10-Q 1 cphc-20180630x10q.htm 10-Q 20180630 10Q Q2

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C.  20549  

FORM 10-Q 

(Mark One)



 

TERLY PERIOD ENDED SEPTEMBER 30, 2012.

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 

SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018.

 

OR 



 

 

 

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:  001-37858 

 

Picture 1 

 

CANTERBURY PARK HOLDING CORPORATION    

(Exact Name of Registrant as Specified in Its Charter) 



Minnesota

 

47-5349765

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)



1100 Canterbury Road 

 



Shakopee, MN  55379

 



(Address of principal executive offices and zip code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



 

 

 

 

 

 



YES

 

NO

 

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    



 

 

 

 

 

 



YES

 

NO

 



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



 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

 Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).   

YESNO



 The Company had 4,496,275 shares of common stock, $.01 par value, outstanding as of August 1, 2018.

 


 

Canterbury Park Holding Corporation 

INDEX 



 

 

 



 

 

Page 

PART I.

FINANCIAL INFORMATION 

 



 

 

 



Item 1.

Financial Statements (unaudited) 

 



 

 

 



 

Condensed Consolidated Balance Sheets as of 

 



 

June 30, 2018 and December 31, 2017

2 



 

 

 



 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017

3



 

 

 



 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017

4



 

 

 



 

Notes to Condensed Consolidated Financial Statements

6 



 

 

 



Item 2.

Management’s Discussion and Analysis of Financial Condition and  

 



 

Results of Operations

16 



 

 

 



Item 3.

Quantitative and Qualitative Disclosures about Market Risk

23 



 

 

 



Item 4.

Controls and Procedures

23 



 

 

 



 

 

 

PART II.

OTHER INFORMATION 

 



 

 

 



Item 1.

Legal Proceedings

24



 

 

 



Item 1A.

Risk Factors

24



 

 

 



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24



 

 

 



Item 3.

Defaults Upon Senior Securities

24



 

 

 



Item 4.

Mine Safety Disclosures

24



 

 

 



Item 5.

Other Information

24



 

 

 



Item 6.

Exhibits

25



 

 

 



Signatures

 

26



 

 

 

1

 


 

PART 1 – FINANCIAL INFORMATION 

 CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS 







 

 

 

 

 

 



 

 

 

 

 

 



 

(Unaudited)

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017

ASSETS

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,481,746 

 

$

8,888,162 

Restricted cash

 

 

7,541,504 

 

 

3,137,391 

Short-term investments

 

 

206,210 

 

 

206,005 

Accounts receivable, net of allowance of $19,250 for both periods

 

 

760,223 

 

 

1,278,289 

Current portion of notes receivable

 

 

1,048,654 

 

 

1,048,654 

Inventory

 

 

414,807 

 

 

262,989 

Prepaid expenses

 

 

253,894 

 

 

588,634 

Income taxes receivable

 

 

196,537 

 

 

 -

Total current assets

 

 

23,903,575 

 

 

15,410,124 



 

 

 

 

 

 

LONG-TERM ASSETS

 

 

 

 

 

 

Deposits

 

 

22,500 

 

 

22,500 

Notes receivable - long term portion

 

 

1,096,409 

 

 

2,142,512 

Land, buildings and equipment, net of accumulated depreciation of $29,971,794 and $29,670,916, respectively

 

 

38,651,312 

 

 

36,962,188 



 

$

63,673,796 

 

$

54,537,324 



 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

Accounts payable

 

 

4,268,924 

 

 

2,854,305 

Card Casino accruals

 

 

2,579,666 

 

 

2,931,205 

Accrued wages and payroll taxes

 

 

2,154,017 

 

 

2,291,261 

Cash dividend payable

 

 

314,054 

 

 

265,113 

Accrued property taxes

 

 

972,561 

 

 

936,562 

Deferred revenue

 

 

2,105,738 

 

 

905,030 

Payable to horsepersons

 

 

5,314,177 

 

 

630,921 

Income taxes payable

 

 

 -

 

 

3,830 

Total current liabilities

 

 

17,709,137 

 

 

10,818,227 



 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

Deferred income taxes

 

 

3,206,000 

 

 

3,002,000 

Total long-term liabilities

 

 

3,206,000 

 

 

3,002,000 

TOTAL LIABILITIES

 

 

20,915,137 

 

 

13,820,227 



 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Common stock, $.01 par value, 10,000,000 shares authorized, 4,482,567 and 4,414,492, respectively, shares issued and outstanding

 

 

44,826 

 

 

44,145 

Additional paid-in capital

 

 

20,816,671 

 

 

19,865,273 

Retained earnings

 

 

21,897,162 

 

 

20,807,679 

Total stockholders’ equity

 

 

42,758,659 

 

 

40,717,097 



 

$

63,673,796 

 

$

54,537,324 

 See notes to condensed consolidated financial statements



2

 


 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

(Unaudited) 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2018

 

