ASHFORD INC. As used in this Quarterly Report on Form 10-Q, unless the context otherwise indicates, the references to "we," "us," "our," and the "Company" refer toAshford Inc. , aNevada corporation, and, as the context may require, its consolidated subsidiaries, includingAshford Hospitality Advisors LLC , aDelaware limited liability company, which we refer to as "Ashford LLC " or "our operating company";Ashford Hospitality Holdings LLC , aDelaware limited liability company, which we refer to as "Ashford Holdings ";Ashford Hospitality Services LLC , aDelaware limited liability company, which we refer to as "Ashford Services";Premier Project Management LLC , aMaryland limited liability company, which we refer to as "Premier Project Management," or "Premier"; from and afterNovember 6, 2019 ,Remington Lodging & Hospitality, LLC , aDelaware limited liability company, which we refer to as "Remington" a hotel management company acquired byAshford Inc. onNovember 6, 2019 from Mr.Monty J. Bennett , our chief executive officer and chairman of our board of directors (the "Board"), and his father, Mr.Archie Bennett , Jr., chairman emeritus ofAshford Trust ; and, from and afterNovember 6, 2019 ,Marietta Leasehold, L.P. ("Marietta"), also included in theNovember 6, 2019 transaction to acquire Remington. "Remington Lodging" refers to Remington prior to the completion of the acquisition, resulting inRemington Lodging & Hospitality, LLC becoming a subsidiary ofAshford Inc. "Braemar" refers to Braemar Hotels & Resorts Inc., aMaryland corporation, and, as the context may require, its consolidated subsidiaries, includingBraemar Hospitality Limited Partnership , aDelaware limited partnership, which we refer to as "Braemar OP." "Ashford Trust " or "AHT" refers to Ashford Hospitality Trust, Inc., aMaryland corporation, and, as the context may require, its consolidated subsidiaries, includingAshford Hospitality Limited Partnership , aDelaware limited partnership andAshford Trust's operating partnership, which we refer to as "Ashford Trust OP." FORWARD-LOOKING STATEMENTS This Form 10-Q contains certain forward-looking statements that are subject to risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "potential," "intend," "expect," "anticipate," "estimate," "approximately," "believe," "could," "project," "predict," or other similar words or expressions. Additionally, statements regarding the following subjects are forward-looking by their nature: • the impact of the COVID-19 pandemic and numerous governmental travel
restrictions and other orders on our clients' and our business;
• our business and investment strategy;
• our projected operating results;
• our ability to obtain future financing arrangements;
• our ability to continue to meet the NYSE American continued listing standards;
• our understanding of our competition;
• market trends;
• the future success of recent acquisitions, including the 2018 acquisition
of Premier and the 2019 acquisition of Remington;
• the future success of recent business initiatives, including the Enhanced
Return Funding Programs with
• projected capital expenditures; and
• the impact of technology on our operations and business.
Forward-looking statements are based on certain assumptions, discuss future
expectations, describe future plans and strategies, contain financial and
operating projections or state other forward-looking information. Our ability to
predict results or the actual effect of future events, actions, plans or
strategies is inherently uncertain. Although we believe that the expectations
reflected in our forward-looking statements are based on reasonable assumptions,
taking into account all information currently available to
51
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us, our actual results and performance could differ materially from those set
forth in our forward-looking statements. Factors that could have a material
adverse effect on our forward-looking statements include, but are not limited
to:
• the risk factors set forth in our Annual Report on Form 10-K for the year
ended
including under the sections captioned "Item 1. Business," "Item 1A. Risk
Factors" and "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations;" as supplemented by our Current
Report on Form 8-K filed
Form 10-Q and other filings under the Exchange Act;
• adverse effects of the COVID-19 pandemic, including a general reduction in
business and personal travel and travel restrictions in regions where our
clients' hotels are located;
• actions by our clients' lenders to accelerate loan balances and foreclose
on our clients' hotel properties that are security for our clients' loans
that are in default;
• uncertainty associated with the ability of the Company to remain in
compliance with all covenants in our Term Loan Agreement and oursubsidiaries to remain in compliance with the covenants of their debt and
related agreements;
• general volatility of the capital markets, the general economy or thehospitality industry, whether the result of market events or otherwise,
and the market price of our common stock;
• availability, terms and deployment of capital;
• changes in our industry and the markets in which we operate, interest
rates or the general economy;
• the degree and nature of our competition;
• actual and potential conflicts of interest with or between
and Braemar, our executive officers and our non-independent directors;
• availability of qualified personnel;
• changes in governmental regulations, accounting rules, tax rates and
similar matters;
• legislative and regulatory changes;
• the possibility that we may not realize any or all of the anticipated
benefits from transactions to acquire businesses, including the 2018
acquisition of Premier and the 2019 acquisition of Remington, and the
possibility we will be required to record additional goodwill impairments
relating to those businesses as a result of the impact of the COVID-19
pandemic on our clients', and our, business;
• the possibility that we may not realize any or all of the anticipated
benefits from new business initiatives, including the ERFP Agreements with
• sales of our common stock by the stockholders and unitholders of Ashford
Trust and Braemar, to whom Ashford Trust and Braemar, respectively,
divested (on November 5, 2019 ) shares of our common stock previously held
by Ashford Trust and Braemar, in each case, in connection with the
agreement to acquire Remington Lodging that was signed on
amended on July 19, 2019 and further amended on August 28, 2019 ) and which
closed on November 6, 2019 ;
• the failure to pay full dividend payments on our Series D Convertible
Preferred Stock in consecutive quarters, which would will result in a
higher interest rate and the right of Mr.
Bennett, Jr. to each have the right to appoint one member to the Board;
• disruptions relating to the acquisition or integration of Premier,
Remington or any other business we invest in or acquire, which may harm
relationships with customers, employees and regulators; and
• unexpected costs of further goodwill impairments relating to theacquisition or integration of Premier, Remington or any other business we
invest in or acquire.
