UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
or
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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
(Exact name of registrant as specified in its charter)
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Maryland | | 81-0559116 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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218 W. 18th Street, 3rd Floor, New York, NY | | 10011 |
(Address of principal executive offices) | | (Zip Code) |
(Registrant’s telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
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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: 67,070,513 shares outstanding as of May 1, 2020.
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, (i) the timing and conditions under which we may reopen some or all of our golf entertainment and traditional golf venues, (ii) the operation of our golf entertainment and traditional golf venues in light of the COVID-19 pandemic following their anticipated reopening, (iii) the adequacy of our cash flows from operations and available cash to meet our liquidity needs, including in the event of a prolonged closure of our venues, (iv) our ability to modify the timing of certain contractual payments owed, (v) our ability to obtain additional financing and (vi) our results of operations. 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:
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• | factors impacting attendance, such as local conditions, contagious diseases, including COVID-19, or the perceived threat of contagious diseases, disturbances, natural disasters, and terrorist activities; |
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• | regulations and guidance of federal, state and local governments and health officials regarding the response to COVID-19, including with respect to business operations, safety protocols and public gatherings; |
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• | our financial liquidity and ability to access capital; |
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• | the ability to retain and attract members and guests to our properties; |
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• | changes in global, national and local economic conditions, including, but not limited to, increases in unemployment levels, changes in consumer spending patterns, a prolonged economic slowdown and a downturn in the real estate market, particularly due to the COVID-19 pandemic; |
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• | effects of unusual weather patterns and extreme weather events, geographical concentrations with respect to our operations and seasonality of our business; |
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• | competition within the industries in which we operate or may pursue additional investments, including competition for sites for our Entertainment Golf venues; |
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• | 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; |
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• | our inability to sell or exit certain properties, and unforeseen changes to our ability to develop, redevelop or renovate certain properties; |
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• | our ability to further invest in our business and implement our strategies; |
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• | difficulty monetizing our real estate debt investments; |
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• | liabilities with respect to inadequate insurance coverage, accidents or injuries on our properties, adverse litigation judgments or settlements, or membership deposits; |
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• | 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; |
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• | inability to execute on our growth and development strategy by successfully developing, opening and operating new venues; |
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• | impacts of any failures of our information technology and cybersecurity systems; |
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• | the impact of any current or further legal proceedings and regulatory investigations and inquiries; and |
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• | other risks detailed from time to time, particularly under the heading “Risk Factors” in this report and in our subsequent filings with the Securities and Exchange Commission, (the "SEC"). |
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:
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• | 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; |
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• | 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; |
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• | may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and |
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• | 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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data) |
| | | | | | | |
| (unaudited) | | |
| March 31, 2020 | | December 31, 2019 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 16,785 |
| | $ | 28,423 |
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Restricted cash | 3,041 |
| | 3,103 |
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Accounts receivable, net of allowance of $904 and $1,082, respectively | 4,190 |
| | 5,249 |
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Real estate assets, held-for-sale, net | 16,970 |
| | 16,948 |
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Real estate securities, available-for-sale | 3,103 |
| | 3,052 |
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Other current assets | 13,966 |
| | 17,521 |
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Total current assets | 58,055 |
| | 74,296 |
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Restricted cash, noncurrent | 513 |
| | 438 |
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Property and equipment, net of accumulated depreciation | 184,219 |
| | 179,641 |
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Operating lease right-of-use assets | 212,246 |
| | 215,308 |
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Intangibles, net of accumulated amortization | 16,780 |
| | 17,565 |
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Other investments | 24,365 |
| | 24,020 |
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Other assets | 5,245 |
| | 4,723 |
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Total assets | $ | 501,423 |
| | $ | 515,991 |
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Liabilities and Equity | | | |
Current liabilities | | | |
Obligations under finance leases | $ | 6,004 |
| | $ | 6,154 |
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Membership deposit liabilities | 10,784 |
| | 10,791 |
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Accounts payable and accrued expenses | 31,242 |
| | 25,877 |
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Deferred revenue | 25,118 |
| | 26,268 |
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Real estate liabilities, held-for-sale | 4 |
| | 4 |
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Other current liabilities | 23,367 |
| | 23,964 |
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Total current liabilities | 96,519 |
| | 93,058 |
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Credit facilities and obligations under finance leases - noncurrent | 12,468 |
| | 13,125 |
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Operating lease liabilities - noncurrent | 185,802 |
| | 187,675 |
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Junior subordinated notes payable | 51,190 |
| | 51,192 |
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Membership deposit liabilities, noncurrent | 97,648 |
| | 95,805 |
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Deferred revenue, noncurrent | 6,389 |
| | 6,283 |
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Other liabilities | 3,496 |
| | 3,278 |
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Total liabilities | $ | 453,512 |
| | $ | 450,416 |
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Commitments and contingencies |
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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 March 31, 2020 and December 31, 2019 | $ | 61,583 |
| | $ | 61,583 |
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Common stock, $0.01 par value, 1,000,000,000 shares authorized, 67,070,513 and 67,068,751 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 671 |
| | 671 |
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Additional paid-in capital | 3,177,384 |
| | 3,177,183 |
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Accumulated deficit | (3,193,399 | ) | | (3,175,572 | ) |
Accumulated other comprehensive income | 1,672 |
| | 1,710 |
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Total equity | $ | 47,911 |
| | $ | 65,575 |
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Total liabilities and equity | $ | 501,423 |
| | $ | 515,991 |
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See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(dollars in thousands, except share data)
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| Three Months Ended March 31, |
| 2020 | | 2019 |
Revenues | |
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Golf operations | $ | 48,625 |
| | $ | 44,706 |
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Sales of food and beverages | 12,510 |
| | 9,246 |
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Total revenues | 61,135 |
| | 53,952 |
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Operating costs | | | |
Operating expenses | 54,367 |
| | 47,723 |
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Cost of sales - food and beverages | 3,655 |
| | 2,698 |
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General and administrative expense | 9,818 |
| | 11,619 |
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Depreciation and amortization | 6,794 |
| | 4,924 |
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Pre-opening costs | 552 |
| | 1,179 |
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Impairment and other losses | 792 |
| | 4,088 |
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Total operating costs | 75,978 |
| | 72,231 |
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Operating loss | (14,843 | ) | | (18,279 | ) |
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Other income (expenses) | | | |
Interest and investment income | 130 |
| | 344 |
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Interest expense, net | (2,745 | ) | | (2,153 | ) |
Other income, net | 367 |
| | 5,488 |
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Total other income (expenses) | (2,248 | ) | | 3,679 |
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Loss before income tax | (17,091 | ) | | (14,600 | ) |
Income tax expense | 271 |
| | — |
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Net Loss | (17,362 | ) | | (14,600 | ) |
Preferred dividends | (1,395 | ) | | (1,395 | ) |
Loss Applicable to Common Stockholders | $ | (18,757 | ) | | $ | (15,995 | ) |
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Loss Applicable to Common Stock, per share | |
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Basic | $ | (0.28 | ) | | $ | (0.24 | ) |
Diluted | $ | (0.28 | ) | | $ | (0.24 | ) |
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Weighted Average Number of Shares of Common Stock Outstanding | |
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Basic | 67,069,534 |
| | 67,027,104 |
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Diluted | 67,069,534 |
| | 67,027,104 |
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See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)
(dollars in thousands, except share data)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Net loss | $ | (17,362 | ) | | $ | (14,600 | ) |
Other comprehensive loss: | |
| | |
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Net unrealized loss on available-for-sale securities | (38 | ) | | — |
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Other comprehensive loss | (38 | ) | | — |
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Total comprehensive loss | $ | (17,400 | ) | | $ | (14,600 | ) |
Comprehensive loss attributable to Drive Shack Inc. stockholders’ equity | $ | (17,400 | ) | | $ | (14,600 | ) |
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(dollars in thousands, except share data)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Drive Shack Inc. Stockholders |
| Preferred Stock | | Common Stock | |
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| Shares | | Amount | | Shares | | Amount | | Additional Paid- in Capital | | Accumulated Deficit | | Accumulated Other Comp. Income | | Total Equity (Deficit) |
Equity (deficit) - December 31, 2019 | 2,463,321 |
| | $ | 61,583 |
| | 67,068,751 |
| | $ | 671 |
| | $ | 3,177,183 |
| | $ | (3,175,572 | ) | | $ | 1,710 |
| | $ | 65,575 |
|
Dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (465 | ) | | — |
| | (465 | ) |
Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 201 |
| | — |
| | — |
| | 201 |
|
Shares issued from restricted stock units | — |
| | — |
| | 1,762 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Comprehensive income (loss) | | | | | | | | | | | | | | | |
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (17,362 | ) | | — |
| | (17,362 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (38 | ) | | (38 | ) |
Total comprehensive loss | | | | | | | | | | | | | | | (17,400 | ) |
Equity (deficit) - March 31, 2020 | 2,463,321 |
| | $ | 61,583 |
| | 67,070,513 |
| | $ | 671 |
| | $ | 3,177,384 |
| | $ | (3,193,399 | ) | | $ | 1,672 |
| | $ | 47,911 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
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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 |
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars in thousands, except share data)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Cash Flows From Operating Activities | | | |
Net loss | $ | (17,362 | ) | | $ | (14,600 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | |
|
Depreciation and amortization | 6,794 |
| | 4,924 |
|
Amortization of discount and premium | (91 | ) | | (56 | ) |
Other amortization | 1,904 |
| | 1,938 |
|
Amortization of revenue on golf membership deposit liabilities | (364 | ) | | (379 | ) |
Amortization of prepaid golf membership dues | (4,076 | ) | | (3,323 | ) |
Non-cash operating lease expense | 958 |
| | 1,628 |
|
Stock-based compensation | 201 |
| | 1,222 |
|
Impairment and other losses | 792 |
| | 4,088 |
|
Equity in earnings from equity method investments, net of distributions | (344 | ) | | (341 | ) |
Other (gains) losses, net | 46 |
| | (5,006 | ) |
Change in: | |
| | |
|
Accounts receivable, net, other current assets and other assets - noncurrent | 3,913 |
| | (1,052 | ) |
Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrent | 5,052 |
| | (11,234 | ) |
Net cash used in operating activities | (2,577 | ) | | (22,191 | ) |
Cash Flows From Investing Activities | |
| | |
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Proceeds from sale of property and equipment | 91 |
| | 17,749 |
|
Acquisition and additions of property and equipment and intangibles | (6,573 | ) | | (22,717 | ) |
Net cash used in investing activities | (6,482 | ) | | (4,968 | ) |
Cash Flows From Financing Activities | | | |
Repayments of debt obligations | (1,484 | ) | | (1,397 | ) |
Golf membership deposits received | 489 |
| | 357 |
|
Preferred stock dividends paid | (1,395 | ) | | (1,395 | ) |
Other financing activities | (176 | ) | | (3 | ) |
Net cash used in financing activities | (2,566 | ) | | (2,438 | ) |
Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent | (11,625 | ) | | (29,597 | ) |
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, Beginning of Period | 31,964 |
| | 82,819 |
|
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, End of Period | $ | 20,339 |
| | $ | 53,222 |
|
| | | |
Supplemental Schedule of Non-Cash Investing and Financing Activities | | | |
Preferred stock dividends declared but not paid | $ | — |
| | $ | 930 |
|
Additions to finance lease assets and liabilities | $ | 1,028 |
| | $ | 6,352 |
|
Increases in accounts payable and accrued expenses related to the purchase of property and equipment | $ | 3,771 |
| | $ | 2,258 |
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2020
(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 an owner and operator of golf-related leisure and "eatertainment" venues focused on bringing people together through competitive socializing. 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.
