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EX-32.2 - EXHIBIT 32.2 - Ashford Inc.ainc2018q210-qxex322.htm
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EX-31.2 - EXHIBIT 31.2 - Ashford Inc.ainc2018q210-qxex312.htm
EX-31.1 - EXHIBIT 31.1 - Ashford Inc.ainc2018q210-qxex311.htm

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 June 30, 2018
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)

Maryland
 
82-5237353
(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
¨
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
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) if 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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value per share
 
2,109,388
(Class)
 
Outstanding at August 7, 2018




ASHFORD INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2018

TABLE OF CONTENTS

 
 
 




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)
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
40,868

 
$
36,480

Restricted cash
12,389

 
9,076

Accounts receivable, net
5,944

 
5,127

Due from Ashford Trust OP
13,467

 
13,346

Due from Braemar OP
342

 
1,738

Inventories
1,229

 
1,066

Prepaid expenses and other
2,982

 
2,913

Total current assets
77,221

 
69,746

Investments in unconsolidated entities
500

 
500

Furniture, fixtures and equipment, net
26,333

 
21,154

Goodwill
13,103

 
12,947

Intangible assets, net
9,230

 
9,713

Other assets
11,758

 
750

Total assets
$
138,145

 
$
114,810

LIABILITIES


 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
21,596

 
$
20,451

Due to affiliates
5,834

 
4,272

Deferred income
294

 
459

Deferred compensation plan
216

 
311

Notes payable, net
1,670

 
1,751

Other liabilities
23,489

 
9,076

Total current liabilities
53,099

 
36,320

Accrued expenses

 
78

Deferred income
12,817

 
13,440

Deferred compensation plan
13,094

 
18,948

Notes payable, net
11,321

 
9,956

Total liabilities
90,331

 
78,742

Commitments and contingencies (note 9)


 


MEZZANINE EQUITY
 
 
 
Redeemable noncontrolling interests
4,852

 
5,111

EQUITY
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized:
 
 
 
Series A cumulative preferred stock, no shares issued and outstanding at June 30, 2018 and December 31, 2017

 

Common stock, $0.01 par value, 100,000,000 shares authorized, 2,109,388 and 2,093,556 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
21

 
21

Additional paid-in capital
257,303

 
249,695

Accumulated deficit
(215,435
)
 
(219,396
)
Accumulated other comprehensive income (loss)
(348
)
 
(135
)
Total stockholders’ equity of the Company
41,541

 
30,185

Noncontrolling interests in consolidated entities
1,421

 
772

Total equity
42,962

 
30,957

Total liabilities and equity
$
138,145

 
$
114,810


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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
REVENUE
 
 
 
 
 
 
 
Advisory services
$
24,570

 
$
18,172

 
$
47,102

 
$
30,603

Audio visual
23,376

 

 
46,686

 

Other
6,865

 
1,467

 
9,191

 
2,049

Total revenue
54,811

 
19,639

 
102,979

 
32,652

EXPENSES
 
 
 
 
 
 
 
Salaries and benefits
15,710

 
11,364

 
42,227

 
22,396

Cost of revenues for audio visual
17,021

 

 
33,608

 

Depreciation and amortization
1,193

 
587

 
2,233

 
1,055

General and administrative
9,125

 
4,947

 
15,420

 
8,596

Impairment

 
1,072

 
1,919

 
1,072

Other
892

 
251

 
1,738

 
251

Total expenses
43,941

 
18,221

 
97,145

 
33,370

OPERATING INCOME (LOSS)
10,870

 
1,418

 
5,834

 
(718
)
Interest expense
(161
)
 
(6
)
 
(304
)
 
(6
)
Amortization of loan costs
(24
)
 
(9
)
 
(47
)
 
(9
)
Interest income
73

 
38

 
185

 
71

Dividend income

 

 

 
93

Unrealized gain (loss) on investments

 
78

 

 
203

Realized gain (loss) on investments

 
(94
)
 

 
(294
)
Other income (expense)
(221
)
 
(13
)
 
(260
)
 
(21
)
INCOME (LOSS) BEFORE INCOME TAXES
10,537

 
1,412

 
5,408

 
(681
)
Income tax (expense) benefit
(1,605
)
 
(8,643
)
 
(2,311
)
 
(9,273
)
NET INCOME (LOSS)
8,932

 
(7,231
)
 
3,097

 
(9,954
)
(Income) loss from consolidated entities attributable to noncontrolling interests
118

 
190

 
291

 
165

Net (income) loss attributable to redeemable noncontrolling interests
(90
)
 
332

 
(151
)
 
695

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
$
8,960

 
$
(6,709
)
 
$
3,237

 
$
(9,094
)
 
 
 
 
 
 
 
 
INCOME (LOSS) PER SHARE - BASIC AND DILUTED
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
4.26

 
$
(3.32
)
 
$
1.54

 
$
(4.51
)
Weighted average common shares outstanding - basic
2,095

 
2,019

 
2,094

 
2,017

Diluted:
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
0.93

 
$
(3.85
)
 
$
(1.40
)
 
$
(4.77
)
Weighted average common shares outstanding - diluted
2,487

 
2,265

 
2,219

 
2,051

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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
NET INCOME (LOSS)
$
8,932

 
$
(7,231
)
 
$
3,097

 
$
(9,954
)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX


 


 
 
 
 
Foreign currency translation adjustment
(137
)
 

 
(251
)
 

COMPREHENSIVE INCOME (LOSS)
8,795

 
(7,231
)
 
2,846

 
(9,954
)
Comprehensive (income) loss attributable to noncontrolling interests
139

 
190

 
329

 
165

Comprehensive (income) loss attributable to redeemable noncontrolling interests
(90
)
 
332

 
(151
)
 
695

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
$
8,844

 
$
(6,709
)
 
$
3,024

 
$
(9,094
)
See Notes to Condensed Consolidated Financial Statements.


4


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

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated
 Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interests in Consolidated Entities
 
Total
 
Redeemable Noncontrolling Interests
 
Shares
 
Amount
Balance at January 1, 2018
2,094

 
$
21

 
$
249,695

 
$
(219,396
)
 
$
(135
)
 
$
772

 
$
30,957

 
$
5,111

Equity-based compensation
4

 

 
6,061

 

 

 
8

 
6,069

 

Deferred compensation plan distribution
2

 

 
134

 

 

 

 
134

 

Employee advances

 

 
45

 

 

 

 
45

 

Purchase of OpenKey shares from noncontrolling interest holder
9

 

 
838

 

 

 

 
838

 
(838
)
Contributions from noncontrolling interests

 

 

 

 

 
2,666

 
2,666

 

Reallocation of carrying value

 

 
530

 

 

 
(1,696
)
 
(1,166
)
 
1,166

Redemption value adjustment

 

 

 
738

 

 

 
738

 
(738
)
Distributions to consolidated noncontrolling interests

 

 

 
(14
)
 

 

 
(14
)
 

Foreign currency translation adjustment

 

 

 

 
(213
)
 
(38
)
 
(251
)
 

Net income (loss)

 

 

 
3,237

 

 
(291
)
 
2,946

 
151

Balance at June 30, 2018
2,109

 
$
21

 
$
257,303

 
$
(215,435
)
 
$
(348
)
 
$
1,421

 
$
42,962

 
$
4,852


See Notes to Condensed Consolidated Financial Statements.


