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Section 1: 10-Q (10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
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 
Drive Shack Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
81-0559116
(State or other jurisdiction of incorporation
 
(I.R.S. Employer Identification No.)
or organization)
 
 
111 W. 19th Street, New York, NY
 
10011
(Address of principal executive offices)
 
(Zip Code)
(516) 268-7460
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
S Yes  No £ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large accelerated filer £ Accelerated filer S Non-accelerated filer £ (Do not check if a smaller reporting company)
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: 66,977,104 shares outstanding as of July 27, 2018.



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, our operating performance, the performance of our investments, the stability of our earnings, and our financing needs. 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,” “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:

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, changes in consumer spending patterns, a prolonged economic slowdown and a downturn in the real estate market;
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 failures of our information technology and cybersecurity systems;
the impact of any current or further legal proceedings and regulatory investigations and inquiries;
the impact of any material transactions with FIG LLC (the former “Manager”) or one of its affiliates, including the termination of our management agreement and the transition services agreement and the impact of any actual, potential or predicted conflicts of interest;
the effect of the internalization of the Company's management (the “Internalization”) on our business and operations; and
other risks detailed from time to time below, particularly under the heading “Risk Factors,” and in our other reports filed with or furnished to 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 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
 
 
PAGE
PART I.   FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.   
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




DRIVE SHACK INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
June 30, 2018
 
 
 
(Unaudited)
 
December 31, 2017
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
125,659

 
$
167,692

Restricted cash
3,859

 
5,178

Accounts receivable, net
9,877

 
8,780

Real estate assets, held-for-sale
165,261

 
2,000

Real estate securities, available-for-sale
2,425

 
2,294

Other current assets
25,171

 
21,568

Total Current Assets
332,252

 
207,512

Restricted cash, noncurrent
777

 
818

Property and equipment, net of accumulated depreciation
93,592

 
241,258

Intangibles, net of accumulated amortization
53,716

 
57,276

Other investments
21,901

 
21,135

Other assets
9,041

 
8,649

Total Assets
$
511,279

 
$
536,648

 
 
 
 
Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Obligations under capital leases
$
5,158

 
$
4,652

Membership deposit liabilities
8,972

 
8,733

Accounts payable and accrued expenses
44,506

 
36,797

Deferred revenue
10,614

 
31,207

Real estate liabilities, held-for-sale
9,651

 

Other current liabilities
15,145

 
22,596

Total Current Liabilities
94,046

 
103,985

Credit facilities and obligations under capital leases
112,268

 
112,105

Junior subordinated notes payable
51,204

 
51,208

Membership deposit liabilities, noncurrent
87,832

 
86,523

Deferred revenue, noncurrent
7,608

 
6,930

Other liabilities
5,480

 
4,846

Total Liabilities
$
358,438

 
$
365,597

 
 
 
 
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 June 30, 2018 and December 31, 2017
$
61,583

 
$
61,583

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 66,977,104 and 66,977,104 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
670

 
670

Additional paid-in capital
3,174,089

 
3,173,281

Accumulated deficit
(3,084,934
)
 
(3,065,853
)
Accumulated other comprehensive income
1,433

 
1,370

Total Equity
$
152,841

 
$
171,051

 
 
 
 
Total Liabilities and Equity
$
511,279

 
$
536,648

 
See notes to Consolidated Financial Statements.

1



DRIVE SHACK INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 

 
 

 
 

 
 

Golf operations
$
69,150

 
$
60,639

 
$
122,704

 
$
106,935

Sales of food and beverages
21,854

 
20,721

 
34,960

 
33,566

Total revenues
91,004

 
81,360

 
157,664

 
140,501

 
 
 
 
 
 
 
 
Operating costs
 
 
 
 
 
 
 
Operating expenses
67,042

 
62,028

 
124,421

 
112,537

Cost of sales - food and beverages
6,193

 
6,009

 
10,233

 
10,041

General and administrative expense
10,268

 
7,058

 
19,462

 
14,545

Management fee to affiliate

 
2,677

 

 
5,354

Depreciation and amortization
4,315

 
5,972

 
9,863

 
11,765

Pre-opening costs
247

 
50

 
1,803

 
50

Impairment

 
32

 
1,473

 
32

Realized and unrealized (gain) loss on investments
(89
)
 
3,287

 
(331
)
 
6,676

Total operating costs
87,976

 
87,113

 
166,924

 
161,000

Operating income (loss)
3,028

 
(5,753
)
 
(9,260
)
 
(20,499
)
 
 
 
 
 
 
 
 
Other income (expenses)
 
 
 
 
 
 
 
Interest and investment income
469

 
6,395

 
915

 
14,283

Interest expense, net
(4,601
)
 
(5,131
)
 
(8,650
)
 
(10,565
)
Other (loss) income, net
(3,699
)
 
293

 
(4,105
)
 
170

Total other income (expenses)
(7,831
)
 
1,557

 
(11,840
)
 
3,888

Loss before income tax
(4,803
)
 
(4,196
)
 
(21,100
)
 