As of March 31, 2020, the Company owned or leased 4 Entertainment Golf venues across 3 states. We opened our first Entertainment Golf venue in Orlando, Florida, in April 2018, which has largely served as our research and development and testing venue. During the second half of 2019, we opened three Generation 2.0 core Drive Shack venues in Raleigh, North Carolina; Richmond, Virginia; and West Palm Beach, Florida.
The Company’s Traditional Golf business is one of the largest operators of golf properties in the United States. As of March 31, 2020, the Company owned, leased or managed 61 traditional golf properties across 9 states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COVID-19 — In March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). In response to the rapid spread of COVID-19, authorities around the world have implemented numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. Many jurisdictions in which we operate required mandatory store closures or imposed capacity limitations and other restrictions affecting our operations. As a result, between March 19 and March 20, 2020, we temporarily closed all of our entertainment golf and substantially all of our traditional golf venues, and furloughed a substantial majority of our employees. We continue to monitor government guidelines and requirements in each geographic region in which we operate and we will resume operations on a case-by-case basis as soon as possible based on local conditions. In response to the uncertainty caused by the pandemic, we took several actions after we suspended operations to preserve our liquidity position and to prepare for multiple contingencies. We are generating minimal revenue from our venues as of the date of this report.
The COVID-19 pandemic remains a rapidly evolving situation and the extended length of the outbreak and related government response may cause prolonged periods of venue closures and modified operating schedules and may result in changes in customer behaviors, including a potential reduction in consumer discretionary spending. These may lead to increased asset recovery and valuation risks, such as impairment of long-lived and other assets. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including additional actions taken to contain COVID-19 or treat its impact, among others. The Company currently expects these developments to result in a material adverse impact on its revenues, results of operations and cash flows.
Going Concern — The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
However, as noted above, we temporarily closed all of our entertainment golf and substantially all of our traditional golf venues, eliminating substantially all of the Company's revenue sources. The loss of revenues and uncertainty related to the COVID-19 pandemic discussed above raises substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue operations is dependent on the degree of success of management's plans to manage existing cash balances during the closure and to obtain additional financing to fund its short-term liquidity requirements. In order to manage existing cash balances, management reduced spending broadly, including furloughing a substantial majority of our employees, pausing construction on future planned venues to reduce capital spending, and suspending declaration of dividends on our preferred stock, and also deferred payment of certain operating and corporate expenditures. The Company is actively seeking to sell its remaining Traditional Golf property that is held-for-sale and believes that a sale is probable and would mitigate the substantial doubt raised by the COVID-19 pandemic and satisfy the Company's estimated liquidity needs through 12 months from the issuance of the financial statements. The Company is also exploring additional debt financing, including potential financing options made
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
available under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, public or private equity issuances, and additional ways to strategically monetize our remaining real estate securities and other investments. However, there is no assurance that the Company will be successful in raising additional capital or that such additional funds will be available on acceptable terms, if at all.
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, or 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, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 6, 2020. Capitalized terms used herein, and not otherwise defined, are defined in the Company’s Consolidated Financial Statements for the year ended December 31, 2019.
The Company’s significant accounting policies for these financial statements as of March 31, 2020 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, 2019.
Other Income (Loss), Net — These items are comprised of the following: |
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Collateral management fee income, net | 72 |
| | 128 |
|
Equity in earnings of equity method investments | 344 |
| | 341 |
|
Gain (loss) on sale of long-lived assets and intangibles | 48 |
| | 5,029 |
|
Other (loss) income | (97 | ) | | (10 | ) |
Other income, net | $ | 367 |
| | $ | 5,488 |
|
Real Estate, Held-for-Sale — 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 to sell. 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 below carrying value are recognized as an impairment loss and recorded in "Impairment and other losses" on the Consolidated Statements of Operations. To the extent the fair value increases, any previously reported impairment is reversed to the extent of the impairment taken. 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 an amount equal to the lease payments for a 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. Operating leases are subsequently amortized into lease cost on a straight-line basis. Depreciation of the finance lease ROU assets is 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.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
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.
Other Investments — The Company owns an approximately 22% economic interest in a limited liability company which owns preferred equity in a commercial real estate project. The Company accounts for this investment as an equity method investment. As of March 31, 2020, and December 31, 2019, the carrying value of this investment was $24.4 million and $24.0 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 results. 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. As the fair value inputs utilized are unobservable, the Company determined that the significant inputs used to value this real estate investment fall within Level 3 for fair value reporting.
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 and right-of-use 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 is greater than the expected undiscounted cash flows, the asset is considered impaired and 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:
|
| | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Managed course receivables | | $ | 3,434 |
| | $ | 5,426 |
|
Prepaid expenses | | 3,097 |
| | 3,608 |
|
Deposits | | 962 |
| | 1,374 |
|
Inventory | | 3,014 |
| | 2,762 |
|
Miscellaneous current assets, net | | 3,459 |
| | 4,351 |
|
Other current assets | | $ | 13,966 |
| | $ | 17,521 |
|
Other Assets
The following table summarizes the Company's other assets:
|
| | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Prepaid expenses | | $ | 604 |
| | $ | 317 |
|
Deposits | | 2,455 |
| | 2,123 |
|
Miscellaneous assets, net | | 2,186 |
| | 2,283 |
|
Other assets | | $ | 5,245 |
| | $ | 4,723 |
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
Other Current Liabilities
The following table summarizes the Company's other current liabilities:
|
| | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Operating lease liabilities | | 17,186 |
| | 16,922 |
|
Accrued rent | | 2,586 |
| | 2,769 |
|
Dividends payable | | — |
| | 930 |
|
Miscellaneous current liabilities | | 3,595 |
| | 3,343 |
|
Other current liabilities | | $ | 23,367 |
| | $ | 23,964 |
|
Other Liabilities
The following table summarized the Company's other liabilities:
|
| | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Service obligation intangible | | 1,687 |
| | 1,776 |
|
Miscellaneous liabilities | | 1,809 |
| | 1,502 |
|
Other liabilities | | $ | 3,496 |
| | $ | 3,278 |
|
Membership Deposit Liabilities - Private country club members in our Traditional Golf business generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club. Initiation fee deposits are refundable 30 years after the date of acceptance as a member. The difference between the initiation fee deposit paid by the member and the present value of the refund obligation is deferred and recognized into Golf operations revenue in the Consolidated Statements of Operations on a straight-line basis over the expected life of an active membership, which is estimated to be seven years. The present value of the refund obligation is recorded as a membership deposit liability in the Consolidated Balance Sheets and accretes over a 30-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense in the Consolidated Statements of Operations.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("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. The Company adopted the standard on January 1, 2020. The adoption did not impact the Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The standard removes certain exceptions for investments, intraperiod allocations and interim tax calculations and adds guidance to reduce complexity in accounting for income taxes. The effective date of the standard will be for annual periods beginning after December 15, 2020, with early adoption permitted. The various amendments in the standard are applied on a retrospective basis, modified retrospective basis and prospective basis, depending on the amendment. The Company is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
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. Revenue from membership dues is recognized in the month earned. Membership dues received in advance are included in deferred revenue and recognized as revenue ratably over the appropriate period, which is generally twelve months or less for private club members and the following month for The Players Club members.