5


ASHFORD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Six Months Ended June 30,
 
2018
 
2017
Cash Flows from Operating Activities
 
 
 
Net income (loss)
$
3,097

 
$
(9,954
)
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
 
 
 
Depreciation and amortization
3,614

 
1,061

Change in fair value of deferred compensation plan
(5,814
)
 
1,667

Equity-based compensation
6,069

 
4,471

Deferred tax expense (benefit)

 
6,002

Change in fair value of contingent consideration
559

 

Impairment
1,919

 
1,072

(Gain) loss on sale of furniture, fixtures and equipment
(80
)
 
8

Amortization of loan costs
47

 
9

Realized and unrealized (gain) loss on investments, net

 
91

Changes in operating assets and liabilities, exclusive of the effect of acquisitions:
 
 
 
Accounts receivable
(782
)
 
62

Due from Ashford Trust OP
(121
)
 
1,180

Due from Braemar OP
1,396

 
565

Inventories
(157
)
 

Prepaid expenses and other
5

 
493

Other assets
(658
)
 
(6
)
Accounts payable and accrued expenses
351

 
(3,862
)
Due to affiliates
319

 
149

Other liabilities
3,313

 
3,559

Deferred income
(813
)
 
5,496

Net cash provided by (used in) operating activities
12,264

 
12,063

Cash Flows from Investing Activities
 
 
 
Additions to furniture, fixtures and equipment
(4,535
)
 
(474
)
Proceeds from disposal of furniture, fixtures and equipment, net

 
15

Cash acquired in acquisition of Pure Rooms

 
129

Acquisition of assets related to RED Hospitality and Leisure LLC
(3,670
)
 

Net cash provided by (used in) investing activities
(8,205
)
 
(330
)
Cash Flows from Financing Activities
 
 
 
Payments on revolving credit facilities
(10,064
)
 

Borrowings on revolving credit facilities
10,263

 

Proceeds from notes payable
1,765

 

Payments on notes payable and capital leases
(939
)
 
(38
)
Payments of loan costs
(15
)
 
(28
)
Purchases of common stock

 
(24
)
Employee advances
45

 
(93
)
Contributions from noncontrolling interest
2,666

 
650

Distributions to noncontrolling interests in consolidated entities
(14
)
 
(55,071
)
Net cash provided by (used in) financing activities
3,707

 
(54,604
)
Effect of foreign exchange rate changes on cash and cash equivalents
(65
)
 

Net change in cash, cash equivalents and restricted cash
7,701

 
(42,871
)
Cash, cash equivalents and restricted cash at beginning of period
45,556

 
93,843

Cash, cash equivalents and restricted cash at end of period
$
53,257

 
$
50,972

 
 
 
 

6


 
Six Months Ended June 30,
 
2018
 
2017
Supplemental Cash Flow Information
 
 
 
Interest paid
$
278

 
$
4

Income taxes paid
598

 
2,981

Supplemental Disclosure of Non-Cash Investing and Financing Activities
 
 
 
Distribution from deferred compensation plan
134

 
112

Capital expenditures accrued but not paid
2,497

 
1,831

Subsidiary equity consideration for Pure Rooms acquisition

 
425

Assumption of debt associated with Pure Rooms acquisition

 
475

Issuance of OpenKey warrant

 
28

Ashford Inc. common stock consideration for purchase of OpenKey shares
838

 

Accrued but unpaid ERFP liability
11,100

 

 
 
 
 
Supplemental Disclosure of Cash, Cash Equivalents and Restricted Cash
 
 
 
Cash and cash equivalents at beginning of period
$
36,480

 
$
84,091

Restricted cash at beginning of period
9,076

 
9,752

Cash, cash equivalents and restricted cash at beginning of period
$
45,556

 
$
93,843

 
 
 
 
Cash and cash equivalents at end of period
$
40,868

 
$
36,972

Restricted cash at end of period
12,389

 
14,000

Cash, cash equivalents and restricted cash at end of period
$
53,257

 
$
50,972

See Notes to Condensed Consolidated Financial Statements.

7

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



1. Organization and Description of Business
Ashford Inc. is a Maryland corporation formed on April 2, 2014, that provides asset management, advisory and other products and services primarily to clients in the hospitality industry. Ashford Inc. currently manages Ashford Hospitality Trust, Inc. (“Ashford Trust”) and Braemar Hotels & Resorts Inc. (“Braemar”), formerly Ashford Hospitality Prime, Inc. Ashford Trust commenced operating in August 2003 and is focused on investing in full-service hotels in the upscale and upper upscale segments in domestic and international markets that have revenue per available room (“RevPAR”) generally less than twice the U.S. average. Braemar commenced operating in November 2013 and invests primarily in luxury hotels and resorts with RevPAR of at least twice the U.S. national average. Each of Ashford Trust and Braemar is a real estate investment trust (“REIT”) as defined in the Internal Revenue Code, and the common stock of each of Ashford Trust and Braemar is traded on the NYSE. The common stock of Ashford Inc. is listed on the NYSE American. As of June 30, 2018, Ashford Trust held approximately 598,000 shares of Ashford Inc. common stock, which represented an approximate 28.4% ownership interest in Ashford Inc., and Braemar held approximately 195,000 shares, which represented an approximate 9.2% ownership interest in Ashford Inc.
We conduct our advisory and asset management business through our operating subsidiary, Ashford Hospitality Advisors LLC (“Ashford LLC”), a Delaware limited liability company. We conduct our hospitality products and services business through an operating entity, Ashford Hospitality Services, LLC. We own most of our assets through Ashford LLC and Ashford Hospitality Services, LLC.
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 such entity. We provide the personnel and services necessary to allow each of Ashford Trust and Braemar to conduct its respective business. 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 the responsibility of the hotel management companies that operate the hotel properties owned by Ashford Trust and Braemar.
On April 6, 2017, Ashford Inc. entered into the Amended and Restated Limited Liability Company Agreement (the “Amended and Restated LLC Agreement”) of Ashford Hospitality Holdings LLC, a Delaware limited liability company and a subsidiary of the Company (“Ashford Holdings”), in connection with the merger (the “Merger”) of Ashford Merger Sub LLC, a Delaware limited liability company, with and into Ashford LLC, with Ashford LLC surviving the Merger as a wholly-owned subsidiary of Ashford Holdings. Ashford Holdings is owned 99.8% by Ashford Inc. and 0.2% by noncontrolling interest holders. The terms of the Amended and Restated LLC Agreement are consistent with the terms of the Amended and Restated Limited Liability Company Agreement of Advisors. The Merger was effectuated in order to facilitate our investments in businesses that provide products and services to the hospitality industry.
On April 6, 2017, we acquired a 70% controlling interest in Pure Rooms by issuing equity in our subsidiary, PRE Op Co LLC (“Pure Rooms”), with a fair value of $425,000 to the sellers and contributing $97,000 of cash. Pure Rooms’ patented 7-step purification process treats a room’s surfaces, including the air, and removes up to 99% of pollutants. See notes 2, 4, 10 and 14 to our condensed consolidated financial statements.
On November 1, 2017, we acquired an 85% controlling interest in a privately held company that conducts the business of J&S Audio Visual in the United States, Mexico, and the Dominican Republic (“J&S”) for approximately $25.5 million. J&S provides an integrated suite of audio visual services including show and event services, hospitality services, creative services and design & integration services to its customers in various venues including hotels and convention centers in the United States, Mexico and the Dominican Republic. See notes 2, 4, 10, 11 and 14 to our condensed consolidated financial statements.
On January 2, 2018, the Company granted 8,962 shares of restricted common stock to the OpenKey redeemable noncontrolling interest holder in connection with the purchase of 519,647 shares of the outstanding membership interests in OpenKey, Inc. The restricted common stock was granted pursuant to the exemption from the registration requirements under the Securities Act provided under Section 4(a)(2) thereunder and vests three years from the grant date.

