UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
o
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: 001-31458  
Drive Shack Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
81-0559116
(State or other jurisdiction of incorporation
 
(I.R.S. Employer Identification No.)
or organization)
 
 
218 W. 18th Street, 3rd Floor, New York, NY
 
10011
(Address of principal executive offices)
 
(Zip Code)
(646) 585-5591
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
DS
New York Stock Exchange (NYSE)
9.75% Series B Cumulative Redeemable Preferred Stock, $0.01 par value per share
DS-PB
New York Stock Exchange (NYSE)
8.05% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share
DS-PC
New York Stock Exchange (NYSE)
8.375% Series D Cumulative Redeemable Preferred Stock, $0.01 par value per share
DS-PD
New York Stock Exchange (NYSE)
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. Yes   S  No £
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
S   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  S  Non-accelerated filer  £
Smaller reporting company  £ Emerging growth company  £
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  £  No  S
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
Common stock, $0.01 par value per share: 67,033,104 shares outstanding as of July 26, 2019 .


CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, our operating performance, the performance of our investments, the stability of our earnings, and our financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “forecast,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual outcome of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:

•
the ability to retain and attract members and guests to our properties;
•
changes in global, national and local economic conditions, including, but not limited to, changes in consumer spending patterns, a prolonged economic slowdown and a downturn in the real estate market;
•
effects of unusual weather patterns and extreme weather events, geographical concentrations with respect to our operations and seasonality of our business;
•
competition within the industries in which we operate or may pursue additional investments, including competition for sites for our Entertainment Golf venues;
•
material increases in our expenses, including, but not limited to, unanticipated labor issues, rent or costs with respect to our workforce, and costs of goods, utilities and supplies;
•
our inability to sell or exit certain properties and unforeseen changes to our ability to develop, redevelop or renovate certain properties;
•
our ability to further invest in our business and implement our strategies;
•
difficulty monetizing our real estate debt investments;
•
liabilities with respect to inadequate insurance coverage, accidents or injuries on our properties, adverse litigation judgments or settlements, or membership deposits;
•
changes to and failure to comply with relevant regulations and legislation, including in order to maintain certain licenses and permits, and environmental regulations in connection with our operations;
•
inability to execute on our growth and development strategy by successfully developing, opening and operating new venues;
•
impacts of any failure of our information technology and cybersecurity systems;
•
the impact of any current or further legal proceedings and regulatory investigations and inquiries; and
•
other risks detailed from time to time below, particularly in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 , and in our subsequent filings with the Securities and Exchange Commission, which we refer to as the SEC in this Quarterly Report on Form 10-Q.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement.

Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views only as of the date of this report. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.


SPECIAL NOTE REGARDING EXHIBITS
 
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Drive Shack Inc. (the “Company” or the “Registrant”) or the other parties to the agreements.  The agreements contain representations and warranties by each of the parties to the applicable agreement.  These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
 
•
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
•
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
•
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
•
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.  Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
 
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.
 




DRIVE SHACK INC.  
FORM 10-Q
 
INDEX
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I.   FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
(Unaudited)
 
 
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
39,683

 
$
79,235

Restricted cash
4,299

 
3,326

Accounts receivable, net
6,341

 
7,518

Real estate assets, held-for-sale, net
33,355

 
75,862

Real estate securities, available-for-sale
3,071

 
2,953

Other current assets
20,471

 
20,505

Total current assets
107,220

 
189,399

Restricted cash, noncurrent
258

 
258

Property and equipment, net of accumulated depreciation
177,619

 
132,605

Operating lease right-of-use assets
225,666

 
—

Intangibles, net of accumulated amortization
20,115

 
48,388

Other investments
23,300

 
22,613

Other assets
4,897

 
8,684

Total assets
$
559,075

 
$
401,947

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Obligations under finance leases
$
7,675

 
$
5,489

Membership deposit liabilities
8,793

 
8,861

Accounts payable and accrued expenses
41,375

 
45,284

Deferred revenue
10,905

 
18,793

Real estate liabilities, held-for-sale
33

 
2,947

Other current liabilities
28,075

 
22,285

Total current liabilities
96,856

 
103,659

Credit facilities and obligations under finance leases - noncurrent
15,433

 
10,489

Operating lease liabilities - noncurrent
195,347

 
—

Junior subordinated notes payable
51,196

 
51,200

Membership deposit liabilities, noncurrent
94,156

 
90,684

Deferred revenue, noncurrent
5,930

 
6,016

Other liabilities
3,035

 
5,232

Total liabilities
$
461,953

 
$
267,280

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Equity
 
 
 
Preferred stock, $0.01 par value, 100,000,000 shares authorized, 1,347,321 shares of 9.75% Series B Cumulative Redeemable Preferred Stock, 496,000 shares of 8.05% Series C Cumulative Redeemable Preferred Stock, and 620,000 shares of 8.375% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, issued and outstanding as of June 30, 2019 and December 31, 2018
$
61,583

 
$
61,583

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 67,033,104 and 67,027,104 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
670

 
670

Additional paid-in capital
3,178,478

 
3,175,843

Accumulated deficit
(3,145,487
)
 
(3,105,307
)
Accumulated other comprehensive income
1,878

 
1,878

Total equity
$
97,122

 
$
134,667

 
 
 
 
Total liabilities and equity
$
559,075

 
$
401,947


See notes to Consolidated Financial Statements.

1


DRIVE SHACK INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 

 
 

 
 

 
 

Golf operations
$
57,386

 
$
69,150

 
$
102,092

 
$
122,704

Sales of food and beverages
14,229

 
21,854

 
23,475

 
34,960

Total revenues
71,615

 
91,004

 
125,567

 
157,664

 
 
 
 
 
 
 
 
Operating costs
 
 
 
 
 
 
 
Operating expenses
58,720

 
67,042

 
106,443

 
124,421

Cost of sales - food and beverages
3,904

 
6,193

 
6,601

 
10,233

General and administrative expense
13,607

 
10,268

 
25,226

 
19,462

Depreciation and amortization
5,122

 
4,315

 
10,046

 
9,863

Pre-opening costs
1,700

 
247

 
2,879

 
1,803

Impairment
118

 
—

 
4,206

 
1,473

Realized and unrealized (gain) on investments
—

 
(89
)
 
—

 
(331
)
Total operating costs
83,171

 
87,976

 
155,401

 
166,924

Operating income (loss)
(11,556
)
 
3,028

 
(29,834
)
 
(9,260
)
 
 
 
 
 
 
 
 
Other income (expenses)
 
 
 
 
 
 
 
Interest and investment income
265

 
469

 
608

 
915

Interest expense, net
(1,795
)
 
(4,601
)
 
(3,947
)
 
(8,650
)
Other income (loss), net
127

 
(3,699
)
 
5,614

 
(4,105
)
Total other income (expenses)
(1,403
)
 
(7,831
)
 
2,275

 
(11,840
)
Loss before income tax
(12,959
)
 
(4,803
)
 
(27,559
)
 
(21,100
)
Income tax expense
—

 
—

 
—

 
—

Net Loss
(12,959
)
 
(4,803
)
 
(27,559
)
 
(21,100
)
Preferred dividends
(1,395
)
 
(1,395
)
 
(2,790
)
 
(2,790
)
Loss Applicable to Common Stockholders
$
(14,354
)
 
$
(6,198
)
 
$
(30,349
)
 
$
(23,890
)
 
 
 
 
 
 
 
 
Loss Applicable to Common Stock, per share
 

 
 

 
 

 
 

Basic
$
(0.21
)
 
$
(0.09
)
 
$
(0.45
)
 
$
(0.36
)
Diluted
$
(0.21
)
 
$
(0.09
)
 
$
(0.45
)
 
$
(0.36
)
 
 
 
 
 
 
 
 
Weighted Average Number of Shares of Common Stock Outstanding
 

 
 

 
 

 
 

Basic
67,029,610

 
66,977,104

 
67,028,364

 
66,977,104

Diluted
67,029,610

 
66,977,104

 
67,028,364

 
66,977,104


See notes to Consolidated Financial Statements.

2


DRIVE SHACK INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(12,959
)
 
$
(4,803
)
 
$
(27,559
)
 
$
(21,100
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

Net unrealized gain on available-for-sale securities
—

 
30

 
—

 
63

Other comprehensive income
—

 
30

 
—

 
63

Total comprehensive loss
$
(12,959
)
 
$
(4,773
)
 
$
(27,559
)
 
$
(21,037
)
Comprehensive loss attributable to Drive Shack Inc. stockholders’ equity
$
(12,959
)
 
$
(4,773
)
 
$
(27,559
)
 
$
(21,037
)
  
See notes to Consolidated Financial Statements.

3


DRIVE SHACK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(dollars in thousands, except share data)
 
Drive Shack Inc. Stockholders
 
Preferred Stock
 
Common Stock
 

 

 

 

 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid-
in Capital
 
Accumulated
Deficit
 
Accumulated Other Comp.
Income
 
Total Equity (Deficit)
Equity (deficit) - December 31, 2017
2,463,321

 
$
61,583

 
66,977,104

 
$
670

 
$
3,173,281

 
$
(3,065,853
)
 
$
1,370

 
$
171,051

Dividends declared
—

 
—

 
—

 
—

 
—

 
(1,395
)
 
—

 
(1,395
)
Stock-based compensation
—

 
—

 
—

 
—

 
278

 
—

 
—

 
278

Adoption of ASC 606
—

 
—

 
—

 
—

 
—

 
4,809

 
—

 
4,809

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
—

 
—

 
—

 
—

 
—

 
(16,297
)
 
—

 
(16,297
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
33

 
33

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(16,264
)
Equity (deficit) - March 31, 2018
2,463,321

 
$
61,583

 
66,977,104

 
$
670

 
$
3,173,559

 
$
(3,078,736
)
 
$
1,403

 
$
158,479

Dividends declared
—

 
—

 
—

 
—

 
—

 
(1,395
)
 
—

 
(1,395
)
Stock-based compensation
—

 
—

 
—

 
—

 
530

 
—

 
—

 
530

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
—

 
—

 
—

 
—

 
—

 
(4,803
)
 
—

 
(4,803
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
30

 
30

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(4,773
)
Equity (deficit) - June 30, 2018
2,463,321

 
$
61,583

 
66,977,104

 
$
670

 
$
3,174,089

 
$
(3,084,934
)
 
$
1,433

 
$
152,841

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity (deficit) - December 31, 2018
2,463,321

 
$
61,583

 
67,027,104

 
$
670

 
$
3,175,843

 
$
(3,105,307
)
 
$
1,878

 
$
134,667

Dividends declared
—

 
—

 
—

 
—

 
—

 
(1,395
)
 
—

 
(1,395
)
Stock-based compensation
—

 
—

 
—

 
—

 
1,222

 
—

 
—

 
1,222

Adoption of ASC 842
—

 
—

 
—

 
—

 
—

 
(9,831
)
 
 
 
(9,831
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
—

 
—

 
—

 
—

 
—

 
(14,600
)
 
—

 
(14,600
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(14,600
)
Equity (deficit) - March 31, 2019
2,463,321

 
$
61,583

 
67,027,104

 
$
670

 
$
3,177,065

 
$
(3,131,133
)
 
$
1,878

 
$
110,063

Dividends declared
—

 
—

 
—

 
—

 
—

 
(1,395
)
 
—

 
(1,395
)
Stock-based compensation
—

 
—

 
—

 
—

 
1,384

 
—

 
—

 
1,384

Purchase of common stock (directors)
—

 
—

 
6,000

 
—

 
29

 
—

 
—

 
29

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
—

 
—

 
—

 
—

 
—

 
(12,959
)
 
—

 
(12,959
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(12,959
)
Equity (deficit) - June 30, 2019
2,463,321

 
$
61,583

 
67,033,104

 
$
670

 
$
3,178,478

 
$
(3,145,487
)
 
$
1,878

 
$
97,122


See notes to Consolidated Financial Statements.

4



DRIVE SHACK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except share data)

 
Six Months Ended June 30,
 
2019
 
2018
Cash Flows From Operating Activities
 
 
 
Net loss
$
(27,559
)
 
$
(21,100
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
10,046

 
9,863

Amortization of discount and premium
(122
)
 
588

Other amortization
6,826

 
5,481

Amortization of revenue on golf membership deposit liabilities
(874
)
 
(726
)
Amortization of prepaid golf membership dues
(6,855
)
 
(12,990
)
Stock-based compensation
2,606

 
808

Impairment
4,206

 
1,473

Equity in earnings from equity method investments, net of distributions
(685
)
 
(766
)
Other (gains) losses, net
(4,573
)
 
4,055

Unrealized (gain) on investments
—

 
(331
)
Loss on extinguishment of debt
22

 
141

Change in:
 

 
 

Accounts receivable, net, other current assets and other assets - noncurrent
(1,579
)
 
(182
)
Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrent
(5,685
)
 
1,801

Net cash used in operating activities
(24,226
)
 
(11,885
)
Cash Flows From Investing Activities
 

 
 

Proceeds from sale of property and equipment
32,665

 
—

Acquisition and additions of property and equipment and intangibles
(42,569
)
 
(27,877
)
Net cash used in investing activities
(9,904
)
 
(27,877
)
Cash Flows From Financing Activities
 
 
 
Repayments of debt obligations
(2,691
)
 
(2,344
)
Golf membership deposits received
1,012

 
1,735

Preferred stock dividends paid
(2,790
)
 
(2,790
)
Other financing activities
20

 
(232
)
Net cash used in financing activities
(4,449
)
 
(3,631
)
Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent
(38,579
)
 
(43,393
)
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, Beginning of Period
82,819

 
173,688

Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, End of Period
$
44,240

 
$
130,295

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities
 
 
 
Preferred stock dividends declared but not paid
$
930

 
$
930

Additions to finance lease assets and liabilities
$
10,652

 
$
2,416

Additions to property and equipment and accounts payable
$
2,816

 
$
6,882

Additions for operating lease right-of-use assets and operating lease liabilities
$
207,450

 
$
—


See notes to Consolidated Financial Statements.


5
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 


1. ORGANIZATION
Drive Shack Inc., which is referred to, together with its subsidiaries, as “Drive Shack Inc.” or the “Company” is a leading owner and operator of golf-related leisure and entertainment businesses. The Company, a Maryland corporation, was formed in 2002, and its common stock is traded on the NYSE under the symbol “DS.”
The Company conducts its business through the following segments: (i) Entertainment Golf venues, (ii) Traditional Golf properties and (iii) corporate. For a further discussion of the reportable segments, see Note 4.
The Company opened its first Entertainment Golf venue in Orlando, Florida on April 7, 2018. The Company expects to open a chain of next-generation Entertainment Golf venues across the United States and internationally, which combine golf, competition, dining and fun.
The Company’s Traditional Golf business is one of the largest operators of golf properties in the United States. As of June 30, 2019 , the Company owned, leased or managed 61 properties across 10 states.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The accompanying Consolidated Financial Statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements for the year ended December 31, 2018 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019. Capitalized terms used herein, and not otherwise defined, are defined in the Company’s Consolidated Financial Statements for the year ended December 31, 2018 .

