Quarterly Report (10-q)

Date : 11/14/2017 @ 2:08PM
Source : Edgar (US Regulatory)
Stock : Canterbury Park Holding Corp. (MM) (CPHC)
Quote : 13.4318  -0.0682 (-0.51%) @ 4:00PM
Canterbury Park Holding Corp. (MM) share price Chart

Quarterly Report (10-q)

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

 

FORM 10-Q 

(Mark One)

  ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017.

 

OR 

  

  o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.

 

Commission File Number: 001-37858 

 

 

 

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    x   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    x   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 x
  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   x

 

The Company had 4,410,492 shares of common stock, $.01 par value, outstanding as of November 1, 2017.

 

 

 

 

Canterbury Park Holding Corporation 

 

INDEX 

       
      Page 
PART I. FINANCIAL INFORMATION   
       
  Item 1. Financial Statements (unaudited)   
       
    Condensed Consolidated Balance Sheets as of  September 30, 2017 and December 31, 2016 3
       
    Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 4
       
    Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 5
       
    Notes to Condensed Consolidated Financial Statements 7
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14 
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 
       
  Item 4. Controls and Procedures 20 
       
PART II. OTHER INFORMATION    
       
  Item 1. Legal Proceedings 21
       
  Item 1A. Risk Factors 21
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
       
  Item 3. Defaults Upon Senior Securities 21
       
  Item 4. Mine Safety Disclosures 21
       
  Item 5. Other Information 21
       
  Item 6. Exhibits 21
       
  Signatures   22
       
  Certifications    

 

  2  

 

 

PART 1 – FINANCIAL INFORMATION  

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS 

 

    (Unaudited)        
    September 30,     December 31,  
    2017     2016  
ASSETS                
CURRENT ASSETS                
Cash and cash equivalents   $ 7,685,291     $ 6,298,807  
Restricted cash     2,758,635       1,990,013  
Short-term investments     205,944       205,649  
Accounts receivable, net of allowance of $28,000 for both periods     1,508,532       1,309,453  
Current portion of notes receivable     1,048,654       1,048,654  
Inventory     280,744       247,786  
Prepaid expenses     439,960       466,993  
Income taxes receivable     -       511,170  
Due from Minnesota horsemen associations     463,081       -  
Total current assets     14,390,841       12,078,525  
                 
LONG-TERM ASSETS                
Deposits     25,000       25,000  
Notes receivable - long term portion     2,142,512       2,142,512  
Land, buildings and equipment, net of accumulated depreciation of $29,112,870 and $27,642,027, respectively     36,767,333       35,378,917  
    $ 53,325,686     $ 49,624,954  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
CURRENT LIABILITIES                
Accounts payable     2,719,813       2,518,791  
Card Casino accruals     3,101,959       2,231,907  
Accrued wages and payroll taxes     1,505,297       2,034,550  
Cash dividend payable     263,898       216,411  
Due to MHBPA     -       38,145  
Accrued property taxes     1,052,558       932,030  
Deferred revenue     1,031,685       568,921  
Income taxes payable     355,583       -  
Payable to horsepersons     185,215       176,652  
Total current liabilities     10,216,008       8,717,407  
                 
LONG-TERM LIABILITIES                
Deferred income taxes     4,310,000       4,357,000  
Total long-term liabilities     4,310,000       4,357,000  
TOTAL LIABILITIES     14,526,008       13,074,407  
                 
STOCKHOLDERS’ EQUITY                
Common stock, $.01 par value, 10,000,000 shares authorized, 4,398,303 and 4,325,154, respectively, shares issued and outstanding     43,983       43,252  
Additional paid-in capital     19,591,467       18,780,070  
Retained earnings     19,164,228       17,727,225  
Total stockholders’ equity     38,799,678       36,550,547  
    $ 53,325,686     $ 49,624,954  

 

 See notes to condensed consolidated financial statements

 

  3  

 

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  

(Unaudited) 

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2017     2016     2017     2016  
OPERATING REVENUES:                                
Pari-mutuel   $ 3,866,158     $ 3,554,975     $ 8,901,920     $ 7,971,295  
Card Casino     7,979,614       7,324,936       23,796,820       21,445,127  
Food and beverage     3,184,125       3,446,063       6,894,686       6,751,260  
Other     2,682,434       2,347,464       5,483,541       4,801,471  
Total Revenues     17,712,331       16,673,438       45,076,967       40,969,153  
Less: Promotional allowances     (45,490 )     (43,030 )     (120,577 )     (106,451 )
Net Revenues     17,666,841       16,630,408       44,956,390       40,862,702  
                                 
OPERATING EXPENSES:                                
Purse expense     2,252,618       2,155,361       5,430,102       5,003,159  
Minnesota Breeders’ Fund     285,577       252,465       805,748       636,268  
Other pari-mutuel expenses     310,334       300,635       1,034,805       1,061,019  
Salaries and benefits     6,549,250       6,218,896       17,806,828       17,068,272  
Cost of food and beverage and other sales     1,420,725       1,537,438       3,130,105       3,180,245  
Depreciation     646,050       672,465       1,869,048       1,866,975  
Utilities     539,018       540,468       1,157,783       1,134,365  
Advertising and marketing     1,298,818       1,012,905       2,191,197       1,950,611  
Professional and contracted services     1,537,311       1,517,417       3,551,738       3,314,792  
Gain on sale of land     -       -       -       (3,990,519 )
Gain on insurance recoveries     -       (592,276 )     -       (592,276 )
Other operating expenses     1,290,327       1,455,729       4,389,243       4,250,366  
Total Operating Expenses     16,130,028       15,071,503       41,366,597       34,883,277  
INCOME FROM OPERATIONS     1,536,813       1,558,905       3,589,793       5,979,425  
OTHER INCOME (EXPENSE):                                
Interest income (expense), net     13,575       538       37,178       (48,488 )
      Net Other Income (Expense)     13,575       538       37,178       (48,488 )
INCOME BEFORE INCOME TAXES     1,550,388       1,559,443       3,626,971       5,930,937  
INCOME TAX EXPENSE     (597,753 )     (633,606 )     (1,444,753 )     (2,419,447 )
NET INCOME   $ 952,635     $ 925,837     $ 2,182,218     $ 3,511,490  
                                 
