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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020
or
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☐ | 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)
| | | | | | | | |
Maryland | | 81-0559116 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | | | |
218 W. 18th Street, 3rd Floor, New York, NY | | 10011 |
(Address of principal executive offices) | | (Zip Code) |
(Registrant’s telephone number, including area code)
| | |
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbols(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | DS | New York Stock Exchange (NYSE) |
9.75% Series B Cumulative Redeemable Preferred Stock, $0.01 par value per share | DS-PB | New York Stock Exchange (NYSE) |
8.05% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share | DS-PC | New York Stock Exchange (NYSE) |
8.375% Series D Cumulative Redeemable Preferred Stock, $0.01 par value per share | DS-PD | New York Stock Exchange (NYSE) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). S Yes £ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer £ Accelerated filer S Non-accelerated filer £ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No S
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
Common stock, $0.01 par value per share: 67,227,944 shares outstanding as of October 30, 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 any of our entertainment golf venues, (ii) the operation of our entertainment golf venues and traditional golf courses in light of the ongoing COVID-19 pandemic following their reopening and the opening of new venues, (iii) our ability to remain competitive within the leisure and entertainment industry during the ongoing COVID-19 pandemic (iv) the adequacy of our cash flows from operations and available cash to meet our liquidity needs, including in the event of a prolonged reclosure of our venues, (v) our ability to modify the timing of certain contractual payments owed, (vi) our ability to obtain additional financing and (vii) the potential impact of COVID-19 on 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:
•our ability to reopen and/or avoid future closures of our venues;
•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;
•regulations and guidance of federal, state and local governments and health officials regarding the response to the ongoing COVID-19 pandemic, including with respect to business operations, safety protocols and public gatherings;
•our financial liquidity and ability to access capital;
•the ability to retain and attract members and guests to our properties;
•changes in global, national and local economic conditions, including, but not limited to, 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;
•effects of unusual weather patterns and extreme weather events, geographical concentrations with respect to our operations and seasonality of our business;
•competition within the industries in which we operate or may pursue additional investments, including competition for sites for our Entertainment Golf venues;
•material increases in our expenses, including, but not limited to, unanticipated labor issues, rent or costs with respect to our workforce, and costs of goods, utilities and supplies;
•our inability to sell or exit certain properties, and unforeseen changes to our ability to develop, redevelop or renovate certain properties;
•our ability to further invest in our business and implement our strategies;
•difficulty monetizing our real estate debt investments;
•liabilities with respect to inadequate insurance coverage, accidents or injuries on our properties, adverse litigation judgments or settlements, or membership deposits;
•changes to and failure to comply with relevant regulations and legislation, including in order to maintain certain licenses and permits, and environmental regulations in connection with our operations;
•inability to execute on our growth and development strategy by successfully developing, opening and operating new venues;
•impacts of any failures of our information technology and cybersecurity systems;
•the impact of any current or further legal proceedings and regulatory investigations and inquiries; and
•other risks detailed from time to time, particularly under the heading “Risk Factors” in this report, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, 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:
•should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
•have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
•may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
•were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.
