UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 001-36400

ASHFORD INC.
(Exact name of registrant as specified in its charter)
Nevada
 
84-2331507
(State or other jurisdiction of incorporation or organization)
 
(IRS employer identification number)
 
 
 
14185 Dallas Parkway, Suite 1100
 
 
Dallas, Texas
 
75254
(Address of principal executive offices)
 
(Zip code)
(972) 490-9600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
þ
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
þ
 
 
 
 
 
 
Emerging growth company
þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock
 
AINC
 
NYSE American LLC
    
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $0.001 par value per share
 
2,201,745
(Class)
 
Outstanding at November 6, 2019


ASHFORD INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019

TABLE OF CONTENTS

 
 
2
3
4
5
7
9
52
71
71
 
72
72
74
74
74
74
75
77



PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS (unaudited)
ASHFORD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share amounts)
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
36,400

 
$
51,529

Restricted cash
11,978

 
7,914

Accounts receivable, net
6,628

 
4,928

Due from affiliates
55

 
45

Due from Ashford Trust OP
4,444

 
5,293

Due from Braemar OP
2,224

 
1,996

Inventories
1,356

 
1,202

Prepaid expenses and other
4,236

 
3,902

Total current assets
67,321

 
76,809

Investments in unconsolidated entities
3,339

 
500

Furniture, fixtures and equipment, net
72,043

 
47,947

Operating lease right-of-use assets
21,522

 
—

Goodwill
61,969

 
59,683

Intangible assets, net
193,766

 
193,194

Other assets
1,877

 
872

Total assets
$
421,837

 
$
379,005

LIABILITIES


 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
27,314

 
$
24,880

Dividends payable
2,910

 
—

Due to affiliates
1,353

 
2,032

Deferred income
211

 
148

Deferred compensation plan
47

 
173

Notes payable, net
3,549

 
2,595

Operating lease liabilities
2,206

 
—

Other liabilities
18,827

 
8,418

Total current liabilities
56,417

 
38,246

Deferred income
11,409

 
13,396

Deferred tax liability, net
31,656

 
31,506

Deferred compensation plan
4,831

 
10,401

Notes payable, net
25,126

 
15,177

Operating lease liabilities
19,340

 
—

Total liabilities
148,779

 
108,726

Commitments and contingencies (note 10)


 


MEZZANINE EQUITY
 
 
 
Series B Convertible Preferred Stock, $0.01 par value, 8,120,000 shares issued and outstanding, net of discount at September 30, 2019 and December 31, 2018
202,185

 
200,847

Redeemable noncontrolling interests
3,641

 
3,531

EQUITY
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized:
 
 
 
Series A cumulative preferred stock, no shares issued and outstanding at September 30, 2019 and December 31, 2018
—

 
—

Common stock, $0.01 par value, 100,000,000 shares authorized, 2,614,719 and 2,391,541 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
26

 
24

Additional paid-in capital
296,213

 
280,159

Accumulated deficit
(229,379
)
 
(214,242
)
Accumulated other comprehensive income (loss)
(393
)
 
(498
)
Total stockholders’ equity of the Company
66,467

 
65,443

Noncontrolling interests in consolidated entities
765

 
458

Total equity
67,232

 
65,901

Total liabilities and equity
$
421,837

 
$
379,005


See Notes to Condensed Consolidated Financial Statements.

2

ASHFORD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
REVENUE
 
 
 
 
 
 
 
Advisory services
$
20,055

 
$
21,016

 
$
60,462

 
$
68,118

Audio visual
22,430

 
14,526

 
83,532

 
61,212

Project management
7,881

 
3,616

 
23,371

 
3,616

Other
6,523

 
2,407

 
16,310

 
11,598

Total revenue
56,889

 
41,565

 
183,675

 
144,544

EXPENSES
 
 
 
 
 
 
 
Salaries and benefits
21,129

 
21,851

 
61,986

 
64,078

Cost of revenues for audio visual
17,732

 
14,392

 
61,400

 
48,000

Cost of revenues for project management
2,666

 
1,189

 
8,154

 
1,189

Depreciation and amortization
8,374

 
2,972

 
17,835

 
5,205

General and administrative
8,940

 
12,231

 
28,290

 
27,651

Impairment
—

 
—

 
—

 
1,919

Other
4,849

 
434

 
9,326

 
2,172

Total expenses
63,690

 
53,069

 
186,991

 
150,214

OPERATING INCOME (LOSS)
(6,801
)
 
(11,504
)
 
(3,316
)
 
(5,670
)
Equity in earnings (loss) of unconsolidated entities
464

 
—

 
(109
)
 
—

Interest expense
(456
)
 
(289
)
 
(1,198
)
 
(593
)
Amortization of loan costs
(75
)
 
(130
)
 
(214
)
 
(177
)
Interest income
—

 
103

 
29

 
288

Other income (expense)
(20
)
 
(78
)
 
(115
)
 
(338
)
INCOME (LOSS) BEFORE INCOME TAXES
(6,888
)
 
(11,898
)
 
(4,923
)
 
(6,490
)
Income tax (expense) benefit
297

 
13,904

 
(1,429
)
 
11,593

NET INCOME (LOSS)
(6,591
)
 
2,006

 
(6,352
)
 
5,103

(Income) loss from consolidated entities attributable to noncontrolling interests
101

 
413

 
395

 
704

Net (income) loss attributable to redeemable noncontrolling interests
334

 
968

 
623

 
817

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
(6,156
)
 
3,387

 
(5,334
)
 
6,624

Preferred dividends
(2,909
)
 
(1,675
)
 
(8,492
)
 
(1,675
)
Amortization of preferred stock discount
(363
)
 
(303
)
 
(1,338
)
 
(303
)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
(9,428
)
 
$
1,409

 
$
(15,164
)
 
$
4,646

 
 
 
 
 
 
 
 
INCOME (LOSS) PER SHARE - BASIC AND DILUTED
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
(3.65
)
 
$
0.67

 
$
(6.09
)
 
$
2.20

Weighted average common shares outstanding - basic
2,580

 
2,109

 
2,489

 
2,100

Diluted:
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
(3.94
)
 
$
0.18

 
$
(7.95
)
 
$
0.11

Weighted average common shares outstanding - diluted
2,782

 
2,337

 
2,679

 
2,417

See Notes to Condensed Consolidated Financial Statements.

3

ASHFORD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
NET INCOME (LOSS)
$
(6,591
)
 
$
2,006

 
$
(6,352
)
 
$
5,103

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX


 


 
 
 
 
Foreign currency translation adjustment
(116
)
 
112

 
119

 
(140
)
COMPREHENSIVE INCOME (LOSS)
(6,707
)
 
2,118

 
(6,233
)
 
4,963

Comprehensive (income) loss attributable to noncontrolling interests
101

 
413

 
395

 
704

Comprehensive (income) loss attributable to redeemable noncontrolling interests
350

 
954

 
609

 
840

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
$
(6,256
)
 
$
3,485

 
$
(5,229
)
 
$
6,507

See Notes to Condensed Consolidated Financial Statements.


4

ASHFORD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands)

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated
 Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interests in Consolidated Entities
 
Total
 
Convertible Preferred Stock
 
Redeemable Noncontrolling Interests
 
Shares
 
Amount
 
Shares
 
Amount
Balance at June 30, 2019
2,476

 
$
25

 
$
289,821

 
$
(219,965
)
 
$
(293
)
 
$
410

 
$
69,998

 
8,120

 
$
201,822

 
$
3,615

Equity-based compensation
3

 
—

 
2,081

 
—

 
—

 
8

 
2,089

 
—

 
—

 
—

Acquisition of Sebago
135

 
1

 
4,546

 
—

 
—

 
—

 
4,547

 
—

 
—

 
—

Amortization of preferred stock discount
—

 
—

 
—

 
(363
)
 
—

 
—

 
(363
)
 
—

 
363

 
—

Dividends declared - preferred stock
—

 
—

 
—

 
(2,909
)
 
—

 
—

 
(2,909
)
 
—

 
—

 
—

Deferred compensation plan distribution
1

 
—

 
20

 
—

 
—

 
—

 
20

 
—

 
—

 
—

Contributions from noncontrolling interests
—

 
—

 
—

 
—

 
—

 
583

 
583

 
—

 
—

 
—

Reallocation of carrying value
—

 
—

 
(255
)
 
—

 
—

 
(135
)
 
(390
)
 
—

 
—

 
390

Redemption value adjustment
—

 
—

 
—

 
14

 
—

 
—

 
14

 
—

 
—

 
(14
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(100
)
 
—

 
(100
)
 
—

 
—

 
(16
)
Net income (loss)
—

 
—

 
—

 
(6,156
)
 
—

 
(101
)
 
(6,257
)
 
—

 
—

 
(334
)
Balance at September 30, 2019
2,615

 
$
26

 
$
296,213

 
$
(229,379
)
 
$
(393
)
 
$
765

 
$
67,232

 
8,120

 
$
202,185

 
$
3,641

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated
 Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interests in Consolidated Entities
 
Total
 
Convertible Preferred Stock
 
Redeemable Noncontrolling Interests
 
Shares
 
Amount
 
Shares
 
Amount
Balance at December 31, 2018
2,392

 
$
24

 
$
280,159

 
$
(214,242
)
 
$
(498
)
 
$
458

 
$
65,901

 
8,120

 
$
200,847

 
$
3,531

Equity-based compensation
8

 
—

 
6,917

 
—

 
—

 
(16
)
 
6,901

 
—

 
—

 
—

Acquisition of BAV Services
60

 
1

 
3,747

 
—

 
—

 
—

 
3,748

 
—

 
—

 
—

Acquisition of Sebago
135

 
1

 
4,546

 
—

 
—

 
—

 
4,547

 
—

 
—

 
—

Investment in Real Estate Advisory Holdings LLC
17

 
—

 
887

 
—

 
—

 
—

 
887

 
—

 
—

 
—

Amortization of preferred stock discount
—

 
—

 
—

 
(1,338
)
 
—

 
—

 
(1,338
)
 
—

 
1,338

 
—

Dividends declared - preferred stock
—

 
—

 
—

 
(8,492
)
 
—

 
—

 
(8,492
)
 
—

 
—

 
—

Deferred compensation plan distribution
3

 
—

 
93

 
—

 
—

 
—

 
93

 
—

 
—

 
—

Employee advances
—

 
—

 
353

 
—

 
—

 
—

 
353

 
—

 
—

 
—

Contributions from noncontrolling interests
—

 
—

 
—

 
—

 
—

 
1,038

 
1,038

 
—

 
—

 
—

Reallocation of carrying value
—

 
—

 
(489
)
 
—

 
—

 
(257
)
 
(746
)
 
—

 
—

 
746

Redemption value adjustment
—

 
—

 
—

 
27

 
—

 
—

 
27

 
—

 
—

 
(27
)
Distributions to consolidated noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(63
)
 
(63
)
 
—

 
—

 
—

Foreign currency translation adjustment
—

 
—

 
—

 
—

 
105

 
—

 
105

 
—

 
—

 
14

Net income (loss)
—

 
—

 
—

 
(5,334
)
 
—

 
(395
)
 
(5,729
)
 
—

 
—

 
(623
)
Balance at September 30, 2019
2,615

 
$
26

 
$
296,213

 
$
(229,379
)
 
$
(393
)
 
$
765

 
$
67,232

 
8,120

 
$
202,185

 
$
3,641


5

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interests in Consolidated Entities
 
Total
 
Convertible Preferred Stock
 
Redeemable Noncontrolling Interests
 
Shares
 
Amount
 
Shares
 
Amount
Balance at June 30, 2018
2,109

 
$
21

 
$
257,303

 
$
(215,435
)
 
$
(348
)
 
$
1,421

 
$
42,962

 
—

 
$
—

 
$
4,852

Equity-based compensation
1

 
—

 
1,990

 
—

 
—

 
(1
)
 
1,989

 
—

 
—

 
—

Issuance of common stock
270

 
3

 
18,096

 
—

 
—

 
—

 
18,099

 
—

 
—

 
—

Acquisition of Premier
—

 
—

 
—

 
—

 
—

 
—

 
—

 
8,120

 
203,000

 
—

Discount on preferred shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,725
)
 
—

Amortization of preferred stock discount
—

 
—

 
—

 
(303
)
 
—

 
—

 
(303
)
 
—

 
303

 
—

Dividends declared - preferred stock
—

 
—

 
—

 
(1,675
)
 
—

 
—

 
(1,675
)
 
—

 
—

 
—

Deferred compensation plan distribution
1

 
—

 
63

 
—

 
—

 
—

 
63

 
—

 
—

 
—

Acquisition of noncontrolling interest in consolidated entities
—

 
—

 
—

 
—

 
—

 
(382
)
 
(382
)
 
—

 
—

 
55

Redemption value adjustment
—

 
—

 
—

 
(162
)
 
—

 
—

 
(162
)
 
—

 
—

 
162

Distributions to consolidated noncontrolling interests
—

 
—

 
—

 
14

 
—

 
(14
)
 
—

 
—

 
—

 
(300
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
96

 
38

 
134

 
—

 
—

 
(23
)
Net income (loss)
—

 
—

 
—

 
3,387

 
—

 
(413
)
 
2,974

 
—

 
—

 
(968
)
Balance at September 30, 2018
2,381

 
$
24

 
$
277,452

 
$
(214,174
)
 
$
(252
)
 
$
649

 
$
63,699

 
8,120

 
$
200,578

 
$
3,778

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated
 Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interests in Consolidated Entities
 
Total
 
Convertible Preferred Stock
 
Redeemable Noncontrolling Interests
 
Shares
 
Amount
 
Shares
 
Amount
Balance at December 31, 2017
2,094

 
$
21

 
$
249,695

 
$
(219,396
)
 
$
(135
)
 
$
772

 
30,957

 
—

 
$
—

 
$
5,111

Equity-based compensation
5

 
—

 
8,051

 
—

 
—

 
7

 
8,058

 
—

 
—

 
—

Issuance of common stock
270

 
3

 
18,096

 
—

 
—

 
—

 
18,099

 
—

 
—

 
—

Acquisition of Premier
—

 
—

 
—

 
—

 
—

 
—

 
—

 
8,120

 
203,000

 
—

Discount on preferred shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,725
)
 
—

Amortization of preferred stock discount
—

 
—

 
—

 
(303
)
 
—

 
—

 
(303
)
 
—

 
303

 
—

Dividends declared - preferred stock
—

 
—

 
—

 
(1,675
)
 
—

 
—

 
(1,675
)
 
—

 
—

 
—

Deferred compensation plan distribution
3

 
—

 
197

 
—

 
—

 
—

 
197

 
—

 
—

 
—

Employee advances
—

 
—

 
45

 
—

 
—

 
—

 
45

 
—

 
—

 
—

Purchase of OpenKey shares from noncontrolling interest holder
9

 
—

 
838

 
—

 
—

 
—

 
838

 
—

 
—

 
(838
)
Acquisition of noncontrolling interest in consolidated entities
—

 
—

 
—

 
—

 
—

 
(382
)
 
(382
)
 
—

 
—

 
55

Contributions from noncontrolling interests
—

 
—

 
—

 
—

 
—

 
2,666

 
2,666

 
—

 
—

 
—

Reallocation of carrying value
—

 
—

 
530

 
—

 
—

 
(1,696
)
 
(1,166
)
 
—

 
—

 
1,166

Redemption value adjustment
—

 
—

 
—

 
576

 
—

 
—

 
576

 
—

 
—

 
(576
)
Distributions to consolidated noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(14
)
 
(14
)
 
—

 
—

 
(300
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(117
)
 
—

 
(117
)
 
—

 
—

 
(23
)
Net income (loss)
—

 
—

 
—

 
6,624

 
—

 
(704
)
 
5,920

 
—

 
—

 
(817
)
Balance at September 30, 2018
2,381

 
$
24

 
$
277,452

 
$
(214,174
)
 
$
(252
)
 
$
649

 
$
63,699

 
8,120

 
$
200,578

 
$
3,778

See Notes to Condensed Consolidated Financial Statements.

6

ASHFORD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash Flows from Operating Activities
 
 
 
Net income (loss)
$
(6,352
)
 
$
5,103

Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
 
 
 
Depreciation and amortization
21,461

 
8,264

Change in fair value of deferred compensation plan
(5,603
)
 
(3,540
)
Equity-based compensation
6,950

 
8,058

Equity in (earnings) loss in unconsolidated entities
109

 
—

Deferred tax expense (benefit)
(1,057
)
 
(15,148
)
Change in fair value of contingent consideration
4,412

 
338

Impairment of furniture, fixtures and equipment
—

 
1,919

(Gain) loss on sale of furniture, fixtures and equipment
(73
)
 
(74
)
Amortization of loan costs
214

 
177

Changes in operating assets and liabilities, exclusive of the effect of acquisitions:
 
 
 
Accounts receivable
(969
)
 
568

Due from affiliates
(10
)
 
—

Due from Ashford Trust OP
849

 
9,166

Due from Braemar OP
(228
)
 
1,149

Inventories
(154
)
 
(149
)
Prepaid expenses and other
(230
)
 
(1
)
Investment in unconsolidated entities
115

 
—

Operating lease right-of-use assets
1,387

 
—

Other assets
—

 
(772
)
Accounts payable and accrued expenses
2,113

 
1,670

Due to affiliates
(610
)
 
(2,467
)
Other liabilities
3,864

 
1,308

Operating lease liabilities
(1,362
)
 
—

Deferred income
(2,078
)
 
(14
)
Net cash provided by (used in) operating activities
22,748

 
15,555

Cash Flows from Investing Activities
 
 
 
Purchases of furniture, fixtures and equipment under the Ashford Trust ERFP Agreement
(13,089
)
 
—

Purchases of furniture, fixtures and equipment under the Braemar ERFP Agreement
(10,300
)
 
—

Additions to furniture, fixtures and equipment
(5,143
)
 
(7,531
)
Proceeds from disposal of furniture, fixtures and equipment, net
231

 
—

Acquisition of BAV Services
(4,267
)
 
—

Acquisition of Sebago
(2,426
)
 
—

Investment in Real Estate Advisory Holdings LLC
(2,176
)
 
—

Cash acquired in acquisition of Premier
—

 
2,277

Acquisition of assets related to RED Hospitality and Leisure LLC
(1,570
)
 
(4,046
)
Net cash provided by (used in) investing activities
(38,740
)
 
(9,300
)
 
 
 
(Continued)


7

 
Nine Months Ended September 30,
 
2019
 
2018
 
 
 
 
Cash Flows from Financing Activities
 
 
 
Proceeds from issuance of common stock
—

 
18,099

Payments for dividends on preferred stock
(5,582
)
 
(1,675
)
Payments on revolving credit facilities
(25,980
)
 
(14,550
)
Borrowings on revolving credit facilities
26,448

 
16,277

Proceeds from notes payable
11,019

 
6,047

Payments on notes payable and capital leases
(2,211
)
 
(1,409
)
Payments of loan costs
(45
)
 
(72
)
Employee advances
353

 
45

Payment of contingent consideration
—

 
(1,196
)
Contributions from noncontrolling interest
980

 
2,666

Distributions to noncontrolling interests in consolidated entities
(63
)
 
(314
)
Net cash provided by (used in) financing activities
4,919

 
23,918

Effect of foreign exchange rate changes on cash and cash equivalents
8

 
(70
)
Net change in cash, cash equivalents and restricted cash
(11,065
)
 
30,103

Cash, cash equivalents and restricted cash at beginning of period
59,443

 
45,556

Cash, cash equivalents and restricted cash at end of period
$
48,378

 
$
75,659

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Interest paid
$
1,063

 
$
555

Income taxes paid
2,203

 
1,375

Supplemental Disclosure of Non-Cash Investing and Financing Activities
 
 
 
Acquisition of Premier through issuance of convertible preferred stock, less cash acquired
—

 
200,723

Distribution from deferred compensation plan
93

 
197

Capital expenditures accrued but not paid
445

 
1,037

Finance lease additions
1,620

 
—

Ashford Inc. common stock consideration for purchase of OpenKey shares
—

 
838

Contributions from noncontrolling interests
58

 
—

Amortization of discount on preferred stock
1,338

 
303

Ashford Inc. common stock consideration for BAV Services acquisition
3,748

 
—

Ashford Inc. common stock consideration for Sebago acquisition
4,547

 
—

Ashford Inc. common stock consideration for investment in Real Estate Advisory Holdings LLC
887

 
—

 
 
 
 
Supplemental Disclosure of Cash, Cash Equivalents and Restricted Cash
 
 
 
Cash and cash equivalents at beginning of period
$
51,529

 
$
36,480

Restricted cash at beginning of period
7,914

 
9,076

Cash, cash equivalents and restricted cash at beginning of period
$
59,443

 
$
45,556

 
 
 
 
Cash and cash equivalents at end of period
$
36,400

 
$
64,937

Restricted cash at end of period
11,978

 
10,722

Cash, cash equivalents and restricted cash at end of period
$
48,378

 
$
75,659

See Notes to Condensed Consolidated Financial Statements.

8
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



1. Organization and Description of Business
Ashford Inc. is a Nevada corporation (see note 18), that provides asset management services, advisory services and other products and services primarily to clients in the hospitality industry. We became a public company in November 2014, when Ashford Hospitality Trust, Inc. (“Ashford Trust”) completed the spin-off of Ashford Inc. through the distribution of approximately 70% of our outstanding common stock to Ashford Trust stockholders and unitholders in Ashford Trust’s operating partnership, collectively. Unless the context otherwise requires, references to the “Company”, “we”, “us” or “Ashford Inc.” for the period before August 8, 2018 refer to Old Ashford (as defined below), for the period from and including August 8, 2018 through November 6, 2019 refer to Maryland Ashford (as defined in note 18), and for the period beginning on and including November 6, 2019, and thereafter refer to Ashford Inc., a Nevada Corporation. Our common stock is listed on the NYSE American LLC (“NYSE American”). As of September 30, 2019, Ashford Trust held approximately 598,000 shares of our common stock, which represented an approximate 22.9% ownership interest in Ashford Inc., and Braemar Hotels & Resorts Inc. (“Braemar”) held approximately 195,000 shares, which represented an approximate 7.5% ownership interest in the Company. However, as described in note 18, as of November 5, 2019, Ashford Trust and Braemar no longer hold any of our common stock.
We are currently the advisor for Ashford Trust and Braemar. In our capacity as the advisor to Ashford Trust and Braemar, we are responsible for implementing the investment strategies and managing the day-to-day operations of Ashford Trust and Braemar, in each case subject to the supervision and oversight of the respective board of directors of Ashford Trust and Braemar. Ashford Trust commenced operating in August 2003 and is focused on investing in full service hotels in the upscale and upper-upscale segments in the U.S. that have revenue per available room (“RevPAR”) generally less than twice the U.S. national average. Braemar invests primarily in luxury hotels and resorts with RevPAR of at least twice the U.S. national average. Braemar became a publicly traded company in November 2013 upon the completion of its spin-off from Ashford Trust. Each of Ashford Trust and Braemar is a real estate investment trust (“REIT”) as defined in the Internal Revenue Code, and the common stock of each of Ashford Trust and Braemar is traded on the NYSE.
We provide the personnel and services that we believe are necessary for each of Ashford Trust and Braemar to conduct their respective businesses. We may also perform similar functions for new or additional platforms. We are not responsible for managing the day-to-day operations of the individual hotel properties owned by either Ashford Trust or Braemar, which duties are, and will continue to be, the responsibility of the hotel management companies that operate the hotel properties owned by Ashford Trust and Braemar.
We conduct our advisory business primarily through an operating entity, Ashford Hospitality Advisors LLC (“Ashford LLC”), our hospitality products and services business primarily through an operating entity, Ashford Hospitality Services LLC (“Ashford Services”), and our project management business through an operating entity, Premier Project Management LLC (“Premier”). We own substantially all of our assets and conduct substantially all of our business through Ashford LLC, Ashford Services and Premier.
On January 16, 2018, the Company closed on the acquisition of a passenger vessel and other assets related to RED Hospitality & Leisure LLC’s (“RED”) operations in the U.S. Virgin Islands. RED is a provider of watersports activities and other travel and transportation services. This transaction was accounted for as an asset acquisition recorded at cost and did not result in the recognition of goodwill. During 2018, RED acquired additional passenger vessels and a ferry. See notes 2, 11 and 15.
On June 26, 2018, the Company entered into the Enhanced Return Funding Program Agreement and Amendment No. 1 to the Amended and Restated Advisory Agreement (the “Ashford Trust ERFP Agreement”) with Ashford Trust. The independent members of the board of directors of each of the Company and Ashford Trust, with the assistance of separate and independent legal counsel, engaged to negotiate the Ashford Trust ERFP Agreement on behalf of the Company and Ashford Trust, respectively. Under the Ashford Trust ERFP Agreement, the Company agreed to provide $50 million (the “ERFP Commitment”) to Ashford Trust in connection with Ashford Trust’s acquisition of hotels recommended by us, with the option to increase the ERFP Commitment to up to $100 million upon mutual agreement by the parties. Under the Ashford Trust ERFP Agreement, the Company’s ERFP Commitment will be fulfilled as the Company pays Ashford Trust 10% of each acquired hotel’s purchase price in exchange for furniture fixtures and equipment (“FF&E”), which is subsequently leased to Ashford Trust rent-free. Ashford Trust must provide reasonable advance notice to the Company to request ERFP funds in accordance with the Ashford Trust ERFP Agreement. The Ashford Trust ERFP Agreement requires 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 Ashford Trust acquiring 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 Ashford Trust’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. See notes 2, 10 and 15.