8

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


On January 16, 2018, the Company closed on the acquisition of a passenger vessel and other assets related to RED Hospitality & Leisure LLC ("RED"), a premier provider of watersports activities and other travel and transportation services in the U.S. Virgin Islands. The Company paid $970,000 in cash, comprised of a $750,000 deposit paid on December 11, 2017, which was reflected on our consolidated balance sheet as “other assets” as of December 31, 2017, and an additional $220,000 paid on January 16, 2018. On March 23, 2018, the RED operating subsidiary acquired an additional passenger vessel for $1.0 million. On June 12, 2018, the RED operating subsidiary acquired an additional passenger vessel for $2.5 million in cash. The Company owns an 80% interest in RED. See notes 2, 10 and 14 to our condensed consolidated financial statements.
On April 6, 2018, Ashford Inc. signed a definitive agreement to acquire the Project Management business of Remington. The transaction closed on August 8, 2018, after the vote was approved by shareholders on August 7, 2018. See note 17.
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 “ERFP Agreement”) with Ashford Trust. The independent directors of the board of directors of each Ashford Inc. and Ashford Trust with the assistance of separate and independent legal counsel, engaged to negotiate the ERFP Agreement on behalf of Ashford Inc. and Ashford Trust, respectively. Under the ERFP Agreement, the Company has agreed to provide $50 million to Ashford Trust in connection with Ashford Trust’s acquisition of additional hotels with the ability to be increased up to $100 million based upon mutual agreement by the parties. On the date that Ashford Trust closes on a hotel acquisition, the Company is obligated to provide Ashford Trust 10% of the acquired hotel's purchase price in the form of furniture, fixtures and equipment (“FF&E”), which is subsequently leased to Ashford Trust at no cost. In connection with Ashford Trust’s acquisition of a hotel on June 29, 2018, and subject to the terms of the ERFP Agreement, the Company is obligated to provide Ashford Trust with approximately $11.1 million of FF&E at Ashford Trust properties. As of June 30, 2018, the Company had not yet purchased any FF&E under the ERFP Agreement. As a result, our outstanding ERFP obligation of $11.1 million is reflected in our condensed consolidated balance sheet as “other assets” and “other liabilities” as of June 30, 2018. See note 14.
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 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 2017 Annual Report on Form 10-K filed with the SEC on March 12, 2018.
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.

9

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


Noncontrolling Interests—The following tables present information about our noncontrolling interests, including those related to consolidated VIEs, as of June 30, 2018 and December 31, 2017 (in thousands):

 
June 30, 2018
 
Ashford
LLC
 
J&S (3)
 
OpenKey(4)
 
Pure
Rooms
(5)
 
RED (6)
Ashford Inc. ownership interest(9)
99.80
%
 
85.00
%
 
45.61
%
 
70.00
%
 
80.00
%
Redeemable noncontrolling interests(1) (2)
0.20
%
 
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
$
268

 
$
3,172

 
$
1,412

 
n/a

 
n/a

Redemption value adjustment, year-to-date
(123
)
 

 
(615
)
 
n/a

 
n/a

Redemption value adjustment, cumulative
236

 

 
1,406

 
n/a

 
n/a

Carrying value of noncontrolling interests

 
493

 
764

 
162

 
2

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

 
41,866

 
3,471

 
1,732

 
5,089

Liabilities, no recourse to Ashford Inc.(8)
n/a

 
23,247

 
578

 
1,678

 
872

Notes payable, no recourse to Ashford Inc.(8)
n/a

 
10,611

 

 
100

 
738

Revolving credit facility, no recourse to Ashford Inc.(8)
n/a

 
998

 

 
100

 
15

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
Ashford
LLC
 
J&S (3)
 
OpenKey(4)
 
Pure
Rooms
(5)
 
RED (6)
Ashford Inc. ownership interest(9)
99.80
%
 
85.00
%
 
43.90
%
 
70.00
%
 
%
Redeemable noncontrolling interests(1) (2)
0.20
%
 
15.00
%
 
39.59
%
 
%
 
%
Noncontrolling interests in consolidated entities
%
 
%
 
16.51
%
 
30.00
%
 
%
 
100.00
%
 
100.00
%
 
100.00
%
 
100.00
%
 
%
 
 
 
 
 
 
 
 
 
 
Carrying value of redeemable noncontrolling interests
$
385

 
$
2,522

 
$
2,204

 
n/a

 
n/a

Redemption value adjustment, year-to-date
224

 

 
1,046

 
n/a

 
n/a

Redemption value adjustment, cumulative
358

 

 
2,021

 
n/a

 
n/a

Carrying value of noncontrolling interests

 
439

 
128

 
205

 

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

 
36,951

 
1,403

 
1,865

 

Liabilities, no recourse to Ashford Inc.(8)
n/a

 
21,821

 
889

 
1,652

 

Notes payable, no recourse to Ashford Inc.(8)
n/a

 
9,917

 

 
220

 

Revolving credit facility, no recourse to Ashford Inc.(8)
n/a

 
814

 

