10-K 1 ds-20181231x10xk.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended          December 31, 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)
Registrant's telephone number, including area code: (516) 268-7460
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
 
Name of exchange on which registered:
Common Stock, $0.01 par value per share
 
New York Stock Exchange (NYSE)
9.75% Series B Cumulative Redeemable Preferred
 
 
Stock, $0.01 par value per share
 
New York Stock Exchange (NYSE)
8.05% Series C Cumulative Redeemable Preferred
 
 
Stock, $0.01 par value per share
 
New York Stock Exchange (NYSE)
8.375% Series D Cumulative Redeemable Preferred
 
 
Stock, $0.01 par value per share
 
New York Stock Exchange (NYSE)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes x No
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.
x Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation 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).

x Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o

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 definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o
Accelerated Filer x
Non-accelerated Filer o
Smaller Reporting Company o
Emerging Growth Company o

 
 
 

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).

o Yes x No

The aggregate market value of the common stock held by non-affiliates as of June 29, 2018 (computed based on the closing price on the last business day of the registrant's most recently completed second quarter as reported on the NYSE) was: $457.3 million.

The number of shares outstanding of the registrant’s common stock was 67,027,104 as of March 1, 2019.


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for the registrant's 2019 Annual Meeting of Stockholders, to be filed within 120 days of fiscal year-end, are incorporated by reference into Part III of this Annual Report on Form 10-K.






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,” “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:
 
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; 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, which we refer to in this Annual Report on Form 10-K, as 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.



DRIVE SHACK INC.
FORM 10-K
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I
Item 1. Business.
Overview
Drive Shack Inc., which we refer to in this Annual Report on Form 10-K, together with its subsidiaries, as Drive Shack Inc. the Company, we and us, is a leading owner and operator of golf-related leisure and entertainment businesses. The Company conducts its business through three segments: Entertainment Golf venues, Traditional Golf properties and corporate. The Company was formed in 2002 and its common stock is traded on the NYSE under the symbol as DS.

Entertainment Golf | Drive Shack
Drive Shack is an entertainment company that combines golf, competition, dining and fun. Drive Shack plans to open a chain of next-generation dining and entertainment golf venues across the United States and internationally, with each venue featuring multiple stories of hitting suites where friends, family, co-workers or complete strangers may compete in technologically-enhanced golf games. Consumers who are seeking a good time, but not looking to participate in the game, are able to spectate, watch television and engage in other leisure activities from one of Drive Shack’s restaurant or lounge areas. Drive Shack opened its inaugural venue in Orlando, Florida on April 7, 2018.

Traditional Golf | American Golf
American Golf is one of the largest owners and operators of golf properties in the United States. As of December 31, 2018, we owned, leased or managed 66 properties across 11 states. American Golf and its dedicated employees are focused on delivering lasting experiences for our customers, including our more than 45,000 members, who played over 3.7 million rounds at our properties during 2018.
American Golf was acquired by the Company in December 2013, when the Company restructured an existing mezzanine debt investment related to NGP Realty Sub, L.P. and American Golf Corporation, which we refer to together, as American Golf. As part of the restructuring, the Company acquired the equity of American Golf’s indirect parent, AGC Mezzanine Pledge LLC.
Our operations are organized into three principal categories: (1) Public Properties, (2) Private Properties and (3) Managed Properties.
Public Properties.   Our 41 leased or owned public properties generate revenues principally through daily green fees, golf cart rentals and food, beverage and merchandise sales.  Amenities at these properties generally include practice facilities and pro shops with food and beverage facilities.  In some cases, our public properties have small clubhouses with banquet facilities. In addition, The Players Club is a monthly membership program offered at most of our public properties, with membership benefits ranging from daily range access to ability to participate in golf clinics, in return for a monthly membership fee.
Private Properties.   Our eight leased or owned private properties are open to members only and generate revenues principally through initiation fees, membership dues, food, beverage and merchandise sales, and guest fees. Amenities at these courses typically include practice facilities, full service clubhouses with a pro shop, locker room facilities and multiple food and beverage outlets, including grills, restaurants and banquet facilities.
Managed Properties. Our 17 managed properties are properties that American Golf manages pursuant to a management agreement with the owner of each property.  American Golf utilizes its decades of experience to provide sophisticated, full-scale golf course operations expertise to municipal and private owners. We recognize revenue from each of these properties in an amount equal to its management fee. In accordance with the new revenue standard (see Note 3 in Part II, Item 8 “Financial Statements and Supplementary Data” for additional information), certain operating costs incurred by us at the managed properties and the reimbursements of those operating costs by the owner of the managed property are now recognized in operating expenses and revenue from golf operations, respectively. The reimbursements are equal to the reimbursed operating costs and therefore this change will have no net impact to the Company’s operating income (loss).

1


agcpropertiesandholes1231.gif

For a further discussion of our reportable segments in addition to financial results, see Note 4 in Part II, Item 8. “Financial Statements and Supplementary Data.” See Note 12 in Part II, Item 8 “Financial Statements and Supplementary Data” for additional information about transactions with affiliates and affiliated entities.

Developments in 2018

Entertainment Golf - Opened Inaugural Venue, Announced Additional Venues

In April 2018, the Company opened its first entertainment golf venue, a three-story, innovative driving range and entertainment and dining venue in Orlando, Florida.

The Company continued development of three additional venues in Richmond, Virginia; Raleigh, North Carolina and West Palm Beach, Florida with planned openings in 2019.

The Company announced plans to develop two additional venues in New York, New York and New Orleans, Louisiana.

Traditional Golf - Property Updates

In September 2017, Hurricane Irma caused significant damage to a Traditional Golf property in Florida, including damage to trees, bunkers and other landscaping. The three golf courses at this property were closed immediately and reopened prior to December 31, 2017. The property is insured for property damage and business interruption losses related to such events, subject to deductibles and policy limits. The Company has incurred $5.5 million in property repair costs related to Hurricane Irma of which $1.3 million was incurred in 2018. The Company was reimbursed $2.0 million and $3.0 million by the insurer in 2017 and 2018, respectively.

During 2018, the Company exited three leased properties and one managed property and converted one leased property to a managed property. See Note 5 in Part II, Item 8 “Financial Statements and Supplementary Data” for additional information.

In July 2018, the Company sold a private golf property in Georgia for a sale price of $3.5 million resulting in net proceeds of $3.2 million after adjusting for liabilities assumed by the buyer, primarily related to prepaid dues. In December 2018, the Company sold an additional 12 golf properties for net proceeds of $73.5 million. The sale included: one public and seven private golf properties in California, public golf properties in Georgia and Tennessee, and private golf properties in Oregon and Idaho. The proceeds from the sale plus cash on hand were used to prepay a $102.0 million term loan secured by mortgages on the Company's golf properties. The Company entered into management agreements with the buyers of six of the private golf properties in California and the private golf properties in Oregon and Idaho to continue to manage the properties following the sales.


2



Corporate - Additions to the Management Team

In November 2018, the Company added new members to the management team. Kenneth A. May and David M. Hammarley joined the Company as Chief Executive Officer and Chief Financial Officer, respectively. Mr. May is a proven innovator and operator in the entertainment golf business, and Mr. Hammarley has diverse financial leadership experience in the hospitality industry.

Policies with Respect to Certain Other Activities

Subject to the approval of our board of directors, we have the authority to offer our common stock or other equity or debt securities to raise cash financing, in exchange for property and to repurchase or otherwise reacquire our shares or any other securities and may engage in such activities in the future. We also may make loans to, or provide guarantees of certain obligations of, our subsidiaries. We may engage in the purchase and sale of investments. Our officers and directors may change any of these policies and any investment guidelines without a vote of our stockholders. Our board of directors has the authority, without stockholder approval (subject in certain cases to NYSE shareholder approval requirements), to issue additional common stock or preferred stock in any manner and on such terms and for such consideration it deems appropriate, including in exchange for cash or property.

Competition

We operate in a highly competitive industry, and compete primarily on the basis of reputation, location and the perceived value of our properties and facilities. Our ability to compete with other golf and dining and entertainment facilities directly affects our ability to succeed.

In addition, we are subject to significant competition in seeking investments to enhance our business. We compete with other companies, including real estate, golf, leisure and dining and entertainment companies and private equity firms. Some of our competitors have greater resources than we possess, or have superior access to capital or various types of financing than are available to us, and we may not be able to compete successfully for investments to enhance our business or provide attractive investments returns relative to our competitors. In addition, we cannot assure you that we will be able to identify opportunities or complete transactions on commercially reasonable terms or at all, or that we will actually realize any targeted benefits from acquisitions, investments or alliances intended to enhance our business.

We also compete for discretionary leisure and entertainment spending with other types of recreational and entertainment facilities, including entertainment retail and restaurants. Some of these establishments exist in multiple locations, and we may also face competition in the future from new or expanded entertainment retail concepts that are similar to ours.

For more information about the competition we face generally and in our Entertainment and Traditional Golf businesses specifically, see Part I, Item 1A. “Risk Factors—Risks Related to Our Business—Competition in the industry in which we operate could have a material adverse effect on our business and results of operations.”
Seasonality

Traditional Golf is subject to seasonal fluctuations caused by significant reductions in golf activities as well as revenue in the first and fourth quarters of each year, due to shorter days and colder temperatures.  Consequently, a significantly larger portion of our revenue from our Traditional Golf operations is earned in the second and third quarters of our fiscal year. In addition, severe weather patterns can also negatively impact our results of operations.

Government Regulation of Our Business

Our properties and operations are subject to a number of environmental laws. As a result, we may be required to incur costs to comply with the requirements of these laws, such as those relating to water resources, discharges to air, water and land, the handling and disposal of solid and hazardous waste and the cleanup of properties affected by regulated materials. Under these and other environmental requirements, we may be required to investigate and clean up hazardous or toxic substances or chemical releases from currently owned, formerly owned or operated facilities.

Environmental laws typically impose cleanup responsibility and liability on a property owner without regard to whether the property owner knew of or caused the presence of the contaminants. We may use certain substances and generate certain wastes that may be deemed hazardous or toxic under such laws, and from time to time have incurred, and in the future may incur, costs related to cleaning up contamination resulting from historic uses by us or by previous owners of certain of our current or former properties or our treatment, storage or disposal of wastes at facilities owned by others. Our facilities are also subject to risks associated with

3


mold, asbestos and other indoor building contaminants. The costs of investigation, remediation or removal of regulated materials may be substantial, and the presence of those substances, or the failure to remediate a property properly, may impair our ability to use, transfer or obtain financing for our property. We may be required to incur costs to remediate potential environmental hazards, mitigate environmental risks in the future, or comply with other environmental laws and regulations.

In addition, in order to build, improve, upgrade or expand some of our facilities, we may be subject to environmental review under the National Environmental Policy Act and, for projects in California, the California Environmental Quality Act. Both acts require that a specified government agency study any proposal for potential environmental impacts and include in its analysis various alternatives. Any improvement proposal may not be approved or may be approved with modifications that substantially increase the cost or decrease the desirability of implementing the project.

We are also subject to regulation by the United States Occupational Safety and Health Administration and similar health and safety laws in other jurisdictions. These regulations impact a number of aspects of operations, including golf course maintenance and food handling and preparation.

The ownership and operation of our facilities subjects us to federal, state and local laws regulating zoning, land development, land use, building design and construction, and other real estate-related laws and regulations.

Our facilities and operations are subject to the Americans with Disabilities Act of 1990, as amended by the ADA Amendments Act of 2008, which we refer to in this Annual Report on Form 10-K, as the ADA. The ADA generally requires that we remove architectural barriers when readily achievable so that our facilities are made accessible to people with disabilities. In addition, the ADA Amendments Act of 2008, included additional compliance requirements for golf facilities and recreational areas. Noncompliance could result in imposition of fines or an award of damages to private litigants. Federal legislation or regulations may further amend the ADA to impose more stringent requirements with which we would have to comply.

We are also subject to various local, state and federal laws, regulations and administrative practices affecting our business. For instance, we must comply with provisions regulating equal employment, wage and hour practices and licensing requirements and regulations for the sale of food and alcoholic beverages.

Taxation

On February 23, 2017, the Company revoked its election to be treated as a real estate investment trust, or a REIT, effective January 1, 2017. The Company operated in a manner intended to qualify as a REIT for federal income tax purposes through December 31, 2016. Since January 1, 2017, we have generally been subject to federal and state income tax on our taxable income at regular corporate rates, and distributions to stockholders declared on or after January 1, 2017 are not deductible by us in computing our taxable income. Any such corporate tax liability could be substantial, including due to certain deferred cancellation of indebtedness income. Although we have net operating loss carryforwards that may be available to reduce our taxable income for U.S. federal and state income tax purposes and thereby reduce such tax liability, a portion of such carryforwards may be limited in its use due to certain provisions of the Internal Revenue Code, which we refer to in this Annual Report on Form 10-K as the Code. Therefore, no assurances can be given that those losses will remain usable or will not become subject to limitations (including the "ownership change" provisions under Section 382 of the Code). In particular, if the Company has undergone or were to undergo an “ownership change” for purposes of Section 382 of the Code, the Company could incur materially greater tax liability than if the Company had not undergone such an ownership change. For additional information, see Part I, Item 1A. “Risk Factors—Risks Related to our Tax Status and the 1940 Act.”

On December 22, 2017, the Tax Cuts and Jobs Act, which we refer to in this Annual Report on Form 10-K, as the Tax Act was signed into law. The Tax Act significantly revises the U.S. corporate income tax regime by, among other things, lowering corporate income tax rates and eliminating the alternative minimum tax, or the AMT for corporate taxpayers. The Company accounted for the effects of the Tax Act for the year ended December 31, 2017 which relates to the re-measure of deferred tax assets and liabilities due to the reduction in the corporate income tax rate and has booked a non-recurring income tax receivable in the amount of $0.6 million due to refundable AMT credits. See Note 14 in Part II, Item 8. “Financial Statements and Supplementary Data” for additional information.


4


Employees

Entertainment Golf

As of December 31, 2018, there were approximately 175 employees at our entertainment golf venues, consisting primarily of hourly employees. Our employees are not unionized. We believe we have a good working relationship with our employees, and our business has not experienced interruptions as a result of labor disputes.

Traditional Golf

As of December 31, 2018, there were approximately 3,700 employees at our golf facilities, consisting primarily of hourly employees. Other than a small group of golf course maintenance staff at one of our clubs, our employees are not unionized. We believe we have a good working relationship with our employees, and our business has not experienced interruptions as a result of labor disputes.

Corporate

As of December 31, 2018, there were 48 employees at our corporate headquarters in New York. Our employees are not unionized. We believe we have a good working relationship with our employees, and our business has not experienced interruptions as a result of labor disputes.

Corporate Governance and Internet Address

We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. Our board of directors consists of a majority of independent directors under the NYSE listing standards. The Audit, Compensation and Nominating and Corporate Governance Committees of our board of directors are composed exclusively of independent directors. We have adopted corporate governance guidelines and a code of business conduct and ethics, which delineate our standards for our directors, officers and employees.

Where Readers Can Find Additional Information

The Company files annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended, which we refer to in this Annual Report on Form 10-K as the Exchange Act, with the SEC. Our SEC filings are available to the public from the SEC’s internet site at http://www.sec.gov.

Our internet site for our stockholders and other interested parties is http://ir.driveshack.com. We make available free of charge through our internet site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers and any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also posted on our website in the ‘‘Investor Relations—Corporate Governance” section are charters for the Company’s Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, as well as our Corporate Governance Guidelines and our Code of Business Conduct and Ethics governing our directors, officers and employees. Information on, or accessible through, our website is not a part of, and is not incorporated into, this report.