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 March 31, 2020 |
| | Ent. golf venues | | Public golf properties | | Private golf properties | | Managed golf properties (A) | | Total |
Golf operations | | $ | 3,910 |
| | $ | 16,023 |
| | $ | 13,655 |
| | $ | 15,037 |
| | $ | 48,625 |
|
Sales of food and beverages | | 6,207 |
| | 4,285 |
| | 2,018 |
| | — |
| | 12,510 |
|
Total revenues | | $ | 10,117 |
| | $ | 20,308 |
| | $ | 15,673 |
| | $ | 15,037 |
| | $ | 61,135 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Ent. golf venues | | Public golf properties | | Private golf properties | | Managed golf properties (A) | | Total |
Golf operations | | $ | 681 |
| | $ | 17,464 |
| | $ | 15,454 |
| | $ | 11,107 |
| | $ | 44,706 |
|
Sales of food and beverages | | 1,040 |
| | 5,476 |
| | 2,730 |
| | — |
| | 9,246 |
|
Total revenues | | $ | 1,721 |
| | $ | 22,940 |
| | $ | 18,184 |
| | $ | 11,107 |
| | $ | 53,952 |
|
| |
(A) | Includes $13.3 million for the three months ended March 31, 2020, and $9.8 million for the three months ended March 31, 2019, due to management contract reimbursements reported under ASC 606. |
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 and President, who reviews discrete financial information for each reportable segment to manage the Company, including resource allocation and performance assessment.
The Company opened its first Entertainment Golf venue in Orlando, Florida, in April 2018. During the second half of 2019, the Company opened three Generation 2.0 core Entertainment Golf venues in Raleigh, North Carolina; Richmond, Virginia; and West Palm Beach, Florida.
Additionally, the Company's Traditional Golf business is one of the largest operators of golf properties in the United States. As of March 31, 2020, the Company owned, leased or managed 61 Traditional Golf properties across 9 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).
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
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 |
Three Months Ended March 31, 2020 | | | | | | | | |
Revenues | | | | | | | | |
Golf operations | | $ | 3,910 |
| | $ | 44,715 |
| | $ | — |
| | $ | 48,625 |
|
Sales of food and beverages | | 6,207 |
| | 6,303 |
| | — |
| | 12,510 |
|
Total revenues | | 10,117 |
| | 51,018 |
| | — |
| | 61,135 |
|
Operating costs | | | | | | | | |
Operating expenses | | 8,172 |
| | 46,195 |
| | — |
| | 54,367 |
|
Cost of sales - food and beverages | | 1,610 |
| | 2,045 |
| | — |
| | 3,655 |
|
General and administrative expense (A) | | 3,169 |
| | 3,093 |
| | 2,378 |
| | 8,640 |
|
General and administrative expense - acquisition and transaction expenses (B) | | 34 |
| | 122 |
| | 1,022 |
| | 1,178 |
|
Depreciation and amortization | | 3,020 |
| | 3,703 |
| | 71 |
| | 6,794 |
|
Pre-opening costs (C) | | 552 |
| | — |
| | — |
| | 552 |
|
Impairment and other losses | | — |
| | 792 |
| | — |
| | 792 |
|
Total operating costs | | 16,557 |
| | 55,950 |
| | 3,471 |
| | 75,978 |
|
Operating loss | | (6,440 | ) | | (4,932 | ) | | (3,471 | ) | | (14,843 | ) |
Other income (expenses) | | | | | | | | |
Interest and investment income | | 1 |
| | 15 |
| | 114 |
| | 130 |
|
Interest expense (D) | | (105 | ) | | (2,147 | ) | | (526 | ) | | (2,778 | ) |
Capitalized interest (D) | | — |
| | 9 |
| | 24 |
| | 33 |
|
Other (loss) income, net | | — |
| | (46 | ) | | 413 |
| | 367 |
|
Total other income (expenses) | | (104 | ) | | (2,169 | ) | | 25 |
| | (2,248 | ) |
Income tax expense | | — |
| | — |
| | 271 |
| | 271 |
|
Net (loss) income | | (6,544 | ) | | (7,101 | ) | | (3,717 | ) | | (17,362 | ) |
Preferred dividends | | — |
| | — |
| | (1,395 | ) | | (1,395 | ) |
(Loss) income applicable to common stockholders | | $ | (6,544 | ) | | $ | (7,101 | ) | | $ | (5,112 | ) | | $ | (18,757 | ) |
|
| | | | | | | | | | | | | | | | |
| | Entertainment Golf | | Traditional Golf | | Corporate (E) | | Total |
March 31, 2020 | | | | | | | | |
Total assets | | 164,212 |
| | 299,573 |
| | 37,638 |
| | 501,423 |
|
Total liabilities | | 41,182 |
| | 349,105 |
| | 63,225 |
| | 453,512 |
|
Preferred stock | | — |
| | — |
| | 61,583 |
| | 61,583 |
|
Equity attributable to common stockholders | | $ | 123,030 |
| | $ | (49,532 | ) | | $ | (87,170 | ) | | $ | (13,672 | ) |
| | | | | | | | |
Additions to property and equipment (including finance leases) during the three months ended March 31, 2020 | | $ | 4,240 |
| | $ | 1,894 |
| | $ | 403 |
| | $ | 6,537 |
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
Summary segment financial data (continued). |
| | | | | | | | | | | | | | | | |
| | Entertainment Golf | | Traditional Golf | | Corporate | | Total |
Three Months Ended March 31, 2019 | | | | | | | | |
Revenues | | | | | | | | |
Golf operations | | $ | 681 |
| | $ | 44,025 |
| | $ | — |
| | $ | 44,706 |
|
Sales of food and beverages | | 1,040 |
| | 8,206 |
| | — |
| | 9,246 |
|
Total revenues | | 1,721 |
| | 52,231 |
| | — |
| | 53,952 |
|
Operating costs | | | | | | | | |
Operating expenses | | 1,747 |
| | 45,976 |
| | — |
| | 47,723 |
|
Cost of sales - food and beverages | | 251 |
| | 2,447 |
| | — |
| | 2,698 |
|
General and administrative expense (A) | | 3,379 |
| | 3,897 |
| | 3,944 |
| | 11,220 |
|
General and administrative expense - acquisition and transaction expenses (B) | | 157 |
| | 153 |
| | 89 |
| | 399 |
|
Depreciation and amortization | | 709 |
| | 4,217 |
| | (2 | ) | | 4,924 |
|
Pre-opening costs (C) | | 1,179 |
| | — |
| | — |
| | 1,179 |
|
Impairment and other losses | | — |
| | 4,088 |
| | — |
| | 4,088 |
|
Total operating costs | | 7,422 |
| | 60,778 |
| | 4,031 |
| | 72,231 |
|
Operating loss | | (5,701 | ) | | (8,547 | ) | | (4,031 | ) | | (18,279 | ) |
Other income (expenses) | | | | | | | | |
Interest and investment income | | 132 |
| | 38 |
| | 174 |
| | 344 |
|
Interest expense (D) | | (3 | ) | | (2,190 | ) | | (626 | ) | | (2,819 | ) |
Capitalized interest (D) | | — |
| | 188 |
| | 478 |
| | 666 |
|
Other (loss) income, net | | (7 | ) | | 5,030 |
| | 465 |
| | 5,488 |
|
Total other income (expenses) | | 122 |
| | 3,066 |
| | 491 |
| | 3,679 |
|
Income tax expense | | — |
| | — |
| | — |
| | — |
|
Net loss | | (5,579 | ) | | (5,481 | ) | | (3,540 | ) | | (14,600 | ) |
Preferred dividends | | — |
| | — |
| | (1,395 | ) | | (1,395 | ) |
Loss applicable to common stockholders | | $ | (5,579 | ) | | $ | (5,481 | ) | | $ | (4,935 | ) | | $ | (15,995 | ) |
| |
(A) | General and administrative expenses include severance expense in the amount of $0.7 million for the three months ended March 31, 2020, and $0.4 million for the three months ended March 31, 2019. |
| |
(B) | Acquisition and transaction expenses include costs related to completed and potential acquisitions and transactions and strategic initiatives which may include advisory, legal, accounting and other professional or consulting fees. |
| |
(C) | Pre-opening costs are expensed as incurred and consist primarily of site-related marketing expenses, lease expense, employee payroll, travel and related expenses, training costs, food, beverage and other operating expenses incurred prior to opening an Entertainment Golf venue. |
| |
(D) | Interest expense includes the accretion of membership deposit liabilities in the amount of $1.9 million for the three months ended March 31, 2020, and $1.9 million for the three months ended March 31, 2019. Interest expense and capitalized interest are combined in interest expense, net on the Consolidated Statements of Operations. |
| |
(E) | Total assets in the corporate segment include an equity method investment in the amount of $24.4 million as of March 31, 2020 recorded in other investments on the Consolidated Balance Sheets. |
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(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:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Gross Carrying Amount | | Accumulated Depreciation | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Depreciation | | Net Carrying Value |
Land | $ | 6,770 |
| | $ | — |
| | $ | 6,770 |
| | $ | 6,770 |
| | $ | — |
| | $ | 6,770 |
|
Buildings and improvements | 146,474 |
| | (38,359 | ) | | 108,115 |
| | 147,146 |
| | (36,349 | ) | | 110,797 |
|
Furniture, fixtures and equipment | 53,459 |
| | (21,317 | ) | | 32,142 |
| | 52,327 |
| | (19,484 | ) | | 32,843 |
|
Finance leases - equipment | 34,107 |
| | (14,893 | ) | | 19,214 |
| | 36,166 |
| | (16,047 | ) | | 20,119 |
|
Construction in progress | 17,978 |
| | — |
| | 17,978 |
| | 9,112 |
| | — |
| | 9,112 |
|
Total Property and Equipment | $ | 258,788 |
| | $ | (74,569 | ) | | $ | 184,219 |
| | $ | 251,521 |
| | $ | (71,880 | ) | | $ | 179,641 |
|
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 March 31, 2020, the Company continues to present one golf property 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 $17.0 million and include $12.6 million of land, $4.0 million of buildings and improvements, $0.2 million of furniture, fixtures and equipment, and $0.2 million of other related assets, partially offset by accumulated impairment.