(16,611
)
Income tax expense

 
510

 

 
1,049

Net Loss
(4,803
)
 
(4,706
)
 
(21,100
)
 
(17,660
)
Preferred dividends
(1,395
)
 
(1,395
)
 
(2,790
)
 
(2,790
)
Loss Applicable to Common Stockholders
$
(6,198
)
 
$
(6,101
)
 
$
(23,890
)
 
$
(20,450
)
 
 
 
 
 
 
 
 
Loss Applicable to Common Stock, per share
 

 
 

 
 

 
 

Basic
$
(0.09
)
 
$
(0.09
)
 
$
(0.36
)
 
$
(0.31
)
Diluted
$
(0.09
)
 
$
(0.09
)
 
$
(0.36
)
 
$
(0.31
)
 
 
 
 
 
 
 
 
Weighted Average Number of Shares of Common Stock Outstanding
 

 
 

 
 

 
 

Basic
66,977,104

 
66,874,155

 
66,977,104

 
66,858,155

Diluted
66,977,104

 
66,874,155

 
66,977,104

 
66,858,155



See notes to Consolidated Financial Statements.

2



DRIVE SHACK INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(4,803
)
 
$
(4,706
)
 
$
(21,100
)
 
$
(17,660
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

Net unrealized gain on available-for-sale securities
30

 
1,220

 
63

 
1,267

Other comprehensive income
30

 
1,220

 
63

 
1,267

Total comprehensive loss
$
(4,773
)
 
$
(3,486
)
 
$
(21,037
)
 
$
(16,393
)
Comprehensive loss attributable to Drive Shack Inc. stockholders’ equity
$
(4,773
)
 
$
(3,486
)
 
$
(21,037
)
 
$
(16,393
)
  
See notes to Consolidated Financial Statements.

3



DRIVE SHACK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(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, 2017
2,463,321

 
$
61,583

 
66,977,104

 
$
670

 
$
3,173,281

 
$
(3,065,853
)
 
$
1,370

 
$
171,051

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared

 

 

 

 

 
(2,790
)
 

 
(2,790
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation

 

 

 

 
808

 

 

 
808

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adoption of ASC 606 (Note 3)

 

 

 

 

 
4,809

 

 
4,809

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)


 


 


 


 


 


 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 

 
(21,100
)
 

 
(21,100
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income

 

 

 

 

 

 
63

 
63

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(21,037
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity (deficit) - June 30, 2018
2,463,321

 
$
61,583

 
66,977,104

 
$
670

 
$
3,174,089

 
$
(3,084,934
)
 
$
1,433

 
$
152,841


See notes to Consolidated Financial Statements.

4




DRIVE SHACK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except share data)

 
Six Months Ended June 30,
 
2018
 
2017
Cash Flows From Operating Activities
 
 
 
Net loss
$
(21,100
)
 
$
(17,660
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
9,863

 
11,765

Amortization of discount and premium
588

 
1,176

Other amortization
5,481

 
5,250

Net interest income on investments accrued to principal balance

 
(7,096
)
Amortization of revenue on golf membership deposit liabilities
(726
)
 
(621
)
Amortization of prepaid golf membership dues
(12,990
)
 
(13,208
)
Non-cash directors’ compensation

 
375

Stock-based compensation
808

 

Impairment
1,473

 
32

Equity in earnings from equity method investments, net of distributions
(766
)
 
(762
)
Loss on settlement of investments, net
4,055

 
7,384

Unrealized (gain) loss on investments
(331
)
 
(556
)
Loss on extinguishment of debt
141

 
182

Change in:
 

 
 

Accounts receivable, net, other current assets and other assets - noncurrent
(182
)
 
(2,072
)
Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrent
1,801

 
4,325

Net cash used in operating activities
(11,885
)
 
(11,486
)
Cash Flows From Investing Activities
 

 
 

Principal repayments from investments

 
19,376

Proceeds from sale of securities and loans

 
286,751

Net payments for settlement of TBAs

 
(4,441
)
Acquisition and additions of property and equipment and intangibles
(23,715
)
 
(7,752
)
Deposits paid on property and equipment
(4,162
)
 
(147
)
Net cash (used in) provided by investing activities
(27,877
)
 
293,787

Cash Flows From Financing Activities
 
 
 
Borrowings under debt obligations

 
1,651

Repayments of debt obligations
(2,344
)
 
(296,748
)
Margin deposits under repurchase agreements and derivatives

 
(73,735
)
Return of margin deposits under repurchase agreements and derivatives

 
72,653

Golf membership deposits received
1,735

 
1,733

Common stock dividends paid

 
(8,019
)
Preferred stock dividends paid
(2,790
)
 
(2,790
)
Payment of deferred financing costs

 
(22
)
Other financing activities
(232
)
 
(200
)
Net cash used in financing activities
(3,631
)
 
(305,477
)
Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent
(43,393
)
 
(23,176
)
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, Beginning of Period
173,688

 
146,544

Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, End of Period
$
130,295

 
$
123,368

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities
 
 
 
Preferred stock dividends declared but not paid
$
930

 
$
930

Additions to capital lease assets and liabilities
$
2,416

 
$
2,149

Additions to property and equipment and accounts payable
$
6,882

 
$
1,870

See notes to Consolidated Financial Statements.