5


Item 1A. Risk Factors

Certain factors may have a material risk on our business, financial condition and results of operations. You should carefully consider the risks and uncertainties below, in addition to other information contained in this Annual Report on Form 10-K. Additional risks that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.

Risks Related to Our Business and Industry

Changes in consumer financial condition, leisure tastes and preferences, spending patterns, particularly discretionary expenditures for leisure and recreation, are subject to factors beyond our control that may impact our business, financial condition and results of operations.

Consumer spending patterns, particularly discretionary expenditures for leisure and recreation, are subject to factors beyond our control that may impact our business, and a curtailing of discretionary spending could reduce our revenues and results of operations and adversely affect our financial position. These factors include:

economic recessions or downturns;
increased unemployment;
low consumer confidence and outlook;
depressed housing markets;
decreased corporate spending, including on events or tournaments;
natural disasters, such as earthquakes, tornadoes, hurricanes, wildfires, blizzards, droughts and floods;
outbreaks of epidemic, pandemic or contagious diseases;
war, terrorist activities or threats and heightened travel security measures instituted in response to these events; and
the financial condition of the airline, automotive and other transportation-related industries and its impact on travel.

These factors and other global, national and regional conditions can adversely affect, and from time to time have adversely affected, individual properties, particular regions or our business as a whole. Any one or more of these factors could negatively affect the sales volume and profitability of our memberships, services, food and beverages at our Entertainment Golf venues and Traditional Golf properties, and rounds played at our Traditional Golf properties.

In addition, during such periods of adverse economic conditions, we may experience increased rates of resignations of existing members, a decrease in the rate of new member enrollment, a decrease in golf rounds played or reduced spending on our Entertainment and Traditional Golf properties, any of which may result in, among other things, financial losses and decreased revenues.

Our expansion into new markets may present increased risks due to our unfamiliarity with the area.

We expect that a number of our Entertainment Golf venues will be located in areas where we have little or no meaningful operating experience. Those markets may have different competitive conditions, local regulatory requirements, consumer tastes and discretionary spending patterns than our existing markets, which may cause our new venues to be less successful than we expect. In addition, we intend to establish Entertainment Golf venues outside of the United States. In addition to the risks posed by new markets generally, the operating conditions in overseas markets may vary significantly from those we have experienced in the past, including in relation to consumer preferences, regulatory environment, currency risk, the presence and cooperation of suitable local partners and availability of vendors or commercial and physical infrastructure, among others. There is no guarantee that we will be successful in integrating these new Entertainment Golf venues into our operations, achieving market acceptance, operating these properties profitably, and maintaining compliance with the rapidly changing business and regulatory requirements of new markets. If we are unable to do so, we could suffer a material adverse effect on our business, financial condition and results of operations.


6


Our growth strategy depends on our ability to fund, develop and open new entertainment venues and operate them profitably.

A key element of our growth strategy is to develop and open Entertainment Golf venues, and we have indicated that we expect to open three to six new sites in 2020 and 2021. We opened our first venue in April 2018, and we have identified a number of locations for potential future Entertainment Golf venues: including in Raleigh, North Carolina; West Palm Beach, Florida and Richmond, Virginia, each of which we expect to open in 2019. In addition, we have announced our intentions to open between 3 and 6 new Entertainment Golf venues in 2020 and between 5 and 10 new Entertainment Golf in 2021 and in future years. Our ability to fund, develop and open these venues on a timely and cost-effective basis, or at all, is dependent on a number of factors, many of which are beyond our control, including but not limited to our ability to:

find quality locations;
reach acceptable agreements regarding the lease or purchase of locations, and comply with our commitments under our lease agreements during the development and construction phases;
comply with applicable zoning, licensing, land use and environmental regulations;
raise or have available an adequate amount of cash or currently available financing for construction and opening costs;
adequately complete construction for operations;
timely hire, train and retain the skilled management and other employees necessary to meet staffing needs;
obtain, for acceptable cost, required permits and approvals, including liquor licenses; and
efficiently manage the amount of time and money used to build and open each new venue.
If we succeed in opening Entertainment Golf venues on a timely and cost-effective basis, we may nonetheless be unable to attract enough customers to these new venues because potential customers may be unfamiliar with our venue or concept, our entertainment and menu options might not appeal to them and we may face competition from other food and leisure venues. New venues may operate at a loss, which could have a significant adverse effect on our overall operating results. We may also need to adjust our liquidity requirements to implement our strategies. Opening new Entertainment Golf venues in an existing market of our competitors, or our competitors opening in our markets, could reduce the revenue at our venues in that market.
The success of our growth strategy depends in part on our ability to procure or develop and protect our intellectual property rights adequately and is subject to competition in the entertainment and leisure industries, including from more established entrants with a longer operating history.
Our growth strategy depends on our ability to procure or develop and protect technologies to be used at our Entertainment Golf venues, and we may not be able to adequately procure or develop these technologies or protect the intellectual property rights in these technologies. Further, our competitors may adapt technologies or business models more quickly or effectively than we do, creating products that are technologically superior to ours or more appealing to consumers. As a result, we may lose an important advantage in the markets in which we open our Entertainment Golf venues. In addition, if third parties misappropriate or infringe, or otherwise inhibit access to, our intellectual property, our brand may fail to achieve and maintain market recognition and our growth strategy may be harmed. To protect the right to use our technologies and intellectual property, we may become involved in litigation, which could result in substantial expenses, divert the attention of management and adversely affect our revenue, financial condition and results of operations.
In addition, the successful execution of our growth strategy depends on our ability to compete effectively with others within the entertainment golf space, including more established entrants in the market with a longer operating history, and other forms of entertainment and leisure activities. It is difficult to predict and prepare for rapid changes in consumer demand that could materially alter public preferences for different forms of entertainment and leisure activities. Failure to adequately identify and adapt to these competitive pressures could negatively impact our business.

Competition in the industry in which we operate could have a material adverse effect on our business and results of operations.

We operate in a highly competitive industry, and compete primarily on the basis of reputation, featured facilities, location, quality and breadth of product offerings and price. As a result, competition for market share in the industry in which we compete is significant.

The Entertainment Golf market is highly competitive and includes competition on a local and regional level with restaurants, dining and social clubs and other entertainment attractions including movie theatres, sporting events, bowling alleys, sports activity centers, arcades and entertainment centers, nightclubs and theme parks. Many of the entities operating these businesses are larger and better capitalized, have a greater number of stores, have been in business longer and are better established with stronger name recognition in the markets where our Entertainment Golf venues are located or are planned to be located. As a result, they may be able to invest greater resources than we can in attracting customers and succeed in attracting customers who would otherwise come

7


to our venues. The legalization of casino and sports gambling in geographic areas near any current or future venues would create the possibility for entertainment alternatives, which could have a material adverse effect on our business and financial condition. We also face competition from increasingly sophisticated home-based forms of entertainment, such as internet and video gaming and home movie streaming and delivery.

The number and variety of competitors in our business varies based on the location and setting of each facility, with some situated in intensely competitive upscale urban areas characterized by frequent innovations in the products and services offered by competing restaurants, dining and social clubs and other entertainment attractions. In addition, in most regions, these businesses are in constant flux as new restaurants and other social and meeting venues open or expand their amenities. As a result of these characteristics, the supply in a given region often exceeds the demand for such facilities, and any increase in the number or quality of restaurants and other social and meeting venues, or the products and services they provide, in such region could significantly impact the ability of our properties to attract and retain members, which could harm our business and results of operations.

Our Traditional Golf properties compete on a local and regional level with other country clubs and golf properties. The level of competition in the Traditional Golf business varies from region to region and is subject to change as existing facilities are renovated or new facilities are developed. An increase in the number or quality of similar clubs and other facilities in a particular region could significantly increase competition, which could have a negative impact on our business and results of operations. In addition, member-owned and individual privately-owned clubs may be able to create a perception of exclusivity that we have difficulty replicating given the diversity of our portfolio and the scope of our holdings.

Unusual weather patterns and extreme weather events, as well as forecasts of bad or mixed weather conditions or periodic and quasi-periodic weather patterns, could adversely affect the value of our golf courses or negatively impact our business and results of operations in our Entertainment and Traditional Golf segments.

Our Entertainment and Traditional Golf businesses are subject to unusual weather patterns and extreme weather events, such as heavy rains, prolonged snow accumulations, high winds, extended heat waves and drought, which could negatively affect the income generated by our properties. Because our Entertainment and Traditional Golf businesses are primarily outdoors, attendance at our facilities could be adversely affected by forecasts of bad weather conditions since individuals may instead choose to participate in indoor activities.

The maintenance of satisfactory turf grass conditions on our Traditional Golf properties requires significant amounts of water. Our ability to irrigate a golf course could be adversely affected by a drought or other cause of water shortage, such as government imposed restrictions on water usage. Additionally, we may be subject to significant increases in the cost of water. We have a concentration of Traditional Golf properties in states (such as California, Georgia, New York and Texas) that experience periods of unusually hot, cold, dry or rainy weather. Unfavorable weather patterns in such states, or any other circumstance or event that causes a prolonged disruption in the operations of our properties in such states (including, without limitation, economic and demographic changes in these areas), could have an adverse impact on our Traditional Golf segment which is vulnerable to all these factors.

Our results of operations are subject to fluctuations due to the timing of new Entertainment Golf venue openings.

The timing of new Entertainment Golf venue openings may result in significant fluctuations in our quarterly performance. During the pre-opening phase, and the first three to six months of operations, we believe that labor and operating costs for a specific venue could be materially greater than such costs once the venue has reached a mature state, both in aggregate dollars and as a percentage of revenues. Additionally, a portion of a current fiscal year new venue capital expenditures is related to venues that are not expected to open until the following fiscal year. Due to these substantial up-front financial requirements to open new venues, the investment risk related to any single venue may be much greater than that associated with other types of entertainment businesses.

Food safety incidents at our properties or in our industry or supply chain may adversely affect customer perception of our brands or industry and result in declines in sales and profits.

We cannot guarantee that our supply chain and food safety controls and training will be fully effective in preventing all food safety issues at our properties and venues, including any occurrences of foodborne illnesses such as salmonella, E. coli, Norovirus, or hepatitis A. Some foodborne illness incidents could be caused by third-party vendors and distributors outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of foodborne illness in any of our properties or related to food products we sell could negatively affect our sales nationwide if highly publicized on national media outlets or through social media. This risk exists even if it were later determined that the illness was wrongly attributed to us or one of our

8


properties. Further, any instances of food contamination, whether or not at our facilities, could subject us or our suppliers to a food recall, including pursuant to regulations of the United States Food and Drug Administration’s under the Food Safety Modernization Act.

Our large workforce subjects us to risks associated with increases in the cost of labor as a result of increased competition for employees, higher employee turnover rates and required wage increases and health benefit coverage, lawsuits or labor union activity.

Labor is one of our primary property-level operating expenses. We may face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, or increases in the federal or state minimum wage or other employee benefit costs. For example, if the federal minimum wage were increased significantly, we would have to assess the financial impact on our operations as we have a large population of hourly employees. If labor-related expenses increase, our operating expense could increase and our business, financial condition and results of operations could be harmed.

We are subject to the Fair Labor Standards Act and various federal and state laws governing such matters as minimum wage requirements, gratuity policies, overtime compensation and other working conditions, citizenship requirements, discrimination and family and medical leave. In recent years, a number of companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, overtime wage policies, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits may be threatened or instituted against us from time to time, and we may incur substantial damages and expenses resulting from lawsuits of this type, which could have a material adverse effect on our business, financial condition or results of operations.

We may not be able to attract and retain key management and other key employees.

Our employees, particularly our key management, are vital to our success and difficult to replace. We may be unable to retain them or to attract other highly qualified employees, particularly if we do not offer employment terms competitive with the rest of the market. Failure to attract and retain highly qualified employees, or failure to develop and implement a viable succession plan, could result in inadequate depth of institutional knowledge or skill sets, adversely affecting our business. In addition, we must continue to attract, retain and motivate a sufficient number of qualified management and operating personnel to maintain consistency in our service, hospitality, quality and atmosphere of our Entertainment Golf venues. Qualified management and operating personnel are typically in high demand, and if we are unable to attract and retain a satisfactory number of qualified management and operating personnel, labor shortages could delay the planned openings of new Entertainment Golf venues or adversely impact our existing business.

Our operations are susceptible to changes in the availability and the cost of food, goods, rent, water, utilities, repairs, maintenance and taxes, which could reduce our operating margins and harm our business, financial condition and results of operations.

In our Traditional Golf segment, our most significant operating costs, other than labor, are our cost of goods, water, utilities, rent and property taxes. Many, and in some cases all, of the factors affecting these costs are beyond our control. Increases in operating costs due to inflation, commodity prices and other factors may not be directly offset by increased revenue. Our cost of goods such as food and beverage costs account for a significant portion of our total property-level operating expense in our Entertainment and Traditional Golf segments. If our cost of goods increased significantly and we are not able to pass along those increased costs to our members in the form of higher prices or otherwise, our operating margins would decrease, which would have an adverse effect on our business, financial condition and results of operations.
    
In addition, rent accounts for a significant portion of our property-level operating expense. Significant increases in our rent costs would increase our operating expense and our business, financial condition and results of operations may be adversely impacted. The prices of utilities are volatile, and shortages sometimes occur. In particular, in the case of our Traditional Golf business, municipalities are increasingly placing restrictions on the use of water for golf course irrigation and increasing the cost of water. Significant increases in the cost of our utilities, or any shortages, could interrupt or curtail our operations and lower our operating margins, which could have a negative impact on our business, financial condition and results of operations.

Each of our properties is subject to real and personal property taxes. The real and personal property taxes on our properties may increase or decrease as tax rates change and as our properties are assessed or reassessed by taxing authorities. If real and personal property taxes increase, our financial condition and results of operations may be adversely impacted.


9


We could be required to make material cash outlays in future periods if the number of initiation deposit refund requests we receive materially increases or if we are required to surrender unclaimed initiation deposits to state authorities under applicable escheatment laws.

We may be required to make significant cash outlays in connection with initiation fee deposits at our Traditional Golf properties. Members of our private properties are generally required to pay an initiation fee deposit upon their acceptance as a member and, in most cases, such deposits are fully refundable after a fixed number of years (typically 30 years) and upon the occurrence of other contract-specific conditions, whether or not the applicable golf property has undergone a transfer of ownership since the time of the deposit. While we will make a refund to any member whose initiation fee deposit is eligible to be refunded, we may be subject to various states’ escheatment laws with respect to initiation fee deposits that have not been refunded to members. All states have escheatment laws and generally require companies to remit to the state cash in an amount equal to unclaimed and abandoned property after a specified period of dormancy, which is typically 3 to 5 years. Moreover, most of the states in which we conduct business hire independent agents to conduct unclaimed and abandoned property audits. We currently do not remit to states any amounts relating to initiation fee deposits that are eligible to be refunded to members based upon our interpretation of the applicability of such laws to initiation fee deposits. The analysis of the potential application of escheatment laws to our initiation fee deposits is complex, involving an analysis of constitutional and statutory provisions and contractual and factual issues. While we do not believe that initiation fee deposits must be escheated, we may be forced to remit such amounts if we are challenged and fail to prevail in our position.

We have concentrated our investments in golf-related real estate and facilities, which are subject to numerous risks, including the risk that the values of our investments may decline if there is a prolonged downturn in real estate values.