2017

 

2018

 

2017

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

Pari-mutuel

 

$

3,504,767 

 

$

3,454,737 

 

$

5,045,711 

 

$

4,960,674 

Card Casino

 

 

8,480,489 

 

 

8,112,734 

 

 

16,757,470 

 

 

15,817,205 

Food and beverage

 

 

2,400,713 

 

 

2,364,686 

 

 

3,704,351 

 

 

3,710,561 

Other

 

 

2,126,755 

 

 

1,914,318 

 

 

3,225,140 

 

 

2,801,106 

Total Net Revenues

 

 

16,512,724 

 

 

15,846,475 

 

 

28,732,672 

 

 

27,289,546 



 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

Purse expense

 

 

2,102,873 

 

 

2,004,688 

 

 

3,347,759 

 

 

3,137,111 

Minnesota Breeders’ Fund

 

 

301,409 

 

 

304,396 

 

 

504,561 

 

 

520,171 

Other pari-mutuel expenses

 

 

484,754 

 

 

452,583 

 

 

763,276 

 

 

724,471 

Salaries and benefits

 

 

6,766,422 

 

 

6,290,356 

 

 

12,196,426 

 

 

11,417,449 

Cost of food and beverage and other sales

 

 

1,096,623 

 

 

1,096,002 

 

 

1,689,530 

 

 

1,709,378 

Depreciation

 

 

601,080 

 

 

577,275 

 

 

1,236,225 

 

 

1,222,998 

Utilities

 

 

382,365 

 

 

337,857 

 

 

700,226 

 

 

618,763 

Advertising and marketing

 

 

1,012,244 

 

 

917,188 

 

 

1,239,219 

 

 

1,185,062 

Professional and contracted services

 

 

1,159,925 

 

 

1,152,893 

 

 

2,020,218 

 

 

2,014,427 

Loss on disposal of assets

 

 

99,934 

 

 

 -

 

 

99,934 

 

 

 -

Gain on insurance recoveries

 

 

 -

 

 

 -

 

 

(21,064)

 

 

 -

Other operating expenses

 

 

1,505,629 

 

 

1,522,079 

 

 

2,600,141 

 

 

2,686,749 

Total Operating Expenses

 

 

15,513,258 

 

 

14,655,317 

 

 

26,376,451 

 

 

25,236,579 

INCOME FROM OPERATIONS

 

 

999,466 

 

 

1,191,158 

 

 

2,356,221 

 

 

2,052,967 

OTHER INCOME

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

5,048 

 

 

11,415 

 

 

17,455 

 

 

23,603 

     Net Other Income

 

 

5,048 

 

 

11,415 

 

 

17,455 

 

 

23,603 

INCOME BEFORE INCOME TAXES

 

 

1,004,514 

 

 

1,202,573 

 

 

2,373,676 

 

 

2,076,570 

INCOME TAX EXPENSE

 

 

(279,163)

 

 

(486,000)

 

 

(658,633)

 

 

(847,000)

NET INCOME

 

$

725,351 

 

$

716,573 

 

$

1,715,043 

 

$

1,229,570 



 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

.16

 

$

.16

 

$

.39

 

$

.28

Diluted earnings per share

 

$

.16

 

$

.16

 

$

.38

 

$

.28

Weighted Average Basic Shares Outstanding

 

 

4,466,966 

 

 

4,372,333 

 

 

4,453,309 

 

 

4,357,472 

Weighted Average Diluted Shares Outstanding

 

 

4,515,648 

 

 

4,395,009 

 

 

4,502,397 

 

 

4,378,481 

Cash dividends declared per share

 

$

.07

 

$

.06

 

$

.14

 

$

.11

 

 See notes to condensed consolidated financial statements.

3

 


 



CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(Unaudited) 







 

 

 

 

 

 



 

Six Months Ended June 30,



 

2018

 

2017

Operating Activities:

 

 

 

 

 

 

Net income

 

$

1,715,043 

 

$

1,229,570 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

1,236,225 

 

 

1,222,998 

Stock-based compensation expense

 

 

203,866 

 

 

192,135 

Stock-based employee match contribution

 

 

276,953 

 

 

240,597 

Deferred income taxes

 

 

204,000 

 

 

64,000 

Loss on disposal of assets

 

 

99,934 

 

 

1,998 

Gain on insurance proceeds

 

 

(21,064)

 

 

 -

Changes in operating assets and liabilities:

 

 

 

 

 

 

Decrease (increase) in accounts receivable

 

 

539,130 

 

 

(393,993)

Increase in inventory

 

 

(151,818)

 

 

(175,646)

Decrease in prepaid expenses

 

 

334,740 

 

 

180,858 

(Increase) decrease in income taxes receivable

 

 

(196,537)

 

 

528,000 

Increase in accounts payable

 

 

1,261,658 

 

 

1,254,158 

Increase in deferred revenue

 