As of June 30, 2019 , the Company’s significant accounting policies for these financial statements are summarized below and should be read in conjunction with the Summary of Significant Accounting Policies detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 .




6
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

Realized and Unrealized (Gain) Loss on Investments and Other Income (Loss), Net — These items are comprised of the following:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Unrealized (gain) on non-hedge derivative instruments
—

 
(89
)
 
—

 
(331
)
Realized and unrealized (gain) loss on investments
$
—

 
$
(89
)
 
$
—

 
$
(331
)
 
 
 
 
 
 
 
 
Loss on lease modifications and terminations
$
—

 
$
(25
)
 
$
—

 
$
(796
)
Loss on extinguishment of debt, net
(6
)
 
(89
)
 
(22
)
 
(141
)
Collateral management fee income, net
129

 
146

 
256

 
301

Equity in earnings of equity method investments
344

 
387

 
685

 
766

Gain (loss) on sale of long-lived assets and intangibles
(362
)
 
882

 
4,666

 
676

Other income (loss) (A)
22

 
(5,000
)
 
29

 
(4,911
)
Other income (loss), net
$
127

 
$
(3,699
)
 
$
5,614

 
$
(4,105
)

(A)
During the three months ended June 30, 2018 , the Company recorded a net loss of approximately $4.9 million related to the settlement of a legal dispute and a related discharge of liabilities assumed by the counterparty to the settlement. See Note 13 for additional information.
Property and Equipment, Net — Long-lived assets to be disposed of by sale, which meet certain criteria, are reclassified to real estate held-for-sale and measured at the lower of their carrying amount or fair value less costs of sale. The Company suspends depreciation and amortization for assets held-for-sale. Subsequent changes to the estimated fair value less costs to sell could impact the measurement of assets held-for-sale. Decreases are recognized as an impairment loss and recorded in "Impairment" on the Consolidated Statements of Operations. To the extent the fair value increases, any previously reported impairment is reversed. Real estate held-for-sale is recorded in “Real estate assets, held-for-sale, net” and “Real estate liabilities, held-for-sale” on the Consolidated Balance Sheets.

Leasing Arrangements — The Company evaluates at lease inception whether an arrangement is or contains a lease by providing the Company with the right to control an asset. Operating leases are accounted for on balance sheet with the Right of Use (“ROU”) assets and lease liabilities recognized in "Operating lease right-of-use assets," "Other current liabilities" and "Operating lease liabilities - noncurrent" in the Consolidated Balance Sheets. Finance lease ROU assets, current lease liabilities and noncurrent lease liabilities are recognized in "Property and equipment, net of accumulated depreciation," and "Obligations under finance leases" and "Credit facilities and obligations under finance leases - noncurrent" in the Consolidated Balance Sheets, respectively.

All lease liabilities are measured at the present value of the associated payments, discounted using the Company’s incremental borrowing rate determined using a portfolio approach based on the rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments for similar term and in a similar economic environment on a collateralized basis. ROU assets, for both operating and finance leases, are initially measured based on the lease liability, adjusted for initial direct costs, prepaid rent, and lease incentives received. The operating lease ROU assets are subsequently measured at the carrying amount of the lease liability adjusted for initial direct costs, prepaid or accrued lease payments, and lease incentives. Depreciation of the finance lease ROU assets are subsequently calculated using the straight-line method over the shorter of the estimated useful lives or the expected lease terms and recorded in "Depreciation and amortization" on the Consolidated Statements of Operations.

In addition to the fixed minimum payments required under the lease arrangements, certain leases require variable lease payments, which are payment of the excess of various percentages of gross revenue or net operating income over the minimum rental payments as well as payment of taxes assessed against the leased property. The leases generally also require the payment for the cost of insurance and maintenance. Variable lease payments are recognized when the associated activity occurs and contingency is resolved.

The Company has elected to combine lease and non-lease components for all lease contracts. Additionally, the Company does not recognize ROU assets and lease liabilities for arrangements with lease terms of 12 months or less and lease payments are recognized on a straight-line basis over the lease term with variable lease payments recognized in the period in which the obligation is incurred.


7
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

Other Investment — The Company owns an approximately 22% economic interest in a limited liability company which owns preferred equity secured by a commercial real estate project. The Company accounts for this investment as an equity method investment. As of June 30, 2019 and December 31, 2018 , the carrying value of this investment was $23.3 million and $22.6 million , respectively. The Company evaluates its equity method investment for other-than-temporary impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. The evaluation of recoverability is based on management’s assessment of the financial condition and near-term prospects of the commercial real estate project, the length of time and the extent to which the market value of the investment has been less than cost, availability and cost of financing, demand for space, competition for tenants, changes in market rental rates, and operating costs.  As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the values estimated by management in its recoverability analyses may not be realized, and actual losses or impairment may be realized in the future.

Impairment of Long-lived Assets — The Company periodically reviews the carrying amounts of its long-lived assets, including real estate held-for-use and held-for-sale, as well as finite-lived intangible assets, to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. The assessment of recoverability is based on management’s estimates by comparing the sum of the estimated undiscounted cash flows generated by the underlying asset, or other appropriate grouping of assets, to its carrying value to determine whether an impairment existed at its lowest level of identifiable cash flows. If the carrying amount of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment is recognized to the extent the carrying value of such asset exceeds its fair value. The Company generally measures fair value by considering sale prices for similar assets or by discounting estimated future cash flows using an appropriate discount rate.

Other Current Assets

The following table summarizes the Company's other current assets:
 
 
June 30, 2019
 
December 31, 2018
Prepaid expenses
 
$
2,372

 
$
2,651

Deposits
 
2,516

 
2,494

Inventory
 
2,743

 
2,855

Miscellaneous current assets, net
 
12,840

 
12,505

Other current assets
 
$
20,471

 
$
20,505

 
Other Assets

The following table summarizes the Company's other assets:
 
 
June 30, 2019
 
December 31, 2018
Prepaid expenses
 
$
261

 
$
277

Deposits
 
2,097

 
2,140

Miscellaneous assets, net
 
2,539

 
6,267

Other assets
 
$
4,897

 
$
8,684



8
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

Other Current Liabilities

The following table summarizes the Company's other current liabilities:
 
 
June 30, 2019
 
December 31, 2018
Security deposits payable
 
$
5,933

 
$
14,188

Operating lease liabilities
 
15,835

 
—

Accrued rent
 
2,315

 
2,885

Dividends payable
 
930

 
930

Miscellaneous current liabilities
 
3,062

 
4,282

Other current liabilities
 
$
28,075

 
$
22,285


Other Liabilities

The following table summarized the Company's other liabilities:
 
 
June 30, 2019
 
December 31, 2018
Security deposits payable
 
$
319

 
$
91

Service obligation intangible
 
1,954

 
2,759

Accrued rent
 
—

 
1,617

Miscellaneous liabilities
 
762

 
765

Other liabilities
 
$
3,035

 
$
5,232


Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02 Leases (Topic 842) . The standard requires lessees to recognize most leases on the balance sheet and addresses certain aspects of lessor accounting. On January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective approach. The Company has utilized the effective date transition method and accordingly is not required to adjust its comparative period financial information for effects of ASU 2016-02. The Company has elected to adopt practical expedients which permits it to not reassess its prior conclusions about lease identification, lease classification and initial direct costs under the new standard. The Company elected to combine lease and non-lease components for all lease contracts and also elected not to recognize ROU assets and lease liabilities for leases with terms of 12 months or less. The Company has also elected to adopt the practical expedient for land easements which permits it not to evaluate existing and expired land easements under the new standard. The adoption of ASU 2016-02 had a material impact on the Company’s Consolidated Balance Sheets, resulting in the recognition of operating lease right-of-use assets and operating lease liabilities of $225.6 million and $205.9 million , respectively, with the difference primarily due to reclassifications of leasehold intangibles and an adjustment to accumulated deficit. There was no material impact on the Consolidated Statements of Operations.

In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount under the other-than-temporary impairment model. In November 2018, the FASB issued ASU 2018-19 Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which clarifies that operating lease receivables accounted for under ASC 842 are not in the scope of this guidance. In April 2019, the FASB issued ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which addresses certain fair value disclosure requirements, the measurement basis under the measurement alternative and which equity securities have to be remeasured at historical exchange rates. In May 2019, the FASB issued Financial Instruments - Credit Losses (Topic 326), Targeted Transition Relief , which allows entities to elect to measure assets in the scope of ASC 326-20, using the fair value option when ASU 2016-13 is adopted. The effective date of the standards will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted for annual periods beginning after December 15, 2018. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of

9
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

the first reporting period in which the guidance is effective. The Company is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-15 Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . The standard requires a customer in a cloud computing arrangement (i.e., a hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. That guidance requires certain costs incurred during the application development stage to be capitalized and other costs incurred during the preliminary project and post-implementation stages to be expensed as they are incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use.  The effective date of the standard will be for annual periods beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. Entities can either apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively. The Company is currently evaluating the timing for adoption and the impact it may have on its Consolidated Financial Statements.

3. REVENUES

The majority of the Company’s revenue is recognized at a point in time which is at the time of sale to customers at the Company’s Entertainment Golf venues and Traditional Golf properties, including green fees, cart rentals, bay play, events and sales of food, beverages and merchandise.

The Company’s revenue is all generated within the Entertainment and Traditional Golf segments. The following tables disaggregate revenue by category: Entertainment golf venues, public and private golf properties (owned and leased) and managed golf properties.
 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
 
Ent. golf venues
 
Public golf properties
 
Private golf properties
 
Managed golf properties
 
Total
 
Ent. golf venues
 
Public golf properties
 
Private golf properties
 
Managed golf properties
 
Total
Golf operations
 
$
607

 
$
28,902

 
$
13,352

 
$
14,525

 
$
57,386

 
$
1,288

 
$
46,366

 
$
28,806

 
$
25,632

 
$
102,092

Sales of food and beverages
 
872

 
10,116

 
3,241

 
—

 
14,229

 
1,911

 
15,593

 
5,971

 
—

 
23,475

Total revenues
 
$
1,479

 
$
39,018

 
$
16,593

 
$
14,525

 
$
71,615

 
$
3,199

 
$
61,959

 
$
34,777

 
$
25,632

 
$
125,567

 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
Ent. golf venues
 
Public golf properties
 
Private golf properties
 
Managed golf properties
 
Total
 
Ent. golf venues
 
Public golf properties
 
Private golf properties
 
Managed golf properties
 
Total
Golf operations
 
$
855

 
$
34,609

 
$
26,891

 
$
6,795

 
$
69,150

 
$
855

 
$
56,979

 
$
52,840

 
$
12,030

 
$
122,704

Sales of food and beverages
 
952

 
12,307

 
8,595

 
—

 
21,854

 
952

 
19,514

 
14,494

 
—

 
34,960

Total revenues
 
$
1,807

 
$
46,916

 
$
35,486

 
$
6,795

 
$
91,004

 
$
1,807

 
$
76,493

 
$
67,334

 
$
12,030

 
$
157,664


4. SEGMENT REPORTING
 
The Company currently has three reportable segments: (i) Entertainment Golf venues, (ii) Traditional Golf properties and (iii) corporate. The chief operating decision maker (“CODM”) for each segment is our Chief Executive Officer, who reviews discrete financial information for each reportable segment to manage the Company, including resource allocation and performance assessment.

The Company opened its inaugural Entertainment Golf venue in Orlando, Florida on April 7, 2018 and expects to continue opening a chain of next-generation Entertainment Golf venues across the United States and internationally, which combine golf, competition, dining and fun. 

10
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 


Additionally, the Company's Traditional Golf business is one of the largest operators of golf properties in the United States. As of June 30, 2019 , the Company owned, leased or managed 61 Traditional Golf properties across 10 states. 

The corporate segment consists primarily of investments in loans and securities, interest income on short-term investments, general and administrative expenses as a public company, interest expense on the junior subordinated notes payable (Note 8) and income tax expense (Note 14).
 
Summary financial data on the Company’s segments is given below, together with a reconciliation to the same data for the Company as a whole:
 
 
Entertainment Golf
 
Traditional Golf
 
Corporate
 
Total
Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Golf operations
 
$
1,288

 
$
100,804

 
$
—

 
$
102,092

Sales of food and beverages
 
1,911

 
21,564

 
—

 
23,475

Total revenues
 
3,199

 
122,368

 
—

 
125,567

Operating costs
 
 
 
 
 
 
 
 
Operating expenses (A)
 
3,605

 
102,838

 
—

 
106,443

Cost of sales - food and beverages
 
501

 
6,100

 
—

 
6,601

General and administrative expense (B)
 
6,930

 
8,212

 
8,510

 
23,652

General and administrative expense - acquisition and transaction expenses (C)
 
963

 
333

 
278

 
1,574

Depreciation and amortization
 
1,670

 
8,335

 
41

 
10,046

Pre-opening costs (D)
 
2,879

 
—

 
—

 
2,879

Impairment
 
118

 
4,088

 
—

 
4,206

Realized and unrealized (gain) on investments
 
—

 
—

 
—

 
—

Total operating costs
 
16,666

 
129,906

 
8,829

 
155,401

Operating loss
 
(13,467
)
 
(7,538
)
 
(8,829
)
 
(29,834
)
Other income (expenses)
 
 
 
 
 
 
 
 
Interest and investment income
 
246

 
61

 
301

 
608

Interest expense (E)
 
(142
)
 
(4,051
)
 
(1,256
)
 
(5,449
)
Capitalized interest (E)
 
—

 
413

 
1,089

 
1,502

Other (loss) income, net
 
(7
)
 
4,688

 
933

 
5,614

Total other income (expenses)
 
97

 
1,111

 
1,067

 
2,275

Income tax expense
 
—

 
—

 
—

 
—

Net loss
 
(13,370
)
 
(6,427
)
 
(7,762
)
 
(27,559
)
Preferred dividends
 
—

 
—

 
(2,790
)
 
(2,790
)
Loss applicable to common stockholders
 
$
(13,370
)
 
$
(6,427
)
 
$
(10,552
)
 
$
(30,349
)

11
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

Summary segment financial data (continued).
 