9
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


On August 8, 2018, we completed the acquisition of Premier, the project management business formerly conducted by certain affiliates of Remington Holdings, LP (“Remington”), for a total transaction value of $203 million. As a result, the project management services that were previously provided by Remington Lodging & Hospitality, LLC (“Remington Lodging”) are now provided by a subsidiary of Ashford Inc. under the respective project management agreement with each customer, including Ashford Trust and Braemar. The purchase price was paid by issuing 8,120,000 shares of the Series B Convertible Preferred Stock to the sellers of Premier (the “Remington Sellers”), primarily MJB Investments, LP (which is wholly-owned by Monty J. Bennett, our Chief Executive Officer and Chairman of our board of directors), and his father Archie Bennett, Jr., the Chairman Emeritus of Ashford Trust (together, the “Bennetts”). The Series B Convertible Preferred Stock has a conversion price of $140 per share and would convert into 1,450,000 shares of our common stock. Cumulative preferred dividends on the Series B Convertible Preferred Stock accrue at an annual rate of 5.5% in the first year, 6.0% in the second year, and 6.5% in the third year and each year thereafter. In addition to certain separate class voting rights, the holders of the Series B Convertible Preferred Stock vote on an as-converted basis with the holders of the common stock on all matters submitted for approval by the holders of our capital stock possessing general voting rights. However, for five years following the closing of the acquisition of Premier, the Remington Sellers and their transferees are subject to certain voting restrictions with respect to shares in excess of 25% of the combined voting power of the Company’s outstanding capital stock. The holders of the Series B Convertible Preferred Stock have certain conversion rights upon certain events constituting a change of control of the Company. See notes 4,12 and 18.
In connection with the acquisition of Premier, we effected a holding company reorganization. The change in holding company organizational structure was effected by a merger, pursuant to which each issued and outstanding share of common stock, par value $0.01 per share, of our predecessor publicly-traded parent Ashford OAINC Inc. (formerly named Ashford Inc.) (“Old Ashford”) was converted into one share of common stock, par value $0.01 per share, of the Company having the same rights, powers and preferences and the same qualifications, limitations and restrictions as a share of common stock of Old Ashford. As a result of the foregoing, we became the successor issuer of Old Ashford under Rule 12g-3 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Our common stock continues to be listed on the NYSE American under the symbol “AINC.”
On September 28, 2018, we completed a public offering of 270,000 shares of common stock at a price to the public of $74.50 per share, resulting in gross proceeds of $20.1 million. The net proceeds from the sale of the shares, after discounts and commissions to the underwriters and offering expenses, were approximately $18.2 million. We also sold an additional 10,000 shares of common stock to the underwriters on October 10, 2018, in connection with the underwriters’ partial exercise of their over-allotment option that had been granted to them in connection with the transaction. The net proceeds from the sale of the over-allotment shares, after discounts and commissions to the underwriters, were approximately $700,000.
Effective January 1, 2019, we acquired a 30% noncontrolling ownership interest in Real Estate Advisory Holdings LLC (“REA Holdings”), a real estate advisory firm that provides financing, advisory and property sales services primarily to clients in the hospitality and leisure industry, for a purchase price of approximately $3.0 million which was paid in the form of $2.1 million cash and the issuance of 16,529 shares of our common stock (approximately $890,000) to the seller pursuant to the exemption from the registration requirements under the Securities Act, provided under Section 4(a)(2) thereunder. We have an option to acquire an additional 50% of the ownership interests in REA Holdings for $12.5 million beginning on January 1, 2022. Our investment in REA Holdings is accounted for under the equity method as we have significant influence over the voting interest entity.
On January 15, 2019, the Company entered into the Enhanced Return Funding Program Agreement and Amendment No. 1 to the Fifth Amended and Restated Advisory Agreement (the “Braemar ERFP Agreement”) 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 Braemar ERFP Agreement, the Company agreed to provide $50 million (the “ERFP Commitment”) to Braemar in connection with Braemar’s acquisition of hotels recommended by us, with the option to increase the ERFP Commitment to up to $100 million upon mutual agreement by the parties. Under the Braemar ERFP Agreement, the Company’s ERFP Commitment will be fulfilled as the Company pays Braemar 10% of each acquired hotel’s purchase price in exchange for FF&E, which is subsequently leased to Braemar rent-free. Braemar must provide reasonable advance notice to the Company to request ERFP funds in accordance with the Braemar ERFP Agreement. The Braemar ERFP Agreement requires 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 Braemar acquiring 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 Braemar’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. See notes 2, 10 and 15.

10
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


On March 1, 2019, J&S Audio Visual (“JSAV”), our consolidated subsidiary, acquired a privately-held company, BAV Services in the United States (“BAV”). BAV is an audio visual rental, staging, and production company focused on meeting and special event services. As a result of the acquisition, our ownership interest in JSAV, which we consolidate under the voting interest model, increased from 85% to approximately 88%. Pursuant to the asset purchase agreement, as amended on September 24, 2019, the purchase price consisted of: (i) $5.0 million in cash (excluding working capital adjustments) funded by an existing JSAV term loan; (ii) $3.5 million in the form of Ashford Inc. common stock consisting of 61,387 shares issued on March 1, 2019, which was determined based on a thirty-day volume weighted average price per share (“30-Day VWAP”) of $57.01 and had an estimated fair value of approximately $3.7 million as of the acquisition date; (iii) $500,000 payable in cash or Ashford Inc. common stock at our sole discretion to be issued 18 months after the acquisition date, subject to certain conditions; and (iv) contingent consideration related to the achievement of certain performance targets with an estimated fair value of approximately $1.4 million, payable, if earned, 12 to 18 months after the acquisition date. Additionally, the transaction includes a stock consideration collar with potential settlements at 12 months, 15 months and 18 months after the acquisition date dependent upon the 30-Day VWAP of Ashford Inc.’s common stock on each respective settlement date. A liability resulting from contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved, with changes in fair value recognized in earnings within “other” operating expenses in our condensed consolidated statements of operations. See notes 4 and 8 for further discussion of the Company’s liabilities related to acquisition-related contingent consideration.
On May 31, 2019, Ashford Inc. signed a Combination Agreement, between the Bennetts, Remington, Remington Holdings GP, LLC, MJB Investments, LP, the Company, James L. Cowen, Jeremy J. Welter (our Co-President and COO), Ashford Nevada Holding Corp. and Ashford Merger Sub Inc. (which was subsequently amended on July 17, 2019 and further amended on August 28, 2019) (the “Combination Agreement”) to acquire the Hotel Management business of Remington, a privately held company. The transaction closed on November 6, 2019, after the transaction was approved by shareholders on October 24, 2019. See note 18.
On July 18, 2019, RED completed the acquisition of substantially all of the assets of Sebago, a leading provider of watersports activities and excursion services based in Key West, Florida. After giving effect to the transaction, Ashford Inc. will own an approximately 84% interest in the common equity of RED. The purchase price consisted of approximately $2.5 million in cash (excluding transaction costs and working capital adjustments) funded by new RED term loans and $4.5 million in the form of Ashford Inc. common stock consisting of 135,366 shares issued on July 18, 2019, subject to a six month stock consideration collar. See note 4.
On September 25, 2019, the Company announced the formation of Ashford Securities LLC (“Ashford Securities”) to raise capital in order to grow the Company’s existing and future platforms. Following registration with the Financial Industry and Regulatory Authority and other regulatory authorities, Ashford Securities will be a dedicated capital raising platform to fund investment opportunities sponsored and asset-managed by the Company. Types of capital raised may include, but are not limited to, preferred equity, convertible preferred equity, mezzanine debt, or non-traded REIT common equity for future platforms. Ashford Securities is not raising common equity for the Company nor for the Company’s existing advised platforms Ashford Trust and Braemar.
In conjunction with the formation of Ashford Securities, Ashford Trust and Braemar have entered into a contribution agreement with Ashford Inc. in which Ashford Trust and Braemar have agreed to contribute a combined contribution amount of up to $15.0 million to fund the operations of Ashford Securities. As of September 30, 2019, Ashford Trust and Braemar have funded approximately $485,000 and $165,000, respectively.
The accompanying condensed consolidated financial statements reflect the operations of our advisory and asset management business, hospitality products and services business, and entities that we consolidate. In this report, the terms the “Company,” “we,” “us” or “our” refers to Ashford Inc. and all entities included in its condensed consolidated financial statements.
2. Significant Accounting Policies
Basis of Presentation and Principles of Consolidation—The accompanying historical unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These condensed consolidated financial statements include the accounts of Ashford Inc., its majority-owned subsidiaries and entities which it controls. All significant intercompany accounts and transactions between these entities have been eliminated in these historical condensed consolidated financial statements. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP in the accompanying unaudited condensed consolidated financial

11
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


statements. We believe the disclosures made herein are adequate to prevent the information presented from being misleading. However, the condensed consolidated financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in our 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2019.
A variable interest entity (“VIE”) must be consolidated by a reporting entity if the reporting entity is the primary beneficiary because it has (i) the power to direct the VIE’s activities that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. We determine whether we are the primary beneficiary of a VIE upon our initial involvement with the VIE and we reassess whether we are the primary beneficiary of a VIE on an ongoing basis. Our determination of whether we are the primary beneficiary of a VIE is based upon the facts and circumstances for each VIE and requires significant judgment.

12
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Noncontrolling Interests—The following tables present information about noncontrolling interests in our consolidated subsidiaries, including those related to consolidated VIEs, as of September 30, 2019 and December 31, 2018 (in thousands):

 
September 30, 2019
 
Ashford
Holdings
 
JSAV (3)
 
OpenKey(4)
 
Pure
Wellness (5)
 
RED (6)
Ashford Inc. ownership interest
99.84
%
 
88.20
%
 
47.61
%
 
70.00
%
 
84.21
%
Redeemable noncontrolling interests(1) (2)
0.16
%
 
11.80
%
 
26.59
%
 
—
%
 
—
%
Noncontrolling interests in consolidated entities
—
%
 
—
%
 
25.80
%
 
30.00
%
 
15.79
%
 
100.00
%
 
100.00
%
 
100.00
%
 
100.00
%
 
100.00
%
 
 
 
 
 
 
 
 
 
 
Carrying value of redeemable noncontrolling interests
$
100

 
$
1,802

 
$
1,739

 
n/a

 
n/a

Redemption value adjustment, year-to-date
(89
)
 
—

 
62

 
n/a

 
n/a

Redemption value adjustment, cumulative
89

 
—

 
2,095

 
n/a

 
n/a

Carrying value of noncontrolling interests
—

 
—

 
540

 
157

 
19

Assets, available only to settle subsidiary’s obligations (7) (8)
n/a

 
56,115

 
2,461

 
2,027

 
18,682

Liabilities (9)
n/a

 
42,752

 
513

 
1,869

 
10,388

Notes payable (9)
n/a

 
18,711

 
—

 
—

 
6,327

Revolving credit facility (9)
n/a

 
2,327

 
—

 
45

 
6

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
Ashford
Holdings
 
JSAV (3)
 
OpenKey(4)
 
Pure
Wellness (5)
 
RED (6)
Ashford Inc. ownership interest
99.83
%
 
85.00
%
 
45.61
%
 
70.00
%
 
80.00
%
Redeemable noncontrolling interests(1) (2)
0.17
%
 
15.00
%
 
29.65
%
 
—
%
 
—
%
Noncontrolling interests in consolidated entities
—
%
 
—
%
 
24.74
%
 
30.00
%
 
20.00
%
 
100.00
%
 
100.00
%
 
100.00
%
 
100.00
%
 
100.00
%
 
 
 
 
 
 
 
 
 
 
Carrying value of redeemable noncontrolling interests
$
215

 
$
1,858

 
$
1,458

 
n/a

 
n/a

Redemption value adjustment, year-to-date
(180
)
 
—

 
12

 
n/a

 
n/a

Redemption value adjustment, cumulative
178

 
—

 
2,033

 
n/a

 
n/a

Carrying value of noncontrolling interests
—

 
—

 
308

 
218

 
(68
)
Assets, available only to settle subsidiary’s obligations (7)
n/a

 
37,141

 
1,410

 
2,267

 
6,807

Liabilities (9)
n/a

 
24,836

 
421

 
1,977

 
2,839

Notes payable (9)
n/a

 
13,614

 
—

 
—

 
2,480

Revolving credit facility (9)
n/a

 
1,733

 
—

 
60

 
118

________
(1) 
Redeemable noncontrolling interests are included in the “mezzanine” section of our condensed consolidated balance sheets as they may be redeemed by the holder for cash or registered shares in certain circumstances outside of the Company’s control. The carrying value of the noncontrolling interests is based on the greater of the accumulated historical cost or the redemption value, which is generally fair value.
(2) 
Redeemable noncontrolling interests in Ashford Hospitality Holdings LLC (“Ashford Holdings”) represent the members’ proportionate share of equity in earnings/losses of Ashford Holdings. Net income/loss attributable to the common unit holders is allocated based on the weighted average ownership percentage of the members’ interest.
(3) 
Represents ownership interests in JSAV, which we consolidate under the voting interest model. JSAV provides audio visual products and services in the hospitality industry. See also notes 1, 11 and 12.
(4) 
Represents ownership interests in OpenKey, a VIE for which we are considered the primary beneficiary and therefore we consolidate it. OpenKey is a hospitality focused mobile key platform that provides a universal smartphone app for keyless entry into hotel guest rooms. See also notes 1, 11 and 12.

13
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


(5) 
Represents ownership interests in Pure Wellness, a VIE for which we are considered the primary beneficiary and therefore we consolidate it. Pure Wellness provides hypoallergenic premium rooms in the hospitality industry. See also notes 1 and 11.
(6) 
Represents ownership interests in RED, a VIE for which we are considered the primary beneficiary and therefore we consolidate it. RED is a provider of watersports activities and other travel and transportation services and includes the entity that conducts RED’s legacy U.S. Virgin Islands operations and Sebago. We are provided a preferred return on our investment in RED’s legacy U.S. Virgin Islands operations and Sebago which is accounted for in our income allocation based on the applicable partnership agreement. See also notes 1 and 11.
(7) 
Total assets consist primarily of cash and cash equivalents, FF&E and other assets that can only be used to settle the subsidiaries’ obligations.
(8) 
The assets of Sebago are not available to settle the obligations of the entity that conducts RED’s legacy U.S. Virgin Islands operations.
(9) 
Liabilities consist primarily of accounts payable, accrued expenses and notes payable for which creditors do not have recourse to Ashford Inc. except in the case of the term loans and line of credit held by RED’s legacy U.S. Virgin Islands operations, for which the creditor has recourse to Ashford Inc.
Investments in Unconsolidated Entities—We hold “investments in unconsolidated entities” in our condensed consolidated balance sheets, which are considered to be variable interests and voting interests in the underlying entities. Certain of our investments in variable interests are not consolidated because we have determined that we are not the primary beneficiary. Certain other investments are not consolidated as the underlying entity does not meet the definition of a VIE and we do not control more than 50% of the voting interests. We review our “investments in unconsolidated entities” for impairment in each reporting period pursuant to the applicable authoritative accounting guidance. An investment is impaired when its estimated fair value is less than the carrying amount of our investment. Any impairment is recorded in “equity in earnings (loss) of unconsolidated entities.” No such impairment was recorded during the three and nine months ended September 30, 2019 and 2018.
We held an investment in an unconsolidated variable interest entity with a carrying value of $500,000 at September 30, 2019 and December 31, 2018. We account for the investment at estimated fair value based on recent observable transactions as we do not exercise significant influence over the entity. No equity in earnings (loss) of unconsolidated entities due to a change in fair value of the investment was recognized during the three and nine months ended September 30, 2019 and 2018.
Effective January 1, 2019, we acquired a 30% noncontrolling ownership interest in REA Holdings, a real estate advisory firm that provides financing, advisory and property sales services primarily to clients in the hospitality and leisure industry, for a purchase price of approximately $3.0 million which was paid in the form of $2.1 million cash and the issuance of 16,529 shares of our common stock (approximately $890,000) to the seller pursuant to the exemption from the registration requirements under the Securities Act, provided under Section 4(a)(2) thereunder. We have an option to acquire an additional 50% of the ownership interests in REA Holdings for $12.5 million beginning on January 1, 2022. Our investment in REA Holdings is accounted for under the equity method as we have significant influence over the voting interest entity.
The following table summarizes our carrying value and ownership interest in REA Holdings (in thousands):
 
September 30, 2019
Carrying value of the investment in REA Holdings
$
2,839

Ownership interest in REA Holdings
30
%
The following table summarizes our equity in earnings (loss) in REA Holdings (in thousands):
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Equity in earnings (loss) in unconsolidated entities
$
464

 
$
(109
)
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

14
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


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 condensed consolidated financial statements may be exposed to potential impairment of the intangible assets and goodwill.
Certain of our business combinations include contingent consideration arrangements that require additional consideration to be paid based on the achievement of established objectives, most commonly related to post-combination period performance targets and stock consideration collars. We assess contingent consideration to determine if it is part of the business combination or if it should be accounted for separately from the business combination in the post-combination period. Contingent consideration is recognized at its fair value on the acquisition date. A liability resulting from contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved, with changes in fair value recognized in earnings. See note 4 for additional information regarding contingent consideration arising from business acquisitions. 
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.
Use of Estimates—The preparation of these condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Furniture, Fixtures and Equipment, net—We record FF&E at cost. We also capitalize certain costs incurred related to the development of internal use software. We capitalize costs incurred during the application development stage related to the development of internal use software. We expense costs incurred related to the planning and post-implementation phases of development as incurred. Assets are depreciated using the straight-line method over the estimated useful lives of the assets. As of September 30, 2019 and December 31, 2018, FF&E, net of accumulated depreciation, included ERFP assets of $35.7 million and $16.1 million, audio visual equipment at JSAV of $16.0 million and $13.4 million and marine vessels at RED of $8.2 million and $5.7 million, respectively.
Impairment of Furniture, Fixtures and Equipment—FF&E are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the asset is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the asset. If our analysis indicates that the carrying value of the asset is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the asset net book value exceeds its estimated fair value, or fair value, less cost to sell. In evaluating impairment of assets, we make many assumptions and estimates, including projected cash flows, expected holding period, and expected useful life. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. Assets not yet placed into service are also reviewed for impairment whenever events or changes in circumstances indicate that all or a portion of the assets will not be placed into service. No impairment charges were recorded for the three and nine months ended September 30, 2019. We recorded impairment charges of $0 and $1.9 million for the three and nine months ended September 30, 2018, respectively. The impairment in 2018 was recognized upon determination that a portion of capitalized software that was not eligible for reimbursement would not be placed into service.
Goodwill and Indefinite-Lived Intangible Assets—Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. Indefinite-lived intangible assets primarily include trademark rights resulting from our acquisition of JSAV and RED’s acquisition of Sebago. We assess goodwill and indefinite-lived intangible assets, neither of which is amortized, for impairment annually as of October 1, or more frequently, if events and circumstances indicate impairment may have occurred. In the evaluation of goodwill for impairment, we typically 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 evaluated 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

15
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


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 either a market valuation approach or an analysis of discounted projected future operating cash flows using a discount rate that is commensurate with the risk inherent in our current business model. We base our measurement of fair value of trademarks using the relief-from-royalty method. This 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. Based on the results of our annual impairment assessments, no impairment of goodwill or trademark rights was indicated. In the third quarter of 2019, the Company identified a potential indicator of goodwill impairment in our reporting units due to a decline in the price of our common stock. We performed an interim qualitative assessment to determine whether it was more likely than not that the carrying value of goodwill in our reporting units was impaired as of September 30, 2019. Based on our assessment, goodwill was not impaired as of September 30, 2019.
Definite-Lived Intangible Assets—Definite-lived intangible assets primarily include customer relationships, management contracts and boat slip rights resulting from our acquisitions of Premier, JSAV, RED and Pure Wellness. Definite-lived intangible assets are amortized over their respective estimated useful lives based on the projected economic benefit associated with the asset, or using the straight-line method if not materially different. We review the carrying amount of the assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. No indicators of impairment were identified as of September 30, 2019.
Other Liabilities—As of September 30, 2019 and December 31, 2018, other liabilities included reserves in the amount of $12.1 million and $7.8 million, respectively, related primarily to Ashford Trust and Braemar properties’ casualty insurance claims and related fees. The liability for casualty insurance claims and related fees is established based upon an analysis of historical data and actuarial estimates. We record the related funds received from Ashford Trust and Braemar in “restricted cash” in our condensed consolidated balance sheets. As of September 30, 2019, other liabilities also included our remaining consideration of $500,000 and the fair value of contingent consideration of $4.6 million due to the sellers of BAV resulting from JSAV’s acquisition of BAV in March of 2019 and the fair value of contingent consideration of $1.2 million due to the sellers of Sebago resulting from RED’s acquisition of Sebago in July of 2019. See notes 4 and 15.
Revenue Recognition—See note 3.
Salaries and Benefits—Salaries and benefits are expensed as incurred. Salaries and benefits includes expense for equity grants of Ashford Trust and Braemar common stock and performance-based Long-Term Incentive Plan (“LTIP”) units awarded to our officers and employees in connection with providing advisory services equal to the grant date fair value of the award in proportion to the requisite service period satisfied during the period. There is an offsetting amount, included in “advisory services” revenue. Salaries and benefits also includes changes in fair value in the deferred compensation plan liability. See note 14.
Depreciation and Amortization—Our FF&E is depreciated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the related assets. Furniture and equipment, excluding our RED vessels, are depreciated using the straight-line method over lives ranging from 3 to 7.5 years and computer software placed into service is amortized on a straight-line basis over estimated useful lives ranging from 3 to 5 years. Our RED vessels are depreciated using the straight-line method over a useful life of 20 years. While we believe our estimates are reasonable, a change in estimated useful lives could affect depreciation expense and net income/loss as well as resulting gains or losses on potential sales. See also the “Definite-Lived Intangible Assets” above.
Equity-Based Compensation—Our equity incentive plan provides for the grant of restricted or unrestricted shares of our common stock, share appreciation rights, performance shares, performance units and other equity-based awards or any combination of the foregoing. Equity-based compensation included in “salaries and benefits” is accounted for at fair value based on the market price of the shares/options on the date of grant in accordance with applicable authoritative accounting guidance. The fair value is charged to compensation expense on a straight-line basis over the vesting period of the shares/options. Grants of restricted stock to independent directors are recorded at fair value based on the market price of our shares at grant date, and this amount is fully expensed in “general and administrative” expense as the grants of stock are fully vested on the date of grant. Our officers and employees can be granted common stock and LTIP units from Ashford Trust and Braemar in connection with providing advisory services that result in expense, included in “salaries and benefits,” 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 “advisory services” revenue.
Prior to the adoption of ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”) in the third quarter of 2018, equity-based awards granted to non-employees

16
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


were accounted for at fair value based on the market price of the awards at period end, which resulted in recording expense equal to the fair value of the award in proportion to the requisite service period satisfied during the period. After the adoption of ASU 2018-07 in the third quarter of 2018, equity-based awards granted to non-employees are measured at the grant date and expensed ratably over the vesting period based on the original measurement date as the grant date. This results in the recording of expense equal to the ratable amount of the grant date fair value based on the requisite service period satisfied during the period.
Other Comprehensive Income (Loss)—Comprehensive income consists of net income (loss) and foreign currency translation adjustments. The foreign currency translation adjustment represents the unrealized impact of translating the financial statements of the JSAV operations in Mexico and the Dominican Republic from their respective functional currencies to U.S. dollars. This amount is not included in net income and would only be realized upon the sale or upon complete or substantially complete liquidation of the foreign businesses. The accumulated other comprehensive income (loss) is presented on our condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018.
Due to Affiliates—Due to affiliates represents current payables resulting primarily from general and administrative expense, and FF&E reimbursements. Due to affiliates is generally settled within a period not exceeding one year.
Leases—We determine if an arrangement is a lease at the inception of the contract. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments related to operating leases is recognized on a straight-line basis over the lease term. Lease expense for minimum lease payments related to financing leases is recognized using the effective interest method over the lease term. Short-term leases are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. See note 7.
Income Taxes—We are a taxable corporation for federal and state income tax purposes. Income tax expense includes U.S. federal and state income taxes, beginning November 1, 2017, Mexico and Dominican Republic income taxes and, beginning 2018, U.S. Virgin Islands taxes. In accordance with authoritative accounting guidance, we account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between our condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
The “Income Taxes” topic of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance requires us to determine whether tax positions we have taken or expect to take in a tax return are more likely than not to be sustained upon examination by the appropriate taxing authority based on the technical merits of the positions. Tax positions that do not meet the more likely than not threshold would be recorded as additional tax expense in the current period. We analyze all open tax years, as defined by the statute of limitations for each jurisdiction, which includes the federal jurisdiction and various states. We classify interest and penalties related to underpayment of income taxes as income tax expense. We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and cities, beginning November 1, 2017, in Mexico and the Dominican Republic and, beginning 2018, in the U.S. Virgin Islands. Tax years 2014 through 2018 remain subject to potential examination by certain federal and state taxing authorities.
Recently Adopted Accounting Standards—In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”) and ASU 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”). The amendments in ASU 2018-10 affect only narrow aspects of the guidance issued in the amendments in ASU 2016-02, including but not limited to lease residual value guarantee, rate implicit in the lease and lease term and purchase option. The amendments in ASU 2018-11 provide an optional transition method for adoption of the new standard, which will allow entities to continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption.
Effective January 1, 2019, we have adopted the new standard using the modified retrospective approach and implemented internal controls to enable the preparation of financial information upon adoption. We elected to adopt both the transition relief provided in ASU 2018-11 and the package of practical expedients which allowed us, among other things, to retain historical lease

17
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


classifications and accounting for any leases that existed prior to adoption of the standard. Additionally, we elected the practical expedients allowing us not to separate lease and non-lease components and not record leases with an initial term of twelve months or less (“short-term leases”) on the balance sheet across all existing asset classes.
Adoption of the new standard resulted in the recording of operating lease assets and operating lease liabilities of $26.2 million as of January 1, 2019, which primarily relates to certain office space, warehouse facilities, vehicles and equipment. The standard did not materially impact our condensed consolidated statements of operations or cash flows. Adopting the new standard did not have a material impact on the accounting for leases under which we are the lessor, except as it pertains to our rent-free leases of FF&E with Ashford Trust and Braemar. The new standard requires leases with related parties entered into on or after January 1, 2019, to be accounted for in accordance with the legally enforceable terms and conditions of the lease (i.e. zero rent payments). Therefore, we will no longer allocate a portion of base advisory fee revenue to lease revenue in an amount equal to the estimated fair value of the lease payments that would have been made because ERFP leases are rent-free. For historical leases related to our key money and ERFP programs that were in place upon adoption of the new standard on January 1, 2019, we will continue allocating a portion of base advisory fee revenue to lease revenue consistent with our historical accounting for the remainder of the applicable lease terms. See note 7.
Recently Issued Accounting Standards—In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 sets forth an “expected credit loss” impairment model to replace the current “incurred loss” method of recognizing credit losses. The standard requires measurement and recognition of expected credit losses for most financial assets held. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for periods beginning after December 15, 2018. We are implementing repeatable processes to manage our analysis of any expected credit losses which may occur related to our short-term receivables and evaluating accounting policies and controls that will be impacted by the new standard.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, ASU 2017-04 clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are evaluating the impact that ASU 2017-04 will have on our condensed consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies certain disclosure requirements related to fair value measurements including requiring disclosures on changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements and a requirement to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact that ASU 2018-13 will have on our condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact that ASU 2018-15 will have on our condensed consolidated financial statements.

18
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


3. Revenues
Revenue Recognition—Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
We determine revenue recognition through the following steps:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, we satisfy a performance obligation
In determining the transaction price, we include variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved.

The following provides detailed information on the recognition of our revenues from contracts with customers:
Advisory Services Revenue
Advisory services revenue is reported within our REIT Advisory segment and primarily consists of advisory fees and expense reimbursements that are recognized when services have been rendered. Advisory fees consist of base fees and incentive fees. For Ashford Trust, prior to June 26, 2018, the base fee was paid quarterly and ranged from 0.50% to 0.70% per annum of the total market capitalization ranging from less than $6.0 billion to greater than $10.0 billion plus the Key Money Asset Management Fee, as defined in the amended and restated advisory agreement, subject to certain minimums. Upon effectiveness of the Enhanced Return Funding Program Agreement and Amendment No. 1 to the Amended and Restated Advisory Agreement on June 29, 2018, the base fee is paid monthly and ranges from 0.50% to 0.70% per annum of the total market capitalization ranging from less than $6.0 billion to greater than $10.0 billion plus the Net Asset Fee Adjustment, as defined in the amended and restated advisory agreement, as amended, subject to certain minimums. For Braemar, prior to January 15, 2019, the base fee was paid monthly and was fixed at 0.70% of Braemar’s total market capitalization plus the Key Money Asset Management Fee, as defined in the advisory agreement, subject to certain minimums. Upon effectiveness of the Enhanced Return Funding Program Agreement and Amendment No. 1 to the Fifth Amended and Restated Advisory Agreement on January 15, 2019, the base fee is paid monthly and is fixed at 0.70% of Braemar’s total market capitalization plus the Net Asset Fee Adjustment, as defined in the advisory agreement, as amended, subject to certain minimums. Reimbursements for overhead, internal audit, risk management advisory services and asset management services, including compensation, benefits and travel expense reimbursements, are recognized when services have been rendered. We record advisory revenue for equity grants of Ashford Trust and Braemar common stock and LTIP units awarded to our officers and employees in connection with providing advisory services equal to the grant date fair value of the award in proportion to the requisite service period satisfied during the period, as well as an offsetting expense in an equal amount included in “salaries and benefits.”
Incentive advisory fees are measured annually in each year that Ashford Trust’s and/or Braemar’s annual total stockholder return exceeds the average annual total stockholder return for each company’s respective peer group, subject to the Fixed Charge Coverage Ratio Condition (the “FCCR Condition”), as defined in the respective advisory agreements. Incentive advisory fees are paid over a three-year period and each payment is subject to the FCCR Condition, which relates to the ratio of adjusted EBITDA to fixed charges for Ashford Trust or Braemar, as applicable. Incentive advisory fees are a form of variable consideration and therefore must be (i) deferred until such fees are probable of not being subject to significant reversal, and (ii) tied to a performance obligation in the contract with the customer so that revenue recognition depicts the transfer of the related advisory services to the customer. Accordingly, the Company does not record incentive advisory fee revenue in interim periods prior to the fourth quarter of the year in which the incentive fee is measured. The first year installment of incentive advisory fees will generally be recognized only upon measurement in the fourth quarter of the first year of the three year period. The second and third year installments of incentive advisory fees are recognized as revenue on a pro-rata basis each quarter as such amounts are not subject to significant reversal.