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. Subsequent to the completion of the sale, the Company entered into a management agreement on the California golf property.
No golf properties were sold during the three months ended March 31, 2020.
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 24 to 66 months 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 months ended March 31, 2020 are as follows:
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
|
| | | | |
| | Three Months Ended March 31, 2020 |
Finance lease cost | | |
Amortization of right-of-use assets | | $ | 1,532 |
|
Interest on lease liabilities | | 341 |
|
Total finance lease cost | | 1,873 |
|
| | |
Operating lease cost | | |
Operating lease cost | | 9,267 |
|
Short-term lease cost | | 428 |
|
Variable lease cost | | 2,788 |
|
Total operating lease cost | | 12,483 |
|
Total lease cost | | $ | 14,356 |
|
Other information related to leases included on the Consolidated Balance Sheet as of and for the three months ended March 31, 2020 are as follows:
|
| | | | | | |
| | Operating Leases | | Financing Leases |
Right-of-use assets | | 212,246 |
| | 19,214 |
|
Lease liabilities | | 202,988 |
| | 18,272 |
|
| | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | |
Operating cash flows | | 8,303 |
| | 340 |
|
Financing cash flows | | N/A |
| | 1,484 |
|
| | | | |
Right-of-use assets obtained in exchange for lease liabilities | | 2,459 |
| | 1,028 |
|
| | | | |
Weighted average remaining lease term | | 12.6 years |
| | 3.4 years |
|
Weighted average discount rate | | 8.3 | % | | 7.3 | % |
Future minimum lease payments under non-cancellable leases as of March 31, 2020 are as follows:
|
| | | | | | | | |
| | Operating Leases | | Financing Leases |
April 1, 2020 - December 31, 2020 | | 24,277 |
| | 5,508 |
|
2021 | | 31,944 |
| | 6,018 |
|
2022 | | 30,673 |
| | 4,454 |
|
2023 | | 30,511 |
| | 3,434 |
|
2024 | | 24,659 |
| | 1,284 |
|
Thereafter | | 202,618 |
| | 90 |
|
Total minimum lease payments | | 344,682 |
| | 20,788 |
|
Less: imputed interest | | 141,694 |
| | 2,516 |
|
Total lease liabilities | | $ | 202,988 |
| | $ | 18,272 |
|
7. INTANGIBLES, NET OF ACCUMULATED AMORTIZATION
The following table summarizes the Company’s intangible assets:
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
Trade name | $ | 700 |
| | $ | (146 | ) | | $ | 554 |
| | $ | 700 |
| | $ | (140 | ) | | $ | 560 |
|
Management contracts | 31,830 |
| | (17,435 | ) | | 14,395 |
| | 32,331 |
| | (17,342 | ) | | 14,989 |
|
Internally-developed software | 258 |
| | (40 | ) | | 218 |
| | 252 |
| | (27 | ) | | 225 |
|
Membership base | 5,236 |
| | (4,675 | ) | | 561 |
| | 5,236 |
| | (4,488 | ) | | 748 |
|
Nonamortizable liquor licenses | 1,052 |
| | — |
| | 1,052 |
| | 1,043 |
| | — |
| | 1,043 |
|
Total Intangibles | $ | 39,076 |
| | $ | (22,296 | ) | | $ | 16,780 |
| | $ | 39,562 |
| | $ | (21,997 | ) | | $ | 17,565 |
|
8. DEBT OBLIGATIONS
The following table presents certain information regarding the Company’s debt obligations at March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2020 | | December 31, 2019 |
Debt Obligation/Collateral | | Month Issued | | Outstanding Face Amount | | Carrying Value | | Final Stated Maturity | | Weighted Average Coupon | | Weighted Average Funding Cost (A) | | 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 | | 3.09% | | 3.09 | % | | 23.7 | | $ | 200 |
| | $ | 200 |
| | $ | 200 |
|
Finance leases (Equipment) | | Jul 2014 - Mar 2020 | | 18,272 |
| | 18,272 |
| | Apr 2020 - Sep 2025 | | 3.00% to 15.00% | | 7.33 | % | | 3.4 | | — |
| | 19,079 |
| | 19,079 |
|
| | | | 18,472 |
| | 18,472 |
| | | | | | 7.28 | % | | 3.6 | | 200 |
| | 19,279 |
| | 19,279 |
|
Less current portion of obligations under finance leases | | | | 6,004 |
| | 6,004 |
| | | | | | | | | | | | 6,154 |
| | 6,154 |
|
Credit facilities and obligations under finance leases - noncurrent | | | | 12,468 |
| | 12,468 |
| | | | | | | | | | | | 13,125 |
| | 13,125 |
|
Corporate | | | | |
| | |
| | | | | | |
| | | | |
| | | | |
Junior subordinated notes payable (B) | | Mar 2006 | | 51,004 |
| | 51,190 |
| | Apr 2035 | | LIBOR+2.25% | | 3.99 | % | | 15.1 | | 51,004 |
| | 51,004 |
| | 51,192 |
|
Total debt obligations | | | | $ | 69,476 |
| | $ | 69,662 |
| | | | | | 4.86 | % | | 12.0 | | $ | 51,204 |
| | $ | 70,283 |
| | $ | 70,471 |
|
| |
(A) | Including the effect of deferred financing costs. |
| |
(B) | Interest rate based on 3 month LIBOR plus 2.25%. Collateral for this obligation is the Company's general credit. |
9. REAL ESTATE SECURITIES
The following is a summary of the Company’s real estate securities at March 31, 2020, 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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 |
| | | | 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 |
| | $ | 2,952 |
| | $ | (1,521 | ) | | $ | 1,431 |
| | $ | 1,672 |
| | $ | — |
| | $ | 3,103 |
| | 1 |
| | CCC | | 1.53 | % | | 30.37 | % | | 3.9 | | 45.6 | % |
Total Securities, Available for Sale (E) | | $ | 4,000 |
| | $ | 2,952 |
| | $ | (1,521 | ) | | $ | 1,431 |
| | $ | 1,672 |
| | $ | — |
| | $ | 3,103 |
| | 1 |
| | | | | | | | | | |
| |
(A) | See Note 10 regarding the estimation of fair value, which is equal to carrying value for all securities. |
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
| |
(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. |
The Company had no securities in an unrealized loss position as of March 31, 2020.
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 March 31, 2020:
|
| | | | | | | | | |
| Carrying Value | | Estimated Fair Value | | Fair Value Method (A) |
Assets | |
| | |
| | |
Real estate securities, available-for-sale | $ | 3,103 |
| | $ | 3,103 |
| | Pricing models - Level 3 |
Cash and cash equivalents | 16,785 |
| | 16,785 |
| | |
Restricted cash, current and noncurrent | 3,554 |
| | 3,554 |
| | |
Liabilities | | | | | |
Junior subordinated notes payable | 51,190 |
| | 5,459 |
| | Pricing models - Level 3 |
| |
(A) | Pricing models are used for (i) real estate securities 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 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
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
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 methodologies 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 estate securities 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 March 31, 2020:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted Average Significant Input |
Asset Type | | Amortized Cost Basis | | Fair Value | | Discount Rate | | Prepayment Speed | | Cumulative Default Rate | | Loss Severity |
ABS - Non-Agency RMBS | | $ | 1,431 |
| | $ | 3,103 |
| | 10.0 | % | | 8.0 | % | | 2.6 | % | | 70.0 | % |
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 three months ended March 31, 2020 as follows:
|
| | | | |
| | ABS - Non-Agency RMBS |
Balance at December 31, 2019 | | $ | 3,052 |
|
Total gains (losses) (A) | | |
|
Included in other comprehensive income (loss) | | (38 | ) |
Amortization included in interest income | | 109 |
|
Purchases, sales and repayments (A) | | |
|
Proceeds | | (20 | ) |
Balance at March 31, 2020 | | $ | 3,103 |
|
| |
(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 three months ended March 31, 2020. There were no transfers into or out of Level 3 during the three months ended March 31, 2020. |
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 |
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(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 three months ended March 31, 2020:
|
| | | | | | | | | |
| | Number of Options | | Weighted Average Strike Price | | Weighted Average Life Remaining (in years) |
Balance at December 31, 2019 | | 6,898,346 |
| | $ | 3.26 |
| | |
Expired | | (1,117,118 | ) | | 5.44 |
| | |
Forfeited | | (770,652 | ) | | 4.74 |
| | |
Balance at March 31, 2020 | | 5,010,576 |
| | $ | 2.55 |
| | 2.92 |
| | | | | | |
Exercisable at March 31, 2020 | | 3,702,422 |
| | $ | 2.56 |
| | 2.94 |
As of March 31, 2020, the Company’s outstanding options were summarized as follows:
|
| | | | |
| | Number of Options |
Held by the former Manager | | 3,627,245 |
|
Issued to the former Manager and subsequently transferred to certain of the Manager’s employees (A) | | 1,382,998 |
|
Issued to the independent directors | | 333 |
|
Issued to Drive Shack employees | | — |
|
Total | | 5,010,576 |
|
Weighted average strike price | | $ | 2.55 |
|
| |
(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. |
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 $(0.1) million during the three months ended March 31, 2020, and $1.2 million during the three months ended March 31, 2019, 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 $2.0 million as of March 31, 2020 and will be expensed over a weighted average of 2.2 years.