When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements under "Item 1A. Risk Factors" of our Annual Report, as supplemented by our Current Report on Form 8-K filedMay 8, 2020 and this Quarterly Report, the discussion in this Management's Discussion and Analysis of Financial Conditions and Results of Operations, and elsewhere which could cause our actual results and performance to differ significantly from those contained in our forward-looking statements. Accordingly, we cannot guarantee future results or performance. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Form 10-Q. Furthermore, we do not intend to update any of our forward-looking statements after the date of this Form 10-Q to conform these statements to actual results and performance, except as may be required by applicable law. OverviewAshford Inc. is aNevada corporation that provides products and services primarily to clients in the hospitality industry, includingAshford Trust and Braemar. We became a public company inNovember 2014 , and our common stock is listed on the 52 -------------------------------------------------------------------------------- NYSE American. As ofJune 23, 2020 , Mr.Monty J. Bennett ,Ashford Inc.'s Chairman and Chief Executive Officer and the Chairman ofAshford Trust and Braemar, and his father, Mr.Archie Bennett , Jr., Chairman Emeritus ofAshford Trust , owned approximately 427,684 shares of our common stock, which represented an approximately 16.9% ownership interest inAshford Inc. , and owned 18,758,600 shares of our Series D Convertible Preferred Stock (the "Series D Convertible Preferred Stock"), which is exercisable (at an exercise price of$117.50 per share) into an additional approximate 3,991,191 shares ofAshford Inc. common stock, which if exercised as ofJune 23, 2020 would have increased Mr.Monty J. Bennett and Mr.Archie Bennett , Jr.'s ownership interest inAshford Inc. to 67.8%. We provide: (i) advisory services; (ii) asset management services; (iii) hotel management services; (iv) project management 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 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 throughAshford Hospitality Advisors, LLC ("Ashford LLC "),Ashford Hospitality Services, 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 toAshford 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 from an ownership perspective, in each case subject to the supervision and oversight of the respective board of directors ofAshford Trust and Braemar.Ashford Trust is focused on investing in full-service hotels in the upscale and upper upscale segments in theU.S. that have RevPAR generally less than twice the 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 of 1986, as amended (the "Internal Revenue Code"), and the common stock of each ofAshford Trust and Braemar is traded on theNew York Stock Exchange (the "NYSE"). As required for disclosure under the Enhanced Return Funding Program Agreement and Amendment No. 1 to the Fifth Amended and Restated Advisory Agreement, for the trailing twelve months endedMarch 31, 2020 , the total incremental expenses incurred (including all reimbursable expenses), as reasonably determined, in connection with providing services to Braemar under the agreement was$11.6 million . Recent Developments COVID-19, Management's Plans and Liquidity InDecember 2019 , a novel strain of coronavirus (COVID-19) was identified inWuhan, China , which subsequently spread to other regions of the world, and has resulted in significant travel restrictions and extended shutdown of numerous businesses in every state inthe United States . InMarch 2020 , theWorld Health Organization declared COVID-19 to be a global pandemic. Our clientsAshford Trust and Braemar have reported that the negative impact on room demand within their respective portfolios stemming from the novel coronavirus (COVID-19) is significant, which has resulted and is expected to result in significantly reduced occupancy and RevPAR. Furthermore, the prolonged presence of the virus has resulted in health or other government authorities imposing widespread restrictions on travel and other businesses. The hotel industry has experienced postponement or cancellation of a significant number of business conferences and similar events. Following the government mandates and health official orders, the Company dramatically reduced staffing and expenses at its products and services businesses and at our corporate office. COVID-19 has had a significant negative impact on the Company's operations and financial results to date. The Company expects that the COVID-19 pandemic will have a significant negative impact on the Company's results of operations, financial position and cash flow in 2020. As a result, inMarch 2020 , the Company declared 50% of the cumulative preferred dividend which was due with respect to its Series D Convertible Preferred Stock for the first quarter of 2020, reduced the compensation of its board of directors, executive officers and other employees, amended payment terms pursuant to certain hotel management agreements to better manage corporate working capital, reduced planned capital expenditures, and significantly reduced operating expenses. Additionally, subsequent toMarch 31, 2020 , in order to preserve Company liquidity, the Company entered into a letter agreement with its Chief Executive Officer, Mr.Monty J. Bennett , to pay his base salary (as previously reduced in March) for the remainder of 2020 in the form of common stock of the Company, amended contingent consideration and stock consideration collar payment terms related to the acquisition of BAV, and onJune 24, 2020 , the Company declared the remaining 50% of the cumulative preferred dividends due with respect to its Series D Convertible Preferred Stock for the first quarter of 2020 to be paid onJuly 14, 2020 . The Company adopted a remote-work policy at its corporate office in an effort to protect the health and safety of its employees and does not anticipate these policies to have any adverse impact on its ability to continue to operate its business. This transition 53 -------------------------------------------------------------------------------- to a remote-work environment has not had a material adverse impact on the Company's financial reporting system, internal controls or disclosure controls and procedures. As ofMarch 31, 2020 , the Company's consolidated net worth was less than$23.2 million , which resulted in a breach of a financial covenant related to our credit agreement withAshford Hospitality Holdings LLC , a subsidiary of the Company,Bank of America, N.A ., as administrative agent and letters of credit issuer, and the lenders from time to time party thereto (the "Term Loan Agreement"). EffectiveJune 23, 2020 , the Company andBank of America N.A . executed the Fifth Amendment to the Term Loan Agreement (the "Fifth Amendment"). The Fifth Amendment (a) establishes a 0.50% LIBOR floor, (b) eliminates the consolidated net worth financial covenant, and (c) waives the violation of the consolidated net worth financial covenant that occurred onMarch 31, 2020 . As ofMarch 31, 2020 , our subsidiaries were in compliance in all material respects with all covenants or other requirements set forth in our debt and related agreements as amended. However, there can be no guarantee that our subsidiaries' will remain in compliance for the remainder of the fiscal year. Due to the significant negative impact of COVID-19 on the operations of our subsidiaries, we expect that within the next twelve months, our JSAV and RED subsidiaries will violate debt covenants pursuant to certain existing debt agreements which have no recourse toAshford Inc. As a result, JSAV and RED may be required to immediately repay debt balances of$20.2 million and$2.6 million , respectively, which have therefore been classified as current liabilities within our condensed consolidated balance sheet as ofMarch 31, 2020 . The JSAV and RED subsidiary loans, which are expected to violate debt covenants, are secured by the respective subsidiary's tangible assets. All of our subsidiaries' debt has no recourse toAshford Inc. with the exception of$3.8 million of debt held by the entity that conducts RED's legacyU.S. Virgin Islands operations which is currently not expected to violate debt covenants. See note 6 in our condensed consolidated financial statements. Based on these factors, as well as, our negative$29.0 million working capital position as ofMarch 31, 2020 , the Company has determined that there is substantial doubt about the Company's ability to continue as a going concern within one year after the date the financial statements are issued.U.S. generally accepted accounting principles require that in making this determination, the Company cannot consider any remedies that are outside of the Company's control and have not been fully implemented. As a result, the Company could not consider future potential fundraising activities, whether through equity or debt offerings, disposition of assets or the likelihood of obtaining waivers as we could not conclude they were probable of being effectively implemented. Further, the Company could not consider continued cash payment of advisory fees and other revenues fromAshford Trust and Braemar, two of the Company's key customers, because each ofAshford Trust and Braemar currently exhibits conditions that create substantial doubt about the ability for each to continue as a going concern. Also, the continued cash payment of such advisory fees and other revenues remains subject to the discretion of the independent board members of each ofAshford Trust and Braemar, which is not within the Company's control. As such, the Company's ability to remain in compliance with the financial covenants related to our Term Loan Agreement, as amended, for the next twelve months is outside