s common stock, having an aggregate value of up to $20 million. No shares were repurchased under the stock repurchase program during the three months ended March 31, 2022.
Our deferred compensation plan currently has only one participant, Mr. Monty J. Bennett, our Chairman and Chief Executive Officer. Mr. Monty J. Bennett has elected to invest his deferred compensation account in our common stock. As a result, we have an obligation to issue approximately 196,000 shares of our common stock to Mr. Monty J. Bennett in quarterly installments over five years beginning in 2024. Mr. Monty J. Bennett may postpone all or a portion of the distributions, for a minimum of 5 years, if he notifies the Company 12 months prior to the scheduled distributions. As of March 31, 2022, the fair value of the DCP liability was $3.4 million.
The Company has commitments related to cash compensation for the departure of one of our executive officers which include a cash payment of $750,000 on July 15, 2022, and monthly cash payments of approximately $267,000 per month payable in equal monthly installments over a 24 month period beginning in August of 2022.
Additional information pertaining to other liquidity considerations of the Company can be found in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments.”
Sources and Uses of Cash
As of March 31, 2022 and December 31, 2021, we had $29.8 million and $37.6 million of cash and cash equivalents, respectively, and $33.7 million and $34.9 million of restricted cash, respectively. Our principal sources of funds to meet our cash requirements include: net cash provided by operations and existing cash balances, which include borrowings from our existing lending agreements. Additionally, our principal uses of funds are expected to include possible operating shortfalls, capital expenditures, preferred dividends, debt interest and principal payments. Items that impacted our cash flow and liquidity during the periods indicated are summarized as follows:
Net Cash Flows Provided by (Used in) Operating Activities. Net cash flows used in operating activities were $5.7 million for the three months ended March 31, 2022 compared to net cash flows used in operating activities of $5.4 million for the three months ended March 31, 2021. The decrease in cash flows from operating activities was primarily due to the timing of receipt of our receivables from Ashford Trust and third parties. These decreases in cash flows provided by operating activities were offset by an increase in earnings due to a recovery in the Company’s operations in the three months ended March 31, 2022 from the effects of the COVID-19 pandemic.
Net Cash Flows Provided by (Used in) Investing Activities. For the three months ended March 31, 2022, net cash flows used in investing activities were $351,000. These cash flows consisted of capital expenditures primarily of FF&E and audio visual equipment totaling $1.3 million, capital expenditures of $455,000 for RED’s marine vessels, and an investment in an unconsolidated entity of $400,000. These were offset by cash inflows of $406,000 in proceeds received from the sale of FF&E to Ashford Trust and proceeds from a note receivable of $1.4 million.
For the three months ended March 31, 2021, net cash flows used in investing activities were $3.0 million. These cash flows consisted of the issuance of a note receivable of $2.9 million, purchases of Ashford Trust and Braemar common stock related to Remington’s employee compensation plan of $873,000, capital expenditures of $637,000 for RED’s marine vessels and capital expenditures of FF&E of $491,000, offset by cash inflows of $1.9 million primarily from proceeds received in 2021 from the sale of FF&E to Braemar in the fourth quarter of 2020.
Net Cash Flows Provided by (Used in) Financing Activities. For the three months ended March 31, 2022, net cash flows used in financing activities were $2.8 million. These cash flows consisted of $1.6 million of payments on notes payable, $208,000 of payments on finance leases, purchases of $218,000 of treasury stock, $61,000 of loan cost payments, $615,000 of net payments on our revolving credit facilities, and net repayments in advances to employees of $246,000 associated with tax withholdings for restricted stock vesting. These were offset by $61,000 of proceeds from borrowings on notes payable.
For the three months ended March 31, 2021, net cash flows used in financing activities were $5.1 million. These cash flows consisted of $5.1 million of payments on notes payable, $332,000 of payments on our revolving credit facilities, purchases of $102,000 of treasury stock and $61,000 of payments on finance leases. These were offset by $325,000 of proceeds from borrowings on notes payable and employee advances of $245,000 associated with tax withholdings for restricted stock vesting.
Seasonality
Quarterly revenues may be adversely affected by events beyond our control, such as the COVID-19 pandemic and government-issued travel restrictions in response, extreme weather conditions, natural disasters, terrorist attacks or alerts, civil unrest, government shutdowns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel and products and services. To the extent that cash flows from operations are insufficient during any quarter due to temporary or seasonal fluctuations in revenues, we expect to utilize cash on hand or borrowings to fund operations.
Contractual Obligations and Commitments
There have been no material changes since December 31, 2021, outside the ordinary course of business, to contractual obligations and commitments included in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K, other than items as described in Liquidity and Capital Resources.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our accounting policies that are critical or most important to understanding our financial condition and results of operations and that require management to make the most difficult judgments are described in our 2021 Form 10-K. There have been no material changes in these critical accounting policies.