B. Restricted Stock Units ("RSUs")
The following is a summary of the changes in the Company’s RSUs for the three months ended March 31, 2020.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
|
| | | | | | | |
| | Number of RSUs | | Weighted Average Grant Date Fair Value (per unit) |
Balance at December 31, 2019 | | 520,618 |
| | $ | 4.66 |
|
Released | | (1,762 | ) | | $ | 4.73 |
|
Forfeited | | (67,248 | ) | | $ | 4.58 |
|
Balance at March 31, 2020 | | 451,608 |
| | $ | 4.67 |
|
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. During the three months ended March 31, 2020, the Company granted no RSUs to non-employee directors and no RSUs granted to non-employee directors vested. The Company also grants 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. During the three months ended March 31, 2020, the Company granted no RSUs to employees. Stock-based compensation expense is recognized on a straight-line basis through the vesting date of the RSUs. Stock-based compensation expense related to RSUs was $0.3 million during the three months ended March 31, 2020, respectively, and less than $0.1 million for the three months ended March 31, 2019. 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 $1.3 million as of March 31, 2020 and will be expensed over a weighted average of 2.0 years.
C. Dividends
On November 11, 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 November 1, 2019 and ending January 31, 2020. Dividends totaling $1.4 million were paid on January 31, 2020. No dividends were declared during the three months ended March 31, 2020.
D. Earnings Per Share
The following table shows the Company's basic and diluted earnings per share (“EPS”):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Numerator for basic and diluted earnings per share: | | | |
Loss from continuing operations after preferred dividends and noncontrolling interests | $ | (18,757 | ) | | $ | (15,995 | ) |
Loss Applicable to Common Stockholders | $ | (18,757 | ) | | $ | (15,995 | ) |
Denominator: | | | |
Denominator for basic earnings per share - weighted average shares | 67,069,534 |
| | 67,027,104 |
|
Effect of dilutive securities | | | |
Options | — |
| | — |
|
RSUs | — |
| | — |
|
Denominator for diluted earnings per share - adjusted weighted average shares | 67,069,534 |
| | 67,027,104 |
|
Basic earnings per share: | | | |
Loss from continuing operations per share of common stock, after preferred dividends and noncontrolling interests | $ | (0.28 | ) | | $ | (0.24 | ) |
Loss Applicable to Common Stock, per share | $ | (0.28 | ) | | $ | (0.24 | ) |
Diluted earnings per share: | | | |
Loss from continuing operations per share of common stock, after preferred dividends and noncontrolling interests | $ | (0.28 | ) | | $ | (0.24 | ) |
Loss Applicable to Common Stock, per share | $ | (0.28 | ) | | $ | (0.24 | ) |
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
The Company’s dilutive securities are outstanding stock options and RSUs. During the three months ended March 31, 2020, based on the treasury stock method, the Company had 964,335 potentially dilutive securities, which were excluded due to the Company's loss position. During the three months ended March 31, 2019, based on the treasury stock method, the Company had 2,233,692 potentially dilutive securities.
12. TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES
Agreements with the Former Manager
At March 31, 2020, Fortress, through its affiliates, and principals of Fortress, owned 9.0 million shares of the Company’s common stock and Fortress, through its affiliates, had options relating to an additional 3.6 million shares of the Company’s common stock (Note 11).
Other Affiliated Entities
The Company incurred expenses for services of Ms. Khouri prior to execution of an employment agreement, which will be reimbursed to an affiliate of a member of the Board of Directors, subject to Board approval. The Company accrued $0.2 million in compensation expense for the year ended December 31, 2019, and an additional $0.1 million for the three months ended March 31, 2020.
13. COMMITMENTS AND CONTINGENCIES
Legal Contingencies - 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 March 31, 2020, 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 - As of March 31, 2020, the Company has additional operating leases that have not yet commenced of $98.0 million. The leases are expected to commence over the next 12 - 24 months with lease terms of approximately 10 - 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 which generally occurs prior to construction.
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 $0.3 million for the three months ended March 31, 2020. There was no income tax provision for the three months ended March 31, 2019. The increase in the income tax provision is due to tax on excess inclusion income and an increase in unrecognized tax benefits related to the current period.
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 March 31, 2020 as management does not believe that it is more likely than not that the deferred tax assets will be realized.
The Company and its subsidiaries file U.S. federal and state income tax returns in various jurisdictions. Generally, the Company is no longer subject to tax examinations by tax authorities for years prior to 2016.
At December 31, 2019, the Company reported a total liability for unrecognized tax benefits of $1.2 million. During the three months ended March 31, 2020, the Company increased the liability by $0.1 million. The Company does not anticipate any significant increases or decreases to the balance of unrecognized tax benefits during the next 12 months.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2020
(dollars in tables in thousands, except share data)
On March 27, 2020, as part of the business stimulus package in response to the COVID-19 pandemic, the U.S. government enacted the CARES Act. The CARES Act established new tax provisions including, but not limited to: (1) five-year carryback of NOLs generated in 2018, 2019 and 2020, and a temporary suspension of certain other limitations on the use of NOLs; (2) accelerated refund of AMT credit carryforwards; and (3) retroactive changes to allow accelerated depreciation for certain depreciable property. The legislation does not have a material impact on the Company’s tax positions due to the lack of taxable income in the carryback periods and the fact the Company was already expecting to receive a cash benefit for the remaining AMT credits in 2020.
15. IMPAIRMENT AND OTHER LOSSES
The following table summarizes the amounts the Company recorded in the Consolidated Statements of Operations:
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
Traditional golf properties (held-for-sale) | | $ | — |
| | $ | 952 |
|
Traditional golf properties (held-for-use) | | 792 |
| | 3,136 |
|
Total impairment and other losses | | $ | 792 |
| | $ | 4,088 |
|
Held-for-Sale Impairment: For the three months ended March 31, 2019, the Company recognized impairment losses and recorded accumulated impairment totaling approximately $1.0 million on two golf properties. 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.
Held-for-Use Impairment: For the three months ended March 31, 2020, the Company recorded impairment charges totaling $0.8 million for one property. For the three months ended March 31, 2019, the Company recorded impairment charges totaling $3.1 million for one golf property. The Company evaluated the recoverability of the carrying value of these assets using the income approach based on future assumptions of cash flows. As the fair value inputs utilized are unobservable, the Company determined that the significant inputs used to value these properties fall within Level 3 for fair value reporting.
16. SUBSEQUENT EVENTS
Preferred Dividends in Arrears - No dividends on Drive Shack Inc.’s cumulative preferred stock have been declared during 2020, and as of the date of this Quarterly Report on Form 10-Q, $1.4 million of dividends on Drive Shack Inc.’s cumulative preferred stock were unpaid and in arrears.
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) - On March 27, 2020, Congress enacted the CARES Act to provide certain relief in response to the COVID-19 pandemic. The CARES Act includes numerous tax provisions and other stimulus measures. See Note 14 in Part I, Item 1 “Financial Statements” for additional information.
This legislation was enacted during the period covered by this Form 10-Q, but the effective date is subsequent to March 31, 2020. We continue to evaluate applicability and benefits of the provisions and stimulus measures being provided under the CARES Act to determine its impacts to the Company.
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., which is referred to, together with its subsidiaries as Drive Shack Inc. or the Company. The following should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto and with Part II, Item 1A. “Risk Factors” included herein.
GENERAL
The Company is an owner and operator of golf-related leisure and "eatertainment" venues focused on bringing people together through competitive socializing. The Company, a Maryland corporation, was formed in 2002 and its common stock is traded on the NYSE under the symbol “DS.”
Covid-19 Pandemic
In March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). In response to the pandemic, many states and localities in which we operate have issued stay-at-home orders and other social distancing measures, in addition to mandatory store closures, capacity limitations and other restrictions affecting our operations. Between March 19 and March 20, 2020, we temporarily closed all of our entertainment golf and substantially all of our traditional golf venues. As of May 7, 2020, all of our golf entertainment venues were temporarily closed and 30 of our traditional golf courses were temporarily closed.