Basic earnings per share   $ .22     $ .22     $ .50     $ .82  
Diluted earnings per share   $ .22     $ .21     $ .50     $ .82  
Weighted Average Basic Shares Outstanding     4,393,523       4,296,581       4,369,489       4,276,387  
Weighted Average Diluted Shares Outstanding     4,419,436       4,322,801       4,395,534       4,294,153  
Cash dividends declared per share   $ .06     $ .05     $ .17     $ .30  

 

 See notes to condensed consolidated financial statements.

  4  

 

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES  

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  

(Unaudited) 

 

    Nine Months Ended September 30,  
    2017     2016  
Operating Activities:                
Net income   $ 2,182,218     $ 3,511,490  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation     1,869,048       1,866,975  
Stock-based compensation expense     264,357       179,141  
Stock-based employee match contribution     349,244       -  
Deferred income taxes     (47,000 )     1,215,433  
Loss (gain) on sale of land and equipment     2,000       (3,990,519 )
Gain on insurance proceeds     -       (592,276 )
Tax benefit from exercise of stock-based awards     -       1,050  
Changes in operating assets and liabilities:                
Increase in restricted cash     (768,622 )     (574,208 )
Increase in accounts receivable     (199,079 )     (260,259 )
Increase in inventory     (32,958 )     (21,479 )
Decrease in prepaid expenses     27,033       88,662  
Increase in other long term assets     -       (5,000 )
Decrease in income taxes receivable     511,170       355,060  
Increase in due from Minnesota horsemen associations     (463,081 )     (1,101,444 )
Increase in accounts payable     159,933       1,119,777  
Increase in deferred revenue     462,764       513,905  
Increase in Card Casino accruals     467,806       620,524  
Decrease in accrued wages and payroll taxes     (127,007 )     (250,147 )
Increase (decrease) in accrued property taxes     120,528       (181,060 )
Decrease in due to MHBPA     (38,145 )     -  
Increase in income taxes payable     355,583       204,969  
Increase (decrease) in payable to horsepersons     8,563       (158,032 )
Net cash provided by operating activities     5,104,355       2,542,562  
                 
Investing Activities:                
Additions to buildings and equipment     (3,218,375 )     (3,777,239 )
Purchase of investments     (295 )     (213 )
Net cash used in investing activities     (3,218,670 )     (3,777,452 )
                 
Financing Activities                
Proceeds from issuance of common stock     198,528       371,564  
Principal payments on capital lease obligations     -       (1,887,349 )
Cash dividends to shareholders     (697,729 )     (1,072,470 )
Tax benefit from exercise of stock-based awards     -       (1,015 )
Net cash used in financing activities     (499,201 )     (2,589,270 )
                 
Net increase (decrease) in cash and cash equivalents     1,386,484       (3,824,160 )
                 
Cash and cash equivalents at beginning of period     6,298,807       8,274,112  
                 
Cash and cash equivalents at end of period   $ 7,685,291     $ 4,449,952  

 

See notes to condensed consolidated financial statements.

  5  

 

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES  

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS   ( continued)

(Unaudited) 

  

    2017     2016  
Schedule of non-cash investing and financing activities                
Additions to buildings and equipment funded through accounts payable   $ 41,000     $ 65,000  
Dividend declared     264,000       215,000  
Issuance of promissory notes receivable     -       3,191,000  
Insurance recoveries proceeds receivable     -       592,000  
                 
Proceeds from land sale remitted to qualified intermediary   $ -     $ 1,051,000  
Principal payments of capital lease obligation remitted from qualified intermediary     -       1,051,000  
                 
Supplemental disclosure of cash flow information:                
Income taxes paid, net of refunds   $ 1,141,000     $ 2,121,000  

 

  6  

 

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

 

1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

 

Overview; Reorganization - Canterbury Park Holding Corporation (the “Company”) was incorporated as a Minnesota corporation in October 2015. The Company is a successor corporation to another corporation, also named Canterbury Park Holding Corporation, that was incorporated in 1994 (“CPHC”). Effective as of the close of business on June 30, 2016 CPHC’s business and operations were reorganized into a holding company structure (the “Reorganization”) pursuant to an Agreement and Plan of Merger dated as of March 1, 2016 that was approved by CPHC’s shareholders on June 28, 2016. Pursuant to the Reorganization:

 

The Company replaced CPHC as the public company owned by CPHC’s shareholders, with each shareholder at June 30, 2016 owning the same number of shares and having the same percentage ownership in the Company (and, indirectly, in all property and other assets then owned by CPHC) immediately after the Reorganization as that shareholder had in CPHC immediately before the Reorganization.

 

The Company became the holding company for and parent company of two subsidiaries, Canterbury Park Entertainment LLC (“EntertainmentCo”) and Canterbury Development LLC (“DevelopmentCo”).

 

EntertainmentCo is the surviving business entity in a merger with CPHC pursuant to the Reorganization and it became the direct owner of all land, facilities, and substantially all other assets related to the CPHC’s pari-mutuel wagering, Card Casino, concessions and other related businesses (“Racetrack Operations”), and EntertainmentCo continues to conduct these businesses consistent with CPHC’s past practices and will continue to be subject to direct regulation by the Minnesota Racing Commission (“MRC”).

