Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our audited financial statements and the accompanying notes thereto included in Item 8. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K. See “Forward-Looking Statements.”
Overview
Ashford Inc., a Nevada corporation, is an alternative asset management company with a portfolio of strategic operating businesses that provides products and services primarily to clients in the real estate and hospitality industries, 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 March 14, 2023, 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 610,261 shares of our common stock, which represented an approximately 18.5% 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, along with all unpaid accrued and accumulated dividends thereon, is convertible at a price of $117.50 per share into an additional approximate 4,147,646 shares of Ashford Inc. common stock, which if converted as of March 14, 2023 would have increased Mr. Monty J. Bennett and Mr. Archie Bennett, Jr.’s ownership interest in Ashford Inc. to approximately 63.9%.
We provide: (i) advisory services; (ii) asset management services; (iii) hotel management services; (iv) design and construction 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.
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 Ashford Trust or Braemar’s individual hotel properties, which duties are, and will continue to be, the responsibility of the hotel management companies that operate such hotel properties. Additionally, Remington, a subsidiary of the Company, operates certain hotel properties for Ashford Trust, Braemar and third-parties. As of December 31, 2022, Remington provided hotel management services to 118 properties, 45 of which were owned by third-parties.
Recent Developments
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 $100.0 million, including a $50.0 million term loan funded on the closing date of the Credit Facility (the “Closing Date”) and commitments to fund up to an additional $50.0 million of term loans in up to five separate borrowings within 24 months after the Closing Date, subject to certain conditions. On April 18, 2022 and March 7, 2023, the Company drew an additional $20.0 million and $12.0 million on the Credit Facility, respectively. See note 8 to our consolidated financial statements for discussion of the Credit Agreement.
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 ended 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 ended June 30, 2021 and December 31, 2021. On each of April 15, 2022, July 15, 2022 and October 14, 2022 the Company 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, second and third quarters of 2022. On December 13, 2022, the Board declared a cash dividend on the Company’s Series D Convertible Preferred Stock for the quarter ended December 31, 2022. The Company paid the dividend of $8.7 million, or $0.455 per share of Series D Convertible Preferred Stock, on January 13, 2023. See note 15 to our consolidated financial statements for discussion of the dividends.
On April 15, 2022, the Company acquired privately held Chesapeake, a third-party hotel management company, for a purchase price of $9.6 million. See note 4 to our consolidated financial statements for discussion of the Chesapeake acquisition.
In the third quarter of 2022, given the recent increases in the federal funds rate and interest rates on short-term U.S. Treasury securities, the independent members of the respective boards of directors of Ashford Trust and Braemar approved the engagement of the Company to actively manage and invest each of Ashford Trust’s and Braemar’s excess cash in short-term U.S. Treasury securities (the “Cash Management Strategy”). As consideration for the Company’s services under the respective engagements, (i) Ashford Trust will pay the Company an annual fee equal to 20 basis points (0.20%) of the average daily balance of Ashford Trust’s excess cash invested by the Company; and (ii) Braemar will pay the Company an annual fee equal to the lesser of (a) 20 basis points (0.20%) of the average daily balance of Braemar’s excess cash invested by the Company and (b) the actual rate of return realized by the Cash Management Strategy; provided that in no event will the Cash Management Fee be less than zero (such respective fees, the “Cash Management Fees”). The Cash Management Fees will be calculated and payable monthly in arrears. Investment of Ashford Trust’s and Braemar’s excess cash pursuant to the Cash Management Strategy commenced in October 2022.
On December 16, 2022, the Company and Ashford Trust entered into an Agreement of Purchase and Sale (the “Purchase Agreement”) pursuant to which, effective as of December 16, 2022, Ashford Trust acquired all of the equity interests in Marietta and, in exchange, Ashford Trust forgave, cancelled and discharged in full the Company’s outstanding $11.4 million ERFP commitment to Ashford Trust. See note 5 to our consolidated financial statements.
On December 16, 2022, RED entered into a Securities Purchase Agreement and two Asset Purchase Agreements (collectively, the “Agreements”) to purchase certain entities (the “Companies”) and assets (the “Assets”) associated with the Alii Nui Maui business which is engaged in watercraft recreation and ocean adventure tourism in Maui, Hawaii. Pursuant to the Agreements, RED will acquire the Companies and the Assets for an aggregate purchase price of $11.0 million, subject to certain adjustments on the closing date, which is expected to occur in 2023. The consummation of the transactions described in the foregoing are subject to certain conditions and no assurance can be given that the transactions will be consummated.
On January 3, 2023, the Company acquired RHC, an affiliate owned by the Bennetts, from which the Company leases the offices for our corporate headquarters in Dallas, Texas. The purchase price paid was de minimis.
On February 1, 2023, the Company entered into a Third Amended and Restated Contribution Agreement with Ashford Trust and Braemar (collectively, the “Parties” and each individually a “Party”). The Third Amended and Restated Contribution Agreement states that after 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 capital contributions for the remainder of fiscal year 2023 will be divided between each Party based on the actual amount of capital raised by such Party through Ashford Securities. Thereafter on a yearly basis at year-end, starting with the year-end of 2023, there will be a true-up between the Parties whereby there will be adjustments so that the capital contributions made by each Party will be based on the cumulative amount of capital raised by each Party through Ashford Securities as a percentage of the total amount raised by the Parties collectively through Ashford Securities since June 19, 2019 (the resulting ratio of capital contributions among the Company, Ashford Trust and Braemar following this true-up, the “Cumulative Ratio”). Thereafter, the capital contributions will be divided among each Party in accordance with the Cumulative Ratio, as recalculated at the end of each year.
Other Developments
Shareholder Rights Plan
On August 30, 2022, we adopted a shareholder rights plan by entering into a Rights Agreement, dated August 30, 2022, with ComputerShare Trust Company, N.A., as rights agent (the “Rights Agreement”). The Rights Agreement was adopted in response to recent volatility of the stock market and trading of our common stock and is intended to protect the Company and its stockholders from efforts to obtain control or rapid share accumulations that are inconsistent with the best interests of the Company and its stockholders. The Board implemented the rights plan by declaring (i) a dividend to the holders of the Company’s common stock of one preferred share purchase right (a “Right”) for each share of common stock and (ii) a dividend to the holders of the Company’s Series D Convertible Preferred Stock of one Right in respect of each share of the Company’s common stock issuable upon conversion of the Series D Convertible Preferred Stock. The dividends were distributed on September 9, 2022, to our stockholders of record on that date. Each of those Rights becomes exercisable on the date on which the Rights separate and begin trading separately from our common stock and entitles the registered holder to purchase from the Company one one-thousandth of a share of our Series F Preferred Stock, par value $0.001 per share (“Series F Preferred Stock”), at a price of $275 per one one-thousandth of a share of our Series F Preferred Stock represented by such Right, subject to adjustment. The Rights will expire on July 30, 2023 unless the expiration date is extended or unless the Rights are earlier redeemed by the Company. The value of the Rights was de minimis. See discussion in “Item 1. Business.”
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
This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2021 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
The following table summarizes the changes in key line items from our consolidated statements of operations for the year ended December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | Favorable (Unfavorable) |
| 2022 | | 2021 | | | | $ Change | | % Change |
| REVENUE | | | | | | | | | |
| Advisory services fees | $ | 48,381 | | | $ | 47,566 | | | | | $ | 815 | | | 1.7 | % |
| Hotel management fees | 46,548 | | | 26,260 | | | | | 20,288 | | | 77.3 | % |
| Design and construction fees | 22,167 | | | 9,557 | | | | | 12,610 | | | 131.9 | % |
| Audio visual | 121,261 | | | 49,880 | | | | | 71,381 | | | 143.1 | % |
| Other | 44,312 | | | 47,329 | | | | | (3,017) | | | (6.4) | % |
| Cost reimbursement revenue | 361,763 | | | 203,975 | | | | | 157,788 | | | 77.4 | % |
| Total revenues | 644,432 | | | 384,567 | | | | | 259,865 | | | 67.6 | % |
| EXPENSES | | | | | | | | | |
| Salaries and benefits | 76,521 | | | 65,251 | | | | | (11,270) | | | (17.3) | % |
| Cost of revenues for design and construction | 8,359 | | | 4,105 | | | | | (4,254) | | | (103.6) | % |
| Cost of revenues for audio visual | 84,986 | | | 38,243 | | | | | (46,743) | | | (122.2) | % |
| Depreciation and amortization | 31,766 | | | 32,598 | | | | | 832 | | | 2.6 | % |
| General and administrative | 34,004 | | | 26,288 | | | | | (7,716) | | | (29.4) | % |
| Impairment | — | | | 1,160 | | | | | 1,160 | | | 100.0 | % |
| Other | 25,828 | | | 18,199 | | | | | (7,629) | | | (41.9) | % |
| Reimbursed expenses | 361,375 | | | 203,956 | | | | | (157,419) | | | (77.2) | % |
| Total expenses | 622,839 | | | 389,800 | | | | | (233,039) | | | (59.8) | % |
| OPERATING INCOME (LOSS) | 21,593 | | | (5,233) | | | | | 26,826 | | | 512.6 | % |
| Equity in earnings (loss) of unconsolidated entities | 392 | | | (126) | | | | | 518 | | | 411.1 | % |
| | | | | | | | | |
| | | | | | | | | |
| Interest expense | (9,996) | | | (5,144) | | | | | (4,852) | | | (94.3) | % |
| Amortization of loan costs | (761) | | | (322) | | | | | (439) | | | (136.3) | % |
| Interest income | 371 | | | 285 | | | | | 86 | | | 30.2 | % |
| | | | | | | | | |
| | | | | | | | | |
| Realized gain (loss) on investments | (121) | | | (3) | | | | | (118) | | | (3,933.3) | % |
| | | | | | | | | |
| Other income (expense) | (25) | | | (437) | | | | | 412 | | | 94.3 | % |
| INCOME (LOSS) BEFORE INCOME TAXES | 11,453 | | | (10,980) | | | | | 22,433 | | | 204.3 | % |
| Income tax (expense) benefit | (8,530) | | | 162 | | | | | (8,692) | | | (5,365.4) | % |
| NET INCOME (LOSS) | 2,923 | | | (10,818) | | | | | 13,741 | | | 127.0 | % |
| (Income) loss from consolidated entities attributable to noncontrolling interests | 1,171 | | | 678 | | | | | 493 | | | 72.7 | % |
| Net (income) loss attributable to redeemable noncontrolling interests | (448) | | | 215 | | | | | (663) | | | (308.4) | % |
| NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY | 3,646 | | | (9,925) | | | | | 13,571 | | | 136.7 | % |
| Preferred dividends, declared and undeclared | (36,458) | | | (35,000) | | | | | (1,458) | | | (4.2) | % |
| Amortization of preferred stock discount | — | | | (1,053) | | | | | 1,053 | | | 100.0 | % |
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | (32,812) | | | $ | (45,978) | | | | | $ | 13,166 | | | 28.6 | % |
Net Income (Loss) Attributable to Common Stockholders. Net loss attributable to common stockholders changed $13.2 million to a $32.8 million loss for the year ended December 31, 2022 (“2022”) compared to a $46.0 million loss for the year ended December 31, 2021 (“2021”) as a result of the factors discussed below.
Total Revenues. Total revenues increased by $259.9 million, or 67.6%, to $644.4 million for 2022 compared to 2021 due to the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | Favorable (Unfavorable) | | | | |
| 2022 | | 2021 | | | | $ Change | | % Change | | | | | | |
| Advisory services fees: | | | | | | | | | | | | | | | |
Base advisory fees (1) | $ | 47,592 | | | $ | 47,045 | | | | | $ | 547 | | | 1.2 | % | | | | | | |
Incentive advisory fees (2) | 268 | | | — | | | | | 268 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Other advisory revenue (3) | 521 | | | 521 | | | | | — | | | — | % | | | | | | |
| Total advisory services fees revenue | 48,381 | | | 47,566 | | | | | 815 | | | 1.7 | % | | | | | | |
| | | | | | | | | | | | | | | |
| Hotel management fees: | | | | | | | | | | | | | | | |
| Base management fees | 34,072 | | | 21,291 | | | | | 12,781 | | | 60.0 | % | | | | | | |
| Incentive management fees | 8,533 | | | 4,969 | | | | | 3,564 | | | 71.7 | % | | | | | | |
| Other management fees | 3,943 | | | — | | | | | 3,943 | | | | | | | | | |
Total hotel management fees revenue (4) | 46,548 | | | 26,260 | | | | | 20,288 | | | 77.3 | % | | | | | | |
| | | | | | | | | | | | | | | |
Design and construction fees revenue (5) | 22,167 | | | 9,557 | | | | | 12,610 | | | 131.9 | % | | | | | | |
| | | | | | | | | | | | | | | |
Audio visual revenue (6) | 121,261 | | | 49,880 | | | | | 71,381 | | | 143.1 | % | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Other revenue: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Watersports, ferry and excursion services (7) | 26,309 | | | 23,867 | | | | | 2,442 | | | 10.2 | % | | | | | | |
Debt placement and related fees (8) | 4,222 | | | 12,384 | | | | | (8,162) | | | (65.9) | % | | | | | | |
Cash management fees (9) | 135 | | | — | | | | | 135 | | | | | | | | | |
Claims management services (10) | 20 | | | 81 | | | | | (61) | | | (75.3) | % | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Other services (11) | 13,626 | | | 10,997 | | | | | 2,629 | | | 23.9 | % | | | | | | |
| Total other revenue | 44,312 | | | 47,329 | | | | | (3,017) | | | (6.4) | % | | | | | | |
| | | | | | | | | | | | | | | |
Cost reimbursement revenue (12) | 361,763 | | | 203,975 | | | | | 157,788 | | | 77.4 | % | | | | | | |
| | | | | | | | | | | | | | | |
| Total revenues | $ | 644,432 | | | $ | 384,567 | | | | | $ | 259,865 | | | 67.6 | % | | | | | | |
| | | | | | | | | | | | | | | |
REVENUES BY SEGMENT (13) | | | | | | | | | | | | | | | |
| REIT advisory | $ | 77,347 | | | $ | 74,616 | | | | | $ | 2,731 | | | 3.7 | % | | | | | | |
| Remington | 356,435 | | | 197,802 | | | | | 158,633 | | | 80.2 | % | | | | | | |
| Premier | 32,247 | | | 12,413 | | | | | 19,834 | | | 159.8 | % | | | | | | |
| INSPIRE | 121,418 | | | 49,900 | | | | | 71,518 | | | 143.3 | % | | | | | | |
| RED | 26,335 | | | 23,867 | | | | | 2,468 | | | 10.3 | % | | | | | | |
| OpenKey | 1,484 | | | 1,965 | | | | | (481) | | | (24.5) | % | | | | | | |
| Corporate and other | 29,166 | | | 24,004 | | | | | 5,162 | | | 21.5 | % | | | | | | |
| Total revenues | $ | 644,432 | | | $ | 384,567 | | | | | $ | 259,865 | | | 67.6 | % | | | | | | |
________
(1)The increase in base advisory fees is primarily due to higher revenue of $2.0 million from Braemar offset by lower revenue of $1.4 million from Ashford Trust. See note 3 to our consolidated financial statements for discussion of the advisory services revenue recognition policy.
(2)The $268,000 of incentive advisory fees recognized in 2022 includes the first year installment of the Braemar 2022 incentive advisory fee which was paid in January 2023. Incentive fee payments are subject to meeting the December 31st FCCR Condition each year, as defined in our advisory agreements. Ashford Trust’s annual total stockholder return did not meet the relevant incentive fee thresholds during the 2022, 2021 and 2020 measurement periods. Braemar’s annual total stockholder return did not meet the relevant incentive fee thresholds during the 2021 and 2020 measurement periods.
(3) 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 consolidated balance sheet and is being recognized evenly over the initial ten-year term of the agreement.
(4) The increase in hotel management fees revenue is due to higher base management fees from Ashford Trust, Braemar and third-parties of $6.1 million, $655,000 and $6.1 million, respectively and incentive management fees of $1.9 million, $174,000 and $1.5 million from Ashford Trust, Braemar and third-parties, respectively. The increase from Ashford Trust and Braemar are due to increased demand compared to 2021. The increase of $3.9 million in other management fees is primarily due to Remington’s acquisition of Chesapeake in April 2022. Other management fees primarily includes fixed monthly accounting fees and fees for revenue management services at certain third-party properties.
(5) The increase in design and construction fees revenue is due to higher revenue from Ashford Trust and Braemar of $7.6 million and $5.1 million, respectively, due to increased capital expenditures.
(6) The $71.4 million increase in audio visual revenue is primarily due to a recovery in demand for group events.
(7) The $2.4 million increase in watersports, ferry and excursion services revenue is due primarily to an increase of $2.8 million in revenue from RED’s Turks and Caicos operations, partially offset by a decrease of $311,000 in revenue in the U.S. Virgin Islands and Key West, Florida.
(8) The decrease in debt placement and related fee revenue is due to lower revenue of $8.1 million from Ashford Trust and $63,000 from Braemar. Debt placement and related fees are earned by Lismore for providing debt placement, modification, forbearance and refinancing services. The decrease in revenue from Ashford Trust in 2022 is primarily due to the expiration of the Ashford Trust Agreement with Lismore on April 6, 2022. The decrease in revenue from Braemar in 2022 is primarily due to the expiration of the Braemar Agreement with Lismore in March 2021.
(9) Cash management fees include revenue earned by providing active management and investment of Ashford Trust and Braemar’s excess cash in short-term U.S. Treasury securities. See note 1 to our consolidated financial statements.
(10) Claims management services include revenue earned from providing insurance claim assessment and administration services to Ashford Trust and Braemar.
(11) 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. Other revenue additionally includes Marietta prior to Ashford Trust’s acquisition on December 16, 2022. The increase in other services revenue is primarily due to higher revenue of $3.4 million in 2022 from Marietta due to a recovery in 2022 compared to 2021.
(12) The increase in cost reimbursement revenue is primarily due to an increase in Remington’s cost reimbursement revenue of $138.2 million in 2022 due a recovery in operations in 2022 compared to 2021 and Remington’s acquisition of Chesapeake in April 2022. The increase is additionally due to an increase of $7.2 million in cost reimbursement revenue from Premier in 2022 due to a recovery in operations in 2022 compared to 2021 and an increase of $1.8 million in cost reimbursement revenue in 2022 related to reimbursable advisory expenses for Ashford Trust and Braemar.
(13) See note 21 to our consolidated financial statements for discussion of segment reporting.
Salaries and Benefits Expense. Salaries and benefits expense increased by $11.3 million, or 17.3%, to $76.5 million for 2022 compared to 2021. The change in salaries and benefits expense consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, | | | | | | | |
| | | | | | | 2022 | | 2021 | | | | $ Change | | | |
| Salaries and benefits: | | | | | | | | | | | | | | | | |
Salary expense (1) | | | | | | | $ | 45,432 | | | $ | 38,164 | | | | | $ | 7,268 | | | | |
| Bonus expense | | | | | | | 16,859 | | | 15,547 | | | | | 1,312 | | | | |
Benefits related expenses (2) | | | | | | | 11,174 | | | 6,011 | | | | | 5,163 | | | | |
| Total salary, bonus, and benefits related expenses | | | | | | | 73,465 | | | 59,722 | | | | | 13,743 | | | | |
| Non-cash equity-based compensation: | | | | | | | | | | | | | | | | |
Class 2 LTIP units and stock option grants (3) | | | | | | | 1,398 | | | 2,641 | | | | | (1,243) | | | | |
Employee equity grant expense (4) | | | | | | | 2,135 | | | 1,217 | | | | | 918 | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Total equity-based compensation | | | | | | | 3,533 | | | 3,858 | | | | | (325) | | | | |
Non-cash (gain) loss in deferred compensation plan (5) | | | | | | | (477) | | | 1,671 | | | | | (2,148) | | | | |
| Total salaries and benefits | | | | | | | $ | 76,521 | | | $ | 65,251 | | | | | $ | 11,270 | | | | |
________
(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 2021 and includes $1.7 million of expense recognized in 2022 related to Mr. Welter’s termination agreement with the Company. See note 13 to our consolidated financial statements.
(2) The increase in benefits related expenses is primarily due to expense of $2.8 million related to the reinstatement of the Company’s 401(k) contribution to employees at the start of 2022 and due to an increase in corporate employees at both the Company’s corporate office and our subsidiaries’ corporate offices compared to 2021.
(3) 2022 includes compensation expense of approximately $947,000 related to the modification of 74,000 and 150,000 fully vested stock options and Class 2 LTIP units, respectively, awarded to employees and management which were granted in December 2014 and expiring in December 2022 under the original grant terms. The modification extended the expiration date for the stock options and Class 2 LTIP unit awards to December 2025. No other modifications were made to the original grant terms.
(4) 2022 includes $472,000 of expense related to restricted shares previously awarded to Mr. Welter which were accelerated upon the termination of his employment.
(5) The DCP obligation is recorded as a liability at fair value with changes in fair value reflected in earnings. The gain in 2022 and the loss in 2021 are primarily attributable to decreases and increases, respectively, in the fair value of the DCP obligation which is based on the Company’s common stock price. See note 17 to our consolidated financial statements.
Cost of Revenues for Design and Construction. Cost of revenues for design and construction increased $4.3 million, or 103.6% to $8.4 million during 2022 compared to $4.1 million for 2021 due to increased capital expenditures by our clients.
Cost of Revenues for Audio Visual. Cost of revenues for audio visual increased $46.7 million, or 122.2%, to $85.0 million during 2022 compared to $38.2 million for 2021, primarily due to an increase in demand for group events.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased by $832,000, or 2.6%, to $31.8 million for 2022 compared to 2021, primarily due to a decrease in FF&E related to the respective ERFP agreements with Ashford Trust and Braemar compared to 2021. Depreciation and amortization expense for 2022 and 2021 excludes depreciation expense related to audio visual equipment of $4.9 million and $5.0 million, respectively, which is included in “cost of revenues for audio visual” and also excludes depreciation expense for 2022 and 2021 related to marine vessels in the amount of $1.4 million and $929,000, respectively, which are included in “other” operating expense.
General and Administrative Expense. General and administrative expenses increased by $7.7 million, or 29.4%, to $34.0 million for 2022 compared to 2021. The change in general and administrative expense consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, | | | | | | | |
| | | | | | | 2022 | | 2021 | | | | $ Change | | | |
| Professional fees | | | | | | | $ | 9,900 | | | $ | 9,234 | | | | | $ | 666 | | | | |
Office expense (1) | | | | | | | 11,062 | | | 7,921 | | | | | 3,141 | | | | |
| Public company costs | | | | | | | 543 | | | 669 | | | | | (126) | | | | |
| Director costs | | | | | | | 1,802 | | | 2,007 | | | | | (205) | | | | |
Travel and other expense (2) | | | | | | | 9,775 | | | 6,134 | | | | | 3,641 | | | | |
| Non-capitalizable - software costs | | | | | | | 922 | | | 323 | | | | | 599 | | | | |
| Total general and administrative | | | | | | | $ | 34,004 | | | $ | 26,288 | | | | | $ | 7,716 | | | | |
________
(1) The increase in office expenses in 2022 is primarily due to an increase of $2.2 million for INSPIRE from greater demand for group events compared to 2021.
(2) The increase in travel and other expense is primarily due to increases in the Company’s business travel and other related expenses for our products and services companies in 2022 as our subsidiaries’ operations accelerated compared to 2021. INSPIRE, RED and Remington had increased expenses compared to 2021 of $1.2 million, $1.0 million, and $723,000, respectively.
Impairment. During 2021, as a result of the strategic rebranding of our segment formerly known as JSAV to INSPIRE, we performed an impairment test on our indefinite-lived JSAV trademarks and recognized an intangible asset impairment charge of $1.2 million for the full value of the indefinite-lived JSAV trademarks.
Other. Other operating expense increased $7.6 million, or 41.9%, to $25.8 million for 2022 compared to 2021. The increase was primarily caused by operating expenses associated with RED and Marietta as their respective operations increased during 2022. Other operating expenses for 2022 also includes losses on the sale of FF&E previously leased to Ashford Trust of $2.8 million under the Ashford Trust ERFP agreement and a loss of $1.2 million on Ashford Trust’s acquisition of Marietta on December 16, 2022. Other operating expense also includes cost of goods sold, royalties and operating expenses associated with OpenKey and Pure Wellness.
Reimbursed Expenses. Reimbursed expenses increased $157.4 million to $361.4 million during 2022 compared to $204.0 million for 2021 primarily due to an increase in hotel management reimbursed expenses incurred by Remington due to a recovery in hotel operations in 2022 compared to 2021 and Remington’s acquisition of Chesapeake in April 2022.
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):
| | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | |
| 2022 | | 2021 | | $ Change | |
| Cost reimbursement revenue | $ | 361,763 | | | $ | 203,975 | | | $ | 157,788 | | |
| Reimbursed expenses | 361,375 | | | 203,956 | | | 157,419 | | |
| Net total | $ | 388 | | | $ | 19 | | | $ | 369 | | |
Equity in Earnings (Loss) of Unconsolidated Entities. Equity in earnings (loss) of unconsolidated entities were earnings of $392,000 and a loss of $126,000 for 2022 and 2021, 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 consolidated financial statements.