In response to the uncertainty of the circumstances described above, we continue to implement plans to adapt to changing circumstances arising from this pandemic. We have constructed a plan to enhance cleaning, sanitizing and handwashing protocols, as well as to provide masks, gloves, hand sanitizers and other protective equipment necessary to ensure the safety of our employees and guests. In addition, we expect to re-open our golf entertainment venues located in Florida in May, subject, in the case of West Palm Beach, to the expansion of the state's re-opening order to include Palm Beach county.
To further preserve our liquidity, we have also taken the following measures to reduce costs: (i) suspended all non-essential capital expenditures, including the suspension of all capital expenditures for design and construction of future venues; (ii) furloughed or laid off a substantial majority of our personnel; (iii) deferred cash compensation for our Board of Directors; (iv) undertook significant reductions in staffing and operating expenses across all venues; and (v) suspended payment of all 2019 bonuses. Additionally, we are undertaking conversations with landlords to discuss potential deferral or abatement of rent payments.
As we plan for re-opening in our entertainment golf segment, albeit in a restricted and modified capacity, we will work closely with local authorities, Centers for Disease Control ("CDC") guidelines and our landlords during the process, and will follow any and all social distancing and other safety restrictions and recommendations.
As we move through this transition, we expect to incur some labor inefficiencies as we adjust to new protocols and operating models with a goal to remain as efficient as possible, while still offering safe and high quality service to our communities. We will also incur additional costs and investments in supplies necessary to keep our teams and guests safe, such as face coverings, gloves and additional secure packaging for all orders, directional signage and cleaning supplies, which are all expected to be ongoing for a period of time. Given the dynamic and unpredictable nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, we expect the impact to continue to have a material adverse impact on our revenues, results of operations and cash flows. We will continue to monitor the rapidly evolving situation and guidance from international and domestic authorities.
CARES Act
On March 27, 2020, Congress enacted the CARES Act to provide certain relief in response to the COVID-19 pandemic. The CARES Act includes numerous tax provisions and other stimulus measures. See Note 14 in Part I, Item 1 “Financial Statements” for additional information.
This legislation was enacted during the period covered by this Form 10-Q, but the effective date is subsequent to March 31, 2020. We continue to evaluate applicability and benefits of the provisions and stimulus measures being provided under the CARES Act to determine its impacts to the Company.
In April 2020, four of our subsidiaries entered into notes payable with J.P. Morgan pursuant to the Paycheck Protection Program Loan under the CARES Act, in an aggregate principal amount equal to $5,276,742. On May 1, 2020, we returned the entire outstanding balance, inclusive of interest.
Business Overview
We conduct our business through two primary operating segments:
| |
• | Entertainment Golf | Drive Shack |
Drive Shack is a golf-related leisure and “eatertainment” company that offers sports and social entertainment with gaming and premier golf technology, a chef-inspired menu, craft cocktails, and engaging social events throughout the year. Each core Drive Shack venue features expansive, climate-controlled, suite style bays with lounge seating; augmented-reality golf games and virtual course play; a restaurant and multiple bars; an outdoor patio with lawn games; and arcade games.
During the second half of 2019, we opened three Generation 2.0 core Drive Shack venues in Raleigh, North Carolina; Richmond, Virginia and West Palm Beach, Florida.
We opened our first Drive Shack venue in Orlando, Florida, in April 2018, which has largely served as our research and development and testing venue. During the fourth quarter of 2019, we briefly closed this venue to retrofit with Generation 2.0 enhancements, including new ball tracking technology (Trackman™), enhanced gaming and a redesigned outfield to provide a more engaging guest experience.
| |
• | Traditional Golf | American Golf |
American Golf, acquired by the Company in December 2013, is one of the largest operators of golf properties in the United States. As an owner, lessee, and manager of golf courses and country clubs for over 45 years, we believe American Golf is one of the most experienced operators in the traditional golf industry. As of March 31, 2020, we owned, leased or managed 61 properties across 9 states and have approximately 37,000 members. American Golf is focused on delivering lasting experiences for our guests, who played over 475,000 rounds at our properties during the three months ended March 31, 2020.
Our operations are organized into three principal revenue-generating categories: (1) public properties (leased and owned), (2) private properties (leased and owned) and (3) managed properties (public and private). We organize our operations in this manner due to the nature of the revenue streams generated by these properties.
Public Properties. Our 33 leased or owned 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, pro shops and food and beverage facilities. In some cases, our public properties have larger clubhouses with extensive 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 and off-peak access to the ability to participate in golf clinics, in return for a monthly membership fee.
Private Properties. Our five leased or owned private properties are open to members and their guests and generate revenues principally through initiation fees, membership dues, food, beverage and merchandise sales, and guest fees. Amenities at these courses 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 23 managed properties are managed by American Golf pursuant to management agreements with the owners of each property. We recognize revenue from each of these properties in an amount equal to a management fee and the reimbursements of certain operating costs.
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 in loans and securities, optimize our Traditional Golf business, including sales of certain owned properties, and obtain additional capital. We have substantially monetized our historical investments in loans and securities and have a small number of positions remaining that we could sell or use as collateral or support in a lending transaction. 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
Our ability to open our targeted number of Entertainment Golf related venue formats in 2020 and beyond will depend on many factors, including our ability to identify sites that meet our requirements and negotiate acceptable purchase or lease terms. There is competition within the bid process, and land development and construction are subject to obtaining the necessary regulatory approvals. Delays in these processes, as well as completing construction and recruiting and training the necessary talent, could impact our 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. In addition, our Entertainment Golf business could be impacted on a season-to-season basis, based upon corporate event and social gatherings during peak and off-peak times.
Traditional Golf Business
Our Traditional Golf business is subject to trends in consumer discretionary spending, as well as climate and weather patterns, which has a significant impact on the markets in which we operate. Traditional Golf is generally 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.
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, 2019. 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.
RESULTS OF OPERATIONS
The following tables summarize the changes in our results of operations for the three months ended March 31, 2020 and 2019 (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase (Decrease) |
| | 2020 | | 2019 | | Amount | | % |
Revenues | | | | | | | | |
Golf operations (A) | | $ | 48,625 |
| | $ | 44,706 |
| | $ | 3,919 |
| | 8.8 | % |
Sales of food and beverages | | 12,510 |
| | 9,246 |
| | 3,264 |
| | 35.3 | % |
Total revenues | | 61,135 |
| | 53,952 |
| | 7,183 |
| | 13.3 | % |
Operating costs | | | | | | | | |
Operating expenses (A) | | 54,367 |
| | 47,723 |
| | 6,644 |
| | 13.9 | % |
Cost of sales - food and beverages | | 3,655 |
| | 2,698 |
| | 957 |
| | 35.5 | % |
General and administrative expense | | 9,818 |
| | 11,619 |
| | (1,801 | ) | | (15.5 | )% |
Depreciation and amortization | | 6,794 |
| | 4,924 |
| | 1,870 |
| | 38.0 | % |
Pre-opening costs | | 552 |
| | 1,179 |
| | (627 | ) | | (53.2 | )% |
Impairment and other losses | | 792 |
| | 4,088 |
| | (3,296 | ) | | (80.6 | )% |
Total operating costs | | 75,978 |
| | 72,231 |
| | 3,747 |
| | 5.2 | % |
Operating loss | | (14,843 | ) | | (18,279 | ) | | (3,436 | ) | | (18.8 | )% |
Other income (expenses) | | | | | | | | |
Interest and investment income | | 130 |
| | 344 |
| | (214 | ) | | (62.2 | )% |
Interest expense, net | | (2,745 | ) | | (2,153 | ) | | 592 |
| | 27.5 | % |
Other income (loss), net | | 367 |
| | 5,488 |
| | (5,121 | ) | | 93.3 | % |
Total other income (expenses) | | (2,248 | ) | | 3,679 |
| | (5,927 | ) | | 161.1 | % |
Loss before income tax | | $ | (17,091 | ) | | $ | (14,600 | ) | | $ | 2,491 |
| | 17.1 | % |
| |
(A) | Includes $13.3 million for the three months ended March 31, 2020, and $9.8 million for the three months ended March 31, 2019, due to management contract reimbursements reported under ASC 606. |
Revenues from Golf Operations
Revenues from golf operations increased by $3.9 million primarily due to increases of: (i) $4.0 million in our Traditional Golf business at courses operating in both periods, primarily due to an increase in rounds played, (ii) $4.0 million in revenues from management contracts including $3.6 million of reimbursed expenses, and (iii) $3.2 million in our Entertainment Golf business due to having four venues in operation in 2020 compared with one in 2019, partially offset by decreases of (iv) $3.7 million due to fewer Traditional Golf properties owned or operated in 2020, and (v) $3.6 million in our Traditional Golf business primarily due to course closures in March 2020 in response to the COVID-19 pandemic.
Sales of Food and Beverages
Sales of food and beverages increased by $3.3 million primarily due to increases of: (i) $5.2 million in our Entertainment Golf business due to having four venues in operation in 2020 compared with one in 2019, partially offset by decreases of (ii) $0.7 million due to fewer Traditional Golf properties owned or operated in 2020 and (ii) $1.2 million primarily due to closure of courses related to the COVID-19 pandemic.
