10-Q 1 cphc-20190331x10q.htm 10-Q cphc_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

(Mark One)

 

☒           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019.

 

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 every Interactive Data File required to be submitted 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 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).

 

 

 

 

 

 

 

 

 

YES

 

NO

 

 

Securities registered pursuant Section 12(b) of the Act:

 

 

 

Title of Each Class

Trading Symbol

Name of each exchange on which registered

Common Stock Common stock, $.01 par value

CPHC

Nasdaq

 

The Company had 4,587,402 shares of common stock, $.01 par value, outstanding as of May 1, 2019.

 

 

 


 

Canterbury Park Holding Corporation

INDEX

 

 

 

 

Page

 

 

 

 

PART I. 

FINANCIAL INFORMATION 

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited) 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

2

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018

3

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019

4

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

5

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

23

 

 

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

 

PART II. 

OTHER INFORMATION 

 

 

 

 

 

 

Item 1.

Legal Proceedings

25

 

 

 

 

 

Item 1A.

Risk Factors

25

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

25

 

 

 

 

 

Item 4.

Mine Safety Disclosures

25

 

 

 

 

 

Item 5.

Other Information

25

 

 

 

 

 

Item 6.

Exhibits

26

 

 

 

 

 

Signatures

 

26

 

 

1


 

PART 1 – FINANCIAL INFORMATION

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

ASSETS

 

 

  

 

 

  

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

  

 

 

  

Cash and cash equivalents

 

$

370,592

 

$

4,895,359

Restricted cash

 

 

6,011,710

 

 

5,058,639

Short-term investments

 

 

206,545

 

 

206,545

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

 

 

311,128

 

 

241,743

Current portion of notes receivable

 

 

1,063,650

 

 

1,063,650

Inventory

 

 

315,783

 

 

297,209

Prepaid expenses

 

 

646,908

 

 

625,024

Income taxes receivable

 

 

59,845

 

 

417,004

Total current assets

 

 

8,986,161

 

 

12,805,173

 

 

 

 

 

 

 

LONG-TERM ASSETS

 

 

  

 

 

  

Deposits

 

 

49,500

 

 

49,500

Restricted cash - long-term portion

 

 

1,253,201

 

 

1,250,000

TIF receivable

 

 

3,608,103

 

 

1,908,065

Notes receivable - long-term portion

 

 

1,078,861

 

 

1,078,861

Related party receivable

 

 

3,208,400

 

 

3,208,400

Operating lease right-of-use assets

 

 

13,074

 

 

 —

Equity investment

 

 

2,992,633

 

 

2,995,010

Land, buildings and equipment, net

 

 

40,720,542

 

 

38,131,052

TOTAL ASSETS

 

$

61,910,475

 

$

61,426,061

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

  

 

 

  

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

  

 

 

  

Accounts payable

 

 

4,117,171

 

 

3,587,328

Card Casino accruals

 

 

2,158,248

 

 

1,740,926

Accrued wages and payroll taxes

 

 

1,379,436

 

 

2,268,351

Cash dividend payable

 

 

320,226

 

 

316,938

Accrued property taxes

 

 

1,223,643

 

 

1,001,200

Deferred revenue

 

 

917,604

 

 

979,358

Payable to horsepersons

 

 

828,576

 

 

706,122

Current portion of finance lease obligations

 

 

23,506

 

 

23,216

Current portion of operating lease obligations

 

 

7,735

 

 

 —

Total current liabilities

 

 

10,976,145

 

 

10,623,439

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

  

 

 

  

Deferred income taxes

 

 

4,064,800

 

 

3,970,000

Finance lease obligations, net of current portion

 

 

92,244

 

 

98,272

Operating lease obligations, net of current portion

 

 

5,339

 

 

 —

Total long-term liabilities

 

 

4,162,383

 

 

4,068,272

TOTAL LIABILITIES

 

 

15,138,528

 

 

14,691,711

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

  

 

 

  

Common stock, $.01 par value, 10,000,000 shares authorized, 4,574,658 and 4,527,685 respectively, shares issued and outstanding

 

 

45,747

 

 

45,277

Additional paid-in capital

 

 

21,783,690

 

 

21,420,886

Retained earnings

 

 

24,942,510

 

 

25,268,187

Total stockholders’ equity

 

 

46,771,947

 

 

46,734,350

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

61,910,475

 

$

61,426,061

See notes to condensed consolidated financial statements.