Interest Expense. Interest expense increased $4.9 million to $10.0 million during 2022 compared to $5.1 million for 2021. The increase is primarily due to an increase in the Company’s notes payable under our Credit Facility which had an outstanding balance of $70.0 million as of December 31, 2022. Interest expense in 2022 included expense of $5.3 million related to the
Company’s Credit Facility. The increase in interest expense is also due to higher average LIBOR and Prime Rates during 2022. The average LIBOR rates in 2022 and 2021 were 1.91% and 0.10%, respectively, and the average Prime Rates in 2022 and 2021 were 4.85% and 3.25%, respectively. Interest expense relates to our Credit Facility and notes payable, lines of credit and finance leases held by our consolidated subsidiaries. See note 8 to our consolidated financial statements.
Amortization of Loan Costs. Amortization of loan costs was $761,000 and $322,000 for 2022 and 2021, respectively. The increase is primarily due to the Company’s Credit Facility entered into in 2022. Amortization of loan costs relates to our Credit Facility and notes payable held by our consolidated subsidiaries. See note 8 to our consolidated financial statements.
Interest Income. Interest income was $371,000 and $285,000 for 2022 and 2021, respectively.
Realized Gain (Loss) on Investments. Realized loss on investments was $121,000 and $3,000 for 2022 and 2021, respectively. The realized loss on investments for 2022 and 2021 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 11 to our consolidated financial statements.
Other Income (Expense). Other income (expense) was expense of $25,000 and expense of $437,000 in 2022 and 2021, respectively.
Income Tax (Expense) Benefit. Income tax (expense) benefit changed by $8.7 million from a $162,000 benefit in 2021 to $8.5 million of expense in 2022 due to an increase in operating income. Current income tax expense changed by $7.9 million from $4.9 million of expense in 2021 to $12.8 million in expense in 2022. Deferred income tax benefit changed by $797,000 from a $5.1 million benefit in 2021 to a $4.3 million benefit in 2022.
(Income) Loss from Consolidated Entities Attributable to Noncontrolling Interests. The noncontrolling interests in consolidated entities were allocated a loss of $1.2 million in 2022 and a loss of $678,000 in 2021. See notes 2 and 14 to our 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 income of $448,000 in 2022 and losses of $215,000 in 2021. 2022 includes $489,000 of income allocated to the Series CHP Units holders. Redeemable noncontrolling interests represents ownership interests in Ashford Holdings which include the Series CHP Units which are recorded as a redeemable noncontrolling interest in the mezzanine section of our consolidated balance sheets. The change in 2022 compared to 2021 is also due to the Company’s acquisition of all of the redeemable noncontrolling interests in OpenKey in 2021. Redeemable noncontrolling interests represents ownership interests in Ashford Holdings and, in 2021, OpenKey. For a summary of ownership interests, carrying values and allocations, see notes 2 and 15 to our consolidated financial statements.
Preferred Dividends, Declared and Undeclared. Preferred dividends, declared and undeclared, increased $1.5 million to $36.5 million during 2022 compared to $35.0 million for 2021 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 15 to our consolidated financial statements.
Amortization of Preferred Stock Discount. The amortization of preferred stock discount decreased $1.1 million to $0 during 2022 compared to $1.1 million from 2021 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 15 to our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements consist primarily of funds necessary to pay for operating expenses primarily attributable to paying our employees, investments and other capital expenditures to grow our businesses, interest and principal payments on our Credit Facility and our subsidiaries’ borrowings and dividends on the Series D Convertible Preferred Stock. We expect to meet our liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, borrowings under our Credit Facility or other loans, which we believe will provide sufficient liquidity to meet our existing non-discretionary obligations and anticipated ordinary course operating expenses.
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 $100.0 million, including a $50.0 million term loan funded upon closing and commitments to fund up to an additional $50.0 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 and pay dividends to the holders of the Series D Convertible Preferred Stock as stated below. On April 18, 2022 and March 7, 2023, the Company drew an additional $20.0 million and $12.0 million on the Credit Facility, respectively. 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% during the first 24 months of the term, payable on the last business day of each month.
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 December 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 the Leverage Ratio under our Credit Agreement to exceed 3.00 to 1.00 or debt held by our subsidiaries to violate any loan covenants within one year of the issuance of the financial statements.
As of December 31, 2022, principal and interest payment obligations related to the Company’s notes payable were as follows (in thousands):
| | | | | | | | | | | | | |
| Principal Payments (1) | | Interest Payments (2) | | |
| 2023 | $ | 5,047 | | | $ | 10,747 | | | |
| 2024 | 14,750 | | | 8,979 | | | |
| 2025 | 1,134 | | | 8,890 | | | |
| 2026 | 1,224 | | | 8,800 | | | |
| 2027 | 71,977 | | | 2,531 | | | |
| Thereafter | 4,970 | | | 615 | | | |
| Total payments | $ | 99,102 | | | $ | 40,562 | | | |
__________________
(1) Principal payments assume no extension of existing extension options for each of the following five years and thereafter as of December 31, 2022.
(2) For variable-rate indebtedness, interest obligations are estimated based on the LIBOR and Prime interest rates as of December 31, 2022. We have assumed that credit facility balances remain outstanding until maturity using the interest rates as of December 31, 2022.
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 $27.6 million and $30.6 million as of December 31, 2022 and 2021, respectively. For further discussion see note 8 to our consolidated financial statements.
Preferred stock dividends—As of December 31, 2022, the Company had aggregate undeclared preferred stock dividends of approximately $18.4 million, which remain in arrears for 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 ended 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. On each of April 15, 2022, July 15, 2022 and October 14, 2022 the Company 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, second and third quarters of 2022. On December 13, 2022, the Board declared a cash dividend on the Company’s Series D Convertible Preferred Stock for the quarter ended December 31, 2022. The Company paid the dividend of $8.7 million, or $0.455 per share of Series D Convertible Preferred Stock, on January 13, 2023.
The Company does not currently expect to declare and pay the accrued and unpaid dividends on the Series D Convertible Preferred Stock for the quarters ended June 30, 2021 and December 31, 2021 during calendar year 2023. However, the Company remained current on the preferred dividend payments in 2022 and currently intends to remain current on future preferred dividend payments. 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 and will make decisions on such preferred dividend payments based on the ongoing liquidity and capital needs of the Company.
Each share of Series D Convertible Preferred Stock: (i) has a liquidation value of $25 per share plus the amount of all unpaid accrued and accumulated dividends on such 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, along with all unpaid accrued and accumulated dividends thereon, 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 beneficially held primarily by Mr. Monty J. Bennett, the Chairman of our Board and our Chief Executive Officer, and Mr. Archie Bennett, Jr., who is Mr. Monty J. Bennett’s father.
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 note 15 to our 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. 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.
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. 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 had no impact on the Extension Agreement which continued in full force until December 16, 2022, when Ashford Trust acquired all of the equity interests in Marietta and, in exchange, forgave, cancelled and discharged in full the outstanding $11.4 million ERFP commitment. See note 5 to our consolidated financial statements.
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.
As of December 31, 2022, the Company had no remaining ERFP commitments to Ashford Trust or Braemar under the Ashford Trust ERFP Agreement and the Braemar ERFP Agreement, respectively.
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 year ended December 31, 2022.
As of December 31, 2022, future minimum lease payments on operating leases and financing leases were as follows (in thousands):
| | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | |
| 2023 | $ | 4,980 | | | $ | 1,475 | | | |
| 2024 | 4,660 | | | 263 | | | |
| 2025 | 4,052 | | | 235 | | | |
| 2026 | 3,781 | | | 215 | | | |
| 2027 | 3,705 | | | 206 | | | |
| Thereafter | 9,204 | | | 1,792 | | | |
| Total minimum lease payments | 30,382 | | | 4,186 | | | |
| Imputed interest | (6,432) | | | (768) | | | |
| Present value of minimum lease payments | $ | 23,950 | | | $ | 3,418 | | | |
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 2025. 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 December 31, 2022, the fair value of the DCP liability was $2.7 million.
The Company has commitments related to cash compensation for the departure of Mr. Welter which included a cash termination payment of $750,000, which was paid on August 5, 2022, and payments totaling approximately $6.4 million, which are payable in 24 substantially equal monthly installments of approximately $267,000 beginning in August 2022. As of December 31, 2022, the Company’s remaining commitment to Mr. Welter totaled approximately $5.1 million.
Additional information pertaining to other liquidity considerations of the Company can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments.”
Sources and Uses of Cash
As of December 31, 2022 and December 31, 2021, we had $44.4 million and $37.6 million of cash and cash equivalents, respectively, and $37.1 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, principal payments, acquisitions and key money payments to grow our products and services companies. 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 provided by operating activities were $42.1 million for the year ended December 31, 2022 compared to net cash flows provided by operating activities of $20.8 million for the year ended December 31, 2021. The increase in cash flows from operating activities was primarily due to an increase in earnings from growth in our subsidiaries’ operations in the year ended December 31, 2022. Cash flows from operations are also impacted by the timing of working capital cash flows such as collecting receivables, settling with vendors and settling with related parties, primarily our clients Ashford Trust and Braemar.
Net Cash Flows Provided by (Used in) Investing Activities. For the year ended December 31, 2022, net cash flows used in investing activities were $22.4 million. These cash flows consisted of capital expenditures primarily for FF&E, audio visual equipment and marine vessels totaling $14.8 million, net cash paid to acquire Chesapeake of $6.4 million, cash held by Marietta upon disposition of $2.1 million, issuance of a note receivable of $530,000 and an investment in an unconsolidated entity of $400,000. These were offset by cash inflows of $1.4 million in proceeds from notes receivable and $466,000 in proceeds primarily received from the sale of FF&E to Ashford Trust.
For the year ended December 31, 2021, net cash flows used in investing activities were $9.4 million. These cash flows consisted of capital expenditures primarily for FF&E, audio visual equipment and marine vessels totaling $8.1 million, 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 and an investment in an unconsolidated entity of $250,000. These were offset by cash inflows of $2.1 million in proceeds received in 2021 from the sale of FF&E primarily to Ashford Trust and Braemar and cash inflows of $535,000 from Remington’s sale of an equity method investment during the period.
Net Cash Flows Provided by (Used in) Financing Activities. For the year ended December 31, 2022, net cash flows used in financing activities were $10.7 million. These cash flows consisted of $43.9 million of dividend payments on the Series D Convertible Preferred Stock and $31.1 million of payments on notes payable which were primarily related to paying off the remaining balance of the Company’s Term Loan Agreement with Bank of America, N.A. Other cash flows used in financing activities consisted of $2.7 million of loan cost payments, $1.8 million of net payments on our revolving credit facilities, $1.2 million of payments on finance leases, $413,000 of distributions to consolidating noncontrolling interests, purchases of $270,000 of treasury stock and net repayments in advances to employees of $45,000 associated with tax withholdings for restricted stock vestings. These were offset by $70.4 million of proceeds from borrowings on notes payable, primary related to the Company’s Credit Agreement entered into in the second quarter of 2022, and $327,000 of contributions from Braemar from investments in OpenKey.
For the year ended December 31, 2021, net cash flows used in financing activities were $21.6 million. These cash flows consisted of $16.7 million of dividend payments on the Series D Convertible Preferred Stock, $8.7 million of payments on notes payable, $439,000 of payments on finance leases, purchases of $121,000 of treasury stock and $222,000 of loan cost payments. These were offset by $2.9 million of proceeds from borrowings on notes payable, $763,000 of net borrowings on our revolving credit facilities, $734,000 of contributions from noncontrolling interests in a consolidated entity and net repayments in advance to employees of $180,000 associated with tax withholdings for restricted stock vesting.
Critical Accounting Policies
Our accounting policies are fully described in notes 2 and 3 to our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data.” We believe that the following discussion addresses our most critical accounting policies, representing those policies considered most vital to the portrayal of our consolidated financial condition and results of operations and requiring management’s most difficult, subjective, and complex judgments.
Revenue Recognition—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.
On January 15, 2021, Ashford Trust and Ashford Trust OP entered into a Credit Agreement (as amended, the “Oaktree Credit Agreement”) with certain funds and accounts managed by Oaktree Capital Management L.P. (“Oaktree”). In connection with the transactions contemplated by the Oaktree 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 Oaktree Credit Agreement, (1) prior to the later of (i) the second anniversary of the Oaktree 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 Oaktree 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 was approximately $29.0 million each year as stated in the Oaktree Credit Agreement. As a result, base advisory fee revenue in 2021 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 Oaktree 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. Based upon Ashford Trust’s ability to meet the requirements stated in Amendment No. 1, the Company concluded that base fees from our Second Amended and Restated Advisory Agreement with Ashford Trust which exceed the Advisory Fee Cap were no longer probable of being subject to significant reversal and were recorded within “advisory services fees” in our 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 in an amount equal to 1/12th of 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. Braemar’s 2022 annual total stockholder return met the relevant incentive fee thresholds during the 2022 measurement period and $268,000 was recognized as incentive advisory fees in 2022 for the first year installment which was paid in January of 2023. Ashford Trust’s annual total stockholder return did not meet the relevant incentive fee thresholds during the 2022, 2021 and 2020 measurement periods. Braemar’s annual total stockholder return did not meet the relevant incentive fee thresholds during the 2021 and 2020 measurement periods.
Hotel Management Fees Revenue
Hotel management fees revenue is reported within our Remington segment and primarily consists of base management fees, incentive management fees and other management fees. Base management fees, incentive management fees and other 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 whenever a hotel’s gross operating profit (“GOP”) exceeds the hotel’s budgeted GOP. The incentive fee is equal to the lesser of 1% of each hotel’s annual gross revenue or the amount by which the respective hotel’s GOP exceeds the hotel’s budgeted GOP. The base management fees and incentive management fees that Remington receives for third-party owned properties vary by property. Other management fees primarily includes fixed monthly accounting fees and fees for revenue management services at certain third-party properties.
Design and Construction Fees Revenue
Design and construction fees 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 and our Amended and Restated Contribution Agreement with Ashford Trust and Braemar (as defined below), 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 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.
The recognition of cost reimbursement revenue and reimbursed expenses for centralized software programs reimbursed by Ashford Trust and Braemar may result in temporary timing differences 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.
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 2018 through 2022 remain subject to potential examination by certain federal and state taxing authorities.
Equity-Based Compensation—Our equity incentive plan provides for the grant of restricted or unrestricted shares of our common stock, share appreciation rights, performance shares, performance units and other equity-based awards or any combination of the foregoing. Equity-based compensation included in “salaries and benefits” is accounted for at fair value based on the market price of the shares/options on the date of grant in accordance with applicable authoritative accounting guidance. The fair value is charged to compensation expense on a straight-line basis over the vesting period of the shares/options. Grants of restricted stock to independent directors are recorded at fair value based on the market price of our shares at grant date, and this amount is fully expensed in “general and administrative” expense as the grants of stock are fully vested on the date of grant. The Company accounts for forfeitures when they occur. Our officers and employees can be granted common stock and LTIP units from Ashford Trust and Braemar in connection with providing advisory services that result in expense, included in “reimbursed expenses,” equal to the grant date fair value of the award in proportion to the requisite service period satisfied during the period, as well as offsetting revenue in an equal amount included in “cost reimbursement revenue”.
Acquisitions—We account for acquisitions and investments in businesses as business combinations if the target meets the definition of a business and (a) the target is a VIE and we are the target’s primary beneficiary, and therefore we must consolidate its financial statements, or (b) we acquire more than 50% of the voting interest of the target and it was not previously consolidated. We record business combinations using the acquisition method of accounting, which requires all of the assets acquired and liabilities assumed to be recorded at fair value as of the acquisition date. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. The application of the acquisition method of accounting for business combinations requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. The fair value assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Significant assumptions and estimates include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset, if applicable. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in our consolidated financial statements may be exposed to potential impairment of the intangible assets and goodwill.
If our investment involves the acquisition of an asset or group of assets that does not meet the definition of a business, the transaction is accounted for as an asset acquisition. An asset acquisition is recorded at cost, which includes capitalizing transaction costs, and does not result in the recognition of goodwill.
Impairment of Goodwill and Indefinite-Lived Intangible Assets—Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. Indefinite-lived intangible assets primarily include trademark rights resulting from our acquisition of Remington, INSPIRE and Sebago. We assess goodwill and indefinite-lived intangible assets, neither of which is amortized, for impairment annually as of October 1, or more frequently, if events and circumstances indicate impairment may have occurred. In the evaluation of goodwill for impairment, we elected to perform a qualitative assessment to determine whether the fair value of the goodwill is more likely than not impaired. In considering the qualitative approach, we evaluate factors including, but not limited to, the operational stability and the overall financial performance of the reporting units. We may choose to bypass the qualitative assessment and perform a quantitative assessment and compare the fair value of the reporting unit to the carrying value and, if applicable, record an impairment charge based on the excess of the reporting unit’s carrying amount over its fair value. We determine the fair value of a reporting unit based on a blended analysis of the present value of future cash flows and the market value approach. Based on the results of our annual impairment assessments, no impairment of goodwill was indicated as of October 1, 2022. Additionally, no indicators of impairment were identified from the date of our impairment assessments through December 31, 2022. During 2020, as a result of our reduced cash flow projections and the significant decline in our market capitalization as a result of the COVID-19 pandemic, we concluded that sufficient indicators existed to require us to perform multiple impairment assessments on our reporting units’ goodwill balances.
During the third quarter of 2021, as a result of the strategic rebranding of our segment formerly known as JSAV to INSPIRE, we concluded sufficient indicators existed to require us to perform an assessment of INSPIRE’s JSAV trademark. We performed an impairment test and calculated the fair value of our indefinite-lived INSPIRE trademarks using the relief-from-royalty method which includes unobservable inputs including royalty rates and projected revenues for the time period that the Company is expected to benefit from the trademark. The relief-from-royalty method assumes that the trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. For additional information on our goodwill and trademark impairments, see note 11 to our consolidated financial statements.
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. We adopted ASU 2016-13 and ASU 2019-10 effective January 1, 2023 and the adoption did not have a material impact on our 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 smaller reporting companies, 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. The Company continues to evaluate whether the adoption of ASU 2020-06 will have any impact on the Company’s financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposures consist of changes in interest rates on borrowings under our debt instruments that bear interest at variable rates that fluctuate with market interest rates as well as foreign currency exchange rate risk.
Interest Rate Risk—At December 31, 2022, our total indebtedness of $99.1 million included $94.4 million of variable-rate debt. The impact on our results of operations of a 100 basis point change in interest rate on the outstanding balance of variable-rate debt at December 31, 2022, would be approximately $944,000 annually. Interest rate changes have no impact on the remaining $4.7 million of fixed rate debt.
The amount above was determined based on the impact of a hypothetical interest rate on our borrowings and assumes no changes in our capital structure. As the information presented above includes only those exposures that existed at December 31, 2022, it does not consider exposures or positions that could arise after that date. Accordingly, the information presented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on exposures that arise during the period, the hedging strategies at the time, and the related interest rates.
Foreign Exchange Risk—The majority of our revenues, expenses and capital purchases are transacted in U.S. dollars. INSPIRE has operations in Mexico and the Dominican Republic for which we have exposure with respect to exchange rate fluctuations. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred. We have chosen not to hedge foreign exchange risks related to our foreign currency denominated earnings and cash flows through the use of financial instruments. As of December 31, 2022, the impact to our net income of a 10% change (up or down) in the Mexican Peso exchange rate is estimated to be an increase or decrease of approximately $215,000 for the twelve months ended December 31, 2022. Operations in the Dominican Republic are not material. RED’s operations outside of the U.S. are primarily transacted in U.S. dollars, which is the official currency of the Turks and Caicos Islands.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Ashford Inc.
Dallas, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Ashford Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), equity (deficit), and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Business Combination
As described in Note 4 to the consolidated financial statements, on April 15, 2022, the Company acquired Chesapeake Hospitality, a third-party hotel management company, for purchase consideration of approximately $9.55 million. The purchase consideration included preferred units and liabilities related to contingent consideration. The Company accounted for the acquisition as a business combination, which required the Company to exercise judgment and make estimates and assumptions based on available information regarding the fair values of acquired identifiable tangible and intangible assets as of the date of the acquisition. Estimates and assumptions required in estimating the fair value of the management contracts intangible assets include future cash flow projections. The Company recognized an intangible asset of approximately $7.1 million related to the acquired management contracts. As described in Note 15 to the consolidated financial statements, the preferred units are convertible into common units of Ashford Holdings, a subsidiary of the Company, at the option of the Company or issuer, which units are then redeemable by the holder into common stock of the Company. These preferred units are classified as redeemable noncontrolling interests within mezzanine equity.
We identified the valuation of the management contracts intangible assets, the valuation of the contingent consideration, and the accounting for the preferred units as a critical audit matter. The principal consideration for our determination included (i) the subjectivity and judgment required to determine the fair value of the management contracts intangible assets specifically related to forecasts of future revenues and expenses and the selection of the discount rate, (ii) the judgment management used to value the contingent consideration liability, specifically related to forecasts of future revenues, and (iii) the judgments and knowledge of complex technical accounting guidance required in the determination of the scope of the applicable accounting guidance, the appropriate balance sheet classification of the preferred units, including the identification and evaluation of embedded features, and the initial and subsequent recognition and measurement, including any resulting adjustments to earnings per share. Auditing these elements involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•Assessing the reasonableness of the forecasts of future revenue and expenses utilized in the valuation of the management contracts intangibles assets and the forecasts of future revenues utilized in the valuation of contingent consideration by (i) comparing to historical revenue and expenses of the acquired entity and (ii) assessing forecasts of future revenues and expenses against industry metrics.
•Utilizing personnel with specialized knowledge and skill with valuation to assist in: (i) assessing the reasonableness of discount rates incorporated into the valuation models used by management for management contracts intangible assets and contingent consideration, and (ii) testing the mathematical accuracy of the Company’s calculations.
•Reading and analyzing the contract terms related to the issuance of preferred units.
•Evaluating the reasonableness of the conclusions made by the Company related to the accounting treatment for issuance of preferred units, including the Company’s consideration of relevant accounting standards to analyze the proper balance sheet classification, the embedded features, and the initial and subsequent recognition and measurement.
•Utilizing personnel with specialized knowledge and skills in the relevant technical accounting guidance to assist in evaluating the appropriateness of management’s application of the relevant accounting guidance for the issuance of the preferred units.
| | | | | |
| /s/ BDO USA, LLP | |
| |
| We have served as the Company’s auditor since 2015. | |
| |
| Dallas, Texas | |
| March 16, 2023 | |
ASHFORD INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 44,390 | | | $ | 37,571 | |
| Restricted cash | 37,058 | | | 34,878 | |
| Restricted investment | 303 | | | 576 | |
| | | |
| Accounts receivable, net | 17,615 | | | 10,502 | |
| Due from affiliates | 463 | | | 165 | |
| Due from Ashford Trust | — | | | 2,575 | |
| Due from Braemar | 11,828 | | | 1,144 | |
| | | |
| Inventories | 2,143 | | | 1,555 | |
| Prepaid expenses and other | 11,226 | | | 9,490 | |
| | | |
| Total current assets | 125,026 | | | 98,456 | |
| Investments in unconsolidated entities | 4,217 | | | 3,581 | |
| Property and equipment, net | 41,791 | | | 83,566 | |
| Operating lease right-of-use assets | 23,844 | | | 26,975 | |
| | | |
| Goodwill | 58,675 | | | 56,622 | |
| Intangible assets, net | 226,544 | | | 244,726 | |
| Other assets, net | 2,259 | | | 870 | |
| Total assets | $ | 482,356 | | | $ | 514,796 | |
| LIABILITIES | | | |
| Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 56,079 | | | $ | 39,897 | |
| Dividends payable | 27,285 | | | 34,574 | |
| Due to affiliates | 15 | | | — | |
| Due to Ashford Trust | 1,197 | | | — | |
| | | |
| | | |
| Deferred income | 444 | | | 2,937 | |
| | | |
| Notes payable, net | 5,195 | | | 6,725 | |
| Finance lease liabilities | 1,456 | | | 1,065 | |
| Operating lease liabilities | 3,868 | | | 3,628 | |
| Other liabilities | 25,630 | | | 25,899 | |
| Total current liabilities | 121,169 | | | 114,725 | |
| | | |
| Deferred income | 7,356 | | | 7,968 | |
| Deferred tax liability, net | 27,873 | | | 32,848 | |
| Deferred compensation plan | 2,849 | | | 3,326 | |
| Notes payable, net | 89,680 | | | 52,669 | |
| Finance lease liabilities | 1,962 | | | 43,479 | |
| Operating lease liabilities | 20,082 | | | 23,477 | |
| Other liabilities | 3,237 | | | — | |
| Total liabilities | 274,208 | | | 278,492 | |
Commitments and contingencies (note 13) | | | |
| MEZZANINE EQUITY | | | |
Series D Convertible Preferred Stock, $0.001 par value, 19,120,000 shares issued and outstanding as of December 31, 2022 and December 31, 2021 | 478,000 | | | 478,000 | |
| Redeemable noncontrolling interests | 1,614 | | | 69 | |
| EQUITY (DEFICIT) | | | |
Common stock, 100,000,000 shares authorized, $0.001 par value, 3,181,585 and 3,072,688 shares issued and 3,110,044 and 3,023,002 shares outstanding at December 31, 2022 and December 31, 2021, respectively | 3 | | | 3 | |
| Additional paid-in capital | 297,715 | | | 294,395 | |
| Accumulated deficit | (568,482) | | | (534,999) | |
| Accumulated other comprehensive income (loss) | 78 | | | (1,206) | |
Treasury stock, at cost, 71,541 and 49,686 shares at December 31, 2022 and December 31, 2021, respectively | (947) | | | (596) | |
| Total equity (deficit) of the Company | (271,633) | | | (242,403) | |
| Noncontrolling interests in consolidated entities | 167 | | | 638 | |
| Total equity (deficit) | (271,466) | | | (241,765) | |
| Total liabilities, mezzanine equity and equity (deficit) | $ | 482,356 | | | $ | 514,796 | |
See Notes to Consolidated Financial Statements.