 
100

 

________
(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.

10

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


(2) Redeemable noncontrolling interests in Ashford Holdings represent the members’ proportionate share of equity in earnings/losses of Ashford Holdings or Ashford LLC as applicable and net income/loss attributable to the common unit holders is allocated based on the weighted average ownership percentage of these members’ interest.
(3) Represents ownership interests in J&S, which we consolidate under the voting interest model. J&S provides audio visual products and services in the hospitality industry. See also notes 1, 10 and 11.
(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, 10 and 11.
(5) Represents ownership interests in Pure Rooms, a VIE for which we are considered the primary beneficiary and therefore we consolidate it. Pure Rooms provides “allergy friendly” premium rooms in the hospitality industry. See also notes 1 and 10.
(6) Represents ownership interests in RED, a VIE for which we are considered the primary beneficiary and therefore we consolidate it. RED is a premier provider of watersports activities and other travel and transportation services in the U.S. Virgin Islands. See also notes 1 and 10.
(7) Total assets primarily consist of cash and cash equivalents and other assets that can only be used to settle the subsidiaries obligations.
(8) 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 loan and line of credit held by RED, for which the creditor has recourse to Ashford Inc.
(9) For certain of our investments we are provided a preferred return which is accounted for in our income allocation based on the applicable partnership agreement.
In addition to the consolidated entity information above, noncontrolling interests in consolidated entities included a noncontrolling ownership interest in AIM Performance Holdco LP (“AIM”) of 40% as of June 30, 2018 and December 31, 2017.
Unconsolidated VIEs—Our investments in certain unconsolidated entities are considered to be variable interests in the underlying entities. Because we do not have the power and financial responsibility to direct the unconsolidated entities’ activities and operations, we are not considered to be the primary beneficiary of these entities on an ongoing basis and therefore such entities should not be consolidated. In evaluating VIEs, our analysis involves considerable management judgment and assumptions. We review the 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 in unconsolidated entities.
We held an investment in an unconsolidated entity with a carrying value of $500,000 at both June 30, 2018 and December 31, 2017. No impairment of the investment was recorded during the three and six months ended June 30, 2018 or 2017.
AcquisitionsWe account for acquisitions and investments in businesses as business combinations if the target meets the definition of a business and (a) the target is a VIE and we are the target's primary beneficiary, and therefore we must consolidate its financial statements, or (b) we acquire more than 50% of the voting interest of the target and it was not previously consolidated. We record business combinations using the acquisition method of accounting, which requires all of the assets acquired and liabilities assumed to be recorded at fair value as of the acquisition date. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. The application of the acquisition method of accounting for business combinations requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. The fair value assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Significant assumptions and estimates include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset, if applicable. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the consolidated financial statements may be exposed to potential impairment of the intangible assets and goodwill.
If our investment involves the acquisition of an asset or group of assets that does not meet the definition of a business, the transaction is accounted for as an asset acquisition. An asset acquisition is recorded at cost, which includes capitalizing transaction costs, and does not result in the recognition of goodwill.

11

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


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.
Impairment of Furniture, Fixtures and Equipment—Furniture, fixtures and equipment are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the asset is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the asset. If our analysis indicates that the carrying value of the asset is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the asset net book value exceeds its estimated fair value, or fair value, less cost to sell. In evaluating impairment of assets, we make many assumptions and estimates, including projected cash flows, expected holding period, and expected useful life. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. Assets not yet placed into service are also reviewed for impairment whenever events or changes in circumstances indicate that all or a portion of the assets will not be placed into service. We recorded impairment charges of $0 and $1.9 million for the three and six months ended June 30, 2018, respectively. The impairment was recognized upon determination that a portion of capitalized software that was not eligible for reimbursement would not be placed into service. An impairment charge of $1.1 million was recorded for both the three and six months ended June 30, 2017, partially offset by recognition of deferred income from reimbursable expenses related to capitalized software implementation costs. The impairment was recognized upon determination that a portion of the implemented software cost will not be placed into service. See note 14 to our condensed consolidated financial statements.
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 J&S. 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 perform a quantitative assessment and compare the fair value of the reporting unit to the carrying value. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis, we will record an impairment loss equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value should such a circumstance arise. We determine fair value based on 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 trade name and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. No indicators of impairment were identified during our most recent annual test or as of June 30, 2018.
Definite-Lived Intangible Assets—Definite-lived intangible assets primarily include customer relationships resulting from our acquisition of J&S and Pure Rooms. These assets are amortized using the straight-line method over the estimated useful lives of the assets. We review the carrying amount of the assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. No indicators of impairment were identified as of June 30, 2018.
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 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 further discussion in notes 2 and 13 to our condensed consolidated financial statements.

12

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


Depreciation and Amortization—Our furniture, fixtures and equipment are 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. Definite-lived intangible assets, which include customer relationships resulting from our acquisitions of J&S and Pure Rooms, are amortized using the straight-line method over the estimated useful lives of the assets. See notes 4 and 5.
Equity-Based CompensationWe adopted an equity incentive plan that provides for the grant of restricted or unrestricted shares of our common stock, options to purchase our common stock and other share awards, share appreciation rights, performance shares, performance units and other equity-based awards or any combination of the foregoing. Equity-based compensation included in “salaries and benefits” is accounted for at fair value based on the market price of the shares/options on the date of grant in accordance with applicable authoritative accounting guidance. The fair value is charged to compensation expense on a straight-line basis over the vesting period of the shares/options. Grants of restricted stock to independent directors are recorded at fair value based on the market price of our shares at grant date, and this amount is fully expensed in “general and administrative” expense as the grants of stock are fully vested on the date of grant. The amount of the expense may be subject to adjustment in future periods depending on the specific characteristics of the equity-based award and the application of the accounting guidance. Options to purchase common stock granted to other non-employees are accounted for at fair value based on the market price of the options at period end in accordance with applicable authoritative accounting guidance that results in recording expense, included in “general and administrative,” equal to the fair value of the award in proportion to the requisite service period satisfied during the period. 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 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.
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 J&S 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 is presented on the condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017. There were no sources of other comprehensive income (loss) for the three and six months ended June 30, 2017.
Due to Affiliates—Due to affiliates represents current payables resulting from general and administrative expense, furniture, fixtures and equipment reimbursements, and contingent consideration associated with the acquisition of J&S. Due to affiliates is generally settled within a period not exceeding one year.
Recently Adopted Accounting StandardsIn May 2014, the FASB issued ASU 2014-09, also referred to as “ASC 606” Revenue from Contracts with Customers. The core principle of the guidance is that an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity is required to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and (e) recognize revenue when (or as) the entity satisfies a performance obligation. In determining the transaction price, an entity may 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. ASC 606 also specifies the accounting for certain costs to obtain or fulfill a contract with a customer. In addition, the new guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.
Effective January 1, 2018, we adopted the new standard using the modified retrospective approach. Based on our assessment, adoption of the new guidance did not require a cumulative-effect adjustment to the opening retained earnings on January 1, 2018. We expect the new standard’s impact on net income will be immaterial on an ongoing annual basis; however, the Company does anticipate that the new standard will have an impact on its revenues in interim periods due to timing. The primary impact of adopting the new standard relates to the timing of recognition of incentive advisory fees, which 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