5

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(dollars in tables in thousands, except share data)
 


1. ORGANIZATION
Drive Shack Inc., which is referred to, together with its subsidiaries, “Drive Shack Inc.” or the “Company” is a leading owner and operator of golf-related leisure and entertainment businesses. 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) Traditional Golf properties, (ii) Entertainment Golf venues and (iii) corporate. For a further discussion of the reportable segments, see Note 4.
The Company’s Traditional Golf business is one of the largest owners and operators of golf properties in the United States. As of June 30, 2018, the Company owned, leased or managed 74 properties across 12 states.
The Company opened its first Entertainment Golf venue in Orlando, Florida on April 7, 2018. The Company expects to open a chain of next-generation Entertainment Golf venues across the United States and internationally which combine golf, competition, dining and fun.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 (“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, 2017 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2018. Capitalized terms used herein, and not otherwise defined, are defined in the Company’s Consolidated Financial Statements for the year ended December 31, 2017.

As of June 30, 2018, the Company’s significant accounting policies for these financial statements 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, 2017.

Prior Period Reclassification Certain prior period amounts have been reclassified to conform to the current period's presentation. Effective January 1, 2018, the Company internalized management (as discussed above) and records corporate overhead, including corporate payroll and related expenses, in "General and administrative expense" on the Consolidated Statements of Operations. Prior to January 1, 2018, the Company reported corporate overhead, including corporate payroll and related expenses, related to the Traditional Golf business in "Operating expenses" on the Consolidated Statements of Operations. The Company reclassified $3.8 million and $7.8 million from "Operating expenses" to "General and administrative expense" for the three and six months ended June 30, 2017.

The Company adopted ASU 2015-18 Statement of Cash Flows (Topic 230), Restricted Cash effective January 1, 2018, which requires retrospective adjustment to all periods. The addition of the reconciliation of restricted cash for six months ended June 30, 2017 included an increase of $1.1 million in "Margin deposits under repurchase agreements and derivatives."


6

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(dollars in tables in thousands, except share data)
 

REVENUE RECOGNITION

Golf Operations

Traditional Golf Revenue from green fees, cart rentals, merchandise sales and other operating activities (consisting primarily of range income, banquets and club amenities) is generally recognized at the time of sale, when services are rendered and collection is reasonably assured.

Revenue from membership dues for private club members and The Players Club members 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 membership dues are generally structured to cover the club operating costs and membership services.
Private country club members 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 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 determination of the estimated average expected life of an active membership is a significant judgment based on company-specific historical membership addition and attrition data. 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.
Revenue from the reimbursement of certain operating costs incurred at the Company’s managed Traditional Golf properties is recognized at the time the associated operating costs are incurred as collection is reasonably assured per the terms of the management contracts and the repayment histories of the property owners.

Entertainment Golf Revenue from bay play, events, and other operating activities (consisting primarily of instruction and merchandise sales) is generally recognized at the time of sale, when services are rendered and collection is reasonably assured.

Revenue from general memberships is recognized at the time of sale. Dues from other membership programs are included in deferred revenue and recognized as revenue ratably over the appropriate period, which is generally twelve months or less.
Sales of Food and Beverages Revenue from food and beverage sales are recorded at the time of sale, net of discounts.

7

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(dollars in tables in thousands, except share data)
 

Realized and Unrealized (Gain) Loss on Investments and Other Income (Loss), Net These items are comprised of the following:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Loss on settlement of real estate securities

 

 
$

 
$
2,803

Unrealized loss on securities, intent-to-sell

 

 

 
558

(Gain) on settlement of loans held-for-sale

 
(12
)
 

 
(12
)
Realized loss on settlement of TBAs, net

 
6,915

 

 
4,441

Unrealized (gain) on non-hedge derivative instruments
(89
)
 
(3,616
)
 
(331
)
 
(1,114
)
Realized and unrealized (gain) loss on investments
$
(89
)
 
$
3,287

 
$
(331
)
 
$
6,676

 
 
 
 
 
 
 
 
Loss on lease modifications and terminations
$
(25
)
 
$
(2
)
 
$
(796
)
 
$
(160
)
Loss on extinguishment of debt, net
(89
)
 
(36
)
 
(141
)
 
(182
)
Collateral management fee income, net
146

 
126

 
301

 
248

Equity in earnings of equity method investments
387

 
383

 
766

 
762

Gain on disposal of long-lived assets
882

 

 
676

 
26

Other (loss) income (A)
(5,000
)
 
(178
)
 
(4,911
)
 
(524
)
Other (loss) income, net
$
(3,699
)
 
$
293

 
$
(4,105
)
 
$
170

(A)
During the three months ended June 30, 2018, the Company recorded a net loss of approximately $4.9 million related to the settlement of a legal dispute and a related discharge of liabilities assumed by the counterparty to the settlement. See Notes 13 and 15 for additional information.