ASHFORD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| REVENUE | | | | | | | | | |
| Advisory services fees | | | | | $ | 48,381 | | | $ | 47,566 | | | $ | 45,247 | |
| Hotel management fees | | | | | 46,548 | | | 26,260 | | | 17,126 | |
| Design and construction fees | | | | | 22,167 | | | 9,557 | | | 8,936 | |
| Audio visual | | | | | 121,261 | | | 49,880 | | | 37,881 | |
| Other | | | | | 44,312 | | | 47,329 | | | 25,602 | |
| Cost reimbursement revenue | | | | | 361,763 | | | 203,975 | | | 158,559 | |
| Total revenues | | | | | 644,432 | | | 384,567 | | | 293,351 | |
| EXPENSES | | | | | | | | | |
| Salaries and benefits | | | | | 76,521 | | | 65,251 | | | 57,171 | |
| Cost of revenues for design and construction | | | | | 8,359 | | | 4,105 | | | 3,521 | |
| Cost of revenues for audio visual | | | | | 84,986 | | | 38,243 | | | 30,256 | |
| Depreciation and amortization | | | | | 31,766 | | | 32,598 | | | 39,957 | |
| General and administrative | | | | | 34,004 | | | 26,288 | | | 20,351 | |
| Impairment | | | | | — | | | 1,160 | | | 188,837 | |
| Other | | | | | 25,828 | | | 18,199 | | | 18,687 | |
| Reimbursed expenses | | | | | 361,375 | | | 203,956 | | | 158,501 | |
| Total expenses | | | | | 622,839 | | | 389,800 | | | 517,281 | |
| OPERATING INCOME (LOSS) | | | | | 21,593 | | | (5,233) | | | (223,930) | |
| Equity in earnings (loss) of unconsolidated entities | | | | | 392 | | | (126) | | | 212 | |
| | | | | | | | | |
| | | | | | | | | |
| Interest expense | | | | | (9,996) | | | (5,144) | | | (5,389) | |
| Amortization of loan costs | | | | | (761) | | | (322) | | | (318) | |
| Interest income | | | | | 371 | | | 285 | | | 32 | |
| | | | | | | | | |
| | | | | | | | | |
| Realized gain (loss) on investments | | | | | (121) | | | (3) | | | (386) | |
| | | | | | | | | |
| Other income (expense) | | | | | (25) | | | (437) | | | (264) | |
| INCOME (LOSS) BEFORE INCOME TAXES | | | | | 11,453 | | | (10,980) | | | (230,043) | |
| Income tax (expense) benefit | | | | | (8,530) | | | 162 | | | 14,255 | |
| NET INCOME (LOSS) | | | | | 2,923 | | | (10,818) | | | (215,788) | |
| (Income) loss from consolidated entities attributable to noncontrolling interests | | | | | 1,171 | | | 678 | | | 1,178 | |
| Net (income) loss attributable to redeemable noncontrolling interests | | | | | (448) | | | 215 | | | 2,245 | |
| NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY | | | | | 3,646 | | | (9,925) | | | (212,365) | |
| Preferred dividends, declared and undeclared | | | | | (36,458) | | | (35,000) | | | (32,095) | |
| | | | | | | | | |
| Amortization of preferred stock discount | | | | | — | | | (1,053) | | | (2,887) | |
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS | | | | | $ | (32,812) | | | $ | (45,978) | | | $ | (247,347) | |
| | | | | | | | | |
| INCOME (LOSS) PER SHARE - BASIC AND DILUTED | | | | | | | | | |
| Basic: | | | | | | | | | |
| Net income (loss) attributable to common stockholders | | | | | $ | (11.26) | | | $ | (16.68) | | | $ | (108.30) | |
| Weighted average common shares outstanding - basic | | | | | 2,915 | | | 2,756 | | | 2,284 | |
| Diluted: | | | | | | | | | |
| Net income (loss) attributable to common stockholders | | | | | $ | (11.26) | | | $ | (16.68) | | | $ | (108.30) | |
| Weighted average common shares outstanding - diluted | | | | | 2,915 | | | 2,756 | | | 2,284 | |
| | | | | | | | | |
| | | | | | | | | |
See Notes to Consolidated Financial Statements.
ASHFORD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| NET INCOME (LOSS) | | | | | $ | 2,923 | | | $ | (10,818) | | | $ | (215,788) | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX | | | | | | | | | |
| Foreign currency translation adjustment | | | | | 645 | | | (19) | | | (447) | |
| Unrealized gain (loss) on restricted investment | | | | | — | | | (409) | | | (879) | |
| Less reclassification for realized (gain) loss on restricted investment included in net income | | | | | — | | | 378 | | | 386 | |
| COMPREHENSIVE INCOME (LOSS) | | | | | 3,568 | | | (10,868) | | | (216,728) | |
| Comprehensive (income) loss attributable to noncontrolling interests | | | | | 1,171 | | | 678 | | | 1,178 | |
| Comprehensive (income) loss attributable to redeemable noncontrolling interests | | | | | (448) | | | 215 | | | 2,310 | |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY | | | | | $ | 4,291 | | | $ | (9,975) | | | $ | (213,240) | |
See Notes to Consolidated Financial Statements.
ASHFORD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 January 1, 2020 | 2,203 | | | $ | 2 | | | $ | 285,825 | | | $ | (244,084) | | | $ | (216) | | | (2) | | | $ | (131) | | | $ | 628 | | | $ | 42,024 | | | 19,120 | | | $ | 474,060 | | | $ | 4,131 | |
| Equity-based compensation | 694 | | | 1 | | | 8,140 | | | — | | | — | | | — | | | — | | | 9 | | | 8,150 | | | — | | | — | | | — | |
| Purchase of treasury stock | (2) | | | — | | | — | | | — | | | — | | | (2) | | | (18) | | | — | | | (18) | | | — | | | — | | | — | |
| Forfeiture of restricted common shares | (28) | | | — | | | 289 | | | — | | | — | | | (28) | | | (289) | | | — | | | — | | | — | | | — | | | — | |
| Amortization of preferred stock discount | — | | | — | | | — | | | (2,887) | | | — | | | — | | | — | | | — | | | (2,887) | | | — | | | 2,887 | | | — | |
| Dividends declared and undeclared - preferred stock | — | | | — | | | — | | | (32,095) | | | — | | | — | | | — | | | — | | | (32,095) | | | — | | | — | | | — | |
| Deferred compensation plan distribution | 1 | | | — | | | 11 | | | — | | | — | | | — | | | — | | | — | | | 11 | | | — | | | — | | | — | |
| Employee advances | — | | | — | | | (584) | | | — | | | — | | | — | | | — | | | — | | | (584) | | | — | | | — | | | — | |
| Acquisition of noncontrolling interest in consolidated entities | — | | | — | | | 303 | | | 785 | | | — | | | — | | | — | | | (12) | | | 1,076 | | | — | | | — | | | (1,301) | |
| Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 457 | | | 457 | | | — | | | — | | | — | |
| Reallocation of carrying value | — | | | — | | | (387) | | | — | | | — | | | — | | | — | | | (25) | | | (412) | | | — | | | — | | | 412 | |
| Redemption value adjustment | — | | | — | | | — | | | (837) | | | — | | | — | | | — | | | — | | | (837) | | | — | | | — | | | 837 | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | (447) | | | — | | | — | | | — | | | (447) | | | — | | | — | | | — | |
| Unrealized gain (loss) on available for sale securities | — | | | — | | | — | | | — | | | (879) | | | — | | | — | | | — | | | (879) | | | — | | | — | | | — | |
| Reclassification for realized loss (gain) on available for sale securities | — | | | — | | | — | | | — | | | 386 | | | — | | | — | | | — | | | 386 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | — | | | — | | | — | | | (212,365) | | | — | | | — | | | — | | | (1,178) | | | (213,543) | | | — | | | — | | | (2,245) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Equity-based compensation | 169 | | | — | | | 4,296 | | | — | | | — | | | — | | | — | | | 3 | | | 4,299 | | | — | | | — | | | — | |
| Purchase of treasury stock | (14) | | | — | | | — | | | — | | | — | | | (14) | | | (121) | | | — | | | (121) | | | — | | | — | | | — | |
| Forfeiture of restricted common shares | (3) | | | — | | | 37 | | | — | | | — | | | (3) | | | (37) | | | — | | | — | | | — | | | — | | | — | |
| Amortization of preferred stock discount | — | | | — | | | — | | | (1,053) | | | — | | | — | | | — | | | — | | | (1,053) | | | — | | | 1,053 | | | — | |
| Dividends declared and undeclared - preferred stock | — | | | — | | | — | | | (35,000) | | | — | | | — | | | — | | | — | | | (35,000) | | | — | | | — | | | — | |
| Deferred compensation plan distribution | 3 | | | — | | | 51 | | | — | | | — | | | — | | | — | | | — | | | 51 | | | — | | | — | | | — | |
| Employee advances | — | | | — | | | 180 | | | — | | | — | | | — | | | — | | | — | | | 180 | | | — | | | — | | | — | |
| Acquisition of noncontrolling interest in consolidated entities | — | | | — | | | (3,392) | | | 2,560 | | | — | | | — | | | — | | | 326 | | | (506) | | | — | | | — | | | (1,648) | |
| Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 734 | | | 734 | | | — | | | — | | | — | |
| Reallocation of carrying value | — | | | — | | | (374) | | | — | | | — | | | — | | | — | | | 374 | | | — | | | — | | | — | | | — | |
| Redemption value adjustment | — | | | — | | | — | | | (98) | | | — | | | — | | | — | | | — | | | (98) | | | — | | | — | | | 98 | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | (19) | | | — | | | — | | | — | | | (19) | | | — | | | — | | | — | |
| Unrealized gain (loss) on available for sale securities | — | | | — | | | — | | | — | | | (409) | | | — | | | — | | | — | | | (409) | | | — | | | — | | | — | |
| Reclassification for realized loss (gain) on available for sale securities | — | | | — | | | — | | | — | | | 378 | | | — | | | — | | | — | | | 378 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | — | | | — | | | — | | | (9,925) | | | — | | | — | | | — | | | (678) | | | (10,603) | | | — | | | — | | | (215) | |
| Balance at December 31, 2021 | 3,023 | | | $ | 3 | | | $ | 294,395 | | | $ | (534,999) | | | $ | (1,206) | | | (49) | | | $ | (596) | | | $ | 638 | | | $ | (241,765) | | | 19,120 | | | $ | 478,000 | | | $ | 69 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Equity-based compensation | 109 | | | — | | | 3,753 | | | — | | | — | | | — | | | — | | | — | | | 3,753 | | | — | | | — | | | 164 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Purchase of treasury stock | (16) | | | — | | | — | | | — | | | — | | | (16) | | | (270) | | | — | | | (270) | | | — | | | — | | | — | |
| Forfeiture of restricted common shares | (6) | | | — | | | 81 | | | — | | | — | | | (6) | | | (81) | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition of Chesapeake | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,390 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Dividends declared and undeclared - preferred stock | — | | | — | | | — | | | (36,458) | | | — | | | — | | | — | | | — | | | (36,458) | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Employee advances | — | | | — | | | (45) | | | — | | | — | | | — | | | — | | | — | | | (45) | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 327 | | | 327 | | | — | | | — | | | — | |
| Reallocation of carrying value | — | | | — | | | (469) | | | — | | | — | | | — | | | — | | | 469 | | | — | | | — | | | — | | | — | |
| Redemption value adjustment | — | | | — | | | — | | | (32) | | | — | | | — | | | — | | | — | | | (32) | | | — | | | — | | | 32 | |
| Distributions to consolidated noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (96) | | | (96) | | | — | | | — | | | (489) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | 645 | | | — | | | — | | | — | | | 645 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Other | — | | | — | | | — | | | (639) | | | 639 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net income (loss) | — | | | — | | | — | | | 3,646 | | | — | | | — | | | — | | | (1,171) | | | 2,475 | | | — | | | — | | | 448 | |
| Balance at December 31, 2022 | 3,110 | | | $ | 3 | | | $ | 297,715 | | | $ | (568,482) | | | $ | 78 | | | (71) | | | $ | (947) | | | $ | 167 | | | $ | (271,466) | | | 19,120 | | | $ | 478,000 | | | $ | 1,614 | |
See Notes to Consolidated Financial Statements.
ASHFORD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash Flows from Operating Activities | | | | | |
| Net income (loss) | $ | 2,923 | | | $ | (10,818) | | | $ | (215,788) | |
| Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities: | | | | | |
| Depreciation and amortization | 38,003 | | | 38,497 | | | 45,674 | |
| | | | | |
| Change in fair value of deferred compensation plan | (477) | | | 1,671 | | | (3,012) | |
| | | | | |
| | | | | |
| Equity-based compensation | 4,045 | | | 4,553 | | | 5,562 | |
| Equity in (earnings) loss in unconsolidated entities | (392) | | | 126 | | | (212) | |
| Deferred tax expense (benefit) | (4,258) | | | (5,056) | | | (22,410) | |
| Change in fair value of contingent consideration | 650 | | | 23 | | | 436 | |
| Impairment | — | | | 1,160 | | | 188,837 | |
| (Gain) loss on disposal of assets | 3,115 | | | 1,593 | | | 8,357 | |
| Amortization of other assets | 663 | | | 1,039 | | | 1,286 | |
| Amortization of loan costs | 761 | | | 322 | | | 318 | |
| Realized loss on restricted investments | 86 | | | 378 | | | 386 | |
| | | | | |
| | | | | |
| Loss on disposition of Marietta | 1,244 | | | — | | | — | |
| Other (gain) loss | 117 | | | (306) | | | 145 | |
| | | | | |
| | | | | |
| | | | | |
| Changes in operating assets and liabilities, exclusive of the effect of acquisitions: | | | | | |
| Accounts receivable | (9,317) | | | (4,180) | | | 3,666 | |
| Due from affiliates | (298) | | | 188 | | | 4 | |
| Due from Ashford Trust | 2,575 | | | 10,623 | | | (8,393) | |
| Due from Braemar | (10,684) | | | (818) | | | 1,265 | |
| Inventories | (697) | | | (666) | | | 79 | |
| Prepaid expenses and other | (2,017) | | | (1,744) | | | — | |
| Investment in unconsolidated entities | 156 | | | 69 | | | — | |
| | | | | |
| Operating lease right-of-use assets | 3,481 | | | 3,713 | | | 3,764 | |
| Other assets | (22) | | | 99 | | | (116) | |
| Accounts payable and accrued expenses | 16,881 | | | 302 | | | 5,565 | |
| Due to affiliates | 240 | | | (1,698) | | | 461 | |
| Due to Ashford Trust | 2,229 | | | — | | | — | |
| | | | | |
| Other liabilities | (286) | | | (4,029) | | | 11,828 | |
| Operating lease liabilities | (3,505) | | | (3,724) | | | (3,650) | |
| Deferred income | (3,108) | | | (10,481) | | | 8,158 | |
| | | | | |
| Net cash provided by (used in) operating activities | 42,108 | | | 20,836 | | | 32,210 | |
| Cash Flows from Investing Activities | | | | | |
| | | | | |
| | | | | |
| Additions to property and equipment | (14,797) | | | (8,074) | | | (4,591) | |
| Proceeds from sale of property and equipment, net | 466 | | | 2,104 | | | 4 | |
| Additional purchase price paid for Remington working capital adjustment | — | | | — | | | (1,293) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Investment in unconsolidated entity | (400) | | | (250) | | | — | |
| Acquisition of Chesapeake, net of cash acquired | (6,363) | | | — | | | — | |
| | | | | |
| Cash held by Marietta upon disposition | (2,123) | | | — | | | — | |
| Acquisition of non-controlling interest in consolidated subsidiaries | — | | | — | | | (150) | |
| Purchase of common stock of related parties | — | | | (873) | | | — | |
| | | | | |
| Proceeds from sale of equity method investment | — | | | 535 | | | — | |
| Proceeds from note receivable | 1,380 | | | — | | | — | |
| Issuance of note receivable | (530) | | | (2,880) | | | — | |
| Net cash provided by (used in) investing activities | (22,367) | | | (9,438) | | | (6,030) | |
| | | | | (Continued) |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Cash Flows from Financing Activities | | | | | |
| | | | | |
| | | | | |
| Payments for dividends on preferred stock | (43,919) | | | (16,706) | | | (20,540) | |
| Payments on revolving credit facilities | (2,910) | | | (1,063) | | | (15,723) | |
| Borrowings on revolving credit facilities | 1,092 | | | 1,826 | | | 14,660 | |
| Proceeds from notes payable | 70,397 | | | 2,900 | | | 44,797 | |
| Payments on notes payable | (31,098) | | | (8,737) | | | (17,775) | |
| Payments on finance lease liabilities | (1,160) | | | (439) | | | (785) | |
| Payments of loan costs | (2,714) | | | (222) | | | (375) | |
| Purchase of treasury stock | (270) | | | (121) | | | (18) | |
| Employee advances | (45) | | | 180 | | | (584) | |
| | | | | |
| | | | | |
| | | | | |
| Payment of contingent consideration | — | | | — | | | (1,384) | |
| Contributions from noncontrolling interest | 327 | | | 734 | | | 457 | |
| Distributions to noncontrolling interests in consolidated entities | (413) | | | — | | | — | |
| Net cash provided by (used in) financing activities | (10,713) | | | (21,648) | | | 2,730 | |
| Effect of foreign exchange rate changes on cash and cash equivalents | (29) | | | 33 | | | 507 | |
| Net change in cash, cash equivalents and restricted cash | 8,999 | | | (10,217) | | | 29,417 | |
| Cash, cash equivalents and restricted cash at beginning of period | 72,449 | | | 82,666 | | | 53,249 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 81,448 | | | $ | 72,449 | | | $ | 82,666 | |
| | | | | |
| Supplemental Cash Flow Information | | | | | |
| Interest paid | $ | 9,749 | | | $ | 5,022 | | | $ | 4,761 | |
| Income taxes paid (refunded), net | 6,403 | | | 6,628 | | | 8,539 | |
| Supplemental Disclosure of Non-Cash Investing and Financing Activities | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Acquisition of Chesapeake through issuance of Series CHP Units from our subsidiary Ashford Holdings | $ | 1,387 | | | $ | — | | | $ | — | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Acquisition related contingent consideration liability | 1,670 | | | — | | | |
| Distribution from deferred compensation plan | — | | | 51 | | | 11 | |
| Capital expenditures accrued but not paid | 212 | | | 205 | | | 494 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Finance lease additions | 903 | | | — | | | 1,869 | |
| | | | | |
| | | | | |
| | | | | |
| Acquisition of noncontrolling interest in consolidated entities with notes payable and common stock | — | | | 2,202 | | | — | |
| | | | | |
| Supplemental Disclosure of Cash, Cash Equivalents and Restricted Cash | | | | | |
| Cash and cash equivalents at beginning of period | $ | 37,571 | | | $ | 45,270 | | | $ | 35,349 | |
| Restricted cash at beginning of period | 34,878 | | | 37,396 | | | 17,900 | |
| Cash, cash equivalents and restricted cash at beginning of period | $ | 72,449 | | | $ | 82,666 | | | $ | 53,249 | |
| | | | | |
| Cash and cash equivalents at end of period | $ | 44,390 | | | $ | 37,571 | | | $ | 45,270 | |
| Restricted cash at end of period | 37,058 | | | 34,878 | | | 37,396 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 81,448 | | | $ | 72,449 | | | $ | 82,666 | |
See Notes to Consolidated Financial Statements.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Ashford Inc. (the “Company”, “we”, “us” or “our”), a Nevada corporation, is an alternative asset management company with a portfolio of strategic operating businesses that provides products and services primarily to clients in the real estate and hospitality industries, 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 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 Ashford Trust or Braemar’s individual hotel properties, which duties are, and will continue to be, the responsibility of the hotel management companies that operate such hotel properties. Additionally, Remington Lodging & Hospitality, LLC (“Remington”), a subsidiary of the Company, operates certain hotel properties for Ashford Trust, Braemar and third-parties.
Shareholder Rights Plan
On August 30, 2022, we adopted a shareholder rights plan by entering into a Rights Agreement, dated August 30, 2022, with ComputerShare Trust Company, N.A., as rights agent (the “Rights Agreement”). The Rights Agreement was adopted in response to recent volatility of the stock market and trading of our common stock and is intended to protect the Company and its stockholders from efforts to obtain control or rapid share accumulations that are inconsistent with the best interests of the Company and its stockholders. The Board implemented the rights plan by declaring (i) a dividend to the holders of the Company’s common stock of one preferred share purchase right (a “Right”) for each share of common stock and (ii) a dividend to the holders of the Company’s Series D Convertible Preferred Stock of one Right in respect of each share of the Company’s common stock issuable upon conversion of the Series D Convertible Preferred Stock. The dividends were distributed on September 9, 2022, to our stockholders of record on that date. Each of those Rights becomes exercisable on the date on which the Rights separate and begin trading separately from our common stock and entitles the registered holder to purchase from the Company one one-thousandth of a share of our Series F Preferred Stock, par value $0.001 per share (“Series F Preferred Stock”), at a price of $275 per one one-thousandth of a share of our Series F Preferred Stock represented by such Right, subject to adjustment. The Rights will expire on July 30, 2023 unless the expiration date is extended or unless the Rights are earlier redeemed by the Company. The value of the Rights was de minimis.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Developments
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 $100.0 million, including a $50.0 million term loan funded on the closing date of the Credit Facility (the “Closing Date”) and commitments to fund up to an additional $50.0 million of term loans in up to five separate borrowings within 24 months after the Closing Date, subject to certain conditions. On April 18, 2022, the Company drew an additional $20.0 million on the Credit Facility. See note 8.
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 ended 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 ended June 30, 2021 and December 31, 2021. On each of April 15, 2022, July 15, 2022 and October 14, 2022 the Company 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, second and third quarters of 2022. On December 13, 2022, the Board declared a cash dividend on the Company’s Series D Convertible Preferred Stock for the quarter ended December 31, 2022. The Company paid the dividend of $8.7 million, or $0.455 per share of Series D Convertible Preferred Stock, on January 13, 2023. See note 15.
On April 15, 2022, the Company acquired privately held Chesapeake Hospitality (“Chesapeake”), a third-party hotel management company, for a purchase price of $9.6 million. See note 4.
In the third quarter of 2022, given the recent increases in the federal funds rate and interest rates on short-term U.S. Treasury securities, the independent members of the respective boards of directors of Ashford Trust and Braemar approved the engagement of the Company to actively manage and invest each of Ashford Trust’s and Braemar’s excess cash in short-term U.S. Treasury securities (the “Cash Management Strategy”). As consideration for the Company’s services under the respective engagements, (i) Ashford Trust will pay the Company an annual fee equal to 20 basis points (0.20%) of the average daily balance of Ashford Trust’s excess cash invested by the Company; and (ii) Braemar will pay the Company an annual fee equal to the lesser of (a) 20 basis points (0.20%) of the average daily balance of Braemar’s excess cash invested by the Company and (b) the actual rate of return realized by the Cash Management Strategy; provided that in no event will the Cash Management Fee be less than zero (such respective fees, the “Cash Management Fees”). The Cash Management Fees will be calculated and payable monthly in arrears. Investment of Ashford Trust’s and Braemar’s excess cash pursuant to the Cash Management Strategy commenced in October 2022.
On December 16, 2022, the Company and Ashford Trust entered into an Agreement of Purchase and Sale (the “Purchase Agreement”) pursuant to which, effective as of December 16, 2022, Ashford Trust acquired all of the equity interests in Marietta and, in exchange, Ashford Trust forgave, cancelled and discharged in full the Company’s outstanding $11.4 million commitment to Ashford Trust under the Ashford Trust ERFP Agreement. See notes 5 and 19.
2. Significant Accounting Policies
Basis of Presentation and Principles of Consolidation—The accompanying 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 consolidated financial statements.
The consolidated balance sheet and statement of equity (deficit) as of December 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 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 CONSOLIDATED FINANCIAL STATEMENTS (continued)
Noncontrolling Interests—The following tables present information about noncontrolling interests in our consolidated subsidiaries, including those related to consolidated VIEs, as of December 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Ashford
Holdings | | | | OpenKey (3) | | Pure
Wellness (4) | | | | |
| Ashford Inc. ownership interest | 99.87 | % | | | | 76.79 | % | | 70.00 | % | | | | |
Redeemable noncontrolling interests (1) (2) | 0.13 | % | | | | — | % | | — | % | | | | |
| Noncontrolling interests in consolidated entities | — | % | | | | 23.21 | % | | 30.00 | % | | | | |
| 100.00 | % | | | | 100.00 | % | | 100.00 | % | | | | |
| | | | | | | | | | | |
| Carrying value of redeemable noncontrolling interests | $ | 1,614 | | | | | n/a | | n/a | | | | |
| | | | | | | | | | | |
| Redemption value adjustment, year-to-date | 32 | | | | | n/a | | n/a | | | | |
| Redemption value adjustment, cumulative | 613 | | | | | n/a | | n/a | | | | |
| Carrying value of noncontrolling interests | n/a | | | | 273 | | | (106) | | | | | |
Assets, available only to settle subsidiary’s obligations (5) | n/a | | | | 2,114 | | | 1,580 | | | | | |
Liabilities (6) | n/a | | | | 1,078 | | | 2,048 | | | | | |
| | | | | | | | | | | |
Revolving credit facility (6) | n/a | | | | — | | | 150 | | | | | |
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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 | | | | | |
| | | | | | | | | | | |
Revolving credit facility (6) | n/a | | | | — | | | 100 | | | | | |
________
(1) Redeemable noncontrolling interests are included in the “mezzanine” section of our 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 8.