Our operations at our Entertainment Golf venues and Traditional Golf properties encompass and will continue to encompass, a large amount of real estate holdings, in the form of fee simple ownership and leasehold interests. Accordingly, we are subject to the risks associated with holding real estate investments. In addition, a prolonged decline in the popularity of golf could adversely affect the value of our real estate holdings in our Traditional Golf business and could make it difficult to sell facilities or businesses in our Traditional Golf segment.

Our real estate holdings (including our long-term leaseholds) are subject to risks typically associated with investments in real estate. The investment returns available from equity investments in real estate depend in large part on the amount of income earned, expenses incurred and capital appreciation generated by the related properties. In addition, a variety of other factors affect income from properties and real estate values, including governmental regulations, real estate, insurance, zoning, tax and eminent domain laws, interest rate levels and the availability of financing. For example, new or existing real estate zoning or tax laws can make it more expensive and time-consuming to expand, modify or renovate older properties. Under eminent domain laws, governments can take real property. Sometimes this taking is for less compensation than the owner believes the property is worth. Any of these factors could have an adverse impact on our business, financial condition or results of operations.
We may not be able to retain members at our public and private Traditional Golf properties, and attract golf rounds played, which could have an adverse effect on our business, financial condition and results of operations.

Our success depends on our ability to attract and retain members and other customers at our public and private Traditional Golf properties, attract golf rounds played and maintain or increase revenues generated from our Traditional Golf properties. Changes in consumer financial condition, leisure tastes and preferences, particularly those affecting the popularity of golf, and other social and demographic trends could adversely affect our business. Significant periods where attrition rates exceed enrollment rates or where facilities usage is below historical levels at our Traditional Golf properties would have a material adverse effect on our business, financial condition and results of operations. A portion of our member base may not regularly use our facilities and may be more likely to cancel their membership. Factors that could lead to a decrease in membership include a decline in our ability to deliver quality service at our current membership prices, a decrease in public interest in the sport of golf, and direct and indirect competition in our industry. If we cannot attract new members and other customers, retain our existing members and other customers, or maintain golf rounds played at our Traditional Golf properties, our financial condition and results of operations could be harmed.

We have significant operations concentrated in certain geographic areas, and any disruption in the operations of our properties in any of these areas could harm our results of operations.

As of December 31, 2018, we operated multiple Traditional Golf properties in several metropolitan areas, including 29 in the greater Los Angeles, California region. As a result, any prolonged disruption in the operations of our properties in any of these markets, whether due to technical difficulties, power failures or destruction or damage to the properties as a result of a natural disaster, such as hurricanes or earthquakes, fire or any other reason, could harm our results of operations or may result in property

10


closures. In addition, some of the metropolitan areas where we operate properties could be disproportionately affected by regional economic conditions, such as declining home prices and rising unemployment. Concentration in these markets increases our exposure to adverse developments related to competition, as well as economic and demographic changes in these areas.

Seasonality may adversely affect our business and results of operations.

Seasonality can affect our results of operations in the Entertainment and Traditional Golf businesses. Usage of Traditional Golf properties tends to decline significantly during the first and fourth quarters, when colder temperatures and shorter days reduce the demand for outdoor activities. As a result, we expect the Traditional Golf business to generate a disproportionate share of its annual revenue in the second and third quarters of each year. Accordingly, our Traditional Golf business is especially vulnerable to events that may negatively impact its operations during the second and third quarters, when guest and member usage is highest. In addition, although we have not experienced a full year of operations in the Entertainment Golf business, we expect that our results could be significantly impacted on a season-to-season basis. For this reason, a quarter-to-quarter comparison may not be a good indicator of our current and/or future performance.

If the owner for any of our managed Traditional Golf properties defaults on its obligation to pay us our management fee under the management contract, we may not obtain the full amount, or any, of the revenue associated with that contract.

Our 17 managed Traditional Golf properties are properties that American Golf manages pursuant to a management agreement with the owner of each property.  If any property owner defaults on its obligation to pay us the management fee that we are entitled to receive under the management for the property, we are at risk of losing some or all of the revenue associated with that management agreement. In addition, we may decide to enforce our right to damages for breach of contract and related claims, which may cause us to incur significant legal fees and expenses. Any damages we ultimately collect may be less than the projected future value of the fees and other amounts we would have otherwise collected under the management agreement, which may result in, among other things, financial losses and decreased revenues.

The illiquidity of real estate may make it difficult for us to dispose of one or more of our properties or negatively affect our ability to profitably sell such properties and access liquidity.

We are engaged in the sale of the real estate that we own constituting a portion of our Traditional Golf properties, and we may from time to time decide to dispose of one or more of our other real estate assets. Because real estate holdings are relatively illiquid, we may not be able to dispose of one or more real estate assets on a timely basis. In some circumstances, sales may result in investment losses which could adversely affect our financial condition. The illiquidity of our real estate assets could mean that we continue to operate a facility that management has identified for disposition. Failure to dispose of a real estate asset in a timely fashion, or at all, could adversely affect our business, financial condition and results of operations, and impede our ability to fund our growth plans and access liquidity to be deployed in the operation of our business.

Timing, budgeting and other risks could delay our efforts to develop, redevelop or renovate the properties that we own, or make these activities more expensive, which could reduce our profits, impair our ability to compete effectively, and negatively impact liquidity.

We must regularly expend capital to construct, open, maintain and renovate the Entertainment and Traditional Golf properties that we own in order to remain competitive, pursue our business strategies, maintain and build the value and brand standards of our properties and comply with applicable laws and regulations. We must also periodically upgrade or replace the furniture, fixtures and equipment necessary to operate our business. These efforts are subject to a number of risks, including:

construction delays or cost overruns (including labor and materials) that may increase project costs;
obtaining zoning, occupancy and other required permits or authorizations;
governmental restrictions on the size or kind of development;
force majeure events, including earthquakes, tornadoes, hurricanes or floods;
design defects that could increase costs; and
environmental concerns which may create delays or increase costs.

Our insurance policies may not provide adequate levels of coverage against all claims and we may incur losses that are not covered by our insurance.

There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental

11


considerations, and other factors, including terrorism or acts of war, also might make the insurance proceeds insufficient to repair or replace a property, if it is damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore our economic position with respect to the affected real property. For example, we may suffer losses from acts of terrorism that are not covered by insurance.

Accidents or injuries at our properties or in connection with our operations may subject us to liability, and accidents or injuries could negatively impact our reputation and attendance, which would harm our business, financial condition and results of operations.

There are inherent risks of accidents or injuries at our properties or in connection with our operations, including injuries from premises liabilities such as slips, trips and falls. If accidents or injuries occur at any of our properties, we may be held liable for costs related to such incidents. We maintain insurance of the type and in the amounts that we believe are commercially reasonable and that are available to businesses in our industry, but there can be no assurance that our liability insurance will be adequate or available at all times and in all circumstances. There can also be no assurance that the liability insurance we have carried in the past was adequate or available to cover any liability related to previous incidents. The expansion of social media over recent years to report such incidents could increase the impact of the resulting negative publicity on our business. Our business, financial condition and results of operations could be harmed to the extent claims and associated expenses resulting from accidents or injuries exceed our insurance recoveries.

The failure to comply with regulations applicable to our properties or the failure to retain licenses or permits relating to our properties may harm our business and results of operations.

Our business is subject to extensive federal, state and local government regulation in the various jurisdictions in which our properties are located, including regulations relating to alcoholic beverage control, public health and safety, environmental hazards and food safety. Alcoholic beverage control regulations require each of our properties to obtain licenses and permits to sell alcoholic beverages on the premises. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. In some states, the loss of a license for cause with respect to one location may lead to the loss of licenses at all locations in that state and could make it more difficult to obtain additional licenses in that state. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each venue, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling and storage and dispensing of alcoholic beverages.

The failure of a property to obtain or retain its licenses and permits would adversely affect that property’s operations and profitability, as well as our ability to obtain such a license or permit in other locations. We may also be subject to dram shop statutes in certain states, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Even though we are covered by general liability insurance, a settlement or judgment against us under a dram shop lawsuit in excess of liability coverage could have a material adverse effect on our operations. In addition, any of our locations located near airports must comply with land-use zoning ordinances related to the height of objects around airports, which are promulgated at the federal level based on advice and guidance published by the Federal Aviation Administration.

We are also subject to the Americans with Disabilities Act (the “ADA”) which, among other things, may require certain renovations to our facilities to comply with access and use requirements. A determination that we are not in compliance with the ADA or any other similar law or regulation could result in the imposition of fines or an award of damages to private litigants. While we believe we are operating in substantial compliance, and will continue to remove architectural barriers in our facilities when readily achievable, in accordance with current applicable laws and regulations, there can be no assurance that our expenses for compliance with these laws and regulations will not increase significantly and harm our business, financial condition and results of operations.

We are also subject to numerous other federal, state and local governmental regulations related to building and zoning requirements and the use and operation of clubs, including changes to building codes and fire and life safety codes, which can affect our ability to obtain and maintain licenses relating to our business and properties. If we were required to make substantial modifications at our properties to comply with these regulations or if we fail to comply with these regulations, our business, financial condition and results of operations could be negatively impacted.

Environmental compliance costs and liabilities related to real estate that we own, or in which we have interests, may adversely affect our results of operations.

Our operating costs may be affected by the cost of complying with existing or future environmental laws, ordinances and regulations with respect to the properties (or loans secured by such properties) or by environmental problems that materially impair the value

12


of such properties. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under, or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous or toxic substances, or the failure to remediate properly, may adversely affect the owner’s ability to borrow using such real property as collateral. Certain environmental laws and common law principles could be used to impose liability for releases of hazardous materials, including asbestos-containing materials, into the environment, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released asbestos-containing materials or other hazardous materials. Environmental laws may also impose restrictions on the manner in which a property may be used or transferred or in which businesses it may be operated, and these restrictions may require expenditures. In connection with the direct or indirect ownership and operation of properties, we may be potentially liable for any such costs. The cost of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could adversely affect our results of operations and financial condition.
Our procurement of certain materials for developing, redeveloping or renovating our venues is dependent upon a few suppliers.
Our ability to continue to procure certain materials is important to our business strategy for developing, redeveloping or renovating our venues. The number of suppliers from which we can purchase our materials is limited. In addition, the materials necessary to construct Entertainment Golf venues are subject to price fluctuation. To the extent that the number of suppliers declines, or the price of materials necessary to construct our Entertainment Golf venues increases, we could be subject to the risk increased capital expenditure costs, of distribution delays, pricing pressure, lack of innovation and other associated risks which could adversely affect our business, financial condition or results of operations.
Changes in laws, regulations and other requirements could adversely affect our business, results of operations or financial condition.
We are also subject to federal, state and local environmental laws, regulations and other requirements. More stringent and varied requirements of local and state governmental bodies with respect to zoning, land use and environmental factors could delay or prevent development of new venues in particular locations. Environmental laws and regulations also govern, among other things, discharges of pollutants into the air and water as well as the presence, handling, release and disposal of and exposure to hazardous substances. These laws provide for significant fines and penalties for noncompliance. Third parties may also make personal injury, property damage or other claims against us associated with actual or alleged release of, or exposure to, hazardous substances at our properties. We could also be strictly liable, without regard to fault, for certain environmental conditions at properties we formerly owned or operated as well as our current properties. The failure to receive or retain a liquor license, or any other required permit or license, in a particular location, or to continue to qualify for, or renew licenses, could have a material adverse effect on operations and our ability to obtain such a license or permit in other locations. In addition, changes in federal law relating to the height of objects around airports may interfere with the planned design, construction and operation of any of our Entertainment Golf venues located near airports.

Lawsuits, investigations and indemnification claims could result in significant liabilities and reputational harm, which could materially adversely affect our results of operations, financial condition and liquidity.

From time to time, we are and may become involved in lawsuits, inquiries or investigations or receive claims for indemnification. Our efforts to resolve any such lawsuits, inquiries, investigations or claims could be very expensive and highly damaging to our reputation, even if the underlying claims are without merit. We could potentially be found liable for significant damages or indemnification obligations. Such developments could have a material adverse effect on our business, results of operations and financial condition.

Our risk of litigation includes, but is not limited to, lawsuits that could be brought by users of our properties and property-level employees. For instance, we are subject to federal and state laws governing minimum wage requirements, overtime compensation, discrimination and family and medical leave. Any lawsuit alleging a violation of any such laws could result in a settlement or other resolution that requires us to make a substantial payment, which could have a material adverse effect on our financial condition and results of operations. In addition, accidents or injuries in connection with our properties could subject us to liability and reputational harm.


13


A failure in our systems or infrastructure which maintain our internal and customer data, or those of our third-party service providers, including as a result of cyber-attacks, could result in faulty business decisions or harm to our reputation or subject us to costs, fines or lawsuits.

Certain information relating to our members and guests, including personally identifiable information and credit card numbers, is collected and maintained by us, or by third-parties that do business with us or facilitate our business activities. This information is maintained for a period of time for various business purposes, including maintaining records of member and guest preferences to enhance our customer service and for billing, marketing and promotional purposes. We also maintain personally identifiable information about our employees. The integrity and protection of our customer, employee and company data is critical to our business. Our members and guests and our employees expect that we will adequately protect their personal information, and the regulations applicable to security and privacy are increasingly demanding. Privacy regulation is an evolving area and compliance with applicable privacy regulations may increase our operating costs or adversely impact our ability to service our members and guests and market our properties and services.

To date we have not experienced any material losses relating to cyber-attacks, computer viruses or other systems or infrastructure failures. While we have cyber security procedures in place, given the evolving nature of these threats, there can be no assurance that we will not suffer material losses in the future due to cyber-attacks or other systems or infrastructure failures. The theft, loss, misappropriation, fraudulent or unlawful use of customer, employee or company data, including in connection with one or more cyber-attacks on us or one of our third-party providers, could harm our reputation, result in loss of members or business disruption or result in remedial and other costs, fines or lawsuits. In addition, non-compliance with applicable privacy regulations by us (or in some circumstances non-compliance by third-parties engaged by us) could result in fines or restrictions on our use or transfer of data. Any of these matters could adversely affect our business, financial condition or results of operations.

We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information and to manage or support a variety of our business processes, including financial transactions and maintenance of records, which in the case of our business, may include personal identifying information. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmitting and storing this confidential information, such as individually identifiable information relating to financial accounts. Although we have taken steps to protect the security of the data maintained in our information systems, it is possible that our security measures will not be able to prevent the systems’ improper functioning, or the improper disclosure of personally identifiable information such as in the event of cyber attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could materially and adversely affect our business, financial condition and results of operations. If our incident response and disaster recovery plans do not resolve these issues in an efficient manner, remediation of these problems could result in significant, unexpected capital expenditures.

Our investments may be subject to significant impairment charges, which would adversely affect our results of operations.

We are required to periodically evaluate our investments for impairment indicators. The value of an investment is impaired when our analysis indicates that, with respect to a loan, it is probable that we will not be able to collect the full amount we intended to collect from the loan or, with respect to a security or property, it is probable that the value of the security or property is other than temporarily impaired. The judgment regarding the existence of impairment indicators is based on a variety of factors depending upon the nature of the investment and the manner in which the income related to such investment was calculated for purposes of our financial statements. If we determine that an impairment has occurred, we are required to make an adjustment to the net carrying value of the investment and the amount of accrued interest recognized as income from such investment, which could have a material adverse effect on our results of operations.

We have assumed the role of manager of CDOs previously managed by a third party. Each such engagement exposes us to a number of potential risks.

In February 2011, one of our subsidiaries became the collateral manager of certain CDOs previously managed by C-BASS Investment Management LLC (“C-BASS”).