 
Entertainment Golf
 
Traditional Golf
 
Corporate
 
Total
Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Golf operations
 
$
607

 
$
56,779

 
$
—

 
$
57,386

Sales of food and beverages
 
872

 
13,357

 
—

 
14,229

Total revenues
 
1,479

 
70,136

 
—

 
71,615

Operating costs
 
 
 
 
 
 
 
 
Operating expenses (A)
 
1,857

 
56,863

 
—

 
58,720

Cost of sales - food and beverages
 
251

 
3,653

 
—

 
3,904

General and administrative expense (B)
 
3,551

 
4,316

 
4,565

 
12,432

General and administrative expense - acquisition and transaction expenses (C)
 
806

 
179

 
190

 
1,175

Depreciation and amortization
 
961

 
4,118

 
43

 
5,122

Pre-opening costs (D)
 
1,700

 
—

 
—

 
1,700

Impairment
 
118

 
—

 
—

 
118

Realized and unrealized loss on investments
 
—

 
—

 
—

 
—

Total operating costs
 
9,244

 
69,129

 
4,798

 
83,171

Operating (loss) income
 
(7,765
)
 
1,007

 
(4,798
)
 
(11,556
)
Other income (expenses)
 
 
 
 
 
 
 
 
Interest and investment income
 
114

 
23

 
128

 
265

Interest expense (E)
 
(142
)
 
(1,861
)
 
(629
)
 
(2,632
)
Capitalized interest (E)
 
—

 
226

 
611

 
837

Other (loss) income, net
 
—

 
(343
)
 
470

 
127

Total other income (expenses)
 
(28
)
 
(1,955
)
 
580

 
(1,403
)
Income tax expense
 
—

 
—

 
—

 
—

Net loss
 
(7,793
)
 
(948
)
 
(4,218
)
 
(12,959
)
Preferred dividends
 
—

 
—

 
(1,395
)
 
(1,395
)
Loss applicable to common stockholders
 
$
(7,793
)
 
$
(948
)
 
$
(5,613
)
 
$
(14,354
)

 
 
Entertainment Golf
 
Traditional Golf
 
Corporate (F)
 
Total
June 30, 2019
 
 
 
 
 
 
 
 
Total assets
 
180,343

 
336,484

 
42,248

 
559,075

Total liabilities
 
46,035

 
354,116

 
61,802

 
461,953

Preferred stock
 
—

 
—

 
61,583

 
61,583

Equity attributable to common stockholders
 
$
134,308

 
$
(17,632
)
 
$
(81,137
)
 
$
35,539

 
 
 
 
 
 
 
 
 
Additions to property and equipment (including finance leases) during the six months ended June 30, 2019
 
$
47,249

 
$
6,490

 
$
1,648

 
$
55,387



12
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

Summary segment financial data (continued).

 
 
Entertainment Golf
 
Traditional Golf
 
Corporate
 
Total
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Golf operations
 
$
855

 
$
121,849

 
$
—

 
$
122,704

Sales of food and beverages
 
952

 
34,008

 
—

 
34,960

Total revenues
 
1,807

 
155,857

 
—

 
157,664

Operating costs
 
 
 
 
 
 
 
 
Operating expenses (A)
 
1,835

 
122,586

 
—

 
124,421

Cost of sales - food and beverages
 
228

 
10,005

 
—

 
10,233

General and administrative expense (B)
 
2,638

 
8,467

 
6,257

 
17,362

General and administrative expense - acquisition and transaction expenses (C)
 
1,454

 
508

 
138

 
2,100

Depreciation and amortization
 
535

 
9,320

 
8

 
9,863

Pre-opening costs (D)
 
1,803

 
—

 
—

 
1,803

Impairment
 
—

 
1,326

 
147

 
1,473

Realized and unrealized (gain) on investments
 
—

 
(331
)
 
—

 
(331
)
Total operating costs
 
8,493

 
151,881

 
6,550

 
166,924

Operating (loss) income
 
(6,686
)
 
3,976

 
(6,550
)
 
(9,260
)
Other income (expenses)
 
 
 
 
 
 
 
 
Interest and investment income
 
112

 
96

 
707

 
915

Interest expense (E)
 
—

 
(8,099
)
 
(1,064
)
 
(9,163
)
Capitalized interest (E)
 
—

 
342

 
171

 
513

Other (loss) income, net
 
—

 
(5,166
)
 
1,061

 
(4,105
)
Total other income (expenses)
 
112

 
(12,827
)
 
875

 
(11,840
)
Income tax expense
 
—

 
—

 
—

 
—

Net loss
 
(6,574
)
 
(8,851
)
 
(5,675
)
 
(21,100
)
Preferred dividends
 
—

 
—

 
(2,790
)
 
(2,790
)
Loss applicable to common stockholders
 
$
(6,574
)
 
$
(8,851
)
 
$
(8,465
)
 
$
(23,890
)



13
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

Summary segment financial data (continued).
 
 
Entertainment Golf
 
Traditional Golf
 
Corporate
 
Total
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Golf operations
 
$
855

 
$
68,295

 
$
—

 
$
69,150

Sales of food and beverages
 
952

 
20,902

 
—

 
21,854

Total revenues
 
1,807

 
89,197

 
—

 
91,004

Operating costs
 
 
 
 
 
 
 
 
Operating expenses (A)
 
1,835

 
65,207

 
—

 
67,042

Cost of sales - food and beverages
 
228

 
5,965

 
—

 
6,193

General and administrative expense (B)
 
1,535

 
4,313

 
3,961

 
9,809

General and administrative expense - acquisition and transaction expenses (C)
 
200

 
200

 
59

 
459

Depreciation and amortization
 
504

 
3,808

 
3

 
4,315

Pre-opening costs (D)
 
247

 
—

 
—

 
247

Impairment
 
—

 
—

 
—

 
—

Realized and unrealized (gain) on investments
 
—

 
(89
)
 
—

 
(89
)
Total operating costs
 
4,549

 
79,404

 
4,023

 
87,976

Operating (loss) income
 
(2,742
)
 
9,793

 
(4,023
)
 
3,028

Other income (expenses)
 
 
 
 
 
 
 
 
Interest and investment income
 
84

 
45

 
340

 
469

Interest expense (E)
 
—

 
(4,161
)
 
(570
)
 
(4,731
)
Capitalized interest (E)
 
—

 
87

 
43

 
130

Other (loss) income, net
 
—

 
(4,228
)
 
529

 
(3,699
)
Total other income (expenses)
 
84

 
(8,257
)
 
342

 
(7,831
)
Income tax expense
 
—

 
—

 
—

 
—

Net (loss) income
 
(2,658
)
 
1,536

 
(3,681
)
 
(4,803
)
Preferred dividends
 
—

 
—

 
(1,395
)
 
(1,395
)
(Loss) income applicable to common stockholders
 
$
(2,658
)
 
$
1,536

 
$
(5,076
)
 
$
(6,198
)


(A)
Operating expenses include rental expenses recorded under operating leases for carts and equipment in the amount of $0.2 million and $0.5 million for the three and six months ended June 30, 2019 , respectively, and $0.6 million and $1.1 million for the three and six months ended June 30, 2018 , respectively.
(B)
General and administrative expenses include severance expense in the amount of $0.7 million and $1.1 million for the three and six months ended June 30, 2019 , respectively, and zero and $0.1 million for the three and six months ended June 30, 2018 .
(C)
Acquisition and transaction expenses include costs related to completed and potential acquisitions and transactions, which may include advisory, legal, accounting and other professional or consulting fees.
(D)
Pre-opening costs are expensed as incurred and consist primarily of site-related marketing expenses, pre-opening rent, employee payroll, travel and related expenses, training costs, food, beverage and other operating expenses incurred prior to opening an Entertainment Golf venue.
(E)
Interest expense includes the accretion of membership deposit liabilities in the amount of $1.6 million and $3.6 million for the three and six months ended June 30, 2019 , respectively, and $1.7 million and $3.4 million for the three and six months ended June 30, 2018 , respectively. Interest expense and capitalized interest are combined in interest expense, net on the Consolidated Statements of Operations.
(F)
Total assets in the corporate segment include an equity method investment in the amount of $23.3 million as of June 30, 2019 recorded in other investments on the Consolidated Balance Sheets.


14
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

5. PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION

The following table summarizes the Company’s property and equipment:
 
 
June 30, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Depreciation
 
Net Carrying Value
 
Gross Carrying Amount
 
Accumulated Depreciation
 
Net Carrying Value
Land
$
6,792

 
$
—

 
$
6,792

 
$
6,747

 
$
—

 
$
6,747

Buildings and improvements
78,655

 
(32,025
)
 
46,630

 
78,833

 
(30,540
)
 
48,293

Furniture, fixtures and equipment
28,984

 
(18,401
)
 
10,583

 
26,726

 
(16,729
)
 
9,997

Finance leases - equipment
37,520

 
(15,018
)
 
22,502

 
28,745

 
(12,843
)
 
15,902

Construction in progress
91,112

 
—

 
91,112

 
51,666

 
—

 
51,666

Total Property and Equipment
$
243,063

 
$
(65,444
)
 
$
177,619

 
$
192,717

 
$
(60,112
)
 
$
132,605


On March 7, 2018, the Company announced it was actively pursuing the sale of 26 owned Traditional Golf properties in order to generate capital for reinvestment in the Entertainment Golf business. As of June 30, 2019 , the Company continues to present five golf properties as held-for-sale. The assets and associated liabilities are reported on the Consolidated Balance Sheets as “Real estate assets, held-for-sale, net” and “Real estate liabilities, held-for-sale,” respectively.
 
The real estate assets, held-for-sale, net are reported at a carrying value of $ 33.4 million and include $ 24.4 million of land, $ 8.0 million of buildings and improvements, $ 0.5 million of furniture, fixtures and equipment, and $ 0.5 million of other related assets, partially offset by accumulated impairment. The real estate liabilities, held-for-sale, are reported at a carrying value of less than $ 0.1 million and include property liabilities to be assumed, primarily prepaid membership dues. In March 2019, the Company reassessed the real estate assets, held-for-sale, net and determined that the carrying value of two properties exceeded the fair value less anticipated costs to sell. As a result, the Company recognized an impairment loss and recorded accumulated impairment totaling approximately $1.0 million . The fair value measurements were based on expected selling prices, less costs to sell. The significant inputs used to value these real estate investments fall within Level 3 for fair value reporting.

During the three months ended March 31, 2019, the Company sold two public golf properties in Georgia and a private golf property in California for an aggregate sale price of $28.7 million , resulting in net proceeds of $25.5 million , inclusive of transaction costs of $0.5 million . The Company received sale proceeds of $17.7 million during the three months ended March 31, 2019, consisting of $18.2 million for the golf properties sold during the three months ended March 31, 2019, and $2.2 million for golf properties that were sold during December 2018, less $2.7 million that was remitted to buyers for golf properties that were sold during December 2018. The Company previously received a $9.4 million cash deposit in 2018 related to a golf property that was sold in 2019. The difference between the sales price and the net proceeds was primarily due to prepaid membership dues that we are obligated to remit to the buyer, including $2.1 million payable to the buyer of a golf property sold during the three months ended March 31, 2019. The golf properties had a carrying value of $20.3 million and resulted in a gain on sale of $5.2 million . The gain on sale is recorded in other income (loss), net on the Consolidated Statement of Operations. The Company entered into a management agreement on the California golf property.

During the three months ended June 30, 2019 , the Company sold two public golf properties in New Jersey and California and two private golf properties in Tennessee and Washington for an aggregate sale price of $19.7 million , resulting in net proceeds of $17.9 million , inclusive of transaction costs of $0.8 million . The Company received sale proceeds of $14.9 million during the three months ended June 30, 2019 , consisting of $18.4 million for the golf properties sold during the three months ended June 30, 2019 , less $3.5 million that was remitted to buyers for golf properties that were sold in 2018 and the first quarter of 2019. The golf properties had a carrying value of $18.3 million and resulted in a loss on sale of $0.4 million . The loss on sale is recorded in other income (loss), net on the Consolidated Statement of Operations. The Company entered into a management agreement on the Washington golf property.

In March 2019, the Company evaluated the recoverability of the carrying value of a Traditional Golf leased golf property in California, using the income approach based on future assumptions of cash flows. Based on the analysis, the Company recorded

15
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

an impairment charge of $3.1 million . As the fair value inputs utilized are unobservable, the Company determined that the significant inputs used to value this property falls within Level 3 for fair value reporting.

6. LEASES
The Company's commitments under lease arrangements are primarily ground leases for Entertainment Golf venues and Traditional Golf properties and related facilities, office leases and leases for golf carts and equipment. The majority of lease terms for our Entertainment Golf venues and Traditional Golf properties and related facilities initially range from 10 to 20 years, and include up to eight 5-year renewal options (see Note 13 for additional detail). Equipment and golf cart leases initially range between 2 to 6 years and typically contain renewal options which may be on a month-to-month basis. An option to renew a lease is included in the determination of the ROU asset and lease liability when it is reasonably certain that the renewal option will be exercised.
Lease related costs recognized in the Consolidated Statements of Operations for the three and six months ended June 30, 2019 are as follows:
 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Finance lease cost
 
 
 
 
Amortization of right-of-use assets
 
$
1,529

 
$
3,046

Interest on lease liabilities
 
373

 
619

Total finance lease cost
 
1,902

 
3,665

 
 
 
 
 
Operating lease cost
 
 
 
 
Operating lease cost
 
9,588

 
18,598

Short-term lease cost
 
711

 
1,462

Variable lease cost
 
4,401

 
7,173

Total operating lease cost
 
14,700

 
27,233

 
 
 
 
 
Total lease cost
 
$
16,602

 
$
30,898


Other information related to leases included on the Consolidated Balance Sheet as of and for the six months ended June 30, 2019 are as follows:
 
 
Operating Leases
 
Financing Leases
Right-of-use assets
 
225,666

 
22,502

Lease liabilities
 
211,182

 
22,908

 
 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
 
Operating cash flows
 
15,062

 
420

Financing cash flows
 
N/A

 
2,692

 
 
 
 
 
Right-of-use assets obtained in exchange for lease liabilities
 
11,387

 
10,613

 
 
 
 
 
Weighted average remaining lease term
 
12.7 years

 
3.7 years

Weighted average discount rate
 
8.8
%
 
7.2
%


16
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

Future minimum lease payments under non-cancellable leases as of June 30, 2019 are as follows:
 
 
Operating Leases
 
Financing Leases
July 1, 2019 - December 31, 2019
 
15,179

 
5,549

2020
 
33,736

 
6,854

2021
 
32,509

 
5,409

2022
 
31,134

 
3,829

2023
 
30,962

 
2,821

Thereafter
 
229,332

 
910

Total minimum lease payments
 
372,852

 
25,372

Less: imputed interest
 
161,670

 
2,464

Total lease liabilities
 
$
211,182

 
$
22,908



7. INTANGIBLES, NET OF ACCUMULATED AMORTIZATION

The following table summarizes the Company’s intangible assets:
 
June 30, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
Trade name
$
700

 
$
(128
)
 
$
572

 
$
700

 
$
(117
)
 
$
583

Leasehold intangibles (A) (B)
—

 
—

 
—

 
46,581

 
(20,270
)
 
26,311

Management contracts
32,331

 
(16,240
)
 
16,091

 
32,932

 
(15,174
)
 
17,758

Internally-developed software
1,607

 
(329
)
 
1,278

 
2,314

 
(967
)
 
1,347

Membership base
5,236

 
(4,114
)
 
1,122

 
5,236

 
(3,740
)
 
1,496

Nonamortizable liquor licenses
1,052

 
—

 
1,052

 
893

 
—

 
893

Total Intangibles
$
40,926

 
$
(20,811
)
 
$
20,115

 
$
88,656

 
$
(40,268
)
 
$
48,388

(A)
The amortization expense for leasehold intangibles is reported in operating expenses in the Consolidated Statements of Operations.
(B)
As of January 1, 2019, leasehold intangibles were reclassified from "Intangibles, net of accumulated amortization" to "Operating lease right-of-use assets" in the Consolidated Balance Sheet as part of the adoption of ASU 2016-02.