19
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Audio Visual Revenue
Audio visual revenue primarily consists of revenue generated within our JSAV 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.
Project Management Revenue
Project management revenue primarily consists of revenue generated within our Premier segment by providing development and construction, capital improvements, refurbishment, project management, and other services such as purchasing, interior design, architectural services, freight management, and construction management services at properties. Premier receives fees for these services and recognizes revenue over time as services are provided to the customer. Project management revenue also includes revenue from reimbursable costs for accounting, overhead and project manager services provided to projects owned by affiliates of Ashford Trust, Braemar and other owners.
Other Revenue
Other revenue includes revenues provided by certain of our hospitality 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 fees include revenues earned from providing debt placement services by Lismore Capital (“Lismore”), our wholly-owned subsidiary. These fees are recognized based on a stated percentage of the loan amount when services have been rendered and the subject loan has closed. In connection with our ERFP Agreements and legacy key money transaction with Ashford Trust and legacy key money transaction with Braemar, we lease FF&E to Ashford Trust and Braemar rent-free. Our ERFP leases entered into in 2018 with Ashford Trust commenced on December 31, 2018. Consistent with our accounting treatment prior to adopting ASC 842, a portion of the base advisory fee for leases, which commenced prior to our adoption, is allocated to lease revenue each period equal to the estimated fair value of the lease payments that would have been made.
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.

20
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Deferred Income and Contract Balances
Deferred income primarily consists of customer billings in advance of revenues being recognized from our advisory agreements and other hospitality products and services contracts. Generally, deferred income that could result in a cash payment within the next twelve months is recorded as current deferred income and the remaining portion is recorded as noncurrent. The increase in the deferred income balance is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by revenues recognized that were included in the deferred income balance at the beginning of the period. The following tables summarize our consolidated deferred income activity (in thousands):
 
Deferred Income
 
2019
 
2018
Balance as of June 30
$
11,226

 
$
13,111

Increases to deferred income
1,681

 
2,144

Recognition of revenue (1)
(1,287
)
 
(1,344
)
Balance as of September 30
$
11,620

 
$
13,911

________
(1) 
Deferred income recognized in the three months ended September 30, 2019, includes (a) $554,000 of advisory revenue primarily related to our advisory agreements with Ashford Trust and Braemar, (b) $194,000 of audio visual revenue and (c) $539,000 of “other services” revenue earned by our hospitality products and services companies. Deferred income recognized in the three months ended September 30, 2018, includes (a) $666,000 of advisory revenue primarily related to our advisory agreements with Ashford Trust and Braemar, (b) $173,000 of audio visual revenue and (c) $505,000 of “other services” revenue earned by our hospitality products and services companies.
 
Deferred Income
 
2019
 
2018
Balance as of January 1
$
13,544

 
$
13,899

Increases to deferred income
4,429

 
5,731

Recognition of revenue (1)
(6,353
)
 
(5,719
)
Balance as of September 30
$
11,620

 
$
13,911

________
(1) 
Deferred income recognized in the nine months ended September 30, 2019, includes (a) $2.0 million of advisory revenue primarily related to our advisory agreements with Ashford Trust and Braemar, (b) $2.6 million of audio visual revenue and (c) $1.8 million of “other services” revenue earned by our hospitality products and services companies. Deferred income recognized in the nine months ended September 30, 2018, includes (a) $1.6 million of advisory revenue primarily related to our advisory agreements with Ashford Trust and Braemar, (b) $2.9 million of audio visual revenue and (c) $1.3 million of “other services” revenue earned by our hospitality products and services companies.
We do not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was primarily related to (i) reimbursed software costs that will be recognized evenly over the period the software is used to provide advisory services to Ashford Trust and Braemar, and (ii) a $5.0 million cash payment received in June 2017 from Braemar in connection with our Fourth Amended and Restated Braemar Advisory Agreement, which is recognized evenly over the 10-year initial contract period that we are providing Braemar advisory services. Incentive advisory fees that are contingent upon future market performance are excluded as the fees are considered variable and not included in the transaction price at September 30, 2019.

21
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


The timing of revenue recognition may differ from the timing of payment by customers. We record a receivable when revenue is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, we record deferred income until the performance obligations are satisfied. We had receivables related to revenues from contracts with customers of $6.6 million and $4.9 million included in “accounts receivable, net” primarily related to our hospitality products and services segment, $4.4 million and $5.3 million in “due from Ashford Trust OP”, and $2.2 million and $2.0 million included in “due from Braemar OP” related to REIT advisory services at September 30, 2019 and December 31, 2018, respectively. We had no significant impairments related to these receivables during the three and nine months ended September 30, 2019 and 2018.

22
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Disaggregated Revenue
Our revenues were comprised of the following for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Advisory services revenue:
 
 
 
 
 
 
 
Base advisory fee 
$
10,570

 
$
11,655

 
$
32,382

 
$
33,540

Incentive advisory fee
170

 
452

 
509

 
1,356

Reimbursable expenses
2,541

 
2,607

 
8,270

 
7,052

Equity-based compensation
6,643

 
6,170

 
18,912

 
25,780

Other advisory revenue
131

 
132

 
389

 
390

Total advisory services revenue (2)
20,055

 
21,016

 
60,462

 
68,118

 
 
 
 
 
 
 
 
Audio visual revenue
22,430

 
14,526

 
83,532

 
61,212

 
 
 
 
 
 
 
 
Project management revenue
7,881

 
3,616

 
23,371

 
3,616

 
 
 
 
 
 
 
 
Other revenue:
 
 
 
 
 
 
 
Investment management reimbursements (2)
246

 
339

 
941

 
850

Debt placement fees (3)
429

 
350

 
1,862

 
5,941

Claims management services (2)
51

 
48

 
147

 
153

Lease revenue (2)
1,029

 
251

 
3,088

 
754

Other services (4)
4,768

 
1,419

 
10,272

 
3,900

Total other revenue
6,523

 
2,407

 
16,310

 
11,598

 
 
 
 
 
 
 
 
Total revenue
$
56,889

 
$
41,565

 
$
183,675

 
$
144,544

 
 
 
 
 
 
 
 
REVENUE BY SEGMENT (1)
 
 
 
 
 
 
 
REIT advisory
$
21,381

 
$
21,656

 
$
64,638

 
$
69,875

Premier
7,881

 
3,616

 
23,371

 
3,616

JSAV
22,430

 
14,526

 
83,532

 
61,212

OpenKey
313

 
301

 
764

 
773

Corporate and other
4,884

 
1,466

 
11,370

 
9,068

Total revenue
$
56,889

 
$
41,565

 
$
183,675

 
$
144,544

________
(1) 
We have four reportable segments: REIT Advisory, Premier, JSAV and OpenKey. We combine the operating results of RED, Pure Wellness and Lismore into an “all other” category, which we refer to as “Corporate and Other.” See note 17 for discussion of segment reporting.
(2) 
Indicates revenue recognized by our REIT Advisory segment.
(3) 
Debt placement fees are earned by Lismore for providing debt placement services to Ashford Trust and Braemar.
(4)  
Other services revenue relates primarily to other hotel services provided by our consolidated subsidiaries, OpenKey, RED and Pure Wellness, to Ashford Trust, Braemar and third parties. Other services also includes reimbursements for expenses related to Ashford Securities from Ashford Trust and Braemar.


23
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Geographic Information
Our REIT Advisory, Premier, OpenKey, and Corporate and Other reporting segments conduct their business within the United States. Our JSAV reporting segment conducts business in the United States, Mexico, and the Dominican Republic. The following table presents revenue from our JSAV reporting segment geographically for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
United States
$
19,860

 
$
12,385

 
$
67,550

 
$
44,547

Mexico
1,804

 
1,293

 
11,289

 
12,010

Dominican Republic
766

 
848

 
4,693

 
4,655

 
$
22,430

 
$
14,526

 
$
83,532

 
$
61,212

4. Acquisitions
Sebago
On July 18, 2019, RED completed the acquisition of substantially all of the assets of Sebago, a leading provider of watersports activities and excursion services based in Key West, Florida. After giving effect to the transaction, Ashford Inc. will own an approximately 84% interest in the common equity of RED.
The purchase price consisted of approximately $2.5 million in cash (excluding transaction costs and working capital adjustments) funded by new RED term loans and $4.5 million in the form of Ashford Inc. common stock consisting of 135,366 shares issued on July 18, 2019, subject to a six month stock consideration collar. The issued Ashford Inc. shares were determined using a 30-Day VWAP of $33.24 and had an estimated fair value of approximately $4.5 million as of the acquisition date. Pursuant to the acquisition agreement, in the event that the 30-Day VWAP of the common stock on the six month anniversary of the closing date of the acquisition is lower than the price of the common stock on July 18, 2019, the Company at its sole discretion will either pay to the sellers a cash payment, if greater than zero, equal to the amount by which the value of the common stock on the six month anniversary of the acquisition is less than $3.8 million or may repurchase all of the common stock from the seller for $3.8 million. In the event that the 30-Day VWAP of the common stock on the six month anniversary of the closing date of the acquisition is higher than the price of the common stock on July 18, 2019, the Company may repurchase shares of common stock at a price of $0.01 per share, such that the stock consideration for the transaction remains $4.5 million in common stock. A liability resulting from contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved, with changes in fair value recognized in earnings within “other” operating expenses in our condensed consolidated statements of operations. See note 8 for further discussion of the Company’s liabilities related to acquisition-related contingent consideration.
The acquisition of Sebago was recorded using the acquisition method of accounting in accordance with the authoritative guidance for business combinations, and the purchase price allocation is based on our valuation of the fair value of the tangible and intangible assets acquired and liabilities assumed at the date of acquisition. The fair values of the assets acquired were determined using various valuation techniques, including an income approach. The fair value measurements were primarily based on significant inputs that are not directly observable in the market and are considered Level 3 under the fair value measurements and disclosure framework. Key assumptions include cash flow projections of Sebago and the discount rate applied to those cash flows. The excess of the purchase price over the estimated fair values of the identifiable net assets acquired was recorded as goodwill.
We have allocated the purchase price to the assets acquired and liabilities assumed on a preliminary basis using estimated fair value information currently available. We are in the process of evaluating the values assigned to marine vessels and intangible assets. Thus, the balances reflected below are subject to change, and any such changes could result in adjustments to the allocation.

24
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


The fair value of the purchase price and preliminary allocation of the purchase price is as follows (in thousands):
Cash
 
$
2,500

Less working capital adjustments
 
(74
)
Fair value of Ashford Inc. common stock issued
 
4,547

Purchase price consideration
 
$
6,973

 
 
Fair Value
 
Estimated Useful Life
Current assets
 
$
76

 
 
Marine vessels
 
2,220

 
20 years
FF&E
 
1,514

 
20 years
Operating lease right-of-use assets
 
391

 
 
Goodwill
 
1,452

 
 
Trademarks
 
480

 
 
Boat slip rights
 
2,900

 
20 years
Total assets acquired
 
9,033

 
 
Current liabilities
 
299

 
 
Noncurrent liabilities
 
1,761

 
 
Total assumed liabilities
 
2,060

 
 
Net assets acquired
 
$
6,973

 
 
We expect approximately $1.5 million of the goodwill balance to be deductible by Ashford Inc. for tax purposes. The qualitative factors that make up the recorded goodwill include value associated with an assembled workforce and value attributable to expanding Sebago’s operations through our relationship with RED.
Results of Sebago
The results of operations of Sebago have been included in our results of operations since the acquisition date. Our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, include total revenues from Sebago of $1.2 million. In addition, our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, include net income from Sebago of $129,000. The unaudited pro forma results of operations, as if the acquisition had occurred on January 1, 2018, are included below under “Pro Forma Financial Results.”
BAV
On March 1, 2019, JSAV acquired a privately-held company, BAV. BAV is an audio visual rental, staging, and production company focused on meeting and special event services. As a result of the acquisition, our ownership interest in JSAV, which we consolidate under the voting interest model, increased from 85% to approximately 88%.
Pursuant to the asset purchase agreement, as amended on September 24, 2019, the purchase price consisted of: (i) $5.0 million in cash (excluding working capital adjustments) funded by an existing JSAV term loan; (ii) $3.5 million in the form of Ashford Inc. common stock consisting of 61,387 shares issued on March 1, 2019, which was determined based on a 30-Day VWAP of $57.01 and had an estimated fair value of approximately $3.7 million as of the acquisition date; (iii) $500,000 payable in cash or Ashford Inc. common stock at our sole discretion to be issued 18 months after the acquisition date, subject to certain conditions; and (iv) contingent consideration related to the achievement of certain performance targets with an estimated fair value of approximately $1.4 million, payable, if earned, 12 to 18 months after the acquisition date. Additionally, the transaction includes a stock consideration collar with potential settlements at 12 months, 15 months and 18 months after the acquisition date dependent upon the 30-Day VWAP of Ashford Inc.’s common stock on each respective settlement date. A liability resulting from contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved, with changes in fair value recognized in earnings within “other” operating expenses in our condensed consolidated statements of operations. See note 8 for further discussion of the Company’s liabilities related to acquisition-related contingent consideration.

25
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


The acquisition of BAV was recorded using the acquisition method of accounting in accordance with the authoritative guidance for business combinations, and the purchase price allocation is based on our valuation of the fair value of the tangible and intangible assets acquired and liabilities assumed at the date of acquisition. The fair values of the assets acquired were determined using various valuation techniques, including an income approach. The fair value measurements were primarily based on significant inputs that are not directly observable in the market and are considered Level 3 under the fair value measurements and disclosure framework. Key assumptions include cash flow projections of BAV and the discount rate applied to those cash flows. The excess of the purchase price over the estimated fair values of the identifiable net assets acquired was recorded as goodwill.
We have allocated the purchase price to the assets acquired and liabilities assumed on a preliminary basis using estimated fair value information currently available. We are in the process of evaluating the values assigned to furniture, fixtures and equipment, and intangible assets. Thus, the balances reflected below are subject to change, and any such changes could result in adjustments to the allocation.
The fair value of the purchase price and preliminary allocation of the purchase price is as follows (in thousands):
Term loan
 
$
5,000

Less working capital adjustments
 
(733
)
Fair value of Ashford Inc. common stock issued
 
3,748

Consideration payable
 
500

Fair value of contingent consideration
 
1,384

Purchase price consideration
 
$
9,899

 
 
Fair Value
 
Estimated Useful Life
Current assets
 
$
754

 
 
FF&E
 
1,895

 
5 years
Operating lease right-of-use assets
 
165

 
 
Goodwill
 
4,827

 
 
Trademarks
 
440

 
 
Customer relationships
 
2,800

 
15 years
Total assets acquired
 
10,881

 
 
Current liabilities
 
619

 
 
Noncurrent liabilities
 
363

 
 
Total assumed liabilities
 
982

 
 
Net assets acquired
 
$
9,899

 
 
We expect approximately $4.8 million of the goodwill balance to be deductible by Ashford Inc. for tax purposes. The qualitative factors that make up the recorded goodwill include value associated with an assembled workforce and value attributable to expanding BAV’s operations through our relationship with JSAV.
Results of BAV
The results of operations of BAV have been included in our results of operations since the acquisition date. Our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, include total revenues from BAV of $2.8 million and $8.5 million, respectively. In addition, our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, include net income from BAV of $428,000 and $1.2 million, respectively. The unaudited pro forma results of operations, as if the acquisition had occurred on January 1, 2018, are included below under “Pro Forma Financial Results.”

26
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Premier
On August 8, 2018, we completed the acquisition of Premier for a total transaction value of $203.0 million. Premier provides construction management, interior design, architecture, and the purchasing, expediting, warehousing coordination, freight management, and supervision of installation of FF&E, and related services. The purchase price was paid by issuing 8,120,000 shares of the newly created Series B Convertible Preferred Stock to the sellers. See note 12 for further discussion of the Series B Convertible Preferred Stock. The results of operations of Premier are included in our condensed consolidated financial statements from the date of acquisition.
The acquisition of Premier has been recorded using the acquisition method of accounting in accordance with the authoritative guidance for business combinations. The holding company reorganization that we effected in connection with the Premier acquisition was accounted for as a common control transaction. The purchase price allocation for the acquisition of Premier is based on our valuation of the fair value of the tangible and intangible assets acquired and liabilities assumed at the date of acquisition. The fair values of the assets acquired were determined using various valuation techniques, including an income approach. The fair value measurements were primarily based on significant inputs that are not directly observable in the market and are considered Level 3 under the fair value measurements and disclosure framework. Key assumptions include cash flow projections of Premier and the discount rate applied to those cash flows. The excess of the purchase price over the estimated fair values of the identifiable net assets acquired was recorded as goodwill.
As of September 30, 2019, we have finalized the valuation of the acquired assets and liabilities associated with the acquisition. The final fair value analysis resulted in a $5.2 million adjustment to increase the value of the acquired management contracts to their estimated fair value and a corresponding decrease to goodwill on our condensed consolidated balance sheet during the third quarter of 2019. We also recorded an adjustment of approximately $1.2 million to increase our deferred tax liability and a corresponding increase to goodwill on our condensed consolidated balance sheet during the third quarter of 2019.
The fair value of the purchase price and final allocation of the purchase price are as follows (in thousands):
Series B Convertible Preferred Stock
 
$
203,000

Preferred stock discount
 
(2,883
)
Total fair value of purchase price
 
$
200,117

 
 
Fair Value
 
Estimated Useful Life
Current assets including cash
 
$
3,878

 
 
FF&E
 
47

 
 
Goodwill
 
49,524

 
 
Management contracts
 
194,000

 
30 years
Total assets acquired
 
247,449

 
 
Current liabilities
 
2,375

 
 
Deferred tax liability
 
44,957

 
 
Total assumed liabilities
 
47,332

 
 
Net assets acquired
 
$
200,117

 
 
We do not expect any of the goodwill balance to be deductible for tax purposes.
Results of Premier
The results of operations of Premier have been included in our results of operations since the acquisition date. Our condensed consolidated statement of operations for the three and nine months ended September 30, 2019, include total revenue of $7.9 million and $23.4 million, respectively. In addition, our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, include net losses of $1.2 million and $336,000, respectively, from Premier. The unaudited pro forma results of operations, as if the acquisition had occurred on January 1, 2018, are included below under “Pro Forma Financial Results.”

27
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Pro Forma Financial Results
The following table reflects the unaudited pro forma results of operations as if the Premier, BAV and Sebago acquisitions had occurred and the indebtedness associated with those acquisitions was incurred on January 1, 2018, and the removal of $283,000 and $659,000 of transaction costs directly attributable to the acquisitions for the three and nine months ended September 30, 2019 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Total revenue
$
57,189

 
$
47,815

 
$
189,138

 
$
174,769

Net income (loss)
(6,361
)
 
5,612

 
(5,276
)
 
13,307

Net income (loss) attributable to the Company
(6,285
)
 
6,982

 
(4,775
)
 
14,629

The acquisition of certain assets related to RED on January 16, 2018, were treated as an acquisition of property and equipment. As such, the pro forma results of operations of RED are not included above.
5. Goodwill and Intangible Assets, net
The changes in the carrying amount of goodwill for the nine months ended September 30, 2019, are as follows (in thousands):
 
 
Premier
 
JSAV
 
Corporate and Other
 
Consolidated
Balance at December 31, 2018
 
$
53,517

 
$
5,384

 
$
782

 
$
59,683

Changes in goodwill:
 
 
 
 
 
 
 
 
Additions (1)
 
—

 
4,827

 
1,452

 
6,279

Adjustments (2)
 
(3,993
)
 
—

 
—

 
(3,993
)
Balance at September 30, 2019
 
$
49,524

 
$
10,211

 
$
2,234

 
$
61,969

________
(1) The addition of approximately $4.8 million and $1.5 million relates to the preliminary valuation of assets and liabilities related to JSAV’s acquisition of BAV and RED’s acquisition of Sebago, respectively.
(2) The adjustment to Premier goodwill relates to changes in our final valuation of the acquired assets and liabilities associated with the acquisition of Premier. See note 4.

28
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Intangible assets, net as of September 30, 2019 and December 31, 2018, are as follows (in thousands):
 
September 30, 2019
 
December 31, 2018
 
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Definite-lived intangible assets:
 
 
 
 
 
 
 
Premier management contracts
$
194,000

$
(14,756
)
$
179,244

 
$
188,800

$
(4,353
)
$
184,447

JSAV customer relationships
9,319

(1,894
)
7,425

 
6,519

(1,087
)
5,432

RED boat slip rights
2,900

(29
)
2,871

 
—

—

—

Pure Wellness customer relationships
175

(87
)
88

 
175

(61
)
114

Other
20

(3
)
17

 
—

—

—

 
$
206,414

$
(16,769
)
$
189,645

 
$
195,494

$
(5,501
)
$
189,993

 
 
 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
JSAV trademarks
$
3,641

 
 
 
$
3,201

 
 
RED trademarks
480

 
 
 
—

 
 
 
$
4,121





 
$
3,201

 
 
Amortization expense for definite-lived intangible assets was $5.3 million and $11.3 million for the three and nine months ended September 30, 2019, respectively. Amortization expense for definite-lived intangible assets was $1.9 million and $2.3 million for the three and nine months ended September 30, 2018, respectively. The useful lives of our customer relationships range from 5 to 15 years. Our boat slip rights and management contracts intangible assets were assigned useful lives of 20 years and 30 years, respectively.

29
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


6. Notes Payable, net
Notes payable—Notes payable, net consisted of the following (in thousands):
Indebtedness
 
Borrower
 
Maturity
 
Interest Rate
 
September 30, 2019
 
December 31, 2018
Senior revolving credit facility (7)
 
Ashford Inc.
 
March 1, 2021
 
Base Rate (1) + 2.00% to 2.50% or LIBOR (2) + 3.00% to 3.50%
 
$
—

 
$
—

Term loan (5) (8)
 
JSAV
 
November 1, 2022
 
One-Month LIBOR (3) + 3.25%
 
12,983

 
8,917

Revolving credit facility (5) (8)
 
JSAV
 
November 1, 2022
 
One-Month LIBOR (3) + 3.25%
 
2,327

 
1,733

Finance lease obligations (5)
 
JSAV
 
Various
 
Various - fixed
 
320

 
661

Equipment note (5) (9)
 
JSAV
 
November 1, 2022
 
One-Month LIBOR (3) + 3.25%
 
3,607

 
2,087

Draw term loan (5) (9)
 
JSAV
 
November 1, 2022
 
One-Month LIBOR (3) + 3.25%
 
1,800

 
1,950

Revolving credit facility (5) (10)
 
OpenKey
 
April 30, 2020
 
Prime Rate (4) + 2.75%
 
—

 
—

Revolving credit facility (5) (11)
 
Pure Wellness
 
On demand
 
Prime Rate (4) + 1.00%
 
45

 
60

Term loan (6) (12)
 
RED
 
April 5, 2025
 
Prime Rate (4) + 1.75%
 
628

 
695

Revolving credit facility (6) (13)
 
RED
 
February 5, 2020
 
Prime Rate (4) + 1.75%
 
6

 
118

Draw term loan (6) (14)
 
RED
 
December 5, 2026
 
Prime Rate (4) + 1.75%
 
1,314

 
—

Term loan (6) (15)
 
RED
 
February 1, 2029
 
Prime Rate (4) + 2.00%
 
1,681

 
1,785

Term loan (5) (16)
 
RED
 
July 17, 2029
 
6.0% (16)
 
1,685

 
—

Term loan (5) (17)
 
RED
 
July 17, 2022
 
6.5%
 
1,019

 
—

Finance lease obligations (5)
 
RED
 
Various
 
Various - fixed
 
1,507

 
—

Notes payable
 
 
 
 
 
 
 
28,922

 
18,006

Less deferred loan costs, net
 
 
 
 
 
 
 
(247
)
 
(234
)
Notes payable less net deferred loan costs
 
 
 
 
 
 
 
28,675

 
17,772

Less current portion
 
 
 
 
 
 
 
(3,549
)
 
(2,595
)
Notes payable, net - non-current
 
 
 
 
 
 
 
$
25,126

 
$
15,177

__________________
(1)
Base Rate, as defined in the senior revolving credit facility agreement, is the greater of (i) the prime rate set by Bank of America, or (ii) federal funds rate plus 0.50%, or (iii) LIBOR plus 1.00%.
(2)  
Ashford Inc. may elect a 1, 2, 3 or 6 month LIBOR period for each borrowing.
(3)  
The one-month LIBOR rate was 2.02% and 2.50% at September 30, 2019 and December 31, 2018, respectively.
(4)  
Prime Rate was 5.00% and 5.50% at September 30, 2019 and December 31, 2018, respectively.
(5)  
Creditors do not have recourse to Ashford Inc.
(6) 
Creditors have recourse to Ashford Inc.
(7) 
The Company has a $35.0 million senior revolving credit facility with Bank of America, N.A. There is a one-year extension option subject to the satisfaction of certain conditions. The senior revolving credit facility includes the opportunity to expand the borrowing capacity by up to $40.0 million to an aggregate amount of $75.0 million, subject to certain conditions.
(8) 
On March 1, 2019, in connection with the acquisition of BAV, JSAV amended the existing term loan and borrowed an additional $5.0 million. The revolving credit facility was also amended to increase the borrowing capacity from $3.0 million to $3.5 million. In connection with the term loan, JSAV entered into an interest rate cap with an initial notional amount totaling $5.0 million and a strike rate of 4.0%. The fair value of the interest rate cap at September 30, 2019 and December 31, 2018, was not material. As of September 30, 2019, $1.2 million of credit was available under the revolving credit facility.
(9) 
On March 1, 2019, in connection with the acquisition of BAV, JSAV amended the existing equipment note and draw term note to increase the borrowing capacity to $8.0 million and $2.4 million, respectively. All the loans are partially secured by a security interest on all of the assets and equity interests of JSAV.
(10) 
On November 8, 2018, OpenKey renewed the Loan and Security Agreement that expired in October 2018 for a revolving credit facility in the amount of $1.5 million. The credit facility is secured by all of OpenKey’s assets. As of September 30, 2019, OpenKey had no borrowings outstanding and the $1.5 million revolving credit facility funds were no longer available.
(11) 
On April 6, 2017, Pure Wellness entered into a $100,000 line of credit. As of September 30, 2019, $55,000 of credit was available under the revolving credit facility.