EXPENSE RECOGNITION

Operating Expenses Operating expenses consist primarily of payroll (Traditional Golf property level and Entertainment Golf venue level), utilities, repairs and maintenance, supplies, marketing and operating lease rent expense.

Traditional Golf
Operating expenses for Traditional Golf also include equipment and cart leases, seed, soil and fertilizer, and certain operating costs incurred at managed Traditional Golf properties. Many of the Traditional Golf properties and related facilities are leased under long-term operating leases. In addition to minimum payments, certain leases require payment of the excess of various percentages of gross revenue or net operating income over the minimum rental payments. The leases generally require the payment of taxes assessed against the leased property and the cost of insurance and maintenance. The majority of lease terms initially range from 10 to 20 years, and typically, the leases contain renewal options. Certain leases include scheduled increases or decreases in minimum rental payments at various times during the term of the lease. These scheduled rent increases or decreases are recognized on a straight-line basis over the term of the lease. Increases result in an accrual, which is included in other current liabilities and other liabilities, and decreases result in a receivable, which is included in other current assets and other assets, for the amount by which the cumulative straight-line rent differs from the contractual cash rent.

Entertainment Golf
Operating expenses for Entertainment Golf also include information technology-related support and maintenance.

General and Administrative Expense General and administrative expense consists of costs associated with corporate and administrative functions that support development and operations.

Pre-Opening Costs Pre-opening costs are expensed as incurred and consist primarily of marketing expenses, pre-opening rent, employee payroll, travel and related expenses, training costs, food, beverage and other restaurant operating expenses incurred prior to opening an Entertainment Golf venue.


8

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(dollars in tables in thousands, except share data)
 

Derivatives and Hedging Activities All derivatives are recognized as either assets or liabilities on the balance sheet and measured at fair value. The Company reports the fair value of derivative instruments gross of cash paid or received pursuant to credit support agreements and fair value is reflected on a net counterparty basis when the Company believes a legal right of offset exists under an enforceable netting agreement. Changes in fair value are recorded in net income. Derivative transactions are entered into by the Company solely for risk management purposes in the ordinary course of business. As of June 30, 2018, the Company has one interest rate cap with a fair value of $0.6 million which is not designated as a hedge.
BALANCE SHEET MEASUREMENT
Property and Equipment, Net Real estate and related improvements are recorded at cost less accumulated depreciation. Costs that both materially add value to an asset and extend the useful life of an asset by more than a year are capitalized. The Company capitalizes to construction in progress certain costs related to properties under construction. Capitalization begins when the activities related to development have begun and ceases when activities are substantially complete and the asset is available for use. Capitalized costs include development, construction-related costs and interest expense.

Traditional Golf
With respect to Traditional Golf course improvements (included in buildings and improvements), costs associated with construction, significant replacements, permanent landscaping, sand traps, fairways, tee boxes or greens are capitalized. All other asset-related costs that do not meet these criteria, such as minor repairs and routine maintenance, are expensed as incurred.

The Company leases certain golf carts and other equipment that are classified as capital leases. The value of capital leases is recorded as an asset on the balance sheet, along with a liability related to the associated payments. Depreciation of capital lease assets is calculated using the straight-line method over the shorter of the estimated useful lives and the expected lease terms. The cost of equipment under capital leases is included in property and equipment in the Consolidated Balance Sheets. Payments under the leases are treated as reductions of the obligations under capital leases, with a portion being recorded as interest expense under the effective interest method.
Entertainment Golf
Entertainment Golf includes land, furniture, fixtures and equipment and leasehold improvements including building and land improvements.

Depreciation is calculated using the straight-line method based on the following estimated useful lives:
Buildings and improvements
10-30 years
Capital leases - equipment
3-7 years
Furniture, fixtures and equipment
2-7 years
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 of sale. Real estate held-for-sale is recorded in “Real estate assets, held-for-sale” and “Real estate liabilities, held-for-sale” on the Consolidated Balance Sheets. A disposal of a component of an entity or a group of components of an entity is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the Company’s operations and financial results. Discontinued operations are retroactively reclassified to income (loss) from discontinued operations for all periods presented.

Intangibles, Net Intangible assets and liabilities consist primarily of leasehold advantages (disadvantages), management contracts, membership base and internally-developed software. A leasehold advantage (disadvantage) exists to the Company when it pays a contracted rent that is below (above) market rents at the date of an acquisition transaction. The value of a leasehold advantage (disadvantage) is calculated based on the differential between market and contracted rent, which is tax effected and discounted to present value based on an after-tax discount rate corresponding to each property and is amortized over the term of the underlying lease agreement. The management contract intangible represents the Company’s golf course management contracts for both leased and managed properties. The management contract intangible for leased and managed properties is valued using the discounted cash flow method under the income approach and is amortized over the term of the underlying lease or management agreements, respectively. The membership base intangible represents the Company’s relationship with its private country club members. The membership base intangible is valued using the multi-period excess earnings method under the income approach, and is amortized over the expected life of an active membership. The internally-developed software intangible represents proprietary

9

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(dollars in tables in thousands, except share data)
 

software developed for the Company’s exclusive use. For Traditional Golf, the internally-developed software intangible is valued using the discounted cash flow method under the income approach at the date of an acquisition transaction. For Entertainment Golf, the internally-developed software intangible is composed of third-party costs and capitalized internal costs incurred to develop the software. The internally-developed software intangible is amortized over the expected useful life of the software.

