Canterbury Park Holding Corp - Quarter Report: 2021 March (Form 10-Q)

 

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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, 2021.

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

 

 ​

 

CANTERBURY PARK HOLDING CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

	Minnesota		47-5349765
	(State or Other Jurisdiction of Incorporation or		(I.R.S. Employer
	Organization)		Identification No.)

 

	1100 Canterbury Road
	Shakopee, MN 55379

(Address of principal executive offices and zip code) ​

 

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

 ​

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

☒

 

The Company had 4,764,942 shares of common stock, $.01 par value, outstanding as of May 1, 2021.

 

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Canterbury Park Holding Corporation

INDEX

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			Page
PART I.	FINANCIAL INFORMATION		​
​	Item 1.	Financial Statements (unaudited)	​
​	​	​	​
		Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020	2
​	​	​	​
​	​	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020	3
​	​	​	​
​	​	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020	4
​	​	​	​
​	​	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020	5
​	​	​	​
​	​	Notes to Condensed Consolidated Financial Statements	7
​	​	​	​
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
	Item 4.	Controls and Procedures	27
PART II.	OTHER INFORMATION		​
	Item 1.	Legal Proceedings	28
	Item 1A.	Risk Factors	28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
	Item 3.	Defaults Upon Senior Securities	28
	Item 4.	Mine Safety Disclosures	28
	Item 5.	Other Information	28
	Item 6.	Exhibits	29
	Signatures		29

 ​

 

		(Unaudited)
		March 31,				December 31,
		2021				2020
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	2,271,227			$	—
Restricted cash			3,855,368				4,471,712
Accounts receivable, net of allowance of $19,250 for both periods			322,135				231,255
Inventory			220,693				218,791
Prepaid expenses			711,149				498,642
Income taxes receivable			3,556,915				4,031,621
Total current assets			10,937,487				9,452,021
LONG-TERM ASSETS
Deposits			49,500				49,500
Other prepaid expenses			76,723				—
TIF receivable			12,041,157				11,888,570
Related party receivable			1,464,583				1,541,910
Operating lease right-of-use assets			45,057				45,057
Equity investment			6,877,405				7,515,108
Land held for development			4,805,417				4,805,417
Property, plant, and equipment, net			33,014,705				33,507,204
TOTAL ASSETS		$	69,312,034			$	68,804,787
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable			1,937,039				2,953,586
Card Casino accruals			2,889,285				2,327,994
Accrued wages and payroll taxes			2,146,481				1,150,102
Accrued property taxes			998,135				804,817
Deferred revenue			483,154				435,866
Payable to horsepersons			1,339,346				2,374,696
Current portion of finance lease obligations			26,071				25,749
Current portion of operating lease obligations			22,271				22,271
Total current liabilities			9,841,782				10,095,081
LONG-TERM LIABILITIES
Deferred income taxes			7,347,700				7,347,700
Finance lease obligations, net of current portion			39,395				46,035
Operating lease obligations, net of current portion			22,786				22,786
Total long-term liabilities			7,409,881				7,416,521
TOTAL LIABILITIES			17,251,663				17,511,602
STOCKHOLDERS’ EQUITY
Common stock, $.01 par value, 10,000,000 shares authorized, 4,764,942 and 4,748,012 respectively, shares issued and outstanding			47,649				47,480
Additional paid-in capital			23,847,636				23,631,618
Retained earnings			28,165,086				27,614,087
Total stockholders’ equity			52,060,371				51,293,185
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	69,312,034			$	68,804,787

 