DRIVE SHACK INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
| | | | | | | | | | | |
| (unaudited) | | |
| September 30, 2020 | | December 31, 2019 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 13,314 | | | $ | 28,423 | |
Restricted cash | 2,904 | | | 3,103 | |
Accounts receivable, net of allowance of $899 and $1,082, respectively | 3,670 | | | 5,249 | |
Real estate assets, held-for-sale, net | 17,016 | | | 16,948 | |
Real estate securities, available-for-sale | 3,027 | | | 3,052 | |
Other current assets | 14,861 | | | 17,521 | |
Total current assets | 54,792 | | | 74,296 | |
Restricted cash, noncurrent | 286 | | | 438 | |
Property and equipment, net of accumulated depreciation | 175,014 | | | 179,641 | |
Operating lease right-of-use assets | 198,458 | | | 215,308 | |
Intangibles, net of accumulated amortization | 15,329 | | | 17,565 | |
Other investments | — | | | 24,020 | |
Other assets | 5,610 | | | 4,723 | |
Total assets | $ | 449,489 | | | $ | 515,991 | |
| | | |
Liabilities and Equity | | | |
Current liabilities | | | |
Obligations under finance leases | $ | 6,583 | | | $ | 6,154 | |
Membership deposit liabilities | 14,815 | | | 10,791 | |
Accounts payable and accrued expenses | 38,964 | | | 25,877 | |
Deferred revenue | 15,351 | | | 26,268 | |
Real estate liabilities, held-for-sale | 5 | | | 4 | |
Other current liabilities | 30,452 | | | 23,964 | |
Total current liabilities | 106,170 | | | 93,058 | |
Credit facilities and obligations under finance leases - noncurrent | 12,435 | | | 13,125 | |
Operating lease liabilities - noncurrent | 171,592 | | | 187,675 | |
Junior subordinated notes payable | 51,185 | | | 51,192 | |
Membership deposit liabilities, noncurrent | 97,943 | | | 95,805 | |
Deferred revenue, noncurrent | 7,385 | | | 6,283 | |
Other liabilities | 3,154 | | | 3,278 | |
Total liabilities | $ | 449,864 | | | $ | 450,416 | |
| | | |
Commitments and contingencies | | | |
| | | |
Equity | | | |
Preferred stock, $0.01 par value, 100,000,000 shares authorized, 1,347,321 shares of 9.75% Series B Cumulative Redeemable Preferred Stock, 496,000 shares of 8.05% Series C Cumulative Redeemable Preferred Stock, and 620,000 shares of 8.375% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, issued and outstanding as of September 30, 2020 and December 31, 2019 | $ | 61,583 | | | $ | 61,583 | |
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 67,227,944 and 67,068,751 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | 672 | | | 671 | |
Additional paid-in capital | 3,178,319 | | | 3,177,183 | |
Accumulated deficit | (3,242,337) | | | (3,175,572) | |
Accumulated other comprehensive income | 1,388 | | | 1,710 | |
Total equity | $ | (375) | | | $ | 65,575 | |
Total liabilities and equity | $ | 449,489 | | | $ | 515,991 | |
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(dollars in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Revenues | | | | | | | |
Golf operations | $ | 58,766 | | | $ | 60,797 | | | $ | 137,066 | | | $ | 162,889 | |
Sales of food and beverages | 7,699 | | | 13,885 | | | 22,634 | | | 37,360 | |
Total revenues | 66,465 | | | 74,682 | | | 159,700 | | | 200,249 | |
| | | | | | | |
Operating costs | | | | | | | |
Operating expenses | 54,993 | | | 63,454 | | | 142,584 | | | 169,897 | |
Cost of sales - food and beverages | 2,170 | | | 3,856 | | | 6,654 | | | 10,458 | |
General and administrative expense | 7,916 | | | 12,755 | | | 24,102 | | | 37,981 | |
Depreciation and amortization | 6,853 | | | 5,723 | | | 20,329 | | | 15,769 | |
Pre-opening costs | 227 | | | 4,350 | | | 1,049 | | | 7,229 | |
(Gain) Loss on lease terminations and impairment | 302 | | | 1,872 | | | (2,031) | | | 6,077 | |
| | | | | | | |
Total operating costs | 72,461 | | | 92,010 | | | 192,687 | | | 247,411 | |
Operating loss | (5,996) | | | (17,328) | | | (32,987) | | | (47,162) | |
| | | | | | | |
Other income (expenses) | | | | | | | |
Interest and investment income | 135 | | | 191 | | | 400 | | | 799 | |
Interest expense, net | (2,896) | | | (2,061) | | | (8,232) | | | (6,008) | |
Other income (loss), net | (157) | | | 7,341 | | | (24,212) | | | 12,955 | |
Total other income (expenses) | (2,918) | | | 5,471 | | | (32,044) | | | 7,746 | |
Loss before income tax | (8,914) | | | (11,857) | | | (65,031) | | | (39,416) | |
Income tax expense | 498 | | | 162 | | | 1,269 | | | 162 | |
Net loss | (9,412) | | | (12,019) | | | (66,300) | | | (39,578) | |