(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 14.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(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 8.
Investments in Unconsolidated Entities—We hold “investments in unconsolidated entities” in our 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 years ended December 31, 2022, 2021 and 2020.
We held an investment in an unconsolidated variable interest entity with a carrying value of $500,000 at December 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 years ended December 31, 2022, 2021 and 2020. 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):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Carrying value of the investment in REA Holdings | $ | 3,067 | | | $ | 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): | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Equity in earnings (loss) in unconsolidated entities REA Holdings | | | | | $ | 385 | | | $ | 13 | | | $ | 212 | |
| | | | | | | | | |
Acquisitions—We account for acquisitions and investments in businesses as business combinations if the target meets the definition of a business and (a) the target is a VIE and we are the target’s primary beneficiary, and therefore we must consolidate its financial statements, or (b) we acquire more than 50% of the voting interest of the target and it was not previously consolidated. We record business combinations using the acquisition method of accounting, which requires all of the assets acquired and liabilities assumed to be recorded at fair value as of the acquisition date. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. The application of the acquisition method of accounting for business combinations requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. The fair value assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Significant assumptions and estimates include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset, if applicable. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in our consolidated financial statements may be exposed to potential impairment of the intangible assets and goodwill.
If our investment involves the acquisition of an asset or group of assets that does not meet the definition of a business, the transaction is accounted for as an asset acquisition. An asset acquisition is recorded at cost, which includes capitalizing transaction costs, and does not result in the recognition of goodwill.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Use of Estimates—The preparation of these 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 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.
Restricted Cash—Restricted cash was comprised of the following (in thousands):
| | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | |
| REIT Advisory: | | | | | |
Insurance claim reserves (1) | $ | 23,471 | | | $ | 24,588 | | | |
| | | | | |
| Remington: | | | | | |
Managed hotel properties’ reserves (2) | 11,464 | | | 6,923 | | | |
Insurance claim reserves (3) | 2,123 | | | 1,312 | | | |
| Total Remington restricted cash | 13,587 | | | 8,235 | | | |
| | | | | |
| INSPIRE: | | | | | |
Debt service related operating reserves (4) | — | | | 1,000 | | | |
| | | | | |
| Marietta: | | | | | |
Capital improvement reserves (5) | — | | | 255 | | | |
Restricted cash held in escrow (6) | — | | | 800 | | | |
| Total Marietta restricted cash | — | | | 1,055 | | | |
| | | | | |
| | | | | |
| | | | | |
| Total restricted cash | $ | 37,058 | | | $ | 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 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 to/from Ashford Trust” and “due from Braemar” in our consolidated balance sheets. The liability related to the restricted cash balance for hotel employee bonuses is included in “accounts payable and accrued expenses” in our consolidated balance sheets.
(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” in our consolidated balance sheets.
(4) Our subsidiary, Inspire Event Technologies, LLC (“INSPIRE”), provides event technology and creative communications solutions services. On June 27, 2022, INSPIRE’s credit agreement was amended to remove the previous requirement for INSPIRE to maintain an operating reserve account of $1.0 million to service interest expense and projected operating costs. See note 8.
(5) Includes cash reserves for capital improvements associated with renovations at Marietta Leasehold LP (“Marietta”), which held the leasehold rights to a single hotel and convention center property in Marietta, Georgia until Marietta was acquired by Ashford Trust on December 16, 2022. The liability related to the restricted cash balance for the hotel’s renovations was included in “accounts payable and accrued expenses” in our consolidated balance sheets.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(6) Prior to Ashford Trust’s acquisition of Marietta, restricted cash was held in escrow in accordance with the Marietta lease agreement. The cash held in escrow was funded from hotel cash flows and could 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 December 31, 2022 and December 31, 2021, accounts receivable included $0 and $2.9 million, respectively, for a note receivable due to Remington. On January 16, 2023, Remington amended the terms of their outstanding note receivable with a third-party property owner with an outstanding principal balance of $1.5 million. The amendment extends the maturity date of the note receivable from December 31, 2022 to January 31, 2024 for the outstanding principal balance and all accrued and unpaid interest. The outstanding principal balance is included in “Other assets, net” in our consolidated balance sheets as of December 31, 2022. See note 23.
Inventories—Inventories consist primarily of audio visual equipment and related accessories and are carried at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) valuation method.
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.
Impairment of Property and Equipment—Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the asset is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the asset. If our analysis indicates that the carrying value of the asset is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the asset net book value exceeds its estimated fair value, or fair value, less cost to sell. In evaluating impairment of assets, we make many assumptions and estimates, including projected cash flows, expected holding period, and expected useful life. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. Assets not yet placed into service are also reviewed for impairment whenever events or changes in circumstances indicate that all or a portion of the assets will not be placed into service. During the year ended December 31, 2020, as a result of the negative impact of the COVID-19 pandemic, we concluded that sufficient indicators existed to require us to perform recoverability tests by comparing the sum of the estimated undiscounted future cash flows attributable to the assets to the carrying values. Approximately $36,000 of impairment charges related to long-lived assets were recorded in the year ended December 31, 2020 based on the results of the recoverability tests. No impairment charges related to Property and Equipment were recorded in the years ended December 31, 2022 and 2021.
Goodwill and Indefinite-Lived Intangible Assets—Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. Indefinite-lived intangible assets primarily include trademark rights resulting from our acquisition of Remington, INSPIRE and Sebago. We assess goodwill and indefinite-lived intangible assets, neither of which is amortized, for impairment annually as of October 1, or more frequently, if events and circumstances indicate impairment may have occurred. In the evaluation of goodwill for impairment, we elected to perform a qualitative assessment to determine whether the fair value of the goodwill is more likely than not impaired. In considering the qualitative approach, we evaluate factors including, but not limited to, the operational stability and the overall financial performance of the reporting units. We may choose to bypass the qualitative assessment and perform a quantitative assessment and compare the fair value of the reporting unit to the carrying value and, if applicable, record an impairment charge based on the excess of the reporting unit’s carrying amount over its fair value. We determine the fair value of a reporting unit based on a blended analysis of the present value of future cash flows and the market value approach. Based on the results of our annual impairment assessments, no impairment of goodwill was indicated as of October 1, 2022. Additionally, no indicators of impairment were identified from the date of our impairment assessments through December 31, 2022. During 2020, as a result of our reduced cash flow projections and the significant decline in our market capitalization as a result of the COVID-19 pandemic, we concluded that sufficient indicators existed to require us to perform multiple impairment assessments on our reporting units’ goodwill balances.
During the third quarter of 2021, as a result of the strategic rebranding of our segment formerly known as JSAV to INSPIRE, we concluded sufficient indicators existed to require us to perform an assessment of INSPIRE’s JSAV trademark.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We performed an impairment test and calculated the fair value of our indefinite-lived INSPIRE trademarks using the relief-from-royalty method which includes unobservable inputs including royalty rates and projected revenues for the time period that the Company is expected to benefit from the trademark. The relief-from-royalty method assumes that the trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. For additional information on our goodwill and trademark impairments, see note 11.
Definite-Lived Intangible Assets—Definite-lived intangible assets primarily include management contracts, customer relationships and boat slip rights resulting from our acquisitions. The Remington and Premier management contracts are not amortized on a straight-line basis, rather the assets are amortized in a manner that approximates the pattern of the assets’ economic benefit to the Company over an estimated useful life of five to 22 years, respectively. The INSPIRE, RED Hospitality & Leisure, LLC (“RED”) and Pure Wellness assets are amortized using the straight-line method over the estimated useful lives of the assets. We review the carrying amount of the assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. During the year ended December 31, 2020, as a result of the negative impact of the COVID-19 pandemic, we concluded that sufficient indicators existed to require us to perform recoverability tests by comparing the sum of the estimated undiscounted future cash flows attributable to the assets to the carrying values. For additional information on our definite-lived intangible assets, see notes 7 and 11.
Other Liabilities—As of December 31, 2022 and December 31, 2021, other current liabilities included reserves in the amount of $23.5 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 consolidated balance sheets. As of December 31, 2022 and December 31, 2021, other liabilities also included $2.2 million and $1.3 million, respectively, relating to reserves for Remington health insurance claims. As of December 31, 2022, other liabilities non-current of $3.2 million includes a liability for contingent consideration from the Company’s acquisition of Chesapeake of $2.3 million and $917,000 related to an uncertain tax position liability. See notes 11 and 18.
Revenue Recognition—See note 3.
Salaries and Benefits—Salaries and benefits are expensed as incurred and include salaries and benefit related expenses for our officers and employees. Salaries and benefits also includes expense for equity grants of the Company’s common stock to our officers and employees and changes in fair value in the deferred compensation plan liability. See notes 16 and 17.
General and Administrative—General and administrative costs are expensed as incurred, and include advertising costs of $1.8 million, $1.5 million and $1.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Depreciation and Amortization—Our property and equipment, including assets acquired under finance leases, are depreciated on a straight-line basis over the estimated useful lives of the assets with useful lives ranging from 2 to 32 years including the Marietta finance lease prior to Marietta’s acquisition by Ashford Trust on December 16, 2022. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the related assets. Property and equipment, excluding our RED vessels, are depreciated using the straight-line method over lives ranging from 2 to 7.5 years. Our RED vessels are depreciated using the straight-line method over a useful life of 20 years. While we believe our estimates are reasonable, a change in estimated useful lives could affect depreciation expense and net income/loss as well as resulting gains or losses on potential sales. See also the “Definite-Lived Intangible Assets” above.
Equity-Based Compensation—Our equity incentive plan provides for the grant of restricted or unrestricted shares of our common stock, share appreciation rights, performance shares, performance units and other equity-based awards or any combination of the foregoing. Equity-based compensation included in “salaries and benefits” is accounted for at fair value based on the market price of the shares/options on the date of grant in accordance with applicable authoritative accounting guidance. The fair value is charged to compensation expense on a straight-line basis over the vesting period of the shares/options. Grants of restricted stock to independent directors are recorded at fair value based on the market price of our shares at grant date, and this amount is fully expensed in “general and administrative” expense as the grants of stock are fully vested on the date of grant. The Company accounts for forfeitures when they occur. Our officers and employees can be granted common stock and LTIP units from Ashford Trust and Braemar in connection with providing advisory services that result in expense, included in “reimbursed expenses,” equal to the grant date fair value of the award in proportion to the requisite service period satisfied during the period, as well as offsetting revenue in an equal amount included in “cost reimbursement revenue”.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Comprehensive Income (Loss)—Comprehensive income consists of net income (loss) and foreign currency translation adjustments. The foreign currency translation adjustment represents the unrealized impact of translating the financial statements of the INSPIRE operations in Mexico and the Dominican Republic from their respective functional currencies to U.S. dollars. This amount is not included in net income and would only be realized upon the sale or upon complete or substantially complete liquidation of the foreign businesses. The accumulated other comprehensive income (loss) is presented on our consolidated balance sheets as of December 31, 2022 and 2021.
Due to Affiliates—Due to affiliates represents current payables resulting primarily from general and administrative expense. Due to affiliates is generally settled within a period not exceeding one year.
Due to/from Ashford Trust—Due to/from Ashford Trust represents current receivables related to advisory services fees, incentive fees, reimbursable expenses and business expenses and payables owed by our products and services businesses to Ashford Trust which are presented net on the consolidated balance sheet. Due to/from Ashford Trust is generally settled within a period not exceeding one year and is presented as a current asset or current liability based upon the period’s ending net balance.
Due from Braemar—Due from Braemar represents current receivables related to advisory services fees, incentive fees, reimbursable expenses and service business expenses and payables owed by our products and services businesses to Braemar which are presented net on the consolidated balance sheet. Due from Braemar is generally settled within a period not exceeding one year and is presented as a current asset or current liability based upon the period’s ending net balance.
Income (Loss) Per Share—Basic income (loss) per common share is calculated by dividing net income (loss) attributable to the Company by the weighted average common shares outstanding during the period using the two-class method prescribed by applicable authoritative accounting guidance. Diluted income (loss) per common share is calculated using the more dilutive of the two-class method or the treasury stock method. Diluted income (loss) per common share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares, whereby such exercise or conversion would result in lower income per share. See note 20.
Leases—We determine if an arrangement is a lease at the inception of the contract. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments related to operating leases is recognized on a straight-line basis over the lease term. Lease expense for minimum lease payments related to financing leases is recognized using the effective interest method over the lease term. Short-term leases (less than twelve months) are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. See note 9.
Deferred Compensation Plan—Effective January 1, 2008, Ashford Trust established a nonqualified deferred compensation plan (“DCP”) for certain executive officers, which was assumed by the Company in connection with the separation from Ashford Trust. 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. 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. The DCP is carried at fair value with changes in fair value reflected in “salaries and benefits” in our consolidated statements of operations. See note 17.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 2018 through 2022 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 $0 and $1.3 million of Social Security taxes within “accounts payable and accrued expenses” in our consolidated balance sheets as of December 31, 2022 and December 31, 2021, respectively, related to the Consolidated Appropriations Act, 2021.
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. We adopted ASU 2016-13 and ASU 2019-10 effective January 1, 2023 and the adoption did not have a material impact on our 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 smaller reporting companies, 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. The Company continues to evaluate whether the adoption of ASU 2020-06 will have any impact on the Company’s financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
On January 15, 2021, Ashford Trust and Ashford Trust OP entered into a Credit Agreement (as amended, the “Oaktree Credit Agreement”) with certain funds and accounts managed by Oaktree Capital Management L.P. (“Oaktree”). In connection with the transactions contemplated by the Oaktree 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 Oaktree Credit Agreement, (1) prior to the later of (i) the second anniversary of the Oaktree 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 Oaktree Credit Agreement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 was approximately $29.0 million each year as stated in the Oaktree Credit Agreement. As a result, base advisory fee revenue in 2021 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 Oaktree 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. Based upon Ashford Trust’s ability to meet the requirements stated in Amendment No. 1, the Company concluded that base fees from our Second Amended and Restated Advisory Agreement with Ashford Trust which exceed the Advisory Fee Cap were no longer probable of being subject to significant reversal and were recorded within “advisory services fees” in our 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 in an amount equal to 1/12th of 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. Braemar’s 2022 annual total stockholder return met the relevant incentive fee thresholds during the 2022 measurement period and $268,000 was recognized as incentive advisory fees in 2022 for the first year installment which was paid in January of 2023. Ashford Trust’s annual total stockholder return did not meet the relevant incentive fee thresholds during the 2022, 2021 and 2020 measurement periods. Braemar’s annual total stockholder return did not meet the relevant incentive fee thresholds during the 2021 and 2020 measurement periods.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hotel Management Fees Revenue
Hotel management fees revenue is reported within our Remington segment and primarily consists of base management fees, incentive management fees and other management fees. Base management fees, incentive management fees and other 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 whenever a hotel’s gross operating profit (“GOP”) exceeds the hotel’s budgeted GOP. The incentive fee is equal to the lesser of 1% of each hotel’s annual gross revenue or the amount by which the respective hotel’s GOP exceeds the hotel’s budgeted GOP. The base management fees and incentive management fees that Remington receives for third-party owned properties vary by property. Other management fees primarily includes fixed monthly accounting fees and fees for revenue management services at certain third-party properties.
Design and Construction Fees Revenue
Design and construction fees 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 and our Amended and Restated Contribution Agreement with Ashford Trust and Braemar (as defined below), 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
record cost reimbursement revenue for equity grants of Ashford Trust and Braemar common stock and 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.
The recognition of cost reimbursement revenue and reimbursed expenses for centralized software programs reimbursed by Ashford Trust and Braemar may result in temporary timing differences 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 12 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 | 11,531 | | | 11,774 | | | |
Recognition of revenue (1) | (14,636) | | | (22,228) | | | |
| Balance as of December 31 | $ | 7,800 | | | $ | 10,905 | | | |
________(1) Deferred income recognized in the year ended December 31, 2022 includes (a) $2.4 million of advisory revenue primarily related to our advisory agreements and our Amended and Restated Contribution Agreement with Ashford Trust and Braemar, (b) $3.5 million of audio visual revenue, (c) $2.3 million of other revenue primarily related to Ashford Trust’s agreement with Lismore (see note 19), and (d) $6.4 million of “other services” revenue earned by our products and services companies, excluding Lismore. Deferred income recognized in the year ended December 31, 2021 includes (a) $2.1 million of advisory revenue primarily related to our advisory agreements and our Amended and Restated Contribution Agreement with Ashford Trust and Braemar, (b) $2.1 million of audio visual revenue, (c) $11.2 million of other revenue related to Ashford Trust’s and Braemar’s agreements with Lismore, which includes a $1.2 million cumulative catch-up adjustment to revenue which was previously considered constrained (see note 19), and (d) $6.9 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 19. 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 December 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 $17.6 million and $7.6 million included in “accounts receivable, net” primarily related to our products and services segment, $0 and $2.6 million in “due from Ashford Trust”, and $11.8 million and $1.1 million included in “due from Braemar” related to REIT advisory services at December 31, 2022 and December 31, 2021, respectively. We had no impairments related to these receivables during the years ended December 31, 2022, 2021 and 2020. See note 19.
Disaggregated Revenue
Our revenues were comprised of the following for the years ended December 31, 2022, 2021 and 2020 respectively (in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Advisory services fees: | | | | | | | | | |
Base advisory fees | | | | | $ | 47,592 | | | $ | 47,045 | | | $ | 44,725 | |
| Incentive advisory fees | | | | | 268 | | | — | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Other advisory revenue | | | | | 521 | | | 521 | | | 522 | |
| Total advisory services fees revenue | | | | | 48,381 | | | 47,566 | | | 45,247 | |
| | | | | | | | | |
| Hotel management fees: | | | | | | | | | |
| Base fees | | | | | 34,072 | | | 21,291 | | | 17,126 | |
| Incentive fees | | | | | 8,533 | | | 4,969 | | | — | |
| Other management fees | | | | | 3,943 | | | — | | | — | |
| Total hotel management fees revenue | | | | | 46,548 | | | 26,260 | | | 17,126 | |
| | | | | | | | | |
| Design and construction fees revenue | | | | | 22,167 | | | 9,557 | | | 8,936 | |
| | | | | | | | | |
| Audio visual revenue | | | | | 121,261 | | | 49,880 | | | 37,881 | |
| | | | | | | | | |
| Other revenue: | | | | | | | | | |
| | | | | | | | | |
Watersports, ferry and excursion services (1) | | | | | 26,309 | | | 23,867 | | | 9,663 | |
Debt placement and related fees (2) | | | | | 4,222 | | | 12,384 | | | 8,412 | |
Cash management fees (3) | | | | | 135 | | | — | | | — | |
| Claims management services | | | | | 20 | | | 81 | | | 226 | |
| | | | | | | | | |
Other services (4) | | | | | 13,626 | | | 10,997 | | | 7,301 | |
| Total other revenue | | | | | 44,312 | | | 47,329 | | | 25,602 | |
| | | | | | | | | |
| Cost reimbursement revenue | | | | | 361,763 | | | 203,975 | | | 158,559 | |
| | | | | | | | | |
| Total revenues | | | | | $ | 644,432 | | | $ | 384,567 | | | $ | 293,351 | |
| | | | | | | | | |
REVENUES BY SEGMENT (5) | | | | | | | | | |
| REIT advisory | | | | | $ | 77,347 | | | $ | 74,616 | | | $ | 70,169 | |
| Remington | | | | | 356,435 | | | 197,802 | | | 145,596 | |
| Premier | | | | | 32,247 | | | 12,413 | | | 11,604 | |
| INSPIRE | | | | | 121,418 | | | 49,900 | | | 37,881 | |
| RED | | | | | 26,335 | | | 23,867 | | | 9,663 | |
| OpenKey | | | | | 1,484 | | | 1,965 | | | 1,479 | |
| Corporate and other | | | | | 29,166 | | | 24,004 | | | 16,959 | |
| Total revenues | | | | | $ | 644,432 | | | $ | 384,567 | | | $ | 293,351 | |
________(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) Cash management fees include revenue earned by providing active management and investment of Ashford Trust and Braemar’s excess cash in short-term U.S. Treasury securities. See note 1 to our consolidated financial statements.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(4) 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 held the leasehold rights to a single hotel and convention center property in Marietta, Georgia, and was acquired by Ashford Trust on December 16, 2022. See note 5.
(5) 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 21 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 years ended December 31, 2022, 2021 and 2020, respectively (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | | 2020 |
| INSPIRE: | | | | | | | | | | |
| United States | | | | | $ | 92,418 | | | $ | 39,164 | | | | $ | 28,923 | |
| Mexico | | | | | 22,087 | | | 7,724 | | | | 7,100 | |
| | | | | | | | | | |
| Dominican Republic | | | | | 6,913 | | | 2,992 | | | | 1,858 | |
| Total audio visual revenue | | | | | $ | 121,418 | | | $ | 49,880 | | | | $ | 37,881 | |
| RED: | | | | | | | | | | |
| United States | | | | | $ | 22,354 | | | $ | 22,665 | | | | $ | 9,663 | |
| United Kingdom (Turks and Caicos Islands) | | | | | 3,981 | | | 1,202 | | | | — | |
| | | | | | | | | | |
| Total watersports, ferry and excursion services | | | | | $ | 26,335 | | | $ | 23,867 | | | | $ | 9,663 | |
4. Acquisitions
Chesapeake
On April 15, 2022, the Company acquired privately held Chesapeake, a third-party hotel management company. The Company paid to the sellers $6.3 million in cash, subject to certain adjustments, and issued to the sellers 378,000 Series CHP Convertible Preferred Units of Ashford Holdings (the “Series CHP Units”) at $25 per Unit, for a total liquidation value of $9.45 million. The Series CHP Units include a discount of $8.1 million resulting in a total fair value of $1.4 million. The discount is due to the Company’s ability to convert the Series CHP Units to common units of Ashford Holdings at the preferred conversion price of $117.50. Common units of Ashford Holdings are exchangeable into common stock of the Company on a 1:1 ratio. The sellers also have the ability to earn up to $10.25 million of additional consideration based on the base management fee contribution from the acquired business for the trailing 12 month periods ending March 2024 and March 2025, respectively, for a total potential purchase consideration of $18.1 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.
The acquisition of Chesapeake was recorded using the acquisition method of accounting in accordance with the authoritative guidance for business combinations, and the purchase price allocation was based on our valuation of the fair value of the tangible and intangible assets acquired and liabilities assumed at the date of acquisition. The fair values of the assets acquired were determined using various valuation techniques, including an income approach. The fair value measurements were primarily based on significant inputs that are not directly observable in the market and are considered Level 3 under the fair value measurements and disclosure framework. Key assumptions include cash flow projections for Chesapeake and the discount rate applied to those cash flows. The excess of the purchase price over the estimated fair values of the identifiable net assets acquired was recorded as goodwill. In the third quarter of 2022, we recorded an adjustment to increase the working
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
capital paid to the sellers by $73,000. In the fourth quarter of 2022, we finalized the valuation of the acquired assets and liabilities associated with the acquisition. For goodwill reporting purposes, the operations and goodwill for Chesapeake are included in our Remington reporting unit as they are similar businesses. See note 7.
The fair value of the purchase price and final allocation of the purchase price are as follows (in thousands):
| | | | | | | | |
| Series CHP Units | | $ | 9,450 | |
| Discount on Series CHP Units | | (8,063) | |
| Cash | | 6,300 | |
| Fair value of contingent consideration | | 1,670 | |
| Working capital adjustments | | 193 | |
| Total fair value of purchase price | | $ | 9,550 | |
| | | | | | | | | | | | | | |
| | Fair Value | | Estimated Useful Life |
Current assets including cash of $228 | | $ | 930 | | | |
| | | | |
| | | | |
| | | | |
| Goodwill | | 2,053 | | | |
| | | | |
| | | | |
| Management contracts | | 7,131 | | | 8 years |
| Total assets acquired | | 10,114 | | | |
| Current liabilities | | 347 | | | |
| Deferred tax liability | | 217 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total assumed liabilities | | 564 | | | |
| Net assets acquired | | $ | 9,550 | | | |
We do not expect any of the goodwill balance to be deductible for tax purposes. The qualitative factors that make up the recorded goodwill includes value attributable to growth opportunities to expand Remington’s hotel management services to third-party owners in the hospitality industry.
Results of Chesapeake
The results of operations of Chesapeake have been included in our results of operations since the acquisition date of April 15, 2022. Our consolidated statements of operations for the year ended December 31, 2022 include total revenue from Chesapeake of $43.1 million. In addition, our consolidated statements of operations for the year ended December 31, 2022 includes net income from Chesapeake of $3.0 million.
Pro Forma Financial Results
The following table reflects the unaudited pro forma results of operations as if the Chesapeake acquisition had occurred on January 1, 2021, and the removal of $1.9 million of transaction costs directly attributable to the acquisition (net of the incremental tax expense) for the year ended December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | |
| | | | | 2022 | | 2021 | | |
| Total revenues | | | | | $ | 657,352 | | | $ | 419,832 | | | |
| Net income (loss) | | | | | 3,531 | | | (14,047) | | | |
| Net income (loss) attributable to common stockholders | | | | | (32,403) | | | (49,895) | | | |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Marietta Disposition
On June 26, 2018, the Company entered into the Ashford Trust ERFP Agreement with Ashford Trust. 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 Company remained obligated to fund the remaining $11.4 million ERFP commitment from Ashford Trust’s acquisition of the Embassy Suites Manhattan hotel under the Ashford Trust ERFP Agreement by December 31, 2022. See note 19.
