Drive Shack : Annual Report FY 2023

Drive Shack Inc.

A Maryland Corporation

10670 N. Central Expressway

Suite 700

75231

Telephone: [phone]

Corporate Website: https://ir.driveshack.com/

Annual Report

For the period ending December 31, 2023

(the "Reporting Period")

Securities:				Shares Outstanding as
Title of each class:	Trading Symbol(s)	CUSIP	Name of exchange on
of December 31,
			which registered:	2023
Common Stock, $0.01 par value	DSHK	262077100	Over the Counter	159,544,168
per share			Markets (OTCMKTS)
9.75% Series B Cumulative	DSHKP	262077209	Over the Counter	1,347,321
Redeemable Preferred Stock, $0.01
par value per share			Markets (OTCMKTS)
8.05% Series C Cumulative	DSHKN	262077308	Over the Counter	496,000
Redeemable Preferred Stock, $0.01
par value per share			Markets (OTCMKTS)
8.375% Series D Cumulative		262077407		620,000
Redeemable Preferred Stock, $0.01	DSHKO		Over the Counter
par value per share			Markets (OTCMKTS)

Securities registered pursuant to Section 12(g) of the Act: None

The aggregate market value of the common stock held by non-affiliates as of December 31, 2023 (computed based on the closing price on the last business day of the registrant's most recently completed second quarter as reported) was: $30,297,437.

The number of shares outstanding of the registrant's common stock was 199,442,524 as of April 15, 2024.

Indicate by check mark whether the company is a shell company (as defined in Rule 405 of the Securities Act of 1933 and Rule 12b-2 of the Exchange Act of 1934):

Yes: □ No: 

Indicate by check mark whether the company's shell status has changed since the previous reporting period:

Yes: □ No: 

Indicate by check mark whether a Change in Control of the company has occurred over this reporting period:

Yes: □ No: 

Our Company's transfer agent is the Equiniti Trust Company, LLC. Equiniti Trust Company, LLC is registered under the U.S. Securities and Exchange Commission in accordance with the requirements of Securities Exchange of of 1934. They can be contacted through telephone at:

Office: 1-877-864-4750equiniti.com/us/ast-access

Or in writing at:

Equiniti Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report contains certain "forward-looking statements". 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:

• factors impacting attendance, such as local conditions, contagious diseases or the perceived threat of contagious diseases, disturbances, natural disasters, and terrorist activities;
• our financial liquidity and ability to access capital;
• 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, increases in unemployment levels, 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 where we 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, monetary inflation, 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;
• 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;
• impacts of failures of our information technology and cybersecurity systems;
• the impact of any current or further legal proceedings and regulatory investigations and inquiries; and
• other risks detailed from time to time below, particularly under the heading "Risk Factors," and in our other reports made available on http://ir.driveshack.com and otcmarkets/com/DSHK/disclosure.

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.
		INDEX
			Page
		PART I
Item 1.	Business		1
Item 1A.	Risk Factors		8
Item 2.	Properties		18
Item 3.	Legal Proceedings	20
		PART II
Item 5.	Market for Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
	Securities		21
Item 6.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
	General		22
	Market Considerations	22
	Application of Critical Accounting Policies	23
	Results of Operations	24
	Liquidity and Capital Resources	27
	Contractual Obligations	29
Item 7.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 8.	Financial Statements and Supplementary Data	31
	Report of Independent Auditors	32
	Consolidated Balance Sheets as of December 31, 2023 and 2022	34
	Consolidated Statements of Operations for the years ended December 31, 2023, 2022 and 2021	36
	Consolidated Statements of Comprehensive Loss for the years ended December 31, 2023, 2022 and 2021	37
	Consolidated Statements of Changes in Equity for the years ended December 31, 2023, 2022 and 2021	38
	Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021	39
	Notes to Consolidated Financial Statements
	Note 1	Organization	41
	Note 2	Summary of Significant Accounting Policies	41
	Note 3	Revenues	49
	Note 4	Segment Reporting	50
	Note 5	Property and Equipment, Net of Accumulated Depreciation	54
	Note 6	Leases	55
	Note 7	Intangibles, Net of Accumulated Amortization	57
	Note 8	Debt Obligations	58
	Note 9	Real Estate Securities	59
	Note 10 Fair Value of Financial Instruments	60
	Note 11 Equity and Earnings Per Share	62

Note 12 Commitments and Contingencies	68
Note 13	Income Taxes	69
Note 14	Impairment and Other Losses	72
Note 15	Subsequent Events	73
Signatures		74

PART I

Item 1. Business.