 

DevelopmentCo will continue CPHC’s efforts to commercially develop approximately 140 acres of land currently owned or controlled that is not needed for our Racetrack Operations. DevelopmentCo is not subject to direct regulation by the MRC.

 

On July 1, 2016 the shares of the Company’s common stock began trading on the NASDAQ Global Market under the symbol “CPHC.”

  

For purposes of this Report on Form 10-Q, when the term “Company” is used with reference to information covering or related to periods up to and including June 30, 2016, such term refers to the operations of CPHC prior to the Reorganization.

 

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, 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.

 

  7  

 

 

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, 2016, included in its Annual Report on Form 10-K (the “2016 Form 10-K”).

 

The condensed consolidated balance sheets and the related condensed consolidated statements of operations and the cash flows for the periods ended September 30, 2017 and 2016 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 September 30, 2017 and 2016 and for the periods then ended have been made.

   

Summary of Significant Accounting Policies – A detailed description of our significant accounting policies can be found in our most recent Annual Report filed on Form 10-K for the fiscal year ended December 31, 2016. There were no material changes in significant accounting policies during the quarter ended September 30, 2017.

 

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.

 

Reclassifications – Prior period financial statement amounts have been reclassified to conform to current period presentations. Deferred revenue amounts have been reclassified on the December 31, 2016 Consolidated Balance Sheets to Deferred revenue from Accounts payable in the amount of approximately $569,000. Also, certain amounts due to horsepersons have been reclassified from accounts payable to payable to horsepersons and certain amounts have been reclassified from card casino accruals to accrued wages and payroll taxes, which impacted the changes of these items on the Consolidated Statements of Cash Flows .

 

Due to Minnesota Horsemen’s Benevolent and Protective Association, Inc. (“MHBPA”) – 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, $5,313,888 and $6,273,000 for the nine months ended September 30, 2017 and 2016, 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 are not recorded on the Company’s Consolidated Balance Sheet.

 

Recent Accounting Pronouncement In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. The new standard requires that the statement of cash flows explain the change during the period of cash, cash equivalents, and amounts generally described as restricted cash. Entities will also be required to reconcile to the balance sheet and disclose the nature of the restrictions. The guidance will become effective in 2018. While we are continuing to assess all potential impacts of the standard, we believe the most significant impact relates to the presentation of our statement of cash flows where we will be required to reconcile to total cash, cash equivalents, and restricted cash. Currently, our statement of cash flows reconciles to total cash and cash equivalents.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance will become effective in 2018. We are assessing the impact of the new accounting guidance and currently cannot estimate the financial statement impact of adoption.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 is effective in our first quarter of fiscal 2019 on a modified retrospective basis and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-02 on our Condensed Consolidated Financial Statements.

 

  8  

 

 

In May 2014, the FASB issued ASU No. 2014-09,  Revenue from Contracts with Customers , which provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance will become effective in 2018 and will be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. During 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net); and ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients; which clarified the guidance on certain items such as reporting revenue gross versus net and presentation of sales tax, among other things. We are assessing the impact of the new accounting guidance and currently cannot estimate the financial statement impact of adoption.

 

2. 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.

 

Board of Directors Stock Option and Restricted Stock Grants

 

The Company’s Stock Plan authorizes annual grants of restricted stock, deferred stock, and 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 prior to the shares vesting. The Board of Directors’ unvested restricted stock as of September 30, 2017 was 11,264 shares with a weighted average fair value per share of $10.65. There were no unvested stock options outstanding at September 30, 2017 or December 31, 2016.

 

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. Such 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. As of September 30, 2017, 4,500 shares were not vested with a weighted average fair value of $10.46 per share.

 

Stock-based compensation expense related to the LTI Plan, deferred stock awards and restricted stock awards are included on the Condensed Consolidated Statements of Operations and totaled $264,000 and $179,000 for the nine months ended September 30, 2017 and 2016, 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.

 

  9  

 

 

A summary of stock option activity as of September 30, 2017 and changes during the nine months 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, 2017     191,002     $ 9.08                  
Granted     -       -                  
Exercised     (18,500 )     7.23                  
Expired/Forfeited     (15,000 )     13.76                  
Outstanding at September 30, 2017     157,502     $ 8.17       2.0 Years     $ 1,286,382  
                                 
Exercisable at September 30, 2017     157,502     $ 8.17       2.0 Years     $ 1,286,382  

 

 

3. 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 nine months ended September 30, 2017 and 2016:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2017     2016     2017     2016  
Net income (numerator) amounts used for basic and diluted per share computations:   $ 952,635     $ 925,837     $ 2,182,218     $ 3,511,490  
                                 
Weighted average shares (denominator) of common stock outstanding:                                
Basic     4,393,523       4,296,581       4,369,489       4,276,387  
Plus dilutive effect of stock options     25,913       26,220       26,045       17,766  
Diluted     4,419,436       4,322,801       4,395,534       4,294,153  
                                 
Net income per common share:                                
Basic   $ .22     $ .22     $ .50     $ .82  
Diluted     .22       .21       .50       .82  

 

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 three and nine months ended September 30, 2017 because the exercise price of the options exceeded the market price of the Company’s common stock at September 30, 2017.

 

Options to purchase 45,000 shares of common stock at an average price of $12.80 per share were outstanding but not included in the computation of diluted net income per share for the three and nine months ended September 30, 2016 because the exercise price of the options exceeded the market price of the Company’s common stock at September 30, 2016.

 

4. 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 consist of two promissory notes totaling $3,191,000 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 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.

 

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5. GENERAL CREDIT AGREEMENT 

 

The Company has a general credit and security agreement with Bremer Bank, which provides a revolving credit line of up to $6,000,000. This agreement was amended on September 30, 2017 to extend the maturity date to 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 nine months ended September 30, 2017.