30
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


(12) 
On March 23, 2018, RED entered into a term loan of $750,000.
(13) 
On February 28, 2019, RED renewed its $250,000 revolving credit facility. As of September 30, 2019, $244,000 was available under the revolving credit facility.
(14) 
On February 27, 2019, RED entered into a draw term loan in the amount of $1.4 million. As of September 30, 2019, $86,000 was available under the draw term loan.
(15) 
On August 31, 2018, RED entered into a term loan of $1.8 million.
(16) 
On July 18, 2019, in connection with the acquisition of Sebago, RED entered into a term loan of $1.7 million. The interest rate for the term loan is 6.0% for the first five years. After five years, the interest rate is equal to the Prime Rate plus 0.5% with a floor of 6.0%.
(17) 
On July 18, 2019, in connection with the acquisition of Sebago, RED entered into a term loan of $1.1 million.

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. As of September 30, 2019, we were in compliance in all material respects with all covenants or other requirements set forth in our debt and related agreements as amended.
7. Leases
We lease certain office space, warehouse facilities, vehicles and equipment under operating leases. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years. The exercise of lease renewal options is at our sole discretion. Operating lease obligations expire at various dates with the latest maturity in 2028. Certain of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. For the three and nine months ended September 30, 2018, we recorded rental expense of $556,000 and $1.2 million, respectively.
We lease certain equipment and boat slips under finance leases. The net book value of these assets was approximately $2.2 million and $807,000 as of September 30, 2019 and December 31, 2018, respectively. The net book value of these assets is included in “furniture, fixtures and equipment, net” in our condensed consolidated balance sheets. Amortization of assets under finance leases is included in “depreciation and amortization” expense in our condensed consolidated statement of operations.

During the second quarter of 2019, we exercised our option to modify our corporate office lease agreement for the remainder of the lease term to reduce the amount of office space and the annual lease payment. This modification resulted in a reduction of the operating lease right-of-use asset and operating lease liability by approximately $4.1 million.
As of September 30, 2019, our leased assets and liabilities consisted of the following (in thousands):
Leases
Classification
September 30, 2019
Assets
 
 
Operating lease assets
Operating lease right-of-use assets
$
21,522

Finance lease assets
Furniture, fixtures and equipment, net
2,244

Total leased assets
 
$
23,766

 
 
 
Liabilities
 
 
Current
 

Operating
Operating lease liabilities
$
2,206

Finance
Notes payable, net
236

Noncurrent
 
 
Operating
Operating lease liabilities
19,340

Finance
Notes payable, net
1,591

Total leased liabilities
 
$
23,373


31
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


We incurred the following lease costs related to our operating and finance leases (in thousands):
Lease Cost
Classification
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Operating lease cost
 
 
 
 
Rent expense
General and administrative
$
805

 
$
2,342

Rent expense
Cost of revenues for project management
38

 
111

Finance lease cost
 
 
 
 
Amortization of leased assets
Depreciation and amortization
72

 
198

Interest on lease liabilities
Interest expense
23

 
38

Total lease cost
 
$
938

 
$
2,689

For the nine months ended September 30, 2019, cash paid amounts included in the measurement of lease liabilities included (in thousands):
Lease Payments
Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
2,453

Financing cash flows from finance leases
476

As of September 30, 2019, future minimum lease payments on operating and financing leases were as follows (in thousands):
 
Operating Leases
 
Finance Leases
2019
$
863

 
$
130

2020
3,294

 
272

2021
3,082

 
200

2022
2,802

 
182

2023
2,599

 
150

Thereafter
17,537

 
2,189

Total minimum lease payments
$
30,177

 
$
3,123

Imputed interest
(8,631
)
 
(1,296
)
Present value of minimum lease payments
$
21,546

 
$
1,827


32
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


As of December 31, 2018, future minimum lease payments on operating and capital leases under ASC 840 were as follows (in thousands):
 
Operating Leases
 
Capital Leases
2019
$
3,529

 
$
541

2020
3,532

 
105

2021
3,329

 
33

2022
3,172

 
7

2023
3,059

 
—

Thereafter
13,999

 
—

Total minimum lease payments
$
30,620

 
$
686

Imputed interest
—

 
(25
)
Present value of minimum lease payments
$
30,620

 
$
661

Our weighted-average remaining lease terms (in years) and discount rates consisted of the following:
 
September 30, 2019
Lease term and discount rate
 
Weighted-average remaining lease term
 
Operating leases (1)
12.3

Finance leases
16.7

Weighted-average discount rate
 
Operating leases
5.6
%
Finance leases
6.2
%
__________________
(1) 
The weighted-average remaining lease term for our operating leases includes two optional 10 year extension periods for our JSAV headquarters in Irving, Texas, as failure to renew the lease would result in JSAV incurring significant relocation costs.
8. Fair Value Measurements
Fair Value Hierarchy—Our financial instruments measured at fair value, either on a recurring or a non-recurring basis, are classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs in the market place as discussed below:
•Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.
•Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
•Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.

33
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):
 
Quoted Market Prices (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant Unobservable Inputs
 (Level 3)
 
Total
September 30, 2019
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
(2,865
)
(1) 
$
—

 
$
(2,931
)
(2) 
$
(5,796
)
Deferred compensation plan
(4,878
)
 
—

 
—

 
(4,878
)
Total
$
(7,743
)
 
$
—

 
$
(2,931
)
 
$
(10,674
)
__________________
(1) Represents the fair value of the contingent consideration liability of $1.7 million related to the stock consideration collar associated with JSAV’s acquisition of BAV and $1.2 million related to the stock consideration collar associated with RED’s acquisition of Sebago. The contingent consideration liabilities related to BAV and Sebago are reported as “other liabilities” in our condensed consolidated balance sheets. See notes 1 and 4.
(2) Represents the fair value of the contingent consideration liability related to the achievement of certain performance targets associated with the acquisition of BAV, which is reported within “other liabilities” in our condensed consolidated balance sheets. See notes 1 and 4.
 
Quoted Market Prices (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
December 31, 2018
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Deferred compensation plan
$
(10,574
)
 
$
—

 
$
—

 
$
(10,574
)
Total
$
(10,574
)
 
$
—

 
$
—

 
$
(10,574
)

The following tables presents the rollforward of our Level 3 contingent consideration liability (in thousands):
 
Contingent Consideration Liability (1)
Balance at December 31, 2018
$
—

Acquisitions
(1,384
)
Gains (losses) included in earnings (2)
(1,547
)
Dispositions and settlements
—

Transfers into/out of Level 3
—

Balance at September 30, 2019
$
(2,931
)
__________________
(1) 
Includes JSAV’s contingent consideration associated with the acquisition of BAV in March of 2019, which is carried at fair value in our condensed consolidated balance sheets within “other liabilities”. The fair value was estimated using significant inputs that are not observable in the market and thus represent Level 3 fair value measurements. The significant inputs in the Level 3 measurement of the contingent consideration include the timing and amount of the ultimate payout based on our estimate of BAV operating performance during the earn-out period, calculated in accordance with the applicable agreement, and the risk adjusted discount rate used to discount the future payment.
(2)  
Reported as “other” operating expense in our condensed consolidated statements of operations.

34
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Effect of Fair Value Measured Assets and Liabilities on Our Condensed Consolidated Statements of Operations
The following table summarizes the effect of fair value measured assets and liabilities on our condensed consolidated statements of operations (in thousands):
 
Gain (Loss) Recognized
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
Liabilities
 
 
 
 
 
 
 
 
Contingent consideration
$
(2,773
)
(1) 
$
221

(2) 
$
(4,412
)
(1) 
$
(338
)
(2) 
Deferred compensation plan (3)
1,526

 
(2,274
)
 
5,603

 
3,540

 
Total
$
(1,247
)
 
$
(2,053
)
 
$
1,191

 
$
3,202

 
__________________
(1)  
Represents the changes in fair value of the contingent consideration liabilities related to the achievement of certain performance targets of BAV and stock consideration collars associated with the acquisitions of BAV and Sebago reported as a component of “other” operating expense in our condensed consolidated statements of operations. See notes 1 and 4.
(2)  
Represents the accretion of contingent consideration associated with the acquisition of JSAV in November of 2017, which was settled in the third quarter of 2018. Amounts are reported as “other” operating expense in our condensed consolidated statements of operations.
(3)  
Reported as a component of “salaries and benefits” in our condensed consolidated statements of operations.
9. Summary of Fair Value of Financial Instruments
Certain of our financial instruments are not measured at fair value on a recurring basis. The estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold or settled. The carrying amounts and estimated fair values of financial instruments were as follows (in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial liabilities measured at fair value:
 
 
 
 
 
 
 
 
Deferred compensation plan
 
$
4,878

 
$
4,878

 
$
10,574

 
$
10,574

Contingent consideration
 
5,796

 
5,796

 
—

 
—

Financial assets not measured at fair value:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
36,400

 
$
36,400

 
$
51,529

 
$
51,529

Restricted cash
 
11,978

 
11,978

 
7,914

 
7,914

Accounts receivable, net
 
6,628

 
6,628

 
4,928

 
4,928

Due from affiliates
 
55

 
55

 
45

 
45

Due from Ashford Trust OP
 
4,444

 
4,444

 
5,293

 
5,293

Due from Braemar OP
 
2,224

 
2,224

 
1,996

 
1,996

Investments in unconsolidated entities
 
3,339

 
3,339

 
500

 
500

Financial liabilities not measured at fair value:
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
27,314

 
$
27,314

 
$
24,880

 
$
24,880

Dividends payable
 
2,910

 
2,910

 
—

 
—

Due to affiliates
 
1,353

 
1,353

 
2,032

 
2,032

Other liabilities
 
13,031

 
13,031

 
8,418

 
8,418

Notes payable
 
28,922

 
27,132 to 29,988

 
18,006

 
16,681 to 18,437

Deferred compensation plan. The liability resulting from the deferred compensation plan is carried at fair value based on the closing prices of the underlying investments. This is considered a Level 1 valuation technique.

35
Table of Contents
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Contingent consideration. The liability associated with JSAV’s acquisition of BAV and RED’s acquisition of Sebago is carried at fair value based on the terms of the acquisition agreements and any changes to fair value are recorded in “other” operating expenses in our condensed consolidated statements of operations. See note 8.
Cash, cash equivalents and restricted cash. These financial assets bear interest at market rates and have maturities of less than 90 days. The carrying values approximate fair value due to the short-term nature of these financial instruments. This is considered a Level 1 valuation technique.
Accounts receivable, net, due from affiliates, due from Ashford Trust OP, due from Braemar OP, accounts payable and accrued expenses, dividends payable, due to affiliates and other liabilities. The carrying values of these financial instruments approximate their fair values due primarily to the short-term nature of these financial instruments. This is considered a Level 1 valuation technique.
Investments in unconsolidated entities. The carrying value of the asset resulting from investment in unconsolidated entities approximates fair value based on recent observable transactions. This is considered a level 2 valuation technique.
Notes payable. The fair value of notes payable is based on credit spreads on observable transactions of a similar nature and is considered a Level 2 valuation technique.
10. Commitments and Contingencies
Purchase Commitment—As of September 30, 2019, we had approximately $20.8 million of remaining purchase commitments related to our Ashford Trust ERFP Agreement and $39.7 million of remaining purchase commitments related to our Braemar ERFP Agreement. See “ERFP Commitments” within note 15.
Contingent Consideration—We had total acquisition-related contingent consideration liabilities outstanding of approximately $5.8 million and $0 primarily related to achievement of certain performance targets and stock consideration collars, as of September 30, 2019 and December 31, 2018, respectively. See note 4.
Litigation—The Company is engaged in various legal proceedings which have arisen but have not been fully adjudicated. The likelihood of loss for these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible and to probable. Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the financial position or results of operations of the Company. However, the adjudication of legal proceedings is difficult to predict, and if the Company failed to prevail in one or more of these legal matters, and the associated realized losses were to exceed the Company’s current estimates of the range of potential losses, the Company’s financial position or results of operations could be materially adversely affected in future periods.
11. Equity
Noncontrolling Interests in Consolidated Entities—See note 2 for details regarding ownership interests, carrying values and allocations related to noncontrolling interests in our consolidated subsidiaries.
The following table summarizes the (income) loss allocated to noncontrolling interests for each of our consolidated entities (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
(Income) loss allocated to noncontrolling interests:
 
 
 
 
 
 
 
JSAV
$
—

 
$
151

 
$
—

 
$
58

OpenKey
146

 
242

 
475

 
585

RED
(27
)
 
38

 
(87
)
 
36

Pure Wellness
(27
)
 
(18
)
 
(2
)
 
25

Other
9

 
—

 
9

 
—

Total net (income) loss allocated to noncontrolling interests
$
101

 
$
413

 
$
395

 
$
704


36
Table of Contents
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


12. Mezzanine Equity
Redeemable Noncontrolling Interests—Redeemable noncontrolling interests are included in the mezzanine section of our condensed consolidated balance sheets as the ownership interests are redeemable for cash or registered shares outside of the Company’s control. See note 2 for tables summarizing the redeemable noncontrolling ownership interests and carrying values.
The following table summarizes the net (income) loss allocated to our redeemable noncontrolling interests (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net (income) loss allocated to redeemable noncontrolling interests:
 
 
 
 
 
 
 
Ashford Holdings
$
15

 
$
(3
)
 
$
25

 
$
(9
)
JSAV
165

 
679

 
71

 
29

OpenKey
154

 
292

 
527

 
797

Total net (income) loss allocated to redeemable noncontrolling interests
$
334

 
$
968

 
$
623

 
$
817

Preferred Stock—On August 8, 2018, we completed the acquisition of Premier for a total transaction value of $203 million. The purchase price was paid by issuing 8,120,000 shares of Series B Convertible Preferred Stock to the Remington Sellers. The Series B Convertible Preferred Stock has a conversion price of $140 per share and, if converted, would convert into 1,450,000 shares of our common stock. Cumulative dividends on the Series B Convertible Preferred Stock are payable at an annual rate of 5.5% in the first year, 6.0% in the second year, and 6.5% in the third year and each year thereafter. Under the applicable authoritative accounting guidance, this increasing dividend rate feature results in a discount that must be reflected in the fair value of the preferred stock, which is reflected in “Series B Convertible Preferred Stock, net of discount” on our condensed consolidated balance sheets. For the three and nine months ended September 30, 2019, we recorded $363,000 and $1.3 million, respectively, of amortization related to the preferred stock discount.
The Series B Convertible Preferred Stock is included in the mezzanine section of our condensed consolidated balance sheets as the ownership interests are redeemable outside of the Company’s control. The Series B Convertible Preferred Stock is redeemable at the option of the holder for cash or stock in the event of a change of control. Each share of our Series B Convertible Preferred Stock is convertible at any time, at the option of the holder, into a number of whole or partial shares of common stock, pursuant to the agreements.
In addition to certain separate class voting rights, the holders of the Series B Convertible Preferred Stock vote on an as-converted basis with the holders of the common stock on all matters submitted for approval by the holders of our capital stock possessing general voting rights. However, for five years following the closing of the acquisition of Premier, the selling stockholders and their transferees will generally be subject to certain voting restrictions with respect to shares in excess of 25% of the combined voting power of our outstanding capital stock.
The holders of the Series B Convertible Preferred Stock also participate in any dividend or distribution paid on the Company’s common stock. If the Company declares or pays a dividend or distribution to the common stockholders, the Company will simultaneously declare and pay a dividend on the Series B Convertible Preferred Stock on a pro rata basis with the common stock as determined on an as-converted basis assuming all shares have been converted immediately prior to the date of record.
After the seventh anniversary of the closing of the acquisition of Premier, we have the option to redeem all or any portion of the Series B Convertible Preferred Stock in a minimum amount of $25.0 million on a pro rata basis among all covered investors unless, no less than 15 days before the closing of the purchase transaction, the participating covered investors specify an alternative allocation of the Series B Convertible Preferred Stock subject to the redemption (the “Call Option”), at a price per share equal to the sum of (i) $25.125 (as adjusted for any applicable stock splits or similar transactions) plus (ii) all accrued but unpaid dividends. The purchase price is payable only in cash. The notice of exercise of the Call Option does not limit or restrict any covered investor’s right to convert the Series B Convertible Preferred Stock into shares of our common stock prior to the closing of the Call Option.

37
Table of Contents
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Declared Series B Convertible Preferred Stock cumulative dividends for all issued and outstanding shares were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Preferred dividends
$
2,909

 
$
1,675

 
$
8,492

 
$
1,675

Preferred dividends per share
$
0.3583

 
$
0.2063

 
$
1.0458

 
$
0.2063

13. Equity-Based Compensation
Equity-based compensation expense is primarily recorded in “salaries and benefits expense” in our condensed consolidated statements of operations and comprehensive income (loss). The components of equity-based compensation expense for the three and nine months ended September 30, 2019 and 2018 are presented below by award type (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Equity-based compensation
 
 
 
 
 
 
 
Stock option amortization (1)
$
2,070

 
$
1,951

 
$
6,264

 
$
7,625

Employee equity grant expense (2)
14

 
—

 
71

 
—

Director and other non-employee equity grants expense (3)
5

 
38

 
615

 
433

Total equity-based compensation
$
2,089

 
$
1,989

 
$
6,950

 
$
8,058

 
 
 
 
 
 
 
 
Other equity-based compensation
 
 
 
 
 
 
 
REIT equity-based compensation (4)
$
6,743

 
$
6,232

 
$
19,226

 
$
25,842

 
$
8,832

 
$
8,221

 
$
26,176

 
$
33,900

________
(1) 
As of September 30, 2019, the Company had approximately $12.7 million of total unrecognized compensation expense related to stock options that will be recognized over a weighted average period of 1.5 years. During the nine months ended September 30, 2018, we recorded approximately $2.5 million of equity-based compensation expense in “salaries and benefits expense” related to accelerated vesting of stock options, in accordance with the terms of the awards, as a result of the death of an executive in March 2018.
(2) 
As of September 30, 2019, the Company had approximately $128,000 of total unrecognized compensation expense related to restricted shares that will be recognized over a weighted average period of 2.5 years.
(3) 
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. See “Equity-based Compensation” in note 2.
(4) 
REIT equity-based compensation expense is primarily recorded in “salaries and benefits expense” and is associated with equity grants of Ashford Trust’s and Braemar’s common stock and LTIP units awarded to our officers and employees. During the three and nine months ended September 30, 2019, $85,000 and $253,000, respectively, of equity based compensation expense related to REIT awards to our employees was included in “cost of revenues for project management” on our condensed consolidated statements of operations. During the nine months ended September 30, 2018, REIT equity-based compensation included $6.7 million of expense in “salaries and benefit expense” related to accelerated vesting, in accordance with the terms of the awards, as a result of the death of an executive in March 2018. See notes 2 and 15.

38
Table of Contents
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


14. Deferred Compensation Plan
We administer a non-qualified deferred compensation plan (“DCP”) for certain executive officers. The plan allowed participants to defer up to 100% of their base salary and bonus and select an investment fund for measurement of the deferred compensation obligation. For the periods the DCP was administered by Ashford Trust, the participants elected Ashford Trust common stock as their investment option. In accordance with the applicable authoritative accounting guidance, the deferred amounts and any dividends earned received equity treatment and were included in additional paid-in capital. In connection with our spin-off and the assumption of the DCP obligation by the Company, the DCP was modified to give the participants various investment options, including Ashford Inc. common stock, for measurement that can be changed by the participant at any time. These modifications resulted in the DCP obligation being recorded as a liability in accordance with the applicable authoritative accounting guidance. Distributions under the DCP are made in cash, unless the participant has elected Ashford Inc. common stock as the investment option, in which case any such distributions would be made in Ashford Inc. common stock. Additionally, the DCP obligation is carried at fair value with changes in fair value reflected in “salaries and benefits” in our condensed consolidated statements of operations and comprehensive income (loss).
The following table summarizes the DCP activity (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Change in fair value
 
 
 
 
 
 
 
Unrealized gain (loss)
$
1,526

 
$
(2,274
)
 
$
5,603

 
$
3,540

 
 
 
 
 
 
 
 
Distributions
 
 
 
 
 
 
 
Fair value (1)
$
20

 
$
63

 
$
93

 
$
197

Shares (1)
1

 
1

 
3

 
3

________
(1) 
Distributions made to one participant.
As of September 30, 2019 and December 31, 2018 the carrying value of the DCP liability was $4.9 million and $10.6 million, respectively.
15. Related Party Transactions
As an asset manager providing advisory services to Ashford Trust and Braemar, as well as holding an ownership interest in other businesses providing products and services to the hospitality industry, including Ashford Trust and Braemar, related party transactions are inherent in our business. Details of our related party transactions are presented below.
We are a party to an amended and restated advisory agreement, as amended, with Ashford Trust and Ashford Trust OP. Prior to June 26, 2018, the base fee was paid quarterly based on a declining sliding scale percentage of Ashford Trust’s total market capitalization plus the Key Money Asset Management Fee (defined as the aggregate gross asset value of all key money assets multiplied by 0.70%), subject to a minimum quarterly base fee, as payment for managing its day-to-day operations in accordance with its investment guidelines. Total market capitalization includes the aggregate principal amount of its consolidated indebtedness (including its proportionate share of debt of any entity that is not consolidated but excluding its joint venture partners’ proportionate share of consolidated debt). The range of base fees on the scale are between 0.50% and 0.70% per annum for total market capitalization that ranges from less than $6.0 billion to greater than $10.0 billion. Upon effectiveness of the Ashford Trust ERFP Agreement on June 29, 2018, the base fee is paid monthly as a percentage of Ashford Trust’s total market capitalization on a declining sliding scale plus the Net Asset Fee Adjustment, as defined in our advisory agreement, subject to a minimum monthly base fee. At September 30, 2019, the quarterly base fee was 0.70% per annum. Reimbursement for overhead, internal audit, risk management advisory services and asset management services, including compensation, benefits and travel expense reimbursements, are billed monthly to Ashford Trust based on a pro rata allocation as determined by the ratio of Ashford Trust’s net investment in hotel properties in relation to the total net investment in hotel properties for both Ashford Trust and Braemar. We also record advisory revenue for equity grants of Ashford Trust common stock and LTIP units awarded to our officers and employees in connection with providing advisory services equal to the grant date fair value of the award in proportion to the requisite service period satisfied during the period, as well as an offsetting expense in an equal amount included in “salaries and benefits.” We are also entitled to an incentive advisory fee that is measured annually in each year that Ashford Trust’s annual total stockholder return exceeds the average annual total stockholder return for Ashford Trust’s peer group, subject to the FCCR

39
Table of Contents
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Condition, as defined in our advisory agreement. In addition to our advisory agreement with Ashford Trust and Ashford Trust OP, Premier is party to a master project management agreement with Ashford Trust OP and Ashford TRS Corporation, a subsidiary of Ashford Trust OP, and certain of its affiliates (collectively, “Ashford Trust TRS”) to provide comprehensive and cost-effective design, development, architectural, and project management services and a related mutual exclusivity agreement with Ashford Trust and Ashford Trust OP.
The following table summarizes the revenues and expenses related to Ashford Trust OP (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
REVENUE BY TYPE
 
 
 
 
 
 
 
Advisory services revenue
 
 
 
 
 
 
 
Base advisory fee
$
8,003

 
$
9,145

 
$
24,463

 
$
26,611

Reimbursable expenses (1)
2,018

 
2,119

 
6,716

 
5,645

Equity-based compensation (2)
4,649

 
4,855

 
13,486

 
20,540

Incentive advisory fee (3)
—

 
452

 
—

 
1,356

Total advisory services revenue
14,670

 
16,571

 
44,665

 
54,152

 
 
 
 
 
 
 
 
Audio visual revenue (4)
—

 
—

 
—

 
88

Project management revenue (5)
5,083

 
2,491

 
15,098

 
2,491

 
 
 
 
 
 
 
 
Other revenue
 
 
 
 
 
 
 
Investment management reimbursements (6)
246

 
339

 
941

 
850

Debt placement fees (7)
—

 
350

 
1,158

 
4,942

Claims management services (8)
26

 
17

 
57

 
53

Lease revenue (9)
946

 
168

 
2,837

 
503

Other services (10)
967

 
454

 
1,843

 
1,141

Total other revenue
2,185

 
1,328

 
6,836

 
7,489

 
 
 
 
 
 
 
 
Total revenue
$
21,938

 
$
20,390

 
$
66,599

 
$
64,220

 
 
 
 
 
 
 
 
REVENUE BY SEGMENT (11)
 
 
 
 
 
 
 
REIT advisory
$
15,888

 
$
17,095

 
$
48,500

 
$
55,558

Premier
5,083

 
2,491

 
15,098

 
2,491

JSAV
—

 
—

 
—

 
88

OpenKey
28

 
16

 
83

 
63

Corporate and other
939

 
788

 
2,918

 
6,020

Total revenue
$
21,938

 
$
20,390

 
$
66,599

 
$
64,220

 
 
 
 
 
 
 
 
COST OF REVENUES
 
 
 
 
 
 
 
Cost of audio visual revenues (4)
$
1,778

 
$
1,021

 
$
5,324

 
$
2,211

________
(1) 
Reimbursable expenses include overhead, internal audit, risk management advisory and asset management services. During the three and nine months ended September 30, 2019, we recognized $395,000 and $1.5 million, respectively, of deferred income from reimbursable expenses related to software implementation costs. During the three and nine months ended September 30, 2018, we recognized $784,000 and $1.4 million, respectively, of deferred income from reimbursable expenses related to software implementation costs.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


(2) 
Equity-based compensation revenue is associated with equity grants of Ashford Trust’s common stock and LTIP units awarded to officers and employees of Ashford Inc. For the nine months ended September 30, 2018, equity-based compensation revenue from Ashford Trust included $4.5 million of expense related to accelerated vesting, in accordance with the terms of the awards, as a result of the death of an executive in March 2018.
(3) 
Incentive advisory fee for the three and nine months ended September 30, 2018, includes the pro-rata portion of the third year installment of the 2016 incentive advisory fee, which was paid in January 2019. Incentive fee payments are subject to meeting the December 31 FCCR Condition each year, as defined in the Ashford Trust advisory agreement. Ashford Trust’s annual total stockholder return did not meet the relevant incentive fee thresholds during the 2018 and 2017 measurement periods. See note 3.
(4) 
JSAV primarily contracts directly with customers to whom it provides audio visual services. JSAV recognizes the gross revenue collected from their customers by the hosting hotel or venue. Commissions retained by the hotel or venue, including Ashford Trust, are recognized in “cost of revenues for audio visual” in our condensed consolidated statements of operations. See note 3 for discussion of the audio visual revenue recognition policy.
(5) 
Project management revenue primarily consists of revenue generated within our Premier segment by providing design, development, architectural, and project management services for which Premier receives fees. Project management revenue also includes revenue from reimbursable costs related to accounting, overhead and project manager services provided to projects owned by affiliates of Ashford Trust, Braemar and other owners. See note 3 for discussion of the project management revenue recognition policy.
(6) 
Investment management reimbursements include Ashford Investment Management, LLC’s (“AIM”) management of Ashford Trust’s excess cash under the Investment Management Agreement. AIM is not compensated for its services but is reimbursed for all costs and expenses.  
(7) 
Debt placement fees are earned by Lismore for providing debt placement services.  
(8) 
Claims management services include revenues earned from providing insurance claim assessment and administration services.
(9) 
In connection with our ERFP Agreements and legacy key money transaction with Ashford Trust, we lease FF&E to Ashford Trust rent-free. Our ERFP leases entered into in 2018 commenced on December 31, 2018. Consistent with our accounting treatment prior to adopting ASC 842, a portion of the base advisory fee for leases, which commenced prior to our adoption, is allocated to lease revenue each period equal to the estimated fair value of the lease payments that would have been made.
(10) 
Other services revenue is primarily associated with other hotel products and services, such as mobile key applications and hypoallergenic premium rooms, provided to Ashford Trust by our consolidated subsidiaries, OpenKey and Pure Wellness. Other services revenue also includes reimbursements for expenses related to Ashford Securities from Ashford Trust.
(11) 
See note 17 for discussion of segment reporting.
The following table summarizes amounts due (to) from Ashford Trust OP, net at September 30, 2019 and December 31, 2018, associated primarily with the advisory services fee and other fees discussed above, as it relates to each of our consolidated entities (in thousands):
 