On December 16, 2022, the Company and Ashford Trust entered into an Agreement of Purchase and Sale (the “Purchase Agreement”) pursuant to which, effective as of December 16, 2022, Ashford Trust acquired all of the equity interests in Marietta and, in exchange, Ashford Trust forgave, cancelled and discharged in full the Company’s outstanding $11.4 million ERFP commitment to Ashford Trust. The Company incurred a loss on the disposition of Marietta related to the net assets of Marietta on the disposal date of approximately $1.2 million which is included in “other” operating expense in our consolidated statements of operations.
Since the disposition of Marietta does not represent a strategic shift that has (or will have) a major effect on our operations or financial results, its results of operations were not reported as discontinued operations in the consolidated financial statements. The results of operations of Marietta are included in net income (loss) through the date of disposition as shown in the consolidated statements of operations for the years ended December 31, 2022, 2021, and 2020. The following table includes financial information from Marietta in the consolidated statements of operations for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Other revenue | | | | | $ | 9,763 | | | $ | 6,336 | | | $ | 3,936 | |
| Depreciation and amortization | | | | | (1,206) | | | (1,260) | | | (1,260) | |
| General and administrative | | | | | (113) | | | 48 | | | (163) | |
| Other expenses | | | | | (7,047) | | | (3,758) | | | (2,882) | |
| Operating income (loss) | | | | | 1,397 | | | 1,366 | | | (369) | |
| Interest expense | | | | | (2,399) | | | (2,539) | | | (2,470) | |
| Loss before income taxes | | | | | $ | (1,002) | | | $ | (1,173) | | | $ | (2,839) | |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On the date of disposition, the assets and liabilities related to Marietta were as follows (in thousands):
| | | | | |
| December 16, 2022 |
| Assets | |
| Current assets: | |
| Cash and cash equivalents | $ | 1,067 | |
| Restricted cash | 1,056 | |
| |
| Accounts receivable, net | 22 | |
| |
| |
| |
| Inventories | 48 | |
| Prepaid expenses and other | 364 | |
| Total current assets | 2,557 | |
| |
| Property and equipment, net | 40,381 | |
| |
| |
| |
| |
| Total assets | $ | 42,938 | |
| Liabilities | |
| Current liabilities: | |
| Accounts payable and accrued expenses | $ | 582 | |
| |
| Due to affiliates | 242 | |
| |
| |
| |
| Finance lease liabilities | 845 | |
| |
| |
| Total current liabilities | 1,669 | |
| |
| |
| |
| |
| Finance lease liabilities | 40,025 | |
| |
| |
| Total liabilities | 41,694 | |
| Net assets disposed | $ | 1,244 | |
6. Property and Equipment, net
Property and equipment, net, consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Marietta Leasehold L.P. finance lease | | $ | — | | | $ | 44,294 | |
| Rental pool equipment | | 26,563 | | | 20,498 | |
| FF&E leased to Ashford Trust | | 11,283 | | | 19,688 | |
| FF&E leased to Braemar | | 1,616 | | | 1,744 | |
| Property and equipment | | 11,726 | | | 10,370 | |
| Marine vessels | | 17,789 | | | 15,153 | |
| Leasehold improvements | | 1,148 | | | 1,177 | |
| Computer software | | 1,266 | | | 1,244 | |
| Total cost | | 71,391 | | | 114,168 | |
| Accumulated depreciation | | (29,600) | | | (30,602) | |
| Property and equipment, net | | $ | 41,791 | | | $ | 83,566 | |
For the years ended December 31, 2022, 2021 and 2020, depreciation expense was $12.7 million, $12.9 million and $18.0 million, respectively. Depreciation and amortization expense on the statement of operations for the years ended December 31, 2022, 2021 and 2020 excludes depreciation expense related to audio visual equipment of $4.9 million, $5.0 million and $4.9 million, respectively, which is included in “cost of revenues for audio visual” and depreciation expense related to marine vessels of $1.4 million, $929,000, and $795,000, respectively, which is included in “other” operating expense in our consolidated statements of operations.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Goodwill and Intangible Assets, net
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2022 and December 31, 2021, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remington | | | | | | RED | | Corporate and Other (1) | | Consolidated |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Balance at January 1, 2021 | | $ | 54,605 | | | | | | | $ | 1,235 | | | $ | 782 | | | $ | 56,622 | |
| Balance at December 31, 2021 | | 54,605 | | | | | | | 1,235 | | | 782 | | | 56,622 | |
| Changes in goodwill: | | | | | | | | | | | | |
Additions (2) | | 1,980 | | | | | | | — | | | — | | | 1,980 | |
Adjustments (2) | | 73 | | | | | | | — | | | — | | | 73 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Balance at December 31, 2022 | | $ | 56,658 | | | | | | | $ | 1,235 | | | $ | 782 | | | $ | 58,675 | |
________(1) Corporate and Other includes the goodwill from the Company’s acquisition of Pure Wellness.
(2) The addition relates to the Company’s acquisition of Chesapeake and subsequent adjustments to the purchase price. See note 4.
Intangible Assets
Intangible assets, net as of December 31, 2022 and December 31, 2021, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 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 (1) | | $ | 114,731 | | | | $ | (40,519) | | $ | 74,212 | | | $ | 107,600 | | | $ | (28,284) | | $ | 79,316 | | |
| Premier management contracts | | 194,000 | | | | (53,415) | | 140,585 | | | 194,000 | | | (41,619) | | 152,381 | | |
| INSPIRE customer relationships | | 9,319 | | | | (5,527) | | 3,792 | | | 9,319 | | | (4,409) | | 4,910 | | |
| | | | | | | | | | | | |
| RED boat slip rights | | 3,100 | | | | (535) | | 2,565 | | | 3,100 | | | (380) | | 2,720 | | |
| Pure Wellness customer relationships | | 175 | | | | (175) | | — | | | 175 | | | (166) | | 9 | | |
| | | | | | | | | | | | |
| | $ | 321,325 | | | | $ | (100,171) | | $ | 221,154 | | | $ | 314,194 | | | $ | (74,858) | | $ | 239,336 | | |
| | | | | | | | | | | | |
| | Gross Carrying Amount | | | | | | Gross Carrying Amount | | Impairment | Net Carrying Amount | |
| Indefinite-lived intangible assets: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Remington trademarks | | $ | 4,900 | | | | | | | $ | 4,900 | | | $ | — | | $ | 4,900 | | |
| | | | | | | | | | | | |
INSPIRE trademarks (2) | | — | | | | | | | 1,160 | | | (1,160) | | — | | |
| RED trademarks | | 490 | | | | | | | 490 | | | — | | 490 | | |
| | $ | 5,390 | | | | | | | $ | 6,550 | | | $ | (1,160) | | $ | 5,390 | | |
________(1) As of December 31, 2022, Remington’s management contracts include $7.1 million of gross management contracts acquired in the Company’s acquisition of Chesapeake. See note 4.
(2) During the third quarter of 2021, as a result of the strategic rebranding of our segment formerly known as JSAV to INSPIRE, we performed an impairment test and calculated the fair value of our indefinite-lived JSAV trademarks using the relief-from-royalty method which includes unobservable inputs including royalty rates and projected revenues for the time period that the Company is expected to benefit from the trademark. As a result of the evaluation, we recognized intangible asset impairment charges of $1.2 million, which was the full impairment of the indefinite-lived JSAV trademarks within the INSPIRE segment in the year ended December 31, 2021. See note 11.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amortization expense for definite-lived intangible assets was $25.3 million, $25.6 million, and $27.7 million for the years ended December 31, 2022, 2021, and 2020, respectively. The useful lives of our customer relationships range from five to 15 years and the useful lives of our Remington management contracts range from eight to 22 years. Our Premier management contracts and RED’s boat slip rights intangible assets were assigned useful lives of 30 and 20 years, respectively.
Expected future amortization expense of definite-lived intangible assets as of December 31, 2022 are as follows (in thousands):
| | | | | | | | |
| | |
| 2023 | | $ | 24,046 | |
| 2024 | | 21,558 | |
| 2025 | | 18,675 | |
| 2026 | | 16,942 | |
| 2027 | | 15,451 | |
| Thereafter | | 124,482 | |
| Total | | $ | 221,154 | |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Notes Payable, net
Notes payable—Notes payable, net consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Indebtedness | | Borrower | | Maturity | | Interest Rate | | December 31, 2022 | | December 31, 2021 |
Credit facility (9) | | Ashford Inc. | | April 1, 2027 | | Base Rate (1) + 6.35% or LIBOR (3) +7.35% | | $ | 70,000 | | | $ | — | |
Term loan (9) | | Ashford Inc. | | March 19, 2024 | | Base Rate (2) + 2.00% to 2.25% or LIBOR (3) +3.00% to 3.25% | | — | | | 27,271 | |
Note payable (12) | | Ashford Inc. | | February 29, 2028 | | 4.00% | | 1,495 | | | 1,746 | |
Term loan (5) (7) (10) | | INSPIRE | | January 1, 2024 | | Prime Rate (4) + 2.75% | | 17,300 | | | 20,000 | |
Revolving credit facility (5) (7) (10) | | INSPIRE | | January 1, 2024 | | Prime Rate (4) + 2.75% | | — | | | 1,869 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Revolving credit facility (5) (13) | | Pure Wellness | | On demand | | Prime Rate (4) + 1.00% | | 150 | | | 100 | |
| | | | | | | | | | |
Revolving credit facility (5) (8) (14) | | RED | | December 5, 2023 | | Prime Rate (4) + 1.75% | | — | | | — | |
| | | | | | | | | | |
Term loan (5) (8) (15) | | RED | | July 18, 2029 | | 6.00% | | 1,596 | | | 1,641 | |
Term loan (5) (8) | | RED | | July 18, 2023 | | 6.50% | | 337 | | | 607 | |
| | | | | | | | | | |
| | | | | | | | | | |
Term loan (5) (8) (16) | | RED | | August 5, 2029 | | Prime Rate (4) + 2.00% | | 858 | | | 888 | |
Term loan (5) (8) | | RED | | August 5, 2029 | | Prime Rate (4) + 2.00% | | 1,980 | | | 2,143 | |
Term loan (6) (8) | | RED | | August 5, 2029 | | Prime Rate (4) + 1.75% | | 3,006 | | | 3,357 | |
Draw term loan (5) (8) (17) | | RED | | March 17, 2032 | | 5.00% | | 641 | | | — | |
Draw term loan (5) (8) (17) | | RED | | March 17, 2032 | | 5.00% | | 640 | | | — | |
Draw term loan (5) (8) (18) | | RED | | Various (18) | | Prime Rate (4) + 1.00% | | 1,099 | | | — | |
| Total notes payable | | | | | | | | 99,102 | | | 59,622 | |
Capitalized default interest, net (11) | | | | | | | | 148 | | | 290 | |
| Deferred loan costs, net | | | | | | | | (2,643) | | | (518) | |
Original issue discount, net (9) | | | | | | | | (1,732) | | | — | |
| Notes payable including capitalized default interest and deferred loan costs, net | | | | | | | | 94,875 | | | 59,394 | |
| | | | | | | | | | |
| Less current portion | | | | | | | | (5,195) | | | (6,725) | |
| Total notes payable, net - non-current | | | | | | | | $ | 89,680 | | | $ | 52,669 | |
__________________
(1) Base Rate, as defined in the credit facility agreement with Mustang Lodging Funding LLC, is the greater of (i) the Wall Street Journal prime rate, (ii) the federal funds rate plus 0.50%, (iii) LIBOR plus 1.00%, or (iv) 1.25%.
(2) Base Rate, as defined in the Term Loan Agreement (the “Term Loan Agreement”) with Bank of America, N.A., is the greater of (i) the prime rate set by Bank of America, N. A., (ii) the federal funds rate plus 0.50%, or (iii) LIBOR plus 1.00%.
(3) The one-month LIBOR rate was 4.39% and 0.10% at December 31, 2022 and December 31, 2021, respectively.
(4) The Prime Rate was 7.50% and 3.25% at December 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 eligible receivables, including accounts receivable, due from Ashford Trust and due from Braemar, with a total carrying value of $7.5 million and $5.0 million as of December 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 $13.6 million and $12.5 million as of December 31, 2022 and December 31, 2021, respectively.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(9) 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 $100.0 million, including a $50.0 million term loan funded on the closing date of the Credit Facility (the “Closing Date”) and commitments to fund up to an additional $50.0 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 and pay dividends to the holders of the Series D Convertible Preferred Stock. 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% during the first 24 months of the term, payable on the last business day of each month. The Credit Facility included an original issue discount of $2.0 million on the Closing Date. As of December 31, 2022, the amount unused under the Credit Facility was $30.0 million.
(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 December 31, 2022, the amount unused under INSPIRE’s revolving credit facility was $3.0 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. 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.
(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 December 31, 2022, the amount unused under Pure Wellness’s revolving credit facility was $100,000.
(14) As of December 31, 2022, the amount unused under RED’s revolving credit facility was $250,000.
(15) On July 18, 2019, RED entered into a term loan of $1.7 million. 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) On July 23, 2021, RED entered into a term loan agreement with a maximum principal amount of $900,000. RED was 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 December 31, 2022, the amount unused under RED’s non-revolving line of credit loans were $859,000 and $860,000, respectively.
(18) On September 15, 2022, RED entered into a closed-end non-revolving line of credit for $1.5 million that converts into individual term loans as RED draws upon the facility. The loans under the facility bear an interest rate at the Wall Street Journal Prime Rate plus 1.0%. The term length of the loans once drawn is either five or 10 years based upon the amount drawn. As of December 31, 2022, the maturity dates for amounts drawn under the facility were November 30, 2027 and December 28, 2027, and the amount remaining unused under RED’s non-revolving line of credit was $401,000.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 December 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.
Maturities and scheduled amortization of long-term debt as of December 31, 2022, assuming no extension of existing extension options for each of the following five years and thereafter are as follows (in thousands):
| | | | | | | | |
| | |
2023 (1) | | $ | 5,047 | |
| 2024 | | 14,750 | |
| 2025 | | 1,134 | |
| 2026 | | 1,224 | |
| 2027 | | 71,977 | |
| Thereafter | | 4,970 | |
| Total | | $ | 99,102 | |
__________________(1) Excludes $148,000 of capitalized default interest, net which is included in the current portion of “notes payable, net” in our consolidated balance sheets.
9. Leases
We lease certain office space, warehouse facilities, vehicles and equipment under operating leases. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years. The exercise of lease renewal options is at our sole discretion. 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 years ended December 31, 2022, 2021 and 2020, we recorded $3.3 million, $3.4 million and $3.4 million in rent expense related to our corporate office lease with RHC. Operating lease obligations expire at various dates with the latest maturity in 2028. Certain of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We additionally lease certain equipment and boat slips which are accounted for as finance leases. Prior to Ashford Trust’s acquisition of Marietta on December 16, 2022, finance lease assets included a lease of a single hotel and convention center property in Marietta, Georgia, from the City of Marietta. The net book value of finance lease assets is included in “property and equipment, net” in our consolidated balance sheets. Amortization of finance lease assets is included in “depreciation and amortization” expense in our consolidated statements of operations.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 2022 and 2021, our leased assets and liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | | |
| Leases | | Classification | December 31, 2022 | | December 31, 2021 |
| Assets | | | | | |
| Operating lease assets | | Operating lease right-of-use assets | $ | 23,844 | | | $ | 26,975 | |
| Finance lease assets | | Property and equipment, net | 3,236 | | | 44,333 | |
| Total leased assets | | | $ | 27,080 | | | $ | 71,308 | |
| | | | | |
| Liabilities | | | | | |
| Current | | | | | |
| Operating | | Operating lease liabilities | $ | 3,868 | | | $ | 3,628 | |
| Finance | | Finance lease liabilities | 1,456 | | | 1,065 | |
| Noncurrent | | | | | |
| Operating | | Operating lease liabilities | 20,082 | | | 23,477 | |
| Finance | | Finance lease liabilities | 1,962 | | | 43,479 | |
| Total leased liabilities | | | $ | 27,368 | | | $ | 71,649 | |
We incurred the following lease costs related to our operating and finance leases (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, |
| Lease Cost | | Classification | | | 2022 | | 2021 | | 2020 |
| Operating lease cost | | | | | | | | | |
Rent expense (1) | | General and administrative | | | $ | 6,060 | | | $ | 5,654 | | | $ | 5,327 | |
| | | | | | | | | |
| Finance lease cost | | | | | | | | | |
| Amortization of leased assets | | Depreciation and amortization | | | 1,624 | | | 1,455 | | | 1,458 | |
| Interest on lease liabilities | | Interest expense | | | 2,616 | | | 2,727 | | | 2,626 | |
| Total lease cost | | | | | $ | 10,300 | | | $ | 9,836 | | | $ | 9,411 | |
__________________
(1) The years ended December 31, 2022, 2021 and 2020 include short term lease expense of $619,000, $442,000 and $227,000, respectively.
The years ended December 31, 2022, 2021 and 2020 include the following operating and finance lease additions (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Lease Additions | 2022 | | 2021 | | 2020 |
| Operating leases | $ | 298 | | | $ | 607 | | | $ | 1,350 | |
| Finance leases | $ | 903 | | | $ | — | | | $ | 1,869 | |
| | | | | |
For the years ended December 31, 2022, 2021 and 2020, cash paid amounts included in the measurement of lease liabilities included (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Lease Payments | 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | 3,505 | | | $ | 3,713 | | | $ | 3,650 | |
| Financing cash flows from finance leases | $ | 1,160 | | | $ | 439 | | | $ | 785 | |
| | | | | |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 2022, future minimum lease payments on operating leases and financing leases and total future minimum lease payments to be received were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Sublease Payments to be Received |
| 2023 | $ | 4,980 | | | $ | 1,475 | | | $ | 215 | |
| 2024 | 4,660 | | | 263 | | | 105 | |
| 2025 | 4,052 | | | 235 | | | 83 | |
| 2026 | 3,781 | | | 215 | | | 83 | |
| 2027 | 3,705 | | | 206 | | | 83 | |
| Thereafter | 9,204 | | | 1,792 | | | 76 | |
| Total minimum lease payments (receipts) | 30,382 | | | 4,186 | | | $ | 645 | |
| Imputed interest | (6,432) | | | (768) | | | |
| Present value of minimum lease payments | $ | 23,950 | | | $ | 3,418 | | | |
Our weighted-average remaining lease terms (in years) and discount rates consisted of the following:
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| Lease term and discount rate | | | | | |
| Weighted-average remaining lease term | | | | | |
Operating leases (1) | 8.74 | | 9.34 | | 9.93 |
Finance leases (2) | 8.17 | | 31.49 | | 32.30 |
| Weighted-average discount rate | | | | | |
| Operating leases | 5.2 | % | | 5.2 | % | | 5.2 | % |
| Finance leases | 6.6 | % | | 6.2 | % | | 6.2 | % |
__________________(1) The weighted-average remaining lease term includes two optional 10 year extension periods for our INSPIRE headquarters in Irving, Texas, as failure to renew the lease would result in INSPIRE incurring significant relocation costs.
(2) The weighted-average remaining lease term as of December 31, 2021 and 2020 includes our lease with the City of Marietta with a lease term through December 31, 2054. On December 16, 2022, Marietta was acquired by Ashford Trust. See note 5.
10. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses were comprised of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | |
| Accounts payable | $ | 18,841 | | | $ | 11,682 | |
| Accrued payroll expense | 30,626 | | | 23,648 | |
| Accrued vacation expense | 2,418 | | | 3,427 | |
| Accrued interest | 381 | | | 259 | |
| Other accrued expenses | 3,813 | | | 881 | |
| | | |
| Total accounts payable and accrued expenses | $ | 56,079 | | | $ | 39,897 | |
11. 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.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
•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.
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 | |
| December 31, 2022 | | | | | | | | |
| Assets | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Restricted Investment: | | | | | | | | |
| Ashford Trust common stock | $ | 57 | | (1) | $ | — | | | $ | — | | | $ | 57 | | |
| Braemar common stock | 246 | | (1) | — | | | — | | | 246 | | |
| Total | $ | 303 | | | $ | — | | | $ | — | | | $ | 303 | | |
| Liabilities | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Contingent consideration | $ | — | | | $ | — | | | $ | (2,320) | | (2) | $ | (2,320) | | |
| Subsidiary compensation plan | — | | | (74) | | (1) | — | | | (74) | | |
| Deferred compensation plan | (2,849) | | | — | | | — | | | (2,849) | | |
| | | | | | | | |
| | | | | | | | |
| Total | $ | (2,849) | | | $ | (74) | | | $ | (2,320) | | | $ | (5,243) | | |
| Net | $ | (2,546) | | | $ | (74) | | | $ | (2,320) | | | $ | (4,940) | | |
| | | | | | | | |
| | | | | | | | |
__________________
(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, 2022, which are distributed to the plan participants upon vesting. The liability is the total accrued vested shares multiplied by the fair value of the quoted market price of the underlying investment.
(2) Represents the fair value of the contingent consideration liability related to the achievement of certain performance targets associated with the acquisition of Chesapeake, which is reported within long-term “other liabilities” in our consolidated balance sheets. See notes 1 and 4.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| 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 distributed to the plan participants upon vesting. The liability is the total accrued vested shares multiplied by the fair value of the quoted market price of the underlying investment.
The following table presents our roll forward of our Level 3 contingent consideration liability (in thousands):
| | | | | | | | | |
| | | | | Contingent Consideration Liability (1) |
| | | | | |
| Balance at December 31, 2021 | | | | | $ | — | |
| Acquisition of Chesapeake | | | | | (1,670) | |
| Gains (losses) from fair value adjustments included in earnings | | | | | (650) | |
| | | | | |
| | | | | |
| Balance at December 31, 2022 | | | | | $ | (2,320) | |
__________________
(1) The Company measures contingent consideration liabilities at fair value at each reporting period using significant unobservable inputs classified within Level 3 of the fair value hierarchy. The fair value of the contingent consideration liability is based on the present value of the expected future payments to be made to the sellers of Chesapeake in accordance with the provisions outlined in the respective purchase agreements, which is a Level 3 fair value measurement. In determining fair value, the Company estimates Chesapeake’s future performance using a Monte Carlo simulation model. The key assumptions in applying the Monte Carlo simulation model are a) a discount rate, with a range of 34.90% to 35.35%; b) a forward looking risk-free rate, with a range of 4.22% to 4.69%; and c) a volatility rate of 52.64%.
Assets Measured at Fair Value on a Non-recurring Basis
Our non-financial assets, such as goodwill, indefinite-lived intangible assets and long-lived assets are adjusted to fair value when an impairment charge is recognized. Such fair value measurements are based predominately on Level 3 inputs.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill
During 2020, as a result of our reduced cash flow projections and the significant decline in our market capitalization as a result of the COVID-19 pandemic, we recorded goodwill impairment charges during the year ended December 31, 2020 of $180.8 million.
During the first quarter of 2020, as a result of our reduced cash flow projections and the significant decline in our market capitalization as a result of the COVID-19 pandemic, we recognized goodwill impairment charges of $170.6 million, of which $121.0 million related to our Remington segment, and $49.5 million related to our Premier segment. We engaged a third-party valuation expert to assist us in performing an interim quantitative assessment in which we compared the fair value of the reporting units to their carrying value. The fair value estimates for all reporting units were based on a blended analysis of the present value of future cash flows and the market value approach, Level 3 inputs. The significant estimates used in the discounted cash flows model included our weighted average cost of capital, projected cash flows and the long-term rate of growth. Our cash flow assumptions were based on the actual historical performance of the reporting unit and took into account the recent severe and continued weakening of operating results as well as the anticipated rate of recovery due to the COVID-19 pandemic. The projected cash flows were based on management’s expectation of the timing of recovery from the economic downturn under various scenarios. The significant estimates used in the market approach model included identifying public companies engaged in businesses that are considered comparable to those of the reporting unit and assessing comparable revenue and earnings multiples in estimating the fair value of the reporting unit. The excess of the reporting unit's carrying value over our estimate of the fair value was recorded as the goodwill impairment charge in the first quarter of 2020.
During the fourth quarter of 2020, we recorded goodwill impairment charges of $10.2 million related to our INSPIRE segment. We performed an annual quantitative assessment of goodwill for our INSPIRE segment due to sustained under-performance and a less optimistic outlook of the segment’s forecasted operating results. The fair value estimate was based on the present value of future discounted cash flows considered Level 3 inputs. The significant estimates used in the discounted cash flows model included our weighted average cost of capital, projected cash flows and the long-term rate of growth. Our cash flow assumptions were based on management’s expectation of the timing of recovery from the economic downturn. The excess of the reporting unit's carrying value over our estimate of the fair value was recorded as the goodwill impairment charge in the fourth quarter of 2020.
As of December 31, 2022 and December 31, 2021, our Remington segment had $56.7 million and $54.6 million, respectively, of goodwill remaining and our Premier and INSPIRE segments had no goodwill remaining. No impairment charges or any other adjustments related to goodwill were recorded for the years ended December 31, 2022 or December 31, 2021.