 

6. OPERATING SEGMENTS 

 

The Company has three reportable operating segments: horse racing, Card Casino, and food and beverage. The horse racing segment primarily represents simulcast and live horse racing operations. The Card Casino segment represents operations of Canterbury Park’s Card Casino, and the food and beverage segment represents food and beverage operations provided during simulcast and live racing, in the Card Casino, and during special and other catering and events 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 provide information about the Company’s operating segments (in 000’s): 

 

    Nine Months Ended September 30, 2017  
    Horse Racing     Card Casino     Food and Beverage     Total  
                         
Net revenues from external customers   $ 13,952     $ 23,797     $ 7,207     $ 44,956  
                                 
Intersegment revenues     682               1,106       1,788  
                                 
Net interest income (expense)     37                       37  
                                 
Depreciation     1,428       317       124       1,869  
                                 
Segment (loss) income before income taxes     (801 )     4,828       1,407       5,434  
                                 

 

    At September 30, 2017  
Segment Assets   $ 52,421     $ 55     $ 20,968     $ 73,444  

 

 

    Nine Months Ended September 30, 2016  
    Horse Racing     Card Casino     Food and Beverage     Total  
                         
Net revenues from external customers   $ 12,389     $ 21,445     $ 7,029     $ 40,863  
                                 
Intersegment revenues     653       -       1,015       1,668  
                                 
Net interest income     (48 )     -       -       (48 )
                                 
Depreciation     1,430       317       120       1,867  
                                 
Segment (loss) income before income taxes (1)     1,229       5,317       890       7,436  
                                 

 

    At December 31, 2016  
Segment Assets   $ 48,302     $ 478     $ 19,039     $ 67,819  

 

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1 – For the nine months ended September 30, 2016, Segment (loss) income before income taxes for Horse Racing includes the gain on sale of land and gain on insurance recoveries of approximately $3,990,000 and $592,000, respectively.

 

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

 

    Nine Months Ended September 30,  
    2017     2016  
Revenues            
Total net revenues for reportable segments   $ 46,745     $ 42,531  
Elimination of intersegment revenues     (1,789 )     (1,668 )
Total consolidated net revenues   $ 44,956     $ 40,863  

 

Income before income taxes            
Total segment income before income taxes   $ 5,434     $ 7,436  
Elimination of intersegment income before income taxes     (1,807 )     (1,505 )
Total consolidated income before income taxes   $ 3,627     $ 5,931  

 

 

    September 30,     December 31,  
    2017     2016  
Assets                
Total assets for reportable segments   $ 73,444     $ 67,819  
Elimination of intercompany receivables     (20,118 )     (18,194 )
Total consolidated assets   $ 53,326     $ 49,625  

 

7. 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. 

 

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 and 2017, 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 September 30, 2017 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.

 

8. COOPERATIVE MARKETING AGREEMENT 

 

As discussed in Note 7, 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. Such payments have no direct impact on the Company’s consolidated financial statements or operations.

 

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Under the terms of the CMA, as amended, the SMSC paid the horsemen $7.2 million and $6.7 million in the first nine months of 2017 and 2016, 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 $1,581,000 and $1,197,000 for marketing purposes during the nine months ended September 30, 2017 and 2016, respectively.

 

In each of January 2015, 2016, and 2017 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 2018 through 2022:

 

Year   Purse Enhancement Payments to Horsemen 1   Marketing Payments to Canterbury Park  
2018   $ 7,380,000     $ 1,620,000  
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 consolidated statements of operations. For the three and nine months ended September 30, 2017, the Company recorded $672,000 and $1,298,000 in other revenue and incurred $569,000 and $1,128,000 in advertising and marketing expense and $57,000 and $170,000 in depreciation related to the SMSC marketing payment. For the three and nine months ended September 30, 2016, the Company recorded $366,000 and $610,000 in other revenue and incurred $312,000 and $440,000 in advertising and marketing expense and $57,000 and $170,000 in depreciation related to the SMSC marketing payment. The excess of amounts received over revenue is reflected as deferred revenue which is included on the consolidated balance sheets.

 

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.

 

9. INCOME TAXES

 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which requires companies to recognize additional tax benefits or expenses related to the vesting or settlement of employee share based awards as income tax provision or benefit in the income statement in the reporting period in which they occur. In addition, ASU 2016-09 requires that all tax related cash flows resulting from share-based payments, including the excess tax benefits related to settlement of stock-based awards, be classified as cash flows from operating activities in the statement of cash flows. The Company adopted this ASU at March 31, 2017. The adoption of ASU 2016-09 required no retrospective adjustments to the financial statements. In addition there was no material cumulative-effect adjustment to retained earnings. Upon adoption, the Company is required to recognize all excess tax benefits in the statement of earnings.

 

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS 

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Canterbury Park Holding Corporation, our operations, our financial results and financial condition and our present business environment. This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes to the financial statements (the “Notes”).  

 

Overview: 

 

Canterbury Park Holding Corporation (the “Company,” “we,” “our,” or “us”) conducts pari-mutuel wagering operations and hosts “unbanked” card games at its Canterbury Park Racetrack and Card Casino facility (the “Racetrack”) in Shakopee, Minnesota, which is approximately 25 miles southwest of downtown Minneapolis. The Racetrack is the only facility in the State of Minnesota that offers live pari-mutuel thoroughbred and quarter horse racing.