 

1,200,708 

 

 

1,282,893 

Decrease in Card Casino accruals

 

 

(351,539)

 

 

(82,965)

(Decrease) increase in accrued wages and payroll taxes

 

 

(137,244)

 

 

400,135 

Increase (decrease) in accrued property taxes

 

 

35,999 

 

 

(68,022)

Decrease in income taxes payable

 

 

(3,830)

 

 

 -

Increase in payable to horsepersons

 

 

4,683,256 

 

 

3,927,247 

Net cash provided by operating activities

 

 

10,929,480 

 

 

9,803,963 



 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

Additions to buildings and equipment

 

 

(2,872,322)

 

 

(2,732,105)

Decrease in notes receivable

 

 

1,046,103 

 

 

 -

Purchase of investments

 

 

(205)

 

 

(295)

Net cash used in investing activities

 

 

(1,826,424)

 

 

(2,732,400)



 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

471,163 

 

 

149,803 

Cash dividends to shareholders

 

 

(576,522)

 

 

(434,483)

Net cash used in financing activities

 

 

(105,359)

 

 

(284,680)



 

 

 

 

 

 

Net increase in cash, cash equivalents, and restricted cash

 

 

8,997,697 

 

 

6,786,883 



 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

12,025,553 

 

 

8,288,820 



 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at end of period

 

$

21,023,250 

 

$

15,075,703 



 

 

 

 

 

 





See notes to condensed consolidated financial statements.

4

 


 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited) 







 

 

 

 

 

 



 

2018

 

2017

Schedule of non-cash investing and financing activities

 

 

 

 

 

 

Additions to buildings and equipment funded through accounts payable

 

$

153,000 

 

$

51,000 

Dividend declared

 

 

314,000 

 

 

481,000 



 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Income taxes paid

 

$

1,067,000 

 

$

485,000 





5

 


 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

 

 

1.   OVERVIEW AND BASIS OF PRESENTATION   

Business – The Company’s Racetrack operations are conducted at facilities located in Shakopee, Minnesota, approximately 25 miles southwest of downtown Minneapolis. In May 1994, the Company commenced year-round horse racing simulcast operations and hosted the first annual live race meet during the summer of 1995. The Company’s live racing operations are a seasonal business as it hosts live race meets each year from May until September. The Company earns additional pari-mutuel revenue by televising its live racing to out-of-state racetracks around the country. Canterbury Park’s Card Casino operates 24 hours a day, seven days a week and is limited by Minnesota State law to conducting card play on a maximum of 80 tables. The Card Casino currently offers a variety of poker and table games. The Company’s three largest sources of revenues include: Card Casino operations, pari-mutuel operations and food and beverage sales. The Company also derives revenues from related services and activities, such as admissions, advertising signage, publication sales, and from other entertainment events and activities held at the Racetrack.



Basis of Presentation and Preparation – The accompanying condensed consolidated financial statements include the accounts of the Company (Canterbury Park Holding Corporation and its subsidiaries Canterbury Park Entertainment, LLC; Canterbury Park Concession, Inc; and Canterbury Development, LLC). Intercompany accounts and transactions have been eliminated. The preparation of these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.



These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2017, included in its Annual Report on Form 10-K (the “2017 Form 10-K”).



The condensed consolidated balance sheets and the related condensed consolidated statements of operations and the cash flows for the periods ended June  30, 2018 and 2017 have been prepared by Company management. In the opinion of management, all adjustments (which include only normal recurring adjustments, except where noted) necessary to present fairly the financial position, results of operations, and cash flows at June  30, 2018 and 2017 and for the periods then ended have been made.

       

Effective January 1, 2018, we adopted the requirements of Accounting Standards Update (“ASU”) No 2014-09, Revenue from Contracts with Customers and ASU No. 2016-18, Statement of Cash Flows, Restricted Cash as discussed in Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards.



Deferred Revenue – Deferred revenue includes advance sales related to racing, events and corporate partnerships. Revenue from these advance billings are recognized when the related event occurs or services have been performed. Deferred revenue also includes advanced Cooperative Marketing Agreement (CMA) promotional funds and revenue is recognized when expenses are incurred.  The Company maintains a deferred gain on sale of land of $240,000 due to a repurchase right.



Payable to Horsepersons - The Minnesota Pari-mutuel Horse Racing Act specifies that the Company is required to segregate a portion of funds (recorded as purse expense in the statements of operations) received from Card Casino operations and wagering on simulcast and live horse races, for future payment as purses for live horse races or other uses of the horsepersons’ association. Pursuant to an agreement with the MHBPA, the Company transferred into a trust account or paid directly to the MHBPA, $2,678,000 and $2,213,000 for the six months ended June 30, 2018 and 2017, respectively, related to thoroughbred races. Minnesota Statutes specify that amounts transferred into the trust account are the property of the trust and not of the Company, and therefore these amounts are not recorded on the Company’s Consolidated Balance Sheet.