Amortization of leasehold intangible assets and liabilities is included within operating expenses and amortization of all other intangible assets is included within depreciation and amortization in the Consolidated Statements of Operations. Amortization of all intangible assets is calculated using the straight-line method based on the following estimated useful lives:
Trade name
30 years
Leasehold intangibles
2-26 years
Management contracts
2-26 years
Internally-developed software
5-10 years
Membership base
7 years
Liquor licenses
Nonamortizable
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 Investment The Company owns an approximately 22% economic interest in a limited liability company which owns preferred equity secured by a commercial real estate project. The Company accounts for this investment as an equity method investment. As of June 30, 2018 and December 31, 2017, the carrying value of this investment was $21.9 million and $21.1 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 costs.  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.

Impairment of Real Estate and Finite-lived Intangible Assets The Company periodically reviews the carrying amounts of its long-lived assets, including real estate and finite-lived intangible 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 of the asset is greater than the expected undiscounted cash flows to be generated by such asset, 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. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell.


10

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(dollars in tables in thousands, except share data)
 

Other Current Assets

The following table summarizes the Company's other current assets:
 
 
June 30, 2018
 
December 31, 2017
Loans, held-for-sale, net (A)
 
$

 
$
147

Prepaid expenses
 
4,280

 
3,081

Deposits
 
6,850

 
3,469

Inventory
 
4,986

 
4,722

Miscellaneous current assets, net
 
9,055

 
10,149

Other current assets
 
$
25,171

 
$
21,568

(A)
During the six months ended June 30, 2018, the Company recorded an impairment of $0.2 million on a corporate loan.

Other Assets

The following table summarizes the Company's other assets:
 
 
June 30, 2018
 
December 31, 2017
Prepaid expenses
 
$
7

 
$
6

Deposits
 
2,114

 
2,213

Derivative assets
 
617

 
286

Miscellaneous assets, net
 
6,303

 
6,144

Other assets
 
$
9,041

 
$
8,649


Other Current Liabilities

The following table summarizes the Company's other current liabilities:
 
 
June 30, 2018
 
December 31, 2017
Security deposits payable
 
$
7,068

 
$
6,602

Accrued rent
 
2,950

 
2,160

Due to affiliates
 

 
1,786

Dividends payable
 
930

 
930

Miscellaneous current liabilities
 
4,197

 
11,118

Other current liabilities
 
$
15,145

 
$
22,596


Other Liabilities

The following table summarizes the Company's other liabilities:
 
 
June 30, 2018
 
December 31, 2017
Security deposits payable
 
$
238

 
$
66

Unfavorable leasehold interests
 
2,963

 
3,374

Accrued rent
 
1,057

 
1,057

Miscellaneous liabilities
 
1,222

 
349

Other liabilities
 
$
5,480

 
$
4,846



11

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(dollars in tables in thousands, except share data)
 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company adopted the new guidance effective January 1, 2018 using the modified retrospective method. See Note 3 for additional information.

In January 2016, the FASB issued ASU 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The Company adopted the new guidance effective January 1, 2018 and it did not have a material impact on the Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842). The standard requires lessees to recognize most leases on the balance sheet and addresses certain aspects of lessor accounting. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with an option to use certain relief. The Company is continuing to evaluate the potential impacts of adopting the standard. A key change upon adoption will be the balance sheet recognition of all leased assets and liabilities. The Company's operating leases include ground leases, for certain of its properties and leased equipment which are not recognized on the balance sheet. The Company anticipates a right-of-use asset and a related lease liability will be recognized for these leases. There are also certain considerations related to internal control over financial reporting that are associated with implementing the new guidance under Topic 842. The Company is currently evaluating its control framework for lease accounting and identifying any changes that may need to be made in response to the new guidance. The Company will adopt the requirements of the new standard in the first quarter of 2019.

In June 2016, the 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. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted for annual periods beginning after December 15, 2018. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The standard provides specific guidance over eight identified cash flow issues in order to reduce diversity in practice over the presentation and classification of certain types of cash receipts and cash payments. The Company adopted the new guidance effective January 1, 2018 and it did not have a material impact on the Consolidated Statements of Cash Flows.

In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash. The standard requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows and provide a reconciliation to the related line items in the balance sheet. The Company adopted the new guidance effective January 1, 2018 and has included changes in restricted cash in the Consolidated Statements of Cash Flows for all periods presented.

In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805), Clarifying the Definition of a Business. The standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets of businesses. The Company adopted the new guidance effective January 1, 2018 and it did not have a material impact on the Consolidated Financial Statements.