of management's control. Accordingly, the Company has classified the entire$35.0 million outstanding under our Term Loan Agreement, as amended, as a current liability on our condensed consolidated balance sheet as ofMarch 31, 2020 . Subsequent toMarch 31, 2020 , certain subsidiaries applied for and received loans fromKey Bank, N.A. ,Comerica Bank andCentennial Bank under the Paycheck Protection Program ("PPP") which was established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). All funds borrowed under the PPP were returned on or beforeMay 7, 2020 . Other Developments OnMarch 13, 2020 , the Company entered into the Extension Agreement, related to the Ashford Trust ERFP Agreement. Under the terms of the Extension Agreement, the remaining ERFP commitment funding deadline under the Ashford Trust ERFP Agreement of$11.4 million as ofMarch 31, 2020 andDecember 31, 2019 , has been extended fromJanuary 22, 2021 toDecember 31, 2022 . See note 9 to our condensed consolidated financial statements. OnMarch 16, 2020 , the Company announced that in light of the uncertainty created by the effects of the COVID-19, effectiveMarch 21, 2020 , the base salary for its Chief Executive Officer, Mr.Monty J. Bennett , will be temporarily reduced by 20% and the base salary for certain other Company officers, including its Chief Financial Officer and its other named executive officers, will be temporarily reduced by 15% until the effects of COVID-19 have subsided and it has been determined that the Company is in a healthy financial position. Any amounts relinquished pursuant to the reduction may be paid by the Company in the future. OnMarch 16, 2020 , in light of the uncertainty created by the effects of COVID-19, each non-employee serving on the Board agreed to a 25% reduction in their annual cash retainers. In addition, effective as ofMay 14, 2020 , the Board agreed further that this reduced amount would be payable 75% in cash and 25% in equity (common stock ofAshford Inc. ). This arrangement will be effective until such time as the Board determines in its discretion that the effects of COVID-19 have subsided. Any amounts relinquished pursuant to the reduction in fees may be paid by the Company in the future, as determined by the Board in its discretion. 54 -------------------------------------------------------------------------------- OnMarch 16, 2020 , the Company announced that the Board had declared and the Company would pay 50% of the cumulative preferred dividend which was due with respect to its Series D Convertible Preferred Stock for the first quarter of 2020. The declared$3.9 million dividends were paid onApril 15, 2020 . OnMarch 19, 2020 , the Company amended and restated the senior revolving credit facility pursuant to a Fourth Amendment to the Term Loan Agreement. The Company converted and consolidated the existing$10 million borrowing under the senior revolving credit facility (which had been borrowed on a revolving basis) into a term loan and drew down the remaining$25 million balance of the senior revolving credit facility, borrowing$35 million under the term loan in the aggregate. The Term Loan Agreement has a four year term and a maximum principal amount of$35 million . Principal payments of 1.25% of the outstanding balance are payable on the last business day of each fiscal quarter commencingJune 30, 2020 . See note 6 to our condensed consolidated financial statements. OnMarch 20, 2020 ,Lismore Capital LLC ("Lismore"), a wholly owned subsidiary of the Company, entered into an agreement to seek modifications, forbearances or refinancings ofAshford Trust's loans (the "Ashford Trust Agreement"). Pursuant to the Ashford Trust Agreement, Lismore shall, during the term of the agreement (which commenced onMarch 20, 2020 and shall end on the date that is twelve months following the commencement date, or upon it being terminated byAshford Trust on not less than thirty days written notice) negotiate the refinancing, modification or forbearance of the existing mortgage and mezzanine debt onAshford Trust's hotels. For the purposes of the Ashford Trust Agreement, financing shall include, without limitation, senior or subordinate loan financing, provided in any single transaction or a combination of transactions, including, mortgage loan financing, mezzanine loan financing, or subordinate loan financing encumbering the applicable hotel or unsecured loan financing. In connection with the services provided by Lismore, Lismore shall be paid an advisory fee of up to 50 basis points (0.50%) of the aggregate amount of the modifications, forbearances or refinancings, ofAshford Trust's mortgage and mezzanine debt (the "Ashford Trust Financings") calculated and payable as follows: (i) 0.125% of the aggregate amount of potentialAshford Trust Financings upon execution of the Ashford Trust Agreement; (ii) 0.125% payable in six equal installments beginningApril 20, 2020 and ending onSeptember 20, 2020 ; provided, however, in the eventAshford Trust does not complete, for any reason, Ashford Trust Financings during the term of the Ashford Trust Agreement equal to or greater than$4,114,740,601 , thenAshford Trust shall offset, against any fees owed byAshford Trust or its affiliates pursuant to the advisory agreement, a portion of the fee paid byAshford Trust to Lismore pursuant to this section equal to the product of (x) the amount ofAshford Trust Financings completed during the term of the Ashford Trust Agreement minus$4,114,740,601 multiplied by (y) 0.125%; and (iii) 25 basis points (0.25%) payable upon the acceptance by the applicable lender of anyAshford Trust Financing. As ofMarch 31, 2020 , the$5.0 million initial amount is recognized as deferred revenue, which will be recognized over the twelve month term, and a receivable in our condensed consolidated financial statements. See note14 to our condensed consolidated financial statements. OnMarch 20, 2020 , Lismore entered into an agreement to seek modifications, forbearances or refinancings of Braemar's loans (the "Braemar Agreement"). Pursuant to the Braemar Agreement, Lismore shall, during the term of the agreement (which commenced onMarch 20, 2020 and shall end on the date that is twelve months following the commencement date, or upon it being terminated by Braemar on not less than thirty days written notice) negotiate the refinancing, modification or forbearance of the existing mortgage and mezzanine debt on Braemar's hotels. For the purposes of the Braemar Agreement, financing shall include, without limitation, senior or subordinate loan financing, provided in any single transaction or a combination of transactions, including, mortgage loan financing, mezzanine loan financing, or subordinate loan financing encumbering the applicable hotel or unsecured loan financing. In connection with the services provided by Lismore, Lismore shall be paid an advisory fee of up to 50 basis points (0.50%) of the aggregate amount of the modifications, forbearances or refinancings, of Braemar's mortgage and mezzanine debt (the "Braemar Financings") calculated and payable as follows: (i) 0.125% of the aggregate amount of potential Braemar Financings upon execution of the Braemar Agreement; (ii) 0.125% payable in six equal installments beginningApril 20, 2020 and ending onSeptember 20, 2020 ; provided, however, in the event Braemar does not complete, for any reason, Braemar Financings during the term of the Braemar Agreement equal to or greater than$1,091,250,000 , then Braemar shall offset, against any fees owed by Braemar or its affiliates pursuant to the advisory agreement, a portion of the fee paid by Braemar to Lismore pursuant to this section equal to the product of (x) the amount of Braemar Financings completed during the term of the Braemar Agreement minus$1,091,250,000 multiplied by (y) 0.125%; and (iii) 25 basis points (0.25%) payable upon the acceptance by the applicable lender of any Braemar Financing. As ofMarch 31, 2020 , the$1.4 million initial amount is recognized as deferred revenue, which will be recognized over the twelve month term, and a receivable in our condensed consolidated financial statements. See note 14 to our condensed consolidated financial statements. EffectiveMay 13, 2020 ,Douglas A. Kessler , Senior Managing Director of the Company, voluntarily resigned from his employment and all other positions he held with the Company and its subsidiaries, affiliated entities, and entities that it advises (including his role as President and Chief Executive Officer atAshford Trust ) in order to pursue other professional opportunities. EffectiveMay 14, 2020 ,Ashford Trust appointedJ. Robison Hays , III to fill the role of President and Chief Executive Officer. In 55 -------------------------------------------------------------------------------- connection with this appointment,Mr. Hays will no longer serve as theAshford Trust's Chief Strategy Officer. Additionally,Mr. Hays will cease to serve as the Company's Co-President and Chief Strategy Officer and will serve instead as Senior Managing Director of the Company. Accordingly,Jeremy J. Welter's title at the Company will change from Co-President and Chief Operating Officer to President and Chief Operating Officer. OnMay 15, 2020 , the Company and its Chief Executive Officer, Mr.Monty J. Bennett , entered into a letter agreement pursuant to which, effective as ofMay 15, 2020 and continuing through and including the Company's last payroll period in 2020, Mr.Monty J. Bennett will accept payment of his base salary (as previously reduced by mutual agreement of the Company and Mr.Monty J. Bennett ) in the form of common stock of the Company, issued pursuant to the Company's 2014 Incentive Plan, as amended. The Board andMr. Bennett agreed to effectuate this change to preserve Company liquidity as the Company navigates the effects of the novel coronavirus (COVID-19). OnMay 6, 2020 , the Company executed the Second Amendment to the Asset Purchase Agreement in which we agreed to immediately pay$1.5 million in cash and modified certain contingent consideration and stock consideration collar payment terms related to the acquisition of BAV to extend remaining payments of cash or stock on various payment dates throughMarch 2021 . Pursuant to the agreement, we paid$1.5 million cash to the BAV sellers onMay 7, 2020 . OnJune 16, 2020 ,J. Robison Hays , III resigned from the Company's Board. As previously disclosed in our Current Report on Form 8-K filed onApril 30, 2020 ,Mr. Hays also recently ceased to serve as the Company's Co-President and Chief Strategy Officer and was instead appointed to serve as Senior Managing Director of the Company.Mr. Hays will continue to serve as the Company's Senior Managing Director following his Board resignation. These changes were made in order to allowMr. Hays to focus his attention on his new position as President and Chief Executive Officer ofAshford Trust and to ensure that his interests are better aligned with those ofAshford Trust's stockholders. The board resignation was effectiveJune 16, 2020 . There are no disagreements betweenMr. Hays and the Company in connection with his resignation. OnJune 24, 2020 , the Company declared the remaining 50% or approximately$4.0 million of cumulative preferred dividends due with respect to its Series D Convertible Preferred Stock for the first quarter of 2020. As of the date of this filing, the Company has declared no cumulative preferred dividends with respect to its Series D Convertible Preferred Stock for the second quarter of 2020. As a result of declaring less than the full stated amount of dividend payments due on the Series D Convertible Preferred Stock commencing with the first quarter of 2020 dividend period, the Company had aggregate undeclared preferred stock dividends of approximately$3.9 million as ofMarch 31, 2020 which will be paid in full onJuly 14, 2020 and the Company expects to have aggregate undeclared preferred stock dividends of approximately$7.9 million as ofJune 30, 2020 which relates to the second quarter of 2020. Shareholder Rights Plan OnMarch 13, 2020 , we adopted a shareholder rights plan by entering into a Rights Agreement, datedMarch 13, 2020 , withComputerShare Trust Company, N.A. , as rights agent (the "Rights Agreement"). We intend for the shareholder rights plan to improve the bargaining position of the Board in the event of an unsolicited offer to acquire our outstanding shares of common stock. The Board implemented the rights plan by declaring a dividend of one preferred share purchase right (a "Right") that was paid onMarch 23, 2020 , for each outstanding share of our common stock onMarch 23, 2020 (the "Record Date"), to our stockholders of record on that date. Each of those Rights becomes exercisable on the Distribution Date (defined below) and entitles the registered holder to purchase from the Company one one-thousandth of a share of our Series E Preferred Stock, par value$0.001 per share, at a price of$275 per one one-thousandth of a share of our Series E Preferred Stock represented by such a right, subject to adjustment.The Rights will expire onFebruary 13, 2021 unless the expiration date is extended or unless the Rights are earlier redeemed by the Company. Initially, the Rights will be attached to all certificates representing our common stock, and no separate certificates evidencing the Rights (the "Rights Certificates") will be issued. The Rights Agreement provides that, until the date on which the Rights separate and begin trading separately from our common stock (which we refer to as the "Distribution Date") or earlier expiration or redemption of the Rights, (i) the Rights will be transferred with and only with the shares of our common stock, (ii) new certificates representing shares of our common stock issued after the Record Date or upon transfer or new issuance of shares of our common stock will contain a notation incorporating the Rights Agreement by reference, and (iii) the surrender for transfer of any certificates for shares of our common stock outstanding as of the Record Date, even without such notation or a copy of the Summary of Rights (as defined in the Rights Agreement) being attached thereto, will also constitute the transfer of the Rights associated with the shares of our common stock represented by such certificate. The Distribution Date will occur, and the Rights would separate and begin trading separately from the shares of our common stock, and Rights Certificates will be caused to evidence the Rights on the earlier to occur of: 56 --------------------------------------------------------------------------------
i. 10 business days following a public announcement, or the public
disclosure of facts indicating, that a person or group of affiliated or
associated persons has acquired Beneficial Ownership (as defined in the
Rights Agreement) of 10% or more of the outstanding shares of common
stock (referred to, subject to certain exceptions, as "Acquiring
Persons") (or, in the event an exchange of the Rights for shares of our
common stock is effected in accordance with certain provisions of the
Rights Agreement and the Board determines that a later date is
advisable, then such later date that is not more than 20 days after
such public announcement); or
ii. 10 business days (or such later date as may be determined by action of
the Board prior to such time as any person becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make,
a tender offer or exchange offer, the consummation of which would
result in the Beneficial Ownership by a person or group of 10% or more
of the outstanding shares of our common stock.
The Rights also become exercisable if a person or group that already
beneficially owns 10% or more of our common stock acquires any additional shares
of our common stock without the approval of the Board, except that the
Distribution Date will not occur as a result of our company, one of our
subsidiaries, one of our employee benefit plans or a trustee for one of those
plans, or Mr. Monty J. Bennett and certain of his affiliates and associates
acquiring additional shares of our common stock, and those persons will not be
Acquiring Persons.
If a person or group becomes an Acquiring Person at any time after the date of
the Rights Agreement, with certain limited exceptions, the Rights will become
exercisable for shares of our common stock (or, in certain circumstances, shares
of our Series E Preferred Stock or other of our securities that are similar)
having a value equal to two times the exercise price of the right. From and
after the announcement that any person has become an Acquiring Person, if the
Rights evidenced by a Rights Certificate are or were at any time on or after the
earlier of (i) the date of such announcement or (ii) the Distribution Date
acquired or beneficially owned by an Acquiring Person or an associate or
affiliate of an Acquiring Person, such Rights shall become void, and any holder
of such Rights shall thereafter have no right to exercise such Rights. In
addition, if, at any time after a person becomes an Acquiring Person, (i) we
consolidate with, or merge with and into, any other person; (ii) any person
consolidates with us, or merges with and into us and we are the continuing or
surviving corporation of such merger and, in connection with such merger, all or
part of the shares of our common stock are or will be changed into or exchanged
for stock or other securities of any other person (or of ours) or cash or any
other property; or (iii) 50% or more of our consolidated assets or Earning Power
(as defined in the Rights Agreement) are sold, then proper provision will be
made so that each holder of a right will thereafter have the right to receive,
upon the exercise of a right at the then current exercise price of the right,
that number of shares of common stock of the acquiring company which at the time
of such transaction will have a market value of two times the exercise price of
the Right. Upon the occurrence of an event of the type described in this
paragraph, if the Board so elects, we will deliver upon payment of the exercise
price of a right an amount of cash or securities equivalent in value to the
shares of common stock issuable upon exercise of a right. If we fail to meet
that obligation within 30 days following of the announcement that a person has
become an Acquiring Person, we must deliver, upon exercise of a right but
without requiring payment of the exercise price then in effect, shares of our
common stock (to the extent available) and cash equal in value to the difference
between the value of the shares of our common stock otherwise issuable upon the
exercise of a right and the exercise price then in effect. The Board may extend
the 30-day period described above for up to an additional 60 days to permit the
taking of action that may be necessary to authorize sufficient additional shares
of our Common Stock to permit the issuance of such shares of our Common Stock
upon the exercise in full of the Rights.
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.
57
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RESULTS OF OPERATIONS
In the fourth quarter of 2019, cost reimbursement revenue and reimbursed
expenses were reclassified from their previous presentation into aggregated
financial statement line items titled "cost reimbursement revenue" and
"reimbursed expenses" in our consolidated statements of operations. Our
presentation of the three months ended March 31, 2019 , revenue and operating
expense line item amounts have been reclassified to conform to the presentation
adopted in the fourth quarter of 2019. These reclassifications have no effect on
total revenue, total operating expense or net income previously reported.