Being engaged as the collateral manager of CDOs entails a number of risks that could harm our reputation, results of operations

14


and financial condition. For example, we purchased the management rights with respect to the C-BASS CDOs pursuant to a bankruptcy proceeding. As a result, we were not able to conduct extensive due diligence on the CDO assets even though many classes of securities issued by the CDOs were rated as “distressed” by the rating agencies as of the most recent rating date prior to our becoming the collateral manager of the CDOs. We may willingly or unknowingly assume actual or contingent liabilities for significant expenses, we may become subject to new laws and regulations with which we are not familiar, and we may become subject to increased risk of litigation, regulatory investigation or negative publicity. For example, we determined that it would be prudent to register the subsidiary that became the collateral manager of the C-BASS CDOs as a registered investment adviser, which has increased our regulatory compliance costs. In addition to defending against litigation and complying with regulatory requirements, being engaged as collateral manager may require us to invest other resources for various other reasons, which could detract from our ability to capitalize on future opportunities. Moreover, being engaged as collateral manager may require us to integrate complex technological, accounting and management systems, which may be difficult, expensive and time-consuming and which we may not be successful in integrating into our current systems. In addition to the risk that we face if we are successful in becoming the manager of additional CDOs, we may attempt but fail to become the collateral manager of CDOs in the future, which could harm our reputation and subject us to costly litigation. Finally, if we include the financial performance of the C-BASS CDOs or other CDOs for which we become the collateral manager in our public filings, we are subject to the risk that, particularly during the period immediately after we become the collateral manager, this information may prove to be inaccurate or incomplete. The occurrence of any of these negative integration events could negatively impact our reputation with both regulators and investors, which could, in turn, subject us to additional regulatory scrutiny and impair our relationships with the investment community. The occurrence of any of these problems could negatively affect our reputation, financial condition and results of operations.

Our investments in real estate related preferred equity and other direct and indirect interests in pools of real estate properties or other loans may be subject to additional risks relating to the structure and terms of these transactions, which may result in losses to us.

We have investments in real estate related and other loans and other direct and indirect interests in pools of real estate properties or loans, including an approximately 22% economic interest in a limited liability company which owns preferred equity secured by a commercial real estate project. These types of investments involve a higher degree of risk than long-term senior lending secured by business assets or income producing real property because the investment may become unsecured as a result of foreclosure by a senior lender. As a result, we may not recover some or all of our investment.

Many of our investments are illiquid, and this lack of liquidity could significantly impede our ability to vary our portfolio in response to changes in economic and other conditions, these illiquid investments may be difficult to sell to generate cash to meet our needs and we may not realize the value at which such investments are carried if we are required to dispose of them.

The real estate properties that we own and operate and our other direct and indirect investments in real estate, loans and securities are generally illiquid. In addition, the real estate securities that we purchase in connection with privately negotiated transactions are not registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. In addition, there are no established trading markets for a majority of our investments. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be limited.

Our real estate securities have historically been valued based primarily on third-party quotations, which are subject to significant variability based on the liquidity and price transparency created by market trading activity. In the past, dislocation in the trading markets has reduced the trading for many real estate securities, resulting in less transparent prices for those securities. During such times, it is more difficult for us to sell many of our assets because, if we were to sell such assets, we would likely not have access to readily ascertainable market prices when establishing valuations of them. Although we seek to adjust our cash and short-term investment positions to minimize the likelihood that we would need to sell illiquid investments, if we are required to liquidate all or a portion of our illiquid investments quickly, we may realize significantly less than the amount at which we have previously valued these investments.

Changes in accounting rules could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against.

As has been widely publicized, the SEC, the Financial Accounting Standards Board and other regulatory bodies that establish the accounting rules applicable to us have recently proposed or enacted a wide array of changes to accounting rules. Moreover, in the future these regulators may propose additional changes that we do not currently anticipate. Changes to accounting rules that apply to us could significantly impact our business or our reported financial performance in negative ways that we cannot predict or

15


protect against. We cannot predict whether any changes to current accounting rules will occur or what impact any codified changes will have on our business, results of operations, liquidity or financial condition.

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

As a public company, we are required to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Internal control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules. In connection with new investments, we may be required to consolidate additional entities, and, therefore, to document and test effective internal controls over the financial reporting of these entities in accordance with Section 404, which we may not be able to do. Even if we are able to do so, there could be significant costs and delays, particularly if these entities were not subject to Section 404 prior to being acquired by us. Under certain circumstances, the SEC permits newly acquired businesses to be excluded for a limited period of time from management’s annual assessment of the effectiveness of internal control. Our management identified a material weakness in our internal controls with respect to our financial statements for the year ended December 31, 2011. Although this was remediated, we cannot assure you that our internal control over financial reporting will be effective in the future or that a material weakness will not be discovered with respect to a prior period for which we believe that internal controls were effective. If we are not able to maintain or document effective internal control over financial reporting, our independent registered public accounting firm may not be able to certify as to the effectiveness of our internal control over financial reporting as of the required dates. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis, or may cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could materially adversely affect us by, for example, leading to a decline in our share price and impairing our ability to raise capital.

Our agreements with New Residential and New Senior may not reflect terms that would have resulted from negotiations among unaffiliated third parties, and we have agreed to indemnify New Residential and New Senior for certain liabilities in connection with their respective spin-offs.

We completed the spin-off of New Residential Investment Corp. which we refer to in this Annual Report on Form 10-K as New Residential, in May 2013. The terms of the agreements related to the spin-off of New Residential, including a separation and distribution agreement dated April 26, 2013 (the “NRZ Separation and Distribution Agreement”) between us and New Residential and a management agreement between our Manager and New Residential, were not negotiated among unaffiliated third parties. Such terms were proposed by our officers and other employees of our Manager and approved by our board of directors. As a result, these terms may be less favorable to us than the terms that would have resulted from negotiations among unaffiliated third parties.

In the NRZ Separation and Distribution Agreement, we have agreed to indemnify New Residential and its affiliates and representatives against losses arising from: (a) any liability related to our junior subordinated notes due 2035; (b) any other liability that has not been defined as a liability of New Residential; (c) any failure by us and our subsidiaries (other than New Residential and its subsidiaries), which we refer to in this Annual Report on Form 10-K collectively as the Newcastle Group, to pay, perform or otherwise promptly discharge any liability listed under (a) and (b) above in accordance with their respective terms, whether prior to, at or after the time of effectiveness of the NRZ Separation and Distribution Agreement; (d) any breach by any member of the Newcastle Group of any provision of the NRZ Separation and Distribution Agreement and any agreements ancillary thereto (if any), subject to any limitations of liability provisions and other provisions applicable to any such breach set forth therein; and (e) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the information statement or the registration statement of which the information statement is a part that relates solely to any assets owned, directly or indirectly by us, other than New Residential’s initial portfolio of assets. Any indemnification payments that we may be required to make could have a significantly negative effect on our liquidity and results of operations.

We completed the spin-off of New Senior Investment Group Inc., which we refer to in this Annual Report on Form 10-K as New Senior, in November 2014. The terms of the separation and distribution agreement dated October 16, 2014 between us and New Senior are substantially similar to the terms of the NRZ Separation and Distribution Agreement and therefore subjects us to similar risks.


16


Risks Related to Our Stock

We may be unable—or elect not—to pay dividends on our common or preferred stock in the future, which would negatively impact our business in a number of ways and decrease the price of our common and preferred stock.

As a result of the revocation of our REIT election, effective January 1, 2017, we are no longer required by the REIT rules to make distributions of substantially all of our net taxable income. Our board of directors elected not to pay common stock dividends for 2017 and 2018 to retain capital for growth. All future dividend distributions will be made at the discretion of our board of directors and will depend upon, among other things, our earnings, investment strategy, financial condition and liquidity, and such other factors as the board of directors deems relevant. No assurance can be given that we will pay any dividends on our common stock in the future.

We do not currently have unpaid accrued dividends on our preferred stock. However, to the extent we do, we cannot pay any dividends on our common stock, pay any consideration to repurchase or otherwise acquire shares of our common stock or redeem any shares of any series of our preferred stock without redeeming all of our outstanding preferred shares in accordance with the governing documentation. Consequently, the failure to pay dividends on our preferred stock restricts the actions that we may take with respect to our common stock and preferred stock. Moreover, if we do not pay dividends on any series of preferred stock for six or more periods, then holders of each affected series obtain the right to call a special meeting and elect two members to our board of directors. We cannot predict whether the holders of our preferred stock would take such action or, if taken, how long the process would take or what impact the two new directors on our board of directors would have on our company (other than increasing our director compensation costs). However, the election of additional directors would affect the composition of our board of directors and, thus, could affect the management of our business.

Maryland takeover statutes may prevent a change of our control, which could depress our stock price.

Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include certain mergers, consolidations, share exchanges, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities or a liquidation or dissolution. An interested stockholder is defined as:

any person who beneficially owns 10% or more of the voting power of the corporation’s outstanding shares; or
an affiliate or associate of a corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation.

A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder.

After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation voting together as a single group; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder voting together as a single voting group.

The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.


17


Our staggered board and other provisions of our charter and bylaws may prevent a change in our control.

Our board of directors is divided into three classes of directors. Directors of each class are chosen for three-year terms upon the expiration of their current terms, and each year one class of directors is elected by the stockholders. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our stockholders. In addition, our charter and bylaws also contain other provisions that may delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Our charter authorizes us to issue additional authorized but unissued shares of our common stock or preferred stock. In addition, our board of directors may classify or reclassify any unissued shares of our common stock or preferred stock and may set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may establish a series of preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Risks Related to Our Tax Status and the 1940 Act

In January 2013, we experienced an “ownership change” for purposes of Section 382 of the Code, which limits our ability to utilize our net operating loss and net capital loss carryforwards and certain built-in losses to reduce our future taxable income, potentially increases the net taxable income on which we must pay corporate-level taxes, and potentially adversely affects our liquidity, and we could experience another ownership change in the future or forgo otherwise attractive opportunities in order to avoid experiencing another ownership change.

As a result of our January 2013 “ownership change,” our future ability to utilize our net operating loss and net capital loss carryforwards to reduce our taxable income may be limited by certain provisions of the Code.

Specifically, the Code limits the ability of a company that undergoes an “ownership change” to utilize its net operating loss and net capital loss carryforwards and certain built-in losses to offset taxable income earned in years after the ownership change. An ownership change occurs if, during a three-year testing period, more than 50% of the stock of a company is acquired by one or more persons (or certain groups of persons) who own, directly or constructively, 5% or more of the stock of such company. An ownership change can occur as a result of a public offering of stock, as well as through secondary market purchases of our stock and certain types of reorganization transactions. Generally, when an ownership change occurs, the annual limitation on the use of net operating loss and net capital loss carryforwards and certain built-in losses is equal to the product of the applicable long-term tax exempt rate and the value of the company’s stock immediately before the ownership change. We have substantial net operating and net capital loss carry forwards which we have used, and will continue to use, to offset our taxable income. In January 2013, an “ownership change” for purposes of Section 382 of the Code occurred. Therefore, the provisions of Section 382 of the Code impose an annual limit on the amount of net operating loss and net capital loss carryforwards and built in losses that we can use to offset future taxable income.

The ownership change we experienced in January 2013 (and any subsequent ownership changes) could materially increase our income tax liability. As described above, the ownership change we experienced in January 2013 resulted in a limitation on our use of net operating losses and net capital loss carryforwards. These limitations could result in us incurring materially greater tax liability than if we had not undergone such an ownership change.

In addition, if we were to undergo an ownership change again in the future, our net operating losses and net capital loss carryforwards could become subject to additional limitations, which could result in us incurring materially greater tax liability than if we had not undergone such an ownership change. The determination of whether an ownership change has occurred or will occur is complicated and depends on changes in percentage stock ownership among stockholders. We adopted the Tax Benefits Preservation Plan described below in order to discourage an ownership change. However, there can be no assurance that the Tax Benefits Preservation Plan will prevent an ownership change. In addition, to the extent not prohibited by our charter, we may decide in the future that it is necessary or in our interest to take certain actions that could result in an ownership change. Therefore, no assurance can be provided as to whether an ownership change has occurred or will occur in the future.

Moreover, the potential negative consequences of the limitations that would result from an ownership change may discourage us from, among other things, redeeming our stock or issuing additional common stock to raise capital or to acquire businesses or assets. Accordingly, our desire to preserve our net operating losses and net capital loss carryforwards may cause us to forgo otherwise attractive opportunities.


18


Our Tax Benefits Preservation Plan could inhibit a change in our control that may otherwise be favorable to our stockholders.

In November 2018, our board of directors adopted a Tax Benefits Preservation Plan in an effort to protect against a possible limitation on our ability to use our net operating losses and net capital loss carryforwards by discouraging investors from acquiring ownership of our common stock in a manner that could trigger an “ownership change” for purposes of Sections 382 and 383 of the Code. Under the terms of the Tax Benefits Preservation Plan, in general, if a person or group acquires beneficial ownership of 4.9% or more of the outstanding shares of our Common Stock without prior approval of our board of directors or without meeting certain exceptions (an “Acquiring Person”), the rights would become exercisable and our stockholders (other than the Acquiring Person) will have the right to purchase securities from us at a discount to such securities’ fair market value, thus causing substantial dilution to the Acquiring Person. As a result, the Tax Benefits Preservation Plan may have the effect of inhibiting or impeding a change in control not approved by our board of directors and, notwithstanding its purpose, could adversely affect our stockholders’ ability to realize a premium over the then-prevailing market price for our common stock in connection with such a transaction. In addition, because our board of directors may consent to certain transactions, the Tax Benefits Preservation Plan gives our board of directors significant discretion over whether a potential acquirer’s efforts to acquire a large interest in us will be successful. There can be no assurance that the Tax Benefits Preservation Plan will prevent an “ownership change” within the meaning of Sections 382 and 383 of the Code, in which case we may lose all or most of the anticipated tax benefits associated with our prior losses.

We no longer qualify for taxation as a REIT for U.S. federal income tax purposes effective as of January 1, 2017, and there can be no assurance that the IRS will not challenge our previous REIT status.

Although we elected for U.S. federal income tax purposes to be treated as a REIT for the 2016 taxable year and in prior taxable years, we revoked our REIT election for the tax year beginning January 1, 2017 and intend to be treated as a regular “C corporation” for that year and any year in the foreseeable future, and, as a result, we will be unable to claim the United States federal income tax benefits associated with REIT status. Moreover, there can be no assurance that the IRS will not challenge our qualification as a REIT for years in which we intended to qualify as a REIT. Although we believe we did qualify as a REIT in each such year, if the IRS were to successfully challenge our previous REIT status, we would suffer adverse tax consequences, such as those described below.

For the 2017 and 2018 taxable years and future years (and for any prior year if we were to fail to qualify as a REIT in such year), we are generally subject to federal income tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial. Our decision to revoke our REIT election could also have other effects on any given stockholder, depending on its particular circumstances. For example, certain foreign investors that own large positions in our stock may be subject to less favorable rules under the Foreign Investment in Real Property Tax Act of 1980 following the revocation of our REIT election. Stockholders are urged consult their tax advisors regarding the effects to them of the revocation of our REIT elections in light of their particular circumstances.

Qualifying as a REIT involves highly technical and complex provisions of the Code, and our failure to qualify as a REIT for any taxable year through 2016 would result in higher taxes and reduced cash available for distribution to our stockholders.