Overview

Drive Shack Inc., a Maryland corporation, was formed in 2002, and its common stock is traded on the OTCMKTS under the symbol "DSHK." Drive Shack Inc., together with its subsidiaries, is referenced herein as "Drive Shack Inc.", "the Company", "we", or "our". The Company owns and operates golf-related leisure and entertainment venues and courses focused on bringing people together through competitive socializing, by combining sports and entertainment with elevated food and beverage offerings. The Company conducts its business through the following segments: (i) entertainment golf, (ii) traditional golf and (iii) corporate. For a further discussion of the reportable segments, see Note 4 in part II, Item 8 "Financial Statements and Supplementary Data".

• Entertainment golf | Drive Shack and Puttery
  Drive Shack offers competitive, social entertainment through its golf-related leisure and large-format entertainment venues with gaming and premier golf technology, a chef-inspired menu, craft cocktails, and engaging social events throughout the year. Each Drive Shack venue features expansive, climate-controlled, suite style bays with lounge seating; augmented-reality golf games and virtual course play; a restaurant and multiple bars; an outdoor patio with lawn games; and arcade games.
  As of December 31, 2023, the Company operated four Drive Shack venues located in Orlando, Florida; West Palm Beach, Florida; Raleigh, North Carolina; and Richmond, Virginia. Drive Shack venues are freestanding, 50,000 - 60,000 square feet, open-air venues built on approximately 12 acres. Additionally, the Company is committed to a concession agreement in Manhattan (Randall's Island), New York for a Drive Shack entertainment golf venue.
  This segment also includes the Company's indoor entertainment golf brand, Puttery, an adult-focused, modern spin on putting, re-defining the game within an immersive experience as guests move from one course to the next. With a high-energy atmosphere that combines plentiful curated culinary offerings and inventive craft cocktails centered around a lively bar area with great music, guests can relax and enjoy their evening before, during and after their tee time. Puttery venues range in size from 15,000 to 20,000 square feet and feature indoor putting courses anchored by bars and other social spaces that serve to create engaging and fun experiences for guests.
  The Company launched its first Puttery venue in September 2021 in The Colony, Texas. As of December 31, 2023, the Company operated eight leased Puttery venues located in The Colony, Texas, Charlotte, North Carolina, Washington, D.C., Houston, Texas, Kansas City, Missouri, Minneapolis, Minnesota, Pittsburgh, Pennsylvania, and Chicago, Illinois. The Company opened the Puttery venue in Miami, Florida in January 2024 and New York City, New York in March 2024. Puttery venues are indoor venues typically located in urban and suburban dining and entertainment districts.
• Traditional golf | American Golf
  American Golf, acquired by the Company in December 2013, is one of the largest operators of golf properties in the United States. As an owner, lessee, and manager of golf courses and country clubs for over 45 years, we believe American Golf is one of the most experienced operators in the traditional golf industry. As of December 31, 2023, we owned, leased or managed 55 properties across seven states. American Golf is focused on delivering lasting experiences for our guests, with over 27,000 members and over 1.9 million rounds played at our properties during the twelve months ended December 31, 2023.
  Public Properties. Our twenty-nine (32) leased 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, pro shops and food and beverage facilities. At certain locations, our public properties have larger clubhouses with extensive banquet facilities. In addition, The Players Club is a fee-based monthly membership program offered at most of our public properties, with membership benefits ranging from daily range access and off- peak course access to the ability to participate in golf clinics. The leases for three public properties expired on January 15, 2024 and were not renewed.
  Private Properties. Our four (4) leased or owned private properties, which are open primarily to members and their guests, generate revenues principally through initiation fees, membership dues, food, beverage and merchandise

1

sales, and guest fees. Amenities at these properties 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 nineteen (19) managed properties are operated by American Golf pursuant to management agreements with the owners of each property. We recognize revenue from each of these properties in an amount equal to a management fee and the reimbursements of certain operating costs. The management contracts for nine of these nineteen managed properties expired on December 31, 2023 and were not renewed.