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
The following table summarizes the changes in key line items from our condensed
consolidated statements of operations for the three months ended March 31, 2020
and 2019 (in thousands):
Three Months Ended March 31 , Favorable (Unfavorable)
2020 2019 $ Change % Change
REVENUE
Advisory services $ 11,836 $ 10,920 $ 916 8.4 %
Hotel management 6,124 - 6,124
Project management fees 3,938 6,442 (2,504 ) (38.9 )%
Audio visual 29,674 30,975 (1,301 ) (4.2 )%
Other 6,691 5,010 1,681 33.6 %
Cost reimbursement revenue 75,579 9,973 65,606 657.8 %
Total revenues 133,842 63,320 70,522 111.4 %
EXPENSES
Salaries and benefits 16,310 16,214 (96 ) (0.6 )%
Cost of revenues for project management 1,451 1,473 22 1.5 %
Cost of revenues for audio visual 20,430 21,439 1,009 4.7 %
Depreciation and amortization 9,969 4,108 (5,861 ) (142.7 )%
General and administrative 6,183 6,454 271 4.2 %
Impairment 178,213 - (178,213 )
Other 4,226 1,339 (2,887 ) (215.6 )%
Reimbursed expenses 75,511 9,751 (65,760 ) (674.4 )%
Total expenses 312,293 60,778 (251,515 ) (413.8 )%
OPERATING INCOME (LOSS) (178,451 ) 2,542 (180,993 ) (7,120.1 )%
Equity in earnings (loss) of
unconsolidated entities 236 (275 ) 511 185.8 %
Interest expense (1,176 ) (297 ) (879 ) (296.0 )%
Amortization of loan costs (66 ) (69 ) 3 4.3 %
Interest income 28 20 8 40.0 %
Realized gain (loss) on investments (375 ) - (375 )
Other income (expense) (521 ) (53 ) (468 ) (883.0 )%
INCOME (LOSS) BEFORE INCOME TAXES (180,325 ) 1,868 (182,193 ) (9,753.4 )%
Income tax (expense) benefit 2,085 (1,300 ) 3,385 260.4 %
NET INCOME (LOSS) (178,240 ) 568 (178,808 ) (31,480.3 )%
(Income) loss from consolidated
entities attributable to noncontrolling
interests 160 163 (3 ) (1.8 )%
Net (income) loss attributable to
redeemable noncontrolling interests 440 (21 ) 461 2,195.2 %
NET INCOME (LOSS) ATTRIBUTABLE TO THE
COMPANY (177,640 ) 710 (178,350 ) (25,119.7 )%
Preferred dividends, declared and
undeclared (7,875 ) (2,791 ) (5,084 ) (182.2 )%
Amortization of preferred stock
discount (810 ) (491 ) (319 ) (65.0 )%
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (186,325 ) $ (2,572
)
Net Income (Loss) Attributable to Common Stockholders. Net income (loss)
attributable to common stockholders changed
58
--------------------------------------------------------------------------------
Total Revenues. Total revenue increased by $70.5 million , or 111.4%, to $133.8
million for the 2020 quarter compared to the 2019 quarter due to the following
(in thousands):
Three Months Ended March 31, Favorable (Unfavorable)
2020 2019 $ Change % Change
Advisory services revenue:
Base advisory fee (1) $ 11,537 $ 10,622 $ 915 8.6 %
Incentive advisory fee (2) 170 170 - - %
Other advisory revenue (3) 129 128 1 0.8 %
Total advisory services revenue 11,836 10,920 916 8.4 %
Hotel management:
Base management fees (4) 6,124 - 6,124
Project management revenue (5) 3,938 6,442 (2,504 ) (38.9 )%
Audio visual revenue (6) 29,674 30,975
(1,301 ) (4.2 )%
Other revenue: Debt placement fees (7) 128 1,354 (1,226 ) (90.5 )% Claims management services (8) 57 41 16 39.0 % Lease revenue (9) - 1,030 (1,030 ) (100.0 )% Other services (10) 6,506 2,585 3,921 151.7 % Total other revenue 6,691 5,010 1,681 33.6 % Cost reimbursement revenue (11) 75,579 9,973 65,606 657.8 % Total revenue$ 133,842 $ 63,320 $ 70,522 111.4 % REVENUE BY SEGMENT (12) REIT advisory $ 20,957$ 20,616 $ 341 1.7 % Remington 70,456 - 70,456 Premier 5,152 7,790 (2,638 ) (33.9 )% JSAV 29,674 30,975 (1,301 ) (4.2 )% OpenKey 522 257 265 103.1 % Corporate and other 7,081 3,682 3,399 92.3 % Total revenue$ 133,842 $ 63,320 $ 70,522 111.4 % ________
(1) The increase in base advisory fee is due to higher revenue of
(2) Incentive advisory fees did not change compared to the 2019 quarter. The
the pro-rata portion of the third year installment of the Braemar 2018
incentive advisory fee which will be paid in
advisory fee for the 2019 quarter includes the pro-rata portion of the
second year installment of the Braemar 2018 incentive advisory fee in the
amount of
are subject to meeting the
in our advisory agreements.
did not meet the relevant incentive fee thresholds during the 2019, 2018 and
2017 measurement periods. Braemar's annual total stockholder return did not
meet the relevant incentive fee thresholds during the 2019 and 2017
measurement periods.
(3) Other advisory revenue remained steady. Other advisory revenue from Braemar
is a result of the $5.0 million cash payment
59-------------------------------------------------------------------------------- received upon stockholder approval of the Fourth Amended and Restated Braemar Advisory Agreement inJune 2017 . The payment is included in "deferred income" on our condensed consolidated balance sheet and is being recognized on a quarterly basis over the initial ten-year term of the agreement. (4) The increase in hotel management revenue is due to our acquisition of
Remington in November of 2019.
(5) The decrease in project management revenue is due to lower revenue from
to reduced capital expenditures by our clients as a result of COVID19.
(6) The
partially offset by increased revenue from BAV due to the timing of JSAV's
acquisition of BAV in March 2019 .
(7) The decrease in debt placement fee revenue is due to lower revenue ofDebt placement fees are earned by Lismore for providing debt placement,
modification, forbearance and refinancing services.
(8) Claims management services include revenues earned from providing insurance
claim assessment and administration services to
(9) In connection with our ERFP Agreements and legacy key money transaction
with
FF&E to
in 2018 with
our accounting treatment prior to adopting ASU 2016-02, Leases ("ASU
2016-02"), other revenue for the three months ended
includes a portion of the base advisory fee for leases commencing prior to
our adoption, which is equal to the estimated fair value of the lease
payments that would have been made.
(10) The increase in other services revenue is primarily due to increased
revenue from RED of
conducts RED's legacy
of Sebago in July of 2019.
revenue is from our acquisition of Marietta in November of 2019. Other
services revenue primarily relates to other hotel services provided by our
consolidated subsidiaries, OpenKey, RED, Pure Wellness and Marietta, to
Ashford Trust , Braemar and other third parties.
(11) The increase in cost reimbursement revenue is primarily due to $64.3
million of cost reimbursement revenue recognized in the 2020 quarter for
hotel management services from our Remington subsidiary acquired in
November of 2019.
(12) See note 16 to our condensed consolidated financial statements for
discussion of segment reporting.
Salaries and Benefits Expense. Salaries and benefits expense increased by
$96,000 , or 0.6%, to $16.3 million for the 2020 quarter compared to the 2019
quarter. The change in salaries and benefits expense consisted of the following
(in thousands):
Three Months Ended March 31,
2020 2019 $ Change
Cash salaries and benefits:
Salary expense $ 11,387 $ 7,970 $ 3,417
Bonus expense 3,600 3,400 200
Benefits related expenses 2,706 1,953 753
Total cash salaries and benefits (1) 17,693 13,323 4,370
Non-cash equity-based compensation:
Stock option grants 2,089 2,151 (62 )
Employee equity grant expense 105 - 105
Total non-cash equity-based compensation 2,194 2,151 43
Non-cash (gain) loss in deferred compensation
plan (2) (3,577 ) 740 (4,317 )
Total salaries and benefits $ 16,310 $ 16,214 $ 96
________(1) The change in cash salaries and benefits expense is primarily due to
fluctuations in the number of employees, salary and bonus awards, group
insurance costs, payroll taxes and employee participation in the benefits
offered, which occurred primarily as a result of our acquisitions in 2019.
(2) The DCP obligation is recorded as a liability at fair value with changes in
fair value reflected in earnings. The gain in the 2020 quarter and the loss
in the 2019 quarter are primarily attributable to a decrease and increase,
respectively, in the fair value of the DCP obligation. See note 13 to our
condensed consolidated financial statements.
60-------------------------------------------------------------------------------- Cost of Revenues for Project Management. Cost of revenues for project management remained steady with a decrease of only$22,000 , or 1.5% to$1.5 million during the 2020 quarter compared to$1.5 million for the 2019 quarter, Cost of Revenues for Audio Visual. Cost of revenues for audio visual decreased$1.0 million , or 4.7%, to$20.4 million during the 2020 quarter compared to$21.4 million for the 2019 quarter, primarily due to cost control initiatives implemented by JSAV inthe United States ,Mexico and theDominican Republic as a result of COVID-19. Depreciation and Amortization Expense. Depreciation and amortization expense increased by$5.9 million , or 142.7%, to$10.0 million for the 2020 quarter compared to the 2019 quarter, primarily as a result of an increase of$3.3 million in amortization of management contracts acquired in our acquisition of Remington inNovember 2019 and an increase of$1.7 million in depreciation related to ERFP assets. Depreciation and amortization expense for the 2020 quarter and the 2019 quarter excludes depreciation expense related to audio visual equipment of$1.2 million and$968,000 , respectively, which is included in "cost of revenues for audio visual" and also excludes depreciation expense for the 2020 quarter related to marine vessels and other vehicles in the amount of$200,000 and$65,000 , respectively, which is included in "other" operating expense. General and Administrative Expense. General and administrative expenses decreased by$271,000 , or 4.2%, to$6.2 million for the 2020 quarter compared to the 2019 quarter. The change in general and administrative expense consisted of the following (in thousands): Three Months Ended March 31, 2020 2019 $ Change Professional fees (1) $ 1,342$ 2,466 $ (1,124 ) Office expense (2) 2,470 1,883 587 Public company costs 102 136 (34 ) Director costs 109 262 (153 ) Travel and other expense 2,065 1,642 423 Non-capitalizable - software costs 95 65 30 Total general and administrative $ 6,183 $
6,454
________
(1) The decrease in expense is primarily due to decreases in legal fees and
transaction costs related to JSAV's acquisition of BAV in March of 2019 and
our acquisition of Remington in November of 2019.