2


 

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2019

    

2018

OPERATING REVENUES:

 

 

  

 

 

  

Pari-mutuel

 

$

1,490,809

 

$

1,540,944

Card Casino

 

 

7,899,964

 

 

8,276,981

Food and beverage

 

 

1,352,801

 

 

1,303,638

Other

 

 

847,224

 

 

1,098,383

Total Net Revenues

 

 

11,590,798

 

 

12,219,946

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

  

 

 

  

Purse expense

 

 

1,395,538

 

 

1,244,886

Minnesota Breeders’ Fund

 

 

217,695

 

 

203,152

Other pari-mutuel expenses

 

 

268,366

 

 

278,522

Salaries and benefits

 

 

5,745,287

 

 

5,430,004

Cost of food and beverage and other sales

 

 

625,757

 

 

592,907

Depreciation and amortization

 

 

625,520

 

 

635,145

Utilities

 

 

322,115

 

 

317,861

Advertising and marketing

 

 

190,329

 

 

226,975

Professional and Contracted Services

 

 

966,386

 

 

860,293

Loss on disposal of assets

 

 

113,437

 

 

 —

Gain on insurance recoveries

 

 

 —

 

 

(21,064)

Other operating expenses

 

 

1,143,129

 

 

1,094,512

Total Operating Expenses

 

 

11,613,559

 

 

10,863,193

(LOSS) INCOME FROM OPERATIONS

 

 

(22,761)

 

 

1,356,753

OTHER INCOME

 

 

  

 

 

  

Interest income, net

 

 

63,240

 

 

12,407

Net Other Income

 

 

63,240

 

 

12,407

INCOME BEFORE INCOME TAXES

 

 

40,479

 

 

1,369,160

INCOME TAX BENEFIT (EXPENSE)

 

 

16,093

 

 

(379,470)

NET INCOME

 

$

56,572

 

$

989,690

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.01

 

$

0.22

Diluted earnings per share

 

$

0.01

 

$

0.22

Weighted Average Basic Shares Outstanding

 

 

4,559,477

 

 

4,439,652

Weighted Average Diluted Shares

 

 

4,613,245

 

 

4,490,863

Cash dividends declared per share

 

 

0.07

 

 

0.07

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

3


 

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Number of

    

Common

    

Additional

    

Retained

    

 

 

 

 

Shares

 

Stock

 

Paid-in Capital

 

Earnings

 

Total

Balance at December 31, 2017

 

4,414,492

 

$

44,145

 

$

19,865,273

 

$

20,807,679

 

$

40,717,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

22,000

 

 

220

 

 

225,290

 

 

 —

 

 

225,510

Stock-based compensation

 

 —

 

 

 —

 

 

103,221

 

 

 —

 

 

103,221

Dividend distribution

 

 —

 

 

 —

 

 

 —

 

 

(311,499)

 

 

(311,499)

401(K) stock match

 

6,653

 

 

67

 

 

116,326

 

 

 —

 

 

116,393

Issuance of deferred stock awards

 

2,788

 

 

28

 

 

28

 

 

 —

 

 

56

Shares issued under Employee Stock Purchase Plan

 

4,054

 

 

41

 

 

55,945

 

 

 —

 

 

55,986

Net income

 

 —

 

 

 —

 

 

 —

 

 

989,690

 

 

989,690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

4,449,987

 

$

44,500

 

$

20,366,083

 

$

21,485,870

 

$

41,896,453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

4,527,685

 

$

45,277

 

$

21,420,886

 

$

25,268,187

 

$

46,734,350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

28,060

 

 

281

 

 

172,111

 

 

 —

 

 

172,392

Other share retirements

 

(5,863)

 

 

(59)

 

 

(27,915)

 

 

(62,023)

 

 

(89,997)

Stock-based compensation

 

 —

 

 

 —

 

 

90,058

 

 

 —

 

 

90,058

Dividend distribution

 

 —

 

