Drive Shack Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

EQUITY AND EARNINGS PER SHARE

EQUITY AND EARNINGS PER SHARE

12 Months Ended

Dec. 31, 2019

Earnings per Share

The Company is required to present both basic and diluted earnings per share (“EPS”). The following table shows the amounts used in computing basic and diluted EPS:



	For Year Ended December 31,
	2019			2018			2017
Numerator for basic and diluted earnings per share:
Loss from continuing operations after preferred dividends	$	(60,434	)	$	(44,263	)	$	(47,781	)
Loss Applicable to Common Stockholders	$	(60,434	)	$	(44,263	)	$	(47,781	)

Denominator:
Denominator for basic earnings per share - weighted average shares	67,039,556			66,993,543			66,903,457
Effect of dilutive securities
Options	—			—			—
RSUs	—			—			—
Denominator for diluted earnings per share - adjusted weighted average shares	67,039,556			66,993,543			66,903,457

Basic earnings per share:
Loss from continuing operations per share of common stock after preferred dividends	$	(0.90	)	$	(0.66	)	$	(0.71	)
Loss Applicable to Common Stock, per share	$	(0.90	)	$	(0.66	)	$	(0.71	)

Diluted earnings per share:
Loss from continuing operations per share of common stock after preferred dividends	$	(0.90	)	$	(0.66	)	$	(0.71	)
Loss Applicable to Common Stock, per share	$	(0.90	)	$	(0.66	)	$	(0.71	)

Basic EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of dilutive securities during each period. The Company’s dilutive securities are its options and RSUs. During 2019, 2018, and 2017, based on the treasury stock method, the Company had 2,113,022; 2,718,704; and 1,749,596 potentially dilutive securities, respectively, which were excluded due to the Company's loss position. During 2019, 2018 and 2017, the Company had: 396,146; 88,023; and 201,430 antidilutive options, respectively. Net income (loss) applicable to common stockholders is equal to net income (loss) less preferred dividends.

Common Stock Issuances

In 2017, the Company issued a total of 152,800 shares of its common stock to its independent directors as a component of their annual compensation.

In 2018, the Company issued a total of 50,000 shares of its common stock to an independent director as part of the Director Stock Program described below.

In 2019, the Company issued a total of 6,000 shares of its common stock to an independent director as part of the Director Stock Program.

In 2019, the Company issued a total of 27,099 of its common stock to independent directors upon vesting of RSUs that were granted in 2018.

In 2019, the Company issued a total of 8,548 shares of its common stock to employees upon vesting of RSUs that were granted in 2019.

Incentive and Option Plans

The Drive Shack Inc. 2018 Omnibus Incentive Plan (the "2018 Plan") was effective upon approval by our shareholders in May 2018 and provides for the issuance of equity-based awards in various forms to eligible participants. As of December 31, 2019, the 2018 Plan has 5,343,078 shares available for grant in the aggregate, subject to an annual limitation.

All outstanding options granted under prior option plans will continue to be subject to the terms and conditions set forth in the agreements evidencing such options and the terms of respective option plan. Upon exercise, all options will be settled in an amount of cash equal to the excess of the fair market value of a share of common stock on the date of exercise over the strike price per share, unless advance approval is made to settle the option in shares of common stock.

As detailed in the 2018 Plan, the board of directors may permit a first time non-employee director to make a one-time election to participate in a stock purchase and matching grant program (the "Director Stock Program") which provides that if the non-employee director purchases shares of the Company's common stock at fair value within 30 days following the date the individual becomes a non-employee director, then the Company will issue a matching grant of fully vested shares of common stock equal to 20% of the aggregate fair value of the purchased shares. In 2018, a non-employee director purchased 41,667 shares and the Company issued 8,333 shares representing the matching grant. In 2019, a non-employee director purchased 5,000 shares and the Company issued 1,000 shares representing the matching grant.

Stock Options

The following is a summary of the changes in the Company's outstanding options for the year ended December 31, 2019.



	Number of Options		Weighted Average Strike Price		Weighted Average Life Remaining (in years)
Balance at December 31, 2018	8,436,931		$	3.72
Granted	695,652		4.66
Forfeited (A)	(2,234,237	)	5.44
Balance at December 31, 2019	6,898,346		$	3.26	3.4 years

Exercisable at December 31, 2019	4,744,696		$	3.26	2.5 years

The Company's outstanding options were summarized as follows:



	Year Ended December 31,
	2019	2018
Held by the former Manager	3,627,245	2,705,253
Granted to the former Manager and subsequently transferred to certain Manager’s employees (B)	1,382,998	2,304,990
Granted to the independent directors	333	333
Granted to Drive Shack employees (A)(C)	1,887,770	3,426,355
Total	6,898,346	8,436,931

(A)

In 2019, in connection with the former CEO's retirement, the related option awards were modified to accelerate the vesting of 1,117,118 options, subject to a 90-day exercise period which expired on February 9, 2020. The former CEO forfeited 2,234,237 options upon departure. As a result of the modification, the Company reversed $2.1 million in stock compensation expense. The expense for the modified award was recorded at the modification date fair value.

(B)

The Company and the former Manager agreed that options held by certain employees formerly employed by the Manager will not terminate or be forfeited as a result of the Termination and Cooperation Agreement, and the vesting of such options will 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 2019, a certain employee was terminated by the Company and 921,992 options reverted back to the former Manager. The Company reversed $1.2 million in stock compensation expense related to these options.


(C)	In 2018, the Company granted 75,000 options to an employee as provided in their employment agreement. The options fully vest on the third anniversary of the grant date. In 2019, the Company granted 695,652 options to an employee that vest and become exercisable in equal annual installment on each of the first three anniversaries of the grant date.