September 30, 2019
 
December 31, 2018
Ashford LLC
$
734

 
$
2,337

AIM
111

 
99

Premier
2,049

 
1,611

JSAV
1,364

 
826

OpenKey
6

 
2

Pure Wellness
180

 
418

Due from Ashford Trust OP
$
4,444

 
$
5,293

We are also a party to an amended and restated advisory agreement with Braemar and Braemar OP. Prior to January 15, 2019, the base fee was paid monthly calculated as 1/12th of 0.70% of Braemar’s total market capitalization plus the Key Money Asset Management Fee (defined in the advisory agreement as the aggregate gross asset value of all key money assets multiplied by 1/12th of 0.70%), subject to a minimum monthly base fee, as payment for managing its day-to-day operations in accordance with its investment guidelines. Total market capitalization includes the aggregate principal amount of Braemar’s consolidated indebtedness (including its proportionate share of debt of any entity that is not consolidated but excluding its joint venture partners’ proportionate share of consolidated debt). Upon effectiveness of the Braemar ERFP Agreement on January 15, 2019, the base fee

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


is paid monthly calculated as 1/12th of 0.70% of Braemar’s total market capitalization plus the Net Asset Fee Adjustment, as defined in our advisory agreement, subject to a minimum monthly base fee. Reimbursement for overhead, internal audit, risk management advisory services and asset management services, including compensation, benefits and travel expense reimbursements, are billed monthly to Braemar based on a pro rata allocation as determined by the ratio of Braemar’s net investment in hotel properties in relation to the total net investment in hotel properties for both Ashford Trust and Braemar. We also record advisory revenue for equity grants of Braemar common stock and LTIP units awarded to our officers and employees in connection with providing advisory services equal to the grant date fair value of the award in proportion to the requisite service period satisfied during the period, as well as an offsetting expense in an equal amount included in “salaries and benefits.” We are also entitled to an incentive advisory fee that is measured annually in each year that Braemar’s annual total stockholder return exceeds the average annual total stockholder return for Braemar’s peer group, subject to the FCCR Condition, as defined in the advisory agreement. In addition to our advisory agreement with Braemar and Braemar OP, Premier is party to a master project management agreement with Braemar OP and Braemar TRS Yountville LLC, a limited liability company existing under the laws of the state of Delaware and wholly-owned subsidiary of Braemar OP (“Braemar TRS,”) to provide comprehensive and cost-effective design, development, architectural, and project management services and a related mutual exclusivity agreement with Braemar and Braemar OP.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


The following table summarizes the revenues related to Braemar OP (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
REVENUE BY TYPE
 
 
 
 
 
 
 
Advisory services revenue
 
 
 
 
 
 
 
Base advisory fee
$
2,567

 
$
2,510

 
$
7,919

 
$
6,929

Reimbursable expenses (1)
523

 
488

 
1,554

 
1,407

Equity-based compensation (2)
1,994

 
1,315

 
5,426

 
5,240

Incentive advisory fee (3)
170

 
—

 
509

 
—

Other advisory revenue (4)
131

 
132

 
389

 
390

Total advisory services revenue
5,385

 
4,445

 
15,797

 
13,966

 
 
 
 
 
 
 
 
Audio visual revenue (5)
—

 
—

 
—

 
—

Project management revenue (6)
2,839


1,125


8,079


1,125

 
 
 
 
 
 
 
 
Other revenue
 
 
 
 
 
 
 
Debt placement fees (7)
429

 
—

 
704

 
999

Claims management services (8)
25

 
31

 
90

 
100

Lease revenue (9)
83

 
83

 
251

 
251

Other services (10)
521

 
206

 
1,069

 
625

Total other revenue
1,058

 
320

 
2,114

 
1,975

 
 
 
 
 
 
 
 
Total revenue
$
9,282

 
$
5,890

 
$
25,990

 
$
17,066

 
 
 
 
 
 
 
 
REVENUE BY SEGMENT (11)
 
 
 
 
 
 
 
REIT advisory
$
5,493

 
$
4,559

 
$
16,138

 
$
14,317

Premier
2,839

 
1,125

 
8,079

 
1,125

JSAV (11)
—

 
—

 
—

 
—

OpenKey
9

 
6

 
42

 
22

Corporate and other
941

 
200

 
1,731

 
1,602

Total revenue
$
9,282

 
$
5,890

 
$
25,990

 
$
17,066

 
 
 
 
 
 
 
 
COST OF REVENUES
 
 
 
 
 
 
 
Cost of audio visual revenues (5)
$
199

 
$
—

 
$
404

 
$
—

________
(1) 
Reimbursable expenses include overhead, internal audit, risk management advisory and asset management services. During the three and nine months ended September 30, 2019, we recognized $28,000 and $108,000, respectively, of deferred income from reimbursable expenses related to software implementation costs. During the three and nine months ended September 30, 2018, we recognized $58,000 and $102,000, respectively, of deferred income from reimbursable expenses related to software implementation costs.
(2) 
Equity-based compensation revenue is associated with equity grants of Braemar’s common stock and LTIP units awarded to officers and employees of Ashford Inc. For the nine months ended September 30, 2018, equity-based compensation revenue from Braemar included $2.2 million of expense related to accelerated vesting, in accordance with the terms of the awards, as a result of the death of an executive in March 2018.
(3) 
Incentive advisory fee for the three and nine months ended September 30, 2019, includes the pro-rata portion of the second

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


year installment of the 2018 incentive advisory fee, which will be paid in January 2020. Incentive fee payments are subject to meeting the December 31 FCCR Condition each year, as defined in the Braemar advisory agreement. For the three and nine months ended September 30, 2018, no incentive advisory fee was recognized as Braemar’s annual total stockholder return did not meet the relevant incentive fee thresholds during the 2017 and 2016 measurement periods. See note 3.
(4) 
In connection with our Fourth Amended and Restated Braemar Advisory Agreement, a $5.0 million cash payment was made by Braemar upon approval by Braemar’s stockholders, which is recognized over the 10-year initial term.
(5) 
JSAV primarily contracts directly with customers to whom it provides audio visual services. JSAV recognizes the gross revenue collected from their customers by the hosting hotel or venue. Commissions retained by the hotel or venue, including Braemar, are recognized in “cost of revenues for audio visual” in our condensed consolidated statements of operations. See note 3 for discussion of the audio visual revenue recognition policy.
(6) 
Project management revenue primarily consists of revenue generated within our Premier segment by providing design, development, architectural, and project management services for which Premier receives fees. Project management revenue also includes revenue from reimbursable costs related to accounting, overhead and project manager services provided to projects owned by affiliates of Ashford Trust, Braemar and other owners. See note 3 for discussion of the project management revenue recognition policy.
(7) 
Debt placement fees are earned by Lismore for providing debt placement services.
(8) 
Claims management services include revenues earned from providing insurance claim assessment and administration services.
(9) 
In connection with our legacy key money transaction with Braemar which commenced prior to 2019, we lease FF&E to Braemar rent-free. Consistent with our accounting treatment prior to adopting ASC 842, a portion of the base advisory fee for leases, which commenced prior to our adoption, is allocated to lease revenue each period equal to the estimated fair value of the lease payments that would have been made.
(10) 
Other services revenue is primarily associated with other hotel products and services, such as mobile key applications, marine vessel transportation and hypoallergenic premium rooms, provided to Braemar by our consolidated subsidiaries, OpenKey, RED and Pure Wellness. Other services revenue also includes reimbursements for expenses related to Ashford Securities from Braemar.
(11) 
See note 17 for discussion of segment reporting.
The following table summarizes amounts due (to) from Braemar OP, net at September 30, 2019 and December 31, 2018 associated primarily with the advisory services fee and other fees discussed above, as it relates to each of our consolidated entities (in thousands):
 
September 30, 2019
 
December 31, 2018
Ashford LLC
$
766

 
$
941

Premier
1,209

 
949

JSAV
185

 
4

OpenKey
—

 
12

RED
2

 
60

Pure Wellness
62

 
30

Due from Braemar OP
$
2,224

 
$
1,996


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


ERFP Commitments—On June 26, 2018, the Company entered into the Ashford Trust ERFP Agreement with Ashford Trust. The independent members of the board of directors of each of the Company and Ashford Trust, with the assistance of separate and independent legal counsel, engaged to negotiate the Ashford Trust ERFP Agreement on behalf of the Company and Ashford Trust, respectively. On January 15, 2019, the Company entered into the Braemar ERFP Agreement (collectively with the Ashford Trust ERFP Agreement, the “ERFP Agreements”) with Braemar. The independent members of the board of directors of each of the Company and Braemar, with the assistance of separate and independent legal counsel, engaged to negotiate the Braemar ERFP Agreement on behalf of the Company and Braemar, respectively. Under the ERFP Agreements, the Company agreed to provide $50 million (each, an “ERFP Commitment” and collectively, the “ERFP Commitments”) to each of Ashford Trust and Braemar (collectively, the “REITs”), respectively, in connection with each such REITs’ acquisition of hotels recommended by us, with the option to increase each ERFP Commitment to up to $100 million upon mutual agreement by the parties to the respective ERFP Agreement. Under each of the ERFP Agreements, the Company’s ERFP Commitment to such REIT will be fulfilled as the Company pays each such 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 REITs 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 REITs’ 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. See notes 2 and 10.
The changes in our ERFP Commitments to Ashford Trust and Braemar from inception of the programs in 2018 and 2019, respectively, through September 30, 2019, as well as the unfunded ERFP Commitments as of September 30, 2019, for hotels acquired by the REITs are as follows (in thousands):
 
Ashford Trust
 
Braemar
 
Total
ERFP Commitments:
 
 
 
 
 
ERFP Commitments at January 1, 2018
$
—

 
$
—

 
$
—

Initial ERFP Commitment
50,000

 
—

 
50,000

ERFP payment—Hilton Alexandria Old Town
(11,100
)
 
—

 
(11,100
)
ERFP payment—La Posada de Santa Fe
(5,000
)
 
—

 
(5,000
)
ERFP Commitments remaining at December 31, 2018
$
33,900

 
$
—

 
$
33,900

Initial ERFP Commitment
—

 
50,000

 
50,000

ERFP payment—Hilton Santa Cruz/Scotts Valley
(5,000
)
 
—

 
(5,000
)
ERFP payment—Embassy Suites New York Manhattan Times Square
(8,089
)
 
—

 
(8,089
)
ERFP payment—Ritz-Carlton, Lake Tahoe
—

 
(10,300
)
 
(10,300
)
ERFP Commitments remaining at September 30, 2019 (1)
$
20,811

 
$
39,700

 
$
60,511

 
Ashford Trust
 
Braemar
 
Total
Unfunded ERFP Commitments for hotels acquired by REITs:
 
 
 
 
 
Embassy Suites New York Manhattan Times Square
$
11,411

 
$
—

 
$
11,411

Unfunded ERFP Commitments at September 30, 2019
$
11,411

 
$
—

 
$
11,411

________
(1)    See note 10.
Other Related Party Transactions—We reimburse Remington and its subsidiaries, which are beneficially owned by our Chairman and Chief Executive Officer and Ashford Trust’s Chairman Emeritus, for various overhead expenses, including rent, payroll, office supplies, travel and accounting. These charges are allocated based on various methodologies, including headcount and actual amounts incurred, and the allocations are approved quarterly by Ashford Inc. and Remington management. These reimbursements are included in “general and administrative” and “cost of revenues for project management” expenses on the condensed consolidated statements of operations. The charges totaled $1.9 million and $6.2 million, for the three and nine months ended September 30, 2019, respectively, and $2.7 million and $5.2 million for the three and nine months ended September 30,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


2018, respectively. The amounts due under these arrangements as of September 30, 2019 and December 31, 2018, are included in “due to affiliates” on our condensed consolidated balance sheets.
Pursuant to our advisory agreements with each of Ashford Trust and Braemar, we secure certain casualty insurance policies to cover Ashford Trust, Braemar and their respective property managers, as needed. Ashford Trust and Braemar bear the economic burden for the casualty insurance coverage. Our risk management department manages the shared casualty insurance program. At the beginning of each year, funds are collected from Ashford Trust and Braemar, as needed, on an allocated basis based on their risk exposures. These funds are deposited into restricted cash and used to pay casualty claims and other insurance costs throughout the year as incurred. We record the funds received from Ashford Trust and Braemar and the related liability in our condensed consolidated balance sheets in “restricted cash” and “other liabilities,” respectively.
“Equity in earnings (loss) of unconsolidated entities” in our condensed consolidated statement of operations includes equity in earnings of $266,000 and $239,000 from Ashford Trust and Braemar, respectively, for both the three and nine months ended September 30, 2019 for services provided by an unconsolidated entity in which Lismore holds an investment.
Ashford Trust held a 17.00% and 16.30% noncontrolling interest in OpenKey, and Braemar held an 8.58% and 8.21% noncontrolling interest in OpenKey as of September 30, 2019 and December 31, 2018, respectively. During the three and nine months ended September 30, 2019, Ashford Trust invested $348,000 and $647,000, respectively, and Braemar invested $176,000 and $332,000, respectively in OpenKey. During the three and nine months ended September 30, 2018, Ashford Trust invested $0 and $667,000, respectively, and Braemar invested $0 and $2.0 million, respectively, in OpenKey. See also notes 1, 2, 11, and 12.
In conjunction with the formation of Ashford Securities, Ashford Trust and Braemar have entered into a contribution agreement with Ashford Inc. in which Ashford Trust and Braemar have agreed to contribute a combined contribution amount of up to $15.0 million to fund the operations of Ashford Securities. As of September 30, 2019, Ashford Trust and Braemar have funded approximately $485,000 and $165,000, respectively.
An officer of JSAV owns the JSAV headquarters property including the adjoining warehouse space. JSAV leases this property for approximately $307,000 per year, with escalating lease payments based on the Consumer Price Index. Rental expense for the three and nine months ended September 30, 2019, was $77,000, and $232,000, respectively. Rental expense for the three and nine months ended September 30, 2018, was $84,000, and $252,000 respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


16. Income (Loss) Per Share
The following table reconciles the amounts used in calculating basic and diluted income (loss) per share (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss) attributable to common stockholders – basic and diluted:
 
 
 
 
 
 
 
Net income (loss) attributable to the Company
$
(6,156
)
 
$
3,387

 
$
(5,334
)
 
$
6,624

Less: Dividends on preferred stock and amortization
(3,272
)
 
(1,978
)
 
(9,830
)
 
(1,978
)
Less: Undistributed net (income) allocated to unvested shares
—

 
(6
)
 
—

 
(20
)
Undistributed net income (loss) allocated to common stockholders
(9,428
)
 
1,403

 
(15,164
)
 
4,626

Distributed and undistributed net income (loss) - basic
$
(9,428
)
 
$
1,403

 
$
(15,164
)
 
$
4,626

Effect of deferred compensation plan
(1,526
)
 
—

 
(5,603
)
 
(3,540
)
Effect of incremental subsidiary shares
—

 
(971
)
 
(527
)
 
(826
)
Distributed and undistributed net income (loss) - diluted
$
(10,954
)
 
$
432

 
$
(21,294
)
 
$
260

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
2,580

 
2,109

 
2,489

 
2,100

Effect of deferred compensation plan shares
202

 
—

 
135

 
69

Effect of incremental subsidiary shares
—

 
50

 
55

 
57

Effect of assumed exercise of stock options
—

 
178

 
—

 
191

Weighted average common shares outstanding – diluted
2,782

 
2,337

 
2,679

 
2,417

 
 
 
 
 
 
 
 
Income (loss) per share – basic:
 
 
 
 
 
 
 
Net income (loss) allocated to common stockholders per share
$
(3.65
)
 
$
0.67

 
$
(6.09
)
 
$
2.20

Income (loss) per share – diluted:
 
 
 
 
 
 
 
Net income (loss) allocated to common stockholders per share
$
(3.94
)
 
$
0.18

 
$
(7.95
)
 
$
0.11


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Due to their anti-dilutive effect, the computation of diluted income (loss) per share does not reflect the adjustments for the following items (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss) allocated to common stockholders is not adjusted for:
 
 
 
 
 
 
 
Net income (loss) attributable to unvested restricted shares
$
—

 
$
6

 
$
—

 
$
20

Net income (loss) attributable to redeemable noncontrolling interests in Ashford Holdings
(15
)
 
3

 
(25
)
 
9

Net income (loss) attributable to redeemable noncontrolling interests in subsidiary common stock
(319
)
 
—

 
(71
)
 
—

Dividends on preferred stock and amortization
3,272

 
1,978

 
9,830

 
1,978

Total
$
2,938

 
$
1,987

 
$
9,734

 
$
2,007

Weighted average diluted shares are not adjusted for:
 
 
 
 
 
 
 
Effect of unvested restricted shares
12

 
9

 
10

 
9

Effect of assumed exercise of stock options
—

 
—

 
27

 
—

Effect of assumed conversion of Ashford Holdings units
4

 
4

 
4

 
4

Effect of incremental subsidiary shares
186

 
—

 
74

 
—

Effect of assumed conversion of preferred stock
1,450

 
851

 
1,450

 
284

Total
1,652

 
864

 
1,565

 
297

17. Segment Reporting
We have two business segments: (i) REIT Advisory, which provides asset management and advisory services to other entities, and (ii) Hospitality Products and Services (“HPS”), which provides products and services to clients primarily in the hospitality industry. HPS includes (a) Premier, which provides comprehensive and cost-effective design, development, architectural, and project management services, (b) JSAV, which provides event technology and creative communications solutions services, (c) OpenKey, a hospitality focused mobile key platform that provides a universal smartphone app for keyless entry into hotel guest rooms, (d) RED, a provider of watersports activities and other travel and transportation services, (e) Pure Wellness, which provides hypoallergenic premium rooms in the hospitality industry and (f) Lismore, a provider of debt placement services. For 2019, OpenKey, RED, Pure Wellness and Lismore operating segments do not meet aggregation criteria or the quantitative thresholds to individually qualify as reportable segments. However, we have elected to disclose OpenKey as a reportable segment. Accordingly, we have four reportable segments: REIT Advisory, Premier, JSAV and OpenKey. We combine the operating results of RED, Pure Wellness and Lismore into an “all other” category, which we refer to as “Corporate and Other.”
See footnote 3 for details of our segments’ material revenue generating activities. As of September 30, 2019 and 2018, there were no material intercompany revenues or expenses between our operating segments.
Our chief operating decision maker (“CODM”) uses multiple measures of segment profitability for assessing performance of our business. Our reported measure of segment profitability is net income, although the CODM also focuses on adjusted EBITDA and adjusted net income, which exclude certain gains, losses and charges, to assess performance and allocate resources. Our CODM currently reviews assets at the corporate (consolidated) level and does not currently review segment assets to make key decisions on resource allocations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Certain information concerning our segments for the three and nine months ended September 30, 2019, and 2018 are presented in the following tables (in thousands). Consolidated subsidiaries are reflected as of their respective acquisition dates or as of the date we were determined to be the primary beneficiary of variable interest entities.
 
Three Months Ended September 30, 2019
 
Three Months Ended September 30, 2018
 
REIT Advisory
 
Premier
 
JSAV
 
OpenKey
 
Corporate and Other
 
Ashford Inc. Consolidated
 
REIT Advisory
 
Premier
 
JSAV
 
OpenKey
 
Corporate and Other
 
Ashford Inc. Consolidated
REVENUE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advisory services
$
20,055

 
$
—

 
$
—

 
$
—

 
$
—

 
$
20,055

 
$
21,016

 
$
—

 
$
—

 
$
—

 
$
—

 
$
21,016

Audio visual
—

 
—

 
22,430

 
—

 
—

 
22,430

 
—

 
—

 
14,526

 
—

 
—

 
14,526

Project Management
—

 
7,881

 
—

 
—

 
—

 
7,881

 
—

 
3,616

 
—

 
—

 
—

 
3,616

Other
1,326

 
—

 
—

 
313

 
4,884

 
6,523

 
640

 
—

 
—

 
301

 
1,466

 
2,407

Total revenue
21,381

 
7,881

 
22,430

 
313

 
4,884

 
56,889

 
21,656

 
3,616

 
14,526

 
301

 
1,466

 
41,565

EXPENSES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
2,722

 
4,937

 
513

 
7

 
195

 
8,374

 
808

 
1,618

 
587

 
7

 
(48
)
 
2,972

Other operating expenses (1)
9,184

 
4,167

 
24,965

 
896

 
16,104

 
55,316

 
8,777

 
1,923

 
18,087

 
1,271

 
20,039

 
50,097

Total expenses
11,906

 
9,104

 
25,478

 
903

 
16,299

 
63,690

 
9,585

 
3,541

 
18,674

 
1,278

 
19,991

 
53,069

OPERATING INCOME (LOSS)
9,475

 
(1,223
)
 
(3,048
)
 
(590
)
 
(11,415
)
 
(6,801
)
 
12,071

 
75

 
(4,148
)
 
(977
)
 
(18,525
)
 
(11,504
)
Equity in earnings (loss) of unconsolidated entities
—

 
—

 
—

 
—

 
464

 
464

 
—

 
—

 
—

 
—

 
—

 
—

Interest expense
—

 
—

 
(298
)
 
—

 
(158
)
 
(456
)
 
—

 
—

 
(181
)
 
—

 
(108
)
 
(289
)
Amortization of loan costs
—

 
—

 
(14
)
 
(6
)
 
(55
)
 
(75
)
 
—

 
—

 
(12
)
 
(7
)
 
(111
)
 
(130
)
Interest income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
103

 
103

Other income (expense)
—

 
—

 
49

 
3

 
(72
)
 
(20
)
 
141

 
—

 
(38
)
 
3

 
(184
)
 
(78
)
INCOME (LOSS) BEFORE INCOME TAXES
9,475

 
(1,223
)
 
(3,311
)
 
(593
)
 
(11,236
)
 
(6,888
)
 
12,212

 
75

 
(4,379
)
 
(981
)
 
(18,825
)
 
(11,898
)
Income tax (expense) benefit
(2,093
)
 
9

 
698

 
—

 
1,683

 
297

 
(2,693
)
 
(7
)
 
909

 
—

 
15,695

 
13,904

NET INCOME (LOSS)
$
7,382

 
$
(1,214
)
 
$
(2,613
)
 
$
(593
)
 
$
(9,553
)
 
$
(6,591
)
 
$
9,519

 
$
68

 
$
(3,470
)
 
$
(981
)
 
$
(3,130
)
 
$
2,006

________
(1) 
Other operating expenses includes salaries and benefits, cost of revenues for audio visual, costs of revenues for project management and general and administrative expenses. Other operating expenses of REIT Advisory represent expenses for which there is generally a direct offsetting amount included in revenues, including REIT equity-based compensation expense and reimbursable expenses.

49
Table of Contents
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018
 
REIT Advisory
 
Premier
 
JSAV
 
OpenKey
 
Corporate and Other
 
Ashford Inc. Consolidated
 
REIT Advisory
 
Premier
 
JSAV
 
OpenKey
 
Corporate and Other
 
Ashford Inc. Consolidated
REVENUE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advisory services
$
60,462

 
$
—

 
$
—

 
$
—

 
$
—

 
$
60,462

 
$
68,118

 
$
—

 
$
—

 
$
—

 
$
—

 
$
68,118

Audio visual
—

 
—

 
83,532

 
—

 
—

 
83,532

 
—

 
—

 
61,212

 
—

 
—

 
61,212

Project management
—

 
23,371

 
—

 
—

 
—

 
23,371

 
—

 
3,616

 
—

 
—

 
—

 
3,616

Other
4,176

 
—

 
—

 
764

 
11,370

 
16,310

 
1,757

 
—

 
—

 
773

 
9,068

 
11,598

Total revenue
64,638

 
23,371

 
83,532

 
764

 
11,370

 
183,675

 
69,875

 
3,616

 
61,212

 
773

 
9,068

 
144,544

EXPENSES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
5,475

 
10,413

 
1,471

 
21

 
455

 
17,835

 
1,567

 
1,618

 
1,530

 
20

 
470

 
5,205

Impairment
—

 
—

 
—

 
—

 
—

 
—

 
1,863

 
—

 
—

 
—

 
56

 
1,919

Other operating expenses (1)
27,182

 
12,535

 
83,269

 
2,614

 
43,556

 
169,156

 
32,832

 
1,923

 
58,598

 
3,345

 
46,392

 
143,090

Total operating expenses
32,657

 
22,948

 
84,740

 
2,635

 
44,011

 
186,991

 
36,262

 
3,541

 
60,128

 
3,365

 
46,918

 
150,214

OPERATING INCOME (LOSS)
31,981

 
423

 
(1,208
)
 
(1,871
)
 
(32,641
)
 
(3,316
)
 
33,613

 
75

 
1,084

 
(2,592
)
 
(37,850
)
 
(5,670
)
Equity in earnings (loss) of unconsolidated entities
—

 
—

 
—

 
—

 
(109
)
 
(109
)
 
—

 
—

 
—

 
—

 
—

 
—

Interest expense
—

 
—

 
(868
)
 
—

 
(330
)
 
(1,198
)
 
—

 
—

 
(464
)
 
—

 
(129
)
 
(593
)
Amortization of loan costs
—

 
—

 
(41
)
 
(19
)
 
(154
)
 
(214
)
 
—

 
—

 
(35
)
 
(20
)
 
(122
)
 
(177
)
Interest income
—

 
—

 
—

 
—

 
29

 
29

 
—

 
—

 
—

 
—

 
288

 
288

Other income (expense)
—

 
—

 
(107
)
 
15

 
(23
)
 
(115
)
 
187

 
—

 
(353
)
 
2

 
(174
)
 
(338
)
INCOME (LOSS) BEFORE INCOME TAXES
31,981

 
423

 
(2,224
)
 
(1,875
)
 
(33,228
)
 
(4,923
)
 
33,800

 
75

 
232

 
(2,610
)
 
(37,987
)
 
(6,490
)
Income tax (expense) benefit
(7,132
)
 
(759
)
 
130

 
—

 
6,332

 
(1,429
)
 
(6,657
)
 
(7
)
 
(339
)
 
—

 
18,596

 
11,593

NET INCOME (LOSS)
$
24,849

 
$
(336
)
 
$
(2,094
)
 
$
(1,875
)
 
$
(26,896
)
 
$
(6,352
)
 
$
27,143

 
$
68

 
$
(107
)
 
$
(2,610
)
 
$
(19,391
)
 
$
5,103

________
(1) 
Other operating expenses includes salaries and benefits, cost of revenues for audio visual, costs of revenues for project management and general and administrative expenses. Other operating expenses of REIT Advisory represent expenses for which there is generally a direct offsetting amount included in revenues, including REIT equity-based compensation expense and reimbursable expenses.
18. Subsequent Events
On October 2, 2019, as approved by the Board, the Company acquired an aggregate 412,974 shares of its common stock from Ashford Trust and Braemar for $30 per share, resulting in a total cost of approximately $12.4 million. This stock purchase represented approximately 16% of the Company’s common shares outstanding. Subsequent to the stock repurchase, the 412,974 acquired shares were retired by the Company.
On October 14, 2019, the Company drew $10.0 million on our senior revolving credit facility with Bank of America, N.A. As of November 7, 2019, $25.0 million was available under the senior revolving credit facility.
On October 24, 2019, the Company announced the final results of the Special Meeting of Stockholders held October 24, 2019, during which Ashford stockholders overwhelmingly approved the proposal in connection with the Remington Hotel Management business transaction. Holders of approximately 92% of Ashford shares present and voting at the meeting voted in favor of the proposal, including a majority of shares, excluding shares owned by Ashford Trust, Braemar, the Bennetts, and management, present and voting at the meeting voted in favor of the proposal. The Company also announced that it has received the final, official private letter ruling from the Internal Revenue Service related to the transaction.