		Three Months Ended March 31,
		2021				2020
OPERATING REVENUES:
Pari-mutuel		$	1,153,844			$	1,296,026
Card Casino			6,864,294				7,561,172
Food and beverage			374,471				1,118,995
Other			832,933				972,766
Total Net Revenues			9,225,542				10,948,959
OPERATING EXPENSES:
Purse expense			976,360				1,103,394
Minnesota Breeders’ Fund			175,140				189,744
Other pari-mutuel expenses			185,295				220,849
Salaries and benefits			3,967,348				5,577,893
Cost of food and beverage and other sales			205,637				564,151
Depreciation and amortization			689,585				716,853
Utilities			275,730				290,611
Advertising and marketing			56,452				183,988
Professional and Contracted Services			735,847				972,324
Other operating expenses			686,037				987,457
Total Operating Expenses			7,953,431				10,807,264
INCOME FROM OPERATIONS			1,272,111				141,695
OTHER (LOSS) INCOME
Loss from equity investment			(637,704	)			—
Interest income, net			169,310				163,690
Net Other (Loss) Income			(468,394	)			163,690
INCOME BEFORE INCOME TAXES			803,717				305,385
INCOME TAX EXPENSE			(252,224	)			(50,164	)
NET INCOME		$	551,493			$	255,221
Basic earnings per share		$	0.12			$	0.05
Diluted earnings per share		$	0.12			$	0.05
Weighted Average Basic Shares Outstanding			4,754,496				4,659,579
Weighted Average Diluted Shares			4,754,504				4,662,675
Cash dividends declared per share		$	0.00			$	0.00

 

		Number of				Common				Additional				Retained
		Shares				Stock				Paid-in Capital				Earnings				Total
Balance at December 31, 2020			4,748,012			$	47,480			$	23,631,618			$	27,614,087			$	51,293,185
Exercise of stock options			3,654				36				48,562				—				48,598
Stock-based compensation							—				103,130				—				103,130
Dividend distribution			—				—				—				(494	)			(494	)
401(K) stock match			6,575				66				90,341				—				90,407
Issuance of deferred stock awards			6,701				67				(26,015	)			—				(25,948	)
Net income			—				—				—				551,493				551,493
Balance at March 31, 2021			4,764,942			$	47,649			$	23,847,636			$	28,165,086			$	52,060,371

		Number of				Common				Additional				Retained
		Shares				Stock				Paid-in Capital				Earnings				Total
Balance at December 31, 2019			4,644,522			$	46,445			$	22,733,933			$	26,635,732			$	49,416,110
Exercise of stock options			24,250				242				200,548				—				200,790
Other share retirements			(9,920	)			(99	)			(44,587	)			(79,512	)			(124,198	)
Stock-based compensation			—				—				57,606				—				57,606
401(K) stock match			17,179				172				160,795				—				160,967
Issuance of deferred stock awards			18,107				181				(72,560	)			—				(72,379	)
Net Income			—				—				—				255,221				255,221
Balance at March 31, 2020			4,694,138			$	46,941			$	23,035,735			$	26,811,441			$	49,894,117

 

		Three Months Ended March 31,
		2021				2020
Operating Activities:
Net income		$	551,493			$	255,221
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			689,585				716,853
Stock-based compensation expense			103,130				57,606
Stock-based employee match contribution			90,407				160,967
Deferred income taxes			—				259,200
Loss from equity investment			637,704				—
Changes in operating assets and liabilities:
Accounts receivable			(90,880	)			(67,218	)
Other current assets			(291,132	)			74,733
Income taxes receivable/payable			474,706				(645,771	)
Operating lease right-of-use assets			—				1,921
Operating lease liabilities			—				(1,921	)
Accounts payable			(1,084,383	)			960,781
Deferred revenue			47,288				(127,309	)
Card Casino accruals			561,291				(512,051	)
Accrued wages and payroll taxes			996,379				(1,364,320	)
Accrued property taxes			193,318				254,913
Payable to horsepersons			(1,035,350	)			327,215
Net cash provided by operating activities			1,843,556				350,820
Investing Activities:
Additions to property, plant, and equipment			(129,251	)			(825,937	)
Increase in TIF receivable			(152,587	)			(148,557	)
Decrease in related party receivable			77,327				—
Proceeds from sale of investments			—				103,886
Net cash used in investing activities			(204,511	)			(870,608	)
Financing Activities:
Proceeds from issuance of common stock			48,598				76,592
Payments against line of credit			—				(1,450,000	)
Borrowings on line of credit			—				1,450,000
Cash dividend paid to shareholders			(494	)			(324,439	)
Payments for taxes related to net share settlement of equity awards			(25,948	)			(72,379	)
Principal payments on finance lease			(6,318	)			(6,011	)
Net cash provided by (used in) financing activities			15,838				(326,237	)
Net increase in cash, cash equivalents, and restricted cash			1,654,883				(846,025	)
Cash, cash equivalents, and restricted cash at beginning of period			4,471,712				3,927,098
Cash, cash equivalents, and restricted cash at end of period		$	6,126,595			$	3,081,073