Indefinite-Lived Intangible Assets
As a result of the negative impact of the COVID-19 pandemic on our business, we concluded that sufficient indicators existed to require us to perform an interim quantitative impairment assessment of intangible assets as of March 31, 2020. During the first quarter of 2020, we engaged a third-party valuation expert to assist in determining the fair value of our indefinite-lived trademarks. We recognized intangible asset impairment charges of $7.6 million related to trademarks within our Remington and INSPIRE segments which resulted from changes in estimated future revenues. We updated this assessment in the fourth quarter of 2020 and recorded an additional impairment charge of $340,000 related to the INSPIRE trademarks. The Remington and INSPIRE trademarks were written down to $4.9 million and $1.2 million, respectively, based on a valuation using the relief-from-royalty method, which includes unobservable Level 3 inputs including royalty rates and projected revenues.
During the third quarter of 2021, as a result of the strategic rebranding of our segment formerly known as JSAV to INSPIRE, we performed an impairment test and calculated the fair value of our indefinite-lived JSAV trademarks using the relief-from-royalty method which includes unobservable Level 3 inputs including royalty rates and projected revenues for the time period that the Company is expected to benefit from the trademark. As a result of the evaluation, we recognized intangible asset impairment charges of $1.2 million, which was the full impairment of the indefinite-lived JSAV trademarks within the INSPIRE segment for the year ended December 31, 2021.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Long-Lived Assets
Long-lived assets include property and equipment, finance and operating lease assets, and definite-lived intangible assets which primarily include Remington and Premier management contracts, INSPIRE customer relationships and RED boat slip rights resulting from our acquisitions. During the year ended December 31, 2020, as a result of the negative impact of the COVID-19 pandemic, we concluded that sufficient indicators existed to require us to perform recoverability tests by comparing the sum of the estimated undiscounted future cash flows attributable to the assets to the carrying values. Approximately $36,000 of impairment charges related to long-lived assets were recorded in 2020 based on the results of the recoverability tests using Level 3 inputs.
Effect of Fair Value Measured Assets and Liabilities on Our Consolidated Statements of Operations
The following table summarizes the effect of fair value measured assets and liabilities on our consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Gain (Loss) Recognized |
| | Year Ended December 31, |
| | | | 2022 | | 2021 | | 2020 |
| Assets | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Unrealized gain (loss) on investment: (1) | | | | | | | | | |
| Ashford Trust common stock | | | | | $ | 40 | | | $ | — | | | $ | — | |
| Braemar common stock | | | | | (67) | | | — | | | — | |
Realized gain (loss) on investment: (2) | | | | | | | | | |
| Ashford Trust common stock | | | | | (109) | | | (336) | | | (200) | |
| Braemar common stock | | | | | 23 | | | (42) | | | (186) | |
| | | | | | | | | |
Goodwill (3) | | | | | — | | | — | | | (180,783) | |
Intangible assets, net (3) | | | | | — | | | (1,160) | | | (8,018) | |
Property and equipment, net (3) | | | | | — | | | — | | | (36) | |
| Total | | | | | $ | (113) | | | $ | (1,538) | | | $ | (189,223) | |
| Liabilities | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Contingent consideration (4) | | | | | $ | (650) | | | $ | (23) | | | $ | (436) | |
Subsidiary compensation plan (5) | | | | | 117 | | | (295) | | | 131 | |
Deferred compensation plans (5) | | | | | 477 | | | (1,671) | | | 3,012 | |
| Total | | | | | $ | (56) | | | $ | (1,989) | | | $ | 2,707 | |
| Net | | | | | $ | (169) | | | $ | (3,527) | | | $ | (186,516) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
__________________
(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 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) See above for discussion of impairment.
(4) Represents the changes in fair value of our contingent consideration liabilities. The change in the fair value in the year ended December 31, 2022 related to the level of achievement of certain performance targets associated with the acquisition of Chesapeake acquired in April of 2022. The changes in the fair value in the years ended December 31, 2021 and 2020 related to the level of achievement of certain performance targets and stock consideration collars associated with the Company’s previous acquisition of BAV. Changes in the fair value of contingent consideration are reported within “other” operating expense in our consolidated statements of operations.
(5) Reported as a component of “salaries and benefits” in our consolidated statements of operations.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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: | | | | | | | |
| December 31, 2022 | | | | | | | |
Equity securities (1) | $ | 821 | | | $ | — | | | $ | (518) | | | $ | 303 | |
__________________
(1) Distributions of $365,000 of available-for-sale securities occurred in the year ended December 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 in the year ended December 31, 2021.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. 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):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | Carrying
Value | | Estimated
Fair Value | | Carrying
Value | | Estimated
Fair Value |
| Financial assets measured at fair value: | | | | | | | | |
| Restricted investment | | $ | 303 | | | $ | 303 | | | $ | 576 | | | $ | 576 | |
| Financial liabilities measured at fair value: | | | | | | | | |
| | | | | | | | |
| Deferred compensation plan | | $ | 2,849 | | | $ | 2,849 | | | $ | 3,326 | | | $ | 3,326 | |
| | | | | | | | |
| Contingent consideration | | 2,320 | | | 2,320 | | | — | | | — | |
| Financial assets not measured at fair value: | | | | | | | | |
| Cash and cash equivalents | | $ | 44,390 | | | $ | 44,390 | | | $ | 37,571 | | | $ | 37,571 | |
| Restricted cash | | 37,058 | | | 37,058 | | | 34,878 | | | 34,878 | |
| Accounts receivable, net | | 17,615 | | | 17,615 | | | 7,622 | | | 7,622 | |
| Notes receivable | | 2,041 | | | 2,041 | | | 2,880 | | | 2,880 | |
| Due from affiliates | | 463 | | | 463 | | | 165 | | | 165 | |
| Due from Ashford Trust | | — | | | — | | | 2,575 | | | 2,575 | |
| Due from Braemar | | 11,828 | | | 11,828 | | | 1,144 | | | 1,144 | |
| Investments in unconsolidated entities | | 4,217 | | | 4,217 | | | 3,581 | | | 3,581 | |
| Financial liabilities not measured at fair value: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 56,079 | | | $ | 56,079 | | | $ | 39,897 | | | $ | 39,897 | |
| Dividends payable | | 27,285 | | | 27,285 | | | 34,574 | | | 34,574 | |
| Due to affiliates | | 15 | | | 15 | | | — | | | — | |
| Due to Ashford Trust | | 1,197 | | | 1,197 | | | — | | | — | |
| | | | | | | | |
| Other liabilities | | 26,547 | | | 26,547 | | | 25,899 | | | 25,899 | |
| Notes payable | | 99,102 | | | 94,147 to 104,057 | | 59,622 | | | 56,641 to 62,603 |
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.
Contingent consideration. The liability associated with the Company’s acquisition of Chesapeake was carried at fair value based on the terms of the acquisition agreements and any changes to fair value are recorded in “other” operating expenses in our consolidated statements of operations. This is considered a Level 3 valuation technique. See note 11.
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 to/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.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
13. Commitments and Contingencies
Note Receivable—As of December 31, 2022, we have a note receivable to an affiliate BP Annex Dev LLC for $535,000. BP Annex Dev LLC has the ability to borrow an additional $465,000 for a maximum note commitment of $1.0 million from the Company. The note bears interest at 8.00% and matures on November 11, 2026. The note receivable is recorded in “other assets” in our consolidated balance sheet.
Release and Waiver Agreement—On April 15, 2022, the Company and Ashford Services agreed with Jeremy Welter, the Chief Operating Officer of the Company, that, effective on July 15, 2022, Mr. Welter would terminate employment with and service to the Company, Ashford Services and their affiliates. Mr. Welter was 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 also ended on July 15, 2022. The Company has commitments related to cash compensation for the departure of Mr. Welter which included a cash termination payment of $750,000, which was paid on August 5, 2022, and payments totaling approximately $6.4 million, which are payable in 24 substantially equal monthly installments of approximately $267,000 beginning in August 2022. As of December 31, 2022, the Company’s remaining commitment to Mr. Welter totaled approximately $5.1 million.
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. Notices to potential class members were sent out on February 2, 2021. Potential class members had until April 4, 2021 to opt out of the class, however, the total number of employees in the class has not been definitively determined and is the subject of continuing discovery. The opt out period has been extended until such time that discovery has concluded. 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. Therefore, as of December 31, 2022, no amounts have been accrued.
On June 23, 2021, a lawsuit was filed in the United States District Court of the Virgin Islands, Division of St. Thomas and St. John (the “Federal Court”) against one of the Company’s subsidiaries. In the lawsuit, the plaintiff alleges negligence and gross negligence against both our subsidiary and a purported agent of our subsidiary and negligent entrustment against our subsidiary in connection with personal injuries allegedly suffered by the plaintiff. The claims were tendered to our insurance company who denied coverage as to the purported agent and issued a reservation of rights letter during the third quarter of 2022 with respect to our subsidiary’s coverage. We have asserted a number of defenses including a statutory defense that would limit our subsidiary’s liability regardless of whether coverage is afforded or not. The parties participated in a mediation conference on June 29, 2022 but were unable to resolve any of the disputes at issue. During the third quarter of 2022, the purported agent entered into a stipulated judgment for his liability and assigned to the plaintiff any and all claims he may have, including those he may have against our insurers. Subsequently, on July 28, 2022, the plaintiff, individually and as assignee of the purported agent’s claims, filed a separate lawsuit in the Superior Court of the Virgin Islands, Division of St. Thomas and St. John (the “Superior Court”) against our insurers and our subsidiary (the “Superior Court Case”). On August 26, 2022, our insurer filed a Notice of Removal to remove the Superior Court Case to the Federal Court and is in the process of defending against the plaintiff’s Motion to Remand this second lawsuit back to the Superior Court. In this second lawsuit, the plaintiff seeks certain declaratory relief as to our insurance policies and asserts allegations of fraud and bad faith denial of coverage of our subsidiary’s purported agent by our insurers and a breach of contract claim against our subsidiary under a theory of insufficient insurance coverage. Specifically, the purported agent has alleged a breach of contract claim against our subsidiary based on being an alleged third-party beneficiary of a contract between our subsidiary and another entity that required our subsidiary to hold specific insurance coverages. We believe the claims asserted against our subsidiary in this second lawsuit are frivolous. A hearing occurred on February 23, 2023 in the first lawsuit to determine if the Federal Court will bifurcate the lawsuit and first decide whether the statutory defense will apply. The Court has not yet made a ruling as to whether the lawsuit will be bifurcated. We intend to vigorously defend these lawsuits and believe that the amount of any potential loss to the Company is immaterial.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
14. Equity (Deficit)
Capital Stock—In accordance with Ashford Inc.’s charter, we are authorized to issue 200 million shares of capital stock, consisting of 100 million shares common stock, par value $0.001 per share, 50 million shares blank check common stock, par value $0.001 per share, and 50 million shares preferred stock, par value $0.001 per share, 19,120,000 of which is designated as Series D Convertible Preferred Stock.
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.
The following table summarizes the (income) loss attributable to noncontrolling interests for each of our consolidated entities (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| (Income) loss attributable to noncontrolling interests: | | | | | | | | | |
| | | | | | | | | |
| OpenKey | | | | | $ | 1,005 | | | $ | 799 | | | $ | 670 | |
| RED | | | | | — | | | (51) | | | 412 | |
| Pure Wellness | | | | | 166 | | | (70) | | | 75 | |
| Other | | | | | — | | | — | | | 21 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total net (income) loss attributable to noncontrolling interests | | | | | $ | 1,171 | | | $ | 678 | | | $ | 1,178 | |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Mezzanine Equity
Redeemable Noncontrolling Interests—Redeemable noncontrolling interests are included in the mezzanine section of our consolidated balance sheets as the ownership interests are redeemable for cash or registered shares outside of the Company’s control. Redeemable noncontrolling interests in Ashford Holdings includes the Series CHP Unit preferred membership interest issued in our acquisition of Chesapeake in April of 2022 and the membership interests of common unit holders. Redeemable noncontrolling interest additionally includes redeemable ownership interests in the common stock of our consolidated subsidiary OpenKey for the years ended December 31, 2021 and 2020 and INSPIRE for the year ended December 31, 2020. See also note 2 for tables summarizing the redeemable noncontrolling ownership interests and carrying values.
The following table summarizes the net (income) loss attributable to our redeemable noncontrolling interests (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Net (income) loss attributable to redeemable noncontrolling interests: | | | | | | | | | |
| Ashford Holdings | | | | | $ | (448) | | | $ | 63 | | | $ | 432 | |
| INSPIRE | | | | | — | | | — | | | 1,148 | |
| | | | | | | | | |
| OpenKey | | | | | — | | | 152 | | | 665 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total net (income) loss attributable to redeemable noncontrolling interests | | | | | $ | (448) | | | $ | 215 | | | $ | 2,245 | |
| | | | | | | | | |
Series CHP Units—In connection with the acquisition of Chesapeake, Ashford Holdings issued 378,000 Series CHP Units to the sellers of Chesapeake. The Series CHP Units represent a preferred membership interest in Ashford Holdings having a priority in payment of cash dividends over the common unit holders of Ashford Holdings. Each Series CHP Unit (i) has a liquidation value of $25 plus all unpaid accrued and accumulated distributions thereon; (ii) is entitled to cumulative dividends at the rate of 7.28% per annum, payable quarterly in arrears; (iii) participates in any dividend or distribution paid on all outstanding common units of Ashford Holdings in addition to the preferred dividends; (iv) is convertible, along with the aggregate accrued or accumulated and unpaid distributions thereon, into common units of Ashford Holdings at the option of the holder or the issuer, which common units of Ashford Holdings will then be redeemable by the holder thereof into common stock of the Company on a 1:1 ratio or cash, at the Company’s discretion; and (v) provides for customary anti-dilution protections. The number of common units of Ashford Holdings to be received upon conversion of Series of CHP Units, along with the aggregate accrued or accumulated and unpaid distributions thereon, is determined by: (i) multiplying the number of Series CHP Units to be converted by the liquidation value thereof; and then (ii) dividing the result by the preferred conversion price, which is $117.50 per unit. 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.
For the year ended December 31, 2022, the Company recorded net income attributable to redeemable noncontrolling interests of $489,000 to the Series CHP Unit holders which is included in Ashford Holdings in the table above.
Convertible Preferred Stock—Each share of Series D Convertible Preferred Stock: (i) has a liquidation value of $25 per share plus the amount of all unpaid accrued and accumulated dividends on such 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, along with all unpaid accrued and accumulated dividends thereon, 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
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 beneficially held primarily by Mr. Monty J. Bennett, the Chairman of our Board and our Chief Executive Officer, and Mr. Archie Bennett, Jr., who is Mr. Monty J. Bennett’s father.
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.
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 (except that the option to purchase may not be exercised with respect to shares of Series D Convertible Preferred Stock with an aggregate purchase price less than $25.0 million) 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 resulted in a discount that was reflected in the fair value of the preferred stock, which was recorded in “Series D Convertible Preferred Stock, net of discount” on our consolidated balance sheets, until the increasing dividend rate feature ended on November 6, 2021. For the years ended December 31, 2021 and 2020, we recorded $1.1 million and $2.9 million, respectively, of amortization related to preferred stock discounts.
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 ended 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 ended June 30, 2021 and December 31, 2021. As of December 31, 2022, the Company had aggregate undeclared preferred stock dividends of approximately $18.4 million, which relates to the second and fourth quarters of 2021. On each of April 15, 2022, July 15, 2022 and October 14, 2022 the Company 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, second and third quarters of 2022. On December 13, 2022, the Board declared a cash dividend on the Company’s Series D Convertible Preferred Stock for the quarter ended December 31, 2022. The Company paid the dividend of $8.7 million, or $0.455 per share of Series D Convertible Preferred Stock, on January 13, 2023.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Series D Convertible Preferred Stock dividends, declared and undeclared, totaling $27.1 million and $34.6 million at December 31, 2022 and December 31, 2021, respectively, are recorded as a liability in our consolidated balance sheets as “dividends payable.”
Convertible preferred stock cumulative dividends declared during the years ended December 31, 2022, 2021, and 2020 for all issued and outstanding shares were as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| Preferred dividends - declared | | | | | $ | 52,618 | | | $ | 16,706 | | | $ | 15,815 | |
| Preferred dividends per share - declared | | | | | $ | 2.7520 | | | $ | 0.8737 | | | $ | 0.8271 | |
Aggregate undeclared convertible preferred stock cumulative dividends (in thousands, except per share amounts):
| | | | | | | | | | | | | |
| |
| December 31, 2022 | | December 31, 2021 | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Aggregate preferred dividends - undeclared | $ | 18,414 | | | $ | 34,574 | | | |
| | | | | |
| Aggregate preferred dividends - undeclared per share | $ | 0.9631 | | | $ | 1.8083 | | | |
16. Equity-Based Compensation
Under our 2014 Incentive Plan, we are authorized to grant 3,042,946 incentive stock awards in the form of shares of our common stock or securities convertible into shares of our common stock. As of December 31, 2022, 594,121 incentive stock award shares were available for future issuance under the 2014 Incentive Plan. As defined by the 2014 Incentive Plan, authorized shares automatically increase on January 1 of each year in an amount equal to 15% of the sum of (i) the fully diluted share count and (ii) the shares of common stock reserved for issuance under the Company’s deferred compensation plan less shares available under the 2014 Incentive Plan as of December 31 of the previous year. Pursuant to the plan, we have 724,987 shares of our common stock, or securities convertible into 724,987 shares of our common stock, available for issuance under our 2014 Incentive Plan, as of January 1, 2023.
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 consolidated statements of operations. The components of equity-based compensation expense for the years ended December 31, 2022, 2021, and 2020 are presented below by award type (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Equity-based compensation | | | | | | | | | |
Class 2 LTIP units and stock option amortization (1) | | | | | $ | 1,398 | | | $ | 2,641 | | | $ | 4,347 | |
Employee equity grant expense (2) | | | | | 2,135 | | | 1,217 | | | 787 | |
Director and other non-employee equity grants expense (3) | | | | | 512 | | | 695 | | | 428 | |
| | | | | | | | | |
| | | | | | | | | |
| Total equity-based compensation | | | | | $ | 4,045 | | | $ | 4,553 | | | $ | 5,562 | |
| | | | | | | | | |
| Other equity-based compensation | | | | | | | | | |
REIT equity-based compensation (4) | | | | | $ | 16,107 | | | $ | 19,098 | | | $ | 17,325 | |
| | | | | $ | 20,152 | | | $ | 23,651 | | | $ | 22,887 | |
________
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(1) As of December 31, 2022, the Company had approximately $286,000 of total unrecognized compensation expense related to the Class 2 LTIP Units (defined below) that will be recognized over a weighted average period of 2.2 years. The year ended December 31, 2022 includes total compensation expense of approximately $947,000 related to the modification of 74,000 and 150,000 fully vested stock options and Class 2 LTIP units, respectively, awarded to employees and management which were granted in December 2014 and expiring in December 2022 under the original grant terms. The modification extended the expiration date for the stock options and Class 2 LTIP unit awards to December 2025. No other modifications were made to the original grant terms.
(2) As of December 31, 2022, the Company had approximately $2.1 million of total unrecognized compensation expense related to restricted shares and LTIP units that will be recognized over a weighted average period of 1.5 years.
(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.
As of December 31, 2022, we had outstanding equity-based compensation awards as follows:
Stock Options—During the year ended December 31, 2022, we modified 74,000 fully vested stock options to employees and management which were granted in December 2014 and expiring in December 2022 under the original grant terms. The modification extended the expiration date for the stock options to December 2025 which resulted in $313,000 of expense recognized on the extension date due to the increase in the fair value of the stock options. No other modifications were made to the original grant terms. No stock options were granted or modified for the years ended December 31, 2021 and 2020.
A summary of stock option activity is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted Average Exercise Price | | Weighted Average Contractual Term | | Aggregate Intrinsic Value of In-the
Money Options |
| (In thousands) | | (per option) | | (In years) | | (In thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Outstanding, January 1, 2020 | 1,534 | | | $ | 67.66 | | | 6.79 | | $ | — | |
| Granted | — | | | — | | | — | | | — | |
| Exercised | — | | | — | | | — | | | — | |
| Forfeited, canceled or expired | (100) | | | 73.39 | | | 8.11 | | — | |
| Outstanding, December 31, 2020 | 1,434 | | | 67.26 | | | 5.67 | | — | |
| Granted | — | | | — | | | — | | | — | |
| Exercised | — | | | — | | | — | | | — | |
| Forfeited, canceled or expired | (3) | | | 69.51 | | | 7.67 | | — | |
| Conversions to Class 2 LTIP Units | (631) | | | 62.72 | | | 4.80 | | |
| Outstanding, December 31, 2021 | 800 | | | 70.84 | | | 4.56 | | — | |
| Granted | — | | | — | | | — | | | — | |
| Exercised | — | | | — | | | — | | | — | |
| Forfeited, canceled or expired | (76) | | | 85.97 | | | — | | | — | |
| Conversions to Class 2 LTIP Units | (150) | | | 71.06 | | | 4.88 | | — | |
| Outstanding, December 31, 2022 | 574 | | | 68.78 | | | 4.39 | | — | |
| Options exercisable at December 31, 2022 | 574 | | | $ | 68.78 | | | 4.39 | | $ | — | |
The aggregate intrinsic value represents the difference between the exercise price of the stock options and the quoted closing common stock price as of the end of the period. At December 31, 2022, the Company did not have any remaining unrecognized compensation expense related to stock options.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Class 2 LTIP Units—On September 10, 2021, the independent members of the Board of Directors of the Company approved Amendment No. 1 (the “Amendment”) to the Third Amended and Restated Limited Liability Company Agreement of Ashford Hospitality Holdings LLC (a subsidiary operating partnership of the Company), dated as of November 6, 2019 (the “LLC Agreement”). The purpose of the Amendment is to create a new class of Class 2 Long-Term Incentive Partnership Units (the “Class 2 LTIP Units”) in Ashford Hospitality Holdings LLC (“AHH”), which replicate the economics of a stock option granted by the Company by converting (prior to the applicable final conversion date) into a number of long-term incentive partnership units (the “LTIP Units”) in AHH based on the appreciation in a share of the Company’s common stock over the issue price of the applicable Class 2 LTIP Unit. LTIP Units are in turn convertible into common limited partnership units of AHH, which are themselves redeemable for cash or convertible into shares of the Company’s common stock on a 1-for-1 basis at the sole option of the Company. The Amendment was approved in order to provide certain executives of the Company the opportunity to substitute historical stock options granted by the Company with Class 2 LTIP Units awarded under the Company’s 2014 Incentive Plan, as amended, with such Class 2 LTIP Units having an issue price equal to the exercise price of the applicable substituted option, the same vesting conditions as the applicable substituted option and a final conversion date that is the same as the expiration date of the applicable substituted option. There is no incremental expense recognized upon conversion as the fair value of the Class 2 LTIP Units and the applicable substituted options are the same.
During the year ended December 31, 2022, certain executives converted 150,000 fully vested stock options to Class 2 LTIP Units. The fully vested stock options were granted in December 2014 and expiring in December 2022 under the original grant terms. Subsequent to the conversion of the stock options to Class 2 LTIP Units, the 150,000 Class 2 LTIP Units were modified to extend the expiration date from December 2022 to December 2025. The extension of the expiration date resulted in $634,000 of expense recognized on the extension date due to the increase in the fair value of the Class 2 LTIP Units. No other modifications were made to the original grant terms.
During the year ended December 31, 2022, 48,000 Class 2 LTIP Units were granted to an executive officer of the Company with a grant date fair value of $390,000. The units vest three years from the grant date with a maximum option term of ten years. The fair value of each Class 2 LTIP unit granted is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used to value the Class 2 LTIP Units granted in the year ended December 31, 2022 are detailed below:
| | | | | | | | | |
| | | | | |
| | | | | Year Ended December 31, |
| | | | | 2022 |
| Grant date fair value | | | | | $ | 8.10 | |
| Assumptions used: | | | | | |
| Expected volatility | | | | | 75.2 | % |
| Expected term (in years) | | | | | 6.5 |
| Risk-free interest rate | | | | | 2.2 | % |
| Expected dividend yield | | | | | — | % |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of Class 2 LTIP Unit activity is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Exercise Price | | Weighted Average Contractual Term | | Aggregate Intrinsic Value of In-the
Money Options |
| (In thousands) | | (per share) | | (In years) | | (In thousands) |
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| Outstanding, January 1, 2021 | — | | | — | | | — | | | — | |
| Granted | — | | | — | | | — | | | — | |
| Exercised | — | | | — | | | — | | | — | |
| Forfeited, canceled or expired | — | | | — | | | — | | | — | |
| Conversions from stock options | 631 | | | 62.72 | | | 4.80 | | — | |
| Outstanding, December 31, 2021 | 631 | | | 62.72 | | | 4.80 | | — | |
| Granted | 48 | | | 45.00 | | | 9.21 | | — | |
| Exercised | — | | | — | | | — | | | — | |
| Forfeited, canceled or expired | — | | | — | | | — | | | — | |
| Conversions from stock options | 150 | | | 71.06 | | | 4.88 | | — | |
| Outstanding, December 31, 2022 | 829 | | | 63.20 | | | 4.63 | | — | |
| Options exercisable at December 31, 2022 | 781 | | | $ | 60.59 | | | 4.10 | | $ | — | |
The aggregate intrinsic value represents the difference between the exercise price of the Class 2 LTIP Units and the quoted closing common stock price as of the end of the period. At December 31, 2022, the Company had approximately $286,000 of total unrecognized compensation expense, related to Class 2 LTIP Units that will be recognized over the weighted average period of 2.2 years.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restricted Stock—A summary of our restricted stock activity, as it relates to equity-based compensation, is as follows (shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Restricted Shares | | Weighted Average
Price Per Share at Grant | | Restricted Shares | | Weighted Average
Price Per Share at Grant | | Restricted Shares | | Weighted Average
Price Per Share at Grant |
| Outstanding at beginning of year | 303 | | | $ | 9.93 | | | 241 | | | $ | 10.45 | | | — | | | $ | — | |
Restricted shares granted (1) | 109 | | | 15.96 | | | 172 | | | 9.03 | | | 686 | | | 7.43 | |
| Restricted shares vested | (177) | | | 10.54 | | | (107) | | | 9.19 | | | (417) | | | 5.78 | |
| Restricted shares forfeited | (7) | | | 13.44 | | | (3) | | | 9.87 | | | (28) | | | 10.28 | |
| Outstanding at end of year | 228 | | | $ | 12.25 | | | 303 | | | $ | 9.93 | | | 241 | | | $ | 10.45 | |
________(1) Equity-based compensation expense of $1.0 million, $580,000 and $1.0 million was recognized in connection with stock grants of 109,000, 172,000 and 390,000 to our employees and independent directors for the years ended December 31, 2022, 2021 and 2020, respectively. Restricted shares granted and vested for the year ended December 31, 2020 includes 296,000 shares which immediately vested related to the payment of 25% of the 2019 annual bonuses awarded to certain executive officers of the Company, including the Company’s named executive officers, which was delayed beyond their standard payment date in March 2020. Restricted shares that vested for the year ended December 31, 2022 had a fair value of $2.9 million at the date of vesting.