 

The Company’s pari-mutuel wagering operations include both wagering on thoroughbred and quarter horse races during live meets at the Racetrack each year from May through September, and year-round wagering on races held at out-of-state racetracks that are televised simultaneously at the Racetrack (“simulcasting”). Unbanked card games, in which patrons compete against each other, are hosted in the Card Casino at the Racetrack. The Card Casino operates 24 hours a day, seven days a week. The Card Casino offers both poker and table games at up to 80 tables. The Company also derives revenues from related services and activities, such as concessions, parking, advertising signage, publication sales, and from other entertainment events and activities held at the Racetrack.

Recent Reorganization . The Company was incorporated as a Minnesota corporation in October 2015. The Company is a successor corporation to another corporation, also named Canterbury Park Holding Corporation, that was incorporated in 1994 (“CPHC”). Effective as of the close of business on June 30, 2016, CPHC’s business and operations were reorganized into a holding company structure (the “Reorganization”) pursuant to an Agreement and Plan of Merger dated as of March 1, 2016 that was approved by CPHC’s shareholders on June 28, 2016.

 

Further information regarding the Reorganization is set forth at Note 1 in the Notes to Condensed Consolidated Financial Statements under Part I above and in the Company’s Registration Statement on Form S-4 (File No. 333-210877) filed with the SEC on April 22, 2016, which information is incorporated herein by reference.

 

For purposes of this Report on Form 10-Q, when the term “Company” is used with reference to information covering or related to periods up to and including June 30, 2016, such term refers to the operations of CPHC prior to the Reorganization.

 

Operations Review for the Three and Nine Months Ended September 30, 2017:  

 

EBITDA

 

EBITDA represents earnings before interest, income tax expense, and depreciation and amortization. EBITDA is not a measure of performance or liquidity calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), and should not be considered an alternative to, or more meaningful than, net income as an indicator of our operating performance or cash flows from operating activities as a measure of liquidity. EBITDA is presented as a supplemental disclosure because it is a widely used measure of performance and a basis for valuation of companies in our industry. Moreover, other companies that provide EBITDA information may calculate EBITDA differently than we do. Adjusted EBITDA reflects additional adjustments to net income to eliminate unusual items. For the three months ended September 30, 2016, adjusted EBITDA excluded the gain on insurance recoveries. For the nine months ended September 30, 2016, adjusted EBITDA excluded the gain on sale of land and gain on insurance recoveries.

 

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The following table sets forth a reconciliation of net income, a GAAP financial measure, to EBITDA and adjusted EBITDA (defined above) which are non-GAAP financial measures, for the three and nine months ended September 30, 2017 and 2016:

 

Summary of EBITDA Data                        
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2017     2016     2017     2016  
NET INCOME   $ 952,635     $ 925,837     $ 2,182,218     $ 3,511,490  
  Interest (income) expense, net     (13,575 )     (538 )     (37,178 )     48,488  
  Income tax expense     597,753       633,606       1,444,753       2,419,447  
  Depreciation     646,050       672,465       1,869,048       1,866,975  
EBITDA     2,182,863       2,231,370       5,458,841       7,846,400  
  Gain on insurance recoveries     0       (592,276 )     0       (592,276 )
  Gain on sale of land     0       0       0       (3,990,519 )
ADJUSTED EBITDA   $ 2,182,863     $ 1,639,094     $ 5,458,841     $ 3,263,605  

 

Adjusted EBITDA increased $544,000 or 33.2%, and increased as a percentage of net revenues to 12.4% from 9.9% for the three months ended September 30, 2017 as compared to the same period in 2016. Adjusted EBITDA increased $2,195,000, or 67.3%, and increased as a percentage of net revenues to 12.2% from 8.0% for the nine months ended September 30, 2017 as compared to the same period in 2016. The increase for the three and nine months ended September 30, 2017 is primarily due to the increase in revenues compared to the same periods in 2016.

 

Revenues:

 

Total net revenues for the three months ended September 30, 2017 were $17,667,000, an increase of $1,036,000, or 6.2%, compared to total net revenues of $16,630,000 for the three months ended September 30, 2016. This increase primarily consists of increases in pari-mutuel and card casino revenue of 8.8% and 8.9%, respectively, partially offset by a decrease in food and beverage revenue of 7.6%. Total net revenues for the nine months ended September 30, 2017 were $44,956,000, an increase of $4,094,000, or 10.0%, compared to total net revenues of $40,863,000 for the nine months ended September 30, 2016. This increase primarily consists of increases in pari-mutuel, food and beverage and card casino revenue of 11.7%, 2.1% and 11.0%, respectively. See below for a further discussion of our sources of revenues.

 

Pari-Mutuel Data Revenue:                        
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2017     2016     2017     2016  
                         
    Simulcast   $ 1,407,000     $ 1,315,000     $ 4,386,000     $ 4,422,000  
    Live Racing     1,392,000       1,349,000       2,335,000       2,086,000  
    Guest Fees     783,000       772,000       1,279,000       1,210,000  
    Other Revenue (1)     284,000       119,000       902,000       253,000  
   Total Pari-Mutuel Revenue   $ 3,866,000     $ 3,555,000     $ 8,902,000     $ 7,971,000  
                                 
Racing Days                                
     Simulcast only racing days     52       46       206       205  
     Live and simulcast racing days     40       46       67       69  
Total Number of Racing Days     92       92       273       274  

 

1 – Includes source market fees received pursuant to Advanced Deposit Wagering (ADW) legislation effective November 1, 2016.