Schedule of non-cash investing and financing activities
Additions to buildings and equipment funded through accounts payable		$	68,000			$	298,000
Transfer of future TIF reimbursed costs from PP&E			153,000				149,000
Supplemental disclosure of cash flow information:
Income taxes paid		$	100,000			$	—
Interest paid			1,000				11,000

 

1.    OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Business – Canterbury Park Holding Corporation’s (the “Company,” “we,” “our,” or “us”) 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 typically 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 typically 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 are from 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 underutilized land surrounding the Racetrack in a project known as Canterbury Commons^TM, with approximately 140 acres originally designated as underutilized. The Company is pursuing several mixed-use development opportunities for this land, directly and through joint ventures.

 

In January 2020, an outbreak of a respiratory illness caused by a new strain of coronavirus was identified. The disease has since spread rapidly across the world, causing the World Health Organization to declare the outbreak a pandemic (the “COVID-19 Pandemic”) on March 12, 2020. Since that time, governments and businesses have taken measures to limit the impact of the COVID-19 Pandemic, including the issuance of shelter-in-place orders, social distancing measures, travel bans and restrictions and business shutdowns.

 

On March 16, 2020, the Company announced that, based on the advice of Minnesota state and regulatory bodies, it was temporarily suspending all card casino, simulcast, and special events operations at Canterbury Park in response to concerns about the COVID-19 Pandemic. Canterbury Park determined this voluntary suspension of activities was in the best interest of the health and safety of its guests and team members and would provide the Company an opportunity to review and update operational best practices and strategies based on what was currently known about this public health situation and future developments. On June 10, 2020, the Company reopened and resumed simulcast, live racing, and food and beverage operations. The Company also resumed table games and poker operations in the Company’s Card Casino on June 15, 2020 and July 9, 2020, respectively. These reopenings were done in compliance with Minnesota state guidelines on capacity limitations.

 

On November 18, 2020, Minnesota state and regulatory bodies issued an executive order requiring closure of places of public accommodation as a measure to slow the spread of COVID-19. As a result, the Company temporarily suspended all card casino, simulcast, and food and beverage operations from November 21, 2020 through January 10, 2021.

 

The disruptions arising from the COVID-19 Pandemic had a significant impact on the Company's financial condition and operations during the three months ended March 31, 2021. The duration and intensity of this global health emergency and related disruptions is uncertain. Given the dynamic nature of these circumstances, the impact on the Company’s consolidated results of operations, cash flows and financial condition in both 2020 and the first quarter of 2021 has been material, and the Company expects it will continue to be material in the balance of 2021. The Company cannot reasonably estimate at this time when the COVID-19 Pandemic will end, or when or how quickly the current travel restrictions and capacity restrictions will be modified or cease to be necessary, or to what extent visitors will feel comfortable returning to the Company's Card Casino, simulcast, and special events operations. As a result, it is difficult to predict the continuing and future impact on the Company’s business and the willingness of customers to spend on entertainment in venues such as ours.

 

The Company has no long-term debt and a $10,000,000 credit line, of which $8,750,000 is available as of March 31, 2021. The Company anticipates that its existing cash balance, any cash generated from operations and availability under its credit line will provide the Company with the necessary liquidity and financial flexibility to manage through this challenging operating environment. We have taken significant actions to mitigate the effects of the COVID-19 Pandemic on our operations, including initiating workforce reductions and furloughs, implementing reductions in executive pay and board cash retainer, suspending the Company’s quarterly cash dividend, postponing non-essential capital expenditures, reducing operating costs, and substantially reducing discretionary spending. We expect these countermeasures to partially mitigate the impact of COVID-19 on our full year 2021 financial results. As the impact of the COVID-19 Pandemic on the economy and our operations evolves, we will continue to assess the impact on the Company and respond accordingly.