LTIP Units—Under our 2014 Incentive Plan, we are authorized to grant LTIP awards to certain executives and employees as compensation which have a vesting period of three years. All LTIP Units are convertible into common shares of AHH at a 1:1 ratio upon vesting.
A summary of our LTIP Unit activity, as it relates to equity-based compensation, is as follows (shares in thousands):
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | | | |
| LTIPs | | Weighted Average
Price Per Share at Grant | | | | | | | | |
| Outstanding at beginning of year | — | | | $ | — | | | | | | | | | |
LTIPs granted (1) | 39 | | | 16.14 | | | | | | | | | |
| | | | | | | | | | | |
| Outstanding at end of year | 39 | | | $ | 16.14 | | | | | | | | | |
________(1) Equity-based compensation expense of $164,000 was recognized in connection with the grant of 39,000 LTIP units for the year ended December 31, 2022. At December 31, 2022, all LTIP Units were unvested and the Company had approximately $460,000 of total unrecognized compensation expense related to LTIP Units.
Deferred Stock Units—Beginning in 2019 under our existing 2014 Incentive Plan, our independent directors may elect to receive Deferred Stock Units (“DSU”) which allows deferral of immediate vesting common shares granted in the period until the earlier of the end of the director’s service or a change of control in the Company. DSUs are fully vested as of the grant date and may only be settled in the Company’s common stock.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of our DSU activity, as it relates to equity-based compensation, is as follows (shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| DSUs | | Weighted Average
Price Per Share at Grant | | DSUs | | Weighted Average
Price Per Share at Grant | | DSUs | | Weighted Average
Price Per Share at Grant |
| Outstanding at beginning of year | 66 | | | $ | 9.68 | | | 43 | | | $ | 9.67 | | | 7 | | | $ | 31.79 | |
DSUs granted (1) | 16 | | | 15.27 | | | 23 | | | 9.70 | | | 37 | | | 6.12 | |
| DSUs settled | — | | | — | | | — | | | — | | | (1) | | | 31.79 | |
| Outstanding at end of year | 82 | | | $ | 10.76 | | | 66 | | | $ | 9.68 | | | 43 | | | $ | 9.67 | |
________(1) Equity-based compensation expense of $225,000 was recognized in connection with grants of 16,000, 23,000 and 37,000 immediately vested DSUs to our independent directors for each of the years ended December 31, 2022, 2021 and 2020, respectively.
17. Employee Benefit Plans
Deferred Compensation Plan—We administer a non-qualified deferred compensation plan (“DCP”) for certain executive officers and other employees which 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 for our executive officers 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 consolidated statements of operations and comprehensive income (loss).
The following table summarizes the DCP activity (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Change in fair value | | | | | | | | | |
| Unrealized gain (loss) | | | | | $ | 477 | | | $ | (1,671) | | | $ | 3,012 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Distributions | | | | | | | | | |
Fair value (1) | | | | | $ | — | | | $ | 51 | | | $ | 11 | |
Shares (1) | | | | | — | | | 3 | | | 1 | |
________
(1) Distributions made to one participant.
As of December 31, 2022 and December 31, 2021, the carrying value of the DCP liability was $2.8 million and $3.3 million, respectively.
401(k) Plan—Ashford LLC and our consolidated subsidiaries sponsor 401(k) Plans. The 401(k) Plans are qualified defined contribution retirement plans that cover employees 21 years of age or older who have completed three months of service. The 401(k) Plans allow eligible employees to contribute, subject to Internal Revenue Service imposed limitations, to various investment funds. The Company and our consolidated subsidiaries make matching cash contributions equal to 100% of up to the first 3% of an employee’s eligible compensation contributed to the respective 401(k) Plan and cash contributions equal to 50% of up to the next 2% of an employee’s eligible compensation contributed to the respective 401(k) Plan. Both participant contributions and company matches vest immediately.
For the years ended December 31, 2022, 2021 and 2020, “salaries and benefits” expense on our consolidated statements of operations included matching expense of $2.8 million, $0, and $884,000, respectively. For the years ended December 31, 2022, 2021 and 2020, “cost of revenues for design and construction” on our consolidated statements of operations included matching
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
expense of $183,000, $0 and $46,000, respectively. Due to the significant negative impact on the Company’s operations and financial results from COVID-19, the Company’s 401(k) match was temporarily suspended beginning in the second quarter of 2020 through the year ended December 31, 2021.
Subsidiary Compensation Plan—Remington has an employee compensation plan under which it awards to employees, subject to vesting, shares of Ashford Trust and Braemar common stock, which were purchased on the open market. The compensation plan liability is based on ratably accrued vested shares through December 31, 2022, which are exercisable upon vesting. As of December 31, 2022 and 2021, the subsidiary compensation plan accrued liability in the amount of $74,000 and $164,000, respectively, was recorded in “accounts payable and accrued expenses” in our consolidated balance sheets. For the years ended December 31, 2022, 2021 and 2020, the related gain of $117,000, loss of $295,000, and gain of $131,000, respectively, were included in “salaries and benefits” in our consolidated statements of operations. See note 11.
18. Income Taxes
The following table reconciles the income tax (expense) benefit at statutory rates to the actual income tax (expense) benefit recorded (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Income tax (expense) benefit at federal statutory income tax rate | $ | (2,422) | | | $ | 2,261 | | | $ | 48,534 | |
| State income tax (expense) benefit, net of federal income tax benefit | (1,453) | | | 437 | | | 2,675 | |
| Foreign income tax expense | (1,470) | | | (426) | | | — | |
| Income (loss) passed through to common unit holders and noncontrolling interests | 58 | | | (32) | | | 94 | |
| Permanent differences | (203) | | | (1,086) | | | (1,397) | |
| Nondeductible impairment of goodwill | — | | | — | | | (35,820) | |
| Valuation allowance | (1,094) | | | (860) | | | (1,051) | |
| Uncertain tax position | (917) | | | — | | | — | |
| Stock compensation expense | (741) | | | — | | | — | |
| Other | (288) | | | (132) | | | 1,220 | |
| Total income tax (expense) benefit | $ | (8,530) | | | $ | 162 | | | $ | 14,255 | |
The components of income tax (expense) benefit are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | (7,928) | | | $ | (4,192) | | | $ | (7,116) | |
| Foreign | (2,031) | | | (223) | | | 25 | |
| State | (2,829) | | | (479) | | | (1,064) | |
| Total current | (12,788) | | | (4,894) | | | (8,155) | |
| Deferred: | | | | | |
| Federal | 5,301 | | | 4,081 | | | 17,938 | |
| Foreign | (125) | | | (203) | | | 136 | |
| State | (918) | | | 1,178 | | | 4,336 | |
| Total deferred | 4,258 | | | 5,056 | | | 22,410 | |
| Total income tax (expense) benefit | $ | (8,530) | | | $ | 162 | | | $ | 14,255 | |
Penalties of $20,000 and interest of $32,000 and $0 were paid to or were received from taxing authorities for the years ended December 31, 2022, 2021 and 2020, respectively.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At December 31, 2022 and 2021, our net deferred tax asset (liability) and related valuation allowance on the consolidated balance sheets, consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Prepaid expenses | $ | (709) | | | $ | (698) | |
| Investments in unconsolidated entities and joint ventures | 136 | | | 15 | |
| Capitalized acquisition costs | 5,618 | | | 5,575 | |
| Deferred compensation | 711 | | | 850 | |
| Accrued expenses | 2,453 | | | 2,045 | |
| Equity-based compensation | 10,881 | | | 10,700 | |
| Property and equipment | (4,297) | | | (5,106) | |
| Intangibles | (42,733) | | | (47,061) | |
| Deferred revenue | 930 | | | 1,120 | |
| Net operating loss | 6,911 | | | 6,436 | |
| Deferred tax asset (liability) | (20,099) | | | (26,124) | |
| Valuation allowance | (7,774) | | | (6,724) | |
| Net deferred tax asset (liability) | $ | (27,873) | | | $ | (32,848) | |
At December 31, 2022, the Company had federal net operating loss carryforwards of approximately $22.7 million, all related to the separate company filing for OpenKey and only available to reduce future federal tax liabilities at this entity. If unused, $5.9 million of the OpenKey federal net operating loss carryforwards expire in tax year beginning in 2036, with all other federal net operating losses having an indefinite carryforward period.
At December 31, 2022, the Company also had state net operating loss carryforwards of $7.6 million with, $2.5 million of these loss carryforwards only available to OpenKey, and foreign net operating loss carryforwards of $8.3 million related primarily to its operations in the U.S. Virgin Islands.
We evaluate the recoverability of our deferred tax assets quarterly to determine if valuation allowances are required or should be adjusted. We assess whether valuation allowances should be established against deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. The analysis utilized in determining the valuation allowance involves considerable judgment and assumptions.
At December 31, 2022, there is a full valuation allowance on the deferred tax assets related to OpenKey and related to INSPIRE’s operations in Mexico, collectively totaling $7.8 million. We are able to recognize our remaining deferred tax assets based on future taxable income from reversing taxable temporary differences associated with the deferred tax liability recognized as a result of the Premier and Remington acquisitions.
A reconciliation of the unrecognized tax benefit is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Balance at the beginning of the year | $ | — | | | $ | — | | | $ | 471 | |
| Gross increases for tax positions of prior years | 1,161 | | | — | | | — | |
| Gross decreases for tax positions of prior years | — | | | — | | | (471) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Balance at the end of year | $ | 1,161 | | | $ | — | | | $ | — | |
The total amount of unrecognized tax benefits that could affect the Company’s effective tax rate if recognized was $917,000, net of federal benefit, as of December 31, 2022. The Company’s policy is to record penalty and interest as a component of income tax expense. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and cities, and, beginning November 1, 2017, in Mexico and the Dominican Republic. Tax years 2018 through 2022 remain subject to potential examination by certain federal and state taxing authorities.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. 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 a party to an amended and restated advisory agreement, as amended, with Ashford Trust and its operating subsidiary, Ashford Hospitality Limited Partnership (“Ashford Trust OP”). 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, dated June 10, 2015, as amended by the Enhanced Return Funding Program Agreement and Amendment No. 1 to the Amended and Restated Advisory Agreement, dated as of June 26, 2018 to, among other things (i) revise the term and termination rights; (ii) fix the percentage used to calculate the base fee thereunder at 0.70% per annum; (iii) update the list of peer group members; (iv) suspend the requirement that Ashford Trust maintain a minimum Consolidated Tangible Net Worth until the first fiscal quarter beginning after June 30, 2023; and (v) revise the criteria that would constitute a Company Change of Control of Ashford Trust in order to provide Ashford Trust additional flexibility to dispose of underperforming assets negatively impacted by COVID-19. In connection with the transactions contemplated by the Credit Agreement, the Company entered into the SNDA with Ashford Trust 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 the Advisory Fee Cap, (2) any termination fee or liquidated damages amounts under the advisory agreement, or any amount owed under any enhanced return funding program in connection with the termination of the advisory agreement or sale or foreclosure of assets financed thereunder, and (3) any payments to Lismore in connection with the transactions contemplated by the Credit Agreement. See note 3 for discussion of the advisory services fees revenue recognition policy.
On October 12, 2021, Ashford Trust entered into an amendment to the senior secured credit facility with Oaktree which, among other items, suspended Ashford Trust’s obligation to subordinate fees due under the 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 due under Ashford Trust’s senior secured credit facility. On December 13, 2021, Ashford Trust paid the Company $7.2 million for advisory fees that had been deferred as a result of the $29.0 million annual Advisory Fee Cap. The $7.2 million payment was recorded as revenue in “advisory services fees” in our consolidated statements of operations for the year ended December 31, 2021.
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 their 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 TRS 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 approximately $16,000 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. Remington is also party to a mutual exclusivity agreement with Ashford Trust and Ashford Trust OP.
In the year ended December 31, 2020, Lismore, a wholly owned subsidiary of the Company, entered into an agreement with Ashford Trust (the “Ashford Trust Agreement”). Pursuant to the Ashford Trust Agreement, Lismore shall, during the term of the agreement negotiate the refinancing, modification or forbearance of the existing mortgage debt on Ashford Trust’s hotels. The Ashford Trust Agreement additionally allows for the Company to receive certain fees for refinancings performed within eight months after the Ashford Trust Agreement terminates. The Ashford Trust Agreement terminated effective April 6, 2022. For the years ended December 31, 2022, 2021 and 2020, the Company recognized revenue of $2.4 million, $10.3 million and $5.7 million, respectively. Revenue recognized for the year ended December 31, 2021 includes a $1.2 million cumulative catch-up adjustment to revenue which was previously considered constrained. As of December 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
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the revenues and expenses related to Ashford Trust (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| REVENUES BY TYPE | | | | | | | | | |
| Advisory services fees: | | | | | | | | | |
Base advisory fees (1) | | | | | $ | 34,802 | | | $ | 36,239 | | | $ | 34,744 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Hotel management fees: | | | | | | | | | |
| Base management fees | | | | | 23,873 | | | 17,819 | | | 15,923 | |
| Incentive management fees | | | | | 6,066 | | | 4,180 | | | — | |
Total hotel management fees revenue (2) | | | | | 29,939 | | | 21,999 | | | 15,923 | |
| | | | | | | | | |
Design and construction fees revenue (3) | | | | | 11,601 | | | 4,032 | | | 4,964 | |
| | | | | | | | | |
| | | | | | | | | |
| Other revenue: | | | | | | | | | |
| | | | | | | | | |
Watersports, ferry and excursion services (5) | | | | | 217 | | | — | | | — | |
Debt placement and related fees (6) | | | | | 3,282 | | | 11,381 | | | 5,853 | |
| | | | | | | | | |
Cash management fees (7) | | | | | 97 | | | — | | | — | |
Claims management services (8) | | | | | 17 | | | 74 | | | 118 | |
| | | | | | | | | |
| | | | | | | | | |
Other services (9) | | | | | 1,438 | | | 1,628 | | | 1,496 | |
| Total other revenue | | | | | 5,051 | | | 13,083 | | | 7,467 | |
| | | | | | | | | |
| Cost reimbursement revenue | | | | | 244,148 | | | 162,920 | | | 137,131 | |
| | | | | | | | | |
| Total revenues | | | | | $ | 325,541 | | | $ | 238,273 | | | $ | 200,229 | |
| | | | | | | | | |
REVENUES BY SEGMENT (10) | | | | | | | | | |
| REIT advisory | | | | | $ | 48,859 | | | $ | 51,726 | | | $ | 50,574 | |
| Remington | | | | | 255,387 | | | 167,600 | | | 133,489 | |
| Premier | | | | | 18,776 | | | 5,939 | | | 6,800 | |
| INSPIRE | | | | | 85 | | | — | | | — | |
| RED | | | | | 231 | | | — | | | — | |
| OpenKey | | | | | 123 | | | 119 | | | 234 | |
Corporate and other (11) | | | | | 2,080 | | | 12,889 | | | 9,132 | |
| Total revenues | | | | | $ | 325,541 | | | $ | 238,273 | | | $ | 200,229 | |
| | | | | | | | | |
| COST OF REVENUES | | | | | | | | | |
Cost of revenues for audio visual (4) | | | | | $ | 7,663 | | | $ | 2,969 | | | $ | 2,241 | |
| | | | | | | | | |
| | | | | | | | | |
| SUPPLEMENTAL REVENUE INFORMATION | | | | | | | | | |
Audio visual revenue from guests at REIT properties (4) | | | | | $ | 18,183 | | | $ | 6,734 | | | $ | 5,123 | |
Watersports, ferry and excursion services revenue from guests at REIT properties (4) | | | | | 190 | | | 545 | | | 125 | |
________
(1) Advisory services fees earned from Ashford Trust during the year ended December 31, 2021, includes $7.2 million of advisory fees which were paid by Ashford Trust in December of 2021 that were previously 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 CONSOLIDATED FINANCIAL STATEMENTS (continued)
(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 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) Cash management fees include revenue earned by providing active management and investment of Ashford Trust’s excess cash in short-term U.S. Treasury securities. See note 1 to our consolidated financial statements.
(8) Claims management services include revenue earned from providing insurance claim assessment and administration services.
(9) 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.
(10) See note 21 for discussion of segment reporting.
(11) The Corporate and Other segment’s revenue in the year ended December 31, 2022 includes a reduction to cost reimbursement revenue of $2.6 million from Ashford Trust for expense reimbursements for Ashford Securities which were reallocated to Braemar. Expense reimbursements are allocated among the Company, Ashford Trust and Braemar quarterly based upon management’s estimate of the actual capital raised through Ashford Securities upon 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. See discussion regarding Ashford Securities below.
The following table summarizes amounts due (to) from Ashford Trust, net at December 31, 2022 and 2021 associated primarily with the advisory services fee and other fees discussed above, as it relates to each of our consolidated entities (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Ashford LLC | $ | (4,002) | | | $ | 691 | |
| | | |
| Remington | (2,015) | | | (44) | |
| Premier | 2,475 | | | 737 | |
| INSPIRE | 1,718 | | | 985 | |
| OpenKey | (35) | | | 16 | |
| Pure Wellness | 657 | | | 177 | |
| Lismore | — | | | 13 | |
| RED | 5 | | | — | |
| | | |
| Due (to) from Ashford Trust | $ | (1,197) | | | $ | 2,575 | |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Braemar—We are also a party to an amended and restated advisory agreement with Braemar and its operating subsidiary Braemar OP. The base fee is paid monthly calculated as 1/12th of 0.70% of Braemar’s total market capitalization plus the Net Asset Fee Adjustment, as defined in our advisory agreement, subject to a minimum monthly base fee. Reimbursement for overhead, internal audit, risk management advisory services and asset management services, including compensation, benefits and travel expense reimbursements, are billed monthly to Braemar based on a pro rata allocation as determined by the ratio of Braemar’s net investment in hotel properties in relation to the total net investment in hotel properties for both Ashford Trust and Braemar. We also record cost reimbursement revenue for equity grants of Braemar common stock and LTIP units awarded to our officers and employees in connection with providing advisory services equal to the grant date fair value of the award in proportion to the requisite service period satisfied during the period, as well as an offsetting expense in an equal amount included in “reimbursed expenses.” We are also entitled to an incentive advisory fee that is measured annually in each year that Braemar’s annual total stockholder return exceeds the average annual total stockholder return for Braemar’s peer group, subject to the FCCR Condition, as defined in the advisory agreement.
Premier is party to a master project management agreement with Braemar OP and Braemar TRS Corporation, a wholly owned subsidiary of Braemar OP, and certain of their affiliates 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 TRS Corporation and certain of its affiliates to provide hotel management services. Braemar pays the Company a monthly hotel management fee equal to the greater of approximately $16,000 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. Remington is also party to a mutual exclusivity agreement with Braemar and Braemar OP.
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 years ended December 31, 2022, 2021 and 2020, the Company recognized revenue of $0, $853,000, and $2.6 million, respectively, related to the Braemar Agreement. As of December 31, 2022 and 2021, the Company did not have any deferred income related to the Braemar Agreement.
The following table summarizes the revenues and expenses related to Braemar (in thousands):
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| REVENUES BY TYPE | | | | | | | | | |
| Advisory services fees: | | | | | | | | | |
| Base advisory fees | | | | | $ | 12,790 | | | $ | 10,806 | | | $ | 9,981 | |
| | | | | | | | | |
| | | | | | | | | |
Incentive advisory fees (1) | | | | | 268 | | | — | | | — | |
Other advisory revenue (2) | | | | | 521 | | | 521 | | | 522 | |
| Total advisory services fees revenue | | | | | 13,579 | | | 11,327 | | | 10,503 | |
| | | | | | | | | |
| Hotel management fees: | | | | | | | | | |
| Base management fees | | | | | 2,959 | | | 2,304 | | | 1,037 | |
| Incentive management fees | | | | | 786 | | | 612 | | | — | |
Total hotel management fees revenue (3) | | | | | 3,745 | | | 2,916 | | | 1,037 | |
| | | | | | | | | |
Design and construction fees revenue (4) | | | | | 7,365 | | | 2,230 | | | 2,127 | |
| | | | | | | | | |
| | | | | | | | | |
| Other revenue: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Watersports, ferry and excursion services (6) | | | | | 2,293 | | | 2,605 | | | 950 | |
Debt placement and related fees (7) | | | | | 940 | | | 1,003 | | | 2,559 | |
| | | | | | | | | |
Cash management fees (8) | | | | | 38 | | | — | | | — | |
Claims management services (9) | | | | | 3 | | | 7 | | | 108 | |
| | | | | | | | | |
| | | | | | | | | |
Other services (10) | | | | | 166 | | | 192 | | | 190 | |
| Total other revenue | | | | | 3,440 | | | 3,807 | | | 3,807 | |
| | | | | | | | | |
| Cost reimbursement revenue | | | | | 57,396 | | | 30,394 | | | 18,898 | |
| | | | | | | | | |
| Total revenues | | | | | $ | 85,525 | | | $ | 50,674 | | | $ | 36,372 | |
| | | | | | | | | |
REVENUES BY SEGMENT (11) | | | | | | | | | |
| REIT advisory | | | | | $ | 28,486 | | | $ | 22,911 | | | $ | 19,581 | |
| Remington | | | | | 28,181 | | | 18,345 | | | 9,524 | |
| Premier | | | | | 9,875 | | | 3,009 | | | 2,848 | |
| INSPIRE | | | | | 72 | | | — | | | — | |
| RED | | | | | 2,304 | | | 2,605 | | | 950 | |
| OpenKey | | | | | 38 | | | 38 | | | 84 | |
Corporate and other (12) | | | | | 16,569 | | | 3,766 | | | 3,385 | |
| Total revenues | | | | | $ | 85,525 | | | $ | 50,674 | | | $ | 36,372 | |
| | | | | | | | | |
COST OF REVENUES (5) | | | | | | | | | |
| Cost of revenues for audio visual | | | | | $ | 3,842 | | | $ | 998 | | | $ | 495 | |
| Other | | | | | 1,153 | | | 421 | | | 149 | |
| | | | | | | | | |
| SUPPLEMENTAL REVENUE INFORMATION | | | | | | | | | |
Audio visual revenues from guests at REIT properties (5) | | | | | $ | 9,384 | | | $ | 2,175 | | | $ | 1,151 | |
Watersports, ferry and excursion services revenue from guests at REIT properties (5) | | | | | 2,132 | | | 2,117 | | | 550 | |
________
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(1) The incentive advisory fees recognized includes the first year installment of the 2022 incentive advisory fee which was paid in January 2023. Incentive fee payments are subject to meeting the December 31st FCCR Condition each year, as defined in our advisory agreements. The annual total stockholder return did not meet the relevant incentive fee thresholds during the 2021 and 2020 measurement periods.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) Debt placement and related fees are earned by Lismore for providing debt placement, modification, forbearance and refinancing services.
(8) Cash management fees include revenue earned by providing active management and investment of Braemar’s excess cash in short-term U.S. Treasury securities. See note 1 to our consolidated financial statements.
(9) Claims management services include revenue earned from providing insurance claim assessment and administration services.
(10) 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.
(11) See note 21 for discussion of segment reporting.
(12) The Corporate and Other segment’s revenue in the year ended December 31, 2022 includes a re-allocation of $4.4 million of cost reimbursement revenue to Braemar which had previously been allocated to Ashford Trust and the Company. Expense reimbursements are allocated among the Company, Ashford Trust and Braemar quarterly based upon management’s estimate of the actual capital raised through Ashford Securities upon 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. See discussion regarding Ashford Securities below.
The following table summarizes amounts due (to) from Braemar, net at December 31, 2022 and 2021 associated primarily with the advisory services fee and other fees discussed above, as it relates to each of our consolidated entities (in thousands):
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Ashford LLC | $ | 7,253 | | | $ | 354 | |
| | | |
| Remington | (69) | | | (234) | |
| Premier | 3,443 | | | 327 | |
| INSPIRE | 917 | | | 494 | |
| OpenKey | 8 | | | 2 | |
| RED | 193 | | | 201 | |
| Pure Wellness | 83 | | | — | |
| Due from Braemar | $ | 11,828 | | | $ | 1,144 | |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. 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.