As described above, we operated through December 31, 2016 in a manner intended to qualify us as a REIT for federal income tax purposes. Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification for such taxable years. Our qualification as a REIT depended on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements. Although we believe we satisfied those requirements, no assurance can be given in that regard.

Our failure to qualify as a REIT for a taxable year ending on or before December 31, 2015, would potentially give rise to a claim for damages from New Residential or New Senior.

In connection with the spin-off of New Residential, which was completed in May 2013, and the spin-off of New Senior which was completed in November 2014, we represented in the Separation Agreements that we had no knowledge of any fact or circumstance that would cause us to fail to qualify as a REIT. We also covenanted in the Separation Agreements to generally use our reasonable best efforts to maintain our REIT status for each of our taxable years ending on or before December 31, 2014 (in the case of New Residential) and December 31, 2015 (in the case of New Senior). If, notwithstanding our belief that we qualified as a REIT for such taxable years, we breached this representation or covenant, New Residential or New Senior, or both, could be able to seek damages from us, which could have a significantly negative effect on our liquidity and results of operations.


19


If New Residential failed to qualify as a REIT for 2013, or if New Senior failed to qualify as a REIT for 2014, it would significantly affect our ability to maintain our REIT status through December 31, 2016.

For federal income tax purposes, we recorded approximately $600 million of gain as a result of the spin-off of New Residential in May 2013 and $450 million of gain as a result of the spin-off of New Senior in November 2014. If New Residential qualified for taxation as a REIT for 2013, and if New Senior so qualified for 2014, that gain is qualifying income for purposes of our REIT income tests in such years. If, however, New Residential failed to qualify as a REIT for 2013, or if New Senior failed to so qualify in 2014, that gain would be non-qualifying income for purposes of the 75% gross income test. Although New Residential and New Senior covenanted in their respective separation and distribution agreements to use reasonable best efforts to qualify as a REIT in 2013 and 2014, respectively, no assurance can be given that they so qualified. If New Residential or New Senior failed to qualify in such years, it could cause us to fail our REIT income tests for such years, which could cause us to lose our REIT status prior to the revocation of our REIT election for 2017, and thereby materially negatively impact our business, financial condition and potentially impair our ability to continue operating in the future.

Tax matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.

Tax rates in the United States, state and local jurisdictions have been and may be subject to significant change. The future effective tax rate of the Company could be effected by changes in mix of earnings in different jurisdictions with differing statutory tax rates, changes in valuation of deferred tax asset and liabilities, or changes in tax laws or their interpretation, which includes recently enacted U.S. tax reform.

We are also subject to regular reviews, examinations and audits by the Internal Revenue Service and other taxing authorities. Although we believe the positions we have taken are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our results of operations and financial position.

Rapid changes in the values of assets that we hold may make it more difficult for us to maintain our exclusion from the 1940 Act.

If the market value or income potential of qualifying assets for purposes of our exclusion from registration as an investment company under the 1940 Act declines as a result of increased interest rates, changes in prepayment rates or other factors, or the market value or income potential from non-qualifying assets increases, we may need to increase our investments in qualifying assets and/or liquidate our non-qualifying assets to maintain our exclusion from registration under the 1940 Act. If the change in market values or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-qualifying assets we may own. We may have to make investment decisions that we otherwise would not make absent the intent to maintain our exclusion from registration under the 1940 Act.



20


Item 1B. Unresolved Staff Comments
We have no unresolved staff comments received more than 180 days prior to December 31, 2018.

Item 2. Properties.

Drive Shack Inc. leases principal executive and administrative offices located at 111 W. 19th Street, New York, NY 10011.

Entertainment Golf leases property for our Drive Shack Orlando location at 7285 Corner Drive, Orlando, FL 32827.

Our Traditional Golf executive office is located at 909 North Pacific Coast Hwy., Suite 650, El Segundo, CA 90245.

As of December 31, 2018, we own, lease or manage 66 golf properties located in 11 states, as shown in the following table by location, category and number of golf holes.

Owned Properties
Property Name
 
City
 
State
 
Category
 
Golf Holes
Bear Creek
 
Woodinville
 
WA
 
Private
 
18

Beaver Brook
 
Annandale
 
NJ
 
Public
 
18

Bradshaw Farm
 
Woodstock
 
GA
 
Public
 
27

Casta Del Sol
 
Mission Viejo
 
CA
 
Public
 
18

Gettysvue
 
Knoxville
 
TN
 
Private
 
18

Lomas Santa Fe (Executive)
 
Solana Beach
 
CA
 
Public
 
18

Marbella
 
SJ Capistrano
 
CA
 
Private
 
18

Rancho San Joaquin
 
Irvine
 
CA
 
Public
 
18

Rancocas
 
Willingboro
 
NJ
 
Public
 
18

Summitpointe
 
Milpitas
 
CA
 
Public
 
18

Tanoan
 
Albuquerque
 
NM
 
Private
 
27

Trophy Club of Atlanta
 
Alpharetta
 
GA
 
Public
 
18

Vista Valencia
 
Valencia
 
CA
 
Public
 
27



21


Leased Properties
Property Name
 
City
 
State
 
Category
 
Golf Holes
Buffalo Creek
 
Heath
 
TX
 
Public
 
18

Chester Washington
 
Los Angeles
 
CA
 
Public
 
18

Clearview
 
Bayside Queens
 
NY
 
Public
 
18

Coyote Hills
 
Fullerton
 
CA
 
Public
 
18

Diamond Bar
 
Diamond Bar
 
CA
 
Public
 
18

Dyker Beach
 
Brooklyn
 
NY
 
Public
 
18

El Dorado
 
Long Beach
 
CA
 
Public
 
18

Heartwell
 
Long Beach
 
CA
 
Public
 
18

Knollwood
 
Granada Hills
 
CA
 
Public
 
18

La Mirada
 
La Mirada
 
CA
 
Public
 
18

La Tourette
 
Staten Island
 
NY
 
Public
 
18

Lake Forest
 
Lake Forest
 
CA
 
Public
 
9

Lake Tahoe
 
S. Lake Tahoe
 
CA
 
Public
 
18

Lakewood
 
Lakewood
 
CA
 
Public
 
18

Lely
 
Naples
 
FL
 
Private
 
54

Los Coyotes
 
Buena Park
 
CA
 
Private
 
27

Los Verdes
 
Rancho PV
 
CA
 
Public
 
18

Mission Trails
 
San Diego
 
CA
 
Public
 
18

Monarch Bay
 
San Leandro
 
CA
 
Public
 
27

Mountain Meadows
 
Pomona
 
CA
 
Public
 
18

MountainGate
 
Los Angeles
 
CA
 
Private
 
27

National City
 
National City
 
CA
 
Public
 
9

Pelham Split Rock
 
Bronx
 
NY
 
Public
 
36

Recreation Park 18
 
Long Beach
 
CA
 
Public
 
18

Recreation Park 9
 
Long Beach
 
CA
 
Public
 
9

San Dimas
 
San Dimas
 
CA
 
Public
 
18

Saticoy
 
Ventura
 
CA
 
Public
 
9

Scholl Canyon
 
Glendale
 
CA
 
Public
 
18

Sea Cliff
 
Huntington Bch
 
CA
 
Private
 
18

Skylinks
 
Long Beach
 
CA
 
Public
 
18

South Shore
 
Staten Island
 
NY
 
Public
 
18

Tecolote Canyon
 
San Diego
 
CA
 
Public
 
18

Tilden Park
 
Berkeley
 
CA
 
Public
 
18

Vineyard at Escondido
 
Escondido
 
CA
 
Public
 
18

Waterview
 
Rowlett
 
TX
 
Public
 
18

Whittier Narrows
 
Rosemead
 
CA
 
Public
 
27



22


Managed Properties

Property Name
 
City
 
State
 
Category
 
Golf Holes
Fullerton
 
Fullerton
 
CA
 
Public
 
18

Brookside
 
Pasadena
 
CA
 
Public
 
36

Canyon Oaks
 
Chico
 
CA
 
Private
 
18

El Camino
 
Oceanside
 
CA
 
Private
 
18

Monterey
 
Palm Desert
 
CA
 
Private
 
27

Palm Valley
 
Palm Desert
 
CA
 
Private
 
36

Sunset Hills
 
Thousand Oaks
 
CA
 
Private
 
18

Wood Ranch
 
Simi Valley
 
CA
 
Private
 
18

Oregon Golf Club
 
West Linn
 
OR
 
Private
 
18

Plantation
 
Boise
 
ID
 
Private
 
18

John A White
 
Atlanta
 
GA
 
Public
 
9

Lomas Santa Fe
 
Solana Beach
 
CA
 
Private
 
18

Paradise Knolls
 
Riverside
 
CA
 
Public
 
18

Santa Clara
 
Santa Clara
 
CA
 
Public
 
18

Tustin Ranch
 
Tustin
 
CA
 
Public
 
18

Westchester
 
Los Angeles
 
CA
 
Public
 
18

Yorba Linda
 
Yorba Linda
 
CA
 
Private
 
18


We maintain our properties in good condition and believe that our current facilities are adequate to meet the present needs of our business. We do not believe any individual property is material to our financial condition or results of operations.

Item 3. Legal Proceedings.

We exited a leased property and accrued related lease exit costs of approximately $0.8 million in December 2016. The Company subsequently entered into a legal dispute related to this golf property and settled the dispute in July 2018. (See Part II, Item 8. "Financial Statements and Supplementary Data - Note 13 Commitments and Contingencies").

In 2019, a former employee filed a class action complaint against the Company alleging that our Traditional Golf properties in the State of New York did not comply with state wage and hour laws. (See Part II, Item 8. "Financial Statements and Supplementary Data - Note 16 Subsequent Events").

We are and may become involved in legal proceedings, including but not limited to regulatory investigations and inquiries, in the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, regulatory investigation or inquiry, in the opinion of management, we do not expect our current or threatened legal proceedings to have a material adverse effect on our business, financial position or results of operations. Given the inherent unpredictability of these types of proceedings, however, it is possible that future adverse outcomes could have a material effect on our business, financial position or results of operations.

Item 4. Mine Safety Disclosures

None.


23


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
The following graph compares the cumulative total return for the Company’s common stock (stock price change plus reinvested dividends) with the comparable return of four indices: NAREIT All REIT, Russell 2000, NAREIT Mortgage REIT and S&P 500. The graph assumes an investment of $100 in the Company’s common stock and in each of the indices on December 31, 2013, and that all dividends were reinvested. The past performance of the Company’s common stock is not an indication of future performance. The Company’s historical stock price has been adjusted to take into consideration the impact of the spin-off of New Media Investment Group Inc., which we refer to in this Annual Report on Form 10-K as New Media, in February 2014 and New Senior in November 2014.  The Company’s share price has also been adjusted to take into consideration the impact of the 1-for-3 reverse stock split in August 2014 and the 1-for-2 reverse stock split in October 2014.
performancegraph2018.jpg
We have one class of common stock, which has been listed and is traded on the NYSE under the symbol “DS” since our initial public offering in October 2002.

Our board of directors elected not to pay common stock dividends for 2017 and 2018 to retain capital for growth. All future dividend distributions will be made at the discretion of our board of directors and will depend upon, among other things, our earnings,

24


investment strategy, financial condition and liquidity, and such other factors as the board of directors deems relevant. We may declare quarterly distributions on our preferred stock at the discretion of our board of directors. The Company declared and paid preferred dividends in the amount of $5.6 million for both 2017 and 2018.

On March 1, 2019, the closing sale price for our common stock, as reported on the NYSE, was $4.47. As of March 1, 2019, there were approximately 20 record holders of our common stock. This number does not reflect the beneficial owners of shares held in nominee name by record holders on their behalf.

Nonqualified Option and Incentive Award Plans

See Note 11 in Part II, Item 8. “Financial Statements and Supplementary Data” for further information.

Equity Compensation Plan Information

The following table summarizes certain information about securities authorized for issuance under our equity compensation plans as of December 31, 2018:
Plan Category
 
(a) Number of Securities to be
Issued Upon Exercise of
Outstanding Options, Warrants and Rights
 
(b) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights
 
(c) Number of Securities Remaining
Available for Future Issuance
Under Equity
Compensation Plans (Excluding Securities Reflected in Column (a)
 
Equity Compensation Plans Approved by Security Holders:
 
 
 
 
 
 
 
Newcastle Investment Corp. Nonqualified Stock Option and Incentive Award Plan
 
862,601

 
$
1.00

 

 
2012 Newcastle Investment Corp. Nonqualified Stock Option and Incentive Award Plan
 
2,893,078

 
2.45

 
25,820

(D)
2014 Newcastle Investment Corp. Nonqualified Stock Option and Incentive Award Plan
 
765,416

 
4.01

 

(E)
2015 Newcastle Investment Corp. Nonqualified Option and Incentive Award Plan
 
333

 
3.78

 

(F)
Drive Shack Inc. 2018 Omnibus Incentive Plan
 
184,787

(A)
5.44

(C)
1,146,422

(G)
Total Approved
 
4,706,215

(B)
$
2.52

(C)
1,172,242

 

Equity Compensation Plans Not Approved by Security Holders:
 
 
 
 
 
 
 
November 2013 Manager Option Award
 
489,148

 
$
3.57

 

 
2018 Employment Inducement Award
 
3,296,209

 
5.44

 

 
Total Not Approved
 
3,785,357

 
$
5.20

 

 

See notes to table below.

(A)
Includes (i) 130,146 options granted to our officers and (ii) 54,641 RSUs granted to our directors, other than Mr. Wesley R. Edens, representing the aggregate annual automatic stock awards to each such director for the periods subsequent to the adoption of the 2018 Plan.

(B)
Includes options relating to (i) 2,216,105 shares held by an affiliate of the former Manager; (ii) 2,304,990 shares granted to the former Manager and assigned to certain of Fortress’s former employees, (iii) 333 options and 54,641 RSUs granted to our directors, other than Mr. Edens, and (iv) 130,146 options granted to our officers.

(C)
Represents the weighted average exercise price of the 130,146 options reported in column (a), does not include the 54,641 RSUs.

(D)
The maximum available for issuance is 3,333,333 shares in the aggregate over the term of the 2012 Plan and no award shall be granted on or after May 7, 2022 (but awards granted may extend beyond this date).  The number of securities remaining available for future issuance is net of (i) an aggregate of 13,312 shares of our common stock awards to our directors, other than Mr. Edens, representing the aggregate annual automatic stock

25


awards to each such director for the periods subsequent to the adoption of the 2012 Plan and prior to the adoption of the 2014 Plan and (ii) an aggregate of 3,294,201 options which have been previously granted under the plan.

(E)
The maximum available for issuance was 166,666 shares in the aggregate over the term of the 2014 Plan and no award (other than a tandem award) may be granted after April 8, 2015 (but awards granted may extend beyond that date).

(F)
The maximum available for issuance was 300,000 shares in the aggregate over the term of the 2015 Plan and no award (other than a tandem award) may be granted after April 16, 2016 (but awards granted may extend beyond that date).

(G)
The maximum available for issuance is 1,339,542 in the aggregate from May 25, 2018 - May 24, 2019, out of a total of 6,697,710 in the aggregate over the entire five-year term of the 2018 Plan. The number of securities remaining available for issuance during this period is net of (i) an aggregate of 130,146 options granted to our officers, (ii) 8,333 shares granted to a certain director under the Director Stock Program and (iii) 54,641 RSUs granted to our directors, other than Mr. Edens, representing the aggregate annual automatic stock awards to each such director for the periods subsequent to the adoption of the 2018 Plan.