Operating Expenses
Operating expenses increased by $6.6 million primarily due to increases of (i) $6.4 million in our Entertainment Golf business due to having four venues in operation in 2020 compared with one in 2019, (ii) $3.6 million of reimbursed expenses from management contracts, and (iii) $2.1 million in our Traditional Golf business at courses operating in both periods, primarily due to hourly labor and variable rent expenses consistent with the revenue increases, partially offset by decreases of (iv) $4.4 million
due to fewer Traditional Golf properties owned or operated in 2019, and (v) $1.2 million decrease in variable expenses in our Traditional Golf business primarily due to course closures in March 2020 in response to the COVID-19 pandemic.
Cost of Sales - Food and Beverages
Cost of sales - food and beverages increased by $1.0 million primarily due to an increase of $1.4 million in our Entertainment Golf business due to having four venues in operation in 2020 compared with one in 2019, partially offset by a decrease of $0.4 million in our Traditional Golf business due to fewer Traditional Golf properties owned or operated in 2020.
General and Administrative Expense (including Acquisition and Transaction Expense)
General and administrative expense decreased by $1.8 million primarily due to decreases of: (i) $1.0 million stock-based compensation due to departures of executive officers between the two periods and (ii) $0.9 million of bonus expenses while the Company re-evaluates incentive compensation structures in light of the COVID-19 pandemic.
Depreciation and Amortization
Depreciation and amortization increased by $1.9 million due to an increase of $2.3 million in depreciation on assets placed into service in our Entertainment Golf business for three venues in Raleigh, North Carolina; Richmond, Virginia; and West Palm Beach, Florida in August, September and October 2019, respectively, and on assets placed in service for the renovation of our Orlando, Florida venue in November 2019, partially offset by a reduction in depreciation due to Traditional Golf properties that were sold and exited in 2019.
Pre-Opening Costs
Pre-opening expenses decreased by $0.6 million primarily due to costs associated with the opening of three new 2.0 Entertainment Golf venues in 2019.
Impairment and Other Losses
During the three months ended March 31, 2020, we recorded $0.8 million impairment on one Traditional Golf property. During the three months ended March 31, 2019, we recorded $4.1 million impairment on three Traditional Golf properties.
Interest and Investment Income
Interest and investment income decreased by $0.2 million primarily due to lower balances in interest bearing cash accounts.
Interest Expense, Net
Interest expense, net increased by $0.6 million primarily due to a decrease of interest expense capitalized into construction in progress balances associated with the opening of three 2.0 Entertainment Golf venues in 2019 compared to one Entertainment Golf venue with significant construction activities in 2020.
Other Income (Loss), Net
Other income (loss), net decreased by $5.1 million primarily due to a decrease of $5.2 million in gains on the sale of Traditional Golf properties, as three courses were sold in 2019 compared to no courses sold in 2020.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Capital
Our primary sources of liquidity are our current balances of cash and cash equivalents. As of March 31, 2020, we had $16.8 million of available cash. We also generated capital through completing the sales of 24 of our 26 owned Traditional Golf properties, which were completed by December 31, 2019. The proceeds generated by these transactions were reinvested in our Entertainment Golf business and used to pay overhead expenses.
Our primary cash needs are capital expenditures for developing and opening new core Drive Shack and new small-store urban box venues, remodeling and maintaining existing facilities, funding working capital, operating and finance lease obligations, servicing our debt obligations, paying dividends on our preferred stock, and for general corporate purposes.
The Company’s growth strategy is capital intensive and our ability to execute is dependent upon many factors, including the current and future operating performance of our Entertainment Golf venues and Traditional Golf properties, the pace of expansion, real estate markets, site locations, our ability to raise financing and the nature of the arrangements negotiated with landlords.
In March 2020, we temporarily closed all of our entertainment golf and substantially all of our traditional golf venues, eliminating substantially all of the Company's revenue sources. The Company currently expects these developments to result in a material adverse impact on its revenues, results of operations and cash flows and to raise substantial doubt about its ability to continue as a going concern. As we plan for golf entertainment and traditional golf courses to re-open, we will work closely with local authorities, CDC guidelines and our landlords during the process, and will follow any and all social distancing and other safety restrictions and recommendations.
The ability of the Company to continue operations is dependent on the degree of success of management's plans to manage existing cash balances during the closure and to obtain additional financing to fund its short-term liquidity requirements. In order to manage existing cash balances, management reduced spending broadly, including furloughing a substantial majority of our employees, paused construction on future planned venues to reduce capital spending, and suspended declaration of dividends on our preferred stock, and also deferred payment of certain operating and corporate expenditures. The Company is actively seeking to sell its remaining Traditional Golf property that is held-for-sale and believes a sale is probable of occurring and would mitigate the substantial doubt raised by the COVID-19 pandemic and satisfy the Company's estimated liquidity needs through 12 months from the issuance of the financial statements. The Company is also exploring additional debt financing, including potential financing options made available under the CARES Act, public or private equity issuances, and additional ways to strategically monetize our remaining real estate securities and other investments. However, there is no assurance that the Company will be successful in raising additional capital or that such additional funds will be available on acceptable terms, if at all.
We continually monitor market conditions for these financing and capital opportunities, and, at any given time, may enter into or pursue one or more of the transactions described above. However, we cannot ensure that capital will be available on reasonable terms, if at all.
For a further discussion of risks that could affect our liquidity, access to capital resources and our capital obligations, see Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q. 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.
The Company has paid preferred dividends of $1.4 million thus far in fiscal year 2020, and our board of directors has not declared preferred or common stock dividends to date in 2020 to preserve liquidity. For the three months ended March 31, 2020, the Company reported net cash used in operating activities of $2.6 million, net cash used in investing activities of $6.5 million, net cash used in financing activities of $2.6 million, and cash and cash equivalents of $16.8 million as of March 31, 2020. 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.
Summary of Cash Flows
The following table and discussion summarize our key cash flows from operating, investing and financing activities:
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
Net cash (used in) provided by: | | | | |
Operating activities | | (2,577 | ) | | (22,191 | ) |
Investing activities | | (6,482 | ) | | (4,968 | ) |
Financing activities | | (2,566 | ) | | (2,438 | ) |
Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent | | (11,625 | ) | | (29,597 | ) |
Operating Activities
Cash flows used in operating activities consist primarily of net losses adjusted for certain items including depreciation and amortization of assets, amortization of prepaid golf member dues, impairment losses, other gains and losses from the sale of assets, stock-based compensation expense, and the effect of changes in operating assets and liabilities.
Net cash used in operating activities was $2.6 million for the three months ended March 31, 2020 and $22.2 million for the three months ended March 31, 2019. Changes in operating cash flow activities are described below:
| |
• | Operating cash flows increased by: |
| |
◦ | $14.1 million due to increased receipts from Traditional Golf properties primarily due to more playable days in the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 |
| |
◦ | $3.5 million primarily due to the delayed payment of annual bonuses in 2020 that were earned in 2019 as a result of the temporary closure of its venues in response to the COVID-19 pandemic; |
| |
◦ | $1.6 million decreased in general and administrative expenses primarily due to lower professional fee expenses; and |
| |
◦ | $0.7 million in operating cash flows primarily due to the opening of Entertainment Golf venues in Raleigh, North Carolina; Richmond, Virginia; and West Palm Beach, Florida. |
| |
• | Operating cash flows decreased by: |
| |
◦ | $0.3 million due to lower interest income as a result of lower average balances held in interest bearing accounts. |
Investing Activities
Cash flows generated from investing activities primarily relate to proceeds from the dispositions of Traditional Golf properties, and were primarily used for capital expenditures related to the development of the Entertainment Golf venues and renovations of existing facilities.
Investing activities used $6.5 million and $5.0 million during the three months ended March 31, 2020 and 2019, respectively.
Capital Expenditures. Our total capital expenditures for the three months ended March 31, 2020 and 2019 were $6.6 million and $22.7 million, respectively.
We expect our capital expenditures over the next 12 months to range between $40 and $50 million, dependent on the Company's ability to obtain additional financing, which includes developing new core Drive Shack and small-store format urban box venues and remodeling and maintaining existing facilities.
Financing Activities
Cash flows used in or provided by financing activities consist primarily of cash from the borrowing or repayment of debt obligations, deposits received on golf memberships, and the payment of preferred dividends.
Financing activities used $2.6 million and $2.4 million during the three months ended March 31, 2020 and 2019, 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. On November 11, 2019, we declared a quarterly preferred dividend of $1.4 million which was paid on January 31, 2020.
Debt Obligations
Our debt obligations including finance lease obligations, as summarized in Note 8 to our Consolidated Financial Statements included herein, had contractual maturities at March 31, 2020 as follows (in thousands):
|
| | | | | | | | | | | |
| Nonrecourse | | Recourse | | Total |
2020 | $ | 241 |
| | $ | — |
| | $ | 241 |
|
2021 | 1,746 |
| | — |
| | 1,746 |
|
2022 | 3,230 |
| | — |
| | 3,230 |
|
2023 | 3,596 |
| | — |
| | 3,596 |
|
2024 | 7,157 |
| | — |
| | 7,157 |
|
2025 | 2,302 |
| | — |
| | 2,302 |
|
Thereafter | 200 |
| | 51,004 |
| | 51,204 |
|
Total | $ | 18,472 |
| | $ | 51,004 |
| | $ | 69,476 |
|
Equity
Preferred Stock Dividends Paid
|
| | | | | | | | | | | | | | |
| | | | Amount Per Share |
Declared for the three months ended | | Paid | | Series B | | Series C | | Series D |
January 31, 2020 | | January 2020 | | $ | 0.609 |
| | $ | 0.503 |
| | $ | 0.523 |
|
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, 2019.