 

 —

 

 

 —

 

 

(320,226)

 

 

(320,226)

401(K) stock match

 

8,111

 

 

81

 

 

116,312

 

 

 —

 

 

116,393

Issuance of deferred stock awards

 

10,968

 

 

110

 

 

(55,044)

 

 

 —

 

 

(54,934)

Shares issued under Employee Stock Purchase Plan

 

5,697

 

 

57

 

 

67,282

 

 

 —

 

 

67,339

Net Income

 

 —

 

 

 —

 

 

 —

 

 

56,572

 

 

56,572

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

4,574,658

 

$

45,747

 

$

21,783,690

 

$

24,942,510

 

$

46,771,947

 

 

4


 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

    

Three Months Ended March 31, 

 

 

2019

    

2018

Operating Activities:

 

 

 

  

 

  

Net income

 

$

56,572

 

$

989,690

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

 

 

 

  

 

 

Depreciation

 

 

625,520

  

 

635,145

Stock-based compensation expense

 

 

90,058

  

 

103,221

Stock-based employee match contribution

 

 

116,312

  

 

116,326

Deferred income taxes

 

 

94,800

  

 

142,000

Loss from equity investment

 

 

2,377

 

 

 —

Loss on disposal of assets

 

 

113,437

  

 

 —

Gain on insurance recoveries

 

 

 —

  

 

(21,064)

Changes in operating assets and liabilities:

 

 

 

 

 

 

(Increase) decrease in accounts receivable

 

 

(69,385)

 

 

665,007

Increase in other current assets

 

 

(40,457)

 

 

(36,494)

Decrease in income taxes receivable/payable

 

 

357,158

 

 

237,469

Decrease in operating lease right-of-use assets

 

 

1,939

 

 

 —

Decrease in operating lease liabilities

 

 

(1,939)

 

 

 —

Increase in accounts payable

 

 

302,777

 

 

79,734

Decrease in deferred revenue

 

 

(61,754)

 

 

(13,295)

Increase in Card Casino accruals

 

 

417,322

 

 

285,197

Decrease in accrued wages and payroll taxes

 

 

(888,915)

 

 

(1,140,208)

Increase in accrued property taxes

 

 

222,443

 

 

242,501

Increase in payable to horsepersons

 

 

122,454

 

 

136,767

Net cash provided by operating activities

 

 

1,460,719

  

 

2,421,996

 

 

 

 

 

 

 

Investing Activities:

 

 

 

  

 

  

Additions to land, buildings, and equipment

 

 

(4,801,419)

  

 

(1,225,960)

Net cash used in investing activities

 

 

(4,801,419)

  

 

(1,225,960)

 

 

 

 

 

 

 

Financing Activities

 

 

 

  

 

  

Proceeds from issuance of common stock

 

 

149,815

  

 

282,117

Cash dividend paid to shareholders

 

 

(316,938)

  

 

(265,113)

Payments for taxes related to net share settlement of equity awards

 

 

(54,934)

 

 

 —

Principal payments on finance lease

 

 

(5,738)

  

 

 —

Net cash (used in) provided by financing activities

 

 

(227,795)

  

 

17,004

 

 

 

 

 

 

 

Net (decrease) increase in cash, cash equivalents, and restricted cash

 

 

(3,568,495)

  

 

1,213,040

 

 

 

 

 

 

 

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

 

 

11,203,998

  

 

12,025,553

 

 

 

 

 

 

 

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

 

$

7,635,503

 

$

13,238,593

 

 

 

 

 

 

 

Schedule of non-cash investing and financing activities

 

 

 

 

 

 

Additions to buildings and equipment funded through accounts payable

 

$

227,000

 

$

613,000

Transfer of future TIF reimbursed costs from PP&E

 

 

1,700,000

 

 

 —

ROU assets obtained in exchange for operating lease obligations

 

 

15,000

 

 

 —

Dividend declared

 

 

320,000

 

 

311,000

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Income taxes paid

 

$

 —

 

$

326,000

Interest paid

 

 

2,000

 

 

 —

 

See notes to condensed consolidated financial statements.