Material Features of the Equity Compensation Plans Not Approved by Security Holders

November 2013 Manager Option Award

In November 2013, options to acquire a total of 489,148 shares of the Company’s common stock were granted to an affiliate of the former Manager as compensation to the former Manager for its successful efforts in raising capital for the Company. The options have a per-share exercise price of $3.57. The options were fully vested on the date of grant and became exercisable over
a 30-month period in equal monthly installments beginning on the first of each month following the month in which the options
were granted.

2018 Employment Inducement Award

The Company’s Chief Executive Officer, or the CEO, received a grant of options to acquire a total of 3,296,209 shares of the Company’s common stock, effective as of November 12, 2018, that were not granted under an equity compensation plan approved by security holders. The options have a per-share exercise price of $5.44. The options are generally subject to vesting in equal annual installments over a three-year period based on the CEO's continued employment with the Company, subject to accelerated vesting of the options that would vest on the next vesting date upon a termination of the CEO's employment by the Company without “cause,” by the CEO for “good reason” or as a result of his death or “disability” (each as defined in the CEO's employment agreement).


26


Item 6. Selected Financial Data.

The following table presents our selected consolidated financial information as of and for the years ended 2018, 2017, 2016, 2015 and 2014 and other data. The Consolidated Statements of Operations data for the years ended December 31, 2018, 2017 and 2016 and the Consolidated Balance Sheets data as of December 31, 2018 and 2017 have been derived from our audited historical Consolidated Financial Statements included elsewhere herein. The Consolidated Statements of Operations data for the year ended December 31, 2015 and 2014 and the Consolidated Balance Sheets data as of December 31, 2016, 2015 and 2014 have been derived from our Consolidated Financial Statements not included elsewhere herein.

The information below should be read in conjunction with Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and notes thereto included in Part II, Item 8. “Financial Statements and Supplementary Data.”

Selected Consolidated Financial Information
(in thousands, except per share data) (A)

 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Operating Data
 
 
 
 
 
 
 
 
 
Total revenues
$
314,369

 
$
292,594

 
$
298,880

 
$
295,856

 
$
291,537

Total operating costs
340,803

 
337,505

 
338,054

 
318,097

 
276,220

Operating (loss) income
(26,434
)
 
(44,911
)
 
(39,174
)
 
(22,241
)
 
15,317

Other income (expenses)
(11,965
)
 
3,675

 
116,699

 
43,494

 
52,474

(Loss) income from continuing operations before income tax
(38,399
)
 
(41,236
)
 
77,525

 
21,253

 
67,791

Income tax expense
284

 
965

 
189

 
345

 
208

(Loss) income from continuing operations
(38,683
)
 
(42,201
)
 
77,336

 
20,908

 
67,583

Income (loss) from discontinued operations, net of tax

 

 

 
646

 
(35,189
)
Net (loss) income
(38,683
)
 
(42,201
)
 
77,336

 
21,554

 
32,394

Preferred dividends
(5,580
)
 
(5,580
)
 
(5,580
)
 
(5,580
)
 
(5,580
)
Net (income) loss attributable to noncontrolling interest

 

 
(257
)
 
293

 
852

(Loss) Income Applicable to Common Stockholders
$
(44,263
)
 
$
(47,781
)
 
$
71,499

 
$
16,267

 
$
27,666

 
 
 
 
 
 
 
 
 
 
(Loss) Income Applicable to Common Stock, per share
 
 
 
 
 
 
 
 
 
Basic
$
(0.66
)
 
$
(0.71
)
 
$
1.07

 
$
0.24

 
$
0.45

Diluted
$
(0.66
)
 
$
(0.71
)
 
$
1.04

 
$
0.24

 
$
0.44

(Loss) Income from Continuing Operations per share of Common Stock, after preferred dividends and noncontrolling interest
 
 
 
 
 
 
 
 
 
Basic
$
(0.66
)
 
$
(0.71
)
 
$
1.07

 
$
0.23

 
$
1.02

Diluted
$
(0.66
)
 
$
(0.71
)
 
$
1.04

 
$
0.23

 
$
1.00

Income (Loss) from Discontinued Operations per share of Common Stock
 
 
 
 
 
 
 
 
 
Basic
$

 
$

 
$

 
$
0.01

 
$
(0.57
)
Diluted
$

 
$

 
$

 
$
0.01

 
$
(0.57
)
Weighted Average Number of Shares of Common Stock Outstanding
 
 
 
 
 
 
 
 
 
Basic
66,993,543

 
66,903,457

 
66,709,925

 
66,479,321

 
61,500,913

Diluted
66,993,543

 
66,903,457

 
68,788,440

 
68,647,915

 
63,131,227

Dividends declared per share of common stock
$

 
$

 
$
0.48

 
$
0.48

 
$
1.92

 



27


 
As of December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Balance Sheet Data
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
79,235

 
$
167,692

 
$
140,140

 
$
45,651

 
$
73,727

Property and equipment, net
132,605

 
241,258

 
217,611

 
227,907

 
239,283

Assets of discontinued operations

 

 

 

 
6,803

Total assets
401,947

 
536,648

 
1,171,958

 
1,467,982

 
1,761,906

Total debt
67,178

 
167,965

 
767,465

 
970,842

 
1,314,840

Liabilities of discontinued operations

 

 

 

 
447

Total liabilities
267,280

 
365,597

 
953,891

 
1,257,860

 
1,503,578

Common stockholders’ equity
73,084

 
109,468

 
156,484

 
148,796

 
196,709

Preferred stock
61,583

 
61,583

 
61,583

 
61,583

 
61,583

Noncontrolling interest

 

 

 
(257
)
 
36

 
 
 
 
 
 
 
 
 
 
Supplemental Balance Sheet Data
 
 
 
 
 
 
 
 
 
Common shares outstanding
67,027,104

 
66,977,104

 
66,824,304

 
66,654,598

 
66,424,508

Book value per share of common stock
$
1.09

 
$
1.63

 
$
2.34

 
$
2.23

 
$
2.96


(A)
Selected consolidated financial information includes the impact of the spin-offs of New Media and New Senior and the sale of the commercial real estate properties in Beavercreek, OH. For all periods presented, the assets, liabilities and results of operations are presented separately in discontinued operations.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following should be read in conjunction with our Consolidated Financial Statements and notes thereto included in Part II, Item 8. “Financial Statements and Supplementary Data,” and Part I, Item 1A. “Risk Factors.”

General
The Company is a leading owner and operator of golf-related leisure and dining and entertainment businesses. Our common stock is traded on the NYSE under the symbol “DS.” Through January 1, 2018, we were externally managed and advised by an affiliate of Fortress Investment Group LLC, or Fortress (the former “Manager”). On December 21, 2017, we entered into definitive agreements with the Manager to internalize our management (the “Internalization”), effective January 1, 2018.
For further information relating to our business, see “Item 1. Business.”
We report our business through the following segments: (i) Entertainment Golf, (ii) Traditional Golf and (iii) corporate.

Market Considerations
Our ability to execute our business strategy, particularly the development of our Entertainment Golf business, depends to a degree on our ability to monetize our remaining investments, optimize our Traditional Golf business, including sales of certain owned properties, and obtain additional capital. We have substantially monetized the remaining loans and securities. We last raised capital through the equity markets in 2014, and rising interest rates or stock market volatility could impair our ability to raise equity capital on attractive terms.
Our ability to generate income is dependent on, among other factors, our ability to raise capital and finance properties on favorable terms, deploy capital on a timely basis at attractive returns, and exit properties at favorable yields.  Market conditions outside of our control, such as interest rates, inflation, consumer discretionary spending and stock market volatility affect these objectives in a variety of ways.
Entertainment Golf Business

We opened our inaugural venue in Orlando, Florida on April 7, 2018 and are in the construction and development phase for six additional sites, as well as in the process of exploring sites for additional Entertainment Golf venues. There is competition within the bid process, and land development and construction are subject to obtaining the necessary regulatory approvals. Delays in these processes could impact our business. In addition, similar to our Traditional Golf business, trends in consumer spending, as well as climate and weather patterns, could have an impact on the markets in which we currently or will in the future operate.


28


Traditional Golf Business
With respect to our Traditional Golf business, trends in consumer discretionary spending, as well as climate and weather patterns, have a significant impact on the markets in which we operate. Traditional Golf is subject to seasonal fluctuations caused by significant reductions in golf activities due to shorter days and colder temperatures in the first and fourth quarters of each year.  Consequently, a significantly larger portion of our revenue from our Traditional Golf operations is earned in the second and third quarters of our fiscal year. In addition, severe weather patterns can also negatively impact our results of operations.
While consumer spending in the Traditional Golf industry has not grown in recent years, we believe improving economic conditions and improvements in local housing markets have helped and will continue to help drive membership growth and increase the number of golf rounds played. In addition, we believe growth in related industries, including leisure, fitness and entertainment, may positively impact our Traditional Golf business.

Application of Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles or GAAP. The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. 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 described below 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 below to materially change in the future.
A summary of our significant accounting policies is presented in Note 2 to our Consolidated Financial Statements, which appear in Part II, Item 8. “Financial Statements and Supplementary Data.” The following is a summary of our accounting policies that are most affected by judgments, estimates and assumptions.

Impairment of Property and Equipment and Intangible Assets

Real estate and long-lived assets are tested for potential impairment when changes in circumstances indicate the carrying amount of the assets, or other appropriate grouping of assets, may not be fully recoverable. Indicators of impairment include material adverse changes in the projected revenues and expenses, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. An impairment is determined to have occurred if the future net undiscounted cash flows expected to be generated is less than the carrying value of an asset. The impairment is measured as the difference between the carrying value and the fair value. Significant judgment is required both in determining impairment and in estimating the fair value. We may use assumptions and estimates derived from a review of our operating results, business projections, expected growth rates, discount rates, and tax rates. We also make certain assumptions about future economic conditions, interest rates, and other market data. Many of the factors used in these assumptions and estimates are outside the control of management, and can change in future periods.

We assess the potential impairment of our intangible assets with definite lives, when changes in circumstances indicate the carrying amount of the assets, or other appropriate grouping of assets, may not be fully recoverable. The assessment of recoverability is based on comparing management’s estimates of 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. Factors leading to impairment include significant under-performance relative to historical or projected results, significant changes in the manner of use of the acquired assets or the strategy for our overall business and significant negative industry or economic trends.

Membership Deposit Liabilities

In our Traditional Golf business, private country club members generally pay an advance initiation fee deposit upon their acceptance as a member to the their 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

29


membership, which is estimated to be seven years. The determination of the estimated average expected life of an active membership is based on company-specific historical data and involves judgment and estimation. 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, net in the Consolidated Statements of Operations.
Valuation of Securities

Fair value of securities is based on an internal model and involves significant judgement. The inputs to our model includes discount rates, prepayment speeds, default rates and severity assumptions.
See Note 10 to our Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” for information regarding the fair value of our investments, and respective estimation methodologies, as of December 31, 2018.
Impairment of Securities and Other Investments

Temporary declines in value generally result from changes in market factors, such as market interest rates and credit spreads, or from certain macroeconomic events, including market disruptions and supply changes, which do not directly impact our ability to collect amounts contractually due. We continually evaluate the credit status of each of our securities and the collateral supporting our securities. This evaluation includes a review of the credit of the issuer of the security (if applicable), the credit rating of the security, the key terms of the security (including credit support), debt service coverage and loan to value ratios, the performance of the pool of underlying loans and the estimated value of the collateral supporting such loans, including the effect of local, industry and broader economic trends and factors. These factors include loan default expectations and loss severities, which are analyzed in connection with a particular security’s credit support, as well as prepayment rates. These factors are also analyzed in relation to the amount of the unrealized loss and the period elapsed since it was incurred. The result of this evaluation is considered when determining management’s estimate of cash flows, particularly with respect to developing the necessary inputs and assumptions. Each security is impacted by different factors and in different ways; generally the more negative factors which are identified with respect to a given security, the more likely we are to determine that we do not expect to receive all contractual payments when due with respect to that security. Significant judgment is required in this analysis.

We evaluate our other investments for impairment whenever events or changes in circumstances indicate that the carrying amount 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.  

Stock-based Compensation

We account for stock-based compensation for options in accordance with the fair value recognition provisions, under which we use the Black-Scholes option valuation model, which requires the input of subjective assumptions. These assumptions include expected volatility, expected dividend yield of our stock, expected term of the awards and the risk-free interest rate.

Recent Accounting Pronouncements

See Note 2 in Part II, Item 8. “Financial Statements and Supplementary Data” for information about recent accounting pronouncements.

30


Results of Operations
The following tables summarize the changes in our consolidated results of operations from year-to-year (dollars in thousands):
Comparison of Results of Operations for the years ended December 31, 2018 and 2017
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
Revenues
 
 
 
 
 
 


Golf operations
$
244,646

 
$
221,737

 
$
22,909

 
10.3
 %
Sales of food and beverages
69,723

 
70,857

 
(1,134
)
 
(1.6
)%
Total revenues
314,369

 
292,594

 
21,775

 
7.4
 %
 
 
 
 
 
 
 


Operating costs
 
 
 
 


 


Operating expenses
251,794

 
232,796

 
18,998

 
8.2
 %
Cost of sales - food and beverages
20,153

 
20,959

 
(806
)
 
(3.8
)%
General and administrative expense
38,560

 
31,413

 
7,147

 
22.8
 %
Management fee and termination payment to affiliate

 
21,410

 
(21,410
)
 
(100.0
)%
Depreciation and amortization
19,704

 
24,304

 
(4,600
)
 
(18.9
)%
Pre-opening costs
2,483

 
320

 
2,163

 
N.M.

Impairment
8,240

 
60

 
8,180

 
N.M.

Realized and unrealized (gain) loss on investments
(131
)
 
6,243

 
(6,374
)
 
(102.1
)%
Total operating costs
340,803

 
337,505

 
3,298

 
1.0
 %
Operating loss
(26,434
)
 
(44,911
)
 
(18,477
)
 
(41.1
)%
 
 
 
 
 


 


Other income (expenses)
 
 
 
 
 
 


Interest and investment income
1,794

 
23,162

 
(21,368
)
 
(92.3
)%
Interest expense, net
(16,639
)
 
(19,581
)
 
(2,942
)
 
(15.0
)%
Other income, net
2,880

 
94

 
2,786

 
N.M

Total other income (loss)
(11,965
)
 
3,675

 
(15,640
)
 
(425.6
)%
 
 
 
 
 
 
 
 
Loss before income tax
$
(38,399
)
 
$
(41,236
)
 
$
2,837

 
(6.9
)%
N.M. – Not meaningful
Revenues from Golf Operations
Revenues from golf operations increased by $22.9 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to increases of: (i) $22.1 million due to management contract reimbursements reported on a gross basis under the new revenue standard adopted prospectively on January 1, 2018, (ii) $6.6 million of improvements in the Traditional Golf business for properties in operation at both December 31, 2018 and December 31, 2017 including growth in members and in rounds played, and (iii) $2.2 million related to our Entertainment Golf venue opened in Orlando, Florida in 2018, partially offset by a decrease of $7.9 million as a result of fewer Traditional Golf properties owned or operated in 2018.

Sales of Food and Beverages

Sales of food and beverages decreased by $1.1 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to a decrease of $4.1 million as a result of fewer Traditional Golf properties owned or operated in 2018, partially offset by an increase of $2.7 million related to our Entertainment Golf venue opened in Orlando, Florida in 2018 and a $0.3 million increase in the Traditional Golf business for properties in operation at both December 31, 2018 and December 31, 2017
Operating Expenses

Operating expenses increased by $19.0 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to increases of: (i) $22.1 million in management contract expenses reported under the new revenue standard adopted on January 1, 2018, (ii) $5.4 million related to our Entertainment Golf venue opened in Orlando, Florida in 2018, partially offset by (iii) a decrease of $8.5 million due to fewer Traditional Golf properties owned or operated in 2018.