The valuation of the employee options has been determined using the Black-Scholes option valuation model. The Black-Scholes option valuation model uses assumptions of expected volatility, expected dividend yield of the Company’s stock, expected term of the awards and the risk-free interest rate. The fair value of the options was determined using the following assumptions:



Option Valuation Date	January 2018			April 2018			November 2018			April 2019			November 2019
Expected Volatility	39.73		%	35.66		%	35.4 - 35.8%			36.80		%	44.73		%
Expected Dividend Yield	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%
Expected Remaining Term	3.0 - 6.6 years			2.7 - 6.3 years			6.0 - 6.5 years			6.0 years			0.3 years
Risk-Free Rate	2.16 - 2.29%			2.68 - 2.82%			3.09 - 3.11%			2.34		%	1.57		%
Fair Value at Valuation Date	$	4,272		$	3,558		$	7,478		$	1,280		$	67

Stock-based compensation expense is recognized on a straight-line basis from grant date through the vesting date of the options. Stock-based compensation expense related to the employee options was $0.6 million (net of the reversals of stock compensation expenses described above) and $2.2 million during the years ended December 31, 2019 and 2018, respectively, and was recorded in general and administrative expense on the Consolidated Statements of Operations. The unrecognized stock-based compensation expense related to the unvested options was $3.4 million as of December 31, 2019 and will be expensed over a weighted average of 2.3 years.

The closing price on the New York Stock Exchange for the Company’s common stock as of December 31, 2019 was $3.66 per share.

Restricted Stock Units (RSUs)

The following is a summary of the changes in the Company's RSUs for the year ended December 31, 2019:



	Number of RSUs		Weighted Average Grant Date Fair Value (per unit)
Balance at December 31, 2018	54,641		$	5.02
Granted (A)	635,819		$	4.66
Vested/Released	(35,647	)	$	5.17
Forfeited (B)	(134,195	)	$	4.68
Balance at December 31, 2019	520,618		$	4.66


(A)	The Company's non-employee directors were granted 56,076 RSUs during 2019 as part of the annual compensation. The RSUs are subject to a one year vesting period. The Company granted 579,743 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.


(B)	Unvested RSUs are forfeited by non-employee directors upon their departure from the board of directors and forfeited by employees upon their termination.

Stock-based compensation expense related to the RSUs was $0.7 million and $0.1 million during the years ended December 31, 2019 and 2018, respectively, and was recorded in general and administrative expense on the Consolidated Statements of Operations. The unrecognized stock-based compensation expense related to the unvested RSUs was $1.9 million as of December 31, 2019 and is expected to be recognized over a weighted average of 2.2 years.

Tax Benefits Preservation Plan

On March 6, 2020, our board of directors adopted a Tax Benefits Preservation Plan (the “2020 Tax Plan”) with American Stock Transfer and Trust Company, LLC as rights agent, and the disinterested members of the board of directors declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record at the close of business on March 16, 2020. Each right is governed by the terms of the 2020 Tax Plan and entitles the registered holder to purchase from us a unit consisting of one one-thousandth of a share of Series E Junior Participating Preferred Stock, par value $0.01 per share at a purchase price of $18.00 per unit, subject to adjustment. The 2020 Tax Plan is intended to help protect our ability to use our tax net operating losses and certain other tax assets by deterring an “ownership change” as defined under the Code.

In connection with the adoption of the Tax Benefit Preservation Plan in 2016, our board of directors approved the Articles Supplementary of Series E Junior Participating Preferred Stock, which was filed with the State Department of Assessments and Taxation of Maryland on December 8, 2016.

Preferred Stock

In March 2003, the Company issued 2.5 million shares ($62.5 million face amount) of its 9.75% Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred”). In October 2005, the Company issued 1.6 million shares ($40.0 million face amount) of its 8.05% Series C Cumulative Redeemable Preferred Stock (the “Series C Preferred”). In March 2007, the Company issued 2.0 million shares ($50.0 million face amount) of its 8.375% Series D Cumulative Redeemable Preferred Stock (the “Series D Preferred”). The Series B Preferred, Series C Preferred and Series D Preferred are non-voting, have a $25 per share liquidation preference, no maturity date and no mandatory redemption. The Company has the option to redeem the Series B Preferred, the Series C Preferred and the Series D Preferred, at their liquidation preference. If the Series C Preferred or Series D Preferred cease to be listed on the NYSE or the AMEX, or quoted on the NASDAQ, and the Company is not subject to the reporting requirements of the Exchange Act, the Company has the option to redeem the Series C Preferred or Series D Preferred, as applicable, at their liquidation preference and, during such time any shares of Series C Preferred or Series D Preferred are outstanding, the dividend will increase to 9.05% or 9.375% per annum, respectively.

In connection with the issuance of the Series B Preferred, Series C Preferred and Series D Preferred, the Company incurred approximately $2.4 million, $1.5 million, and $1.8 million of costs, respectively, which were netted against the proceeds of such offerings. If any series of preferred stock were redeemed, the related costs would be recorded as an adjustment to income available for common stockholders at that time.

In March 2010, the Company settled its offer to exchange (the “Exchange Offer”) shares of its common stock and cash for shares of its preferred stock. After settlement of the Exchange Offer, 1,347,321 shares of Series B Preferred Stock, 496,000 shares of Series C Preferred Stock and 620,000 shares of Series D Preferred Stock remain outstanding for trading on the New York Stock Exchange.

As of January 31, 2020, Drive Shack Inc. had paid all current and accrued dividends on its preferred stock.