17
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

8. DEBT OBLIGATIONS

The following table presents certain information regarding the Company’s debt obligations at June 30, 2019 and December 31, 2018 :
 
 
 
 
June 30, 2019
 
December 31, 2018
Debt Obligation/Collateral
 
Month Issued
 
Outstanding
Face
Amount
 
Carrying
Value
 
Final Stated Maturity
 
Weighted
Average
Coupon (A)
 
Weighted Average
Funding
Cost (B)
 
Weighted Average Life (Years)
 
Face Amount of
Floating Rate Debt
 
Outstanding Face Amount
 
Carrying Value
Credit Facilities and Finance Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vineyard II
 
Dec 1993
 
$
200

 
$
200

 
Dec 2043
 
2.80%
 
2.80
%
 
24.5
 
$
200

 
$
200

 
$
200

Finance leases (Equipment)
 
Jun 2014 - Jun 2019
 
22,908

 
22,908

 
Jul 2019 - Jan 2025
 
3.00% to 15.00%
 
7.22
%
 
3.7
 
—

 
15,778

 
15,778

 
 
 
 
23,108

 
23,108

 
 
 
 
 
7.19
%
 
3.9
 
200

 
15,978

 
15,978

Less current portion of obligations under finance leases
 
 
 
7,675

 
7,675

 
 
 
 
 
 
 
 
 
 
 
5,489

 
5,489

Credit facilities and obligations under finance leases - noncurrent
 
 
 
15,433

 
15,433

 
 
 
 
 
 
 
 
 
 
 
10,489

 
10,489

Corporate
 
 
 
 

 
 

 
 
 
 
 
 

 
 
 
 

 
 
 
 
Junior subordinated notes payable (C)
 
Mar 2006
 
51,004

 
51,196

 
Apr 2035
 
LIBOR+2.25%
 
4.80
%
 
15.8
 
51,004

 
51,004

 
51,200

Total debt obligations
 
 
 
$
74,112

 
$
74,304

 
 
 
 
 
5.54
%
 
12.1
 
$
51,204

 
$
66,982

 
$
67,178



(A)
Weighted average, including floating and fixed rate classes.
(B)
Including the effect of deferred financing costs.
(C)
Interest rate based on 3 month LIBOR plus 2.25% .

The Company leases certain golf carts and other equipment under finance lease agreements. The agreements typically provide for minimum rentals plus executory costs. Lease terms range from 24 to 66 months. Certain leases include bargain purchase options at lease expiration.

9. REAL ESTATE SECURITIES
 
The following is a summary of the Company’s real estate securities at June 30, 2019 , which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except for securities that are other-than-temporarily impaired.
 
 
June 30, 2019
 
 
 
 
Amortized Cost Basis
 
Gross Unrealized
 
 
 
 
 
Weighted Average
Asset Type
 
Outstanding Face Amount
 
Before Impairment
 
Other-Than- Temporary Impairment
 
After Impairment
 
Gains
 
Losses
 
Carrying
 Value (A)
 
Number of Securities
 
Rating (B)
 
Coupon
 
Yield
 
Life
(Years) (C)
 
Principal Subordination (D)
ABS - Non-Agency RMBS
 
$
4,000

 
$
2,714

 
$
(1,521
)
 
$
1,193

 
$
1,878

 
$
—

 
$
3,071

 
1

 
CCC
 
2.79
%
 
31.98
%
 
4.5
 
40.3
%
Total Securities, Available for Sale (E)
 
$
4,000

 
$
2,714

 
$
(1,521
)
 
$
1,193

 
$
1,878

 
$
—

 
$
3,071

 
1

 
 
 
 
 
 
 
 
 
 
  
(A)
See Note 10 regarding the estimation of fair value, which is equal to carrying value for all securities.
(B)
Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. For each security rated by multiple rating agencies, the lowest rating is used. Ratings provided were determined by third-party rating agencies, represent the most recent credit ratings available as of the reporting date and may not be current.
(C)
The weighted average life is based on the timing of expected cash flows on the assets.
(D)
Percentage of the outstanding face amount of securities and residual interests that is subordinate to the Company’s investments.
(E)
The total outstanding face amount was $4.0 million for floating rate securities. The collateral securing the ABS - Non-Agency RMBS is located in various geographical regions in the U.S. The Company does not have significant investments in any geographic region.


18
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 


The Company had no securities in an unrealized loss position as of June 30, 2019 . The Company has no activity related to credit losses on debt securities for the six months ended June 30, 2019 .

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value Summary Table

The following table summarizes the carrying values and estimated fair values of the Company’s financial instruments at June 30, 2019 : 
 
Carrying Value
 
Estimated Fair Value
 
Fair Value Method (A)
Assets
 

 
 

 
 
Real estate securities, available-for-sale
$
3,071

 
$
3,071

 
Pricing models - Level 3
Cash and cash equivalents
39,683

 
39,683

 
 
Restricted cash, current and noncurrent
4,557

 
4,557

 
 
Liabilities
 
 
 
 
 
Junior subordinated notes payable
51,196

 
29,452

 
Pricing models - Level 3
 

(A)
Pricing models are used for (i) real estate securities and loans that are not traded in an active market, and, therefore, have little or no price transparency, and for which significant unobservable inputs must be used in estimating fair value, or (ii) debt obligations which are private and untraded.

Fair Value Measurements

Valuation Hierarchy
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The Company follows this hierarchy for its financial instruments measured at fair value.

Level 1 - Quoted prices in active markets for identical instruments.
Level 2 - Valuations based principally on observable market parameters, including
•
quoted prices for similar assets or liabilities in active markets,
•
inputs other than quoted prices that are observable for the asset or liability (such as interest rates and yield curves observable at commonly quoted intervals, implied volatilities and credit spreads), and
•
market corroborated inputs (derived principally from or corroborated by observable market data).
Level 3 - Valuations determined using unobservable inputs that are supported by little or no market activity, and that are significant to the overall fair value measurement.

The Company’s real estate securities and loans, and debt obligations are currently not traded in active markets and therefore have little or no price transparency. As a result, the Company has estimated the fair value of these illiquid instruments based on internal pricing models subject to the Company’s controls described below.

The Company has various processes and controls in place to ensure that fair value measurements are reasonably estimated. With respect to broker and pricing service quotations, and in order to ensure these quotes represent a reasonable estimate of fair value, the Company’s quarterly procedures include a comparison of such quotations to quotations from different sources, outputs generated from its internal pricing models and transactions completed, as well as on its knowledge and experience of these markets. With respect to fair value estimates generated based on the Company’s internal pricing models, the Company’s management validates the inputs and outputs of the internal pricing models by comparing them to available independent third-party market parameters and models, where available, for reasonableness. The Company believes its valuation methods and the assumptions used are appropriate and consistent with other market participants.
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. For the Company’s investments in real

19
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

estate securities and loans categorized within Level 3 of the fair value hierarchy, the significant unobservable inputs include the discount rates, assumptions relating to prepayments, default rates and loss severities.

Significant Unobservable Inputs

The following table provides quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 :

 
 
 
 
 
 
Weighted Average Significant Input
Asset Type
 
Amortized Cost Basis
 
Fair Value
 
Discount
Rate
 
Prepayment
Speed
 
Cumulative Default Rate
 
Loss
Severity
ABS - Non-Agency RMBS
 
$
1,193

 
$
3,071

 
10.0
%
 
8.0
%
 
2.9
%
 
43.3
%

All of the inputs used have some degree of market observability, based on the Company’s knowledge of the market, relationships with market participants, and use of common market data sources. Collateral prepayment, default and loss severity projections are in the form of “curves” or “vectors” that vary for each monthly collateral cash flow projection. Methods used to develop these projections vary by asset class but conform to industry conventions. The Company uses assumptions that generate its best estimate of future cash flows of each respective security.

Real estate securities measured at fair value on a recurring basis using Level 3 inputs changed during the six months ended June 30, 2019 as follows:
 
 
ABS - Non-Agency RMBS
Balance at December 31, 2018
 
$
2,953

Total gains (losses) (A)
 
 

Included in other comprehensive income (loss)
 
—

Amortization included in interest income
 
176

Purchases, sales and repayments (A)
 
 

Proceeds
 
(58
)
Balance at June 30, 2019
 
$
3,071


(A)
None of the gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates. There were no purchases or sales during the six months ended June 30, 2019 . There were no transfers into or out of Level 3 during the six months ended June 30, 2019 .

Liabilities for Which Fair Value is Only Disclosed
 
The following table summarizes the level of the fair value hierarchy, valuation techniques and inputs used for estimating each class of liabilities not measured at fair value in the statement of financial position but for which fair value is disclosed:
Type of Liabilities Not Measured At Fair Value for Which Fair Value Is Disclosed
 
Fair Value Hierarchy
 
 
Valuation Techniques and Significant Inputs
Junior subordinated notes payable
 
Level 3
 
Valuation technique is based on discounted cash flows. Significant inputs include:
 
 
 
 
l
Amount and timing of expected future cash flows
 
 
 
 
l
Interest rates
 
 
 
 
l
Market yields and the credit spread of the Company

20
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 


11. EQUITY AND EARNINGS PER SHARE
 
A. Stock Options

The following is a summary of the changes in the Company’s outstanding options for the six months ended June 30, 2019 :
 
Number of Options
 
Weighted Average Strike Price
 
Weighted Average Life Remaining (in years)
Balance at December 31, 2018
8,436,931

 
$
3.72

 
 
Granted (B)
695,652

 
4.66

 
 
Balance at June 30, 2019
9,132,583

 
$
3.79

 
6.26
 
 
 
 
 
 
Exercisable at June 30, 2019
2,705,586

 
$
2.64

 
3.78

As of June 30, 2019 , the Company’s outstanding options were summarized as follows:
 
 
Number of Options
Held by the former Manager
 
2,705,253

Issued to the former Manager and subsequently transferred to certain of the Manager’s employees (A)
 
2,304,990

Issued to the independent directors
 
333

Issued to Drive Shack employees (B)
 
4,122,007

Total
 
9,132,583

Weighted average strike price
 
$
3.79

(A)
The Company and the former Manager agreed that options held by certain employees formerly employed by the Manager would not terminate or be forfeited as a result of the Termination and Cooperation Agreement, and the vesting of such options relate to the relevant holder’s employment with the Company and its affiliates following January 1, 2018. In both February 2017 and April 2018, the former Manager issued 1,152,495 options to certain employees formerly employed by the Manager as part of their compensation. The options fully vest and are exercisable one year prior to the option expiration date, beginning March 2020 through January 2024. In July 2019, a certain employee was terminated by the Company and 921,992 options reverted back to the former Manager.  The Company will reverse $1.2 million in stock compensation expense related to these options.
(B)
In November 2018, the Company issued options to certain employees as provided in their employment agreements. The options fully vest and are exercisable as follows: 3,351,355 options vest in equal annual installments on each of the first three anniversaries of the grant date; and 75,000 options fully vest on the third anniversary of the grant date. In April 2019, the Company issued 695,652 options to an employee that vest and become exercisable in equal annual installment on each of the first three anniversaries of the grant date.
 
The valuation of the employee options has been determined using the Black-Scholes option valuation model. The Black-Scholes option valuation model uses assumptions of expected volatility, expected dividend yield of the Company’s stock, expected term of the awards and the risk-free interest rate. The fair value of the options granted was determined using the following assumptions:

Option Valuation Date
 
April 11, 2019

Expected Volatility
 
36.80
%
Expected Dividend Yield
 
0.00
%
Expected Remaining Term
 
6.0 years

Risk-Free Rate
 
2.34
%
Fair Value at Valuation Date
 
$
1,280



21
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

Stock-based compensation expense is recognized on a straight-line basis through the vesting date of the options. Stock-based compensation expense related to the employee options was $1.2 million and $2.4 million during the three and six months ended June 30, 2019 , respectively, and $0.5 million and $0.8 million during the three and six months ended June 30, 2018 , respectively, and was recorded in general and administrative expense on the Consolidated Statements of Operations. The unrecognized stock-based compensation expense related to the unvested options was $12.0 million as of June 30, 2019 and will be expensed over a weighted average of 2.6 years .

B. Restricted Stock Units ("RSUs")

The following is a summary of the changes in the Company’s RSUs for the six months ended June 30, 2019 .

 
 
Number of RSUs
 
Weighted Average Grant Date Fair Value (per unit)
Balance at December 31, 2018
 
54,641

 
$
5.02

Granted
 
545,518

 
$
4.69

Forfeited
 
(27,542
)
 
$
4.72

Balance at June 30, 2019
 
572,617

 
$
4.72


The Company grants RSUs to the non-employee directors as part of their annual compensation. The RSUs are subject to a one year vesting period and begin to vest in August 2019. During the three months ended June 30, 2019 , the Company granted RSUs to employees as part of their annual compensation. The RSUs vest in equal annual installments on each of the first three anniversaries of the grant date. Stock-based compensation expense is recognized on a straight-line basis through the vesting date of the RSUs. During the three months ended June 30, 2019 , a non-employee director forfeited RSUs following his resignation from the board. Stock-based compensation expense related to RSUs was $0.1 million and $0.2 million during the three and six months ended June 30, 2019 , respectively, and zero for both the three and six months ended June 30, 2018 . Stock-based compensation expense was recorded in general and administrative expense on the Consolidated Statements of Operations. The unrecognized stock-based compensation expense related to the unvested RSUs was $2.4 million as of June 30, 2019 and will be expensed over a weighted average of 2.8 years .

C. Dividends

On March 13, 2019 , the Company declared dividends of $0.609375 , $0.503125 and $0.523438 per share on the 9.750% Series B, 8.050% Series C and 8.375% Series D preferred stock, respectively, for the period beginning February 1, 2019 and ending April 30, 2019. Dividends totaling $1.4 million were paid on April 29, 2019 .

On May 7, 2019 , the Company declared dividends of $0.609375 , $0.503125 and $0.523438 per share on the 9.750% Series B, 8.050% Series C and 8.375% Series D preferred stock, respectively, for the period beginning May 1, 2019 and ending July 31, 2019. Dividends totaling $1.4 million were paid on July 31, 2019 .