Preferred dividends | (1,395) | | | (1,395) | | | (4,185) | | | (4,185) | |
Loss applicable to common stockholders | $ | (10,807) | | | $ | (13,414) | | | $ | (70,485) | | | $ | (43,763) | |
| | | | | | | |
Loss applicable to common stock, per share | | | | | | | |
Basic | $ | (0.16) | | | $ | (0.20) | | | $ | (1.05) | | | $ | (0.65) | |
Diluted | $ | (0.16) | | | $ | (0.20) | | | $ | (1.05) | | | $ | (0.65) | |
| | | | | | | |
Weighted average number of shares of common stock outstanding | | | | | | | |
Basic | 67,212,532 | | | 67,040,692 | | | 67,131,827 | | | 67,032,519 | |
Diluted | 67,212,532 | | | 67,040,692 | | | 67,131,827 | | | 67,032,519 | |
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 September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Net loss | $ | (9,412) | | | $ | (12,019) | | | $ | (66,300) | | | $ | (39,578) | |
Other comprehensive loss: | | | | | | | |
Net unrealized loss on available-for-sale securities | (67) | | | (229) | | | (322) | | | (229) | |
Other comprehensive loss | (67) | | | (229) | | | (322) | | | (229) | |
Total comprehensive loss | $ | (9,479) | | | $ | (12,248) | | | $ | (66,622) | | | $ | (39,807) | |
Comprehensive loss attributable to Drive Shack Inc. stockholders’ equity | $ | (9,479) | | | $ | (12,248) | | | $ | (66,622) | | | $ | (39,807) | |
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(dollars in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Drive Shack Inc. Stockholders |
| Preferred Stock | | Common Stock | | | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Additional Paid- in Capital | | Accumulated Deficit | | Accumulated Other Comp. Income | | Total Equity (Deficit) |
Equity (deficit) - December 31, 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 | |
Stock-based compensation | — | | | — | | | — | | | — | | | 500 | | | — | | | — | | | 500 | |
Shares issued from restricted stock units | — | | | — | | | 141,849 | | | 1 | | | (1) | | | — | | | — | | | — | |
Comprehensive income (loss) | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (39,526) | | | — | | | (39,526) | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | (217) | | | (217) | |
Total comprehensive loss | | | | | | | | | | | | | | | $ | (39,743) | |
Equity (deficit) - June 30, 2020 | 2,463,321 | | | $ | 61,583 | | | 67,212,362 | | | $ | 672 | | | $ | 3,177,883 | | | $ | (3,232,925) | | | $ | 1,455 | | | $ | 8,668 | |
| | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | — | | | — | | | 436 | | | — | | | — | | | 436 | |
Shares issued from restricted stock units | — | | | — | | | 15,582 | | | — | | | — | | | — | | | — | | | — | |
Comprehensive income (loss) | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (9,412) | | | — | | | (9,412) | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | (67) | | | (67) | |
Total comprehensive loss | | | | | | | | | | | | | | | $ | (9,479) | |
Equity (deficit) - September 30, 2020 | 2,463,321 | | | $ | 61,583 | | | 67,227,944 | | | $ | 672 | | | $ | 3,178,319 | | | $ | (3,242,337) | | | $ | 1,388 | | | $ | (375) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Drive Shack Inc. Stockholders |
| Preferred Stock | | Common Stock | | | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Additional Paid- in Capital | | Accumulated Deficit | | Accumulated Other Comp. Income | | Total Equity (Deficit) |
Equity (deficit) - December 31, 2018 | 2,463,321 | | | $ | 61,583 | | | 67,027,104 | | | $ | 670 | | | $ | 3,175,843 | | | $ | (3,105,307) | | | $ | 1,878 | | | $ | 134,667 | |
Dividends declared | — | | | — | | | — | | | — | | | — | | | (1,395) | | | — | | | (1,395) | |
Stock-based compensation | — | | | — | | | — | | | — | | | 1,222 | | | — | | | — | | | 1,222 | |
Adoption of ASC 842 | — | | | — | | | — | | | — | | | — | | | (9,831) | | | | | (9,831) | |
Comprehensive income (loss) | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (14,600) | | | — | | | (14,600) | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total comprehensive loss | | | | | | | | | | | | | | | (14,600) | |
Equity (deficit) - March 31, 2019 | 2,463,321 | | | $ | 61,583 | | | 67,027,104 | | | $ | 670 | | | $ | 3,177,065 | | | $ | (3,131,133) | | | $ | 1,878 | | | $ | 110,063 | |
Dividends declared | — | | | — | | | — | | | — | | | — | | | (1,395) | | | — | | | (1,395) | |
Stock-based compensation | — | | | — | | | — | | | — | | | 1,384 | | | — | | | — | | | 1,384 | |