13

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


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 will no longer record incentive advisory fee revenue in interim periods prior to the fourth quarter of the year in which the incentive fee is measured. The Company expects that this could impact its revenues in future interim periods, but we are unable to estimate the impact because future incentive advisory fees are calculated based on future changes in total stockholder return of our REIT clients compared to the total stockholder return of their respective peer group. There are no material changes in revenue recognition for audio visual, investment management reimbursements, debt placement fees, claims management services revenue, lease revenue or other services revenue. See note 3 for additional information regarding our adoption of ASC 606.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price; and (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination with other deferred tax assets. ASU 2016-01 provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. It also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Certain provisions of ASU 2016-01 are eligible for early adoption. In February 2018, the FASB issued ASU 2018-03, as technical corrections and improvements to amend and clarify certain aspects of the guidance issued in ASU 2016-01. We have adopted this standard effective January 1, 2018, and the adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures. See “Unconsolidated VIEs” above in note 2.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments - a consensus of the Emerging Issues Task Force (“ASU 2016-15”). The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Certain issues addressed in this guidance include debt payments or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, distributions received from equity method investments and beneficial interests in securitization transactions. We have adopted this standard effective January 1, 2018, and the adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business (“ASU 2017-01”), which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether a transaction should be accounted for as an acquisition (or disposal) of an asset or a business. We have adopted this standard effective January 1, 2018.
Recently Issued 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. ASU 2016-02 is effective for annual and interim periods for fiscal years beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of 2019 on a modified retrospective basis. We disclosed $5.5 million in undiscounted operating lease obligations in our lease commitments footnote in our most recent 10-K. We are currently evaluating those contracts as well as other existing arrangements to determine if they qualify for lease accounting under the new standard. We expect the adoption of the new standard will have a material impact on our condensed consolidated balance sheets due to the recognition of the ROU asset and lease liability related to our current operating leases. We are implementing repeatable processes to manage ongoing lease data collection and analysis, and evaluating accounting policies and internal controls that will be impacted by the new 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

14

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


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 currently evaluating the impact that ASU 2016-13 will have on the condensed consolidated financial statements and related disclosures.
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 June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"). ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees and aligns the guidance for share-based payments to non-employees with the requirements for share-based payments granted to employees. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact that ASU 2018-07 will have on the condensed consolidated financial statements and expect that the associated compensation expense of the majority of our equity awards will be based on the grant date fair value.
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

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, the base fee was paid quarterly 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, prior to June 26, 2018, 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. The Braemar base fee is paid monthly and is fixed at 0.70% of Braemar’s total market capitalization plus the Key Money Asset Management Fee, as defined in the respective advisory agreement, 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 Long-Term Incentive Plan (“LTIP”) units awarded to our officers and employees in connection with providing advisory services equal to the fair value of the award in

15

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


proportion to the requisite service period satisfied during the period, as well 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 (“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. Historically, during the incentive advisory fee measurement period (i.e. the first year of each three year period), incentive advisory fees have been accrued (or reversed) quarterly based on the amount that would be due pursuant to the applicable advisory agreements as of the interim balance sheet date. The second and third year installments of incentive advisory fees have been recognized as revenue on a pro-rata basis each quarter for the amounts determined in the first year measurement period, subject to the December 31 FCCR Condition each year. Effective with our January 1, 2018 adoption of ASC 606, we will no longer record the first year's installment of incentive advisory fee revenue in interim periods prior to the fourth quarter. Prior to measurement in the fourth quarter of each year, our first year installment of incentive advisory fees are subject to significant fluctuation (i.e. based on annual total stockholder returns) and are contingent on a future event during the measurement period (e.g. meeting the FCCR Condition). Accordingly, 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.
The tables below present the impact of applying the new revenue recognition standard to the components of total revenue within the condensed consolidated statement of operations for the three and six months ended June 30, 2018, as a result of the change in the timing of revenue recognition of incentive advisory fees during interim periods prior to the fourth quarter of the year in which the incentive fee is measured (in thousands):
 
Three Months Ended June 30, 2018
 
As Reported
 
Financial Results Prior to Adoption of Revenue Recognition Standard
 
Impact of Adoption of Revenue Recognition Standard
Advisory services revenue:
 
 
 
 
 
Base advisory fee
$
11,174

 
$
11,174

 
$

Incentive advisory fee
452

 
1,534

 
(1,082
)
Reimbursable expenses
2,496

 
2,496

 

Non-cash stock/unit-based compensation
10,318

 
10,318

 

Other advisory revenue
130

 
130

 

Total advisory services revenue
24,570

 
25,652

 
(1,082
)
 
 
 
 
 
 
Audio visual
23,376

 
23,376

 

Other
6,865

 
6,865

 

Total revenue
$
54,811

 
$
55,893

 
$
(1,082
)

16

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


 
Six Months Ended June 30, 2018
 
As Reported
 
Financial Results Prior to Adoption of Revenue Recognition Standard
 
Impact of Adoption of Revenue Recognition Standard
Advisory services revenue:
 
 
 
 
 
Base advisory fee
$
21,885

 
$
21,885

 
$

Incentive advisory fee
904

 
2,343

 
(1,439
)
Reimbursable expenses
4,445

 
4,445

 

Non-cash stock/unit-based compensation
19,610

 
19,610

 

Other advisory revenue
258

 
258

 

Total advisory services revenue
47,102

 
48,541

 
(1,439
)
 
 
 
 
 
 
Audio visual
46,686

 
46,686

 

Other
9,191

 
9,191

 