D. Earnings Per Share

The following table shows the Company's basic and diluted earnings per share (“EPS”):

22
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
Loss from continuing operations after preferred dividends and noncontrolling interests
$
(14,354
)
 
$
(6,198
)
 
$
(30,349
)
 
$
(23,890
)
Loss Applicable to Common Stockholders
$
(14,354
)
 
$
(6,198
)
 
$
(30,349
)
 
$
(23,890
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted average shares
67,029,610

 
66,977,104

 
67,028,364

 
66,977,104

Effect of dilutive securities
 
 
 
 
 
 
 
Options
—

 
—

 
—

 
—

RSUs
—

 
—

 
—

 
—

Denominator for diluted earnings per share - adjusted weighted average shares
67,029,610

 
66,977,104

 
67,028,364

 
66,977,104

Basic earnings per share:
 
 
 
 
 
 
 
Loss from continuing operations per share of common stock, after preferred dividends and noncontrolling interests
$
(0.21
)
 
$
(0.09
)
 
$
(0.45
)
 
$
(0.36
)
 
 
 
 
 
 
 
 
Loss Applicable to Common Stock, per share
$
(0.21
)
 
$
(0.09
)
 
$
(0.45
)
 
$
(0.36
)
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Loss from continuing operations per share of common stock, after preferred dividends and noncontrolling interests
$
(0.21
)
 
$
(0.09
)
 
$
(0.45
)
 
$
(0.36
)
 
 
 
 
 
 
 
 
Loss Applicable to Common Stock, per share
$
(0.21
)
 
$
(0.09
)
 
$
(0.45
)
 
$
(0.36
)

The Company’s dilutive securities are outstanding stock options and RSUs. During the three and six months ended June 30, 2019 , the Company had 409,157 and 557,103 antidilutive options, respectively. During both the three and six months ended June 30, 2018 , the Company had zero antidilutive options. During the three and six months ended June 30, 2019 , based on the treasury stock method, the Company had 2,840,284 and 2,538,663 potentially dilutive securities, respectively, which were excluded due to the Company's loss position. During the three and six months ended June 30, 2018 , based on the treasury stock method, the Company had 2,893,372 and 2,702,628 potentially dilutive securities, respectively, which were excluded due to the Company's loss position.

12. TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES
Agreements with the Former Manager
On December 21, 2017, the Company entered into a Transition Services Agreement, effective as of January 1, 2018, with the former Manager. In order to facilitate the transition of the Company’s management of its operations and provide the Company sufficient time to develop such services in-house or to hire other third-party service providers for such services, under the Transition Services Agreement, the former Manager continues to provide to the Company certain services (“Transition Services”).  The Transition Services primarily include information technology, legal, regulatory compliance, tax and accounting services.  The Transition Services are provided for a fee intended to be equal to the former Manager’s cost of providing the Transition Services, including the allocated cost of, among other things, overhead, employee wages and compensation and out-of-pocket expenses, and will be invoiced on a monthly basis. The Company incurred less than $ 0.1 million and $0.1 million in costs for Transition Services during the three and six months ended June 30, 2019 , respectively, and $0.2 million and $0.4 million during the three and six months ended June 30, 2018 , respectively. These costs are reported in general and administrative expense on the Consolidated Statements of Operations.


23
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

At June 30, 2019 , Fortress, through its affiliates, and principals of Fortress, owned 7.3 million shares of the Company’s common stock and Fortress, through its affiliates, had options relating to an additional 2.7 million shares of the Company’s common stock (Note 11).

Other Affiliated Entities
A member of the Board of Directors owned or leased aircraft that the Company chartered from a third-party aircraft operator for business purposes in the course of operations. The Company paid the aircraft operator less than $0.1 million for the six months ended June 30, 2019 , which represents market rates for the charters.

The Company previously leased corporate office space from an affiliate of a member of our Board of Directors. The Company incurred $0.2 million in rent expense during the six months ended June 30, 2019 , which represents market rates for the office space.

13. COMMITMENTS AND CONTINGENCIES
 
Litigation - The Company exited a leased property and accrued related lease exit costs of approximately $ 0.8 million in December 2016. The Company subsequently entered into a legal dispute related to this golf property. In June 2018, the Company accrued an additional $6.6 million for a total of $7.4 million to settle this legal dispute, which was recorded as accounts payable and accrued expenses in the Consolidated Balance Sheet. In July 2018, the Company settled the dispute for $7.4 million , with $5.2 million payable immediately and $2.2 million payable in six quarterly installments. The Company paid a total of $1.5 million of the quarterly installments as of June 30, 2019 , and the final payment is due in December 2019.

The Company is and may become, from time to time, involved in legal actions in the ordinary course of business, including governmental and administrative investigations, inquiries and proceedings concerning employment, labor, environmental, personal injury and other claims. Although management is unable to predict with certainty the eventual outcome of any legal action, management believes the ultimate liability arising from such actions, individually and in the aggregate, which existed at June 30, 2019 , will not materially affect the Company’s consolidated results of operations, financial position or cash flow. Given the inherent unpredictability of these types of proceedings, however, it is possible that future adverse outcomes could have a material effect on our financial results.

Commitments - In 2016, the Company entered into a ground lease in Orlando, Florida. During June 2017, the Company committed to the lease as there were no remaining material contingencies under the terms of the lease. The initial lease term is 20 years and includes three 5 -year renewal options.

In March 2017, the Company entered into a ground lease in Richmond, Virginia. During December 2017, the Company committed to the lease as there were no remaining material contingencies under the terms of the lease. The initial lease term is 20 years and includes three 5 -year renewal options.

In July 2017, the Company entered into a ground lease in West Palm Beach, Florida. During August 2018, the Company committed to the lease as there were no remaining material contingencies under the terms of the lease. The initial lease term is 20 years and includes five 5 -year renewal options.

In February 2018, the Company entered into a ground lease in New Orleans, Louisiana. During December 2018, the Company committed to the lease as there were no remaining material contingencies under the terms of the lease. The initial lease term is 20 years and includes eight 5 -year renewal options.

As of June 30, 2019 , the Company has additional operating leases that have not yet commenced of $105.0 million . The leases are expected to commence over the next 12 - 24 months with lease terms of approximately 20 years . These leases are primarily real estate leases for future Entertainment Golf venues and the commencement of these leases is contingent on completion of due diligence and satisfaction of certain contingencies prior to construction.


24
DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2019
(dollars in tables in thousands, except share data)
 

14. INCOME TAXES

The Company's income tax provision (benefit) for interim periods is determined using an estimate of the Company's annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period.
The Company's income tax provision was zero for both the three and six months ended June 30, 2019 and 2018 .
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.

The Company recorded a valuation allowance against its deferred tax assets as of June 30, 2019 as management does not believe that it is more likely than not that the deferred tax assets will be realized.

At December 31, 2018, the Company reported a total liability for unrecognized tax benefits of $0.7 million . The Company does not anticipate any significant increases or decreases to the balance of unrecognized tax benefits during the next 12 months.


15. SUBSEQUENT EVENTS

These Consolidated Financial Statements include a discussion of material events, if any, that have occurred subsequent to June 30, 2019 through the issuance of these Consolidated Financial Statements.

On July 30, 2019, the Company declared dividends of $0.609375 , $0.503125 and $0.523438 per share on the 9.750% Series B, 8.050% Series C and 8.375% Series D preferred stock, respectively, for the period beginning August 1, 2019 and ending October 31, 2019. Dividends totaling $1.4 million will be paid on October 31, 2019 to stockholders of record on October 1, 2019.

On August 5, 2019, Hana Khouri commenced employment with the Company in the role of President, with Kenneth A. May continuing to serve in the Chief Executive Officer role.








25


ITEM 2. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of Drive Shack Inc. (and with its subsidiaries, “Drive Shack Inc.” or the “Company”). The following should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto included herein, and with Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

GENERAL
The Company is a leading owner and operator of golf-related leisure and entertainment businesses. The Company was formed in 2002 and its common stock is traded on the NYSE under the symbol “DS.” We conduct our business through the following segments: (i) Entertainment Golf venues, (ii) Traditional Golf properties and (iii) corporate.

Business Overview

Entertainment Golf | Drive Shack

Drive Shack is an entertainment company that combines golf, competition, dining and fun. In April 2018, we opened our inaugural venue in Orlando, Florida. Drive Shack expects to open a chain of next-generation entertainment golf venues across the United States and internationally, with each venue featuring multiple stories of hitting suites where friends, family, co-workers or complete strangers can compete in a technologically-enhanced golf games. Consumers who are seeking a good time, and not looking to participate in the game, are able to spectate from one of Drive Shack’s restaurant or lounge areas.
Traditional Golf | American Golf
American Golf (as defined below) is one of the largest operators of golf properties in the United States. As of June 30, 2019 , we owned, leased or managed 61 properties across 10 states. American Golf and its dedicated employees are focused on delivering lasting experiences for our customers, including our more than 40,000 members, who played over 1.4 million rounds at our properties during the six months ended June 30, 2019 .
American Golf was acquired by the Company in December 2013, when the Company restructured an existing mezzanine debt investment related to NGP Realty Sub, L.P. and American Golf Corporation (together, “American Golf”). As part of the restructuring, the Company acquired the equity of American Golf’s indirect parent, AGC Mezzanine Pledge LLC. This business also includes Traditional Golf entities formed since the acquisition.
Traditional Golf operations are organized into three principal categories: (1) public properties, (2) private properties and (3) managed properties.
Public Properties .   Our 37 public properties generate revenues principally through daily green fees, golf cart rentals and food, beverage and merchandise sales.  Amenities at these properties generally include practice facilities and pro shops with food and beverage facilities.  In some cases, our public properties have small clubhouses with banquet facilities. In addition, The Players Club is a monthly membership program offered at most of our public properties, with membership benefits ranging from daily range access to ability to participate in golf clinics, in return for a monthly membership fee.
Private Properties .   Our five private properties are open to members only and generate revenues principally through initiation fees, membership dues, guest fees, and food, beverage and merchandise sales. Amenities at these properties typically include practice facilities, full service clubhouses with a pro shop, locker room facilities and multiple food and beverage outlets, including grills, restaurants and banquet facilities.
Managed Properties . Our 19 managed properties are properties that American Golf manages pursuant to a management agreement with the owner of each property.  We recognize revenue from these properties in amounts equal to the respective management fees and the reimbursements of certain operating costs.

26


The following summarizes the American Golf properties and holes as of June 30, 2019 :
AGCQ22019A02.JPG

MARKET CONSIDERATIONS

Our ability to execute our business strategy, particularly the development of our Entertainment Golf business, depends to a degree on our ability to monetize our remaining investments, optimize our Traditional Golf business, including sales of certain owned properties, and obtain additional capital. We have substantially monetized the remaining loans and securities. We last raised capital through the equity markets in 2014, and rising interest rates or stock market volatility could impair our ability to raise equity capital on attractive terms.

Our ability to generate income is dependent on, among other factors, our ability to raise capital and finance properties on favorable terms, deploy capital on a timely basis at attractive returns, and exit properties at favorable yields. Market conditions outside of our control, such as interest rates, inflation, consumer discretionary spending and stock market volatility affect these objectives in a variety of ways.

Entertainment Golf Business

We opened our inaugural venue in Orlando, Florida in April 2018 and are in the construction and development phase for six additional sites, as well as in the process of exploring sites for additional Entertainment Golf venues. There is competition within the bid process, and land development and construction are subject to obtaining the necessary regulatory approvals. Delays in these processes could impact our business. In addition, similar to our Traditional Golf business, trends in consumer spending, as well as climate and weather patterns, could have an impact on the markets in which we currently or will in the future operate.
Traditional Golf Business

With respect to our Traditional Golf business, trends in consumer discretionary spending, as well as climate and weather patterns, have a significant impact on the markets in which we operate. Traditional Golf is subject to seasonal fluctuations caused by significant reductions in golf activities due to shorter days and colder temperatures in the first and fourth quarters of each year. Consequently, a significantly larger portion of our revenue from our Traditional Golf operations is earned in the second and third quarters of our fiscal year. In addition, severe weather patterns can also negatively impact our results of operations.

While consumer spending in the Traditional Golf industry has not grown in recent years, we believe improving economic conditions and improvements in local housing markets have helped and will continue to help drive membership growth and increase the number of golf rounds played. In addition, we believe growth in related industries, including leisure, fitness and entertainment, may positively impact our Traditional Golf business.

27



APPLICATION OF CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Our estimates are based on information available to management at the time of preparation of the Consolidated Financial Statements, including the result of historical analysis, our understanding and experience of the Company’s operations, our knowledge of the industry and market-participant data available to us.

Actual results have historically been in line with management’s estimates and judgments used in applying each of the accounting policies and management periodically re-evaluates accounting estimates and assumptions. Actual results could differ from these estimates and materially impact our Consolidated Financial Statements. However, the Company does not expect our assessments and assumptions to materially change in the future. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, except for those made in connection with the adoption of ASU 2016-02. See Note 2 in Part I, Item 1 “Financial Statements” for additional information.

Recent Accounting Pronouncements

See Note 2 in Part I, Item 1. “Financial Statements” for information about recent accounting pronouncements.


28


 
RESULTS OF OPERATIONS

The following tables summarize the changes in our results of operations for the three and six months ended June 30, 2019 and 2018 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2019
 
2018
 
Amount
 
%
Revenues
 
 
 
 
 
 
 
Golf operations (A)
$
57,386

 
$
69,150

 
$
(11,764
)
 
(17.0
)%
Sales of food and beverages
14,229

 
21,854

 
(7,625
)
 
(34.9
)%
Total revenues
71,615

 
91,004

 
(19,389
)
 
(21.3
)%
Operating costs
 
 
 
 
 
 
 
Operating expenses (A)
58,720

 
67,042

 
(8,322
)
 
(12.4
)%
Cost of sales - food and beverages
3,904

 
6,193

 
(2,289
)
 
(37.0
)%
General and administrative expense
13,607

 
10,268

 
3,339

 
32.5
 %
Depreciation and amortization
5,122

 
4,315

 
807

 
18.7
 %
Pre-opening costs
1,700

 
247

 
1,453

 
588.3
 %
Impairment
118

 
—

 
118

 
N.M.

Realized and unrealized (gain) on investments
—

 
(89
)
 
(89
)
 
(100.0
)%
Total operating costs
83,171

 
87,976

 
(4,805
)
 
(5.5
)%
Operating (loss) income
(11,556
)
 
3,028

 
14,584

 
(481.6
)%
 
 
 
 
 
 
 
 
Other income (expenses)
 
 
 
 
 
 
 
Interest and investment income
265

 
469

 
(204
)
 
(43.5
)%
Interest expense, net
(1,795
)
 
(4,601
)
 
(2,806
)
 
(61.0
)%
Other income (loss), net
127

 
(3,699
)
 
3,826

 
(103.4
)%
Total other income (expenses)
(1,403
)
 
(7,831
)
 
6,428

 
(82.1
)%
 
 
 
 
 
 
 
 
Loss before income tax
$
(12,959
)
 
$
(4,803
)
 
$
8,156

 
169.8
 %

29


 
 
Six Months Ended June 30,
 
Increase (Decrease)
 
 
2019
 
2018
 
Amount
 
%
Revenues
 
 
 
 
 
 
 
 
Golf operations (A)
 
$
102,092

 
$
122,704

 
$
(20,612
)
 
(16.8
)%
Sales of food and beverages
 
23,475

 
34,960

 
(11,485
)
 
(32.9
)%
Total revenues
 
125,567

 
157,664

 
(32,097
)
 
(20.4
)%
Operating costs
 
 
 
 
 
 
 
 
Operating expenses (A)
 
106,443

 
124,421

 
(17,978
)
 
(14.4
)%
Cost of sales - food and beverages
 
6,601

 
10,233

 
(3,632
)
 
(35.5
)%
General and administrative expense
 
25,226

 
19,462

 
5,764

 
29.6
 %
Depreciation and amortization
 
10,046

 
9,863

 
183

 
1.9
 %
Pre-opening costs
 
2,879

 
1,803

 
1,076

 
59.7
 %
Impairment
 
4,206

 
1,473

 
2,733

 
185.5
 %
Realized and unrealized (gain) on investments
 
—

 
(331
)
 
331

 
(100.0
)%
Total operating costs
 
155,401

 
166,924

 
(11,523
)
 
(6.9
)%
Operating loss
 
(29,834
)
 
(9,260
)
 
20,574

 
222.2
 %
 
 
 
 
 
 
 
 
 
Other income (expenses)
 
 
 
 
 
 
 
 
Interest and investment income
 
608

 
915

 
(307
)
 
(33.6
)%
Interest expense, net
 
(3,947
)
 
(8,650
)
 
(4,703
)
 
(54.4
)%
Other income (loss), net
 
5,614

 
(4,105
)
 
9,719

 
(236.8
)%
Total other income (expenses)
 
2,275

 
(11,840
)
 
14,115

 
(119.2
)%
 
 
 
 
 
 
 
 
 
Loss before income tax
 
$
(27,559
)
 
$
(21,100
)
 
$
6,459

 
30.6
 %
(A)
Includes $13.0 million and $22.8 million for the three and six months ended June 30, 2019 , respectively, and $6.1 million and $10.8 million for the three and six months ended June 30, 2018 due to management contract reimbursements reported under the new revenue standard.