CONTRACTUAL OBLIGATIONS
During the three months ended March 31, 2020, we had all of the material contractual obligations referred to in our annual report on Form 10-K for the year ended December 31, 2019.
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, 2019.
ITEM 4. CONTROLS AND PROCEDURES
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(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 even though most of our employees were working remotely during the period in which we prepared these financial statements due to the impact of COVID-19.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is incorporated by reference to Part I, Item 1, Note 15: Commitments and Contingencies-Legal Contingencies.
Item 1A. Risk Factors
The following additional risk factors should be read in conjunction with the risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which are modified and updated by the risk factors set forth below.
Pandemics or disease outbreaks, such as the recent outbreak of the novel coronavirus (COVID-19 virus), have disrupted, and may continue to disrupt, our business, and may continue to have a material adverse effect on our business, operations and results of operations.
Pandemics or disease outbreaks such as the novel coronavirus (COVID-19 virus) have, and may continue to have, a negative impact on customer traffic at our entertainment golf and traditional golf venues, may make it more difficult to staff our venues and, in more severe cases, may cause closures, a temporary inability to obtain supplies and/or increase to commodity costs, sometimes for prolonged periods of time. Currently, many states and municipalities in the U.S. have temporarily suspended the operation of our golf entertainment venues and a number of our traditional golf course in light of COVID-19. The ability of local and international authorities to contain COVID-19 and limit the spread of infections will impact our business operations, including in connection with when we are permitted to re-open closed venues and the extension of social distancing and similar restrictions promulgated by these authorities. While some state and local governments in the U.S. have started to remove or ease restrictions on certain businesses, there is no guarantee when other jurisdictions will change their current policies, and jurisdictions that have reduced restrictions may reintroduce restrictions in the future if circumstances change.
In addition, our operations could be further disrupted if any of our employees or employees of our business partners were suspected of having contracted COVID-19 or other illnesses since this could require us or our business partners to quarantine some or all such employees or close and disinfect our impacted facilities. If a significant percentage of our workforce or the workforce of our business partners are unable to work, including because of illness or travel or government restrictions in connection with pandemics or disease outbreaks, our operations may be negatively impacted, potentially materially adversely affecting our business, liquidity, financial condition or results of operations.
Furthermore, such viruses may be transmitted through human contact, and the risk of contracting viruses could continue to cause employees or guests to avoid gathering in public places, which has had, and could further have, adverse effects on our guest traffic or our ability to adequately staff venues. We could also be adversely affected if government authorities continue to impose restrictions on public gatherings, human interactions, operations of restaurants or mandatory closures, seek voluntary closures, restrict hours of operations or impose curfews, restrict the import or export of products or if suppliers issue mass recalls of products. Additional regulation or requirements with respect to the compensation of our employees could also have an adverse effect on our business. Even if such measures are not implemented and a virus or other disease does not spread significantly within a specific area, the perceived risk of infection or health risk in such area may adversely affect our business, liquidity, financial condition and results of operations.
The COVID-19 pandemic and mitigation measures have also had an adverse impact on global economic conditions, which could have an adverse effect on our business and financial condition. Our revenue and operating results may be affected by uncertain or changing economic and market conditions arising in connection with and in response to the COVID-19 pandemic, including prolonged periods of high unemployment, inflation, deflation, prolonged weak consumer demand, a decrease in consumer discretionary spending, political instability or other changes. The significance of the operational and financial impact to us will depend on how long and widespread the disruptions caused by COVID-19, and the corresponding response to contain the virus and treat those affected by it, prove to be.
Our financial statements contain a statement regarding a substantial doubt about the Company’s ability to continue as a going concern
Our audited financial statements as of and for the year ended December 31, 2019, were prepared on the assumption that we would continue as a going concern. The COVID-19 pandemic has materially affected our operations and results of operations, and our management has determined that there is a substantial doubt about our ability to continue as a going concern over the next twelve months. Our ability to continue as a going concern over the next twelve months will depend upon a series of factors, including
the duration of our venue shutdowns; the speed with which, and the extent to which, customers return to our venues once they open; our success in obtaining rent and other concessions from our landlords; and our ability to raise additional capital.
Global economic conditions may make it more difficult to access new and additional capital sources.
Global economic conditions may render it more difficult for us to access debt financing under credit facilities and alternative financing. As a result of the COVID-19 outbreak, our total revenues decreased significantly in March, April and May 2020, and we have implemented certain operational changes in order to address the evolving challenges presented by the global pandemic on our operations. Due to the ongoing impacts of COVID-19, our financial performance in future fiscal quarters may be negatively impacted, which may limit our ability to access financing and cause our financing sources to impose stricter terms on the operations of our business in connection with financing. In addition, other companies in our industry have experienced ratings downgrades and made public statements relating to their potential inability to comply with the terms of their credit facilities, each of which may render financing sources less likely to extend credit or other forms of financing to us on favorable terms or at all. Moreover, governmental business stimulus packages in response to the virus, in particular the CARES Act, have been implemented in a manner in which the guidelines are not published until after the government has provided funding, rendering the rules relative to loan eligibility requirements uncertain and subject to change, which may adversely affect our ability to take advantage of the benefits of such programs. If we are unable to access additional capital, we may default on our payment obligations and our existing creditors (including our landlords and development partners) may be unwilling to further defer rental or other payments on terms extended in the early months of the COVID-19 pandemic.
We may be unable to, or elect not to, pay dividends on our common or preferred stock in the future, which would negatively impact our business and decrease the price of our common and preferred stock.
Our board of directors elected not to pay common stock dividends for 2017 through 2019 to retain capital for growth. All future dividend distributions will be made at the discretion of our board of directors and will depend upon, among other things, our earnings, investment strategy, financial condition and liquidity, and such other factors as the board of directors deems relevant. No assurance can be given that we will pay any dividends on our common stock in the future. We currently have $1.4 million unpaid accrued dividends on our preferred stock. We cannot pay any dividends on our common stock, pay any consideration to repurchase or otherwise acquire shares of our common stock or redeem any shares of any series of our preferred stock without redeeming all of our outstanding preferred shares in accordance with the governing documentation. Consequently, the failure to pay dividends on our preferred stock restricts the actions that we may take with respect to our common stock and preferred stock. Moreover, if we do not pay dividends on any series of preferred stock for six or more periods, then holders of each affected series obtain the right to call a special meeting and elect two members to our board of directors. We cannot predict whether the holders of our preferred stock would take such action or, if taken, how long the process would take or what impact the two new directors on our board of directors would have on our company (other than increasing our director compensation costs). However, the election of additional directors would affect the composition of our board of directors and, thus, could affect the management of our business.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
On May 11, 2020, the Board adopted an amendment (the “Bylaw Amendment”) to the Company’s Amended and Restated Bylaws (the “Bylaws”), to provide that (i) all meetings of stockholders shall be held at the principal executive office of the Corporation or at such other place or by means of remote communication as shall be set by the Board of Directors and stated in the notice of the meeting and (ii) an annual meeting of the stockholders for the election of directors and the transaction of any business within the powers of the Corporation shall be held on the date and at the time and place set by the Board. The Bylaw Amendment became effective on May 11, 2020. The purpose of the Bylaw amendment was to enable the Company to host a virtual annual meeting
in connection with additional precautionary measures relating to the COVID-19 pandemic, once the Company’s entertainment golf facilities have reopened.
The foregoing description of the Bylaw Amendment is only a summary and is qualified in its entirety by reference to the full text of the Bylaws, as amended by the Bylaw Amendment, which are filed as Exhibit 3.6 to this Quarterly Report on Form 10-Q and incorporated by reference in this Item 5.
Item 6. Exhibits
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| Exhibit Number | Exhibit Description |
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| | 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). |
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| | 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). |
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| | Articles of Restatement (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.2, filed on December 8, 2016). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | Amended and Restated By-laws (effective May 11, 2020). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | Tax Benefits Preservation Plan, dated as of March 6, 2020, 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 March 6, 2020). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| Exhibit Number | Exhibit Description |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | 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). |
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| | Form of Drive Shack Inc. 2018 Omnibus Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q, Exhibit 10.23, filed on August 6, 2019). |
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| | Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| Exhibit Number | Exhibit Description |
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| | 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. |
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| | 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. |
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| 101.INS | XBRL Instance Document. |
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| 101.SCH | XBRL Taxonomy Extension Schema Document. |
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| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
* Management contract or compensatory plan or arrangement.
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:
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| DRIVE SHACK INC. |
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| By: | /s/ Hana Khouri |
| | Hana Khouri |
| | Chief Executive Officer and President |
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| | May 11, 2020 |
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| By: | /s/ Lawrence A. Goodfield, Jr. |
| | Lawrence A Goodfield, Jr. |
| | Interim Chief Financial Officer, Chief Accounting Officer & Treasurer |
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| | May 11, 2020 |
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