ASHFORD INC.
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 forAshford Trust and Braemar. In our capacity as the advisor toAshford Trust and Braemar, we are responsible for implementing the investment strategies and managing the day-to-day operations ofAshford 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 ofAshford Trust and Braemar.Ashford Trust is focused on investing in full-service hotels in the upscale and upper upscale segments inthe United States that have RevPAR generally less than twice theU.S. national average. Braemar invests primarily in luxury hotels and resorts with RevPAR of at least twice theU.S. national average. Each ofAshford Trust and Braemar is a REIT as defined in the Internal Revenue Code, and the common stock of each ofAshford Trust and Braemar is traded on the NYSE. We provide the personnel and services that we believe are necessary for each ofAshford 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 ofAshford 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 forAshford Trust , Braemar and third-parties. As ofDecember 31, 2022 , Remington provided hotel management services to 118 properties, 45 of which were owned by third-parties.
Recent Developments
OnApril 1, 2022 , the Company entered into a Credit Agreement (the "Credit Agreement") withMustang 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. OnApril 18, 2022 andMarch 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. 60 -------------------------------------------------------------------------------- OnApril 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 endedJune 30, 2020 andDecember 31, 2020 to stockholders of record as ofApril 11, 2022 . The Company paid the dividend of approximately$17.8 million , or$0.932 per share of Series D Convertible Preferred Stock, onApril 15, 2022 . Dividends for the Series D Convertible Preferred Stock remain in arrears for the quarters endedJune 30, 2021 andDecember 31, 2021 . On each ofApril 15, 2022 ,July 15, 2022 andOctober 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. OnDecember 13, 2022 , the Board declared a cash dividend on the Company's Series D Convertible Preferred Stock for the quarter endedDecember 31, 2022 . The Company paid the dividend of$8.7 million , or$0.455 per share of Series D Convertible Preferred Stock, onJanuary 13, 2023 . See note 15 to our consolidated financial statements for discussion of the dividends. OnApril 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-termU.S. Treasury securities, the independent members of the respective boards of directors ofAshford Trust and Braemar approved the engagement of the Company to actively manage and invest each ofAshford Trust's and Braemar's excess cash in short-termU.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 ofAshford 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 ofAshford Trust's and Braemar's excess cash pursuant to the Cash Management Strategy commenced inOctober 2022 . OnDecember 16, 2022 , the Company andAshford Trust entered into an Agreement of Purchase and Sale (the "Purchase Agreement") pursuant to which, effective as ofDecember 16, 2022 ,Ashford Trust acquired all of the equity interests inMarietta and, in exchange,Ashford Trust forgave, cancelled and discharged in full the Company's outstanding$11.4 million ERFP commitment toAshford Trust . See note 5 to our consolidated financial statements. OnDecember 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 inMaui, 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
OnFebruary 1, 2023 , the Company entered into a Third Amended and Restated Contribution Agreement withAshford 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 throughAshford Securities orJune 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 throughAshford 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 throughAshford Securities as a percentage of the total amount raised by the Parties collectively throughAshford Securities sinceJune 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. 61 --------------------------------------------------------------------------------
Other Developments
Shareholder Rights Plan
OnAugust 30, 2022 , we adopted a shareholder rights plan by entering into a Rights Agreement, datedAugust 30, 2022 , withComputerShare 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 onSeptember 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 onJuly 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
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--------------------------------------------------------------------------------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 endedDecember 31, 2021 .
Year Ended
The following table summarizes the changes in key line items from our consolidated statements of operations for the year endedDecember 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 endedDecember 31, 2022 ("2022") compared to a$46.0 million loss for the year endedDecember 31, 2021 ("2021") as a result of the factors discussed below.
Total Revenues. Total revenues increased by
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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
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--------------------------------------------------------------------------------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 fromAshford 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 fromAshford Trust , Braemar and third-parties, respectively. The increase fromAshford 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 inApril 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
(6) The
(7) The
(8) The decrease in debt placement and related fee revenue is due to lower revenue of$8.1 million fromAshford 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 fromAshford Trust in 2022 is primarily due to the expiration of theAshford Trust Agreement with Lismore onApril 6, 2022 . The decrease in revenue from Braemar in 2022 is primarily due to the expiration of the Braemar Agreement with Lismore inMarch 2021 . (9) Cash management fees include revenue earned by providing active management and investment ofAshford Trust and Braemar's excess cash in short-termU.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
(11) Other services revenue relates to other hotel services provided by our consolidated subsidiaries, OpenKey and Pure Wellness, toAshford Trust , Braemar and other third parties. Other revenue additionally includesMarietta prior toAshford Trust's acquisition onDecember 16, 2022 . The increase in other services revenue is primarily due to higher revenue of$3.4 million in 2022 fromMarietta 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 inApril 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 forAshford Trust and Braemar.
(13) See note 21 to our consolidated financial statements for discussion of segment reporting.