 

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. Additionally, the Company is developing approximately 140 acres of underutilized land surrounding the Racetrack in a project known as Canterbury Commons. The Company is pursuing several mixed-use development opportunities for this land, directly and through joint ventures.

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, 2018, included in its Annual Report on Form 10‑K (the “2018 Form 10‑K”).

The condensed consolidated balance sheets and the related condensed consolidated statements of operations, stockholders’ equity, and the cash flows for the periods ended March 31, 2019 and 2018 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, statement of stockholders’ equity, and cash flows at March 31, 2019 and 2018 and for the periods then ended have been made.

Effective January 1, 2019, we adopted the requirements of Accounting Standards Update (“ASU”) No 2016‑02, Leases 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.

Restricted Cash – Restricted cash represents refundable deposits and amounts due to horsemen for purses, stakes and awards, and amounts accumulated in card game progressive jackpot pools, the player pool and poker promotional fund to be used to repay card players in the form of promotions, giveaways, prizes, or by other means. Restricted cash also includes two deposits related to its development operations. One deposit is an escrow account with a bank to fund the road construction on Shenandoah Drive. This account is to ensure the Company completes the construction of the road that allows access to the first phase of the Doran Canterbury I apartment complex. Funds from the escrow account will be released to the Company as progress billings from the contractor are received. The Company also recorded a deposit with a bank to assist Doran Canterbury to complete financing for a construction loan. The bank will release the deposit back to the Company when the construction loan is repaid by Doran Canterbury I and converted into a term loan. Because the Company expects this to occur in 2021 or 2022, the Company classified this as long term restricted cash on its consolidated balance sheet.

6


 

Deferred Revenue – Deferred revenue includes advance sales related to racing, events and corporate partnerships. Revenue from these advance billings is recognized when the related event occurs or services have been performed. Deferred revenue also includes advanced Cooperative Marketing Agreement (“CMA”) promotional funds, for which revenue is recognized when expenses are incurred.  

Payable to Horsepersons - The Minnesota Pari-mutuel Horse Racing Act requires the Company 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 Minnesota Horsemen’s Benevolent and Protective Association (“MHBPA”), the Company transferred into a trust account or paid directly to the MHBPA, $1,260,000 and $1,090,000 for the three months ended March 31, 2019 and 2018, respectively, related to thoroughbred races. Minnesota Statutes provide 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.

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

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 these 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 do not 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 would not differ materially from what would result if the guidance were applied on 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 redemption value 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.

The Company offers certain promotional allowances at no charge to patrons who participate in its player rewards program.

We evaluate our on-track revenue, export revenue, and import revenue contracts 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

7


 

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. 

 

2.    ACCOUNTING STANDARDS AND SIGNIFICANT ACCOUNTING POLICIES

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02 codified as Accounting Standards Codification (“ASC”) 842, Leases, (“ASC 842”) which addresses the recognition and measurement of leases. Under the new guidance, for all leases (with the exception of short-term leases), at the commencement date, lessees will be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to control the use of a specified asset for the lease term. The effective date for this update is for the annual and interim periods beginning after December 15, 2018 with early adoption permitted. ASC 842 requires a transition adoption election using either (1) a modified retrospective approach with periods prior to the adoption date being recast or (2) a prospective adoption approach with a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods continuing to be reported under previous lease accounting guidance.

The Company adopted ASC 842 on January 1, 2019 using the prospective adoption approach, and therefore, comparative periods will continue to be reported under previous lease accounting guidance consistent with previously issued financial statements. The Company also elected to adopt the package of practical expedients permitted under the transition guidance within ASC 842, which among other things, allows us to carry forward the historical lease identification, lease classification and treatment of initial direct costs for leases entered into prior to January 1, 2019. We have also made an accounting policy election to not record short-term leases with an initial term of 12 months or less on the balance sheet for all classes of underlying assets. The adoption of ASC 842 did not have a material impact on our consolidated financial statements.  Refer to Note 11 for further detail.

Summary of Significant Accounting Policies

Except for the accounting policies for leases 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, 2018 filed with the SEC on March 29, 2019, that have had a material impact on our condensed consolidated financial statements and related notes.

 

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

8


 

Period. Currently, there are three awards outstanding that are for three-year periods ending December 31, 2019, 2020, and 2021.