6

 


 

Reclassifications – Prior period financial statement amounts have been reclassified to conform to current period presentations. Certain amounts due to horsepersons have been reclassified on the December 31, 2017 Consolidated Balance Sheets to Payable to Horsepersons from Due to MHBPA. This reclassification has also been reflected on the Consolidated Statements of Cash Flows for the six months ended June 30, 2017. Workers compensation amounts have been reclassified from other operating expenses to salaries and benefits on the Consolidated Statement of Operations for the three and six months ended June 30, 2017. Additionally, amounts related to RiverSouth have been reclassified from other operating expenses to advertising and marketing for the three and six months ended June 30, 2017.





2.   ACCOUNTING STANDARDS AND SIGNIFICANT ACCOUNTING POLICIES



       Recently Adopted Accounting Pronouncements



In November 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. As a result of the adoption of ASU 2016-18 on January 1, 2018, we began combining amounts generally described as restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the condensed consolidated statement of cash flows. See the table at the end of this note for the effects of the adoption of ASU 2016-18 on our condensed consolidated statement of cash flows for the six months ended June  30, 2017.



In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("Topic 606"). Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition ("Topic 605"), and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. Collectively, we refer to Topic 606 as the "new standard."



We adopted the requirements of the new standard as of January 1, 2018, using the full retrospective method.  Adoption of the new standard resulted in changes to our accounting policies for revenue recognition and promotional allowances as detailed below. We applied the new standard using a practical expedient where the consideration allocated to the remaining performance obligations or an explanation of when we expect to recognize that amount as revenue for all reporting periods presented before the date of the initial application is not disclosed.



The impact of adopting the new standard on our fiscal 2018 and fiscal 2017 revenues is not material and resulted in no cumulative effect adjustment on net income or cash flows. The primary impact of adopting the new standard is the removal of the promotional allowance line item on the condensed consolidated statement of operations. The amounts previously included as promotional allowance will now be presented on a net basis within Pari-mutuel revenues.



7

 


 

We adjusted our condensed consolidated financial statements from amounts previously reported due to the adoption of ASU No. 2014-09 and ASU No. 2016-18. Select unaudited condensed consolidated statement of operations line items, which reflect the adoption of ASU No. 2014-09 are as follows:





 

 

 



Three months ended June 30, 2017



As previously reported

Adjustments

As Adjusted

OPERATING REVENUES:

 

 

 

Pari-mutuel

$        3,503,897

$           (49,160)

$      3,454,737

Promotional allowances

             (49,160)

             (49,160)

                     -  







 

 

 



Six months ended June 30, 2017



As previously reported

Adjustments

As Adjusted

OPERATING REVENUES:

 

 

 

Pari-mutuel

$        5,035,761

$           (75,087)

$      4,960,674

Promotional allowances

             (75,087)

             (75,087)

                     -  





Select unaudited condensed consolidated statement of cash flow line items, which reflects the adoption of ASU No. 2016-18 are as follows:



 

 

 



Six months ended June 30, 2017



As previously reported

Adjustments

As Adjusted

Net cash provided by operating activities

          5,494,800

          4,309,163

          9,803,963

Net increase in cash and cash equivalents

          2,477,720

          4,309,163

          6,786,883

Cash, cash equivalents and restricted cash at beginning of period

          6,298,807

          1,990,013

          8,288,820

Cash, cash equivalents and restricted cash at end of period

$        8,776,527

$        6,299,176

$      15,075,703



Summary of Significant Accounting Policies



Except for the accounting policies for revenue recognition, promotional allowances, and restricted cash that were updated as a result of our recently adopted accounting pronouncements, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 27, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.



Revenue Recognition – The Company’s primary revenues with customers consist of Card Casino operations, pari-mutuel wagering on simulcast and live horse races, and food and beverage transactions. We determine revenue recognition through the following steps:



·

Identification of the contract, or contracts, with a customer

·

Identification of the performance obligations in the contract

·

Determination of the transaction price

·

Allocation of the transaction price to the performance obligation in the contract

·

Recognition of revenue when, or as, we satisfy a performance obligation



8

 


 

The transaction price for a Card Casino contract is a set percentage of wagers and is recognized at the time that the wagering process is complete. The transaction price for pari-mutuel wagering is the commission received on a wager, exclusive of any track fees and is recognized upon occurrence of the live race that is presented for wagering and after that live race is made official by the respective state’s racing regulatory body. The transaction price for food and beverage contracts is the net amount collected from the customer for such goods. Food and beverage services have been determined to be separate, stand-alone performance obligations and the transaction price is recorded as revenue as the good is transferred to the customer when delivery is made.