50
Table of Contents
ASHFORD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


On November 5, 2019, Ashford Trust distributed its remaining 205,086 shares of Ashford Inc.’s common stock through a pro-rata taxable dividend to Ashford Trust’s common stockholders and unitholders of record (“Ashford Trust Record Holders”) as of the close of business of the New York Stock Exchange (“NYSE”) on October 29, 2019 (the “Record Date”). Each Ashford Trust Record Holder received approximately 0.0017 share of the Company’s common stock for every unit and/or share of Ashford Trust common stock held by such Ashford Trust Record Holder on the Record Date. After the distribution, Ashford Trust holds no ownership interest in the Company.
On November 5, 2019, Braemar distributed its remaining 174,983 shares of Ashford Inc.’s common stock through a pro-rata taxable dividend to Braemar’s common stockholders and unitholders of record (“Braemar Record Holders”) as of the close of business of the NYSE on October 29, 2019 (the “Record Date”). Each Braemar Record Holder received approximately 0.0047 share of the Company’s common stock for every unit and/or share of Braemar common stock held by such Braemar Record Holder on the Record Date. After the distribution, Braemar holds no ownership interest in the Company.
On November 6, 2019, we completed the acquisition of Remington’s Hotel Management business for a purchase price of $275 million, payable by the issuance of $275 million of a new Ashford Inc. Series D Convertible Preferred Stock. In the previous transaction for Remington’s Project Management business, the sellers received $203 million of Maryland Ashford’s Series B Convertible Preferred Stock. For this transaction involving Remington’s Hotel Management business, that $203 million of Maryland Ashford’s Series B Convertible Preferred Stock was exchanged, pursuant to a merger transaction whereby Maryland Ashford became our wholly-owned subsidiary, for $203 million of Series D Convertible Preferred Stock (such that, after the transactions, $478 million of Series D Convertible Preferred Stock, and no Series B Convertible Preferred Stock, is outstanding). The new Series D Convertible Preferred Stock is convertible into shares of common stock at a price of $117.50 per share. Preferred dividends on the Series D Convertible Preferred Stock accrue at an annual rate of 6.59% in the first year, 6.99% in the second year, and 7.28% in the third year and each year thereafter. The Series D Convertible Preferred Stock also participates in any dividend or distribution paid on our common stock on an as converted basis. Voting rights of the Series D Convertible Preferred Stock are on an as-converted basis, and the holders of the Series D Convertible Preferred Stock have a voting limit of 40% of the total voting power of the Company until August 8, 2023. The holders of the Series D Convertible Preferred Stock have certain put rights upon certain events constituting a change of control of the Company. Remington was previously owned by Monty J. Bennett, the Company’s Chairman and Chief Executive Officer, and his father, Archie Bennett, Jr., the Chairman Emeritus of Ashford Trust. The Company’s Board of Directors formed a special committee of independent and disinterested directors to analyze, negotiate, and recommend the transaction to the Company’s Independent Directors. The Company’s Independent Directors unanimously recommended approval of the acquisition by the Company’s stockholders. The results of operations of the Hotel Management business are expected to be included in our consolidated financial statements from the date of acquisition. We are in the process of evaluating the fair value of the net assets acquired through internal studies and third-party valuations. As a result of the acquisition, hotel management services that were previously provided by Remington will now be provided by a subsidiary of the Company under the respective hotel management agreement with each customer, including Ashford Trust and Braemar.
Also on November 6, 2019, in connection with the acquisition of Remington’s Hotel Management business, we effected a holding company reorganization. The change in holding company organizational structure was effected by a merger, pursuant to which each issued and outstanding share of common stock, par value $0.01 per share, of our predecessor publicly-traded parent Ashford OAINC II Inc., (formerly named Ashford Inc. and incorporated in Maryland) (“Maryland Ashford”) was converted into one share of common stock, par value $0.001 per share, of the Company (which is incorporated in Nevada) having the same rights, powers and preferences and the same qualifications, limitations and restrictions as a share of common stock of Maryland Ashford. As a result of the foregoing, we became the successor issuer of Maryland Ashford under Rule 12g-3 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Our common stock continues to be listed on the NYSE American under the symbol “AINC.”
Also on November 6, 2019, the Company entered into the Second Consent, Assumption and Modification Agreement (the “Modification Agreement”) to the senior revolving credit facility. The Modification Agreement is effective as of November 6, 2019. The Modification Agreement adjusts the required leverage ratios the Company must maintain and amends the senior revolving credit facility to provide that the Company must meet certain fixed charge coverage ratios, as well as meet a specified fixed charge coverage ratio to make any dividend payments to the Company’s common stock.

51


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used in this Quarterly Report on Form 10-Q, unless the context otherwise indicates, the references to “we,” “us,” “our,” and the “Company” refer to Ashford Inc., a Nevada corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Advisors LLC, a Delaware limited liability company, which we refer to as “Ashford LLC” or “our operating company”; Ashford Hospitality Holdings LLC, a Delaware limited liability company, which we refer to as “Ashford Holdings”; and Ashford Hospitality Services LLC, a Delaware limited liability company, which we refer to as “Ashford Services”; and Premier Project Management LLC, a Maryland limited liability company, which we refer to as “Premier Project Management,” or “Premier.” “Braemar” refers to Braemar Hotels & Resorts Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Braemar Hospitality Limited Partnership, a Delaware limited partnership, which we refer to as “Braemar OP.” “Ashford Trust” or “AHT” refers to Ashford Hospitality Trust, Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Limited Partnership, a Delaware limited partnership and Ashford Trust’s operating partnership, which we refer to as “Ashford Trust OP.” “Remington Lodging” refers to Remington Lodging & Hospitality, LLC, a Delaware limited liability company, and, as the context may require, its consolidated subsidiaries, a property management company wholly-owned by Ashford Inc.
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: 
•
our business and investment strategy;
•
our projected operating results;
•
our ability to obtain future financing arrangements;
•
our understanding of our competition;
•
market trends;
•
the future success of recent acquisitions, including the project management business formerly conducted by certain affiliates of Remington, and new business initiatives, including the Enhanced Return Funding Programs (“ERFPs”) with Ashford Trust and Braemar;
•
the future success of the acquisition of the Hotel Management business from Remington, which we signed a definitive agreement to acquire on May 31, 2019 (as amended on July 17, 2019 and further amended on August 28, 2019) and which closed on November 6, 2019;
•
projected capital expenditures; and
•
the impact of technology on our operations and business.
Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, taking into account all information currently available to us, our actual results and performance could differ materially from those set forth in our forward-looking statements. Factors that could have a material adverse effect on our forward-looking statements include, but are not limited to:
•
the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “Annual Report”), as filed with the SEC on March 8, 2019 and our Quarterly Report on Form 10-Q for the period ended June 30, 2019, as filed with the SEC on August 8, 2019, including under the sections captioned “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations;”
•
general volatility of the capital markets, the general economy or the hospitality industry, whether the result of market events or otherwise, and the market price of our common stock;
•
availability, terms and deployment of capital;
•
changes in our industry and the market in which we operate, interest rates or the general economy;
•
the degree and nature of our competition;
•
actual and potential conflicts of interest with or between Ashford Trust and Braemar, our executive officers and our non-independent directors;
•
availability of qualified personnel;

52


•
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 and from new business initiatives, including the ERFP Agreements with Ashford Trust and Braemar;
•
sales of our common stock, including as a result of the divestiture of our common stock by Ashford Trust and Braemar that was completed on November 5, 2019 in connection with the Hotel Management Business acquisition that was signed on May 31, 2019 (as amended on July 19, 2019 and further amended on August 28, 2019) and which closed on November 6, 2019;
•
disruptions relating to the acquisition or integration of Premier and the Hotel Management business from Remington or any other business we invest in or acquire, which may harm relationships with customers, employees and regulators; and
•
unexpected costs relating to the acquisition or integration of Premier and the Hotel Management business from Remington or any other business we invest in or acquire.
When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements under “Item 1A. Risk Factors” of our Annual Report and this Quarterly Report, the discussion in this Management’s Discussion and Analysis of Financial Conditions and Results of Operations, and elsewhere which could cause our actual results and performance to differ significantly from those contained in our forward-looking statements. Accordingly, we cannot guarantee future results or performance. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Form 10-Q. Furthermore, we do not intend to update any of our forward-looking statements after the date of this Form 10-Q to conform these statements to actual results and performance, except as may be required by applicable law.
Overview
Ashford Inc. is a Nevada corporation that provides asset management services, advisory services and other products and services primarily to clients in the hospitality industry. We became a public company in November 2014, when Ashford Trust completed the spin-off of Ashford Inc. through the distribution of approximately 70% of our outstanding common stock to Ashford Trust stockholders and unitholders in Ashford Trust’s operating partnership, collectively. Our common stock is listed on the NYSE American. As of November 6, 2019, Ashford Trust and Braemar did not hold any shares of our common stock. As of November 6, 2019, 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 352,592 shares of our common stock, which represented an approximate 16.0% ownership interest in Ashford Inc., and owned 18,758,600 shares of our Series D Convertible Preferred Stock (the “Series D Convertible Preferred Stock”), which is exercisable (at an exercise price of $117.50 per share) into an additional approximate 3,991,191 shares of Ashford Inc. common stock, which if exercised as of November 6, 2019 would have increased Mr. Monty J. Bennett and Mr. Archie Bennett, Jr.’s ownership interest in Ashford Inc. to 70.1%. As of November 6, 2019, all Series B Convertible Preferred Stock has been extinguished as a result of the exchange to Series D Convertible Preferred Stock. The 18,758,600 Series D Convertible Preferred Stock shares owned by Mr. Monty J. Bennett and Mr. Archie Bennett, Jr. include 360,000 shares owned by trusts.
Our principal business objective is to provide asset management, advisory and other products and services to other entities primarily in the hospitality industry. The Company seeks to grow in three primary areas: (i) expanding its existing REIT platforms accretively and accelerating performance to earn incentive fees; (ii) starting new REIT platforms for additional base and incentive fees; and (iii) acquiring, investing in or incubating strategic businesses that can achieve accelerated growth through doing business with our REIT platforms and by leveraging our deep knowledge and extensive relationships within the hospitality sector.
We are currently the advisor for Ashford Trust and Braemar. In our capacity as the advisor to Ashford Trust and Braemar, we are responsible for implementing the investment strategies and managing the day-to-day operations of Ashford Trust and Braemar, in each case subject to the supervision and oversight of the respective board of directors of Ashford Trust and Braemar. Ashford Trust commenced operating in August 2003 and is focused on investing in full service hotels in the upscale and upper-upscale segments in the U.S. that have RevPAR generally less than twice the U.S. national average. Braemar invests primarily in luxury hotels and resorts with RevPAR of at least twice the U.S. national average. Braemar became a publicly traded company in November 2013 upon the completion of its spin-off from Ashford Trust. Each of Ashford Trust and Braemar is a REIT as defined in the Internal Revenue Code, and the common stock of each of Ashford Trust and Braemar is traded on the NYSE.
We provide the personnel and services that we believe are necessary to assist each of Ashford Trust and Braemar in conducting their respective businesses. We may also perform similar functions for new or additional platforms. We are not responsible for managing the day-to-day operations of the individual hotel properties owned by either Ashford Trust or Braemar, which duties are, and will continue to be, the responsibility of the hotel management companies that operate the hotel properties owned by Ashford Trust and Braemar.

53


We conduct our advisory business primarily through an operating entity, Ashford LLC, our project management business through an operating entity, Premier, and our hospitality products and services business primarily through an operating entity, Ashford Services. We own substantially all of our assets and conduct substantially all of our business through Ashford LLC, Premier, and Ashford Services.
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 ended September 30, 2019, the total incremental expenses incurred (including all reimbursable expenses), as reasonably determined, in connection with providing services to Braemar under the agreement was $10.5 million.
Recent Developments
Effective January 1, 2019, we acquired a 30% noncontrolling ownership interest in REA Holdings, a real estate advisory firm that provides financing, advisory and property sales services primarily to clients in the hospitality and leisure industry, for a purchase price of approximately $3.0 million which was paid in the form of $2.1 million cash and the issuance of 16,529 shares of our common stock (approximately $890,000) to the seller pursuant to the exemption from the registration requirements under the Securities Act, provided under Section 4(a)(2) thereunder. We have an option to acquire an additional 50% of the ownership interests in REA Holdings for $12.5 million beginning on January 1, 2022. Our investment in REA Holdings is accounted for under the equity method as we have significant influence over the voting interest entity.
On January 15, 2019, the Company entered into the Braemar ERFP Agreement 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 Braemar ERFP Agreement, the Company agreed to provide a $50 million ERFP Commitment to Braemar in connection with Braemar’s acquisition of hotels recommended by us, with the option to increase the ERFP Commitment to up to $100 million upon mutual agreement by the parties. Under the Braemar ERFP Agreement, the Company’s ERFP Commitment will be fulfilled as the Company pays Braemar 10% of each acquired hotel’s purchase price in exchange for FF&E, which is subsequently leased to Braemar rent-free. Braemar must provide reasonable advance notice to the Company to request ERFP funds in accordance with the Braemar ERFP Agreement. The Braemar ERFP Agreement requires 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 Braemar acquiring 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 Braemar’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 January 15, 2019, Braemar acquired The Ritz-Carlton Lake Tahoe for an allocated purchase price of $103.0 million which therefore required the Company to provide Braemar with approximately $10.3 million in exchange for FF&E at Braemar’s hotel properties that will subsequently be leased back to Braemar rent-free. As of September 30, 2019, the Company had fully funded its ERFP Commitment under the Braemar ERFP Agreement related to The Ritz-Carlton Lake Tahoe.
On January 22, 2019, Ashford Trust acquired the Embassy Suites New York Manhattan Times Square for a purchase price of $195.0 million which therefore requires the Company to provide Ashford Trust with approximately $19.5 million in exchange for FF&E at Ashford Trust’s hotel properties that will subsequently be leased back to Ashford Trust rent-free. As of September 30, 2019, the Company’s remaining unfunded ERFP Commitment under the Ashford Trust ERFP Agreement includes $11.4 million related to the Embassy Suites New York Manhattan Times Square.
On February 26, 2019, Ashford Trust acquired the Hilton Santa Cruz/Scotts Valley, in Santa Cruz, California, for a purchase price of $50.0 million which therefore required the Company to provide Ashford Trust with approximately $5.0 million in exchange for FF&E at Ashford Trust’s hotel properties that will subsequently be leased back to Ashford Trust rent-free. As of September 30, 2019, the Company had fully funded its ERFP Commitment under the Ashford Trust ERFP Agreement related to the Hilton Santa Cruz/Scotts Valley.
On March 1, 2019, JSAV acquired a privately-held company, BAV. BAV is an audio visual rental, staging, and production company focused on meeting and special event services. As a result of the acquisition, our ownership interest in JSAV, which we consolidate under the voting interest model, increased from 85% to approximately 88%. Pursuant to the asset purchase agreement, as amended on September 24, 2019, the purchase price consisted of: (i) $5.0 million in cash (excluding working capital adjustments) funded by an existing JSAV term loan; (ii) $3.5 million in the form of Ashford Inc. common stock consisting of 61,387 shares issued on March 1, 2019, which was determined based on a 30-Day VWAP of $57.01 and had an estimated fair value of approximately $3.7 million as of the acquisition date; (iii) $500,000 payable in cash or Ashford Inc. common stock at our sole discretion to be issued 18 months after the acquisition date, subject to certain conditions; and (iv) contingent consideration related to the achievement of certain performance targets with an estimated fair value of approximately $1.4 million, payable, if earned, 12 to 18 months after the acquisition date. Additionally, the transaction includes a stock consideration collar with potential

54


settlements at 12 months, 15 months and 18 months after the acquisition date dependent upon the 30-Day VWAP of Ashford Inc.’s common stock on each respective settlement date. A liability resulting from contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved, with changes in fair value recognized in earnings within “other” operating expenses in our condensed consolidated statements of operations. See note 4 and 8 to our condensed consolidated financial statements for further discussion of the Company’s liabilities related to acquisition-related contingent consideration.
On May 31, 2019, Ashford Inc. signed a Combination Agreement, between the Bennetts, Remington, Remington Holdings GP, LLC, MJB Investments, LP, the Company, James L. Cowen, Jeremy J. Welter (our Co-President and COO), Ashford Nevada Holding Corp. and Ashford Merger Sub Inc. (which was subsequently amended on July 17, 2019 and further amended on August 28, 2019) (the “Combination Agreement”) to acquire the Hotel Management business of Remington, a privately held company. The transaction closed on November 6, 2019, after the transaction was approved by shareholders on October 24, 2019.
On July 18, 2019, RED completed the acquisition of substantially all of the assets of Sebago, a leading provider of watersports activities and excursion services based in Key West, Florida. After giving effect to the transaction, Ashford Inc. will own an approximately 84% interest in the common equity of RED. The purchase price consisted of approximately $2.5 million in cash (excluding transaction costs and working capital adjustments) funded by new RED term loans and $4.5 million in the form of Ashford Inc. common stock consisting of 135,366 shares issued on July 18, 2019, subject to a six month stock consideration collar. See note 4 to our condensed consolidated financial statements.
On July 22, 2019, each of Ashford Trust and Braemar filed an amendment to their Schedule 13Ds with the SEC. As disclosed in such filings, each party’s obligation to consummate the transactions contemplated by the Combination Agreement is subject to certain conditions, including, among other things: (i) the receipt of a PLR from the Internal Revenue Service that Ashford Hospitality Services LLC, a subsidiary of Ashford Inc., will not fail to qualify as an “eligible independent contractor” within the meaning of Section 856(d)(9)(A) of the Code with respect to specified clients solely as a result of (a) Ashford Hospitality Services LLC being a brother-sister affiliate of Ashford Hospitality Advisors LLC, or (b) the taxable REIT subsidiaries (within the meaning of Code Section 856(l)) of such clients receiving specified incentives from Ashford Hospitality Advisors LLC; and (ii) the completion of the divestiture by Ashford Trust and Braemar of their securities of the Company in a manner that complies with the private letter ruling.
As disclosed in the amendment to their Schedule 13Ds, each of Ashford Trust and Braemar, acting at the direction of a committee of independent directors of Ashford Trust and Braemar, respectively, who are independent within the meaning of applicable rules of the NYSE and do not have a material financial interest within the meaning of Section 2-419 of the Maryland General Corporation Law in the transactions contemplated by the Combination Agreement, intends, as of July 19, 2019, to vote or cause to be voted all of the shares beneficially owned by it in favor of each proposal presented to the stockholders at the special meeting of stockholders to consider and vote upon on the transactions contemplated by the Combination Agreement; and, as of July 19, 2019, intends to divest (or cause the divestiture) of all of the securities of Ashford Inc. beneficially owned by each of Ashford Trust and Braemar as required by the closing conditions set forth in the Combination Agreement.
On September 25, 2019, the Company announced the formation of Ashford Securities to raise capital in order to grow the Company’s existing and future platforms. Following registration with the Financial Industry and Regulatory Authority and other regulatory authorities, Ashford Securities will be a dedicated capital raising platform to fund investment opportunities sponsored and asset-managed by the Company. Types of capital raised may include, but are not limited to, preferred equity, convertible preferred equity, mezzanine debt, or non-traded REIT common equity for future platforms. Ashford Securities is not raising common equity for the Company nor for the Company’s existing advised platforms Ashford Trust and Braemar.
In conjunction with the formation of Ashford Securities, Ashford Trust and Braemar have entered into a contribution agreement with Ashford Inc. in which Ashford Trust and Braemar have agreed to contribute a combined contribution amount of up to $15.0 million to fund the operations of Ashford Securities. As of September 30, 2019, Ashford Trust and Braemar have funded approximately $485,000 and $165,000, respectively.
On October 2, 2019, as approved by the Board, the Company acquired an aggregate 412,974 shares of its common stock from Ashford Trust and Braemar for $30 per share, resulting in a total cost of approximately $12.4 million. This stock purchase represented approximately 16% of the Company’s common shares outstanding. Subsequent to the stock repurchase, the 412,974 acquired shares were retired by the Company.
On October 7, 2019, each of Ashford Trust and Braemar filed an amendment to their Schedule 13Ds with the SEC to announce that it entered into the stock purchase agreement to sell shares of the Company’s common stock to the Company.

55


On October 23, 2019, each of Ashford Trust and Braemar filed an amendment to their Schedule 13Ds with the SEC to announce the pro-rata taxable dividend of the Company’s common stock to its stockholders and unitholders of record. Each stockholder and unitholder of Ashford Trust and Braemar received a distribution of the Company’s common stock for every unit and/or share of Ashford Trust or Braemar common stock, respectively, held by such stockholders and unitholders on the record date of October 29, 2019. As described further below, this distribution was completed on November 5, 2019.
On October 24, 2019, the Company announced the final results of the Special Meeting of Stockholders held October 24, 2019, during which Ashford stockholders overwhelmingly approved the proposal in connection with the Remington Hotel Management business transaction. Holders of approximately 92% of Ashford shares present and voting at the meeting voted in favor of the proposal, including a majority of shares, excluding shares owned by Ashford Trust, Braemar, the Bennetts, and management, present and voting at the meeting voted in favor of the proposal. The Company also announced that it has received the final, official private letter ruling from the Internal Revenue Service related to the transaction.
On November 5, 2019, Ashford Trust distributed its remaining 205,086 shares of Ashford Inc.’s common stock through a pro-rata taxable dividend to Ashford Trust Record Holders as of the Record Date. Each Ashford Trust Record Holder received approximately 0.0017 share of the Company’s common stock for every unit and/or share of Ashford Trust common stock held by such Ashford Trust Record Holder on the Record Date. After the distribution, Ashford Trust holds no ownership interest in the Company.
On November 5, 2019, Braemar distributed its remaining 174,983 shares of Ashford Inc.’s common stock through a pro-rata taxable dividend to Braemar Record Holders as of the Record Date. Each Braemar Record Holder received approximately 0.0047 share of the Company’s common stock for every unit and/or share of Braemar common stock held by such Braemar Record Holder on the Record Date. After the distribution, Braemar holds no ownership interest in the Company.
On November 6, 2019, we completed the acquisition of Remington’s Hotel Management business for a purchase price of $275 million, payable by the issuance of $275 million of a new Ashford Inc. Series D Convertible Preferred Stock. In the previous transaction for Remington’s Project Management business, the sellers received $203 million of Maryland Ashford’s Series B Convertible Preferred Stock. For this transaction involving Remington’s Hotel Management business, that $203 million of Maryland Ashford’s Series B Convertible Preferred Stock was exchanged, pursuant to a merger transaction whereby Maryland Ashford became our wholly-owned subsidiary, for $203 million of Series D Convertible Preferred Stock (such that, after the transactions, $478 million of Series D Convertible Preferred Stock, and no Series B Convertible Preferred Stock, is outstanding). The new Series D Convertible Preferred Stock is convertible into shares of common stock at a price of $117.50 per share. Preferred dividends on the Series D Convertible Preferred Stock accrue at an annual rate of 6.59% in the first year, 6.99% in the second year, and 7.28% in the third year and each year thereafter. The Series D Convertible Preferred Stock also participates in any dividend or distribution paid on our common stock on an as converted basis. Voting rights of the Series D Convertible Preferred Stock are on an as-converted basis, and the holders of the Series D Convertible Preferred Stock have a voting limit of 40% of the total voting power of the Company until August 8, 2023. The holders of the Series D Convertible Preferred Stock have certain put rights upon certain events constituting a change of control of the Company. Remington was previously owned by Monty J. Bennett, the Company’s Chairman and Chief Executive Officer, and his father, Archie Bennett, Jr., the Chairman Emeritus of Ashford Trust. The Company’s Board of Directors formed a special committee of independent and disinterested directors to analyze, negotiate, and recommend the transaction to the Company’s Independent Directors. The Company’s Independent Directors unanimously recommended approval of the acquisition by the Company’s stockholders. The results of operations of the Hotel Management business are expected to be included in our consolidated financial statements from the date of acquisition. We are in the process of evaluating the fair value of the net assets acquired through internal studies and third-party valuations. As a result of the acquisition, hotel management services that were previously provided by Remington will now be provided by a subsidiary of the Company under the respective hotel management agreement with each customer, including Ashford Trust and Braemar.
Also on November 6, 2019, in connection with the acquisition of Remington’s Hotel Management business, we effected a holding company reorganization. The change in holding company organizational structure was effected by a merger, pursuant to which each issued and outstanding share of common stock, par value $0.01 per share, of our predecessor publicly-traded parent Ashford OAINC II Inc., (formerly named Ashford Inc. and incorporated in Maryland) (“Maryland Ashford”) was converted into one share of common stock, par value $0.001 per share, of the Company (which is incorporated in Nevada) having the same rights, powers and preferences and the same qualifications, limitations and restrictions as a share of common stock of Maryland Ashford. As a result of the foregoing, we became the successor issuer of Maryland Ashford under Rule 12g-3 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Our common stock continues to be listed on the NYSE American under the symbol “AINC.”

56


Also on November 6, 2019, the Company entered into the Second Consent, Assumption and Modification Agreement (the “Modification Agreement”) to the senior revolving credit facility. The Modification Agreement is effective as of November 6, 2019. The Modification Agreement adjusts the required leverage ratios the Company must maintain and amends the senior revolving credit facility to provide that the Company must meet certain fixed charge coverage ratios, as well as meet a specified fixed charge coverage ratio to make any dividend payments to the Company’s common stock.
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


RESULTS OF OPERATIONS
Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018
The following table summarizes the changes in key line items from our condensed consolidated statements of operations for the three months ended September 30, 2019 and 2018 (in thousands):
 
Three Months Ended September 30,
 
Favorable (Unfavorable)
 
2019
 
2018
 
$ Change
 
% Change
REVENUE
 
 
 
 
 
 
 
Advisory services
$
20,055

 
$
21,016

 
$
(961
)
 
(4.6
)%
Audio visual
22,430

 
14,526

 
7,904

 
54.4
 %
Project management
7,881

 
3,616

 
4,265

 
117.9
 %
Other
6,523

 
2,407

 
4,116

 
171.0
 %
Total revenue
56,889

 
41,565

 
15,324

 
36.9
 %
EXPENSES
 
 
 

 
 

 


Salaries and benefits
21,129

 
21,851

 
722

 
3.3
 %
Cost of revenues for audio visual
17,732

 
14,392

 
(3,340
)
 
(23.2
)%
Cost of revenues for project management
2,666

 
1,189

 
(1,477
)
 
(124.2
)%
Depreciation and amortization
8,374

 
2,972

 
(5,402
)
 
(181.8
)%
General and administrative
8,940

 
12,231

 
3,291

 
26.9
 %
Other
4,849

 
434

 
(4,415
)
 
(1,017.3
)%
Total expenses
63,690

 
53,069

 
(10,621
)
 
(20.0
)%
OPERATING INCOME (LOSS)
(6,801
)
 
(11,504
)
 
4,703

 
40.9
 %
Equity in earnings (loss) of unconsolidated entities
464

 
—

 
464

 


Interest expense
(456
)
 
(289
)
 
(167
)
 
(57.8
)%
Amortization of loan costs
(75
)
 
(130
)
 
55

 
42.3
 %
Interest income
—

 
103

 
(103
)
 
(100.0
)%
Other income (expense)
(20
)
 
(78
)
 
58

 
74.4
 %
INCOME (LOSS) BEFORE INCOME TAXES
(6,888
)
 
(11,898
)
 
5,010

 
42.1
 %
Income tax (expense) benefit
297

 
13,904

 
(13,607
)
 
(97.9
)%
NET INCOME (LOSS)
(6,591
)
 
2,006

 
(8,597
)
 
(428.6
)%
(Income) loss from consolidated entities attributable to noncontrolling interests
101

 
413

 
(312
)
 
(75.5
)%
Net (income) loss attributable to redeemable noncontrolling interests
334

 
968

 
(634
)
 
(65.5
)%
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
(6,156
)
 
3,387

 
(9,543
)
 
(281.8
)%
Preferred dividends
(2,909
)
 
(1,675
)
 
(1,234
)
 
(73.7
)%
Amortization of preferred stock discount
(363
)
 
(303
)
 
(60
)
 
(19.8
)%
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
(9,428
)
 
$
1,409

 
$
(10,837
)
 
(769.1
)%
Net Income (Loss) Attributable to Common Stockholders. Net income (loss) attributable to common stockholders changed $10.8 million, or 769.1%, to a $9.4 million loss for the three months ended September 30, 2019 (“the 2019 quarter”) compared to the three months ended September 30, 2018 (“the 2018 quarter”) as a result of the factors discussed below.