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

The Company’s Stock Plan currently authorizes 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 March 31, 2019 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 March 31, 2019.

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 $90,000 and $103,000 for the three months ended March 31, 2019 and 2018, respectively.

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.

A summary of stock option activity as of March 31, 2019 and changes during the three months then ended is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

Exercise

 

Contractual

 

Grant Date

Stock Options

 

 

 

Price

 

Term

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2019

 

75,062

 

$

7.95

 

 

 

 

 

 

Granted

 

 -

 

 

 -

 

 

 

 

 

 

Exercised

 

(28,060)

 

 

6.14

 

 

 

 

 

 

Expired/Forfeited

 

 -

 

 

 -

 

 

 

 

 

 

Outstanding at March 31, 2019

 

47,002

 

$

9.03

 

 

1.0 Years

 

$

424,392

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2019

 

47,002

 

$

9.03

 

 

1.0 Years

 

$

424,392

 

 

9


 

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 months ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

    

Three Months Ended March 31, 

 

    

2019

    

2018

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

 

$

56,572

 

$

989,690

 

 

 

 

 

 

 

Weighted average shares (denominator) of common stock outstanding:

 

 

  

 

 

  

Basic

 

 

4,559,477

 

 

4,439,652

Plus dilutive effect of stock options

 

 

53,768

 

 

51,211

Diluted

 

 

4,613,245

 

 

4,490,863

 

 

 

 

 

 

 

Net income per common share:

 

 

  

 

 

  

Basic

 

$

0.01

 

$

0.22

Diluted

 

 

0.01

 

 

0.22

 

There were no out-of-the money options at March 31, 2019 or 2018; thus, all outstanding options to purchase shares of common stock were included in the computation of diluted net income per share.

 

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 of land and management believes no allowance for collectability is necessary.

 

6.    GENERAL CREDIT AGREEMENT

The Company has a general credit and security agreement with a financial institution, which provides a revolving credit line up to $8,000,000 and allows for letters of credit in the aggregate amount of up to $2,000,000 to be issued under the credit agreement. 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 March 31, 2019.

 

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.

10


 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

    

Horse Racing

    

Card Casino

    

Food and Beverage

    

Development

    

Total

Net revenues from external customers

 

$

2,292

 

$

7,900

 

$

1,399

 

$

 —

 

$

11,591

Intersegment revenues

 

 

116

 

 

 —

 

 

303

 

 

 —

 

 

419

Net interest income

 

 

 8

 

 

 —

 

 

 —

 

 

55

 

 

63

Depreciation

 

 

578

 

 

 4

 

 

44

 

 

 —

 

 

626

Segment (loss) income before income taxes

 

 

(1,176)

 

 

1,110

 

 

(88)

 

 

(22)

 

 

(176)

Segment tax expense (benefit)

 

 

(414)

 

 

441

 

 

(35)

 

 

(8)

 

 

(16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

Segment Assets

 

$

34,688

 

$

441

 

$

23,667

 

$

26,414

 

$

85,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

    

Horse Racing

    

Card Casino

    

Food and Beverage

    

Development

    

Total

Net revenues from external customers

 

$

2,597

 

$

8,277

 

$

1,346

 

$

 —

 

$

12,220

Intersegment revenues

 

 

109

 

 

 —

 

 

319

 

 

 —

 

 

428

Net interest income

 

 

 1

 

 

 —

 

 

 —

 

 

11

 

 

12

Depreciation

 

 

589

 

 

 5

 

 

41

 

 

 —

 

 

635

Segment (loss) income before income taxes

 

 

(129)

 

 

1,531

 

 

(39)

 

 

(6)

 

 

1,357

Segment tax expense (benefit)

 

 

(32)

 

 

424

 

 

(11)

 

 

(2)

 

 

379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

Segment Assets

 

$

35,992

 

$

623

 

$

23,680

 

$

24,647

 

$

84,942

 

 

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

 

 

 

 

 

 

 

 

 

    

Three Months Ended March 31, 2019

 

    

2019

    

2018

Revenues

 

 

 

 

 

 

Total net revenue for reportable segments

 