Contracts for Card Casino operations and pari-mutuel wagering involve two performance obligations for those customers earning points under the Company’s loyalty program and a single performance obligation for customers who don’t participate in the program. The Company applies a practical expedient by accounting for its gaming contracts on a portfolio basis as these wagers have similar characteristics and the Company reasonably expects the effects on the financial statements of applying the revenue recognition guidance to the portfolio to not differ materially from that which would result if applying the guidance to an individual wagering contract. For purposes of allocating the transaction price in a wagering contract between the wagering performance obligation and the obligation associated with the loyalty points earned, the Company allocates an amount to the loyalty point contract liability based on the stand-alone selling price of the points earned, which is determined by the value of a point that can be redeemed for a cash voucher, food and beverage voucher, racing admission, valet parking, or racing forms. Based on past experience, the majority of customers redeem their points for cash vouchers. Therefore, there are no further performance obligations by the Company.



We have two general types of liabilities related to contracts with customers: (1) our MVP Loyalty Program and (2) outstanding chip liability. These are included in the line item card casino accruals on the consolidated balance sheet. We defer the full retail value of these complimentary reward items until the future revenue transaction occurs. Therefore, we do not recognize any contract revenue associated with future performance obligations.



The Company offers certain promotional allowances at no charge to patrons who participate in its player rewards program. The retail value of these promotional items is included as a deduction from pari-mutuel revenues and no longer shown as a separate line item on the Company’s condensed consolidated statements of operations.



We evaluate our on-track revenue, export revenue, and import revenue contracts in order to determine whether we are acting as the principal or as the agent when providing services, which we consider in determining if revenue should be reported gross or net. An entity is a principal if it controls the specified service before that service is transferred to a customer.



The revenue we recognize for on-track revenue and import revenue is the commission we are entitled to retain for providing a wagering service to our customers. For these arrangements, we are the principal as we control the wagering service; therefore, any charges, including simulcast fees, we incur for delivering the wagering service are presented as operating expenses.



For export revenue, our customer is the third party wagering site such as a race track, OTB, or advance deposit wagering provider. Therefore, the revenue we recognize for export revenue is the simulcast host fee we earn for exporting our racing signal to the third party wagering site.



Recently Issued Accounting Pronouncements



In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires that lessees recognize assets and liabilities for leases with lease terms greater than 12 months in the statement of financial position and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases.  The update is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years.  Early adoption is permitted.  We are currently analyzing the impact of this ASU and, at this time, we are unable to determine the impact on the new standard, if any, on our consolidated financial statements.





9

 


 

3.   STOCK-BASED COMPENSATION 

 

Long Term Incentive Plan and Award of Deferred Stock



The Long Term Incentive Plan (the “LTI Plan”) authorizes the grant of Long Term Incentive Awards that provide an opportunity to Named Executive Officers (“NEOs”) and other Senior Executives to receive a payment in cash or shares of the Company’s common stock to the extent of achievement at the end of a period greater than one year (the “Performance Period”) as compared to Performance Goals established at the beginning of the Performance Period. Currently, there are three awards outstanding that are for three-year periods ending December 31, 2018, 2019, and 2020.



Board of Directors Stock Option, Deferred Stock Awards, and Restricted Stock Grants

 

The Company’s Stock Plan was amended to authorize annual grants of restricted stock, deferred stock, stock options, or any combination of the three, to non-employee members of the Board of Directors at the time of the Company’s annual shareholders meeting as determined by the Board prior to each such meeting.  Options granted under the Plan generally expire 10 years after the grant date. Restricted stock and deferred stock grants generally vest 100% one year after the date of the annual meeting at which they were granted, are subject to restrictions on resale for an additional year, and are subject to forfeiture if a board member terminates his or her board service prior to the shares vesting. The Board of Directors’ unvested deferred stock awards as of June 30, 2018 consisted of 7,456 shares with a weighted average fair value per share of $16.10.  There were no unvested restricted stock or stock options outstanding at June 30, 2018.



Employee Deferred Stock Awards



Prior to January 1, 2016 the Company’s Board awarded deferred compensation to executive officers and key employees, that were not performance-based, in the form of deferred stock awards under the Company’s Stock Plan. These deferred stock awards are subject to forfeiture if an employee terminates employment prior to the vesting. Generally, the awards vest ratably over a four-year period and compensation costs are recognized over the vesting period. Compensation costs are recorded in “Salaries and benefits” on the Condensed Consolidated Statements of Operations. There were no unvested deferred stock awards outstanding at June 30, 2018.  



Stock-based compensation expense related to the LTI Plan, deferred stock awards and restricted stock awards is included on the Condensed Consolidated Statements of Operations and totaled $204,000 and $192,000 for the six months ended June 30, 2018 and 2017





Employee Stock Option Grants



The Company has granted incentive stock options to employees pursuant to the Company’s Stock Plan with an exercise price equal to the market price on the date of grant.  The options vest over a 42-month period and expire in 10 years. 