58


Total Revenue. Total revenue increased $15.3 million, or 36.9%, to $56.9 million for the 2019 quarter compared to the 2018 quarter due to the following (in thousands):
 
Three Months Ended September 30,
 
Favorable (Unfavorable)
 
2019
 
2018
 
$ Change
 
% Change
Advisory services revenue:
 
 
 
 
 
 
 
Base advisory fee (1)
$
10,570

 
$
11,655

 
$
(1,085
)
 
(9.3
)%
Incentive advisory fee (2)
170

 
452

 
(282
)
 
(62.4
)%
Reimbursable expenses (3)
2,541

 
2,607

 
(66
)
 
(2.5
)%
Non-cash stock/unit-based compensation (4)
6,643

 
6,170

 
473

 
7.7
 %
Other advisory revenue (5)
131

 
132

 
(1
)
 
(0.8
)%
Total advisory services revenue (13)
20,055

 
21,016

 
(961
)
 
(4.6
)%
 
 
 
 
 
 
 


Audio visual revenue (6)
22,430

 
14,526

 
7,904

 
54.4
 %
 
 
 
 
 
 
 
 
Project management revenue (7)
7,881

 
3,616

 
4,265

 
117.9
 %
 
 
 
 
 
 
 


Other revenue:
 
 
 
 
 
 


Investment management reimbursements (8) (13)
246

 
339

 
(93
)
 
(27.4
)%
Debt placement fees (9)
429

 
350

 
79

 
22.6
 %
Claims management services (10) (13)
51

 
48

 
3

 
6.3
 %
Lease revenue (11) (13)
1,029

 
251

 
778

 
310.0
 %
Other services (12)
4,768

 
1,419

 
3,349

 
236.0
 %
Total other revenue
6,523

 
2,407

 
4,116

 
171.0
 %
 
 
 
 
 


 


Total revenue
$
56,889

 
$
41,565

 
$
15,324

 
36.9
 %
 
 
 
 
 


 


REVENUE BY SEGMENT (14)
 
 
 
 


 


REIT advisory
$
21,381

 
$
21,656

 
$
(275
)
 
(1.3
)%
Premier
7,881

 
3,616

 
4,265

 
117.9
 %
JSAV
22,430

 
14,526

 
7,904

 
54.4
 %
OpenKey
313

 
301

 
12

 
4.0
 %
Corporate and other
4,884

 
1,466

 
3,418

 
233.2
 %
Total revenue
$
56,889

 
$
41,565

 
$
15,324

 
36.9
 %
________
(1) 
The decrease in base advisory fee is primarily due to lower revenue of $1.1 million from Ashford Trust and higher revenue of $57,000 from Braemar.
(2) 
The decrease in incentive advisory fee is due to lower revenue of $452,000 from Ashford Trust, partially offset by higher revenue of $170,000 from Braemar. The $170,000 of incentive advisory fee recognized in the 2019 quarter includes the pro-rata portion of the second year installment of the Braemar 2018 incentive advisory fee which will be paid in January 2020. The incentive advisory fee for the 2018 quarter includes the pro-rata portion of the third year installment of the Ashford Trust 2016 incentive advisory fee in the amount of $452,000, which was paid in January 2019. Incentive fee payments are subject to meeting the December 31 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 2018 and 2017 measurement periods. Braemar’s annual total stockholder return did not meet the relevant incentive fee thresholds during the 2017 and 2016 measurement periods.
(3)  
The decrease in reimbursable expenses revenue is due to lower revenue of $101,000 from Ashford Trust and higher revenue of $35,000 from Braemar. Reimbursable expenses include overhead, internal audit, risk management advisory and asset management services. During the three months ended September 30, 2019, we recognized income from reimbursable expenses

59


related to software implementation costs from Ashford Trust and Braemar of $395,000 and $28,000, respectively. During the three months ended September 30, 2018, we recognized income from reimbursable expenses related to software implementation costs from Ashford Trust and Braemar of $784,000 and $58,000, respectively. See note 15 to our condensed consolidated financial statements.
(4)  
The increase in non-cash stock/unit-based compensation revenue is due to lower revenue of $206,000 from Ashford Trust and higher revenue of $679,000 from Braemar. Non-cash stock/unit-based compensation revenue is associated with equity grants of Ashford Trust’s and Braemar’s common stock and LTIP units awarded to officers and employees of Ashford Inc. for which we recorded an offsetting expense in an equal amount included in “salaries and benefits.”
(5)  
Other advisory revenue remained steady. Other advisory revenue from Braemar is a result of the $5.0 million cash payment received upon stockholder approval of the Fourth Amended and Restated Braemar Advisory Agreement in June 2017. The payment is included in “deferred income” on our condensed consolidated balance sheet and is being recognized on a quarterly basis over the initial ten-year term of the agreement.
(6)  
The $7.9 million increase in audio visual revenue is due to the growth of JSAV and JSAV’s acquisition of BAV in March 2019.
(7)  
The increase in project management revenue is due to the growth of Premier and the timing of our acquisition of Premier in August 2018.
(8)  
The decrease in investment management reimbursements is due to lower revenue of $93,000 from Ashford Trust. Investment management reimbursements include AIM’s management of Ashford Trust’s excess cash under the Investment Management Agreement executed in 2017. AIM is not compensated for its services but is reimbursed for all costs and expenses.
(9)  
The increase in debt placement fee revenue is due to lower revenue of $350,000 from Ashford Trust and higher revenue of $429,000 from Braemar. Debt placement fees are earned by Lismore for providing debt placement services.  
(10)  
Claims management services include revenues earned from providing insurance claim assessment and administration services.
(11)  
In connection with our ERFP Agreements and legacy key money transaction with Ashford Trust and legacy key money transaction with Braemar, we lease FF&E to Ashford Trust and Braemar rent-free. Our ERFP leases entered into in 2018 with Ashford Trust commenced on December 31, 2018. Consistent with our accounting treatment prior to adopting ASC 842, a portion of the base advisory fee for leases, which commenced prior to our adoption, is allocated to lease revenue each period equal to the estimated fair value of the lease payments that would have been made.
(12)  
The increase in other services revenue is due to higher revenue of $513,000 from Ashford Trust, higher revenue of $315,000 from Braemar and higher revenue of $2.5 million from third parties. Other services revenue primarily relates to other hotel services provided by our consolidated subsidiaries, OpenKey, RED and Pure Wellness, to Ashford Trust, Braemar and other third parties. The increase is primarily due to the growth of the entity that conducts RED’s legacy U.S. Virgin Islands operations and RED’s acquisition of Sebago. Other services also includes reimbursements for expenses related to Ashford Securities from Ashford Trust and Braemar.
(13)  
Indicates revenue recognized by our REIT Advisory segment.
(14)  
See note 17 to our condensed consolidated financial statements for discussion of segment reporting.


60


Salaries and Benefits Expense. Salaries and benefits expense decreased $722,000, or 3.3%, to $21.1 million for the 2019 quarter compared to the 2018 quarter. The change in salaries and benefits expense consisted of the following (in thousands):
 
Three Months Ended September 30,
 
 
 
2019
 
2018
 
$ Change
Cash salaries and benefits:
 
 
 
 
 
Salary expense
$
8,625

 
$
6,960

 
$
1,665

Bonus expense
3,674

 
2,959

 
715

Benefits related expenses
1,619

 
1,474

 
145

Total cash salaries and benefits (1)
13,918

 
11,393

 
2,525

Non-cash equity-based compensation:
 
 
 
 
 
Stock option grants
2,066

 
1,951

 
115

Ashford Trust & Braemar equity grants (2)
6,671

 
6,233

 
438

Total non-cash equity-based compensation
8,737

 
8,184

 
553

Non-cash (gain) loss in deferred compensation plan (3)
(1,526
)
 
2,274

 
(3,800
)
Total salaries and benefits
$
21,129

 
$
21,851

 
$
(722
)
________
(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.
(2) 
Equity grants of Ashford Trust’s and Braemar’s common stock and LTIP units are awarded to our officers and employees as part of our advisory agreements with each company, for which we record offsetting revenue in an equal amount. See notes 2 and 13 to our condensed consolidated financial statements.
(3) 
The DCP obligation is recorded as a liability at fair value with changes in fair value reflected in earnings. The gain in the 2019 quarter and the loss in the 2018 quarter are primarily attributable to a decrease and increase, respectively, in the fair value of the DCP obligation. See note 14 to our condensed consolidated financial statements.
Cost of Revenues for Audio Visual. Cost of revenues for audio visual increased $3.3 million, or 23.2%, to $17.7 million during the 2019 quarter compared to $14.4 million for the 2018 quarter, primarily due to the growth of JSAV and JSAV’s acquisition of BAV in March of 2019.
Cost of Revenues for Project Management. Cost of revenues for project management increased $1.5 million, or 124.2%, to $2.7 million during the 2019 quarter compared to $1.2 million for the 2018 quarter, primarily due to the growth of Premier and the timing of our acquisition of Premier in August 2018.
Depreciation and Amortization Expense. Depreciation and amortization expense increased $5.4 million, or 181.8%, to $8.4 million for the 2019 quarter compared to the 2018 quarter, primarily as a result of an increase of $3.3 million in amortization related to the acquisition of Premier’s definite-lived intangible assets in August of 2018 and $2.2 million of depreciation related to ERFP assets. See note 4 to our condensed consolidated financial statements. Depreciation and amortization expense for the 2019 quarter and the 2018 quarter excludes depreciation expense related to audio visual equipment of $1.1 million and $1.6 million, respectively, which is included in “cost of revenues for audio visual” and also excludes depreciation expense for the 2019 quarter related to marine vessels and other vehicles in the amount of $127,000 and $9,000, respectively, which is included in “other” operating expense.

61


General and Administrative Expense. General and administrative expenses decreased $3.3 million, or 26.9%, to $8.9 million for the 2019 quarter compared to the 2018 quarter. The change in general and administrative expense consisted of the following (in thousands):
 
Three Months Ended September 30,
 
 
 
2019
 
2018
 
$ Change
Professional fees (1)
$
3,410

 
$
7,464

 
$
(4,054
)
Office expense
2,573

 
2,590

 
(17
)
Public company costs
266

 
252

 
14

Director costs
224

 
284

 
(60
)
Travel and other expense
2,127

 
1,641

 
486

Non-capitalizable - software costs
340

 
—

 
340

Total general and administrative
$
8,940

 
$
12,231

 
$
(3,291
)
________
(1) 
The decrease in expense is primarily due to decreases in legal fees and transaction costs related to the acquisition of Premier in August of 2018 offset by an increase in similar expenses related to the acquisition of the Hotel Management business of Remington and our increased investment in RED.

Other. Other operating expense was $4.8 million and $434,000 for the 2019 quarter and the 2018 quarter, respectively. Other operating expense includes cost of goods sold and royalties associated with OpenKey, RED and Pure Wellness as well as $2.8 million in expense from changes in the fair value of contingent consideration related to JSAV’s acquisition of BAV in March 2019 and RED’s acquisition of Sebago in July 2019. See notes 4 and 8 to our condensed consolidated financial statements.
Equity in Earnings (Loss) of Unconsolidated Entities. Equity in earnings of unconsolidated entities changed $464,000 for the 2019 quarter due to our investment in REA Holdings in January of 2019. See notes 1 and 2 to our condensed consolidated financial statements.
Interest Expense. Interest expense was $456,000 and $289,000 for the 2019 quarter and the 2018 quarter, respectively, related to the notes payable, lines of credit and capital 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 $75,000 and $130,000 for the 2019 quarter and the 2018 quarter, respectively, related to the notes payable and lines of credit held by our consolidated subsidiaries. See notes 2 and 6 to our condensed consolidated financial statements.
Interest Income. Interest income was $0 and $103,000 for the 2019 quarter and the 2018 quarter, respectively.
Other Income (Expense). Other expense was $20,000 and $78,000 in the 2019 quarter and the 2018 quarter, respectively.
Income Tax (Expense) Benefit. Income tax benefit decreased by $13.6 million, from $13.9 million in the 2018 quarter to $297,000 in the 2019 quarter. Current tax expense decreased by $200,000, from $1.2 million in the 2018 quarter to $1.0 million expense in the 2019 quarter, primarily due to an increase in tax bonus depreciation taken on purchases of furniture, fixtures and equipment under the Ashford Trust and Braemar ERFP Agreements. Deferred tax benefit decreased by $13.8 million from $15.1 million in the 2018 quarter to a $1.3 million benefit in the 2019 quarter. In the third quarter of 2018, the valuation allowance was released due to the acquisition of Premier.
(Income) Loss from Consolidated Entities Attributable to Noncontrolling Interests. The noncontrolling interests in consolidated entities were allocated a loss of $101,000 in the 2019 quarter and a loss of $413,000 in the 2018 quarter. See notes 2, 11 and 15 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 $334,000 in the 2019 quarter and a loss of $968,000 in the 2018 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, 12, and 15 to our condensed consolidated financial statements.

62


Preferred Dividends. Preferred dividends increased $1.2 million, or 73.7%, to $2.9 million during the 2019 quarter compared to $1.7 million for the 2018 quarter, primarily due to the timing of the issuance of the Series B Convertible Preferred Stock in the acquisition of Premier in August 2018 and the contractual increase in the annual dividend rate from 5.5% to 6.0% after one year from the acquisition of Premier.
Amortization of Preferred Stock Discount. The amortization of preferred stock discount increased $60,000, or 19.8%, to $363,000 during the 2019 quarter compared to $303,000 for the 2018 quarter, primarily due to timing of our acquisition of Premier in August 2018 and the contractual increase in the annual dividend rate from 5.5% to 6.0% after one year from the acquisition of Premier.
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
The following table summarizes the changes in key line items from our condensed consolidated statements of operations for the nine months ended September 30, 2019 and 2018 (in thousands):
 
Nine Months Ended September 30,
 
Favorable (Unfavorable)
 
2019
 
2018
 
$ Change
 
% Change
REVENUE
 
 
 
 
 
 
 
Advisory services
$
60,462

 
$
68,118

 
$
(7,656
)
 
(11.2
)%
Audio visual
83,532

 
61,212

 
22,320

 
36.5
 %
Project management
23,371

 
3,616


19,755


546.3
 %
Other
16,310

 
11,598

 
4,712

 
40.6
 %
Total revenue
183,675

 
144,544

 
39,131

 
27.1
 %
EXPENSES
 
 
 

 
 

 


Salaries and benefits
61,986

 
64,078

 
2,092

 
3.3
 %
Cost of revenues for audio visual
61,400

 
48,000

 
(13,400
)
 
(27.9
)%
Cost of revenues for project management
8,154

 
1,189

 
(6,965
)
 
(585.8
)%
Depreciation and amortization
17,835

 
5,205

 
(12,630
)
 
(242.7
)%
General and administrative
28,290

 
27,651

 
(639
)
 
(2.3
)%
Impairment
—

 
1,919

 
1,919

 
100.0
 %
Other
9,326

 
2,172

 
(7,154
)
 
(329.4
)%
Total expenses
186,991

 
150,214

 
(36,777
)
 
(24.5
)%
OPERATING INCOME (LOSS)
(3,316
)
 
(5,670
)
 
2,354

 
41.5
 %
Equity in earnings (loss) of unconsolidated entities
(109
)
 
—

 
(109
)
 


Interest expense
(1,198
)
 
(593
)
 
(605
)
 
(102.0
)%
Amortization of loan costs
(214
)
 
(177
)
 
(37
)
 
(20.9
)%
Interest income
29

 
288

 
(259
)
 
(89.9
)%
Other income (expense)
(115
)
 
(338
)
 
223

 
66.0
 %
INCOME (LOSS) BEFORE INCOME TAXES
(4,923
)
 
(6,490
)
 
1,567

 
24.1
 %
Income tax (expense) benefit
(1,429
)
 
11,593

 
(13,022
)
 
(112.3
)%
NET INCOME (LOSS)
(6,352
)
 
5,103

 
(11,455
)
 
(224.5
)%
(Income) loss from consolidated entities attributable to noncontrolling interests
395

 
704

 
(309
)
 
(43.9
)%
Net (income) loss attributable to redeemable noncontrolling interests
623

 
817

 
(194
)
 
(23.7
)%
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
(5,334
)
 
6,624

 
(11,958
)
 
(180.5
)%
Preferred dividends
(8,492
)
 
(1,675
)
 
(6,817
)
 
(407.0
)%
Amortization of preferred stock discount
(1,338
)
 
(303
)
 
(1,035
)
 
(341.6
)%
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
(15,164
)
 
$
4,646

 
$
(19,810
)
 
(426.4
)%
Net Income (Loss) Attributable to Common Stockholders. Net income (loss) attributable to common stockholders changed $19.8 million, or 426.4%, to a $15.2 million loss for the nine months ended September 30, 2019 (“the 2019 period”) compared to the nine months ended September 30, 2018 (“the 2018 period”) as a result of the factors discussed below.

63


Total Revenue. Total revenue increased by $39.1 million, or 27.1%, to $183.7 million for the 2019 period compared to the 2018 period due to the following (in thousands):
 
Nine Months Ended September 30,
 
Favorable (Unfavorable)
 
2019
 
2018
 
$ Change
 
% Change
Advisory services revenue:
 
 
 
 
 
 
 
Base advisory fee (1)
$
32,382

 
$
33,540

 
$
(1,158
)
 
(3.5
)%
Incentive advisory fee (2)
509

 
1,356

 
(847
)
 
(62.5
)%
Reimbursable expenses (3)
8,270

 
7,052

 
1,218

 
17.3
 %
Non-cash stock/unit-based compensation (4)
18,912

 
25,780

 
(6,868
)
 
(26.6
)%
Other advisory revenue (5)
389

 
390

 
(1
)
 
(0.3
)%
Total advisory services revenue (13)
60,462

 
68,118

 
(7,656
)
 
(11.2
)%
 
 
 
 
 
 
 


Audio visual revenue (6)
83,532

 
61,212

 
22,320

 
36.5
 %
 
 
 
 
 
 
 
 
Project management revenue (7)
23,371

 
3,616

 
19,755

 
546.3
 %
 
 
 
 
 
 
 


Other revenue:
 
 
 
 
 
 


 
 
 
 
 
 
 


Investment management reimbursements (8) (13)
941

 
850

 
91

 
10.7
 %
Debt placement fees (9)
1,862

 
5,941

 
(4,079
)
 
(68.7
)%
Claims management services (10) (13)
147

 
153

 
(6
)
 
(3.9
)%
Lease revenue (11) (13)
3,088

 
754

 
2,334

 
309.5
 %
Other services (12)
10,272

 
3,900

 
6,372

 
163.4
 %
Total other revenue
16,310

 
11,598

 
4,712

 
40.6
 %
 
 
 
 
 
 
 


Total revenue
$
183,675

 
$
144,544

 
$
39,131

 
27.1
 %
 
 
 
 
 
 
 


REVENUE BY SEGMENT (14)
 
 
 
 
 
 


REIT advisory
$
64,638

 
$
69,875

 
$
(5,237
)
 
(7.5
)%
Premier
23,371

 
3,616

 
19,755

 
546.3
 %
JSAV
83,532

 
61,212

 
22,320

 
36.5
 %
OpenKey
764

 
773

 
(9
)
 
(1.2
)%
Corporate and other
11,370

 
9,068

 
2,302

 
25.4
 %
Total revenue
$
183,675

 
$
144,544

 
$
39,131

 
27.1
 %
________
(1) 
The decrease in base advisory fee is due to lower revenue of $2.1 million from Ashford Trust and higher revenue of $990,000 from Braemar.
(2) 
The decrease in incentive advisory fee is due to lower revenue of $1.4 million from Ashford Trust, partially offset by higher revenue of $509,000 from Braemar. The $509,000 of incentive advisory fee recognized in the 2019 period includes the pro-rata portion of the second year installment of the Braemar 2018 incentive advisory fee which will be paid in January 2020. The incentive advisory fee for the 2018 period includes the pro-rata portion of the third year installment of the Ashford Trust 2016 incentive advisory fee in the amount of $1.4 million, which was paid in January 2019. Incentive fee payments are subject to meeting the December 31 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 2018 and 2017 measurement periods. Braemar’s annual total stockholder return did not meet the relevant incentive fee thresholds during the 2017 and 2016 measurement periods.
(3)  
The increase in reimbursable expenses revenue is due to higher revenue of $1.1 million from Ashford Trust and higher revenue of $146,000 from Braemar. Reimbursable expenses include overhead, internal audit, risk management advisory and asset

64


management services. During the nine months ended September 30, 2019, we recognized income from reimbursable expenses related to software implementation costs from Ashford Trust and Braemar of $1.5 million and $108,000, respectively. During the nine months ended September 30, 2018, we recognized income from reimbursable expenses related to software implementation costs from Ashford Trust and Braemar of $1.4 million and $102,000, respectively. See note 15 to our condensed consolidated financial statements.
(4)  
The decrease in non-cash stock/unit-based compensation revenue is due to lower revenue of $7.1 million from Ashford Trust and higher revenue of $186,000 from Braemar. Non-cash stock/unit-based compensation revenue is associated with equity grants of Ashford Trust’s and Braemar’s common stock and LTIP units awarded to officers and employees of Ashford Inc. for which we recorded an offsetting expense in an equal amount included in “salaries and benefits.” During the 2018 period, $6.7 million of non-cash stock/unit-based compensation revenue, including $4.5 million and $2.2 million from Ashford Trust and Braemar, respectively, related to accelerated vesting, in accordance with the terms of the awards, as a result of the death of an executive in March 2018.
(5)  
Other advisory revenue remained steady. Other advisory revenue from Braemar is a result of the $5.0 million cash payment received upon stockholder approval of the Fourth Amended and Restated Braemar Advisory Agreement in June 2017. The payment is included in “deferred income” on our condensed consolidated balance sheet and is being recognized on a quarterly basis over the initial ten-year term of the agreement.
(6)  
The $22.3 million increase in audio visual revenue is due to the growth of JSAV and JSAV’s acquisition of BAV in March 2019.
(7)  
The increase in project management revenue is due to the growth of Premier and the timing of our acquisition of Premier in August 2018.
(8)  
The increase in investment management reimbursements is due to higher revenue of $91,000 from Ashford Trust. Investment management reimbursements include AIM’s management of Ashford Trust’s excess cash under the Investment Management Agreement executed in 2017. AIM is not compensated for its services but is reimbursed for all costs and expenses.
(9)  
The decrease in debt placement fee revenue is due to lower revenue of $3.8 million from Ashford Trust and lower revenue of $295,000 from Braemar. Debt placement fees are earned by Lismore for providing debt placement services.  
(10)  
Claims management services include revenues earned from providing insurance claim assessment and administration services.
(11)  
In connection with our ERFP Agreements and legacy key money transaction with Ashford Trust and legacy key money transaction with Braemar, we lease FF&E to Ashford Trust and Braemar rent-free. Our ERFP leases entered into in 2018 with Ashford Trust commenced on December 31, 2018. Consistent with our accounting treatment prior to adopting ASC 842, a portion of the base advisory fee for leases, which commenced prior to our adoption, is allocated to lease revenue each period equal to the estimated fair value of the lease payments that would have been made.
(12)  
The increase in other services revenue is due to higher revenue of $702,000 from Ashford Trust, higher revenue of $444,000 from Braemar and higher revenue of $5.2 million from third parties. Other services revenue primarily relates to other hotel services provided by our consolidated subsidiaries, OpenKey, RED and Pure Wellness, to Ashford Trust, Braemar and other third parties. The increase is primarily due to the growth of the entity that conducts RED’s legacy U.S. Virgin Islands operations and RED’s acquisition of Sebago. Other services also includes reimbursements for expenses related to Ashford Securities from Ashford Trust and Braemar.
(13)  
Indicates revenue recognized by our REIT Advisory segment.
(14)  
See note 17 to our condensed consolidated financial statements for discussion of segment reporting.


65


Salaries and Benefits Expense. Salaries and benefits expense decreased by $2.1 million, or 3.3%, to $62.0 million for the 2019 period compared to the 2018 period. The change in salaries and benefits expense consisted of the following (in thousands):
 
Nine Months Ended September 30,
 
 
 
2019
 
2018
 
$ Change
Cash salaries and benefits:
 
 
 
 

Salary expense
$
26,321

 
$
18,982

 
$
7,339

Bonus expense
10,429

 
10,508

 
(79
)
Benefits related expenses
5,542

 
4,660

 
882

Total cash salaries and benefits (1)
42,292

 
34,150

 
8,142

Non-cash equity-based compensation:
 
 
 
 

Stock option grants (2)
6,254

 
7,625

 
(1,371
)
Ashford Trust & Braemar equity grants (3)
19,043

 
25,843

 
(6,800
)
Total non-cash equity-based compensation
25,297

 
33,468

 
(8,171
)
Non-cash (gain) loss in deferred compensation plan (4)
(5,603
)
 
(3,540
)
 
(2,063
)
Total salaries and benefits
$
61,986

 
$
64,078

 
$
(2,092
)
________
(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. Cash salaries and benefits recorded in the 2018 period included $1.3 million of severance costs and $716,000 of additional bonus expense recorded upon receiving approval from the board of directors in the first quarter of 2018.
(2) 
The decrease is primarily due to $2.5 million of expense related to the accelerated vesting of stock option awards upon the death of one of our executive officers in March of 2018, in accordance with the terms of the awards, partially offset by forfeitures. See notes 2, 13 and 15 to our condensed consolidated financial statements.
(3) 
Equity grants of Ashford Trust’s and Braemar’s common stock and LTIP units are awarded to our officers and employees as part of our advisory agreements with each company, for which we record offsetting revenue in an equal amount. The decrease is primarily attributable to $6.7 million of compensation expense related to the accelerated vesting of equity awards upon the death of one of our executive officers in March of 2018, in accordance with the terms of the awards, partially offset by an increase in the fair value of equity grants. See notes 2 and 13 to our condensed consolidated financial statements.
(4) 
The DCP obligation is recorded as a liability at fair value with changes in fair value reflected in earnings. The gains in the 2019 period and the 2018 period are primarily attributable to decreases in the fair value of the DCP obligation. See note 14 to our condensed consolidated financial statements.
Cost of Revenues for Audio Visual. Cost of revenues for audio visual increased $13.4 million, or 27.9%, to $61.4 million during the 2019 period compared to $48.0 million for the 2018 period, primarily due to the growth of JSAV and JSAV’s acquisition of BAV in March 2019.
Cost of Revenues for Project Management. Cost of revenues for project management increased $7.0 million, or 585.8% to $8.2 million during the 2019 period compared to $1.2 million for the 2018 period, primarily due to the growth of Premier and the timing of our acquisition of Premier in August 2018.
Depreciation and Amortization Expense. Depreciation and amortization expense increased by $12.6 million, or 242.7%, to $17.8 million for the 2019 period compared to the 2018 period, primarily as a result of an increase of $8.8 million in amortization related to the acquisition of Premier’s definite-lived intangible assets in August of 2018 and $3.8 million depreciation related to ERFP assets. See note 4 to our condensed consolidated financial statements. Depreciation and amortization expense for the 2019 period and the 2018 period excludes depreciation expense related to audio visual equipment of $3.4 million and $2.9 million, respectively, which is included in “cost of revenues for audio visual” and also excludes depreciation expense for the 2019 period related to marine vessels and other vehicles in the amount of $276,000 and $23,000, respectively, which is included in “other” operating expense.

