Ashford (AINC) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited financial statements, management's discussion, market risk disclosures, and internal controls for the period ITEM 1. FINANCIAL STATEMENTS (unaudited) The unaudited financial statements for Q3 2020 show a significant financial deterioration, with a $201.3 million net loss and a $180.5 million equity deficit, driven by impairment charges and COVID-19 impacts Condensed Consolidated Balance Sheets The balance sheets highlight a significant decline in total assets and a shift to a substantial total equity deficit by September 30, 2020 Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $601,841 | $782,500 | ($180,659) | | Cash and cash equivalents | $68,623 | $35,349 | $33,274 | | Goodwill | $66,834 | $205,606 | ($138,772) | | Intangible assets, net | $278,777 | $347,961 | ($69,184) | | Total Liabilities | $302,894 | $262,285 | $40,609 | | Notes payable, net (Current) | $57,719 | $3,550 | $54,169 | | Total Equity (Deficit) | ($180,461) | $42,024 | ($222,485) | | Accumulated deficit | ($469,651) | ($244,084) | ($225,567) | - The company's financial position significantly weakened, with total equity shifting from $42.0 million to a deficit of $180.5 million This was primarily driven by a substantial increase in the accumulated deficit and a large reduction in goodwill and intangible assets[9][10] Condensed Consolidated Statements of Operations The statements of operations reveal a substantial net loss for the nine-month period, primarily due to a significant impairment charge Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $55,868 | $56,889 | $235,308 | $183,675 | | Impairment | $0 | $0 | $178,213 | $0 | | Operating Income (Loss) | ($14,634) | ($6,801) | ($204,224) | ($3,316) | | Net Income (Loss) | ($14,140) | ($6,591) | ($201,298) | ($6,352) | | Net Loss Attributable to Common Stockholders | ($21,983) | ($9,428) | ($225,039) | ($15,164) | | Loss Per Share (Basic & Diluted) | ($9.53) | ($3.65) | ($99.62) | ($6.09) | - For the nine months ended September 30, 2020, the company recorded a massive operating loss of $204.2 million, primarily due to a $178.2 million impairment charge This resulted in a net loss attributable to common stockholders of $225.0 million, or ($99.62) per share[13] Condensed Consolidated Statements of Cash Flows The cash flow statements show positive operating cash flow despite net losses, driven by non-cash adjustments and reduced investing activities Cash Flow Summary for Nine Months Ended September 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $44,700 | $22,748 | | Net cash used in investing activities | ($4,842) | ($38,740) | | Net cash provided by financing activities | $11,522 | $4,919 | | Net change in cash, cash equivalents and restricted cash | $51,951 | ($11,065) | - Despite a significant net loss, cash from operations increased to $44.7 million for the nine-month period, largely due to non-cash charges like the $178.2 million impairment Investing activities decreased significantly due to fewer acquisitions compared to 2019 Financing activities provided cash primarily from new notes payable[25][27] Notes to Condensed Consolidated Financial Statements The notes detail significant going concern doubts, COVID-19 responses, substantial impairment charges, and debt covenant non-compliance - The company has determined there is substantial doubt about its ability to continue as a going concern for at least one year This is due to the impact of COVID-19, uncertainty regarding future advisory fees from its key client Ashford Trust (which also has going concern issues), and the potential inability to comply with loan covenants[43] - In response to the COVID-19 pandemic, the company reduced executive compensation, partially deferred preferred stock dividends, and amended payment terms with clients to manage working capital[40][47] - During the first quarter of 2020, the company recorded significant impairment charges totaling $178.2 million ($170.6 million for goodwill and $7.6 million for intangible assets) due to reduced cash flow projections and a decline in market capitalization caused by the pandemic[138] - As of September 30, 2020, the company's subsidiary JSAV was not in compliance with certain debt covenants, constituting an 'Event of Default' This led to its $20.6 million debt balance being reclassified as a current liability[41][151] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses the severe COVID-19 impact, leading to liquidity preservation measures, covenant breaches, and substantial doubt about the company's going concern status Results of Operations Results of operations show significant revenue declines in project management and audio-visual, partially offset by new hotel management fees and cost reimbursements Revenue Changes - Q3 2020 vs Q3 2019 (in thousands) | Revenue Stream | Q3 2020 | Q3 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Project management fees | $1,790 | $6,660 | ($4,870) | (73.1)% | | Audio visual | $3,114 | $22,430 | ($19,316) | (86.1)% | | Hotel management fees | $3,777 | $0 | $3,777 | N/A | | Cost reimbursement revenue | $28,133 | $11,301 | $16,832 | 148.9% | | Total Revenues | $55,868 | $56,889 | ($1,021) | (1.8)% | Expense Changes - Q3 2020 vs Q3 2019 (in thousands) | Expense Line | Q3 2020 | Q3 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Cost of revenues for audio visual | $3,126 | $17,732 | $14,606 | 82.4% | | Depreciation and amortization | $10,094 | $8,048 | ($2,046) | (25.4)% | | Other | $9,147 | $4,849 | ($4,298) | (88.6)% | | Total Expenses | $70,502 | $63,690 | ($6,812) | (10.7)% | - For the nine months ended Sep 30, 2020, the company recorded a goodwill impairment of $170.6 million and an intangible asset impairment of $7.6 million, which were the primary drivers of the significant operating and net losses for the period[346] - The decrease in project management and audio-visual revenues was directly attributed to the impact of COVID-19 The inclusion of hotel management fees from the Remington acquisition (Nov 2019) and a large increase in cost reimbursement revenue partially offset these declines[316] Liquidity and Capital Resources Liquidity analysis reveals substantial doubt about going concern, reclassification of debt as current, and undeclared preferred stock dividends - Management has concluded there is substantial doubt about the company's ability to continue as a going concern due to the impact of COVID-19, uncertainty of fee collection from Ashford Trust, and potential non-compliance with loan covenants[359] - The company's $34.1 million Term Loan has been classified as a current liability due to uncertainty about its ability to remain in compliance with financial covenants over the next twelve months[357] - The company did not declare dividends on its Series D Convertible Preferred Stock for the second quarter of 2020 As of September 30, 2020, aggregate undeclared preferred dividends were approximately $7.9 million[363] - The company has a remaining purchase commitment of $11.4 million under its Enhanced Return Funding Program (ERFP) with Ashford Trust, with the deadline extended to December 31, 2022[369] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company faces interest rate risk from variable-rate debt and foreign currency risk from international operations, without current hedging strategies - The company is exposed to interest rate risk, with $60.2 million of its total $62.8 million in debt being variable-rate A 100 basis point change in interest rates would impact results by approximately $602,000 annually[391] - Foreign exchange risk exists due to the operations of its subsidiary JSAV in Mexico and the Dominican Republic The company does not currently use financial instruments to hedge this risk[393] ITEM 4. CONTROLS AND PROCEDURES Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of September 30, 2020, and concluded they were effective - Management concluded that as of September 30, 2020, the company's disclosure controls and procedures were effective[394] - No material changes were made to the internal controls over financial reporting during the quarter ended September 30, 2020[395] PART II. OTHER INFORMATION This section covers legal proceedings, significant risk factors, unregistered equity sales, and defaults on senior securities ITEM 1. LEGAL PROCEEDINGS The company is involved in an SEC investigation regarding related-party transactions and a subsidiary faces an employment law class-action lawsuit - In June 2020, the company received an administrative subpoena from the SEC requesting documents and information related to related-party transactions since January 1, 2018[397] - A subsidiary is facing a class-action lawsuit in California alleging violations of employment laws concerning rest breaks The potential loss is not reasonably estimable at this time[398] ITEM 1A. RISK FACTORS Significant risks include the COVID-19 pandemic's impact, going concern doubts, potential delisting, Ashford Trust's bankruptcy risk, and an ongoing SEC investigation - The COVID-19 pandemic continues to significantly and adversely affect the business, leading to goodwill impairments and a substantial doubt about the company's ability to continue as a going concern[402][403] - The company is not in compliance with NYSE American's continued listing standards regarding stockholders' equity and faces a risk of delisting if it cannot regain compliance by February 26, 2022[409][410] - There is a substantial risk that key client Ashford Trust may need to seek Chapter 11 bankruptcy protection, which would likely terminate agreements and materially harm Ashford Inc.'s business, potentially causing it to also seek bankruptcy protection[453][455] - The company is under investigation by the SEC regarding related-party transactions, which could result in significant legal expenses and penalties[451][452] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the third quarter of 2020, the company did not repurchase any shares under its $20 million stock repurchase program, but issued 7,439 restricted shares in a private placement - No shares were repurchased under the company's $20 million stock repurchase program during the third quarter of 2020[459] - The company issued 7,439 restricted shares in a private placement to a consultant as compensation for strategic business outreach services[460] ITEM 3. DEFAULTS UPON SENIOR SECURITIES The company defaulted on its Series D Convertible Preferred Stock dividend for Q2 2020, resulting in approximately $7.9 million in undeclared preferred dividends - The company did not declare dividends for its Series D Convertible Preferred Stock for the second quarter of 2020[461] - As of September 30, 2020, the company had approximately $7.9 million in undeclared preferred stock dividends related to Q2 2020 The total unpaid dividend liability, including declared but unpaid amounts, was $15.9 million[462]