Total revenue
$
102,979

 
$
104,418

 
$
(1,439
)
Audio Visual Revenue
Audio visual revenue primarily consists of revenue generated within our J&S segment by providing event technology services such as audio visual services, audio visual equipment rental, staging and meeting services and event-related communication systems as well as related technical support, to our customers in various venues including hotels and convention centers. Revenue is recognized in the period in which services are provided pursuant to the terms of the contractual arrangements with our customers. We also evaluate whether it is appropriate to present (i) the gross amount that our customers pay for our services as revenue, and the related commissions paid to the venue as cost of revenue, or (ii) the net amount (gross revenue less the related commissions paid to the venue) as revenue. We are responsible for the delivery of the services, including providing the necessary labor and equipment to perform the services. We are generally subject to inventory risk, have latitude in establishing prices and selecting suppliers and, while in many cases the venue bills the end customer on our behalf, we bear the risk of collection from the customer. The venues’ commissions are not dependent on collections. As a result, our revenue is primarily reported on a gross basis. Cost of revenues for audio visual principally includes commissions paid to venues, direct labor costs, the cost of equipment sub-rentals, depreciation of equipment, amortization of signing bonuses, as well as other costs such as supplies, freight, travel and other overhead from our venue and customer facing operations and any losses on equipment disposal.
Other Revenue
Debt placement fees are reported within our REIT Advisory segment and include revenues earned through from providing debt placement services by Lismore Capital, 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.
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.
Deferred Revenue and Contract Balances
As of June 30, 2018, we recorded an $11.1 million contract asset that will be realized in the form of leased FF&E pursuant to our Enhanced Return Funding Program Agreement and Amendment No. 1 to the Amended and Restated Advisory Agreement with Ashford Trust.
Deferred revenue primarily consists of customer billings in advance of revenues being recognized from our advisory agreements and other hospitality products and services contracts. Generally, deferred revenue that could result in a cash payment within the next twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent. The increase in the deferred revenue balance is primarily driven by cash payments received or due in advance of satisfying our

17

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


performance obligations, offset by revenues recognized that were included in the deferred revenue balance at the beginning of the period.
For the three months ended June 30, 2018, we recognized $1.6 million of revenues that were included in deferred revenue at the beginning of the period, including (a) $542,000 of advisory revenue primarily related to our advisory agreements with Ashford Trust and Braemar, and (b) $1.1 million of “other services” revenue earned by our hospitality products and services companies.
For the six months ended June 30, 2018, we recognized $4.4 million of revenues that were included in deferred revenue at the beginning of the period, including (a) $890,000 of advisory revenue primarily related to our advisory agreements with Ashford Trust and Braemar, and (b) $3.5 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 June 30, 2018.
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 revenue until the performance obligations are satisfied. We had receivables related to revenues from contracts with customers of $5.9 million and $5.1 million included in “accounts receivable, net” primarily related to our hospitality products and services segment, $13.5 million and $13.3 million in “due from Ashford Trust OP”, and $342,000 and $1.7 million included in “due from Braemar OP” related to REIT advisory services at June 30, 2018 and December 31, 2017, respectively. We had no significant impairments related to these receivables during the six months ended June 30, 2018.
We have three reportable segments: REIT Advisory, J&S and OpenKey. We combine the operating results of Pure Rooms and RED into an “all other” category, which we refer to as “Corporate and Other.” See note 16 for more information about our segment reporting. Our REIT Advisory, OpenKey, and Corporate and Other reporting segments conduct their business within the United States. Our J&S reporting segment conducts business in the United States, Mexico, and the Dominican Republic. The following table presents revenue from our J&S reporting segment geographically for the three and six months ended June 30, 2018 and 2017 (in thousands).
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
United States
$
16,210

 
$

 
$
32,162

 
$

Mexico
5,257

 

 
10,717

 

Dominican Republic
1,909

 

 
3,807

 

 
$
23,376

 
$

 
$
46,686

 
$

4. Acquisitions
J&S
On November 1, 2017, we completed the acquisition of an 85% controlling interest in J&S Audio Visual Communications, Inc., J&S Audiovisual Mexico, S. de R.L. de C.V. and J&S Audio Visual Dominican Republic, L.P., collectively referred to as "J&S." J&S provides an integrated suite of audio visual services including show and event services, hospitality services, creative services and design & integration services to its customers in various venues including hotels and convention centers in the United States, Mexico and the Dominican Republic.
The purchase price of approximately $25.5 million consisted of (i) $19.2 million in cash of which $10.0 million was funded with a term loan; (ii) 70,318 shares of Ashford Inc. common stock, which was determined based on an agreed upon value of approximately $4.3 million using a thirty-day volume weighted average price per share of $60.44 and had an estimated fair value of approximately $5.1 million as of the acquisition date; and (iii) contingent consideration with an estimated fair value of

18

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


approximately $1.2 million. The results of operations of J&S were included in our consolidated financial statements from the date of acquisition.
The acquisition of J&S has been 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. We have completed our preliminary valuation to determine the fair value of the identifiable assets acquired and liabilities assumed. 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 J&S 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, deferred taxes and noncontrolling interests. Thus, the balances reflected below are subject to change, and any such changes could result in adjustments to the allocation. Any change to the amounts recorded within furniture, fixtures and equipment could also impact depreciation expense.
The fair value of the purchase price and preliminary allocation of the purchase price is as follows (in thousands):
Cash
 
$
9,176

Term loan
 
10,000

Fair value of Ashford Inc. common stock
 
5,063

Fair value of contingent consideration
 
1,196

Purchase price consideration
 
25,435

Fair value of redeemable noncontrolling interest
 
2,724

Fair value of noncontrolling interest
 
324

Total fair value of purchase price
 
$
28,483

 
 
Fair Value
 
Estimated Useful Life
Current assets including cash
 
$
6,564

 
 
Furniture, fixtures and equipment
 
9,020

 
5 years
Goodwill
 
12,321

 
 
Trademarks
 
3,201

 
 
Customer relationships
 
6,519

 
7 years
Other assets
 
129

 
 
Total assets acquired
 
37,754

 
 
Current liabilities
 
7,080

 
 
Notes payable, current
 
445

 
 
Deferred income
 
1,213

 
 
Note payable, non-current
 
533

 
 
Total assumed liabilities
 
9,271

 
 
Net assets acquired
 
$
28,483

 
 
We expect approximately $9.9 million of the goodwill balance to be deductible for tax purposes. The qualitative factors that make up the recorded goodwill include value associated with an assembled workforce and value attributable to expanding J&S’ operations through our relationships with Ashford Trust and Braemar.