See Note 5 in Part II, Item 8 "Financial Statements and Supplementary Data" for additional information.

Strategy

We believe Drive Shack Inc. is the only company comprised of a truly integrated portfolio of both entertainment and traditional golf businesses, which provides us with a unique opportunity to unlock top site locations by leveraging the operational experiences and municipal relationships developed by our traditional golf business. The Company strives to forward innovate and revolutionize next generation experiences. In September 2021, the Company launched Puttery, its newest competitive indoor socializing and entertainment platform.

Puttery has expanded our business by diversifying our experiential offerings with an adult-focused modern spin on putting through innovative technology featuring a series of indoor putting courses anchored by bars and other social spaces that will serve to create engaging and fun experiences for our guests. Our Puttery venues require less space than a Drive Shack venue at approximately 15,000 - 20,000 square feet of indoor new or existing retail space.

In 2024, we are focused on rationalizing costs and restructuring our overhead. In the long-term, we believe Puttery contains the potential to expand store potential by dozens if not hundreds of markets due to the availability of commercial real estate, shorter development timelines, less capital risk and higher development yields. We believe that advanced data and demographic analytics will allow us to strategically evaluate and develop a robust pipeline of target sites in prioritized markets across the United States. As we look to further grow our Puttery brand, the smaller format offers us the opportunity to improve investment returns and take advantage of the availability of retail space at favorable rates.

As we build our brand through the existing operation of Drive Shack locations and new Puttery locations, we continue to strengthen our position in this growing industry. We believe there is significant opportunity to capture market share given the structural decline of dated businesses, coupled with the rising demand for social and interactive entertainment options. We have strategically aligned our Drive Shack and Puttery businesses to provide competitive, social and interactive experiences to capitalize on this opportunity. There are a variety of consumers who seek out active socializing options. We will use data and testing to understand unique drivers, test consumer behaviors, and understand spending habits, seeking to optimize the most effective way to target, acquire, and retain consumers.

• A Modernized Socializing Experience
  Current Consumer Preferences. Our portfolio of current and future entertainment venues directly addresses consumers' changing preferences and provides a new type of leisure with multiple experiences under one roof, including:
• • Social Entertainment - A unique and curated experience where guests can interact, compete and socialize in a sophisticated, fun setting.
  • Sports - Technology forward activities and robust gaming platforms that promote competition and create unique and lasting experiences.
  • Food & Beverage - A complete social experience is rounded out by exceptional food and beverage options. Along with heightened visual cues, craft cocktails and curated food choices will enhance the overall experience for every consumer.
  • Inclusivity - An activity and experience that allows everyone to participate and enjoy, regardless of skill level.

Our focus is on creating an environment that enables sociable competition and connecting with friends and family, providing our guests with memorable and meaningful experiences. These experiences are designed to cater to a

2

range of audiences and competitive appetites, to attract new guests and to drive loyalty and advocacy among our existing guests.

Innovation. Golf as a sport and form of entertainment continues to transform. We believe innovation is at the essence of creating the modernized, broadly appealing golf and entertainment experience. We strive to innovate across all our offerings including technology powered golf games, food and beverage menu offerings, and venue formats.

Technology. Our Drive Shack venues are equipped with radar-based TrackMan™ technology, which provides precision ball tracking, in real time, affording us the ability to bring our augmented reality gaming to the next level.

Our proprietary gaming software provides us with the unique ability to develop and release cutting edge, fun and engaging games. Our current suite of proprietary games includes Darts, Monster Hunt, ShackJack, Pro Range and Snowman. In addition, our partnership with TrackMan™ provides our guests with access to an extensive portfolio of world-famous virtual golf courses. These games and virtual golf courses are suitable for all skill sets and competitive appetites.