31


Cost of Sales - Food and Beverages

Cost of sales - food and beverages decreased by $0.8 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to a $1.4 million decrease in the Traditional Golf business for properties no longer owned or operated as of December 31, 2018, partially offset by $0.6 million of food and beverage costs incurred at our Entertainment Golf venue opened in Orlando, Florida in 2018.
General and Administrative Expense (including Acquisition and Transaction Expense)

General and administrative expense increased by $7.1 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to payroll-related expenses in our Entertainment Golf and corporate segments as a result of the Internalization effective January 1, 2018.
Management Fee and Termination Payment to Affiliate

Management fee and termination payment to affiliate decreased by $21.4 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 due to the Internalization effective January 1, 2018.

Depreciation and Amortization

Depreciation and amortization decreased by $4.6 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to discontinuation of depreciation on the Traditional Golf real estate assets classified as held-for-sale in March 2018, partially offset by depreciation on assets placed into service at our Entertainment Golf venue in Orlando, Florida.

Pre-Opening Costs

Pre-opening costs were $2.5 million during the year ended December 31, 2018 compared to $0.3 million during the year ended December 31, 2017. Pre-opening costs in 2018 were primarily due to: (i) payroll-related expenses incurred in connection with the opening of our Entertainment Golf venue in Orlando, Florida in April 2018 and (ii) pre-opening rent expense for three additional Entertainment Golf venues under construction as of December 31. 2018.
Impairment
Impairment increased by $8.2 million during the year ended December 31, 2018 compared to a loss during the year ended December 31, 2017. Impairment in 2018 consisted primarily of $7.0 million due to impairment on five Traditional Golf properties that were held-for-sale in March 2018 and on three under-performing Traditional Golf properties.
Realized and Unrealized (Gain) Loss on Investments

Realized and unrealized (gain) loss on investments increased by $6.4 million to a gain during the year ended December 31, 2018 compared to the year ended December 31, 2017. During the year ended December 31, 2018, we recorded a net realized gain on the mark-to-market value of derivatives. During the year ended December 31, 2017, we recorded a net realized loss of $0.4 million on the sale of agency RMBS, an unrealized loss of $0.6 million on the mark-to-market of agency RMBS, a realized loss of $4.7 million on the sale of derivatives and an unrealized loss of $0.7 million on the mark-to-market on the value of derivatives.
Interest and Investment Income

Interest and investment income decreased by $21.4 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to decreases of: (i) $8.0 million in interest income earned from agency RMBS which were sold in August 2017, (ii) $5.5 million on the accretion of discount recognized on a resorts-related loan, (iii) $8.5 million of paid-in-kind interest earned on a resorts-related loan due to the full repayment in August 2017, partially offset by (iii) $0.6 million in interest earned on overnight cash deposits.
Interest Expense, net

Interest expense, net decreased by $2.9 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to a decrease in interest expense related to repurchase agreements on agency RMBS which were repaid in August 2017.

32


Other Income, Net

Other income, net increased by $2.8 million from $0.1 million for the year ended December 31, 2017 to $2.9 million for the year ended December 31, 2018 primarily due to: (i) a $9.0 million increase primarily due to gain on sales of long-lived assets and intangibles partially offset by (ii) $0.8 million in higher losses on Traditional Golf lease modifications and terminations, (iii) $1.2 million in higher losses on debt extinguishment and (iii) $4.3 million of higher losses primarily due to the settlement of a legal dispute and related discharge of liabilities assumed by the counterparty to the settlement.


Comparison of Results of Operations for the years ended December 31, 2017 and 2016
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
%
Revenues
 
 
 
 
 
 
 
Golf operations
$
221,737

 
$
226,255

 
$
(4,518
)
 
(2.0
)%
Sales of food and beverages
70,857

 
72,625

 
(1,768
)
 
(2.4
)%
Total revenues
292,594

 
298,880

 
(6,286
)
 
(2.1
)%
 
 
 
 
 
 
 
 
Operating costs
 
 
 
 
 
 
 
Operating expenses
232,796

 
239,021

 
(6,225
)
 
(2.6
)%
Cost of sales - food and beverages
20,959

 
21,593

 
(634
)
 
(2.9
)%
General and administrative expense
31,413

 
29,174

 
2,239

 
7.7
 %
Management fee and termination payment to affiliate
21,410

 
10,704

 
10,706

 
100.0
 %
Depreciation and amortization
24,304

 
26,496

 
(2,192
)
 
(8.3
)%
Pre-opening costs
320

 

 
320

 
N.M.

Impairment
60

 
10,381

 
(10,321
)
 
(99.4
)%
Realized and unrealized loss on investments
6,243

 
685

 
5,558

 
N.M

Total operating costs
337,505

 
338,054

 
(549
)
 
(0.2
)%
Operating loss
(44,911
)
 
(39,174
)
 
5,737

 
14.6
 %
 
 
 
 
 
 
 
 
Other income (expenses)
 
 
 
 
 
 
 
Interest and investment income
23,162

 
91,291

 
(68,129
)
 
(74.6
)%
Interest expense, net
(19,581
)
 
(52,868
)
 
(33,287
)
 
(63.0
)%
Gain on deconsolidation

 
82,130

 
(82,130
)
 
N.M.

Other income (loss), net
94

 
(3,854
)
 
(3,948
)
 
(102.4
)%
Total other income
3,675

 
116,699

 
(113,024
)
 
(96.9
)%
 
 
 
 
 
 
 
 
(Loss) income before income tax
$
(41,236
)
 
$
77,525

 
$
(118,761
)
 
(153.2
)%
N.M. – Not meaningful

Revenues from Golf Operations
Revenues from golf operations decreased by $4.5 million during the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to: (i) a $7.5 million decrease from properties that were exited in 2016 and (ii) a $3.3 million decrease in green fee and cart rental revenue primarily as a result of unfavorable weather conditions, especially in California, partially offset by (iii) a $4.0 million increase due to additional initiation fees from new member sales and higher membership dues rates and (iv) a $2.3 million increase in net driving range revenues at public golf properties as a result of the continued member growth of The Players Club program.

Sales of Food and Beverages

Sales of food and beverages decreased by $1.8 million during the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to a decrease from properties that were exited in 2016.

33


Operating Expenses
Operating expenses decreased by $6.2 million during the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to: (i) a $9.0 million decrease from properties that were exited in 2016, partially offset by (ii) a $2.2 million increase in course cleanup, repairs and maintenance primarily due to hurricane-related damage and (iii) a $0.4 million increase in legal costs.

Cost of Sales - Food and Beverages

Cost of sales - food and beverages decreased by $0.6 million during the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to a decrease from properties that were exited in 2016.
General and Administrative Expense (including Acquisition and Transaction Expense)
General and administrative expense increased by $2.2 million during the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to an increase of $5.7 million related to the development of the Entertainment Golf business, offset by decreases of $2.2 million in corporate professional fees and $0.7 million in Traditional Golf transaction expenses.
Management Fee and Termination Payment to Affiliate

Management fee and termination payment to affiliate increased $10.7 million during the year ended December 31, 2017 compared to the year ended December 31, 2016 due to the payment in connection with the termination of the Management Agreement.
Depreciation and Amortization
Depreciation and amortization expense decreased by $2.2 million during the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to certain assets being fully depreciated in 2016 from scheduled lease expirations partially offset by an increase in depreciation from additional capital leases.
Impairment
The impairment of $0.1 million during the year ended December 31, 2017 is due to valuation allowance recorded on a residential mortgage loan. The impairment of $10.4 million during the year ended December 31, 2016 is primarily due to: (i) a $3.9 million valuation allowance on a corporate loan, (ii) a $0.2 million valuation allowance on two residential mortgage loans, (iii) a $0.1 million other-than-temporary impairment charge on a CMBS security, (iv) a $3.6 million impairment on one golf property when we reclassified the property to held-for-sale and (v) a $2.6 million impairment charge related to two golf properties.
Realized and Unrealized (Gain) Loss on Investments
The realized and unrealized (gain) loss on investments increased by $5.6 million during the year ended December 31, 2017 compared to the year ended December 31, 2016. During the year ended December 31, 2017, we recorded: (i) a net realized loss of $0.4 million on the sale of Agency RMBS, (ii) an unrealized loss of $0.6 million on the mark-to-market value of Agency RMBS, (iii) a realized loss of $4.6 million on the settlement of derivatives and (iv) an unrealized loss of $0.6 million on the mark-to-market value of derivatives. During the year ended December 31, 2016, we recorded: (i) an $8.3 million loss on the sale of Agency RMBS, (ii) a $10.7 million gain on the sale of CDO bonds, (iii) a $0.5 million gain on non-Agency RMBS, (iv) an $18.3 million gain associated with the settlement of derivatives, (v) a $1.2 million unrealized gain associated with derivatives and (vi) a $23.1 million unrealized loss on Agency RMBS due to a change to an intent to sell.
Interest and Investment Income
Interest and investment income decreased by $68.1 million during the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to: (i) a $33.2 million decrease related to our subprime mortgage loan call option, which was sold in the fourth quarter of 2016, (ii) a $20.5 million decrease of PIK interest earned on a resorts-related loan as a result of a pay down in the third quarter of 2016 and final pay down in the third quarter of 2017, (iii) a $5.0 million decrease on the accretion of discount recognized on a resorts-related loan and (iv) a $10.2 million decrease in real estate securities and loans, offset by an increase of $0.8 million in corporate bank interest.
Interest Expense, Net
Interest expense, net decreased by $33.3 million during the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to: (i) a $33.2 million decrease related to our subprime mortgage loan call option which was sold in the fourth quarter of 2016, (ii) a $1.7 million decrease due to lower average balance of repurchase agreements on agency RMBS, (iii) a $0.6

34


million decrease as a result of a lower weighted average coupon on the junior subordinated notes payable, offset by (iv) an increase of $2.2 million on the financings related to the Traditional Golf business.
Gain on Deconsolidation

The gain on deconsolidation of $82.1 million during the year ended December 31, 2016 is related to the deconsolidation of CDO VI. There were no deconsolidations during the year ended December 31, 2017.
Other Income (Loss), Net
Other income (loss), net increased by $3.9 million during the year ended December 31, 2017 compared to the year ended December 31, 2016 due in part to: (i) a $2.9 million writedown on our equity method investment during the year ended December 31, 2016; (ii) a decrease of $0.9 million in disposal related expenses in the Traditional Golf business during the year ended December 31, 2017 as compared to the year ended December 31, 2016 and (iii) a $0.5 million decrease in loss on extinguishment of debt due to fewer write-offs of Traditional Golf liabilities; partially offset by decreases in collateral management fee income and decreases from the disposal of legacy assets.





35


Liquidity and Capital Resources
Overview
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings and fund capital for our Entertainment and Traditional Golf businesses and other general business needs.
Our primary sources of funds for liquidity consist of cash on hand, sales or repayments of assets (including sales of our owned golf properties), and potential issuance of new debt or equity securities, when feasible. We have the ability to publicly or privately issue common stock, preferred stock, depository shares, debt securities and warrants, subject to market and other conditions.
Sources of Liquidity and Uses of Capital
As of the date of this filing, we believe we have sufficient assets, which include unrestricted cash, to satisfy all of our short-term recourse liabilities. Our junior subordinated notes payable are long-term obligations. With respect to the next 12 months, we expect that our cash on hand combined with our other primary sources of funds for liquidity will be sufficient to satisfy our anticipated liquidity needs with respect to our current portfolio, including related financings, capital expenditures for our Entertainment and Traditional Golf businesses, working capital needs and operating expenses. However, we may have additional cash requirements with respect to executing our strategic objectives for our Entertainment Golf business and incremental investments related to our Traditional Golf business. In addition to our available cash, we may elect to meet the cash requirements of these incremental investments through proceeds from the monetization of our assets or from additional borrowings, equity offerings or other means. While it is inherently more difficult to forecast beyond the next 12 months, we currently expect to meet our long-term liquidity requirements, specifically the repayment of our debt obligations and capital expenditures, through our cash on hand and, if needed, additional borrowings, proceeds from equity offerings and the sale or refinancing of our assets. We continually monitor market conditions for financing opportunities, and at any given time, we may enter into or pursue one or more of the transactions described above.
These short-term and long-term expectations are forward-looking and subject to a number of uncertainties and assumptions, which are described below under “–Factors That Could Impact Our Liquidity, Capital Resources and Capital Obligations” as well as Part I, Item 1A. “Risk Factors.” If our assumptions about our liquidity prove to be incorrect, we could be subject to a shortfall in liquidity in the future, and this shortfall may occur rapidly and with little or no notice, which would limit our ability to address the shortfall on a timely basis.

Cash flows provided by operations constitute a critical component of our liquidity. Essentially, our cash flows provided by operations is equal to (i) net cash flows received from our Entertainment and Traditional Golf businesses, plus (ii) the net cash flows from our security investments, including principal and sales proceeds, less (iii) Entertainment Golf and Traditional Golf operating expenses, management fees, professional fees, insurance and other expenses, less (iv) employee wage and benefit expenses, less (v) interest on the junior subordinated notes payable and less (vi) preferred dividends.

Our cash flows provided by operations differs from our net income (loss) due to these primary factors: (i) accretion of discount on our real estate securities and loans (including the accrual of interest payable at maturity) and deferred financing costs, (ii) amortization of favorable and unfavorable leasehold intangibles‎ from the acquisition of the Traditional Golf business in December 2013, (iii) accretion of the golf membership deposit liabilities in interest expense, (iv) recognition of deferred revenue from initiation fee deposits, (v) amortization of prepaid golf membership dues, (vi) gains and losses from sales of assets, (vii) other-than-temporary impairment on our investments, as well as impairments of Traditional Golf properties, (viii) unrealized gains or losses on our investments, (ix) non-cash gains or losses associated with our early extinguishment of debt, (x) non-cash gains on deconsolidation, and (xi) depreciation and amortization on our assets.

The sources of our distributions are net cash provided by operating activities, net cash provided by investing activities and cash equivalents as they represent the return on our real estate debt investments and golf-related real estate and operations.  The Company has paid preferred dividends of $5.6 million in fiscal year 2018 and our board of directors elected not to declare common stock dividends for fiscal year 2018 to retain capital for growth. For the year ended December 31, 2018, the Company reported net cash used in operating activities of $7.2 million, net cash provided by investing activities of $25.9 million, net cash used in financing activities of $109.6 million and cash and cash equivalents of $79.2 million as of December 31, 2018. As a result of our revocation of REIT election, effective January 1, 2017, we are no longer subject to the distribution requirements applicable to REITs. The timing and amount of distributions are in the sole discretion of our board of directors, which considers our earnings, financial performance and condition, debt service obligations and applicable debt covenants, tax considerations, as well as capital expenditure requirements, business prospects and other factors that our board of directors may deem relevant from time to time. 


36


Update on Liquidity, Capital Resources and Capital Obligations
Cash – As of December 31, 2018, we had $79.2 million of available cash, including $16.9 million of working capital for the Traditional Golf business. On November 7, 2018, we declared a quarterly preferred dividend of $1.4 million which was paid on January 31, 2019.

Short-term liquidity requirements - As of December 31, 2018, we expect our short-term liquidity requirements to include a total of approximately $75.0 to $85.0 million for both our Drive Shack venues and Traditional Golf properties.