 

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Total pari-mutuel revenue increased $311,000, or 8.8%, for the three months ended September 30, 2017, compared to the same period in 2016. The increase in other pari-mutuel revenue is due to receipt of $155,000 in source market fees received under Advanced Deposit Wagering (ADW) legislation that took effect on November 1, 2016. The ADW legislation allows Minnesota residents to engage in pari-mutuel wagering on out-of-state horse races online with a prefunded account through an ADW provider. The Company receives a percentage of monies wagered (generally 3.25% to 5.0%) by Minnesota residents through the ADW provider as a source market fee. The Company receives 72% of the gross source market fees less the amount of at least 50% for purses and breeders’ awards. The percentage of source marketing fee retained by the Company is recorded as operating revenue and the percentage to the purses and breeders’ awards are recorded as operating expenses. Simulcast revenue increased $92,000 primarily due to a small group of individual players who placed a significantly high volume of bets in the quarter. Total pari-mutuel revenue increased $931,000, or 11.7%, for the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to $655,000 received in ADW source market fees in the first nine months of 2017. Additionally, on-track live racing revenue increased $249,000 primarily due to an increase in statutory take-out levels as compared to 2016 when the Company reduced the take-out on its live races as a promotion to increase wagering dollars (“handle”), but also resulted in substantially reduced revenue.

 

Card Casino Revenue: 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2017     2016     2017     2016  
Poker Games   $ 2,172,000     $ 2,238,000     $ 6,719,000     $ 6,953,000  
Table Games     5,121,000       4,475,000       15,022,000       12,557,000  
     Total Collection Revenue     7,293,000       6,713,000       21,741,000       19,510,000  
Other Revenue     687,000       612,000       2,056,000       1,935,000  
    Total Card Casino Revenue   $ 7,980,000     $ 7,325,000     $ 23,797,000     $ 21,445,000  

 

The primary source of Card Casino revenue is a percentage of the wagers received from the players as compensation for providing the Card Casino facility and services, which is referred to as “collection revenue.” Other Revenue presented above includes fees collected for the administration of tournaments and amounts earned as reimbursement of the administrative costs of maintaining jackpot funds.

 

As indicated in the table above, total Card Casino revenue increased $655,000, or 8.9%, and $2,352,000 or 11.0%, for the three and nine months, respectively, ended September 30, 2017 compared to the same periods in 2016. The increases are a result of increased play on table games. In management’s judgement, increased play is attributable to players spending more money due to a stronger economy, as well as an overall increase in card casino marketing initiatives. Also, higher jackpots on certain games drove increased play.

 

Food and Beverage Revenue:

 

Food and beverage revenue decreased $262,000, or 7.6%, for the three months ended September 30, 2017 compared to the same period in 2016. The decrease is attributable to six less live racing days compared to the 2016 third quarter. Additionally, there was a decline in attendance for a concert conducted in the 2017 third quarter compared to the 2016 third quarter. Food and beverage revenue increased $143,000, or 2.1%, for the nine months ended September 30, 2017 compared to the same period in 2016 due to hosting more special events in the nine months ended September 30, 2017 compared to the same period in 2016.

 

Other Revenue:

 

Compared to the same periods in 2016, other revenue increased $335,000, or 14.3%, and $682,000, or 14.2% for the three and nine months, respectively, ended September 30, 2017 compared to the same periods in 2016. The increases are due to increased admission revenue from a greater number of premium priced live racing days during 2017 and event admission revenue from a greater number of special events hosted. Also, the Company received higher payments under the CMA for joint marketing efforts with the SMSC. See “Cooperative Marketing Agreement” below. The amounts earned from the marketing payments are offset by an increase in other expenses related to RiverSouth, which is an area wide marketing association that promotes Shakopee entertainment venues.

 

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Operating Expenses:

 

The Company’s operating expenses during the 2017 third quarter were $16,130,000, an increase of $1,058,000, or 7.0%, from the third quarter 2016 expenses of $15,072,000, and the Company’s operating expenses during the nine months ended September 30, 2017 were $41,367,000, an increase of $6,483,000, or 18.6%, from $34,883,000 in the nine months ended September 30, 2016. Operating expenses in the 2016 third quarter included an insurance recovery of $592,276 related to storm damage in 2014 that was accounted for as a reduction in operating expense. The 2016 year-to-date operating expenses reflect the previously reported $3,990,519 pretax gain on sale of land in the 2016 second quarter that was also accounted for as a reduction in operating expense. Excluding insurance recoveries from 2016, operating expenses for the third quarter 2017 increased $396,000 or 2.5%. Excluding insurance recoveries and gain on sale of land from 2016, operating expenses for the nine month period ended September 30, 2017 increased $1,781,000 or 4.5%. The following paragraphs provide further detail regarding certain operating expenses.

 

Purse expense increased $97,000, or 4.5%, and $427,000, or 8.5% for the three and nine months, respectively, ended September 30, 2017 compared to the same periods in 2016. Also, Minnesota Breeders’ Fund expense increased $33,000, or 13.1%, and $169,000, or 26.6%, for the three and nine months, respectively, ended September 30, 2017 compared to the same periods in 2016. The increases are primarily due to increased Card Casino revenues and increased purse fund payments due to ADW source market arrangements.

 

Salaries and benefits increased $330,000, or 5.3%, and $739,000, or 4.3%, for the three and nine months, respectively, ended September 30, 2017 compared to the same periods in 2016. The increases are partially due to the State of Minnesota mandated increase of $0.50 in the minimum wage effective August 2016, as well as an increase in employee incentive compensation resulting from an increase in performance from operations.

 

The gain on sale of land is due to the sale of approximately 24 acres of land adjacent to the Racetrack for a total consideration of $4.3 million.

 

During 2014, the Company incurred damage to buildings from multiple severe storms at the Racetrack. As of September 30, 2016, the Company recognized a $592,000 insurance recoveries gain in the Consolidated Statements of Operations as “Gain on insurance recoveries.”

 

Professional and contracted services increased $20,000, or 1.3%, and $237,000, or 7.1%, for the three and nine months, respectively, ended September 30, 2017 compared to the same periods in 2016. The nine month increase is primarily due to increased live racing contracted services as a result of additional live racing weeks and increased consulting fees, primarily related to development initiatives.