(2) The increase in expense is primarily due to increased rent expense from our
acquisition of Remington in
Impairment. In the 2020 quarter, 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 an interim quantitative assessment of goodwill and intangible assets. As a result, we recorded goodwill impairment charges of$170.6 million and intangible asset impairment charges of$7.6 million . There were no impairment charges for the 2019 quarter. See notes 5 and 7 to our condensed consolidated financial statements. Other. Other operating expense was$4.2 million and$1.3 million for the 2020 quarter and the 2019 quarter, respectively. Other operating expense includes cost of goods sold, depreciation, and royalties associated with OpenKey, RED and Pure Wellness as well as$463,000 in expense from the changes in the fair value of contingent consideration related to JSAV's acquisition of BAV inMarch 2019 and RED's acquisition of Sebago inJuly 2019 . See notes 4 and 7 to our condensed consolidated financial statements. Reimbursed Expenses. Reimbursed expenses increased$65.8 million to$75.5 million during the 2020 quarter compared to$9.8 million for the 2019 quarter primarily due to hotel management expenses incurred by our Remington subsidiary acquired in November of 2019. Reimbursed expenses recorded 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 fromAshford Trust and Braemar. 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 (in thousands): 61 --------------------------------------------------------------------------------
Three Months Ended March 31,
2020 2019 $ Change
Cost reimbursement revenue $ 75,579 $ 9,973 $ 65,606
Reimbursed expenses 75,511 9,751 65,760
Net total $ 68 $ 222 $ (154 )
Equity in Earnings (Loss) of Unconsolidated Entities. Equity in earnings (loss)
of unconsolidated entities was earnings of $236,000 and a loss of $275,000 for
the 2020 quarter and the 2019 quarter, respectively. Equity in earnings (loss)
of unconsolidated entities represents earnings (loss) in our equity method
investment in REA Holdings. See note 2 to our condensed consolidated financial
statements.
Interest Expense. Interest expense increased to $1.2 million from $297,000 for
the 2020 quarter and the 2019 quarter, respectively, related to increases in our
Term Loan Agreement and notes payable, lines of credit and finance leases held
by our consolidated subsidiaries. See notes 2 and 6 to our condensed
consolidated financial statements.
Amortization of Loan Costs. Amortization of loan costs was $66,000 and $69,000
for the 2020 quarter and the 2019 quarter, respectively, related to our Term
Loan Agreement and notes payable held by our consolidated subsidiaries. See
notes 2 and 6 to our condensed consolidated financial statements.
Interest Income. Interest income was $28,000 and $20,000 for the 2020 quarter
and the 2019 quarter, respectively.
Realized Gain (Loss) on Investments. Realized loss on investments was $375,000
for the 2020 quarter. The realized loss on investments relates to 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.
Other Income (Expense). Other expense was $521,000 and $53,000 in the 2020
quarter and the 2019 quarter, respectively.
Income Tax (Expense) Benefit. Income tax (expense) benefit changed by $3.4
million , from $1.3 million expense in the 2019 quarter to a $2.1 million benefit
in the 2020 quarter. Current tax expense changed by $245,000 , from $993,000
expense in 2019 to $1.2 million expense in 2020. Deferred tax (expense) benefit
changed by $2.8 million from $300,000 expense in 2019 to $2.5 million in benefit
in 2020. The difference in deferred tax (expense) benefit is related to the
increase in non-taxable or non-deductible GAAP items, mainly amortization,
impairment & deferred compensation, as well as a decrease in bonus depreciation.
(Income) Loss from Consolidated Entities Attributable to Noncontrolling
Interests. The noncontrolling interests in consolidated entities were allocated
a loss of $160,000 in the 2020 quarter and a loss of $163,000 in the 2019
quarter. See notes 2 and10 to our condensed consolidated financial statements
for more details regarding ownership interests, carrying values and allocations.
Net (Income) Loss Attributable to Redeemable Noncontrolling Interests. The
redeemable noncontrolling interests were allocated a loss of $440,000 in the
2020 quarter and income of $21,000 in the 2019 quarter. Redeemable
noncontrolling interests represented ownership interests in Ashford Holdings and
certain of our consolidated subsidiaries. See note 1 to our condensed
consolidated financial statements. For a summary of ownership interests,
carrying values and allocations, see notes 2 and 11 to our condensed
consolidated financial statements.
Preferred Dividends, Declared and Undeclared. Preferred dividends, declared and
undeclared increased $5.1 million to $7.9 million during the 2020 quarter
compared to $2.8 million for the 2019 quarter, primarily due to the issuance of
$275 million of Series D Convertible Preferred Stock in the acquisition of
Remington Lodging in November 2019 .
Amortization of Preferred Stock Discount. The amortization of preferred stock
discount increased $319,000 to $810,000 during the 2020 quarter compared to
$491,000 from the 2019 quarter, primarily due to the issuance of $275 million of
Series D Convertible Preferred Stock in the acquisition of Remington Lodging in
November 2019 .
62
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LIQUIDITY AND CAPITAL RESOURCES
COVID-19, Management's Plans and Liquidity
In December 2019 , a novel strain of coronavirus (COVID-19) was identified in
Wuhan, China , which subsequently spread to other regions of the world, and has
resulted in significant travel restrictions and extended shutdown of numerous
businesses in every state in the United States . In March 2020 , the World Health
Organization declared COVID-19 to be a global pandemic. Our clients Ashford
Trust and Braemar have reported that the negative impact on room demand within
their respective portfolios stemming from the novel coronavirus (COVID-19) is
significant, which has resulted and is expected to result in significantly
reduced occupancy and RevPAR. Furthermore, the prolonged presence of the virus
has resulted in health or other government authorities imposing widespread
restrictions on travel and other businesses. The hotel industry has experienced
postponement or cancellation of a significant number of business conferences and
similar events. Following the government mandates and health official orders,
the Company dramatically reduced staffing and expenses at its products and
services businesses and at our corporate office. COVID-19 has had a significant
negative impact on the Company's operations and financial results to date. The
Company expects that the COVID-19 pandemic will have a significant negative
impact on the Company's results of operations, financial position and cash flow
in 2020. As a result, in March 2020 , the Company declared 50% of the cumulative
preferred dividend which was due with respect to its Series D Convertible
Preferred Stock for the first quarter of 2020, reduced the compensation of its
board of directors, executive officers and other employees, amended payment
terms pursuant to certain hotel management agreements to better manage corporate
working capital, reduced planned capital expenditures, and significantly reduced
operating expenses. Additionally, subsequent to March 31, 2020 , in order to
preserve Company liquidity, the Company entered into a letter agreement with its
Chief Executive Officer, Mr. Monty J. Bennett , to pay his base salary (as
previously reduced in March) for the remainder of 2020 in the form of common
stock of the Company, amended contingent consideration and stock consideration
collar payment terms related to the acquisition of BAV, and on June 24, 2020 ,
the Company declared the remaining 50% of the cumulative preferred dividends due
with respect to its Series D Convertible Preferred Stock for the first quarter
of 2020 to be paid on July 14, 2020 . The Company adopted a remote-work policy at
its corporate office in an effort to protect the health and safety of its
employees and does not anticipate these policies to have any adverse impact on
its ability to continue to operate its business. This transition to a
remote-work environment has not had a material adverse impact on the Company's
financial reporting system, internal controls or disclosure controls and
procedures.
As of March 31, 2020 , the Company's consolidated net worth was less than $23.2
million , which resulted in a breach of a financial covenant related to our Term
Loan Agreement. Effective June 23, 2020 , the Company and Bank of America N.A .
executed the Fifth Amendment to the Term Loan Agreement (the "Fifth Amendment").