Our liquidity, available capital resources and capital obligations could change rapidly due to a variety of factors, many of which are beyond our control. Set forth below is a discussion of some of the factors that could impact our liquidity, available capital resources and capital obligations.
Factors That Could Impact Our Liquidity, Capital Resources and Capital Obligations
We refer readers to our discussions in other sections of this report for the following information:
For a further discussion of recent trends and events affecting our liquidity, see “– Market Considerations” above;
As described above, under “– Sources of Liquidity and Uses of Capital,” we may be subject to capital obligations associated with our Entertainment and Traditional Golf businesses;
Our debt obligations are also subject to refinancing risk upon the maturity of the related debt. See “– Debt Obligations” below; and
For a further discussion of a number of risks that could affect our liquidity, access to capital resources and our capital obligations, see Part I, Item 1A. “Risk Factors” above.

In addition to the information referenced above, the following factors could affect our liquidity, access to capital resources and our capital obligations related to our Entertainment and Traditional Golf businesses. As such, if their outcomes do not fall within our expectations, changes in these factors could negatively affect our liquidity.

Access to Financing from Counterparties – Decisions by investors, counterparties and lenders to enter into transactions with us will depend upon a number of factors, such as our historical and projected financial performance, compliance with the terms of our current credit and derivative arrangements, industry and market trends, the availability of capital and our investors’, counterparties’ and lenders’ policies and rates applicable thereto, and the relative attractiveness of alternative investment or lending opportunities.
Impact of Expected Repayment or Forecasted Sale on Cash Flows – The timing of and proceeds from the sale of certain assets may be different than expected or may not occur as expected. Proceeds from sales of assets in the current illiquid market environment are unpredictable and may vary materially from their estimated fair value and their carrying value.
Impact of Unexpected Costs, Cost Increases and Delayed Opening of our Entertainment Golf Venues on Cash Flows – There may be unforeseen or higher than expected construction and development costs and the opening of new venues may be later than expected. These additional expenses and timing of opening may vary materially from our estimates.
Performance of the Entertainment and Traditional Golf businesses - Current and future liquidity is greatly dependent upon our operating results, which are driven largely by overall economic conditions and can fluctuate significantly from quarter to quarter as a result of seasonal factors and discretionary consumer spending. We expect that economic and environmental conditions and changes in regulatory legislation will continue to exert pressure on both supplier pricing and consumer spending related to entertainment and dining alternatives. Although there is no assurance that our cost of products will remain stable or that federal, state or local minimum wage rates will not increase beyond amounts currently legislated, the effects of any supplier price increases or wage rate increases are expected to be partially offset by selected price increases where competitively appropriate.
Debt Obligations
See Note 7 in Part II, Item 8. “Financial Statements and Supplementary Data” for further information related to our debt obligations and contractual maturities as of December 31, 2018.



37


Subordinated Notes Payable
The following table presents certain information regarding the junior subordinated notes (dollars in thousands).
Outstanding face amount

$51,004

 
Weighted average coupon
LIBOR + 2.25%

 
Maturity
April 2035

 
Collateral
General credit of Drive Shack Inc.

 
Traditional Golf Credit Facilities

See Note 7 in Part II, Item 8. “Financial Statements and Supplementary Data” for information about our Traditional Golf credit facilities.
Equity
Common Stock

See Note 11 in Part II, Item 8. “Financial Statements and Supplementary Data” for information on shares of our common stock issued since 2016.
Common Dividends Paid
Declared for the Period Ended
 
Paid
 
Amount Per Share
March 31, 2016
 
April 2016
 
$0.12
June 30, 2016
 
July 2016
 
$0.12
September 30, 2016
 
October 2016
 
$0.12
December 31, 2016
 
January 2017
 
$0.12

Our board of directors elected not to declare common stock dividends for 2017 and 2018 to retain capital for growth. See Note 11 in Part II, Item 8. “Financial Statements and Supplementary Data” for detailed information on our options, restricted stock units or RSUs outstanding and option plans.
Preferred Stock
To the extent we have unpaid accrued dividends on our preferred stock, we cannot pay any dividends on our common shares, pay any consideration to repurchase or otherwise acquire stock of our common stock or redeem any stock of any series of our preferred stock without redeeming all of our outstanding preferred stock in accordance with the governing documentation. Moreover, if we do not pay dividends on any series of preferred stock for six or more periods, then holders of each affected series obtain the right to call a special meeting and elect two members to our board of directors. Consequently, if we do not make a dividend payment on our preferred stock for six or more quarterly periods, it could restrict the actions that we may take with respect to our common stock and preferred stock and could affect the composition of our board of directors and, thus, the management of our business. No assurance can be given that we will pay any dividends on any series of our preferred stock in the future.
All accrued dividends on our preferred stock have been paid through January 31, 2019.
See Note 11 in Part II, Item 8. “Financial Statements and Supplementary Data” for additional information on our preferred stock.
Noncontrolling Interest
Noncontrolling interest represents the equity interest in certain consolidated subsidiaries not owned by us. Noncontrolling interest is reported as a component of equity. In addition, changes in the Company’s ownership interest while we retain its controlling interest are accounted for as equity transactions, and, upon a gain or loss of control, retained ownership interests are remeasured at fair value, with any gain or loss recognized in earnings. Our noncontrolling interest associated with a Traditional Golf property has a carrying value of zero.

38


Accumulated Other Comprehensive Income

Our accumulated other comprehensive income changes as our real estate security is marked to market each quarter. Net unrealized gains on our real estate security increased during the year ended December 31, 2018 in accumulated other comprehensive income primarily due to higher variable interest rates and an increase in the prepayment speed assumption.
See “– Market Considerations” above for a further discussion of recent trends and events affecting our unrealized gains and losses as well as our liquidity.
Cash Flow
Operating Activities

Net cash flow (used in) provided by operating activities changed from $(12.4) million for the year ended December 31, 2017 to $(7.2) million for the year ended December 31, 2018. It changed from $9.4 million for the year ended December 31, 2016 to $(12.4) million for the year ended December 31, 2017. These changes resulted primarily from the factors described below:
 
2018 compared to 2017

Operating cash flows increased by:
$18.7 million due to lower management fees paid during the year ended December 31, 2018 compared to the year ended December 31, 2017, as a result of the Internalization;
$4.1 million due to lower general and professional fees paid during the year ended December 31, 2018 compared to the year ended December 31, 2017;
$1.7 million due to lower income taxes paid during the year ended December 31, 2018 compared to the year ended December 31, 2017; and
$0.6 million due to higher interest earned on overnight cash deposits.

Operating cash flows decreased by:
$5.0 million in lower operating cash flows from Traditional Golf, primarily related to the legal dispute settled in July 2018;
$7.5 million of payroll costs primarily due to the Internalization and increased employee hiring associated with the Entertainment Golf business;
$0.1 million due to cash flows from operations from the first Entertainment Golf venue in Orlando; and
$7.9 million in lower net interest proceeds primarily due to the sale of agency RMBS in August 2017.

2017 compared to 2016

Operating cash flows increased by:
$8.6 million in our Traditional Golf business primarily as a result of higher participation in The Players Club program at public golf properties and improving margins on golf operations;
$1.0 million due to savings in interest paid as a result of lower average coupon rates associated with our junior subordinated notes payable for the year ended December 31, 2017 compared to the year ended December 31, 2016; and
$4.1 million due to savings in corporate professional fees.

Operating cash flows decreased by:
$8.5 million of higher costs associated with the development of the Entertainment Golf business;
$7.3 million of lower interest and other fees collected due to the sale of real estate securities;
$1.7 million in estimated federal tax payments for fiscal year 2017 as the Company revoked its election to be treated as a REIT effective January 1, 2017; and
$10.7 million of higher payments primarily due to the termination of the Management Agreement.

Investing Activities
 
Investing activities provided $25.9 million, provided $656.6 million, and used $150.3 million during the years ended December 31, 2018, 2017 and 2016, respectively. Uses of cash flows from investing activities consisted primarily of the investments made in Entertainment Golf venues, Traditional Golf properties, real estate securities and payments for settlement of derivatives. Proceeds

39


from cash flows from investing activities consisted primarily of sale of investments, repayments from loans and securities, settlement of derivatives and sales of property and equipment.

Financing Activities
 
Financing activities used $109.6 million, used $617.0 million, and provided $237.4 million during the years ended December 31, 2018, 2017 and 2016, respectively. Proceeds from cash flow from financing consisted primarily of borrowings under debt obligations, the return of margin deposits under repurchase agreements and derivatives, and deposits received on golf memberships. Uses of cash flow from financing activities included the repayment of debt obligations, deposits made on margin calls related to our repurchase agreements and derivatives, and the payment of financing costs, the payment of common and preferred dividends.
See the Consolidated Statements of Cash Flows in our Consolidated Financial Statements included in “Financial Statements and Supplementary Data” for a reconciliation of our cash position for the periods described herein.
Off-Balance Sheet Arrangements
As of December 31, 2018, we had the following material off-balance sheet arrangements. We believe that these off-balance sheet structures presented the most efficient and least expensive form of financing for these assets at the time they were entered, and represented the most common market-accepted method for financing such assets.
In April 2006, we securitized Subprime Portfolio I. The loans were sold to a securitization trust, of which 80% were treated as a sale, which is an off-balance sheet financing.
In July 2007, we securitized Subprime Portfolio II. The loans were sold to a securitization trust, of which 90% were treated as a sale, which is an off-balance sheet financing.
We have no obligation to repurchase any loans from either of our subprime securitizations. Therefore, it is expected that our exposure to loss is limited to the carrying amount of our retained interests in the securitization entities, in the amount of $3.0 million as of December 31, 2018. A subsidiary of ours gave limited representations and warranties with respect to the second securitization; however, it has no assets and does not have recourse to the general credit of the Company.

Contractual Obligations
As of December 31, 2018, we had the following material contractual obligations (payments in thousands):
Contract
Terms
Capital Leases - Equipment
Described under Note 7 to our Consolidated Financial Statements which appears under Part II, Item 8. “Financial Statements and Supplementary Data.”
 
 
Junior Subordinated Notes Payable
Described under Note 7 to our Consolidated Financial Statements which appears under Part II, Item 8. “Financial Statements and Supplementary Data.”
 
 
Operating Leases, Traditional Golf
Described under Notes 2 and 13 to our Consolidated Financial Statements which appears under Part II, Item 8. “Financial Statements and Supplementary Data.”
 
 
Membership Deposit Liabilities
Described under Notes 2 and 13 to our Consolidated Financial Statements which appears under Part II, Item 8. “Financial Statements and Supplementary Data.”
 
 
Operating Leases, Entertainment Golf
Described under Note 13 to our Consolidated Financial Statements which appears under Part II, Item 8. “Financial Statements and Supplementary Data.”
 
 
Credit Facilities, Traditional Golf

Described under Note 7 to our Consolidated Financial Statements which appears under Part II, Item 8. “Financial Statements and Supplementary Data.”
 

40


 
 
Fixed and Determinable Payments Due by Period
Contract
 
2019
 
2020-2021
 
2022-2023
 
Thereafter
 
Total
 
 
 
 
 
 
 
 
 
 
 
Capital leases - Equipment (A)
 
6,401

 
8,707

 
2,532

 
6

 
17,646

Junior subordinated notes payable (A)
 
2,433

 
4,866

 
4,866

 
78,579

 
90,744

Operating lease obligations - Traditional Golf (B)
 
29,379

 
51,524

 
41,652

 
127,298

 
249,853

Membership deposit liabilities (C)
 
8,873

 
6,039

 
8,329

 
222,876

 
246,117

Operating lease obligations - Entertainment Golf (D)
 
576

 
3,194

 
4,935

 
44,350

 
53,055

Credit facilities, Traditional Golf (A)
 
5

 
9

 
9

 
294

 
317

Total
 
$
47,667

 
$
74,339

 
$
62,323

 
$
473,403

 
$
657,732


(A)
Includes interest based on rates existing at December 31, 2018 and assumes no prepayments. Obligations that are repayable prior to maturity at our option are reflected at their contractual maturity dates.
(B)
Includes leases of golf courses and related facilities, carts and equipment. Excludes escalation charges which per our lease agreements are not fixed and determinable payments. Also excludes four month-to-month property leases which are cancellable by the parties with 30 days written notice and various month-to-month operating leases for carts and equipment. The aggregate monthly expense of these leases was $0.4 million.
(C)
Amounts represent gross initiation fee deposits refundable 30 years after the date of acceptance of a member.
(D)
Includes primarily ground leases for Entertainment Golf venue development.



41


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, credit spreads, foreign currency exchange rates, commodity prices and equity prices. We substantially exited our real estate related debt positions, which significantly reduced our market risk exposure related to interest rate risk, credit spread risk and credit risk. We are also exposed to inflationary factors in our business.

Commodity Price Risk
We are exposed to market price fluctuation in food and beverage product prices and these fluctuations can materially impact our costs. There is no assurance that supply and demand factors such as disease or inclement weather will not cause the prices of the commodities used in our operations to fluctuate. Significant increases in the price of commodities could have a material impact on our operating results to the extent that such increases cannot be offset by menu price increases or other operating efficiencies.

Inflation
The primary inflationary factors affecting our operations include materials and labor costs. We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal, state or city minimum wage and increases in the minimum wage will increase our labor costs. In general, we have been able to partially offset cost increases resulting from inflation by increasing prices, improving productivity, or other operating changes. We may or may not be able to offset cost increases in the future. In addition, our leases require us to pay taxes, maintenance, repairs and utilities and these costs are subject to inflationary increases. In some cases, some of our lease commitments are tied to consumer price index (“CPI”) increases. Furthermore, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors primarily based on our capital needs, and, in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

Trends
See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Considerations” for a further discussion of recent trends and events affecting our liquidity, unrealized gains and losses.
 

42


Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements:
Report of Independent Registered Public Accounting Firm.
Report on Internal Control Over Financial Reporting of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017.
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016.
Consolidated Statements of Equity for the years ended December 31, 2018, 2017 and 2016.
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016.
Notes to Consolidated Financial Statements.
All schedules have been omitted because either the required information is included in our Consolidated Financial Statements and notes thereto or it is not applicable.

43


Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders of Drive Shack Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Drive Shack Inc. and Subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 15, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2000.
New York, New York
March 15, 2019




 


44


 Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders of Drive Shack Inc. and Subsidiaries

Opinion on Internal Control over Financial Reporting
We have audited Drive Shack Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Drive Shack Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2018 consolidated financial statements of the Company and our report dated March 15, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP
New York, New York
March 15, 2019





45


DRIVE SHACK INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
December 31,
 
2018
 
2017
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
79,235

 
$
167,692

Restricted cash
3,326

 
5,178

Accounts receivable, net
7,518

 
8,780

Real estate assets, held-for-sale, net
75,862

 
2,000

Real estate securities, available-for-sale
2,953

 
2,294

Other current assets
20,505

 
21,568

Total Current Assets
189,399

 
207,512

Restricted cash, noncurrent
258

 
818

Property and equipment, net of accumulated depreciation
132,605

 
241,258

Intangibles, net of accumulated amortization
48,388

 
57,276

Other investments
22,613

 
21,135

Other assets
8,684

 
8,649

Total Assets
$
401,947

 
$
536,648

 
 
 
 
Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Obligations under capital leases
$
5,489

 
$
4,652

Membership deposit liabilities
8,861

 
8,733

Accounts payable and accrued expenses
45,284

 
36,797

Deferred revenue
18,793

 
31,207

Real estate liabilities, held-for-sale
2,947

 

Other current liabilities
22,285