3. REVENUES

On January 1, 2018, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers, and all the related amendments (“new revenue standard”) for all contracts using the modified retrospective method. The Company

12

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(dollars in tables in thousands, except share data)
 

recognized the cumulative effect of initially applying the new revenue standard as a decrease to the 2018 opening balance of accumulated deficit of $4.8 million. The adjustment is due to the recognition of breakage on gift cards and gift certificates offered at the Company's Traditional Golf properties that are not expected to be redeemed based on historical redemption rates. The recognition of breakage on gift cards and gift certificates on an ongoing basis is expected to have an immaterial impact to the Company’s net income (loss). Also in accordance with the new revenue standard, certain operating costs incurred at the Company’s managed Traditional Golf properties and the reimbursements of those operating costs will now be recognized in Operating expenses and Golf operations, respectively. The reimbursements do not include a profit margin and therefore this change will have no net impact to the Company’s operating income (loss).

The majority of the Company’s revenue continues to be recognized at the time of sale to customers at the Company’s Traditional Golf properties and Entertainment Golf venues, including green fees, cart rentals, bay play, events and sales of food, beverages and merchandise.

Per the modified retrospective method, comparative information has not been restated to conform to these changes and continues to be reported under the accounting standards in effect for those periods. In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Consolidated Balance Sheet and Statement of Operations was as follows:

Consolidated Balance Sheet
 
 
June 30, 2018
 
 
As reported
 
Balances without Adoption of ASC 606
 
Effect of Change
Liabilities
 
 
 
 
 
 
Other current liabilities
 
$
15,145

 
$
19,954

 
$
(4,809
)
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
Accumulated Deficit
 
$
(3,084,934
)
 
$
(3,089,743
)
 
$
4,809


Consolidated Statement of Operations
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
As reported
 
Balances without Adoption of ASC 606
 
Effect of Change
 
As reported
 
Balances without Adoption of ASC 606
 
Effect of Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Golf operations
 
$
69,150

 
$
63,022

 
$
6,128

 
$
122,704

 
$
111,919

 
$
10,785

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Costs
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
$
67,042

 
$
60,914

 
$
6,128

 
$
124,421

 
$
113,636

 
$
10,785


The Company’s revenue is all generated within the Traditional and Entertainment Golf segments. The following table disaggregates revenue by category: public and private golf properties (owned and leased), managed golf properties and Entertainment golf venues.

13

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(dollars in tables in thousands, except share data)
 

 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
Public golf properties
 
Private golf properties
 
Managed golf properties
 
Ent. golf venues
 
Total
 
Public golf properties
 
Private golf properties
 
Managed golf properties
 
Ent. golf venues
 
Total
Golf operations
 
34,609

 
26,891

 
6,795

 
855

 
69,150

 
56,979

 
52,840

 
12,030

 
855

 
122,704

Sales of food and beverages
 
12,307

 
8,595

 

 
952

 
21,854

 
19,514

 
14,494

 

 
952

 
34,960

Total revenues
 
$
46,916

 
$
35,486

 
$
6,795

 
$
1,807

 
$
91,004

 
$
76,493

 
$
67,334

 
$
12,030

 
$
1,807

 
$
157,664


4. SEGMENT REPORTING
 
The Company currently has three reportable segments: (i) Traditional Golf properties, (ii) Entertainment Golf venues and (iii) corporate. The chief operating decision maker (“CODM”) for each segment is our Chief Executive Officer, who reviews discrete financial information for each reportable segment to manage the Company, including resource allocation and performance assessment.

Beginning as of the Company’s second fiscal quarter in 2018, the Company changed its reportable segments to reflect the manner in which our CODM manages our businesses, including resource allocation and performance assessment. As a result, the Debt Investments segment was combined with the corporate segment, to reflect the ongoing reduction in size of the Debt Investments segment.

The Company's Traditional Golf business is one of the largest owners and operators of golf properties in the United States. As of June 30, 2018, the Company owned, leased or managed 74 Traditional Golf properties across 12 states. 

Additionally, the Company opened its inaugural Entertainment Golf venue in Orlando, Florida on April 7, 2018 and expects to continue opening a chain of next-generation Entertainment Golf venues across the United States and internationally, which combine golf, competition, dining and fun. As of June 30, 2018, the Company completed the first quarter of operations at our inaugural Entertainment Golf venue.
 
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 7), management fees pursuant to the Management Agreement prior to the Internalization effective January 1, 2018 (Note 12) and income tax expense (Note 14).
 