 

Advertising and marketing increased $286,000, or 28.2% and other expenses decreased $165,000, or 11.4%, for the three months ended September 30, 2017 compared to the same period in 2016. This is due to a reclassification of expenses associated with RiverSouth.

 

Income tax expense decreased $36,000, or 5.7%, and $975,000, or 40.3% for the three and nine months, respectively, ended September 30, 2017 compared to the same periods in 2016. The decreases related to tax expense associated with the gain on sale of land and gain on insurance recoveries in 2016 that did not recur in 2017. The effective rate was approximately 41% for both periods ended September 30, 2017 and 2016.

 

Net income for the three months ended September 30, 2017 and 2016 was $953,000 and $926,000, respectively. Net income for the nine months ended September 30, 2017 and 2016 was $2,182,000 and $3,511,000, respectively.

 

Contingencies: 

 

The Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community which became effective on June 4, 2012, and was amended in January 2015, 2016, and 2017, and will expire 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 would occur and that the Company would be required to pay the specified amount related to such covenant is remote.

 

The Company continues to analyze the feasibility of various options related to the development of our underutilized land. The Company may incur substantial costs during the feasibility and predevelopment process, but the Company believes available funds are sufficient to cover the costs. See Liquidity and Capital Resources for more information on liquidity and capital resource requirements.

 

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Liquidity and Capital Resources: 

 

Net cash provided by operating activities for the nine months ended September 30, 2017 was $5,104,000 primarily from net income of $2,182,000, depreciation of $1,869,000, and stock-based compensation and 401(k) match totaling $614,000. The Company also experienced an increase in accounts payable and deferred revenue of $623,000 and a decrease in income taxes receivable of $511,000. This was partially offset by an increase in restricted cash of $769,000.

 

Net cash provided by operating activities for the nine months ended September 30, 2016 was $2,543,000 primarily as a result of the following: The Company reported net income of $3,511,000, depreciation of $1,867,000, and deferred income taxes of $973,000. The Company also experienced an increase in accounts payable and deferred revenue of $1,634,000 and Card Casino accruals of $621,000. This was partially offset by an increase in restricted cash of $574,000 and due from Minnesota horsemen associations of $1,101,000, and partially offset by the gain on disposal of assets relating to the sale of land of $3,990,000 and gain on insurance recoveries of $592,000.

 

Net cash used in investing activities for the first nine months of 2017 was $3,219,000, primarily for building remodel projects. Net cash used in investing activities for the first nine months of 2016 was $3,777,000, primarily for building remodel projects and the purchase of land.

 

Net cash used in financing activities during the first nine months of 2017 was $499,000, primarily for cash dividends to shareholders, partially offset by proceeds from purchases of stock through the Employee Stock Purchase Plan and proceeds received upon the exercise of stock options. Net cash used in financing activities during the first nine months of 2016 was $2,589,000, primarily for principal payments of capital lease obligations and payment of cash dividends to shareholders.

 

The Company has a general credit and security agreement with Bremer Bank, which provides a revolving credit line of up to $6,000,000. This agreement was amended on September 30, 2017 to extend the maturity date to September 30, 2018. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company. As of September 30, 2017, there were no borrowings under this agreement

 

The Company’s cash and cash equivalent balance at September 30, 2017 was $7,685,000 compared to $6,299,000 at December 31, 2016. The Company believes that unrestricted funds available in its cash accounts, amounts available under its revolving line of credit, along with funds generated from operations, will be sufficient to satisfy its liquidity and capital resource requirements for regular operations, as well as predevelopment expenses during 2017. However, if the Company engages in any significant real estate development, additional financing would more than likely be required.

 

Critical Accounting Policies and Estimates:

 

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

 

Our significant accounting policies are included in Note 1 to our consolidated financial statements in our 2016 Annual Report on Form 10-K. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Property and Equipment - We have significant capital invested in our property and equipment, which represents 68.9% of our total assets at September 30, 2017. We utilize our judgment in various ways including: determining whether an expenditure is considered a maintenance expense or a capital asset; determining the estimated useful lives of assets; and determining if or when an asset has been impaired or has been disposed. Management periodically reviews the carrying value of property and equipment for potential impairment by comparing the carrying value of these assets with their related expected undiscounted future net cash flows. If the sum of the related expected future net cash flows is less than the carrying value, management would determine how much of an impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. To date, we have determined that no impairment of these assets exists.

 

  18  

 

 

Stock-Based Compensation – Accounting guidance requires measurement of services provided in exchange for a share-based payment based on the grant date fair market value. We utilize our judgment in determining the assumptions used to determine the fair value of equity instruments granted using a Black-Scholes model.

 

Commitments and Contractual Obligations:

 

The Company entered into the CMA with the SMSC on June 4, 2012, that was amended in January 2015, 2016 and 2017 and expires December 31, 2022. See “Cooperative Marketing Agreement” below. 

 

Legislation:

 

Minimum Wage Legislation

 

Legislation that was enacted into law in 2014 increased the minimum wage that must be paid to most company employees from $7.25 to $8.00 on August 1, 2014, and from $8.00 to $9.00 per hour on August 1, 2015. A further increase from $9.00 to $9.50 per hour went into effect on August 1, 2016. In addition, starting January 1, 2018, the minimum wage will increase at the beginning of each year by the rate of inflation with a maximum increase of up to 2.5% per year. Prior to August 1, 2014, the Company employed a large number of individuals who received an hourly wage equal to or slightly above $7.25 per hour. As a result, this legislation has had an adverse financial impact in 2016 and 2017 and will continue to have an adverse impact. We have implemented measures to partially mitigate the impact of this increase by raising our prices and/or reducing our employee count. However, these measures could themselves have an adverse effect because higher prices and diminished service levels may discourage customers from visiting the Racetrack.