$

12,010

 

$

12,648

Elimination of intersegment revenues

 

 

(419)

 

 

(428)

Total consolidated net revenues

 

$

11,591

 

$

12,220

 

 

 

 

 

 

 

 

(Loss) income before income taxes

    

 

 

    

 

 

Total segment (loss) income before income taxes

 

$

(176)

 

$

1,357

Elimination of intersegment income before income taxes

 

 

216

 

 

12

Total consolidated income before income taxes

 

$

40

 

$

1,369

 

11


 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

    

2019

    

2018

Assets

 

 

  

 

 

  

Total assets for reportable segments

 

$

85,210

 

$

84,942

Elimination of intercompany balances

 

 

(23,300)

 

 

(23,516)

Total consolidated assets

 

$

61,910

 

$

61,426

 

 

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 (a) $700,000 per Operating Year, as defined, or (b) 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 would be required to pay these amounts is remote.  At the date (if any) that these two conditions are met, the five minimum payments would be discounted back to their present value and the sum of those discounted payments would 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 would be due 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.

The Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community (“SMSC”), which became effective June 4, 2012, was amended in the first quarter of each of 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 it unlikely that any breach of a covenant will occur, and that therefore the possibility that the Company will be required to pay the specified amount related to any covenant breach 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 March 31, 2019 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.

 

In August 2018, the Company entered into a Contract for Private Redevelopment with the City of Shakopee in connection with a Tax Increment Financing District (“TIF District”). The Company is obligated to construct certain infrastructure improvements within the TIF District, and will be reimbursed by the City of Shakopee by future tax increment revenue generated from the developed property. The total amount of funding that Canterbury will be paid as reimbursement under the TIF program for these improvements is not guaranteed and will depend on future tax revenues generated from the developed property. 

 

9.    COOPERATIVE MARKETING AGREEMENT

As discussed above 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 2019 and 2018, respectively, primarily for purse enhancements for the live race meets in the respective years.

12


 

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.

In the first quarter of 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 2020 through 2022:

 

 

 

 

 

 

 

 

 

 

Purse Enhancement Payments to

 

Marketing Payments to

Year

    

Horsemen (1)

 

Canterbury Park

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 months ended March 31, 2019, the Company recorded $75,000 in other revenue and incurred $18,000 in advertising and marketing expense and $57,000 in depreciation related to the SMSC marketing funds. For the three months ended March 31, 2018, the Company recorded $106,000 in other revenue and incurred $49,000 in advertising and marketing expense and $57,000 in depreciation related to the SMSC marketing funds.

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.

 

10.  REAL ESTATE DEVELOPMENT

Equity Investment

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 (Doran Canterbury I). Doran Canterbury I 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 is developing Phase I of the Project, which will include approximately 300 units, a heated parking ramp, and a clubhouse.

In connection with the execution of the Amended Doran Canterbury I Agreement, on August 18, 2018, Canterbury Development LLC entered into an Operating Agreement with Doran Shakopee, LLC as the two members of a Minnesota limited liability company entitled Doran Canterbury II, LLC (“Doran Canterbury II”). Under the Doran Canterbury II Operating Agreement, Doran Canterbury II will pursue development of Phase II of the Project, which is expected to begin upon rental stabilization of Phase I. Phase II will include an additional 300 apartment units. Canterbury Development’s equity contribution to Doran Canterbury for Phase II will be approximately 10 acres of land. In connection with its contribution, Canterbury Development became a 27.4% equity member in Doran Canterbury II with Doran owning the remaining 72.6%. 

On September 27, 2018, Canterbury Development LLC contributed approximately 13 acres of land as its equity contribution in the Doran Canterbury I joint venture and became a 27.4% equity member. On December 20, 2018, financing for Doran Canterbury I was secured. As the Company is able to assert significant influence, but not

13


 

control, over Doran Canterbury I’s operational and financial policies, the Company accounts for the joint venture as an equity method investment.

Tax Increment Financing

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.

 

The Redevelopment Agreement provides that 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. As of December 2018, the Company was proceeding with the improvements to Shenandoah Drive. 

 

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 cost of TIF eligible improvements to be 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, which was filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2018. 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 prop