14

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(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:
 
Traditional Golf
 
Entertainment Golf
 
Corporate
 
Total
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Golf operations
$
121,849

 
$
855

 
$

 
$
122,704

Sales of food and beverages
34,008

 
952

 

 
34,960

Total revenues
155,857

 
1,807

 

 
157,664

Operating costs
 
 
 
 
 
 
 
Operating expenses (A)
122,586

 
1,835

 

 
124,421

Cost of sales - food and beverages
10,005

 
228

 

 
10,233

General and administrative expense
8,467

 
2,638

 
6,257

 
17,362

General and administrative expense - acquisition and transaction expenses (B)
508

 
1,454

 
138

 
2,100

Depreciation and amortization
9,320

 
535

 
8

 
9,863

Pre-opening costs (C)

 
1,803

 

 
1,803

Impairment
1,326

 

 
147

 
1,473

Realized and unrealized (gain) on investments
(331
)
 

 

 
(331
)
Total operating costs
151,881

 
8,493

 
6,550

 
166,924

Operating income (loss)
3,976

 
(6,686
)
 
(6,550
)
 
(9,260
)
Other income (expenses)
 
 
 
 
 
 
 
Interest and investment income
96

 
112

 
707

 
915

Interest expense (D)
(8,099
)
 

 
(1,064
)
 
(9,163
)
Capitalized interest (D)
342

 

 
171

 
513

Other (loss) income, net
(5,166
)
 

 
1,061

 
(4,105
)
Total other income (expenses)
(12,827
)
 
112

 
875

 
(11,840
)
Income tax expense

 

 

 

Net loss
(8,851
)
 
(6,574
)
 
(5,675
)
 
(21,100
)
Preferred dividends

 

 
(2,790
)
 
(2,790
)
Loss applicable to common stockholders
$
(8,851
)
 
$
(6,574
)
 
$
(8,465
)
 
$
(23,890
)



15

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(dollars in tables in thousands, except share data)
 

Summary segment financial data (continued).
 
Traditional Golf
 
Entertainment Golf
 
Corporate
 
Total
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Golf operations
$
68,295

 
$
855

 
$

 
$
69,150

Sales of food and beverages
20,902

 
952

 

 
21,854

Total revenues
89,197

 
1,807

 

 
91,004

Operating costs
 
 
 
 
 
 
 
Operating expenses (A)
65,207

 
1,835

 

 
67,042

Cost of sales - food and beverages
5,965

 
228

 

 
6,193

General and administrative expense
4,313

 
1,535

 
3,961

 
9,809

General and administrative expense - acquisition and transaction expenses (B)
200

 
200

 
59

 
459

Depreciation and amortization
3,808

 
504

 
3

 
4,315

Pre-opening costs (C)

 
247

 

 
247

Impairment

 

 

 

Realized and unrealized (gain) on investments
(89
)
 

 

 
(89
)
Total operating costs
79,404

 
4,549

 
4,023

 
87,976

Operating income (loss)
9,793

 
(2,742
)
 
(4,023
)
 
3,028

Other income (expenses)
 
 
 
 
 
 
 
Interest and investment income
45

 
84

 
340

 
469

Interest expense (D)
(4,161
)
 

 
(570
)
 
(4,731
)
Capitalized interest (D)
87

 

 
43

 
130

Other (loss) income, net
(4,228
)
 

 
529

 
(3,699
)
Total other income (expenses)
(8,257
)
 
84

 
342

 
(7,831
)
Income tax expense

 

 

 

Net income (loss)
1,536

 
(2,658
)
 
(3,681
)
 
(4,803
)
Preferred dividends

 

 
(1,395
)
 
(1,395
)
Income (loss) applicable to common stockholders
$
1,536

 
$
(2,658
)
 
$
(5,076
)
 
$
(6,198
)

 
Traditional Golf
 
Entertainment Golf
 
Corporate (E)
 
Total
June 30, 2018
 
 
 
 
 
 
 
Total assets
322,989

 
86,951

 
101,339

 
511,279

Total liabilities
291,565

 
9,431

 
57,442

 
358,438

Preferred stock

 

 
61,583

 
61,583

Equity attributable to common stockholders
$
31,424

 
$
77,520

 
$
(17,686
)
 
$
91,258

 
 
 
 
 
 
 
 
Additions to property and equipment (including capital leases) during the six months ended June 30, 2018
$
7,596

 
$
16,828

 
$

 
$
24,424


16

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(dollars in tables in thousands, except share data)
 

Summary segment financial data (continued).
 
Traditional Golf
 
Entertainment Golf
 
Corporate (F)
 
Total
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Golf operations
$
106,935

 
$

 
$

 
$
106,935

Sales of food and beverages
33,566

 

 

 
33,566

Total revenues
140,501

 

 

 
140,501

Operating costs
 
 
 
 
 
 
 
Operating expenses (A)
112,537

 

 

 
112,537

Cost of sales - food and beverages
10,041

 

 

 
10,041

General and administrative expense
8,298

 
43

 
3,282

 
11,623

General and administrative expense - acquisition and transaction expenses (B)
486

 
2,319

 
117

 
2,922

Management fee to affiliate

 

 
5,354

 
5,354

Depreciation and amortization
11,765

 

 

 
11,765

Pre-opening costs (C)

 
50

 

 
50

Impairment

 

 
32

 
32

Realized and unrealized loss on investments
285

 

 
6,391

 
6,676

Total operating costs
143,412

 
2,412

 
15,176

 
161,000

Operating loss
(2,911
)
 