Elevated Food & Beverage. Our venues feature chef-inspired food offerings alongside inventive craft cocktails. Our menus feature a curated selection of shareable food options, further enabling the socializing nature of our venues. They are designed and tailored to consumer preferences and lifestyle trends, offering unique flavors, and high-quality fresh ingredients to create a premium selection of options to appeal to our broad range of guests.

Alongside our food menu, we have a beverage offering that features a variety of beers, craft cocktails, non-alcoholic cocktails, canned wine and seltzers, and premium spirits. Our beer selection consists of local and regional craft beers and varies by venue locations. In certain locations, we have partnerships with local breweries which source and produce exclusive beverages in both our Drive Shack and Puttery venues.

We plan to rollout new seasonal or limited time offerings, to supplement our core menu and give our guests more reasons to keep coming back as well as attract new guests.

Events. Our venues provide an electric atmosphere for experiential event options spanning corporate events to social gatherings. Each Drive Shack venue features climate-controlled bays, 300-plus television screens, a rooftop terrace with fire pits, and private indoor and outdoor meeting spaces fully equipped with A/V technology and wi-fi, that can accommodate a variety of group sizes up to 1,200 guests. Our Puttery venues have dedicated VIP event spaces as well as other areas throughout each venue, such as lounge areas and outdoor patios.

• Site selection, development, and the experience
  Site Selection. Our site selection process is integral to the successful execution of our growth strategy and integrates a variety of analytical measures with an evaluation of key factors of the overall quality and viability of potential sites. These factors include but are not limited to size and quality of land and existing real estate space; population demographics, such as target population density, age, and household income levels; competition levels in the market; site visibility, accessibility and traffic volume; proximity to other entertainment facilities, restaurants and bars; and market or landlord incentives.
  Venue Development. Our Drive Shack venue formats are generally open-air 60,000 square feet venues on average built on approximately 12 to 15 acres of land. This format features 72 to 96 climate-controlled bays with lounge seating and an approximately 200 yard outfield. The total investment cost of a new Drive Shack venue ranges from $25 to $40 million. We may either enter into a long-term ground lease or purchase the land for our Drive Shack venue format. The average development time for our large format Drive Shack venue is 18 to 24 months.
  We currently have a concession agreement in Manhattan (Randall's Island), New York for a future Drive Shack entertainment golf venue.
  Our Puttery venues average between 15,000 to 20,000 square feet of existing indoor space. These venues each feature anywhere from two to four uniquely themed nine-hole courses, depending on venue size and layout. The total investment cost of a Puttery venue is expected to range from $8 to $12 million, exclusive of landlord incentives.

3

We believe the development timeline for a Puttery venue averages six to nine months and will vary based on the unique layout of each venue.

On occasion, we expect that our various venue formats may be smaller or larger or cost more or less than our targeted range, depending on the specific circumstances of the selected site or market.

Transcending the Experience. We look to create meaningful and memorable experiences by combining world class golf technology, great drinks, delicious food and welcoming environments. Our Drive Shack venues are organized and designed to spread and amplify guest energy and revolutionize the golf and competitive socializing experience. We encourage guest interaction with other guests by way of carefully placed bars and lounges, social event areas, outdoor patios and climate-controlled bays. The lighting, finishes and furniture are contemporary yet comfortable and are purposely organized for group interaction and a social atmosphere. Whether a golfer or not we want everyone to feel comfortable experiencing our version of golf.

Our new Puttery venues consist of exciting, adult focused mini-golf and leisure spaces with social interaction in mind, character-filled with innovative interior designs (including course thematics consisting of libraries, lodges, redwood forests and cityscape rooftops). Each location is customized to create unique ways to socialize with friends for a night out, have drinks with colleagues or meet new people. These bar forward mini-golf spaces blend vintage putting with upscale casual lifestyle through the strategic placement of the lounges, bars, courses, and VIP spaces within each venue. The courses are intimate, transformative and designed specifically to keep guests connected and socializing while playing enhanced mini golf. Beverage and food opportunities are plentiful with multiple bars and a full-service kitchen. Our lounge furniture and finishes are all created with a comfortable yet upscale experience.