The Fifth Amendment (a) establishes a 0.50% LIBOR floor, (b) eliminates the
consolidated net worth financial covenant, and (c) waives the violation of the
consolidated net worth financial covenant that occurred on March 31, 2020 . As of
March 31, 2020 , our subsidiaries were in compliance in all material respects
with all covenants or other requirements set forth in our debt and related
agreements as amended. However, there can be no guarantee that our subsidiaries'
will remain in compliance for the remainder of the fiscal year. Due to the
significant negative impact of COVID-19 on the operations of our subsidiaries,
we expect that within the next twelve months, our JSAV and RED subsidiaries will
violate debt covenants pursuant to certain existing debt agreements which have
no recourse to Ashford Inc. As a result, JSAV and RED may be required to
immediately repay debt balances of $20.2 million and $2.6 million , respectively,
which have therefore been classified as current liabilities within our condensed
consolidated balance sheet as of March 31, 2020 . The JSAV and RED subsidiary
loans, which are expected to violate debt covenants, are secured by the
respective subsidiary's tangible assets. All of our subsidiaries' debt has no
recourse to Ashford Inc. with the exception of $3.8 million of debt held by the
entity that conducts RED's legacy U.S. Virgin Islands operations which is
currently not expected to violate debt covenants. See note 6 in our condensed
consolidated financial statements.
Based on these factors, as well as, our negative $29.0 million working capital
position as of March 31, 2020 , the Company has determined that there is
substantial doubt about the Company's ability to continue as a going concern
within one year after the date the financial statements are issued. U.S.
generally accepted accounting principles require that in making this
determination, the Company cannot consider any remedies that are outside of the
Company's control and have not been fully implemented. As a result, the Company
could not consider future potential fundraising activities, whether through
equity or debt offerings, disposition of assets or the likelihood of obtaining
waivers as we could not conclude they were probable of being effectively
implemented. Further, the Company could not consider continued cash payment of
advisory fees and other revenues from Ashford Trust and Braemar, two of the
Company's key customers, because each of Ashford Trust and Braemar
currently exhibits conditions that create substantial doubt about the ability
for each to continue as a going concern. Also, the continued cash payment of
such advisory fees and other revenues remains subject to the discretion of the
independent board members of each of Ashford Trust and Braemar, which is not
within the Company's control. As such, the Company's ability to remain in
compliance with the financial covenants related to our Term Loan Agreement, as
amended, for the next twelve months is outside of management's control.
Accordingly, the Company has classified the entire $35.0 million outstanding
under our Term Loan Agreement, as amended, as a current liability on our
condensed consolidated balance sheet as of March 31, 2020 .
63
--------------------------------------------------------------------------------
Loan Agreements-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 our inability to borrow unused amounts
under our lines of credit, even if repayment of some or all of our borrowings is
not required. On March 19, 2020 , the Company amended and restated the senior
revolving credit facility pursuant to a Fourth Amendment to the Term Loan
Agreement. The Company converted and consolidated the existing $10 million
borrowing under the senior revolving credit facility (which had been borrowed on
a revolving basis) into a term loan and drew down the remaining $25 million
balance of the senior revolving credit facility, borrowing $35 million under the
term loan in the aggregate. The Term Loan Agreement has a four year term and a
maximum principal amount of $35 million . Principal payments of 1.25% of the
outstanding balance are payable on the last business day of each fiscal quarter
commencing June 30, 2020 . Principal payment amounts are subject to maintaining a
fixed charge coverage ratio below specified thresholds which if not met increase
the principal payment due each quarter from 1.25% to 5.0% of the outstanding
principal balance. The Company is also subject to certain financial covenants.
See discussion above regarding covenant compliance.
On March 24, 2020 , RED entered into a draw term loan with a maximum aggregate
principal amount of $1.9 million with Merchants Commercial Bank with an interest
rate equal to the Prime Rate plus 2.00%. Upon commencement, RED borrowed $1.6
million . As of March 31, 2020 , $325,000 was available under the draw term loan.
The draw term loan requires interest payments only until March 5, 2021 and
matures on February 5, 2028 .
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 subsidiary
notes payable, net was $28.1 million and $26.8 million as of March 31, 2020 and
December 31, 2019 , respectively. See discussion above regarding covenant
compliance. For further discussion see note 6 to our condensed consolidated
financial statements.
Preferred stock dividends-On March 16, 2020 , the Company announced that the
Board had declared and the Company would pay 50% of the cumulative preferred
dividend which was due with respect to its Series D Convertible Preferred Stock
for the first quarter of 2020. The declared $3.9 million dividends were paid on
April 15, 2020 .
On June 24, 2020 , the Company declared the remaining 50% or approximately $4.0
million of cumulative preferred dividends due with respect to its Series D
Convertible Preferred Stock for the first quarter of 2020. As of the date of
this filing, the Company has declared no cumulative preferred dividends with
respect to its Series D Convertible Preferred Stock for the second quarter of
2020. As a result of declaring less than the full stated amount of dividend
payments due on the Series D Convertible Preferred Stock commencing with the
first quarter of 2020 dividend period, the Company had aggregate undeclared
preferred stock dividends of approximately $3.9 million as of March 31, 2020
which will be paid in full on July 14, 2020 and the Company expects to have
aggregate undeclared preferred stock dividends of approximately $7.9 million as
of June 30, 2020 which relates to the second quarter of 2020. The Board plans to
revisit the dividend payment policy with respect to the Series D Convertible
Preferred Stock on an ongoing basis. The Board believes that the deferral of
certain preferred dividends will provide the Company with additional funds to
meet its ongoing liquidity needs.
Each share of Series D Convertible Preferred Stock: (i) has a liquidation value
of $25 per share; (ii) accrues cumulative preferred 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) will
participate in any dividend or distribution on the common stock in addition to
the preferred dividends; (iv) is convertible into voting common stock at $117.50
per share; and (v) provides for customary anti-dilution protections. In the
event the Company fails to pay the accrued preferred 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 may be
declared and paid, and no other distributions or redemptions may be made, on the
Company's common stock; and (C) the Board will be increased by two seats and the
holders of 55% of the outstanding Series D Convertible Preferred Stock will be
entitled to fill such newly created seats. The Series D Convertible Preferred
Stock is held primarily by Mr. Monty J. Bennett , the Chairman of our Board and
our Chief Executive Officer, Mr. Archie Bennett , Jr., who is Mr. Monty J.
Bennett's father, one of our other executive officers and several other
individuals.
To the extent not paid on April 15 , July 15 , October 15 and January 15 of each
calendar year in respect of the quarterly periods ending on March 31 , June 30 ,
September 30 and December 31 , respectively (each such date, a "Dividend Payment
Date"), all accrued dividends on any share shall accumulate and compound on the
applicable Dividend Payment Date whether or not declared by the Board or funds
are legally available thereof and shall remain accumulated, compounding
dividends until paid in cash pursuant hereto or converted to common shares. See
also notes 11 and 17 to our condensed consolidated financial statements.
ERFP Commitments-On June 26, 2018 , the Company entered into the Ashford Trust
ERFP Agreement with Ashford Trust . The independent members of the board of
directors of each of the Company and Ashford Trust , with the assistance of
separate
64
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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 with Braemar
(collectively with the Ashford Trust ERFP Agreement, the "ERFP Agreements"). 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 will pay each REIT
10% of each acquired hotel's purchase price in exchange for FF&E at a property
owned by such REIT, which will be subsequently leased by us to such REIT
rent-free. Each of the REITs must provide reasonable advance notice to the
Company to request ERFP funds in accordance with the respective ERFP Agreement.
The ERFP Agreements require 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 REIT's acquisition of the hotel property. The Company
recognizes the related depreciation tax deduction at the time such FF&E is
purchased by the Company and placed into service at the respective REIT's hotel
properties. However, the timing of the FF&E being purchased and placed into
service is subject to uncertainties outside of the Company's control that could
delay the realization of any tax benefit associated with the purchase of FF&E.
On March 13, 2020 , the Company entered into the Extension Agreement, related to
the Ashford Trust ERFP Agreement. Under the terms of the Extension Agreement,
the remaining ERFP commitment funding deadline under the Ashford Trust ERFP
Agreement of $11.4 million as of March 31, 2020 and December 31, 2019 , has been
extended from January 22, 2021 to December 31, 2022 . As of March 31, 2020 , the
Company has no remaining ERFP commitment to Braemar under the Braemar ERFP
Agreement. See note 9 to our condensed consolidated financial statements.