(2,412
)
 
(15,176
)
 
(20,499
)
Other income (expenses)
 
 
 
 
 
 
 
Interest and investment income
72

 

 
14,211

 
14,283

Interest expense, net (D)
(7,670
)
 

 
(2,895
)
 
(10,565
)
Other (loss) income, net
(834
)
 

 
1,004

 
170

Total other income (expenses)
(8,432
)
 

 
12,320

 
3,888

Income tax expense

 

 
1,049

 
1,049

Net loss
(11,343
)
 
(2,412
)
 
(3,905
)
 
(17,660
)
Preferred dividends

 

 
(2,790
)
 
(2,790
)
Loss applicable to common stockholders
$
(11,343
)
 
$
(2,412
)
 
$
(6,695
)
 
$
(20,450
)


17

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(dollars in tables in thousands, except share data)
 

Summary segment financial data (continued).

 
Traditional Golf
 
Entertainment Golf
 
Corporate (F)
 
Total
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Golf operations
$
60,639

 
$

 
$

 
$
60,639

Sales of food and beverages
20,721

 

 

 
20,721

Total revenues
81,360

 

 

 
81,360

Operating costs
 
 
 
 
 
 
 
Operating expenses (A)
62,028

 

 

 
62,028

Cost of sales - food and beverages
6,009

 

 

 
6,009

General and administrative expense
4,106

 
27

 
1,657

 
5,790

General and administrative expense - acquisition and transaction expenses (B)
210

 
1,058

 

 
1,268

Management fee to affiliate

 

 
2,677

 
2,677

Depreciation and amortization
5,972

 

 

 
5,972

Pre-opening costs (C)

 
50

 

 
50

Impairment

 

 
32

 
32

Realized and unrealized loss on investments
165

 

 
3,122

 
3,287

Total operating costs
78,490

 
1,135

 
7,488

 
87,113

Operating income (loss)
2,870

 
(1,135
)
 
(7,488
)
 
(5,753
)
Other income (expenses)
 
 
 
 
 
 
 
Interest and investment income
33

 

 
6,362

 
6,395

Interest expense, net (D)
(3,853
)
 

 
(1,278
)
 
(5,131
)
Other (loss) income, net
(210
)
 

 
503

 
293

Total other income (expenses)
(4,030
)
 

 
5,587

 
1,557

Income tax expense

 

 
510

 
510

Net loss
(1,160
)
 
(1,135
)
 
(2,411
)
 
(4,706
)
Preferred dividends

 

 
(1,395
)
 
(1,395
)
Loss applicable to common stockholders
$
(1,160
)
 
$
(1,135
)
 
$
(3,806
)
 
$
(6,101
)


(A)
Operating expenses includes rental expenses recorded under operating leases for carts and equipment in the amount of $0.6 million and $1.1 million for the three and six months ended June 30, 2018, respectively, and $0.8 million and $1.6 million for the three and six months ended June 30, 2017, respectively. Operating expenses also includes amortization of favorable and unfavorable lease intangibles in the amount of $1.0 million and $2.1 million for the three and six months ended June 30, 2018, respectively, and $1.1 million and $2.1 million for the three and six months ended June 30, 2017, respectively.
(B)
Acquisition and transaction expenses include costs related to completed and potential acquisitions and transactions which may include advisory, legal, accounting, valuation and other professional or consulting fees.
(C)
Pre-opening costs are expensed as incurred and consist primarily of site-related marketing expenses, pre-opening rent, employee payroll, travel and related expenses, training costs, food, beverage and other restaurant operating expenses incurred prior to opening an Entertainment Golf venue.
(D)
Interest expense includes the accretion of membership deposit liabilities in the amount of $1.7 million and $3.4 million for the three and six months ended June 30, 2018, respectively, and $1.6 million and $3.2 million for the three and six months ended June 30, 2017, respectively. Interest expense and capitalized interest total to 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 $21.9 million as of June 30, 2018 recorded in other investments on the Consolidated Balance Sheets. See Note 2 for additional information.
(F)
The Debt Investments segment and corporate segment as reported previously are combined to conform to the current period's presentation.


18

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2018
(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:
 
 
June 30, 2018
 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Depreciation
 
Net Carrying Value
 
Gross Carrying Amount
 
Accumulated Depreciation
 
Net Carrying Value
Land
$
5,105

 
$

 
$
5,105

 
$
88,251

 
$

 
$
88,251

Buildings and improvements
72,557

 
(24,941
)
 
47,616

 
154,769

 
(52,636
)
 
102,133

Furniture, fixtures and equipment
26,904

 
(16,255
)
 
10,649

 
33,109

 
(23,451
)
 
9,658

Capital leases - equipment
27,273

 
(10,834
)
 
16,439

 
24,949

 
(8,649
)
 
16,300

Construction in progress
13,783

 

 
13,783

 
24,916

 

 
24,916

Total Property and Equipment
$
145,622

 
$
(52,030
)
 
$
93,592

 
$
325,994