Marketing

• Growing Brand Awareness
  Continuing to build and grow brand awareness is a top priority. Our strategy consists of multiple layers, which includes local and national data and demographic profiles to identify interests and behaviors, competitors and consumption habits of our target consumers.
• Embracing Local Communities
  Local Partnerships. Each Drive Shack venue prides itself on forging bonds with local partners in the community. For example, our Drive Shack location in Richmond partnered with a local brewery to create an exclusive premium beer for our venue, while our Drive Shack location in Raleigh has partnered with a local female-owned brewery. We have also collaborated with a local specialty ice cream shop to create a new scratch rendition of the classic ice cream sandwich inspired by Arnold Palmer, called the Chilly Palmer. We plan to continue to explore local partnerships and collaborations that may vary by venue and geographic location.
• Customized Programming and Promotions
  Unique Programs. Our guest experience is enhanced by ongoing events and programs designed to engage a range of guest desires, including quarterly Social Leagues and Summer Swing Academy, which introduces young kids to golf in a fun, relaxed environment. Intended to drive new and repeat guests to our venues, we feature Limited Time Offers ("LTOs") that are generally rolled out on a quarterly basis. The LTOs typically include three new food and three new beverage offerings that have been created and inspired by our talented chefs in each of our Drive Shack venues
  We also have designed programming around seasonal events, including March Madness, National Beer Day, and Easter, with our family themed Easter Egg Hunt. We continually innovate new ways for guests to compete within the venue, such as our new, repeatable tournament model, Drive Shack Open, for use at our large format entertainment venues. The Drive Shack Open is geared towards more competitive, avid golfers and is structured as a single-day tournament, with four-person teams, a team entry fee and prizes awarded to teams based on scores. In December 2020, we debuted our first Drive Shack Open tournament, which sold out in advance of the tournament, and we have continued Drive Shack Open through 2023. We have also developed an in-venue tournament model, Monster Hunt Challenge, that is geared towards less serious players and non-golfers. The Monster Hunt Challenge is structured as a 4-week tournament model built specifically for competition with "high score" tournament mentality for both groups and solo players, with unlimited entries at a low cost per entry fee and prizes awarded based on highest score.

4

Promotional Campaigns. We periodically develop promotional programs to attract new guests and increase the length of stay and spend per visitor. Our promotional programs include Happy Hour specials, offering discounted food and beverage selections during specified periods of time as well as various holiday promotions. These promotions are intended to appeal to our existing guests and to encourage new guests to experience our version of golf in climate-controlled bays. We also launched a 2-Bay promotional package in Fall 2020. This promotional package allows groups of 10 guests or less to reserve two bays and includes a food and beverage credit and two hours of play for a set price. We offer this package today during non-peak seasonal times throughout the year.

Intellectual Property

We have registered the trademarks Drive Shack®, Puttery® and American Golf® and their primary logos have registered or applied to register certain additional trademarks with the United States Patent and Trademark Office and in various foreign countries. We consider our trade names and our logos to be important features of our operations and seek to actively monitor and protect our interest in this property in the various jurisdictions where we operate. We also have certain trade secrets, such as our recipes, processes, proprietary information and certain software programs that we protect by requiring all of our employees to accept an agreement to keep trade secrets confidential in connection with their onboarding process.

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, 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 location, featured facilities, quality and breadth of product offerings and price. As a result, competition for market share in the industry in which we compete is significant.

Our entertainment golf business competes with restaurants, dining and social clubs and other entertainment attractions including movie theaters, sporting events, bowling alleys, sports activity centers, arcades and entertainment centers, nightclubs and theme parks.

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.

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

Seasonality can affect our results of operations. Our traditional golf business is subject to seasonal fluctuations as colder temperatures and shorter days reduce the demand for outdoor activities. As a result, the traditional golf business generates a disproportionate share of its annual revenue in the second and third quarters of each year. In addition, our Drive Shack and Puttery venues could be significantly impacted on a season-to-season basis, based on corporate event and social gathering volumes during holiday seasons and school vacation schedules. For this reason, a quarter-to-quarter comparison may not be a good indicator of our current and/or future performance.

5