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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
(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 withAshford 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. 66 -------------------------------------------------------------------------------- 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) 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 andMarietta as their respective operations increased during 2022. Other operating expenses for 2022 also includes losses on the sale of FF&E previously leased toAshford Trust of$2.8 million under the Ashford Trust ERFP agreement and a loss of$1.2 million onAshford Trust's acquisition ofMarietta onDecember 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
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
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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
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 ofAshford 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
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 inAshford 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 inAshford 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 onNovember 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 onNovember 6, 2021 . See note 15 to our consolidated financial statements. 68 --------------------------------------------------------------------------------
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-OnApril 1, 2022 , the Company entered into the Credit Agreement withMustang 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. OnApril 18, 2022 andMarch 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 ofAshford LLC and each guarantor and a pledge of the equity interests inAshford LLC and each guarantor. As ofDecember 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
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
__________________
69
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(1) Principal payments assume no extension of existing extension options for
each of the following five years and thereafter as of
(2) For variable-rate indebtedness, interest obligations are estimated based on the LIBOR and Prime interest rates as ofDecember 31, 2022 . We have assumed that credit facility balances remain outstanding until maturity using the interest rates as ofDecember 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 ofDecember 31, 2022 and 2021, respectively. For further discussion see note 8 to our consolidated financial statements. Preferred stock dividends-As ofDecember 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. OnApril 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 endedJune 30, 2020 andDecember 31, 2020 to stockholders of record as ofApril 11, 2022 . The Company paid the dividend of approximately$17.8 million , or$0.932 per share of Series D Convertible Preferred Stock, onApril 15, 2022 . On each ofApril 15, 2022 ,July 15, 2022 andOctober 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. OnDecember 13, 2022 , the Board declared a cash dividend on the Company's Series D Convertible Preferred Stock for the quarter endedDecember 31, 2022 . The Company paid the dividend of$8.7 million , or$0.455 per share of Series D Convertible Preferred Stock, onJanuary 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 endedJune 30, 2021 andDecember 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 untilNovember 6, 2020 ; (b) 6.99% per annum fromNovember 6, 2020 untilNovember 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 onApril 15 ,July 15 ,October 15 andJanuary 15 of each calendar year in respect of the quarterly periods ending onMarch 31 ,June 30 ,September 30 andDecember 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-OnJune 26, 2018 , the Company entered into theAshford Trust ERFP Agreement withAshford Trust . The independent members of the board of directors of each of the Company andAshford Trust , with the assistance of separate and independent legal counsel, engaged to negotiate theAshford Trust ERFP Agreement on behalf of the Company andAshford Trust , respectively. OnJanuary 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 ofAshford Trust and Braemar (collectively, the "REITs"), respectively, in connection with each such 70 -------------------------------------------------------------------------------- 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. OnMarch 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 fromJanuary 22, 2021 toDecember 31, 2022 . OnApril 20, 2021 , the Company received written notice fromAshford 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 onJune 26, 2021 . The expiration of the Ashford Trust ERFP Agreement had no impact on the Extension Agreement which continued in full force untilDecember 16, 2022 , whenAshford Trust acquired all of the equity interests inMarietta and, in exchange, forgave, cancelled and discharged in full the outstanding$11.4 million ERFP commitment. See note 5 to our consolidated financial statements. OnNovember 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 onJanuary 15, 2022 .
As of
Other liquidity considerations-OnDecember 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 endedDecember 31, 2022 .
As of
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."
71
--------------------------------------------------------------------------------Sources and Uses of Cash
As ofDecember 31, 2022 andDecember 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 endedDecember 31, 2022 compared to net cash flows provided by operating activities of$20.8 million for the year endedDecember 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 endedDecember 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 clientsAshford Trust and Braemar. Net Cash Flows Provided by (Used in) Investing Activities. For the year endedDecember 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 byMarietta 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 toAshford Trust . For the year endedDecember 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 ofAshford 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 toAshford 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 endedDecember 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 withBank 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 endedDecember 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. 72 --------------------------------------------------------------------------------
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. ForAshford Trust , fromJanuary 1, 2021 throughJanuary 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 withAshford Trust , datedJune 10, 2015 , as amended), subject to certain minimums. OnJanuary 14, 2021 , the Company entered into the Second Amended and Restated Advisory Agreement withAshford 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. OnJanuary 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 byOaktree Capital Management L.P. ("Oaktree"). In connection with the transactions contemplated by the Oaktree Credit Agreement, onJanuary 15, 2021 , the Company and certain of its affiliates entered into a Subordination and Non-Disturbance Agreement (the "SNDA") withAshford 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 endedDecember 31, 2019 (the "AdvisoryFee 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 toLismore 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 fromAshford Trust in 2021 in excess of the AdvisoryFee 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 AdvisoryFee 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 onAshford Trust's market capitalization or (2) 1/12th of$29.0 million . OnOctober 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, suspendedAshford 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 ofAshford Trust's preferred stock andAshford 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 AdvisoryFee Cap . Based uponAshford 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 withAshford Trust which exceed the AdvisoryFee 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 fromAshford 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. 73 -------------------------------------------------------------------------------- Incentive advisory fees are measured annually in each year thatAshford 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 forAshford 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 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 byAshford 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 byAshford Trust and Braemar whenever a hotel's gross operating profit ("GOP") exceeds the hotel's budgetedGOP . 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'sGOP exceeds the hotel's budgetedGOP . 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
74
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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 withAshford Trust and Braemar (as defined below), we are entitled to be reimbursed for certain costs we incur on behalf ofAshford Trust and Braemar, with no added mark-up. These costs primarily consist of expenses related toAshford 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 ofAshford 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 ofAshford 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 withAshford Trust , Braemar and other hotel owners. The recognition of cost reimbursement revenue and reimbursed expenses for centralized software programs reimbursed byAshford 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 includesU.S. federal and state income taxes,Mexico andDominican Republic income taxes andU.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 theFinancial 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 theU.S. federal jurisdiction and various states and cities, beginning in 2017, inMexico 75 -------------------------------------------------------------------------------- and theDominican Republic and, beginning in 2018, in theU.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 fromAshford 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 ofGoodwill 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 ofOctober 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 ofOctober 1, 2022 . Additionally, no indicators of impairment were identified from the date of our impairment assessments throughDecember 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. 76
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Recently Issued Accounting Standards-InJune 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. InNovember 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 afterDecember 15, 2022 . We adopted ASU 2016-13 and ASU 2019-10 effectiveJanuary 1, 2023 and the adoption did not have a material impact on our consolidated financial statements and related disclosures. InAugust 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 afterDecember 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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