10

 


 

A summary of stock option activity as of June 30, 2018 and changes during the six months then ended is presented below: 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Weighted

 

 

 



 

 

 

Weighted

 

Average

 

 

 



 

 

 

Average

 

Remaining

 

Aggregate



 

Number of

 

Exercise

 

Contractual

 

Grant Date

Stock Options

 

Options

 

Price

 

Term

 

Fair Value



 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2018

 

 

142,502 

 

$

8.19 

 

 

 

 

 

 

Granted

 

 

 -

 

 

 -

 

 

 

 

 

 

Exercised

 

 

(44,525)

 

 

8.90 

 

 

 

 

 

 

Expired/Forfeited

 

 

 -

 

 

 -

 

 

 

 

 

 

Outstanding at June 30, 2018

 

 

97,977 

 

$

7.86 

 

 

1.4 Years

 

$

770,295 



 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2018

 

 

97,977 

 

$

7.86 

 

 

1.4 Years

 

$

770,295 

 















 

  

 

 



4.   NET INCOME PER SHARE COMPUTATIONS 



The following is a reconciliation of the numerator and denominator of the earnings per common share computations  for the three and six months ended June 30, 2018 and 2017:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2018

 

2017

 

2018

 

2017

Net income (numerator) amounts used for basic and diluted per share computations:

 

$

725,351 

 

$

716,573 

 

$

1,715,043 

 

$

1,229,570 



 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares (denominator) of common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

4,466,966 

 

 

4,372,333 

 

 

4,453,309 

 

 

4,357,472 

Plus dilutive effect of stock options

 

 

48,682 

 

 

22,676 

 

 

49,088 

 

 

21,009 

Diluted

 

 

4,515,648 

 

 

4,395,009 

 

 

4,502,397 

 

 

4,378,481 



 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

.16

 

$

.16

 

$

.39

 

$

.28

Diluted

 

 

.16

 

 

.16

 

 

.38

 

 

.28



There were no out of-the-money options at June 30, 2018; thus, all outstanding options to purchase shares of common stock were included in the computation of diluted net income per share.



Options to purchase 30,000 shares of common stock at an average price of $12.33 per share were outstanding but not included in the computation of diluted net income per share for the six months ended June 30, 2017 because the exercise price of the options exceeded the market price of the Company’s common stock at June 30, 2017. 



 

 

 

 

 

 



 

 

5.   PROMISSORY NOTES RECEIVABLE 

 

In May 2016, the Company sold approximately 24 acres of land adjacent to the Racetrack for a total consideration of approximately $4.3 million.  Promissory notes receivable consists of two promissory notes totaling $2,145,000 bearing interest at 1.43%.  On May 31, 2017, the Company signed an amendment extending the maturity date of the notes to May 2020. Payments totaling $1,094,000 are due annually on May 13th until the notes mature. The promissory notes are secured by the mortgage on approximately 24 acres and management believes no allowance for doubtful accounts is necessary.





11

 


 

6.   GENERAL CREDIT AGREEMENT 

 

The Company has a general credit and security agreement with a financial institution, which provides a revolving credit line of up to $6,000,000, and expires September 30, 2018.  The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company.  The Company had no borrowings under the credit line during the three months ended June 30, 2018.  



7.   OPERATING SEGMENTS 

 

The Company has four reportable operating segments: horse racing, Card Casino, food and beverage, and development. The horse racing segment primarily represents simulcast and live horse racing operations. The Card Casino segment represents operations of Canterbury Park’s Card Casino, the food and beverage segment represents food and beverage operations provided during simulcast and live racing, in the Card Casino, and during special events. The development segment represents our real estate development operations. The Company’s reportable operating segments are strategic business units that offer different products and services. They are managed separately because the segments differ in the nature of the products and services provided as well as process to produce those products and services. The Minnesota Racing Commission regulates the horse racing and Card Casino segments.  



Depreciation, interest and income taxes are allocated to the segments, but no allocation is made to the food and beverage segment for shared facilities.  However, the food and beverage segment pays approximately 25% of gross revenues earned on live racing and special event days to the horse racing segment for use of the facilities. 



The following tables represent a disaggregation of revenues from contracts with customers along with the Company’s operating segments (in 000’s): 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended June 30, 2018



 

Horse Racing

 

Card Casino

 

Food and Beverage

 

Development

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues from external customers

 

$

8,112 

 

$

16,758 

 

$

3,863 

 

$

 -

 

$

28,733 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intersegment revenues

 

 

368 

 

 

 -

 

 

671 

 

 

 -

 

 

1,039 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest (expense) income

 

 

(4)

 

 

 -

 

 

 -

 

 

21 

 

 

17 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

1,153 

 

 

 

 

78 

 

 

 -

 

 

1,236 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment (loss) income before income taxes

 

 

(456)

 

 

3,040 

 

 

177 

 

 

(2)

 

 

2,759 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment income tax (benefit) expense

 

 

(231)

 

 

842 

 

 

49 

 

 

(1)

 

 

