Drive Shack Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

EQUITY AND EARNINGS PER SHARE

EQUITY AND EARNINGS PER SHARE

6 Months Ended

Jun. 30, 2019

Stockholders' Equity Note [Abstract]

EQUITY AND EARNINGS PER SHARE

A. Stock Options

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



	Number of Options	Weighted Average Strike Price		Weighted Average Life Remaining (in years)
Balance at December 31, 2018	8,436,931	$	3.72
Granted (B)	695,652	4.66
Balance at June 30, 2019	9,132,583	$	3.79	6.26

Exercisable at June 30, 2019	2,705,586	$	2.64	3.78

As of June 30, 2019, the Company’s outstanding options were summarized as follows:



	Number of Options
Held by the former Manager	2,705,253
Issued to the former Manager and subsequently transferred to certain of the Manager’s employees (A)	2,304,990
Issued to the independent directors	333
Issued to Drive Shack employees (B)	4,122,007
Total	9,132,583
Weighted average strike price	$	3.79

(A)

The Company and the former Manager agreed that options held by certain employees formerly employed by the Manager would not terminate or be forfeited as a result of the Termination and Cooperation Agreement, and the vesting of such options relate to the relevant holder’s employment with the Company and its affiliates following January 1, 2018. In both February 2017 and April 2018, the former Manager issued 1,152,495 options to certain employees formerly employed by the Manager as part of their compensation. The options fully vest and are exercisable one year prior to the option expiration date, beginning March 2020 through January 2024. In July 2019, a certain employee was terminated by the Company and 921,992 options reverted back to the former Manager. The Company will reverse $1.2 million in stock compensation expense related to these options.

(B)

In November 2018, the Company issued options to certain employees as provided in their employment agreements. The options fully vest and are exercisable as follows: 3,351,355 options vest in equal annual installments on each of the first three anniversaries of the grant date; and 75,000 options fully vest on the third anniversary of the grant date. In April 2019, the Company issued 695,652 options to an employee that vest and become exercisable in equal annual installment on each of the first three anniversaries of the grant date.

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



Option Valuation Date	April 11, 2019
Expected Volatility	36.80		%
Expected Dividend Yield	0.00		%
Expected Remaining Term	6.0 years
Risk-Free Rate	2.34		%
Fair Value at Valuation Date	$	1,280

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

B. Restricted Stock Units ("RSUs")

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



	Number of RSUs		Weighted Average Grant Date Fair Value (per unit)
Balance at December 31, 2018	54,641		$	5.02
Granted	545,518		$	4.69
Forfeited	(27,542	)	$	4.72
Balance at June 30, 2019	572,617		$	4.72

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

C. Dividends

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

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

D. Earnings Per Share

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



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

Denominator:
Denominator for basic earnings per share - weighted average shares	67,029,610			66,977,104			67,028,364			66,977,104
Effect of dilutive securities
Options	—			—			—			—
RSUs	—			—			—			—
Denominator for diluted earnings per share - adjusted weighted average shares	67,029,610			66,977,104			67,028,364			66,977,104
Basic earnings per share:
Loss from continuing operations per share of common stock, after preferred dividends and noncontrolling interests	$	(0.21	)	$	(0.09	)	$	(0.45	)	$	(0.36	)

Loss Applicable to Common Stock, per share	$	(0.21	)	$	(0.09	)	$	(0.45	)	$	(0.36	)

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

Loss Applicable to Common Stock, per share	$	(0.21	)	$	(0.09	)	$	(0.45	)	$	(0.36	)

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