Purchase of common stock (directors) | — | | | — | | | 6,000 | | | — | | | 29 | | | — | | | — | | | 29 | |
Comprehensive income (loss) | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (12,959) | | | — | | | (12,959) | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total comprehensive loss | | | | | | | | | | | | | | | (12,959) | |
Equity (deficit) - June 30, 2019 | 2,463,321 | | | $ | 61,583 | | | 67,033,104 | | | $ | 670 | | | $ | 3,178,478 | | | $ | (3,145,487) | | | $ | 1,878 | | | $ | 97,122 | |
Dividends declared | — | | | — | | | — | | | — | | | — | | | (1,395) | | | — | | | (1,395) | |
Stock-based compensation | — | | | — | | | — | | | — | | | 177 | | | — | | | — | | | 177 | |
Shares issued from restricted stock units (directors) | — | | | — | | | 17,452 | | | — | | | — | | | — | | | — | | | — | |
Comprehensive income (loss) | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (12,019) | | | — | | | (12,019) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (229) | | | (229) | |
Total comprehensive loss | | | | | | | | | | | | | | | (12,248) | |
Equity (deficit) - September 30, 2019 | 2,463,321 | | | $ | 61,583 | | | 67,050,556 | | | $ | 670 | | | $ | 3,178,655 | | | $ | (3,158,901) | | | $ | 1,649 | | | $ | 83,656 | |
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars in thousands, except share data)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Cash Flows From Operating Activities | | | |
Net loss | $ | (66,300) | | | $ | (39,578) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization | 20,329 | | | 15,769 | |
Amortization of discount and premium | (304) | | | (196) | |
Other amortization | 6,135 | | | 5,387 | |
Amortization of revenue on golf membership deposit liabilities | (1,173) | | | (1,080) | |
Amortization of prepaid golf membership dues | (9,556) | | | (10,728) | |
Non-cash operating lease expense | 7,636 | | | 5,306 | |
Stock-based compensation | 1,137 | | | 2,783 | |
(Gain) Loss on lease terminations and impairment | (2,681) | | | 6,077 | |
Equity in (earnings), net of impairment from equity method investments | 24,020 | | | (1,033) | |
Other (gains) losses, net | 390 | | | (11,469) | |
| | | |
| | | |
Change in: | | | |
Accounts receivable, net, other current assets and other assets - noncurrent | 3,614 | | | 1,605 | |
Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrent | 14,452 | | | (2,591) | |
Net cash used in operating activities | (2,301) | | | (29,748) | |
Cash Flows From Investing Activities | | | |
Proceeds from sale of property and equipment | (74) | | | 44,468 | |
Acquisition and additions of property and equipment and intangibles | (9,607) | | | (60,534) | |
| | | |
Net cash used in investing activities | (9,681) | | | (16,066) | |
Cash Flows From Financing Activities | | | |
Repayments of debt obligations | (3,849) | | | (5,701) | |
Golf membership deposits received | 2,241 | | | 1,776 | |
Preferred stock dividends paid | (1,395) | | | (4,185) | |
Other financing activities | (475) | | | 15 | |
Net cash used in financing activities | (3,478) | | | (8,095) | |
Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent | (15,460) | | | (53,909) | |
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 | $ | 16,504 | | | $ | 28,910 | |
| | | |
Supplemental Schedule of Non-Cash Investing and Financing Activities | | | |
Preferred stock dividends declared but not paid | $ | — | | | $ | 930 | |
Additions to finance lease assets and liabilities | $ | 4,030 | | | $ | 11,723 | |
Increases in accounts payable and accrued expenses related to the purchase of property and equipment | $ | 2,555 | | | $ | (2,141) | |
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2020
(dollars in tables in thousands, except share data)
1. ORGANIZATION
Drive Shack Inc., a Maryland corporation, was formed in 2002, and its common stock is traded on the NYSE under the symbol “DS.” Drive Shack Inc., together with its subsidiaries, is referenced herein as "Drive Shack Inc.", "the Company", "we", or "our". The Company owns and operates golf-related leisure and entertainment venues and courses focused on bringing people together through competitive socializing, by combining sports and entertainment with elevated food and beverage offerings.
The Company conducts its business through the following segments: (i) Entertainment Golf, (ii) Traditional Golf and (iii) corporate. For a further discussion of the reportable segments, see Note 4.