19

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


Results of J&S
The results of operations of J&S have been included in our results of operations since the acquisition date. Our consolidated statement of operations for the three and six months ended June 30, 2018, included total revenue of $23.4 million and $46.7 million, respectively. In addition, our condensed consolidated statements of operations for the three and six months ended June 30, 2018, include net income of $1.3 million and $3.4 million, respectively, from J&S. The unaudited pro forma results of operations as if the acquisition had occurred on January 1, 2017, are included below under “Pro Forma Financial Results.”
Pro Forma Financial Results
The following table reflects the unaudited pro forma results of operations as if the J&S acquisition and Pure Rooms acquisition (as disclosed in our Form 10-K for the year ended December 31, 2017) had occurred and the indebtedness associated with those acquisitions was incurred on January 1, 2017, and the removal of $304,000 and $412,000 of transaction costs directly attributable to the acquisitions for three and six months ended June 30, 2018 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Total revenue
$
54,811

 
$
38,577

 
$
102,979

 
$
71,678

Net income (loss)
8,932


(6,685
)

3,097


(7,922
)
Net income (loss) attributable to the Company
8,960

 
(6,302
)
 
3,237

 
(7,535
)
Pro forma income (loss) per share:
 
 
 
 
 
 
 
Basic
$
4.26

 
$
(3.02
)
 
$
1.54

 
$
(3.61
)
Diluted
$
0.93

 
$
(3.56
)
 
$
(1.40
)
 
$
(3.88
)
Pro forma weighted average common shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
2,095

 
2,089

 
2,094

 
2,087

Diluted
2,487

 
2,334

 
2,219

 
2,121

The acquisition of certain assets related to RED was treated as an acquisition of property and equipment so 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 six months ended June 30, 2018, are as follows (in thousands):
 
 
J&S
Corporate and Other
Consolidated
Balance at January 1, 2018
 
$
12,165

$
782

$
12,947

Changes in goodwill:
 
 
 


Additions
 



Adjustments
 
156


156

Balance at June 30, 2018
 
$
12,321

$
782

$
13,103


20

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


Intangible assets, net as of June 30, 2018 and December 31, 2017, are as follows (in thousands):
 
June 30, 2018
 
December 31, 2017
 
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Definite-lived intangible assets:
 
 
 
 
 
 
 
Pure Rooms customer relationships
$
175

$
(44
)
$
131

 
$
175

$
(26
)
$
149

J&S customer relationships
6,519

(621
)
5,898

 
6,519

(156
)
6,363

 
$
6,694

$
(665
)
$
6,029

 
$
6,694

$
(182
)
$
6,512

 
 
 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
J&S trademarks
$
3,201

 
 
 
$
3,201

 
 
 
$
3,201





 
$
3,201

 
 
Amortization expense for definite-lived intangible assets was $243,000 and $485,000 for the three and six months ended June 30, 2018, respectively. Amortization expense for definite-lived intangible assets was $8,000 for both the three and six months ended June 30, 2017. Customer relationships for Pure Rooms and J&S were assigned a useful life of 5 years and 7 years, respectively.
6. Notes Payable, net
Notes payable, net consisted of the following (in thousands):
Indebtedness
 
Subsidiary
 
Maturity
 
Interest Rate
 
June 30, 2018
 
December 31, 2017
Senior revolving credit facility
 
Ashford Inc.
 
March 1, 2021
 
Base Rate(1) + 2.00% to 2.50% or LIBOR(2) + 3.00% to 3.50%
 
$

 
$

Term loan
 
J&S
 
November 1, 2022
 
One-Month LIBOR(3) + 3.25%
 
9,417

 
9,917

Revolving credit facility
 
J&S
 
November 1, 2022
 
One-Month LIBOR(3) + 3.25%
 
998

 
814

Capital lease obligations
 
J&S
 
Various
 
Various - fixed
 
655

 
896

Equipment note
 
J&S
 
November 1, 2022
 
One-Month LIBOR(3) + 3.25%
 
1,194

 

Draw Term Loan
 
J&S
 
November 1, 2022
 
One-Month LIBOR(3) + 3.25%
 

 

Revolving credit facility
 
OpenKey
 
October 31, 2018
 
Prime Rate(4) + 2.75%
 

 

Term loan
 
Pure Rooms
 
October 1, 2018
 
5.00%
 
100

 
220

Revolving credit facility
 
Pure Rooms
 
On demand
 
Prime Rate(4) + 1.00%
 
100

 
100

Term loan
 
RED
 
April 5, 2025
 
Prime Rate(4) + 1.75%
 
738

 

Revolving credit facility
 
RED
 
March 5, 2019
 
Prime Rate(4) + 1.75%
 
15

 

Total notes payable
 
 
 
 
 
 
 
13,217

 
11,947

Less deferred loan costs, net
 
 
 
 
 
 
 
(226
)
 
(240
)
Total notes payable less net deferred loan costs
 
 
 
 
 
 
 
12,991

 
11,707

Less current portion
 
 
 
 
 
 
 
(1,670
)
 
(1,751
)
 
 
 
 
 
 
 
 
$
11,321

 
$
9,956

__________________
(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 2.09% and 1.56% at June 30, 2018 and December 31, 2017, respectively.
(4) Prime Rate was 5.00% and 4.50% at June 30, 2018 and December 31, 2017, respectively.

21

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


On March 23, 2018, our RED operating subsidiary entered into a term loan of $750,000 and a revolving credit facility of $250,000 for which the creditor has recourse to Ashford Inc. Approximately $225,000 of the proceeds from the term loan is held in an escrow account, which is included in our condensed consolidated balance sheet within “other assets” as of June 30, 2018. During the six months ended June 30, 2018, $15,000 was drawn on the revolving credit facility. As of June 30, 2018, $235,000 was available under the revolving credit facility.
On March 1, 2018, the Company and its subsidiary Ashford Hospitality Holdings LLC entered into a $35 million senior revolving credit facility with Bank of America, N.A. The credit facility provides for a three-year revolving line of credit and bears interest at the Base Rate plus 2.00% to 2.50% or LIBOR plus 3.00% to 3.50%, depending on the leverage level of the Company. There is a one-year extension option subject to the satisfaction of certain conditions. The new credit facility includes the opportunity to expand the borrowing capacity by up to $40 million to an aggregate size of $75 million. At June 30, 2018, there were no outstanding borrowings under the facility.
On November 1, 2017, our J&S operating subsidiary entered into a series of financing transactions for which the creditors do not have recourse to Ashford Inc., including a $10.0 million term loan to finance the acquisition of J&S. The term loan bears interest at LIBOR plus 3.25% and matures on November 1, 2022. Net deferred loan costs associated with this financing of $207,000 and $226,000, respectively, are included as a reduction to “notes payable, net” on the condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017. As of June 30, 2018 and December 31, 2017, $1.0 million of the term loan was recorded in current portion of notes payable, net. In connection with the term loan, the subsidiary 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 June 30, 2018 and December 31, 2017, was not material. The subsidiary also entered into a $3.0 million revolving credit facility which bears interest at LIBOR plus 3.25% and matures on November 1, 2022. During the six months ended June 30, 2018, $10.2 million was drawn and approximately $10.0 million of payments were made on the revolving credit facility. As of June 30, 2018, approximately $2.0 million of credit was available under the revolving credit facility. These debt agreements contain various financial covenants that, among other things, require the maintenance of certain fixed charge coverage ratios. As of June 30, 2018, our J&S operating subsidiary was in compliance with all financial covenants.
Also on November 1, 2017, in connection with the acquisition of J&S, our J&S operating subsidiary entered into a $3.0 million equipment note and a $2.0 million draw term loan agreement. These loans each bear interest at LIBOR plus 3.25% and mature on November 1, 2022. During the six months ended June 30, 2018, $1.2 million was drawn on the equipment note. As of June 30, 2018, no amounts were outstanding on the draw term loan. All the loans in connection with the acquisition of J&S are partially secured by a security interest on all of the assets and equity interests of our J&S operating subsidiary.
On April 13, 2017, OpenKey entered into a Loan and Security Agreement for a line of credit in the amount of $1.5 million. The line of credit is secured by all of OpenKey's assets and matures on October 31, 2018, with an interest rate of Prime Rate plus 2.75%. Creditors do not have recourse to Ashford Inc. At June 30, 2018 and December 31, 2017, there were no borrowings outstanding under the Loan Agreement. In connection with the line of credit, OpenKey granted the creditors a 10-year warrant to purchase approximately 28,000 shares of OpenKey's preferred stock at $1.61 per share. The fair value of the warrants, estimated to be $28,000, was recorded in noncontrolling interests in consolidated entities and debt issuance costs, which is amortized over the term of the line of credit.
On April 6, 2017, Pure Rooms entered into a term loan of $375,000 and a line of credit of $100,000 for which the creditor does not have recourse to Ashford Inc. The term loan has a fixed interest rate of 5.00% per annum with a stated maturity date of October 1, 2018. The line of credit has a variable interest rate of Prime Rate plus 1.00%. There is no stated maturity date related to the line of credit as it is payable on demand; accordingly, the balance has been classified as a current liability on our condensed consolidated balance sheets.
7. 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