659 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

At June 30, 2018

Segment Assets

 

$

50,077 

 

$

633 

 

$

23,006 

 

$

10,547 

 

$

84,263 



12

 


 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended June 30, 2017



 

Horse Racing

 

Card Casino

 

Food and Beverage

 

Development

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues from external customers

 

$

7,639 

 

$

15,817 

 

$

3,834 

 

$

 -

 

$

27,290 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intersegment revenues

 

 

360 

 

 

734 

 

 

 -

 

 

 -

 

 

1,094 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

24 

 

 

 -

 

 

 -

 

 

 -

 

 

24 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

822 

 

 

317 

 

 

84 

 

 

 -

 

 

1,223 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment (loss) income before income taxes

 

 

(890)

 

 

3,081 

 

 

664 

 

 

 -

 

 

2,855 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment income tax (benefit) expense

 

 

(692)

 

 

1,266 

 

 

273 

 

 

 -

 

 

847 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

At December 31, 2017

Segment Assets

 

$

41,077 

 

$

642 

 

$

21,583 

 

$

11,436 

 

$

74,738 

 



The following are reconciliations of reportable segment revenues, income before income taxes, and assets, to the Company’s consolidated totals (in 000’s): 



 





 

 

 

 

 

 



 

 

 

 

 

 



 

Six Months Ended June 30,



 

2018

 

2017

Revenues

 

 

 

 

 

 

Total net revenues for reportable segments

 

$

29,773 

 

$

28,384 

Elimination of intersegment revenues

 

 

(1,040)

 

 

(1,094)

Total consolidated net revenues

 

$

28,733 

 

$

27,290 

























 

 

 

 

 

 



 

 

 

 

 

 

Income before income taxes

 

 

 

 

 

 

Total segment income before income taxes

 

$

2,759 

 

$

2,855 

Elimination of intersegment income before income taxes

 

 

(385)

 

 

(778)

Total consolidated income before income taxes

 

$

2,374 

 

$

2,077 









 

 

 

 

 

 



 

 

 

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017

Assets

 

 

 

 

 

 

Total assets for reportable segments

 

$

84,263 

 

$

74,738 

Elimination of intercompany receivables

 

 

(20,589)

 

 

(20,201)

Total consolidated assets

 

$

63,674 

 

$

54,537 





 



 

 

 

 

 

 



8.   COMMITMENTS AND CONTINGENCIES 

 

In accordance with an Earn Out Promissory Note given to the prior owner of the Racetrack as part of the consideration paid by the Company to acquire the Racetrack in 1994, if (i) off-track betting becomes legally permissible in the State of Minnesota and (ii) the Company begins to conduct off-track betting with respect to or in connection with its operations, the Company will be required to pay to the IMR Fund, L.P. the greater of $700,000 per operating year, as defined, or 20% of the net pretax profit, as defined for each of five operating years.  At this time, management believes that the likelihood that these two conditions will be met and that the Company will be required to pay these amounts is remote.  At the date (if any) that these two conditions are met, the five minimum payments will be discounted back to their present value and the sum of those discounted payments will be capitalized as part of the purchase price in accordance with GAAP.  The purchase price will be further increased if payments become due under the “20% of Net Pretax Profit” calculation.  The first payment is to be made 90 days after the end of the third operating year in which off-track betting is conducted by the Company.  Remaining payments would be made within 90 days of the end of each of the next four operating years. 

13

 


 

The Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community (“SMSC”), which became effective June 4, 2012 and was amended in each of January 2015, 2016, 2017, and 2018, and will expire on December 31, 2022. The CMA contains certain covenants which, if breached, would trigger an obligation to repay a specified amount related to such covenant. At this time, management believes that the likelihood that the breach of a covenant will occur and that the Company will be required to pay the specified amount related to such covenant is remote.



The Company is periodically involved in various claims and legal actions arising in the normal course of business.  Management believes that the resolution of any pending claims and legal actions at June 30, 2018, and as of the date of this report, will not have a material impact on the Company’s consolidated financial positions or results of operations.



 

9.   COOPERATIVE MARKETING AGREEMENT 

 

As discussed in Note 8, on June 4, 2012, the Company entered into the CMA with the SMSC.  The primary purpose of the CMA is to increase purses paid during live horse racing at Canterbury Park’s Racetrack in order to strengthen Minnesota’s thoroughbred and quarter horse industry. Under the CMA, as amended, this is achieved through “Purse Enhancement Payments to Horsemen” paid directly to the MHBPA. These payments have no direct impact on the Company’s consolidated financial statements or operations.



Under the terms of the CMA, as amended, the SMSC paid the horsemen $7.4 million and $7.2 million in the first three months of 2018 and 2017, respectively, primarily for purse enhancements for the live race meets in the respective years.