As of September 30, 2020, the Company's Entertainment Golf segment was comprised of four owned or leased entertainment golf venues across three states with locations in Orlando, Florida; West Palm Beach, Florida; Raleigh, North Carolina; and Richmond, Virginia.
The Company’s Traditional Golf segment is one of the largest operators of traditional golf properties in the United States. As of September 30, 2020, the Company owned, leased or managed 60 traditional golf properties across nine states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COVID-19 Update — Following the temporary closure of all of our entertainment golf venues and substantially all of our traditional golf properties in March 2020 in response to the coronavirus ("COVID-19") global pandemic, three Drive Shack entertainment golf venues and all of our traditional golf properties were reopened by the end of the second quarter, subject to locally mandated capacity limitations and operational restrictions. As of the date of this report, our entertainment golf venue in Orlando, Florida remains closed. Restrictions on large group gatherings remain in effect in the majority of the jurisdictions we operate, which has resulted in the postponement or cancellation of the substantial majority of events, banquets, and other large group gatherings.
The extended length of the COVID-19 pandemic and the related government response has caused, and is continuing to cause prolonged periods of various operational restrictions and capacity limitations impacting our business operations. In addition, the duration and intensity of the pandemic may result in changes in customer behaviors or preferences. 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 ultimately impacts our business will depend on future developments, which remain highly uncertain and cannot be predicted, including additional actions taken by various governmental bodies and private enterprises to contain COVID-19 or mitigate its impact, among others. The Company currently expects these developments to have a material adverse impact on its revenues, results of operations and cash flows in future periods.
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.
As our operations remain subject to numerous locally mandated COVID-19 capacity limitations and operational restrictions. The loss of revenues and uncertainty related to the COVID-19 pandemic raised substantial doubt about the Company's ability to continue as a going concern, as disclosed in the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020.
In order to manage cash balances in the second quarter and continuing through the end of the third quarter, management reduced spending broadly, including furloughing employees, pausing construction on future planned venues to reduce capital spending, suspending declaration of dividends on our preferred stock, and deferring payment of certain operating and corporate expenditures, including rent payments.
On October 16, 2020, the Company completed the sale of its remaining held-for-sale Traditional Golf property for a sale price of $34.5 million and received net cash proceeds of approximately $33.6 million. Management determined that the combination of cash proceeds from the sale with other cost reduction and cash conservation measures provide the Company with sufficient liquidity to meet its obligations for at least twelve months from the date of this report. Accordingly, management believes that
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(dollars in tables in thousands, except share data) its plans to improve the Company's liquidity position have been effectively implemented and the conditions that previously raised substantial doubt about the Company's ability to continue as a going concern have been mitigated.
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. 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.
The Company’s significant accounting policies for these financial statements as of September 30, 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.
Use of Estimates – 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.
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 "(Gain) Loss on lease terminations and impairment" 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.
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 September 30, 2020, the Company continued to present one traditional golf property as held-for-sale. On October 16, 2020, the Company completed the sale of that remaining held-for-sale Traditional Golf property for a sale price of $34.5 million and received net cash proceeds of approximately $33.6 million.
The real estate assets, held-for-sale, net are reported at a carrying value of $17.0 million and include $12.7 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 as of September 30, 2020. 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.
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.
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SEPTEMBER 30, 2020
(dollars in tables in thousands, except share data) 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.
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. 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.
The operations and ongoing construction at the commercial real estate project halted due to the COVID-19 pandemic in mid-March and the Company recorded an other-than-temporary impairment charge of $24.7 million during the three months ended June 30, 2020. The other-than-temporary impairment charge was recorded in "Other income (loss), net" on the Consolidated Statements of Operations. The property reopened to the public with additional entertainment venues and retail shops in October 2020 while following COVID related operational restrictions and capacity limitations, and implementing social distancing measures. However, the ability of the commercial real estate project to obtain additional funding to complete the construction and attain the financial results needed to recover any of our investment remains highly uncertain. The carrying value of the investment was zero and $24.0 million as of September 30, 2020, and December 31, 2019, respectively.