Other liquidity considerations-On December 5, 2017 , the Board approved a stock
repurchase program pursuant to which the Board granted a repurchase
authorization to acquire shares of the Company's common stock, having an
aggregate value of up to $20 million . No shares were repurchased under the stock
repurchase program during the three months ended March 31, 2020 .
On May 6, 2020 , the Company executed the Second Amendment to the Asset Purchase
Agreement in which we agreed to immediately pay $1.5 million in cash and
modified certain contingent consideration and stock consideration collar payment
terms related to the acquisition of BAV to extend remaining payments of cash or
stock on various payment dates through March 2021 . Pursuant to the agreement, we
paid $1.5 million cash to the BAV sellers on May 7, 2020 .
On March 16, 2020 , the Company announced that in light of the uncertainty
created by the effects of the COVID-19, effective March 21, 2020 , the base
salary for its Chief Executive Officer, Mr. Monty J. Bennett , will be
temporarily reduced by 20% and the base salary for certain other Company
officers, including its Chief Financial Officer and its other named executive
officers, will be temporarily reduced by 15% until the effects of COVID-19 have
subsided and it has been determined that the Company is in a healthy financial
position. Any amounts relinquished pursuant to the reduction may be paid by the
Company in the future.
On March 16, 2020 , in light of the uncertainty created by the effects of
COVID-19, each non-employee serving on the Board agreed to a 25% reduction in
their annual cash retainers. In addition, effective as of May 14, 2020 , the
Board agreed further that this reduced amount would be payable 75% in cash and
25% in equity (common stock of Ashford Inc. ). This arrangement will be effective
until such time as the Board determines in its discretion that the effects of
COVID-19 have subsided. Any amounts relinquished pursuant to the reduction in
fees may be paid by the Company in the future, as determined by the Board in its
discretion.
On May 15, 2020 , the Company and its Chief Executive Officer, Mr. Monty J.
Bennett , entered into a letter agreement pursuant to which, effective as of May
15, 2020 and continuing through and including the Company's last payroll period
in 2020, Mr. Monty J. Bennett will accept payment of his base salary (as
previously reduced by mutual agreement of the Company and Mr. Monty J. Bennett )
in the form of common stock of the Company, issued pursuant to the Company's
2014 Incentive Plan, as amended. The Board and Mr. Bennett agreed to effectuate
this change to preserve Company liquidity as the Company navigates the effects
of the novel coronavirus (COVID-19).
Additional information pertaining to other liquidity considerations of the
Company can be found in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Developments."
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Sources and Uses of Cash
As of March 31, 2020 and December 31, 2019 , we had $54.9 million and $35.3
million of cash and cash equivalents, respectively, and $20.7 million and $17.9
million of restricted cash, respectively. Our principal sources of funds to meet
our cash requirements include: net cash provided by operations, existing cash
balances and borrowing on our existing lending agreements. Additionally, our
principal uses of funds are expected to include possible operating shortfalls,
capital expenditures, preferred dividends and debt interest and principal
payments. Items that impacted our cash flow and liquidity during the periods
indicated are summarized as follows:
Net Cash Flows Provided by (Used in) Operating Activities. Operating activities
provided net cash flows of $4.3 million and $2.3 million for the three months
ended March 31, 2020 and 2019, respectively. The increase in cash flows provided
by operating activities in the three months ended March 31, 2020 , were due
primarily to the timing of receipt of our receivables from Ashford Trust and
Braemar and the timing of payments to our affiliates, offset by a decrease in
earnings.
Net Cash Flows Provided by (Used in) Investing Activities. For the three months
ended March 31, 2020 , net cash flows used in investing activities were $3.4
million . These cash flows consisted of capital expenditures of $2.0 million
primarily for audio visual equipment, a $1.3 million working capital payment to
the sellers of Remington Lodging related to the acquisition in November of 2019
and $147,000 for RED's legacy U.S. Virgin Islands marine vessels offset by cash
inflows of $57,000 for proceeds from disposals of audio visual equipment.
For the three months ended March 31, 2019 , net cash flows used in investing
activities were $13.7 million due to the acquisition of BAV Services for $4.3
million ($5.0 million cash consideration less working capital adjustments of
approximately $700,000 ) and the $2.2 million investment in REA Holdings. Capital
expenditures include $5.0 million related to our ERFP agreement with Ashford
Trust , $1.7 million of audio visual equipment and property and equipment, and
$499,000 for RED's legacy U.S. Virgin Islands operations marine vessels.
Net Cash Flows Provided by (Used in) Financing Activities. For the three months
ended March 31, 2020 , net cash flows provided by financing activities were $21.2
million . These cash flows consisted of $29.5 million of proceeds from borrowings
on notes payable, $77,000 of contributions from noncontrolling interests in a
consolidated entity, and employee advances of $124,000 associated with tax
withholdings for restricted stock vesting. These were offset by $4.7 million of
payments for dividends on our preferred stock, $2.3 million of net payments on
our revolving credit facilities, $819,000 of payments on notes payable, $282,000
of payments on finance leases and $290,000 of loan cost payments.
For the three months ended March 31, 2019 , net cash flows provided by financing
activities were $4.6 million . These cash flows consisted of $6.6 million of
proceeds from borrowings on notes payable, $727,000 of net borrowings on our
revolving credit facilities, $455,000 of contributions from noncontrolling
interests in a consolidated entity, and net repayments in advances to employees
of $249,000 associated with tax withholdings for restricted stock vesting. These
were offset by $2.8 million of payments for dividends on our preferred stock,
$413,000 of payments on notes payable, $168,000 of payments on finance leases,
and $41,000 of loan cost payments.
Seasonality
Quarterly revenue may be adversely affected by events beyond our control, such
as the COVID-19 pandemic and government-issued travel restrictions in response,
extreme weather conditions, natural disasters, terrorist attacks or alerts,
civil unrest, government shutdowns, airline strikes or reduced airline capacity,
economic factors and other considerations affecting travel and hospitality
products and services. To the extent that cash flows from operations are
insufficient during any quarter due to temporary or seasonal fluctuations in
revenue, we expect to utilize cash on hand or borrowings to fund operations.
Off-Balance Sheet Arrangements
In the normal course of business, we may form or invest in partnerships or joint
ventures. We evaluate each partnership and joint venture to determine whether
the entity is a VIE. If the entity is determined to be a VIE, we assess whether
we are the primary beneficiary and need to consolidate the entity. For further
discussion, see notes 1 and 2 to our condensed consolidated financial
statements.
Long-term liability of our subsidiary compensation plan
We do not record on the balance sheet the long-term liability portion of the
Ashford Trust and Braemar shares purchased by Remington Lodging on the open
market and held for the purpose of providing compensation to certain employees
as granted under our subsidiary compensation plan. The long-term liability was
$254,000 as of March 31, 2020 .
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Contractual Obligations and Commitments
There have been no material changes since December 31, 2019 , outside the
ordinary course of business, to contractual obligations and commitments included
in the section "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in our 2019 Form 10-K, except with respect to
the conversion of our senior revolving credit facility in the Term Loan
Agreement on March 19, 2020 , and BAV's full achievement of the operating
performance targets during the earn-out period including amended payment terms
pursuant to the Second Amendment to the Asset Purchase Agreement executed on May
6, 2020 , as described elsewhere in this MD&A in "Recent Developments."
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. Our
accounting policies that are critical or most important to understanding our
financial condition and results of operations and that require management to
make the most difficult judgments are described in our 2019 Form 10-K. There
have been no material changes in these critical accounting policies.
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 concluded that sufficient indicators existed to
require us to perform an interim quantitative assessment of goodwill and
intangible assets. As a result, we recorded goodwill impairment charges of
$170.6 million and intangible asset impairment charges of $7.6 million . We may
continue to record impairment charges in the future due to the long-term
economic impact and near-term financial impacts of the COVID-19 pandemic. See
notes 5 and 7.
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