22

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


markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):
 
Quoted Market Prices (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant Unobservable Inputs
 (Level 3)
 
Total
 
June 30, 2018
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
(2,821
)
 
$
(2,821
)
(1) 
Deferred compensation plan
(13,310
)
 

 

 
(13,310
)
 
Total
$
(13,310
)
 
$

 
$
(2,821
)
 
$
(16,131
)
 
 
Quoted Market Prices (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
 
December 31, 2017
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
(2,262
)
 
$
(2,262
)
(1) 
Deferred compensation plan
(19,259
)
 

 

 
(19,259
)
 
Total
$
(19,259
)
 
$

 
$
(2,262
)
 
$
(21,521
)
 
__________________
(1) Reported as “due to affiliates” in the condensed consolidated balance sheets.
The following table presents the rollforward of our Level 3 contingent consideration liability (in thousands):
 
Contingent Consideration Liability (1)
Balance at December 31, 2017
$
(2,262
)
Acquisitions

Gains (losses) included in earnings (2)
(559
)
Dispositions and settlements

Transfers into/out of Level 3

Balance at June 30, 2018
$
(2,821
)
__________________
(1) Includes Ashford Inc.’s contingent consideration associated with the acquisition of J&S, which is carried at fair value in the condensed consolidated balance sheets within “due to affiliates”. 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 input in the Level 3 measurement of the contingent consideration is the risk adjusted discount rate used to discount the future payment.
(2) Reported as “other” operating expense in the condensed consolidated statements of operations.

23

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


Effect of Fair Value Measured Assets and Liabilities on Condensed Consolidated Statements of Operations
The following table summarizes the effect of fair value measured assets and liabilities on the condensed consolidated statements of operations (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
Assets
 
 
 
 
 
 
 
 
Options on futures contracts
$

 
$
(16
)
 
$

 
$
(91
)
 
Total

 
(16
)
 

 
(91
)
 
Liabilities
 
 
 
 
 
 
 
 
Contingent consideration
(346
)
 

 
(559
)
 

 
Deferred compensation plan
6,375

 
1,673

 
5,814

 
(1,667
)
 
Total
6,029

 
1,673

 
5,255

 
(1,667
)
 
Net
$
6,029

 
$
1,657

 
$
5,255

 
$
(1,758
)
 
Total combined
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments (1)
$

 
$
78

 
$

 
$
203

 
Realized gain (loss) on investments

 
(94
)
 

 
(294
)
 
Contingent consideration (2)
(346
)
 

 
(559
)
 

 
Deferred compensation plan (3)
6,375

 
1,673

 
5,814

 
(1,667
)
 
Net
$
6,029

 
$
1,657

 
$
5,255

 
$
(1,758
)
 
________
(1) 
Includes unrealized gain (loss) associated with investments in unconsolidated entities and reported as “unrealized gain (loss) on investments” in the condensed consolidated statements of operations.
(2) 
Represents the accretion of contingent consideration associated with the acquisition of J&S. Reported as a component of “other operating expense” in the condensed consolidated statements of operations.
(3) 
Reported as a component of “salaries and benefits” in the condensed consolidated statements of operations.

24

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


8. 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):
 
 
June 30, 2018
 
December 31, 2017
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial liabilities measured at fair value:
 
 
 
 
 
 
 
 
Deferred compensation plan
 
$
13,310

 
$
13,310

 
$
19,259

 
$
19,259

Contingent consideration
 
2,821

 
2,821

 
2,262

 
2,262

Financial assets not measured at fair value:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
40,868

 
$
40,868

 
$
36,480

 
$
36,480

Restricted cash
 
12,389

 
12,389

 
9,076

 
9,076

Accounts receivable, net
 
5,944

 
5,944

 
5,127

 
5,127

Due from Ashford Trust OP
 
13,467

 
13,467

 
13,346

 
13,346

Due from Braemar OP
 
342

 
342

 
1,738

 
1,738

Investments in unconsolidated entities
 
500

 
500

 
500

 
500

Financial liabilities not measured at fair value:
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
21,596

 
$
21,596

 
$
20,529

 
$
20,529

Due to affiliates
 
5,834

 
5,834

 
4,272

 
4,272

Other liabilities
 
23,489

 
23,489

 
9,076

 
9,076

Notes payable
 
13,217

 
13,257

 
11,947

 
12,040

Deferred compensation plan. The liability resulting from the deferred compensation plan is carried at fair value based on the closing prices of the underlying investments. This is considered a Level 1 valuation technique.
Contingent consideration. The liability associated with the acquisition of J&S is carried at fair value based on the terms of the acquisition agreement and any changes to fair value are recorded in “other” operating expenses in the condensed consolidated statements of operations.
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 Ashford Trust OP, due from Braemar OP, accounts payable and accrued expenses, 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.

25

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



9. Commitments and Contingencies
Purchase CommitmentAs of June 30, 2018, we had approximately $38.9 million of purchase commitments related to our Enhanced Return Funding Program with Ashford Trust which are contingent upon Ashford Trust acquiring additional hotels. See note 14.
LitigationThe 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 are 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.
10. 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):