66


General and Administrative Expense. General and administrative expenses increased by $639,000, or 2.3%, to $28.3 million for the 2019 period compared to the 2018 period. The change in general and administrative expense consisted of the following (in thousands):
 
Nine Months Ended September 30,
 
 
 
2019
 
2018
 
$ Change
Professional fees (1)
$
10,894

 
$
14,446

 
$
(3,552
)
Office expense (2)
7,911

 
6,751

 
1,160

Public company costs
824

 
782

 
42

Director costs
1,346

 
1,149

 
197

Travel and other expense (3)
6,367

 
4,461

 
1,906

Non-capitalizable - software costs
948

 
62

 
886

Total general and administrative
$
28,290

 
$
27,651

 
$
639

________
(1) 
The decrease in expense is primarily due to decreases in legal fees and transaction costs related to the acquisition of Premier in August of 2018 offset by an increase in similar expenses related to the acquisition of the Hotel Management business of Remington and our increased investment in RED.
(2) 
The increase in expense is primarily due to increased rent expense from our acquisition of Premier in August of 2018.
(3) 
The increase in expense is due to our acquisition of Premier in August of 2018 and increased investments in JSAV and RED. See note 4 to our condensed consolidated financial statements.
Impairment. Impairment of capitalized software implementation costs was $0 during the 2019 period compared to $1.9 million for the 2018 period. The impairment in 2018 was recognized upon determination that a portion of capitalized software that was not eligible for reimbursement would not be placed into service. See notes 2 and 15 to our condensed consolidated financial statements.
Other. Other operating expense was $9.3 million and $2.2 million for the 2019 period and the 2018 period, respectively. Other operating expense includes cost of goods sold and royalties associated with OpenKey, RED and Pure Wellness as well as $4.4 million in expense from the changes in the fair value of contingent consideration related to JSAV’s acquisition of BAV in March 2019 and RED’s acquisition of Sebago in July 2019. See notes 4 and 8 to our condensed consolidated financial statements.
Equity in Earnings (Loss) of Unconsolidated Entities. Equity in loss of unconsolidated entities changed $109,000 for the 2019 period due to our investment in REA Holdings in January of 2019. See notes 1 and 2 to our condensed consolidated financial statements.
Interest Expense. Interest expense was $1.2 million and $593,000 for the 2019 period and the 2018 period, respectively, related to the notes payable, lines of credit and capital 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 $214,000 and $177,000 for the 2019 period and the 2018 period, respectively, related to the notes payable and lines of credit held by our consolidated subsidiaries. See notes 2 and 6 to our condensed consolidated financial statements.
Interest Income. Interest income was $29,000 and $288,000 for the 2019 period and the 2018 period, respectively.
Other Income (Expense). Other expense was $115,000 and $338,000 in the 2019 period and the 2018 period, respectively.
Income Tax (Expense) Benefit. Income tax benefit decreased by $13.0 million, from $11.6 million benefit in the 2018 period to $1.4 million expense in the 2019 period. Current tax expense decreased by $900,000, from $3.4 million in the 2018 period to $2.5 million in the 2019 period, mainly due to an increase in tax depreciation taken on purchases of furniture, fixtures and equipment under the Ashford Trust and Braemar ERFP Agreements. Deferred tax benefit decreased by $13.9 million from $15.0 million in the 2018 period to $1.1 million in the 2019 period. In the third quarter of 2018, the valuation allowance was released due to the acquisition of Premier.
(Income) Loss from Consolidated Entities Attributable to Noncontrolling Interests. The noncontrolling interests in consolidated entities were allocated a loss of $395,000 in the 2019 period and a loss of $704,000 in the 2018 period. See notes 2,

67


11 and 15 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 $623,000 in the 2019 period and a loss of $817,000 in the 2018 period. 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, 12, and 15 to our condensed consolidated financial statements.
Preferred Dividends. Preferred dividends increased $6.8 million, or 407.0%, to $8.5 million during the 2019 period compared to $1.7 million for the 2018 period, primarily due to the timing of the issuance of the Series B Convertible Preferred Stock in the acquisition of Premier in August 2018 and the contractual increase in the annual dividend rate from 5.5% to 6.0% after one year from the acquisition of Premier.
Amortization of Preferred Stock Discount. The amortization of preferred stock discount increased $1.0 million, or 341.6%, to $1.3 million during the 2019 period compared to $303,000 from the 2018 period, primarily due to the timing of the issuance of the Series B Convertible Preferred Stock in the acquisition of Premier in August 2018 and the contractual increase in the annual dividend rate from 5.5% to 6.0% after one year from the acquisition of Premier.
LIQUIDITY AND CAPITAL RESOURCES
Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses primarily attributable to paying our employees as well as funding our ERFP Commitments and dividends on preferred stock. We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our revolving credit facility, which we believe will provide sufficient liquidity to meet our existing non-discretionary obligations and anticipated ordinary course operating expenses for at least the next twelve months.
Our long-term liquidity requirements consist primarily of funds necessary to pay for operating expenses attributable to paying our employees, investments to grow our business, funding our ERFP Commitments, paying dividends on preferred stock and certain subsidiary financing transactions. We expect to meet our long-term liquidity requirements through various sources of capital, including net cash provided by operations, future equity issuances and availability under our revolving credit facilities.
ERFP Commitments—On June 26, 2018, the Company entered into the Ashford Trust ERFP Agreement with Ashford Trust. The independent members of the board of directors of each of the Company and Ashford Trust, with the assistance of separate and independent legal counsel, engaged to negotiate the Ashford Trust ERFP Agreement on behalf of the Company and Ashford Trust, respectively. On January 15, 2019, the Company entered into the Braemar ERFP Agreement 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 “ERFP Commitment” and collectively, the “ERFP Commitments”) to each of the REITs, respectively, in connection with each such REITs’ acquisition of hotels recommended by us, with the option to increase each ERFP Commitment to up to $100 million upon mutual agreement by the parties to the respective ERFP Agreement. Under each of the ERFP Agreements, the Company’s ERFP Commitment to such REIT will be fulfilled as the Company pays each such 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 REITs 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 REITs’ 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.

68


The changes in our ERFP Commitments to Ashford Trust and Braemar from inception of the programs in 2018 and 2019, respectively, through September 30, 2019, as well as the unfunded ERFP Commitments as of September 30, 2019, for hotels acquired by the REITs are as follows (in thousands):
 
Ashford Trust
 
Braemar
 
Total
ERFP Commitments:
 
 
 
 
 
ERFP Commitments at January 1, 2018
$
—

 
$
—

 
$
—

Initial ERFP Commitment
50,000

 
—

 
50,000

ERFP payment—Hilton Alexandria Old Town
(11,100
)
 
—

 
(11,100
)
ERFP payment—La Posada de Santa Fe
(5,000
)
 
—

 
(5,000
)
ERFP Commitments remaining at December 31, 2018
$
33,900

 
$
—

 
$
33,900

Initial ERFP Commitment
—

 
50,000

 
50,000

ERFP payment—Hilton Santa Cruz/Scotts Valley
(5,000
)
 
—

 
(5,000
)
ERFP payment—Embassy Suites New York Manhattan Times Square
(8,089
)
 
—

 
(8,089
)
ERFP payment—Ritz-Carlton, Lake Tahoe
—

 
(10,300
)
 
(10,300
)
ERFP Commitments remaining at September 30, 2019 (1)
$
20,811

 
$
39,700

 
$
60,511

 
Ashford Trust
 
Braemar
 
Total
Unfunded ERFP Commitments for hotels acquired by REITs:
 
 
 
 
 
Embassy Suites New York Manhattan Times Square
$
11,411

 
$
—

 
$
11,411

Unfunded ERFP Commitments at September 30, 2019
$
11,411

 
$
—

 
$
11,411

________
(1)    See note 10 to our condensed consolidated financial statements.
Other liquidity considerations—On December 5, 2017, the Board of Directors of Ashford Inc. approved a stock repurchase program pursuant to which the Board granted a repurchase authorization to acquire shares of the Company’s common stock, par value $0.01 per share having an aggregate value of up to $20 million. No shares were repurchased under the stock repurchase program during the nine months ended September 30, 2019 or 2018.
On October 2, 2019, as approved by the Board, the Company acquired an aggregate 412,974 shares of its common stock from Ashford Trust and Braemar for $30 per share, resulting in a total cost of approximately $12.4 million. This stock purchase represented approximately 16% of the Company’s common shares outstanding. Subsequent to the stock repurchase, the 412,974 acquired shares were retired by the Company. See note 18 to our condensed consolidated financial statements for more information.
The Company has a $35.0 million senior revolving credit facility with Bank of America, N.A. There is a one-year extension option subject to the satisfaction of certain conditions. The senior revolving credit facility includes the opportunity to expand the borrowing capacity by up to $40.0 million to an aggregate amount of $75.0 million, subject to certain conditions. On October 14, 2019, the Company drew $10.0 million on our senior revolving credit facility with Bank of America, N.A. As of November 7, 2019, $25.0 million was available under the senior revolving credit facility.
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.”
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 $28.7 million and $17.8 million as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, our subsidiaries were in compliance with all financial debt covenants. For further discussion see note 6 to our condensed consolidated financial statements.
Sources and Uses of Cash
As of September 30, 2019 and December 31, 2018, we had $36.4 million and $51.5 million of cash and cash equivalents, respectively, and $12.0 million and $7.9 million of restricted cash, respectively.

69


Net Cash Flows Provided by (Used in) Operating Activities. Operating activities provided net cash flows of $22.7 million and $15.6 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in cash flows provided by operating activities in the nine months ended September 30, 2019, were due primarily to the timing of payments to vendors and affiliates and an increase in earnings, partially offset by the timing of receipt of receivables from Ashford Trust and Braemar.
Net Cash Flows Provided by (Used in) Investing Activities. For the nine months ended September 30, 2019, net cash flows used in investing activities were $38.7 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), the acquisition of Sebago for $2.4 million ($2.5 million cash consideration less working capital adjustments of approximately $100,000) and the $2.2 million investment in REA Holdings. Capital expenditures include $13.1 million and $10.3 million related to our ERFP agreements with Ashford Trust and Braemar, respectively, $5.1 million of audio visual equipment and FF&E, $1.6 million for RED’s legacy U.S. Virgin Islands marine vessels and cash inflows of $231,000 for proceeds from disposals of audio visual equipment.
For the nine months ended September 30, 2018, investing activities used net cash flows of $9.3 million, which is attributable to purchases of FF&E, including audio visual equipment and computer software of $7.5 million, and $4.0 million in payments for assets related to RED, partially offset by $2.3 million of cash acquired in the acquisition of Premier.
Net Cash Flows Provided by (Used in) Financing Activities. For the nine months ended September 30, 2019, net cash flows provided by financing activities were $4.9 million. These cash flows consisted of $11.0 million of proceeds from borrowings on notes payable, $468,000 of net borrowings on our revolving credit facilities, $980,000 of contributions from noncontrolling interests in a consolidated entity, and employee advances of $353,000 associated with tax withholdings for restricted stock vesting. These were offset by $5.6 million of payments for dividends on our preferred stock, $2.2 million of payments on notes payable and capital leases, $63,000 in distributions to non-controlling interests, and $45,000 of loan cost payments.
For the nine months ended September 30, 2018, net cash flows provided by financing activities were $23.9 million due to cash flows of $18.1 million received from the issuance of our common stock, $2.7 million of contributions from noncontrolling interests in a consolidated entity, $6.0 million of proceeds from borrowings on notes payable, $1.7 million of net borrowings on our revolving credit facilities and net repayments in advances to employees of $45,000 associated with tax withholdings for restricted stock vesting. These were offset by $1.7 million of payments for dividends on our preferred stock, $1.4 million of payments on notes payable and capital leases, $1.2 million paid in contingent consideration related to the November 2017 acquisition of JSAV, $314,000 in distributions to non-controlling interests, and $72,000 of loan cost payments.
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.
Contractual Obligations and Commitments
There have been no material changes since December 31, 2018, 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 2018 Form 10-K, except with respect to the Braemar ERFP Agreement described elsewhere in this MD&A in “Recent Developments.”
Critical Accounting Policies
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 the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2018 Form 10-K.
There have been no material changes in these critical accounting policies other than as discussed in note 2 to our condensed consolidated financial statements with respect to leases.

70


ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our primary market risk exposures consist of changes in interest rates on borrowings under our debt instruments that bear interest at variable rates that fluctuate with market interest rates as well as foreign currency exchange rate risk.
Interest Rate Risk—At September 30, 2019, our total indebtedness of $28.9 million included $24.4 million of variable-rate debt. The impact on our results of operations of a 100 basis point change in interest rate on the outstanding balance of variable-rate debt at September 30, 2019, would be approximately $244,000 annually. Interest rate changes have no impact on the remaining $4.5 million of fixed rate debt.
The amount above was determined based on the impact of a hypothetical interest rate on our borrowings and assumes no changes in our capital structure. As the information presented above includes only those exposures that existed at September 30, 2019, it does not consider exposures or positions that could arise after that date. Accordingly, the information presented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on exposures that arise during the period, the hedging strategies at the time, and the related interest rates.
Foreign Exchange Risk—The majority of our revenues, expenses and capital purchases are transacted in U.S. dollars. We own a controlling interest in JSAV, which has operations in Mexico and the Dominican Republic, and therefore we have exposure with respect to exchange rate fluctuations. Exchange rate gains or losses related to foreign currency transactions are immaterial recognized as transaction gains or losses in our income statement as incurred. We have chosen not to hedge foreign exchange risks related to our foreign currency denominated earnings and cash flows through the use of financial instruments.
ITEM 4.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2019. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the evaluation date, our disclosure controls and procedures are effective (i) to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms; and (ii) to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
During the period ended September 30, 2019, we implemented controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new lease accounting standard on our financial statements to facilitate the adoption of the standard on January 1, 2019. Our subsidiaries have implemented procedures to support the accounting at each subsidiary and we have implemented processes and controls to review the subsidiary level output on a quarterly basis. Additionally, we have implemented tools to calculate and controls to review our accounting for leases at the corporate level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
The Company is engaged in various legal proceedings which have arisen but have not been fully adjudicated. The likelihood of loss for these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible and to probable. Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the financial position or results of operations of the Company. However, the adjudication of legal proceedings is difficult to predict, and if the Company failed to prevail in one or more of these legal matters, and the associated realized losses were to exceed the Company’s current estimates of the range of potential losses, the Company’s financial position or results of operations could be materially adversely affected in future periods.
ITEM 1A.
RISK FACTORS
The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our Annual Report, subsequent Form 10-Qs and our Registration Statement on Form S-4/A (Registration No. 333-232736) filed by the Company (formerly known as Ashford Nevada Holding Corp.) with the SEC on September 19, 2019 and declared effective by the SEC on September 23, 2019, in each case filed with the SEC, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies, or prospects in a material and adverse manner. Because there is no way to determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to the risk factors contained therein and below. The risk factors contained in the section entitled “Risk Factors” in the Registration Statement on Form S-4/A, include the following:
•
the Company will incur significant non-recurring costs in connection with the acquisition of Remington’s Hotel Management business,
•
the Company’s acquisition of Remington’s Hotel Management business may not be accretive to our stockholders,
•
the Company will be substantially dependent on the ability of its subsidiaries to fund cash needs,
•
the Company may not manage the acquisition of Remington’s Hotel Management business effectively,
•
the Company may be exposed to new risks as a result of the acquisition of Remington’s Hotel Management business,
•
the market price of the Company’s common stock may decline as a result of the transaction,
•
the market price of the Company’s common stock may decline as a result of sales of substantial amount of the Company’s common stock,
•
certain provisions of Nevada law could inhibit changes in control of the Company, and
•
our relationships with Ashford Trust and Braemar could create conflicts of interest.

72


The market price of the Company’s common stock may decline compared to the historical market price of the Company’s common stock as a result of the Company’s recently completed acquisition of the Hotel Management business of Remington, which closed on November 6, 2019.
The market price of the Company’s common stock declined during the period between signing and closing of the Company’s recently completed acquisition of the Hotel Management business of Remington, a privately held company. On May 31, 2019, immediately before the merger between the Company and Ashford Merger Sub Inc., a Maryland corporation (the “Merger”), was publicly announced, the closing price of the Company’s common stock was$44.52, and on November 6, 2019, the closing price of the Company’s common stock was $21.64, representing a decline in the price of the common stock of approximately 51.4%. Such declines in the value of the Company’s common stock may continue, including as a result of Ashford Trust’s and Braemar’s divestiture on November 5, 2019 of the 380,069 shares of common stock in the Company they collectively owned, which shares represent, in the aggregate, approximately 17.3% of the Company’s shares outstanding as of November 5, 2019. In the twenty trading days prior to and including November 6, 2019, an average of 14,348 of the Company’s shares were traded on a daily basis. In light of the historical trading volume of the Company’s shares, sales by holders who received such shares from Ashford Trust or Braemar, could cause the price of the Company’s shares to further decline.
In addition, the market price of the Company’s common stock (prior to the closing of the Merger) may decline compared to the historical market price of the Company’s common stock as a result of the Company’s recently completed acquisition of the Hotel Management business of Remington if the Company is not perceived as likely to, or does not, achieve the benefits of the transactions as rapidly or to the extent anticipated by the Company or by financial or industry analysts, or the effect of the transactions on the Company’s financial results is not consistent with the expectations of the Company or the financial or industry analysts. While it is intended that the acquisition of the Hotel Management business of Remington will be accretive to our performance metrics (including after taking into account the possible conversion of the Series D Convertible Preferred Stock into our common stock), there can be no assurance that this will be the case, since, among other things, the expenses we have incurred as a result of the acquisition may be higher than we anticipated and revenue from the Hotel Management business may decrease in the near-term and/or long-term. The failure of the acquisition to be accretive to the Company's stockholders could have a material adverse effect on the Company's business, financial condition, and results of operations.
In addition, the risks associated with implementing the Company’s long-term business plan and strategy following the Company’s recently completed acquisition of the Hotel Management business of Remington may be different from the risks related to the Company’s existing business and the trading price of the Company’s common stock could be adversely affected.
Sales of substantial amounts of the Company’s common stock in the public markets, or the perception that they might occur, including as a result of the divestiture on November 5, 2019 of the Company’s common stock by Ashford Trust and Braemar to their respective shareholders and unitholders in connection with the Company’s recently completed acquisition of the Hotel Management business of Remington, which closed on November 6, 2019 or when the transfer restrictions under the Investor Rights Agreement end in 2023, could cause the market price of the Company’s common stock to decline.
As a closing condition to the Company’s recently completed acquisition of the Hotel Management business of Remington, on November 5, 2019, Ashford Trust and Braemar each divested their respective holdings of the Company’s common stock. On November 5, 2019, Ashford Trust and Braemar completed their divestiture of 380,069 shares of the Company’s common stock through a pro-rata distribution to their respective shareholders which, together with the Company’s prior acquisition of its common stock, resulted in a distribution of 17.3% of the Company’s common stock prior to the closing of the Merger. In connection with such divestiture, it is possible that some of those stockholders who have received such pro-rata distribution will decide to sell their shares of the Company’s common stock on the public market, which could result in a significant decline in price following the closing of the Merger. In the twenty trading days prior to and including November 6, 2019, an average of 14,348 of the Company’s shares were traded on a daily basis. In light of the historical trading volume of the Company’s shares, sales of shares by Ashford Trust and Braemar (or sales by holders who receive such shares from Ashford Trust or Braemar) could cause the price of the Company’s shares to decline.

73


In addition, secondary sales of a substantial number of shares of the Company’s common stock (prior to the closing of the Merger) into the public market, or the perception that these sales might occur, could cause the market price of the Company’s common stock to decline and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. Pursuant to the Investor Rights Agreement (as amended by the First Amendment to the Combination Agreement, dated July 17, 2019) among the Bennetts and certain other parties, for five years after the closing of the Company’s recently completed acquisition of the Hotel Management business of Remington, each of the Covered Investors (as defined in the Investor Rights Agreement) is prohibited from selling or otherwise transferring the Company’s common stock or Series D Convertible Preferred Stock to any person that is or would become, together with such person’s affiliates and associates, a beneficial owner of 10% or more of the shares of the Company’s common stock, considering the Series D Convertible Preferred Stock on an as-converted basis, subject to specified exceptions. After such transfer restrictions expire, all of the shares of the Company’s common stock or Series D Convertible Preferred Stock owned by the Covered Investors will be eligible for sale in the public market, subject to compliance with applicable regulatory limitations.
The market price of the Company’s common stock could decline as a result of the sale of a substantial number of shares of the Company’s common stock in the public market, the availability of shares of the Company’s common stock for sale, or the perception in the market that the holders of a large number of shares of the Company’s common stock intend to sell.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities by the Issuer
In connection with the Company’s acquisition of Sebago, the Company issued shares of the Company’s common stock in a private placement on July 18, 2019. The private placement was disclosed in Item 3.02 of the Company’s Current Report on Form 8-K filed July 23, 2019.
Purchases of Equity Securities by the Issuer
None for the quarter ended September 30, 2019. On October 2, 2019, the Company acquired an aggregate 412,974 shares of its common stock from Ashford Trust and Braemar for $30 per share, resulting in a total cost of approximately $12.4 million. This stock purchase represented approximately 16% of the Company’s common shares outstanding. Subsequent to the stock repurchase, the 412,974 acquired shares were retired by the Company. See note 18 to our condensed consolidated financial statements for more information.
ITEM 3.
DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
ITEM 5.
OTHER INFORMATION
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.
Certificate of Correction to the Articles Supplementary establishing the Series B Convertible Preferred Stock
Effective November 4, 2019, the Company filed with the Maryland State Department of Assessments and Taxation a Certificate of Correction to the Articles Supplementary establishing the Series B Convertible Preferred Stock of the Company (the “Series B Articles”) to correct Article First of the Series B Articles with respect to the par value of the Series B Convertible Preferred Stock. Article First of the Series B Articles has been corrected to state that the par value of the Series B Convertible Preferred Stock is $0.01 per share, which is the par value of the preferred stock provided for in the Company’s charter. The Series B Articles previously stated incorrectly that the par value of the Series B Convertible Preferred Stock was $25.00 per share. This summary is qualified in its entirety by reference to the full text of the Certificate of Correction, which is filed as Exhibit 3.4 to this Quarterly Report on Form 10-Q, and is incorporated herein by reference.


74


ITEM 6.
EXHIBITS
Exhibit
 
Description
2.1
 
2.2
 
2.3
 
3.1
 
3.2
 
3.3
 
3.4*
 
3.5
 
3.6
 
10.2
 

10.3
 

31.1*
 
31.2*
 
32.1*
 
32.2*
 
99.1
 
99.2
 
99.3
 
99.4
 
99.5
 

75


The following materials from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2019, are formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Income (Loss); (iv) Condensed Consolidated Statements of Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements. In accordance with Rule 402 of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
 
 
101.INS
 
XBRL Instance Document
Submitted electronically with this report.
101.SCH
 
XBRL Taxonomy Extension Schema Document
Submitted electronically with this report.
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
Submitted electronically with this report.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
Submitted electronically with this report.
101.LAB
 
XBRL Taxonomy Label Linkbase Document.
Submitted electronically with this report.
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document.
Submitted electronically with this report.
___________________________________
* Filed herewith.


76


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ASHFORD INC.
Date:
November 7, 2019
By:
/s/ MONTY J. BENNETT
 
 
 
 
Monty J. Bennett
 
 
 
 
Chief Executive Officer
 
 
 
 
 
 
Date:
November 7, 2019
By:
/s/ DERIC S. EUBANKS
 
 
 
 
Deric S. Eubanks
 
 
 
 
Chief Financial Officer
 


77


EXHIBIT 3.4

ASHFORD INC.
CERTIFICATE OF CORRECTION
Ashford Inc., a Maryland corporation (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST:        The title of the document being corrected hereby is the Articles Supplementary. The Articles Supplementary created a new class of 8,120,000 shares of Series B Convertible Preferred Stock.
SECOND:    The name of the corporation, as it appeared in the Articles Supplementary, was Ashford Inc. (f/k/a Ashford Holding Corp.). The Articles Supplementary were signed by Deric S. Eubanks in his capacity as Chief Financial Officer, for and on behalf of the Corporation and were attested to by Chris Peckham, in his capacity as Assistant Secretary.
THIRD:    The Articles Supplementary to be corrected hereby were filed and accepted for record on August 8, 2018 at 10:54 a.m. (Eastern Daylight Time) and with a delayed effective time on that date of 6:02 p.m. (Eastern Daylight Time).
FOURTH:    As previously filed, the first paragraph of ARTICLE FIRST of the Articles Supplementary reads as follows:
FIRST: Under a power contained in Section 2-208 of the Maryland General Corporation Law and Article VI of the Corporation's charter (the "Charter"), the Board of Directors (the "Board"), by resolutions duly adopted on August 8, 2018, classified and designated 8,120,000 shares of the authorized but unissued preferred stock of the Corporation, par value $25.00 per share ("Preferred Stock"), as a single class of Series B Convertible Preferred Stock, par value $25.00 per share (the "Series B Convertible Preferred Stock"), with the following preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption:
FIFTH:    The Articles Supplementary contained an error in that the par value of the Preferred Stock and the Series B Convertible Preferred Stock was not correctly stated. The par value of the Preferred Stock of the Corporation, as set forth in the charter of the Corporation, including the Articles of Amendment and Restatement filed and accepted for record on August 6, 2018 was $0.01 per share. As corrected, the first paragraph of ARTICLE FIRST of the Articles Supplementary will read in its entirety as follows:




FIRST: Under a power contained in Section 2-208 of the Maryland
General Corporation Law and Article VI of the Corporation's charter (the "Charter"), the Board of Directors (the "Board"), by resolutions duly adopted on August 8, 2018, classified and designated 8,120,000 shares of the authorized but unissued preferred stock of the Corporation, par value $0.01 per share ("Preferred Stock"), as a single class of Series B Convertible Preferred Stock, par value $0.01 per share (the "Series B Convertible Preferred Stock"), with the following preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption:


- 2 -



EXHIBIT 31.1
CERTIFICATION
I, Monty J. Bennett, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Ashford Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2019

/s/ MONTY J. BENNETT
 
Monty J. Bennett
 
Chief Executive Officer
 




EXHIBIT 31.2
CERTIFICATION
I, Deric S. Eubanks, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Ashford Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2019

/s/ DERIC S. EUBANKS
 
Deric S. Eubanks
 
Chief Financial Officer
 




EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Ashford Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Monty J. Bennett, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 7, 2019

/s/ MONTY J. BENNETT
 
Monty J. Bennett
 
Chief Executive Officer
 




EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Ashford Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Deric S. Eubanks, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 7, 2019

/s/ DERIC S. EUBANKS
 
Deric S. Eubanks
 
Chief Financial Officer