Revenues from Golf Operations

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

Revenues from golf operations decreased by $11.8 million primarily due to decreases of: (i) $19.5 million related to fewer Traditional Golf properties owned or operated in 2019, (ii) $0.2 million primarily due to fewer rounds played related to unfavorable weather, partially offset by an increase of (iii) $7.7 million in revenues from management contracts.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018

Revenues from golf operations decreased by $20.6 million primarily due to decreases of: (i) $33.6 million related to fewer Traditional Golf properties owned or operated in 2019, (ii) $0.9 million due to fewer rounds played related to unfavorable weather, partially offset by an increase of (iii) $13.7 million in revenues from management contracts and (iv) $0.4 million related to our Entertainment Golf business.

Sales of Food and Beverages

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

Sales of food and beverages decreased by $7.6 million primarily due to decreases of: (i) $7.1 million due to fewer Traditional Golf properties owned or operated in 2019 and (ii) $0.5 million due to lower traffic in our Traditional Golf properties.


30


Six months ended June 30, 2019 compared to the six months ended June 30, 2018

Sales of food and beverages decreased by $11.5 million primarily due to decreases of: (i) $11.6 million due to fewer Traditional Golf properties owned or operated in 2019 and (ii) $0.9 million due to lower traffic in our Traditional Golf properties, partially offset by an increase of $1.0 million related to our Entertainment Golf business.

Operating Expenses

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

Operating expenses decreased by $8.3 million primarily due to decreases of: (i) $15.3 million due to fewer Traditional Golf properties owned or operated in 2019, partially offset by increases of: (ii) $6.9 million in reimbursed expenses from management contracts due to more courses managed in 2019.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018

Operating expenses decreased by $18.0 million primarily due to decreases of: (i) $31.9 million due to fewer Traditional Golf properties owned or operated in 2019, partially offset by increases of: (ii) $12.0 million in reimbursed expenses from management contracts due to more courses managed in 2019 and (iii) $1.8 million related to our Entertainment Golf business.

Cost of Sales - Food and Beverages

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

Cost of sales - food and beverages decreased by $2.3 million primarily due to fewer Traditional Golf properties owned or operated in 2019.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018

Cost of sales - food and beverages decreased by $3.6 million primarily due to fewer Traditional Golf properties owned or operated in 2019 partially offset by our Entertainment Golf business.
 
General and Administrative Expense (including Acquisition and Transaction Expense)

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

General and administrative expense increased by $3.3 million primarily due to higher payroll expense related to the hiring of employees in our Entertainment Golf and corporate segments, including an increase of $0.9 million in stock-based compensation expense.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018

General and administrative expense increased by $5.8 million primarily due to higher payroll expense related to the hiring of employees in our Entertainment Golf and corporate segments, including an increase of $1.7 million in stock-based compensation expense.

Depreciation and Amortization

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

Depreciation and amortization increased by $0.8 million primarily due to depreciation on assets placed into service in April 2018 at our Entertainment Golf venue in Orlando, Florida and an increase in capital leases for equipment.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018

There was no significant change in depreciation and amortization.




31


Pre-Opening Costs

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

Pre-opening expenses increased by $1.5 million primarily due to costs associated with the expected opening of three new Entertainment Golf venues prior to year end 2019.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018

Pre-opening expenses increased by $1.1 million primarily due to costs associated with the expected opening of three new Entertainment Golf venues prior to year end 2019.

Impairment

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

There was no significant change in impairment.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018

During the six months ended June 30, 2019 , we recorded impairment of $1.0 million on two Traditional Golf properties that were classified as held-for-sale and $3.1 million on a leased Traditional Golf property. During the six months ended June 30, 2018 , we recorded impairment on a Traditional Golf property that was reclassified as held-for-sale in March 2018.

Realized and Unrealized (Gain) on Investments

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

During the three months ended June 30, 2018 , we recorded an unrealized gain on the mark-to-market value of a derivative, which was unwound in December 2018.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018

During the six months ended June 30, 2018 , we recorded an unrealized gain on the mark-to-market value of a derivative, which was unwound in December 2018.

Interest and Investment Income

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

There was no significant change in interest and investment income.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018

Interest and investment income decreased by $0.3 million primarily due to lower balances in interest bearing cash accounts.

Interest Expense, Net

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

Interest expense, net decreased by $2.8 million primarily due to: (i) a decrease in interest expense related to the Traditional Golf term loan which was prepaid in December 2018, and (ii) an increase of interest expense capitalized into construction in progress balances associated with the opening of three Entertainment Golf venues prior to year-end 2019.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018

Interest expense, net decreased by $4.7 million primarily due to (i) a decrease in interest expense related to the Traditional Golf term loan which was prepaid in December 2018, and (ii) an increase of interest expense capitalized into construction in progress balances associated with the opening of three Entertainment Golf venues prior to year-end 2019.

32


Other Income (Loss), Net

Three months ended June 30, 2019 compared to the three months ended June 30, 2018

Other income (loss), net increased by $3.8 million primarily due to settlement of a legal dispute on a Traditional Golf property during June 2018, partially offset by a gain on the sale of a property during the three months ended June 30, 2018 . There was no significant activity during the three months ended June 30, 2019.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018

Other income (loss), net increased by $9.7 million primarily due to a $4.7 million gain on the sale of seven Traditional Golf properties during the six months ended June 30, 2019 , compared to a $0.9 million gain on the sale of one Traditional Golf property during the six months ended June 30, 2018, and a $5.0 million loss primarily due to the settlement of a legal dispute on a Traditional Golf property during June 2018.



33


 
LIQUIDITY AND CAPITAL RESOURCES

Overview
 
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings and fund capital for our Entertainment and Traditional Golf businesses and other general business needs.

Our primary sources of funds for liquidity consist of cash on hand, sales or repayments of assets (including sales of our owned golf properties), and potential issuance of new debt or equity securities, when feasible. We have the ability to publicly or privately issue common stock, preferred stock, depository shares, debt securities and warrants, subject to market and other conditions.

Sources of Liquidity and Uses of Capital

As of the date of this filing, we believe we have sufficient assets, which include unrestricted cash, to satisfy all of our short-term recourse liabilities. Our junior subordinated notes payable are long-term obligations. With respect to the next 12 months, we expect that our cash on hand combined with our other primary sources of funds for liquidity will be sufficient to satisfy our anticipated liquidity needs with respect to our current portfolio, including related financings, capital expenditures for our Entertainment and Traditional Golf businesses, working capital needs and operating expenses. However, we may have additional cash requirements with respect to executing our strategic objectives for our Entertainment Golf business and incremental capital investments related to our Traditional Golf business. In addition to our available cash, we may elect to meet the cash requirements of these incremental investments through proceeds from the monetization of our assets or from additional borrowings, equity offerings or other means. While it is inherently more difficult to forecast beyond the next 12 months, we currently expect to meet our long-term liquidity requirements, specifically the repayment of our debt obligations and capital expenditures, through our cash on hand and, if needed, additional borrowings, proceeds from equity offerings and the sale or refinancing of our assets. We continually monitor market conditions for financing opportunities, and at any given time, we may enter into or pursue one or more of the transactions described above.
These short-term and long-term expectations are forward-looking and subject to a number of uncertainties and assumptions, which are described below under “–Factors That Could Impact Our Liquidity, Capital Resources and Capital Obligations” as well as Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. If our assumptions about our liquidity prove to be incorrect, we could be subject to a shortfall in liquidity in the future, and this shortfall may occur rapidly and with little or no notice, which would limit our ability to address the shortfall on a timely basis.

Cash flows provided by operations constitute a critical component of our liquidity. Essentially, our cash flows provided by operations is equal to (i) net cash flows received from our Entertainment and Traditional Golf businesses, plus (ii) the net cash flows from our security investments, including principal and sales proceeds, less (iii) Entertainment and Traditional Golf operating expenses, management fees, professional fees, insurance and other expenses, less (iv) employee wage and benefit expenses, less (v) interest on the junior subordinated notes payable and less (vi) preferred dividends.

Our cash flows provided by operations differs from our net income (loss) due to these primary factors: (i) accretion of discount on our real estate securities and loans (including the accrual of interest payable at maturity), (ii) accretion of the golf membership deposit liabilities in interest expense, (iii) recognition of deferred revenue from initiation fee deposits, (iv) amortization of prepaid golf membership dues, (v) gains and losses from sales of assets, (vi) other-than-temporary impairment on our investments, as well as impairments of Traditional Golf properties, (vii) unrealized gains or losses on our investments, (viii) non-cash gains or losses associated with our early extinguishment of debt, (ix) non-cash gains on deconsolidation, and (x) depreciation and amortization on our assets.

The sources of our distributions are net cash provided by operating activities, net cash provided by investing activities and cash equivalents as they represent the return on our real estate debt investments and golf-related real estate and operations. The Company has paid preferred dividends of $2.8 million thus far in fiscal year 2019 , and our board of directors elected not to declare common stock dividends in the first six months of fiscal year 2019 to retain capital for growth. For the six months ended June 30, 2019 , the Company reported net cash used in operating activities of $24.2 million , net cash used in investing activities of $9.9 million , net cash used in financing activities of $4.4 million , and cash and cash equivalents of $39.7 million as of June 30, 2019 . As a result of our revocation of REIT election, effective January 1, 2017, we are no longer subject to the distribution requirements applicable to REITs. The timing and amount of distributions are in the sole discretion of our board of directors, which considers our earnings, financial performance and condition, debt service obligations and applicable debt covenants, tax considerations, as well as capital expenditure requirements, business prospects and other factors that our board of directors may deem relevant from time to time. 


34


Update on Liquidity, Capital Resources and Capital Obligations

Cash – As of June 30, 2019 , we had $39.7 million of available cash, including $5.7 million of working capital for the Traditional Golf business. On May 7, 2019 , we declared a quarterly preferred dividend of $1.4 million which was paid on July 31, 2019 .

Short-term liquidity requirements – As of June 30, 2019 , we expect our short-term liquidity requirements to include a total of approximately $85.0 to $95.0 million for both our Drive Shack venues and Traditional Golf properties.

Our liquidity, available capital resources and capital obligations could change rapidly due to a variety of factors, many of which are beyond our control. Set forth below is a discussion of some of the factors that could impact our liquidity, available capital resources and capital obligations.

Factors That Could Impact Our Liquidity, Capital Resources and Capital Obligations

We refer readers to our discussions in other sections of this report for the following information:
 
•
For a further discussion of recent trends and events affecting our liquidity, see “– Market Considerations” above;
•
As described above, under “- Sources of Liquidity and Uses of Capital,” we may be subject to capital obligations associated with our Entertainment and Traditional Golf businesses;
•
Our debt obligations are also subject to refinancing risk upon the maturity of the related debt. See “– Debt Obligations” below; and
•
For a further discussion of a number of risks that could affect our liquidity, access to capital resources and our capital obligations, see Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

In addition to the information referenced above, the following factors could affect our liquidity, access to capital resources and our capital obligations related to our Entertainment and Traditional Golf businesses. As such, if their outcomes do not fall within our expectations, changes in these factors could negatively affect our liquidity.

•
Access to Financing from Counterparties – Decisions by investors, counterparties and lenders to enter into transactions with us will depend upon a number of factors, such as our historical and projected financial performance, compliance with the terms of our current credit and derivative arrangements, industry and market trends, the availability of capital and our investors’, counterparties’ and lenders’ policies and rates applicable thereto, and the relative attractiveness of alternative investment or lending opportunities.
•
Impact of Expected Repayment or Forecasted Sale on Cash Flows – The timing of and proceeds from the sale of certain assets may be different than expected or may not occur as expected. Proceeds from sales of assets in the current illiquid market environment are unpredictable and may vary materially from their estimated fair value and their carrying value.
•
Impact of Unexpected Costs, Cost Increases and Delayed Opening of our Entertainment Golf Venues on Cash Flows – There may be unforeseen or higher than expected construction and development costs and the opening of new venues may be later than expected. These additional expenses and timing of opening may vary materially from our estimates.
•
Performance of the Entertainment and Traditional Golf businesses - Current and future liquidity is greatly dependent upon our operating results, which are driven largely by overall economic conditions and can fluctuate significantly from quarter to quarter as a result of seasonal factors and discretionary consumer spending. We expect that economic and environmental conditions and changes in regulatory legislation will continue to exert pressure on both supplier pricing and consumer spending related to entertainment and dining alternatives. Although there is no assurance that our cost of products will remain stable or that federal, state or local minimum wage rates will not increase beyond amounts currently legislated, the effects of any supplier price increases or wage rate increases are expected to be partially offset by selected price increases where competitively appropriate.


35


Debt Obligations
 
Our debt obligations including finance lease obligations, as summarized in Note 8 to our Consolidated Financial Statements included herein, existing at June 30, 2019 had contractual maturities as follows (in thousands):
 
Nonrecourse
 
Recourse
 
Total
Period from July 1, 2019 through December 31, 2019
$
4,924

 
$
—

 
$
4,924

2020
5,984

 
—

 
5,984

2021
4,871

 
—

 
4,871

2022
3,542

 
—

 
3,542

2023
2,700

 
—

 
2,700

2024
887

 
—

 
887

Thereafter
200

 
51,004

 
51,204

Total
$
23,108

 
$
51,004

 
$
74,112


Equity
 
Preferred Stock Dividends Paid
 
 
 
 
Amount Per Share
Declared for the three months ended
 
Paid
 
Series B
 
Series C
 
Series D
January 31, 2019
 
January 2019
 
$
0.609

 
$
0.503

 
$
0.523

April 30, 2019
 
April 2019
 
$
0.609

 
$
0.503

 
$
0.523

July 31, 2019
 
July 2019
 
$
0.609

 
$
0.503

 
$
0.523



Cash Flow

Operating Activities

Net cash used in operating activities was $24.2 million for the six months ended June 30, 2019 and $11.9 million for the six months ended June 30, 2018 . Changes in operating cash flow activities are described below:

•
Operating cash flows increased by:
◦
$1.8 million due to management fees paid in 2018 that were incurred in 2017 when the Company was externally managed; and
◦
$0.4 million due to a federal tax refund.