 

Under the CMA, as amended, SMSC also agreed to make “Marketing Payments” to the Company relating to joint marketing efforts for the mutual benefit of the Company and SMSC, including signage, joint promotions, player benefits and events. Under the CMA, the SMSC paid the Company $1,620,000 and $1,581,000 for marketing purposes during the six months ended June  30, 2018 and 2017.  

 

In each of January 2015, 2016, 2017, and 2018 the CMA was amended to adjust the payment amounts between the “Purse Enhancement Payments to Horsemen” and “Marketing Payments to Canterbury Park.” SMSC is currently obligated to make the following purse enhancement and marketing payments for 2019 through 2022:

 



 

 

 

 

 

 



 

 

 

 

 

 

Year

 

Purse Enhancement Payments to Horsemen

1

Marketing Payments to Canterbury Park

2019

 

 

$                      7,380,000

 

 

$                    1,620,000

2020

 

 

7,380,000 

 

 

1,620,000 

2021

 

 

7,380,000 

 

 

1,620,000 

2022

 

 

7,380,000 

 

 

1,620,000 



 

 

 

 

 

 

1   Includes $100,000 each year payable to various horsemen associations



The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s condensed consolidated statements of operations. For the three and six months ended June 30, 2018, the Company recorded $572,000 and $678,000 in other revenue and incurred $515,000 and $565,000 in advertising and marketing expense and $57,000 and $113,000 in depreciation related to the SMSC marketing funds. For the three and six months ended June 30, 2017, the Company recorded $468,000 and $625,000 in other revenue and incurred $458,000 and $558,000 in advertising and marketing expense and $57,000 and $113,000 in depreciation related to the SMSC marketing payment.

 

Under the CMA, the Company agreed for the term of the CMA, which is currently scheduled to terminate on December 31, 2022, that it would not promote or lobby the Minnesota legislature for expanded gambling authority and will support the SMSC’s lobbying efforts against expanding gambling authority.



14

 


 



10.   REAL ESTATE DEVELOPMENT 



On April 2, 2018, the Company’s subsidiary Canterbury Development LLC, entered into an Operating Agreement (“Operating Agreement”) with an affiliate of Doran Companies (“Doran”), a national commercial and residential real estate developer, as the two members of a Minnesota limited liability company named Doran Canterbury I, LLC. The Operating Agreement has a stated effective date of March 1, 2018. Doran Canterbury I, LLC was formed as part of a joint venture between Doran and Canterbury Development LLC to construct an upscale apartment complex on land adjacent to the Company’s Racetrack (the “Project”). Doran Canterbury I, LLC will pursue development of Phase I of the Project, which will include approximately 300 units, a heated parking ramp, and a clubhouse. Under the Operating Agreement, Doran will lead the development, design and construction of the Phase I apartment complex, provide property management and leasing services, and be responsible for the day-to-day operations of the Project.  Further information about the Operating Agreement and Project is presented under Item 1.01 of the Company’s Form 8-K dated April 2, 2018 and filed with the Commission on April 6, 2018.





11.   SUBSEQUENT EVENTS



On August 8, 2018, the City Council of the City of Shakopee, Minnesota approved a Contract for Private Redevelopment (“Redevelopment Agreement”) between the City of Shakopee Economic Development Authority (“Shakopee EDA”) and Canterbury Park Holding Corporation and its subsidiary Canterbury Development LLC in connection with a Tax Increment Financing District (“TIF District”) that the City had approved in April 2018. The City of Shakopee, the Shakopee EDA and the Company entered into the Redevelopment Agreement on August 10, 2018.



Under the Redevelopment Agreement, the Company has agreed to undertake a number of specific infrastructure improvements within the TIF District, including the development of public streets, utilities, sidewalks, and other public infrastructure. More specifically, the Company is obligated to construct improvements on Shenandoah Drive and Barenscheer Boulevard with these improvements required to be substantially complete on or before December 31, 2019 and December 31, 2020, respectively.



If the Company does not proceed with the improvements to Shenandoah Drive on or before December 15, 2018 or the improvements to Barenscheer Boulevard on or before December 15, 2019, the City of Shakopee has the right to construct the improvements itself and assess the Company for the costs of these improvements.



Under the Redevelopment Agreement, the City of Shakopee has agreed that a portion of the tax increment revenue generated from the developed property will be paid to the Company to reimburse it for its expense in constructing infrastructure improvements. The total estimated costs of TIF eligible improvements borne by the Company is $23,336,500. A detailed Schedule of the Public Improvements under the Redevelopment Agreement, the timeline for their construction and the source and amount of funding is set forth on Exhibit C of the Redevelopment Agreement. The total amount of funding that Canterbury will be paid as reimbursement under the TIF program for these improvements is not guaranteed, however, and will depend on future tax revenues generated from the developed property. A copy of the Redevelopment Agreement is attached as Exhibit 10.1 to this Form 10-Q.



The Company expects to finance its improvements under the Redevelopment Agreement with funds from its current operating resources and existing credit facility.











15

 


 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              &nbs