Quarterly report pursuant to Section 13 or 15(d)

EQUITY AND EARNINGS PER SHARE

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EQUITY AND EARNINGS PER SHARE
 9 Months Ended
Sep. 30, 2018
Stockholders' Equity Note [Abstract]  
EQUITY AND EARNINGS PER SHARE
EQUITY AND EARNINGS PER SHARE
 
A. Stock Options

The following is a summary of the changes in the Company’s outstanding options for the nine months ended September 30, 2018:
 
Number of Options
 
Weighted Average Strike Price
 
Weighted Average Life Remaining (in years)
Balance at December 31, 2017
5,010,576

 
$
2.55

 
 
Balance at September 30, 2018
5,010,576

 
$
2.55

 
4.84
 
 
 
 
 
 
Exercisable at September 30, 2018
2,705,586

 
$
2.64

 
4.89


As of September 30, 2018, the Company’s outstanding options were summarized as follows:
 
 
Issued in 2011 and thereafter
Held by the former Manager
 
2,705,253

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

Issued to the independent directors
 
333

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 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 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 1, 2018

 
April 10, 2018

Expected Volatility
 
39.73
%
 
35.66
%
Expected Dividend Yield
 
0.00
%
 
0.00
%
Expected Remaining Term
 
3.0 - 6.6 years

 
2.7 - 6.3 years

Risk-Free Rate
 
2.16 - 2.29%

 
2.68 - 2.82%

Fair Value at Valuation Date
 
$
4,272

 
$
3,558



The options granted to the Company's employees fully vest and are exercisable one year prior to the option expiration date, beginning March 2020 through January 2024. 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 $0.5 million and $1.3 million during the three and nine months ended September 30, 2018, respectively, and was recorded in general and administrative expense on the Consolidated Statements of Operations. The unrecognized stock-based compensation expense related to the unvested options was $6.5 million as of September 30, 2018 and will be expensed over a weighted average of 3.9 years.

B. Drive Shack Inc. 2018 Omnibus Incentive Plan

On May 25, 2018, the shareholders of the Company approved the Drive Shack Inc. 2018 Omnibus Incentive Plan (the "2018 Plan") which provides for the issuance of equity-based awards in various forms to eligible participants. The 2018 Plan allows for 6,697,710 shares of common stock to be available for grants of equity awards, subject to an annual limitation of 1,339,542 (with any shares not issued or granted in a specific year being added to such number in the subsequent year).

On August 22, 2018, the Company granted an aggregate of 26,178 Restricted Stock Units ("RSUs") that are subject to a one year vesting period. The fair value at grant date was $5.73 per share. Stock-based compensation expense is recognized on a straight-line basis through the vesting date of the RSUs. Stock-based compensation expense related to the RSUs was less than $0.1 million during both the three and nine months ended September 30, 2018, 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 $0.1 million as of September 30, 2018 and will be expensed over a weighted average of 0.9 years.

C. Dividends

On March 6, 2018, the Company declared dividends of $0.609375, $0.503125 and $0.523438 per share on the 9.750% Series B, 8.050% Series C and 8.375% Series D preferred stock, respectively, for the period beginning February 1, 2018 and ending April 30, 2018. Dividends totaling $1.4 million were paid on April 30, 2018.

On May 2, 2018, the Company declared dividends of $0.609375, $0.503125 and $0.523438 per share on the 9.750% Series B, 8.050% Series C and 8.375% Series D preferred stock, respectively, for the period beginning May 1, 2018 and ending July 31, 2018. Dividends totaling $1.4 million were paid on July 31, 2018.

On August 2, 2018, the Company declared dividends of $0.609375, $0.503125 and $0.523438 per share on the 9.750% Series B, 8.050% Series C and 8.375% Series D preferred stock, respectively, for the period beginning August 1, 2018 and ending October 31, 2018. Dividends totaling $1.4 million were paid on October 31, 2018.

D. Earnings Per Share

The following table shows the Company's basic and diluted earnings per share (“EPS”):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
Loss from continuing operations after preferred dividends and noncontrolling interests
$
(15,470
)
 
$
(1,864
)
 
$
(39,360
)
 
$
(22,314
)
Loss Applicable to Common Stockholders
$
(15,470
)
 
$
(1,864
)
 
$
(39,360
)
 
$
(22,314
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted average shares
66,992,322

 
66,932,744

 
66,982,233

 
66,883,291

Effect of dilutive securities
 
 
 
 
 
 
 
Options
—

 
—

 
—

 
—

RSUs
—

 
—

 
—

 
—

Denominator for diluted earnings per share - adjusted weighted average shares
66,992,322

 
66,932,744

 
66,982,233

 
66,883,291

 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Loss from continuing operations per share of common stock, after preferred dividends and noncontrolling interests
$
(0.23
)
 
$
(0.03
)
 
$
(0.59
)
 
$
(0.33
)
 
 
 
 
 
 
 
 
Loss Applicable to Common Stock, per share
$
(0.23
)
 
$
(0.03
)
 
$
(0.59
)
 
$
(0.33
)
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Loss from continuing operations per share of common stock, after preferred dividends and noncontrolling interests
$
(0.23
)
 
$
(0.03
)
 
$
(0.59
)
 
$
(0.33
)
 
 
 
 
 
 
 
 
Loss Applicable to Common Stock, per share
$
(0.23
)
 
$
(0.03
)
 
$
(0.59
)
 
$
(0.33
)

The Company’s dilutive securities are its outstanding stock options and RSUs. During both the three and nine months ended September 30, 2018, the Company had zero antidilutive options. During the three and nine months ended September 30, 2017, the Company had 566,894 and 269,311 antidilutive options, respectively. During the three and nine months ended September 30, 2018 based on the treasury stock method, the Company had 3,004,777 and 2,804,451 potentially dilutive securities, respectively, which were excluded due to the Company's loss position. During the three and nine months ended September 30, 2017 based on the treasury stock method, the Company had 1,180,858 and 1,556,898 potentially dilutive securities, respectively, which were excluded due to the Company's loss position.