•
Operating cash flows decreased by:
◦
$4.7 million in lower operating cash flows from Traditional Golf, primarily related to golf properties sold in December 2018; and
◦
$6.3 million of payroll costs primarily due to increased headcount and bonuses paid in 2019 that were incurred in 2018; and
◦
$3.5 million of general and administrative expenses due to increased professional fees.

Investing Activities

Investing activities used $9.9 million and $27.9 million during the six months ended June 30, 2019 and 2018 , respectively. Uses of cash flow from investing activities consisted primarily of investments made in Entertainment Golf venues and Traditional Golf properties. Proceeds received from cash flows from investing activities consisted primarily of sale of property and equipment.

Financing Activities

Financing activities used $4.4 million and $3.6 million during the six months ended June 30, 2019 and 2018 , respectively. Proceeds received from cash flow from financing activities consisted primarily of deposits received on golf memberships. Uses of cash flow from financing activities included the repayment of debt obligations and the payment of preferred dividends.

36



Off-Balance Sheet Arrangements

There have been no significant changes to our off-balance sheet arrangements as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 .


CONTRACTUAL OBLIGATIONS

During the six months ended June 30, 2019 , we had all of the material contractual obligations referred to in our annual report on Form 10-K for the year ended December 31, 2018 . In addition, we had the following material contractual obligations:

•
In March 2019, we executed a lease for office space in New York, New York for a term of seven years.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market risk is the exposure to loss resulting from changes in interest rates, credit spreads, foreign currency exchange rates, commodity prices and equity prices. We substantially exited our real estate related debt positions, which significantly reduced our market risk exposure related to interest rate risk, credit spread risk and credit risk. We are also exposed to inflationary factors in our business.

There have been no material changes to our exposure to market risks as described in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 .


ITEM 4. CONTROLS AND PROCEDURES
 
(a)
Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information is recorded, processed, summarized and reported accurately and completely. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

(b)
Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


37


PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
We are and may become involved in legal proceedings, including but not limited to regulatory investigations and inquiries, in the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, regulatory investigation or inquiry, in the opinion of management, we do not expect our current or threatened legal proceedings to have a material adverse effect on our business, financial position or results of operations. Given the inherent unpredictability of these types of proceedings, however, it is possible that future adverse outcomes could have a material effect on our business, financial position or results of operations.

Item 1A. Risk Factors
 
There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.



38



Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
 
 
 
 
 
 
 
 

Item 3.  Defaults upon Senior Securities
 
None.
 

Item 4.  Mine Safety Disclosures
 
None.
 

Item 5.  Other Information
 
None.

39


Item 6. Exhibits
 
Exhibit Number
Exhibit Description
 
 
 
 
Separation and Distribution Agreement dated April 26, 2013, between New Residential Investment Corp. and the Registrant (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 2.1, filed on May 3, 2013).
 
 
 
 
Separation and Distribution Agreement dated October 16, 2014, between New Senior Investment Group Inc. and the Registrant (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 2.2, filed on November 5, 2014).
 
 
 
 
Articles of Restatement (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.2, filed on December 8, 2016).
 
 
 
 
Articles Supplementary relating to the Series B Preferred Stock (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.3, filed on May 13, 2003).
 
 
 
 
Articles Supplementary relating to the Series C Preferred Stock (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.3, filed on October 25, 2005).
 
 
 
 
Articles Supplementary relating to the Series D Preferred Stock (incorporated by reference to the Registrant’s Report on Form 8-A, Exhibit 3.1, filed on March 14, 2007).
 
 
 
 
Articles Supplementary of Series E Junior Participating Preferred Stock (incorporated by reference to the Registrant’s Annual Report on Form 10-K, Exhibit 3.5, filed on March 2, 2017).
 
 
 
 
Amended and Restated By-laws (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.4, filed on December 8, 2016).
 
 
 
 
Junior Subordinated Indenture between Newcastle Investment Corp. and The Bank of New York Mellon Trust Company, National Association, dated April 30, 2009 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 4.1, filed on May 4, 2009).
 
 
 
 
Pledge and Security Agreement between Newcastle Investment Corp. and The Bank of New York Mellon Trust Company, National Association, as trustee, dated April 30, 2009 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 4.2, filed on May 4, 2009).
 
 
 
 
Pledge, Security Agreement and Account Control Agreement among Newcastle Investment Corp., NIC TP LLC, as pledgor, and The Bank of New York Mellon Trust Company, National Association, as bank and trustee, dated April 30, 2009 (incorporated by reference to the Registrant’s Current Report on Form 8- K, Exhibit 4.3, filed on May 4, 2009).
 
 
 
 
Tax Benefits Preservation Plan, dated as of December 7, 2016, between Newcastle Investment Corp. and American Stock Transfer & Trust Company, LLC (incorporated by reference to the Registrant's Current Report on Form 8-K, Exhibit 4.1, filed on December 8, 2016).
 
 
 
 
Tax Benefits Preservation Plan, dated as of December 6, 2017, between Drive Shack Inc. and American Stock Transfer & Trust Company, LLC (incorporated by reference to the Registrant's Current Report on Form 8-K, Exhibit 4.1, filed on December 6, 2017).
 
 
 
 
Tax Benefits Preservation Plan, dated as of December 5, 2018, between Drive Shack Inc. and American Stock Transfer & Trust Company, LLC (incorporated by reference to the Registrant's Current Report on Form 8-K, Exhibit 4.1, filed on December 6, 2018).
 
 
 
 
Termination and Cooperation Agreement, dated December 21, 2017, by and between Drive Shack Inc. and FIG
LLC (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 10.1, filed on December
21, 2017).
 
 
 
 
Transition Services Agreement, dated December 21, 2017, by and between Drive Shack Inc. and FIG LLC
(incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 10.2, filed on December 21,
2017).
 
 
 
 
Letter Agreement, dated December 21, 2017, by and between Drive Shack Inc. and Sarah L. Watterson (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 10.3, filed on December 21, 2017).

40


 
Exhibit Number
Exhibit Description
 
 
 
 
 
 
 
Amendment to the Letter Agreement dated December 21, 2017, by and between Drive Shack Inc. and Sarah L. Watterson (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 10.4, filed on May 10, 2019).
 
 
 
 
Letter Agreement, dated December 21, 2017, by and between Drive Shack Inc. and Lawrence A. Goodfield, Jr.
(incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 10.4, filed on December 21,
2017).
 
 
 
 
Letter Agreement, dated December 21, 2017, by and between Drive Shack Inc. and Sara A. Yakin (incorporated
by reference to the Registrant’s Current Report on Form 8-K, Exhibit 10.5, filed on December 21, 2017).
 
 
 
 
Letter Agreement, dated November 7, 2018, by and between Drive Shack Inc. and Kenneth A. May (incorporated by reference to the Registrant’s Annual Report on Form 10-K, Exhibit 10.6, filed on March 15, 2019).
 
 
 
 
Letter Agreement, dated November 7, 2018, by and between Drive Shack Inc. and David M. Hammarley (incorporated by reference to the Registrant’s Annual Report on Form 10-K, Exhibit 10.7, filed on March 15, 2019).
 
 
 
 
2012 Newcastle Investment Corp. Nonqualified Stock Option and Incentive Award Plan, adopted as of May 7, 2012 (incorporated by reference to the Registrant’s Annual Report on Form 10-K, Exhibit 10.3, filed on February 28, 2013).
 
 
 
 
Amended and Restated 2014 Newcastle Investment Corp. Nonqualified Stock Option and Incentive Award Plan, adopted as of November 3, 2014 (incorporated by reference to the Registrant’s Annual Report on Form 10-K, Exhibit 10.5, filed on March 2, 2015).
 
 
 
 
2015 Newcastle Investment Corp. Nonqualified Option and Incentive Award Plan, adopted as of April 16, 2015 (incorporated by reference to Annex A of the Registrant’s definitive proxy statement for the 2015 annual meeting of stockholders filed on April 17, 2015).
 
 
 
 
2016 Newcastle Investment Corp. Nonqualified Option and Incentive Award Plan (incorporated by reference to the Registrant's Current Report on Form 8-K, Exhibit 10.1, filed on May 19, 2016).
 
 
 
 
2017 Drive Shack Inc. Nonqualified Option and Incentive Award Plan (incorporated by reference to the Registrant's definitive proxy statement for the 2017 annual meeting of stockholders, filed on April 13, 2017).
 
 
 
 
Drive Shack Inc. 2018 Omnibus Incentive Plan (incorporated by reference to Annex A of the Registrant's definitive proxy statement for the 2018 annual meeting of stockholders filed on April 13, 2018).
 
 
 
 
Exchange Agreement between Newcastle Investment Corp. and Taberna Preferred Funding IV, Ltd., Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VI, Ltd. And Taberna Preferred Funding VII, Ltd., dated April 30, 2009 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 10.1, filed on May 4, 2009).
 
 
 
 
Exchange Agreement, dated as of January 29, 2010, by and among Newcastle Investment Corp., Taberna Capital Management, LLC, Taberna Preferred Funding IV, Ltd., Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VI, Ltd. And Taberna Preferred Funding VII, Ltd. (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 10.1, filed on February 1, 2010).
 
 
 
 
Form of Indemnification Agreement (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 10.19, filed on August 8, 2014).
 
 
 
 
Form of Drive Shack Inc. 2018 Omnibus Incentive Plan Director Restricted Stock Unit Award Agreement (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 10.15, filed on November 9, 2018).
 
 
 
 
Non-Qualified Stock Option Award Agreement dated November 12, 2018, by and between Drive Shack Inc. and
Kenneth A. May (incorporated by reference to the Registrant’s Annual Report on Form 10-K, Exhibit 10.18, filed on March 15, 2019).
 
 
 
 
Incentive Stock Option Award Agreement dated November 12, 2018, by and between Drive Shack Inc. and Kenneth A. May (incorporated by reference to the Registrant’s Annual Report on Form 10-K, Exhibit 10.19, filed on March 15, 2019).

41


 
Exhibit Number
Exhibit Description
 
 
 
 
 
 
 
Non-Qualified Stock Option Award Agreement dated November 12, 2018, by and between Drive Shack Inc. and
David M. Hammarley (incorporated by reference to the Registrant’s Annual Report on Form 10-K, Exhibit 10.20, filed on March 15, 2019).
 
 
 
 
Form of Drive Shack Inc. 2018 Omnibus Incentive Plan Executive Non-Qualified Stock Option Award Agreement (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 10.22, filed on May 10, 2019).
 
 
 
 
Form of Drive Shack Inc. 2018 Omnibus Incentive Plan Restricted Stock Unit Award Agreement.
 
 
 
 
Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
Certification of Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
101.INS
XBRL Instance Document.
 
 
 
 
101.SCH
XBRL Taxonomy Extension Schema Document.
 
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
* Management contract or compensatory plan or arrangement.



42


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

 
DRIVE SHACK INC.
 
 
 
By:
/s/ Kenneth A. May
 
Kenneth A. May
 
Chief Executive Officer and Director
 
 
 
 
August 6, 2019
 
 
 
 
By:
/s/ David M. Hammarley
 
David M. Hammarley
 
Chief Financial Officer
 
 
 
 
August 6, 2019
 
 
 
 
By:
/s/ Lawrence A. Goodfield, Jr.
 
Lawrence A. Goodfield, Jr.
 
Chief Accounting Officer and Treasurer
 
 
 
August 6, 2019


43


EXHIBIT 10.23

DRIVE SHACK INC.
2018 OMNIBUS INCENTIVE PLAN

RESTRICTED STOCK UNIT AWARD AGREEMENT

This Restricted Stock Unit Award Agreement (this “ Agreement ”), dated as of [_________], 2019 (the “ Date of Grant ”), is made by and between Drive Shack Inc., a Maryland corporation (the “ Company ”), and [___________] (the “ Participant ”). Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Drive Shack Inc. 2018 Omnibus Incentive Plan (the “ Plan ”). Where the context permits, references to the Company shall include any successor to the Company and references to employment or termination of employment by, or resignation of employment from, the Company shall include employment or termination of employment by, or resignation of employment from, any Affiliate.
1. Grant of Restricted Stock Units . The Company hereby grants to the Participant [ ______] restricted stock units (the “ RSUs ”), subject to all of the terms and conditions of this Agreement and the Plan.
2.      Form of Payment . Except as otherwise provided in the Plan or in Section 9 hereof, each RSU granted hereunder shall represent the right to receive one (1) share of Common Stock (a “ Share ”), which shall be issued to the Participant pursuant to the terms of Section 3(d) hereof.
3.      Vesting and Settlement .
(a)    The RSUs shall vest in equal annual installments on each of the first three (3) anniversaries of the Date of Grant (each a “ Vesting Date ”); provided that the Participant remains in continuous employment with the Company through, and has not given or received a notice of termination of such employment as of, the applicable Vesting Date.

(b)    Except as set forth in Section 3(c) hereof, if the Participant’s employment is terminated for any reason prior to the final Vesting Date, (i) this Agreement shall terminate and all rights of the Participant with respect to RSUs that have not vested as of the date of termination shall immediately terminate, (ii) any such unvested RSUs shall be forfeited without payment of any consideration, and (iii) neither the Participant nor any of the Participant’s successors, heirs, assigns, or personal representatives shall thereafter have any further rights or interests in such unvested RSUs.

(c)    If the Participant’s employment is terminated prior to the final Vesting Date either (i) by the Company without Cause or (ii) as a result of the Participating death or Disability, and provided that the Participant (or the Participant’s estate, as applicable) executes and delivers to the Company (and does not revoke) a general release of claims in a form satisfactory to the Company within sixty (60) days following such termination (or such shorter period as may be specified by the Company in accordance with applicable law): (i) the portion of the RSUs that




would have vested on the next Vesting Date had the Participant remained in employment with the Company shall immediately vest, (ii) this Agreement shall terminate and all rights of the Participant with respect to the portion of the RSUs, if any, that have not vested as of the date of termination in accordance with this Section 3(c) shall immediately terminate, (iii) any such unvested RSUs shall be forfeited without payment of any consideration, and (iv) neither the Participant nor any of the Participant’s successors, heirs, assigns, or personal representatives shall thereafter have any further rights or interests in such unvested RSUs.

(d)    The Shares subject to the RSUs shall become issuable hereunder (provided, that such issuance is otherwise in accordance with federal and state securities laws) as soon as practicable following the date on which they vest in accordance with this Section 3 and in no event later than March 15 of the year following the year in which they vest.
 