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:
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SEPTEMBER 30, 2020
(dollars in tables in thousands, except share data) | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Managed course receivables | | $ | 5,244 | | | $ | 5,426 | |
Prepaid expenses | | 2,806 | | | 3,608 | |
Deposits | | 949 | | | 1,374 | |
Inventory | | 2,173 | | | 2,762 | |
Miscellaneous current assets, net | | 3,689 | | | 4,351 | |
Other current assets | | $ | 14,861 | | | $ | 17,521 | |
Other Assets
The following table summarizes the Company's other assets:
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Prepaid expenses | | $ | 727 | | | $ | 317 | |
Deposits | | 2,504 | | | 2,123 | |
Miscellaneous assets, net | | 2,379 | | | 2,283 | |
Other assets | | $ | 5,610 | | | $ | 4,723 | |
Other Current Liabilities
The following table summarizes the Company's other current liabilities:
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | | | |
Operating lease liabilities | | $ | 20,336 | | | $ | 16,922 | |
Accrued rent | | 5,863 | | | 2,769 | |
Dividends payable | | — | | | 930 | |
Miscellaneous current liabilities | | 4,253 | | | 3,343 | |
Other current liabilities | | $ | 30,452 | | | $ | 23,964 | |
Other Liabilities
The following table summarized the Company's other liabilities:
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | | | |
Service obligation intangible | | $ | — | | | $ | 1,776 | |
| | | | |
Miscellaneous liabilities | | 3,154 | | | 1,502 | |
Other liabilities | | $ | 3,154 | | | $ | 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.
Other Income (Loss), Net — These items are comprised of the following:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2020
(dollars in tables in thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Collateral management fee income, net | 62 | | | 101 | | | 199 | | | 357 | |
Equity in earnings, net of impairment from equity method investments | — | | | 348 | | | (24,020) | | | 1,033 | |
Gain (loss) on sale of traditional golf properties | (9) | | | 7,096 | | | (63) | | | 11,763 | |
Other (loss) income | (210) | | | (204) | | | (328) | | | (198) | |
Other income (loss), net | $ | (157) | | | $ | 7,341 | | | $ | (24,212) | | | $ | 12,955 | |
Equity in earnings, net of impairment from equity method investments - During the nine months ended September 30, 2020, the Company recorded an other-than-temporary impairment charge of $24.7 million on the Company's equity method investment.
Gain (loss) on sale of traditional golf properties - During the three months ended September 30, 2019, the Company sold one traditional golf property resulting in net proceeds of $12.3 million, inclusive of transaction costs. The traditional golf property had a carrying value of $5.2 million and resulted in a gain on sale of $7.0 million. During the nine months ended September 30, 2019, the company sold eight traditional golf properties, resulting in net proceeds of $55.7 million. The traditional golf properties had a carrying value of $43.8 million and resulted in a gain on sale of $11.8 million.
Recent Accounting Pronouncements
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.
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 revenues are generated within the Entertainment Golf 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 September 30, 2020 | | Nine Months Ended September 30, 2020 |
| | Ent. golf venues | | Public golf properties | | Private golf properties | | Managed golf properties (A) | | Total | | Ent. golf venues | | Public golf properties | | Private golf properties | | Managed golf properties (A) | | Total |
Golf operations | | $ | 2,736 | | | $ | 27,361 | | | $ | 11,833 | | | $ | 16,836 | | | $ | 58,766 | | | $ | 7,408 | | | $ | 56,419 | | | $ | 31,994 | | | $ | 41,245 | | | $ | 137,066 | |
Sales of food and beverages | | 3,440 | | | 2,719 | | | 1,540 | | | — | | | 7,699 | | | 10,675 | | | 7,914 | | | 4,045 | | | — | | | 22,634 | |
Total revenues | | $ | 6,176 | | | $ | 30,080 | | | $ | 13,373 | | | $ | 16,836 | | | $ | 66,465 | | | $ | 18,083 | | | $ | 64,333 | | | $ | 36,039 | | | $ | 41,245 | | | $ | 159,700 | |
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(dollars in tables in thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| | Ent. golf venues | | Public golf properties | | Private golf properties | | Managed golf properties (A) | | Total | | Ent. golf venues | | Public golf properties | | Private golf properties | | Managed golf properties (A) | | Total |
Golf operations | | $ | 1,431 | | | $ | 30,258 | | | $ | 11,902 | | | $ | 17,206 | | | $ | 60,797 | | | $ | 2,720 | | | $ | 76,624 | | | $ | 40,707 | | | $ | 42,838 | | | $ | 162,889 | |
Sales of food and beverages | | 2,256 | | | 9,053 | | | 2,576 | | | — | | | 13,885 | | | 4,167 | | | 24,646 | | | |