 

Cooperative Marketing Agreement:

 

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. Such 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 $7.2 million and $6.7 million in the first nine months of 2017 and 2016, 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 $1,581,000 and $1,197,000 for marketing purposes during the three months ended September 30, 2017 and 2016, respectively.

 

In each of January 2015, 2016, and 2017 the CMA was amended three times 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 2018 through 2022:

 

 

Year   Purse Enhancement Payments to Horsemen 1   Marketing Payments to Canterbury Park  
2018     7,380,000       1,620,000  
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

 

  19  

 

 

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 consolidated statements of operations. For the three and nine months ended September 30, 2017, the Company recorded $672,000 and $1,298,000 in other revenue and incurred $569,000 and $1,128,000 in advertising and marketing expense and $57,000 and $170,000 in depreciation related to the SMSC marketing payment. For the three and nine months ended September 30, 2016, the Company recorded $366,000 and $610,000 in other revenue and incurred $312,000 and $440,000 in advertising and marketing expense and $57,000 and $170,000 in depreciation related to the SMSC marketing payment. The excess of amounts received over revenue is reflected as deferred revenue which is included on the consolidated balance sheets.

 

Under the CMA, the Company has agreed for the 10 ½ year term of the CMA expiring December 31, 2022 that it will not promote or lobby the Minnesota legislature for expanded gambling authority and will support the SMSC’s lobbying efforts against expanding gambling authority.

 

Forward-Looking Statements:

 

From time-to-time, in reports filed with the Securities and Exchange Commission, in press releases, and in other communications to shareholders or the investing public, we may make forward-looking statements concerning possible or anticipated future financial performance, prospective business activities or plans which are typically preceded by words such as “believes,” “expects,” “anticipates,” “intends” or similar expressions. For such forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in federal securities laws. Shareholders and the investing public should understand that such forward-looking statements are subject to risks and uncertainties which could affect our actual results and cause actual results to differ materially from those indicated in the forward-looking statements. Such risks and uncertainties include, but are not limited to: material fluctuations in attendance at the Racetrack, decline in interest in wagering on horse races at the Racetrack, at other tracks, or on unbanked card games offered at the Card Casino, competition from other venues offering unbanked card games or other forms of wagering, greater than anticipated expenses or a lower than anticipated return on the development of our underutilized land, competition from other sports and entertainment options, increases in compensation and employee benefit costs, increases in the percentage of revenues allocated for purse fund payments, higher than expected expenses related to new marketing initiatives, the impact of wagering products and technologies introduced by competitors, legislative and regulatory decisions and changes, the general health of the gaming sector, and other factors that are beyond our ability to control or predict.

 

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  

 

Canterbury Park is not required to provide the information requested by this Item as it qualifies as a smaller reporting company. 

 

ITEM 4: CONTROLS AND PROCEDURES 

 

(a) Evaluation of Disclosure Controls and Procedures:
   
  The Company’s President and Chief Executive Officer, Randall D. Sampson and Chief Financial Officer, Robert M. Wolf, have reviewed the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based upon this review, these officers have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that the disclosure controls are also effective to ensure that information required to be disclosed in the Company’s Exchange Act reports is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Control over Financial Reporting:
   
  There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during our fiscal quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  20  

 

 

PART II 

OTHER INFORMATION 

 

Item 1.     Legal Proceedings 
       
      Not Applicable. 
       
Item 1A.     Risk Factors  
       
      There have been no material changes to the Risk Factors reported under Item 1A in the Form 10-K for the year ended December 31, 2016, and the risk factors presented therein are incorporated by reference herein. 
       
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds  
       
  (a)   Not Applicable. 
  (b)   Not Applicable. 
 

(c)

 

 

 

 

 

 

  On December 17, 2007, the Company’s Board of Directors adopted a plan that authorized the repurchase of up to 250,000 shares of the Company’s common stock pursuant to Exchange Act Rule 12b-18 in open market transactions, block purchases of privately negotiated transactions (the “2008 Stock Repurchase Plan”).  From its adoption until August 13, 2012, the Company repurchased 216,543 shares under the 2008 Stock Repurchase Plan and, on such date, authorized the repurchase of an additional 100,000 shares of the Company’s common stock.  The Company did not repurchase any shares during the third quarter of 2017.  The maximum number of shares that may yet be purchased under the above authorizations is 128,781 as of September 30, 2017.
       
Item 3.     Defaults upon Senior Securities  
       
      Not Applicable. 
       
Item 4.     Mine Safety Disclosures
       
      Not Applicable.
       
Item 5.     Other Information  
       
      Not Applicable.
       
Item 6.     Exhibits  
       
   

11

 

Statement re computation of per share earnings – See Net Income Per Share under Note 3 of Notes to Consolidated Financial Statements under Part 1, Item 1, which is incorporated herein by reference.  
       
    31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (rules 13a-14 and 15d-14 of the Exchange Act). 
       
   

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (rules 13a-14 and 15d-14 of the Exchange Act).  
       
    32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 

 

101

 

 

 

The following financial information from Canterbury Park Holding Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017, formatted in eXtensible Business Reporting Language XBRL: (i) Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (ii) Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2017 and September 30, 2016, (iii) Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2017 and September 30, 2016, and (iv) Notes to Financial Statements. 

 

  21  

 

 

SIGNATURES  

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

   
  Canterbury Park Holding Corporation 
   
   
Dated:  November 14, 2017 /s/ Randall D. Sampson

  Randall D. Sampson,  
  President and Chief Executive Officer
   
   
Dated:  November 14, 2017 /s/ Robert M. Wolf
  Robert M. Wolf,  
  Chief Financial Officer

 

  22  

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