4.      Voting and Other Rights . The Participant shall have no rights of a stockholder (including the right to distributions or dividends) until Shares are issued following vesting of the Participant’s RSUs; provided , that with respect to the period commencing on the date an RSU becomes vested and ending on the date the Shares subject to such RSU are issued pursuant to this Agreement, the Participant shall be eligible to receive an amount of cash or property equal to the product of (i) the number of Shares to be delivered as a result of such vesting, and (ii) the amount of cash or property distributed with respect to an outstanding Share during such period, which amount of cash or property shall be paid to the Participant on the date such Shares are issued. No interest or other earnings will be credited with respect to such payment.
5.      Agreement Subject to Plan . This Agreement is made pursuant to all of the provisions of the Plan, which is incorporated herein by this reference, and is intended, and shall be interpreted in a manner, to comply therewith. In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan shall govern.
6.      Protective Covenants . The Participant acknowledges that, as part of the Participant’s employment with the Company, the Participant will have access to secret and confidential information, knowledge or data relating to the Company and its Affiliates, and their respective businesses, and will meet and develop relationships with potential and existing clients, investors, business partners and employees of the Company and its Affiliates. The Participant further acknowledges and agrees that (i) the foregoing makes it necessary for the protection of the Company’s and its Affiliates’ goodwill that the Participant comply with the provisions of this Section 6, (ii) the RSUs would not have been granted to the Participant if the Participant had not agreed to comply with the provisions of this Section 6 and (iii) the restrictions set forth in this Section 6 are reasonable. Except as expressly provided in Section 6(e) hereof, the protective covenants set forth in this Section 6 shall supersede and replace the protective covenants set forth in the Participant’s offer letter or any other agreement between the Participant and the Company.
(a)    The Participant shall not, directly or indirectly, without the prior written consent of the Company, at any time during the Participant’s employment and for twelve (12) months following the termination or resignation of the Participant’s employment for any reason, serve as

2



an employee or consultant for, establish, or control any entity that competes with (any such action, individually, and in the aggregate, to “ compete with ”), the Company or any of its subsidiaries in any state where the Company or any of its subsidiaries conducts business, including, but not limited to, any such business, individual, partner, firm, corporation, or other entity engaged in the business of operating golf entertainment or traditional golf venues; provided that, notwithstanding the forgoing, this Section 6(a) shall not apply if the Participant is located in California. Notwithstanding anything else herein, the mere “beneficial ownership” by the Participant, either individually or as a member of a “group” (as such terms are used in Rule 13(d) issued under the United States Securities Exchange Act of 1934, as amended from time to time) of not more than five percent (5%) of the voting stock of any public company shall not be deemed a violation of this Section 6(a).

(b)    The Participant further agrees that the Participant shall not, directly or indirectly, for the benefit of the Participant or for the benefit of any other person (including, without limitation, an individual or entity), or knowingly assist any other person to, during the Participant’s employment with the Company and for twelve (12) months thereafter, in any manner:

(i)    hire or Solicit (as defined below) the employment or services of any person (A) who provided services to the Company or any of its Affiliates as an employee, independent contractor or consultant at the time of the termination of the Participant’s employment with the Company, or within twelve (12) months prior thereto and (B) with whom the Participant had contact while the Participant was employed by the Company.

(ii)    Solicit any person who is an employee of the Company or any of its Affiliates to apply for or accept employment with any enterprise;

(iii)    accept employment or work, in any capacity (including as an employee, consultant or independent contractor), in any state where the Company conducts business with any firm, corporation, partnership or other entity that is, directly or indirectly, owned or controlled by any Former Employee (as defined below) of the Company involving the provision of services that are substantially similar to the services that the Participant provided to the Company of an Affiliate at any time during the twelve (12) months prior to the Participant’s termination of employment with the Company; provided that, notwithstanding the forgoing, this Section 6(b)(iii) shall not apply if the Participant is located in California;

(iv)    Solicit or otherwise attempt to establish any business relationship (in connection with any business in competition with the Company) with any limited partner, investor, person, firm, corporation or other entity that is, at the time of the Participant’s termination of employment, or was a Client, Investor or Business Partner (as defined below) of the Company or any of its Affiliates; provided that, if the Participant is located in California, this Section 6(b)(iv) shall apply only if the Participant uses or discloses Company trade secrets or confidential information; or


3



(v)    interfere with or damage (or attempt to interfere with or damage) any relationship between the Company and any of its Affiliates and the respective Clients, Investors, Business Partners, or employees of the foregoing entities.

(c)    For purposes of this Section 6:

(i)    the term “ Client ,” “ Investor ,” or “ Business Partner ” means (A) anyone who is or has been a Client, Investor, or Business Partner of the Company or any of its Affiliates during the Participant’s employment with Company, but only if the Participant had a direct relationship with or supervisory responsibility for, or other business involvement with such Client, Investor, or Business Partner during the Participant’s employment with the Company; and (B) any prospective Client, Investor, or Business Partner to whom the Company or any of its Affiliates made a new business presentation (or similar offering of services) at any time during the one (1) year period immediately preceding, or two (2) month period immediately following, the Participant’s termination of employment with the Company (but only if initial discussions between the Company or any of its Affiliates and such prospective Client, Investor, or Business Partner relating to the rendering of services occurred prior to the termination date, and only if the Participant participated in or supervised such presentation and/or its preparation or the discussions leading up to it);

(ii)    the term “ Former Employee ” means anyone who was an employee of, or exclusive consultant to, the Company or any of its Affiliates as of, or at any time during the one-year period immediately preceding, the termination of the Participant’s employment with the Company; and

(iii)    the term “ Solicit ” means (a) active solicitation of any Client, Investor, or Business Partner or Company employee; (b) the provision of non-public information regarding any Client, Investor, or Business Partner or Company employee to any third party where such information could be useful to such third party in attempting to obtain business from such Client, Investor, or Business Partner or attempting to hire any such Company employee; (c) participation in any meetings, discussions, or other communications with any third party regarding any Client, Investor, or Business Partner or Company employee where the purpose or effect of such meeting, discussion or communication is to obtain business from such Client, Investor, or Business Partner or employ such Company employee; or (d) any other passive use of non-public information about any Client, Investor, or Business Partner, or Company employee which has the purpose or effect of assisting a third party to obtain business from Clients, Investors, or Business Partners, assisting a third party to hire any Company employee or causing harm to the business of the Company.

(d)    Any works of authorship, databases, discoveries, developments, improvements, computer programs, or other intellectual property, etc. (“ Works ”) that the Participant makes or conceive, or has made or conceived, solely or jointly, during the period of the Participant’s employment with the Company, whether or not patentable or registerable under copyright, trademark or similar statutes, which either (i) are related to or useful in the current or anticipated business or activities of the Company or any of its Affiliates; (ii) fall within the Participant’s

4



responsibilities as employed by the Company; or (iii) are otherwise developed by the Participant through the use of the confidential information, equipment, software, or other facilities or resources of the Company or any of its Affiliates or at times during which the Participant is or has been an employee constitute “work for hire” under the United States Copyright Act, as amended.  If for any reason any portion of the Works shall be deemed not to be a “work for hire,” then the Participant hereby assigns to the Company all rights, title and interest therein and shall cooperate to establish the Company’s ownership rights, including the execution of all documents necessary to establish the Company’s exclusive ownership rights. Notwithstanding the foregoing, Works do not include, and any provision in this Agreement requiring the Participant to assign (or otherwise providing for ownership by the Company of) rights to an invention does not apply to any invention that qualifies fully under the provisions of California Labor Code Section 2870 (a copy of which is attached as Exhibit A hereto).

(e)    As a condition of employment, the Participant is required to sign a Confidentiality and Proprietary Rights Agreement, in a form acceptable to the Company, and that agreement shall remain in full force and effect after it is executed and following the termination of the Participant’s employment with the Company for any reason.

(f)    Notwithstanding anything in this Agreement to the contrary, pursuant to Section 7 of the Defend Trade Secrets Act of 2016 (which added 18 U.S.C. § 1833(b)), the Participant acknowledges that the Participant shall not have criminal or civil liability under any federal or state trade secret law for the disclosure of a trade secret that (A) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.  Nothing in this Agreement, or any other agreement that the Participant has with the Company, is intended to conflict with 18 U.S.C. § 1833(b) or create liability for disclosures of trade secrets that are expressly allowed by such Section. Notwithstanding anything in this Agreement, or any other agreement that the Participant has with the Company, to the contrary, the provisions of this Section 6 do not prohibit the Participant from voluntarily reporting violations of federal or state law or regulation to any governmental agency or from making other disclosures that are protected under the whistleblower provisions of federal or state law or regulation, nor do the confidentiality obligations require the Participant to notify the Company regarding any such reporting, disclosure or cooperation with the government.

7.      No Rights to Continuation of Employment . Nothing in the Plan or this Agreement shall confer upon the Participant any right to continue in the employ of the Company or any Affiliate thereof or shall interfere with or restrict the right of the Company or its Affiliates to terminate the Participant’s employment at any time for any reason whatsoever, with or without Cause.
8.      Tax Withholding . The Company shall be entitled to require a cash payment by or on behalf of the Participant in respect of any sums required or permitted by federal, state or local tax law to be withheld with respect to the settlement of any RSUs; provided , that, notwithstanding the foregoing, the Administrator may, in its sole discretion, permit the Participant to satisfy the

5



applicable tax obligations with respect to any RSUs by any other procedure approved by the Administrator, including cashless exercise or net share settlement pursuant to which the Company shall withhold from the number of Shares that would otherwise be issued upon settlement of the RSUs the largest whole number of Shares with a Fair Market Value equal to the applicable tax obligations.
9.      Section 409A Compliance . The intent of the parties is that the payments and benefits under this Agreement comply with Section 409A of the Code, to the extent subject thereto, and accordingly, to the maximum extent permitted, this Agreement shall be interpreted and administered to be in compliance therewith. Notwithstanding anything contained herein to the contrary, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, the Participant shall not be considered to have terminated service with the Company and its Affiliates for purposes of this Agreement until the Participant would be considered to have incurred a “separation from service” within the meaning of Section 409A of the Code. Each amount to be paid or benefit to be provided under this Agreement shall be construed as a separate identified payment for purposes of Section 409A of the Code. Any payments described in this Agreement that are due within the “short-term deferral period” as defined in Section 409A of the Code shall not be treated as deferred compensation unless applicable law requires otherwise. Notwithstanding anything to the contrary in this Agreement, to the extent that any payment (including Share delivery) is to be made upon a separation from service and such payment would result in the imposition of any individual penalty tax and late interest charges imposed under Section 409A of the Code, such payment shall instead be made on the first business day after the date that is six (6) months following such separation from service (or upon the Participant’s death, if earlier). Notwithstanding the foregoing, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, if the sixty (60) day period (or such shorter period as may be specified by the Company in accordance with applicable law) referenced in Section 3(c) hereof begins in one taxable year and ends in a second taxable year, the settlement of the applicable portion of the RSUs shall occur in the second taxable year. The Company makes no representation that any or all of the payments described in this Agreement will be exempt from or comply with Section 409A of the Code and makes no undertaking to preclude Section 409A of the Code from applying to any such payment. The Participant shall be solely responsible for the payment of any taxes and penalties incurred under Section 409A of the Code.
10.      Governing Law . This Agreement shall be governed by, and construed in accordance with the laws of the State of Maryland, without giving effect to the principles of conflict of laws of such state.
11.      Agreement Binding on Successors . The terms of this Agreement shall be binding upon the Participant and upon the Participant’s heirs, executors, administrators, personal representatives, transferees, assignees and successors in interest, and upon the Company and its successors and assignees, subject to the terms of the Plan.
12.      No Assignment . Notwithstanding anything to the contrary in this Agreement, neither this Agreement nor any rights granted herein shall be assignable by the Participant.

6



13.      Necessary Acts . The Participant hereby agrees to perform all acts, and to execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement, including but not limited to all acts and documents related to compliance with federal and/or state securities and/or tax laws.
14.      Severability . Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable, or enforceable only if modified, such holding shall not affect the validity of the remainder of this Agreement, the balance of which shall continue to be binding upon the parties hereto with any such modification (if any) to become a part hereof and treated as though contained in this original Agreement. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity, subject or otherwise so as to be unenforceable, in lieu of severing such unenforceable provision, such provision or provisions shall be construed by the appropriate judicial body by limiting or reducing it or them, so as to be enforceable to the maximum extent compatible with the applicable law as it shall then appear, and such determination by such judicial body shall not affect the enforceability of such provisions or provisions in any other jurisdiction.
15.      Entire Agreement . This Agreement and the Plan contain the entire agreement and understanding among the parties as to the subject matter hereof, and supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof.
16.      Headings . Headings are used solely for the convenience of the parties and shall not be deemed to be a limitation upon or descriptive of the contents of any such Section.
17.      Counterparts; Electronic Signature . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. The Participant’s electronic signature of this Agreement shall have the same validity and effect as a signature affixed by the Participant’s hand.
18.      Amendment . No amendment or modification hereof shall be valid unless it shall be in writing and signed by all parties hereto.
19.      Set-Off . The Participant hereby acknowledges and agrees, without limiting the rights of the Company or any Affiliate thereof otherwise available at law or in equity, that, to the extent permitted by law, the number of Shares due to the Participant under this Agreement may be reduced by, and set-off against, any or all amounts or other consideration payable by the Participant to the Company or any of its Affiliates under any other agreement or arrangement between the Participant and the Company or any of its Affiliates; provided that any such set-off does not result in a penalty under Section 409A of the Code.

[Signature Pages Follow]


7



IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the date set forth above.
 
DRIVE SHACK INC.
 
 
 
 
 
 
By:
 
 
 
 
 
 
 
 
 
 
 
Print Name:
 
 
 
 
 
 
 
 
 
 
Title:
 
 
 
 
 

The undersigned hereby accepts and agrees to all the terms and provisions of the foregoing Agreement.
 
PARTICIPANT
 
 
 
 
 
 
Signature:
 
 
 
 
 

 
 
 
 
 
Print Name:
 
 
 
 
 


[Signature Page to Restricted Stock Unit Award Agreement]

8



Exhibit A
California Labor Code Section 2870
(a)    Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either:
(1)    Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or
(2)    Result from any work performed by the employee for the employer.
(b)    To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.



9



  EXHIBIT 31.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 
I, Kenneth A. May, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Drive Shack Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
August 6, 2019
 
/s/ Kenneth A. May
 
 
Kenneth A. May
 
 
Chief Executive Officer and Director





EXHIBIT 31.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
 
I, David M. Hammarley, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Drive Shack Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
August 6, 2019
/s/ David M. Hammarley
 
David M. Hammarley
 
Chief Financial Officer





EXHIBIT 32.1
 
CERTIFICATION OF CEO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of Drive Shack Inc. (the "Company") for the quarterly period ended June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Kenneth A. May as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ Kenneth A. May
 
 
 
Kenneth A. May
 
 
 
Chief Executive Officer and Director
 
 
 
 
 
 
 
August 6, 2019
 
 
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
 
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.





 EXHIBIT 32.2
 
CERTIFICATION OF CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of Drive Shack Inc. (the "Company") for the quarterly period ended June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), David M. Hammarley, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ David M. Hammarley
 
 
 
David M. Hammarley
 
 
Chief Financial Officer
 
 
 
 
 
 
August 6, 2019
 
 
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
 
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.