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. 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 had no impact on the Extension Agreement which continued in full force until December 16, 2022, when Ashford Trust acquired all of the equity interests in Marietta and, in exchange, forgave, cancelled and discharged in full the outstanding $11.4 million ERFP commitment. See note 5.
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.
As of December 31, 2022, the Company had no remaining ERFP commitments to Ashford Trust or Braemar under the Ashford Trust ERFP Agreement and the Braemar ERFP Agreement, respectively.
Expiration of ERFP Agreement Related Leases with Ashford Trust and Braemar—On August 19, 2020, Ashford Trust sold the Embassy Suites New York Manhattan Times Square. The hotel contained FF&E with a net book value of $6.4 million which was owned by the Company and leased to Ashford Trust rent-free pursuant to the Ashford Trust ERFP Agreement. On November 4, 2020, the independent members of the Board waived the requirement for Ashford Trust to provide replacement FF&E. As a result, the Company recorded a loss on disposal of FF&E of $6.4 million within “other” operating expense in our consolidated statements of operations for the year ended December 31, 2020.
For the year ended December 31, 2020, Braemar purchased FF&E from the Company for $1.8 million upon expiration of the underlying leases of FF&E under the Braemar ERFP Agreement and legacy key money agreements. The Company recorded a loss on sale of the FF&E of $1.6 million which is included within “other” operating expense in our consolidated statement of operations for the year ended December 31, 2020.
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 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 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.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the second quarter of 2021, the Company purchased $1.6 million of FF&E from Braemar. The Company set-off the purchased FF&E against a $1.6 million outstanding receivable previously incurred by Braemar. The FF&E purchased by the Company was subsequently leased back to Braemar rent-free.
In the second quarter of 2021, Braemar purchased FF&E from the Company at the fair market value of $144,000 upon expiration of the underlying leases of the FF&E under the Braemar ERFP Agreement. The Company recorded a loss on sale of the FF&E of $267,000 which is included within “other” operating expense in our consolidated statements of operations.
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. The Company recorded a loss on sale of the FF&E of $706,000 which is included within “other” operating expense in our consolidated statement of operations.
In the fourth quarter of 2022, Ashford Trust purchased FF&E with a net book value of $3.1 million from the Company at the fair market value of $1.0 million upon expiration of the underlying leases of the FF&E under the Ashford Trust ERFP Agreement. The Company recognized a $1.0 million outstanding receivable which was recorded net in “due to Ashford Trust” in our consolidated balance sheet. The Company recorded a loss on sale of the FF&E of $2.1 million which is included within “other” operating expense in our consolidated statement of operations.
Ashford Securities—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 (collectively, the “Parties” and each individually a “Party”) with respect to funding certain expenses of Ashford Securities. Beginning on the effective date of the Amended and Restated Contribution Agreement, costs to fund the operations of Ashford Securities were allocated 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 a true up (the “Amended and Restated True-Up Date”) among the Parties whereby the actual amount contributed by each Party will be based on the actual amount of capital raised by such Party through Ashford Securities (the resulting ratio of contributions among the Parties, the “Initial True-Up Ratio”). 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 aggregate contributions to Ashford Securities allocated 10% to the Company, 45% to Ashford Trust, and 45% to Braemar.
As of December 31, 2022, Ashford Trust and Braemar have funded approximately $6.2 million and $5.8 million, respectively. Contributions are allocated among the Parties quarterly based upon management’s estimate of the actual capital that will be raised through Ashford Securities upon 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. Prior to September 30, 2022, sufficient information was not available to estimate the actual capital which will be raised by each Party on the Amended and Restated True-Up Date. Based upon management’s estimate as of December 31, 2022, the year ended December 31, 2022 included a re-allocation of $2.6 million of cost reimbursement revenue and reimbursed expenses to Braemar which had previously been allocated to Ashford Trust and a re-allocation of $1.8 million of cost reimbursement revenue and reimbursed expenses to Braemar which had previously been allocated to the Company and eliminated upon consolidation.
The Company recognized a reduction to cost reimbursement revenue of $2.5 million from Ashford Trust for the year ended December 31, 2022 in our consolidated statements of operations. The Company recognized $0 and $2.0 million of cost reimbursement revenue from Ashford Trust for the years ended December 31, 2021, and 2020, respectively, in our consolidated statements of operations. The Company recognized $15.5 million, $2.6 million, and $719,000 of cost reimbursement revenue from Braemar for the years ended December 31, 2022, 2021, and 2020, respectively, in our consolidated statements of operations. Cost reimbursement revenue for the year ended December 31, 2022 includes $5.8 million of dealer manager fees earned by Ashford Securities for the placement of Braemar’s non-listed preferred equity offerings.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Related Party Transactions—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 (“Braemar TRS”) 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 of 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 $8.5 million, in the aggregate, during the Waiver Period.
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 years ended December 31, 2022, 2021, and 2020, we recorded $3.3 million and $3.4 million, and $3.4 million, 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 consolidated balance sheets. See note 2.
Ashford Trust held a 15.06% and 16.65% noncontrolling interest in OpenKey, and Braemar held an 7.92% and 7.77% noncontrolling interest in OpenKey as of December 31, 2022 and 2021, respectively. Ashford Trust invested $0, $500,000 and $431,000 in OpenKey during the years ended December 31, 2022, 2021 and 2020, respectively. Braemar invested $327,000, $233,000 and $26,000 in OpenKey during the years ended December 31, 2022, 2021 and 2020, respectively. See also notes 1, 2, 14, and 15.
The Company or its affiliates provide to the Bennetts or their permitted designees certain services, including, but not limited to, accounting, tax and administrative services pursuant to that certain Transition Cost Sharing Agreement entered into in connection with Company’s acquisition of Remington Lodging from the Bennetts in November 2019. The gross amount of expenses and reimbursements for these transition services for the years ended December 31, 2022, 2021, and 2020 was $379,000, $405,000, and $387,000, respectively. The expenses and reimbursements for transition services are recorded on a net basis and, therefore, the reimbursed activity does not impact our consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020.
An officer of INSPIRE owned the INSPIRE headquarters property including the adjoining warehouse space through December 2020 when it was sold to a third party. Rental expense for the periods in which the INSPIRE headquarters was owned by an officer of INSPIRE was $308,000 for the year ended December 31, 2020.
As of December 31, 2022, we have a note receivable to an affiliate BP Annex Dev LLC for $535,000. BP Annex Dev LLC has the ability to borrow an additional $465,000 for a maximum note commitment of $1.0 million from the Company. The note bears interest at 8.00% and matures on November 11, 2026. The note receivable is recorded in “other assets” in our consolidated balance sheet.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. 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):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Net income (loss) attributable to common stockholders – basic and diluted: | | | | | | | | | |
| Net income (loss) attributable to the Company | | | | | $ | 3,646 | | | $ | (9,925) | | | $ | (212,365) | |
Less: Dividends on preferred stock, declared and undeclared (1) | | | | | (36,458) | | | (35,000) | | | (32,095) | |
| Less: Amortization of preferred stock discount | | | | | — | | | (1,053) | | | (2,887) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Undistributed net income (loss) allocated to common stockholders | | | | | (32,812) | | | (45,978) | | | (247,347) | |
| | | | | | | | | |
| Distributed and undistributed net income (loss) - basic | | | | | $ | (32,812) | | | $ | (45,978) | | | $ | (247,347) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Distributed and undistributed net income (loss) - diluted | | | | | $ | (32,812) | | | $ | (45,978) | | | $ | (247,347) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | | |
| Weighted average common shares outstanding – basic | | | | | 2,915 | | | 2,756 | | | 2,284 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Weighted average common shares outstanding – diluted | | | | | 2,915 | | | 2,756 | | | 2,284 | |
| | | | | | | | | |
| Income (loss) per share – basic: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net income (loss) allocated to common stockholders per share | | | | | $ | (11.26) | | | $ | (16.68) | | | $ | (108.30) | |
| Income (loss) per share – diluted: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net income (loss) allocated to common stockholders per share | | | | | $ | (11.26) | | | $ | (16.68) | | | $ | (108.30) | |
| | | | | | | | | |
________(1) Undeclared dividends were deducted to arrive at net income (loss) attributable to common stockholders. See note 15.
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):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Net income (loss) allocated to common stockholders is not adjusted for: | | | | | | | | | |
| | | | | | | | | |
| Net income (loss) attributable to redeemable noncontrolling interests in Ashford Holdings | | | | | $ | 448 | | | $ | (63) | | | $ | (432) | |
| Net income (loss) attributable to redeemable noncontrolling interests in subsidiary common stock | | | | | — | | | (152) | | | (1,813) | |
| | | | | | | | | |
| | | | | | | | | |
| Dividends on preferred stock, declared and undeclared | | | | | 36,458 | | | 35,000 | | | 32,095 | |
| Amortization of preferred stock discount | | | | | — | | | 1,053 | | | 2,887 | |
| Total | | | | | $ | 36,906 | | | $ | 35,838 | | | $ | 32,737 | |
| Weighted average diluted shares are not adjusted for: | | | | | | | | | |
| | | | | | | | | |
| Effect of unvested restricted shares | | | | | 92 | | | 124 | | | 23 | |
| | | | | | | | | |
| Effect of assumed conversion of Ashford Holdings units | | | | | 65 | | | 4 | | | 4 | |
| Effect of incremental subsidiary shares | | | | | 117 | | | 145 | | | 504 | |
| | | | | | | | | |
| Effect of assumed conversion of preferred stock | | | | | 4,272 | | | 4,265 | | | 4,111 | |
| Total | | | | | 4,546 | | | 4,538 | | | 4,642 | |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. 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) Pure Wellness, which provides hypoallergenic premium rooms in the hospitality and commercial office industry; and (h) Marietta, which held the leasehold rights to a single hotel and convention center property in Marietta, Georgia, until the disposition date of December 16, 2022. See discussion in note 5. For 2022, Premier, 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 Premier, 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 note 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 years ended December 31, 2022, 2021, and 2020 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| REIT Advisory | | Remington | | Premier | | INSPIRE | | RED | | OpenKey | | Corporate and Other | | Ashford Inc. Consolidated |
| REVENUE | | | | | | | | | | | | | | | |
| Advisory services fees | $ | 48,381 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 48,381 | |
| Hotel management fees | — | | | 46,548 | | | — | | | — | | | — | | | — | | | — | | | 46,548 | |
| Design and construction fees | — | | | — | | | 22,167 | | | — | | | — | | | — | | | — | | | 22,167 | |
| | | | | | | | | | | | | | | |
| Audio visual | — | | | — | | | — | | | 121,261 | | | — | | | — | | | — | | | 121,261 | |
| Other | 157 | | | 181 | | | — | | | — | | | 26,309 | | | 1,480 | | | 16,185 | | | 44,312 | |
Cost reimbursement revenue (1) | 28,809 | | | 309,706 | | | 10,080 | | | 157 | | | 26 | | | 4 | | | 12,981 | | | 361,763 | |
| Total revenues | 77,347 | | | 356,435 | | | 32,247 | | | 121,418 | | | 26,335 | | | 1,484 | | | 29,166 | | | 644,432 | |
| EXPENSES | | | | | | | | | | | | | | | |
| Depreciation and amortization | 3,410 | | | 12,362 | | | 11,899 | | | 1,803 | | | 656 | | | 12 | | | 1,624 | | | 31,766 | |
| | | | | | | | | | | | | | | |
Other operating expenses (2) | 2,828 | | | 24,414 | | | 13,693 | | | 107,520 | | | 22,760 | | | 5,758 | | | 52,725 | | | 229,698 | |
Reimbursed expenses (1) | 28,421 | | | 309,706 | | | 10,080 | | | 157 | | | 26 | | | 4 | | | 12,981 | | | 361,375 | |
| Total operating expenses | 34,659 | | | 346,482 | | | 35,672 | | | 109,480 | | | 23,442 | | | 5,774 | | | 67,330 | | | 622,839 | |
| OPERATING INCOME (LOSS) | 42,688 | | | 9,953 | | | (3,425) | | | 11,938 | | | 2,893 | | | (4,290) | | | (38,164) | | | 21,593 | |
| Equity in earnings (loss) of unconsolidated entities | — | | | 7 | | | — | | | — | | | — | | | — | | | 385 | | | 392 | |
| Interest expense | — | | | — | | | — | | | (1,263) | | | (769) | | | — | | | (7,964) | | | (9,996) | |
| Amortization of loan costs | — | | | — | | | — | | | (130) | | | (52) | | | — | | | (579) | | | (761) | |
| Interest income | — | | | 182 | | | — | | | — | | | — | | | — | | | 189 | | | 371 | |
| Realized gain (loss) on investments | — | | | (121) | | | — | | | — | | | — | | | — | | | — | | | (121) | |
| Other income (expense) | — | | | (26) | | | — | | | 131 | | | (47) | | | 4 | | | (87) | | | (25) | |
| INCOME (LOSS) BEFORE INCOME TAXES | 42,688 | | | 9,995 | | | (3,425) | | | 10,676 | | | 2,025 | | | (4,286) | | | (46,220) | | | 11,453 | |
| Income tax (expense) benefit | (10,406) | | | (1,845) | | | (528) | | | (4,073) | | | (557) | | | — | | | 8,879 | | | (8,530) | |
| NET INCOME (LOSS) | $ | 32,282 | | | $ | 8,150 | | | $ | (3,953) | | | $ | 6,603 | | | $ | 1,468 | | | $ | (4,286) | | | $ | (37,341) | | | $ | 2,923 | |
________
(1) Our segments are reported net of eliminations upon consolidation. Approximately $13.2 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 CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| REIT Advisory | | Remington | | Premier | | INSPIRE | | RED | | OpenKey | | Corporate and Other | | Ashford Inc. Consolidated |
| REVENUE | | | | | | | | | | | | | | | |
| Advisory services fees | $ | 47,566 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 47,566 | |
| Hotel management fees | — | | | 26,260 | | | — | | | — | | | — | | | — | | | — | | | 26,260 | |
| Design and construction fees | — | | | — | | | 9,557 | | | — | | | — | | | — | | | — | | | 9,557 | |
| Audio visual | — | | | — | | | — | | | 49,880 | | | — | | | — | | | — | | | 49,880 | |
| Other | 81 | | | 20 | | | — | | | — | | | 23,867 | | | 1,965 | | | 21,396 | | | 47,329 | |
Cost reimbursement revenue (1) | 26,969 | | | 171,522 | | | 2,856 | | | 20 | | | — | | | — | | | 2,608 | | | 203,975 | |
| Total revenues | 74,616 | | | 197,802 | | | 12,413 | | | 49,900 | | | 23,867 | | | 1,965 | | | 24,004 | | | 384,567 | |
| EXPENSES | | | | | | | | | | | | | | | |
| Depreciation and amortization | 4,039 | | | 12,141 | | | 12,230 | | | 1,880 | | | 400 | | | 15 | | | 1,893 | | | 32,598 | |
| Impairment | — | | | — | | | — | | | 1,160 | | | — | | | — | | | — | | | 1,160 | |
Other operating expenses (2) | 645 | | | 14,525 | | | 8,846 | | | 52,228 | | | 18,547 | | | 5,170 | | | 52,125 | | | 152,086 | |
Reimbursed expenses (1) | 26,949 | | | 171,522 | | | 2,856 | | | 20 | | | — | | | — | | | 2,609 | | | 203,956 | |
| Total operating expenses | 31,633 | | | 198,188 | | | 23,932 | | | 55,288 | | | 18,947 | | | 5,185 | | | 56,627 | | | 389,800 | |
| OPERATING INCOME (LOSS) | 42,983 | | | (386) | | | (11,519) | | | (5,388) | | | 4,920 | | | (3,220) | | | (32,623) | | | (5,233) | |
| Equity in earnings (loss) of unconsolidated entities | — | | | (139) | | | — | | | — | | | — | | | — | | | 13 | | | (126) | |
| Interest expense | — | | | — | | | — | | | (876) | | | (628) | | | — | | | (3,640) | | | (5,144) | |
| Amortization of loan costs | — | | | — | | | — | | | (121) | | | (81) | | | — | | | (120) | | | (322) | |
| Interest income | — | | | 277 | | | — | | | — | | | — | | | — | | | 8 | | | 285 | |
| Realized gain (loss) on investments | — | | | (3) | | | — | | | — | | | — | | | — | | | — | | | (3) | |
| Other income (expense) | — | | | 10 | | | — | | | (189) | | | (252) | | | 7 | | | (13) | | | (437) | |
| INCOME (LOSS) BEFORE INCOME TAXES | 42,983 | | | (241) | | | (11,519) | | | (6,574) | | | 3,959 | | | (3,213) | | | (36,375) | | | (10,980) | |
| Income tax (expense) benefit | (10,097) | | | (1,406) | | | 2,414 | | | 1,326 | | | (1,025) | | | — | | | 8,950 | | | 162 | |
| NET INCOME (LOSS) | $ | 32,886 | | | $ | (1,647) | | | $ | (9,105) | | | $ | (5,248) | | | $ | 2,934 | | | $ | (3,213) | | | $ | (27,425) | | | $ | (10,818) | |
________
(1) Our segments are reported net of eliminations upon consolidation. Approximately $8.6 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 CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 |
| REIT Advisory | | Remington | | Premier | | INSPIRE | | RED | | OpenKey | | Corporate and Other | | Ashford Inc. Consolidated |
| REVENUE | | | | | | | | | | | | | | | |
| Advisory services fees | $ | 45,247 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 45,247 | |
| Hotel management fees | — | | | 17,126 | | | — | | | — | | | — | | | — | | | — | | | 17,126 | |
| Design and construction fees | — | | | — | | | 8,936 | | | — | | | — | | | — | | | — | | | 8,936 | |
| Audio visual | — | | | — | | | — | | | 37,881 | | | — | | | — | | | — | | | 37,881 | |
| Other | 237 | | | — | | | — | | | — | | | 9,663 | | | 1,479 | | | 14,223 | | | 25,602 | |
Cost reimbursement revenue (1) | 24,685 | | | 128,470 | | | 2,668 | | | — | | | — | | | — | | | 2,736 | | | 158,559 | |
| Total revenues | 70,169 | | | 145,596 | | | 11,604 | | | 37,881 | | | 9,663 | | | 1,479 | | | 16,959 | | | 293,351 | |
| EXPENSES | | | | | | | | | | | | | | | |
| Depreciation and amortization | 9,131 | | | 13,943 | | | 12,628 | | | 1,968 | | | 329 | | | 19 | | | 1,939 | | | 39,957 | |
| Impairment | — | | | 126,548 | | | 49,524 | | | 12,692 | | | — | | | — | | | 73 | | | 188,837 | |
Other operating expenses (2) | 8,035 | | | 12,751 | | | 7,930 | | | 45,125 | | | 9,942 | | | 4,044 | | | 42,159 | | | 129,986 | |
Reimbursed expenses (1) | 24,627 | | | 128,470 | | | 2,668 | | | — | | | — | | | — | | | 2,736 | | | 158,501 | |
| Total operating expenses | 41,793 | | | 281,712 | | | 72,750 | | | 59,785 | | | 10,271 | | | 4,063 | | | 46,907 | | | 517,281 | |
| OPERATING INCOME (LOSS) | 28,376 | | | (136,116) | | | (61,146) | | | (21,904) | | | (608) | | | (2,584) | | | (29,948) | | | (223,930) | |
| Equity in earnings (loss) of unconsolidated entities | — | | | — | | | — | | | — | | | — | | | — | | | 212 | | | 212 | |
| Interest expense | — | | | — | | | — | | | (1,253) | | | (554) | | | — | | | (3,582) | | | (5,389) | |
| Amortization of loan costs | — | | | — | | | — | | | (57) | | | (4) | | | — | | | (257) | | | (318) | |
| Interest income | — | | | — | | | — | | | — | | | — | | | — | | | 32 | | | 32 | |
| Realized gain (loss) on investments | — | | | (386) | | | — | | | — | | | — | | | — | | | — | | | (386) | |
| Other income (expense) | — | | | 27 | | | — | | | (48) | | | (72) | | | (6) | | | (165) | | | (264) | |
| INCOME (LOSS) BEFORE INCOME TAXES | 28,376 | | | (136,475) | | | (61,146) | | | (23,262) | | | (1,238) | | | (2,590) | | | (33,708) | | | (230,043) | |
| Income tax (expense) benefit | (8,066) | | | 3,108 | | | 3,267 | | | 5,060 | | | 523 | | | — | | | 10,363 | | | 14,255 | |
| NET INCOME (LOSS) | $ | 20,310 | | | $ | (133,367) | | | $ | (57,879) | | | $ | (18,202) | | | $ | (715) | | | $ | (2,590) | | | $ | (23,345) | | | $ | (215,788) | |
________
(1) Our segments are reported net of eliminations upon consolidation. Approximately $9.4 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
Geographic Information
For revenues by geographical locations, see note 3. The following table presents property and equipment, net by geographic area as of December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| United States | $ | 36,548 | | | $ | 80,879 | |
| Mexico | 4,478 | | | 2,119 | |
| Dominican Republic | 538 | | | 365 | |
| United Kingdom (Turks and Caicos Islands) | 227 | | | 203 | |
| $ | 41,791 | | | $ | 83,566 | |
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
22. Concentration of Risk
During the years ended December 31, 2022, 2021 and 2020, our advisory revenue was primarily derived from our advisory agreements with Ashford Trust and Braemar. Additionally, Remington, Premier, OpenKey, RED, Pure Wellness and Lismore generated revenues through contracts with Ashford Trust and Braemar, as summarized in the table below, stated as a percentage of the consolidated subsidiaries’ total revenues.
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
Percentage of total revenues from Ashford Trust and Braemar (1) | | | | | | | | | |
| Remington | | | | | 79.6 | % | | 93.7 | % | | 97.9 | % |
| Premier | | | | | 88.8 | % | | 72.1 | % | | 83.1 | % |
INSPIRE (2) | | | | | 22.8 | % | | 17.9 | % | | 16.6 | % |
| OpenKey | | | | | 10.8 | % | | 8.0 | % | | 21.5 | % |
| RED | | | | | 9.6 | % | | 10.9 | % | | 9.8 | % |
| Pure Wellness | | | | | 65.7 | % | | 62.1 | % | | 73.7 | % |
| Lismore | | | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | |
________
(1)See note 19 for details regarding our related party transactions.
(2)Represents percentage of revenues earned by INSPIRE from customers at Ashford Trust and Braemar hotels. See note 3 for the discussion of audio visual revenue recognition policy.
The carrying amounts of net assets related to our INSPIRE operations in Mexico and the Dominican Republic increased to a net asset position of $1.4 million and $763,000, respectively, as of December 31, 2022, from a net deficit position of $864,000 and $201,000 as of December 31, 2021. The carrying amounts of net assets related to our RED operations in Turks and Caicos were $682,000 and $172,000 as of December 31, 2022 and 2021, respectively. For discussion of revenues by geographic location, see note 3.
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents and accounts receivable. We are exposed to credit risk with respect to cash held at financial institutions that are in excess of the FDIC insurance limits of $250,000 and U.S. government treasury bond holdings. Our counterparties are investment grade financial institutions.
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
23. Subsequent Events
On January 3, 2023, the Company acquired RHC, an affiliate owned by the Bennetts, from which the Company leases the offices for our corporate headquarters in Dallas, Texas. The purchase price paid was de minimis.
On January 16, 2023, Remington amended the terms of their outstanding note receivable with a third-party property owner with an outstanding principal balance of $1.5 million. The amendment extends the maturity date of the note receivable from December 31, 2022 to January 31, 2024 for the outstanding principal balance and all accrued and unpaid interest. The interest rate on the note receivable is 10% per annum with payments of interest payable quarterly commencing March 31, 2023.
On February 1, 2023, the Company entered into a Third Amended and Restated Contribution Agreement with Ashford Trust and Braemar. The Third Amended and Restated Contribution Agreement states that after the Amended and Restated True-Up Date occurs capital contributions for the remainder of fiscal year 2023 will be divided between each Party based on the Initial True-Up Ratio. Thereafter on a yearly basis at year-end, starting with the year-end of 2023, there will be a true-up between the Parties whereby there will be adjustments so that the capital contributions made by each Party will be based on the cumulative amount of capital raised by each Party through Ashford Securities as a percentage of the total amount raised by the Parties collectively through Ashford Securities since June 19, 2019 (the resulting ratio of capital contributions among the Company, Ashford Trust and Braemar following this true-up, the “Cumulative Ratio”). Thereafter, the capital contributions will be divided among each Party in accordance with the Cumulative Ratio, as recalculated at the end of each year.
On March 2, 2023, the Company entered into a Limited Waiver Under Advisory Agreement (the “2023 Braemar Limited Waiver”) with Braemar, Braemar OP, and Braemar TRS and a Limited Waiver Under Advisory Agreement (the “2023 Ashford Trust Limited Waiver” and together with the 2023 Braemar Limited Waiver, the “2023 Limited Waivers”) with Ashford Trust, Ashford Trust OP, and Ashford Trust TRS. Pursuant to the 2023 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 of 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 2023 (the “2023 Waiver Period”), cash incentive compensation to employees and other representatives of the Company; provided that, pursuant to the 2023 Ashford Trust Limited Waiver, such awarded cash incentive compensation does not exceed $13.1 million, in the aggregate, during the 2023 Waiver Period.
On March 7, 2023, the Company drew $12.0 million on the Credit Facility. The remaining amount unused after drawing upon the Credit Facility is $18.0 million.