 

 

Basis of Presentation and Preparation – The accompanying condensed consolidated financial statements include the accounts of the Company (Canterbury Park Holding Corporation and its direct and indirect subsidiaries Canterbury Park Entertainment, LLC; Canterbury Park Concessions, 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, 2020, included in its Annual Report on Form 10-K (the “2020 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, 2021 and 2020 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, 2021 and 2020 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 on the 2020 Form 10-K. There were no material changes in significant accounting policies during the three months ended March 31, 2021.

 

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.

 

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, $2,000,000 and $1,185,000 for the three months ended March 31, 2021 and 2020, 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 Condensed 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 (as described below), and import revenue (as described below) contracts to determine whether we are acting as the principal or as the agent when providing services, to determine if we should report revenue on a gross or net basis. An entity acts as a principal if it controls a specified service before that service is transferred to a customer.

 

For on-track revenue and “import revenue,” that is revenue we generate for racing held elsewhere that our patrons wager on, we are entitled to retain a commission for providing a wagering service to our customers. For these arrangements, we are the principal because 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,” when the wagering occurs outside our premises, our customer is the third party wagering site such as a racetrack, Off Track Betting (“OTB”), or advance deposit wagering (“ADW”) 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.

 

In the quarter ended March 31, 2021, the Company recorded as other revenue $515,000 of COVID-19 relief grants, including a lump sum grant of $500,000 from the Convention Center Relief Grant Program, which is overseen by the Minnesota Department of Employment and Economic Development. There were no grants in the quarter ended March 31, 2020.

 

 

 

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. Currently, there is one award outstanding for the three-year period ending December 31, 2021. Beginning in 2020, and as a result of the COVID-19 Pandemic, the Company temporarily suspended the granting of performance awards under its LTI Plan until there is more certainty about the Company’s future operations, and instead granted deferred stock awards designed to retain NEOs and other Senior Executives. 

 

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, 2021 consisted of 20,073 shares with a weighted average fair value per share of $11.17. There were no unvested restricted stock or stock options outstanding at March 31, 2021.

 

Employee Deferred Stock Awards

 

The Company's Stock Plan permits its Compensation Committee to grant stock-based awards, including deferred stock awards, to key employees and non-employee directors. The Company has made deferred stock grants that vest over one to three years. 

 

During the three months ended March 31, 2021, the Company granted employees deferred stock awards totaling 27,900 shares of common stock, with a vesting term of approximately three years and a fair value of $13.33 per share. There were no deferred stock awards granted during the three months ended March 31, 2020. 

 

Deferred stock transactions during the three months ended March 31, 2021 are summarized as follows: 

 

 

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 $103,000 and $58,000 for the three months ended March 31, 2021 and 2020. 

 

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, 2021 and changes during the three months then ended is presented below:

 

 ​ 

 

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 months ended March 31, 2021 and 2020:

 ​

 ​

Options to purchase 9,000 shares of common stock at an average price of $13.30 per share were outstanding but not included in the computation of diluted net income per share for the three months ended March 31, 2020 because the exercise price of the options exceeded the market price of the Company’s common stock at March 31, 2020. There were no out-of-the money stock options at March 31, 2021.

 

 

4.    GENERAL CREDIT AGREEMENT

 

The Company has a general credit and security agreement with a financial institution, which provides a revolving credit line up to $10,000,000 and allows for letters of credit in the aggregate amount of up to $2,000,000 to be issued under the credit agreement. As of March 31, 2021, the bank issued a $1,250,000 letter of credit on behalf of the Company and therefore, the Company has an available credit line up to $8,750,000. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company. The line of credit also includes collateral in the form of a Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents. As of March 31, 2021, the outstanding balance on the line of credit was $0.

 

 

 

5.    OPERATING SEGMENTS

 

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

 

Depreciation, interest, and income taxes are allocated to the segments, but no allocation is made to the food and beverage segment for shared facilities. However, the food and beverage segment pays approximately 25% of gross revenues earned on live racing and special event days to the horse racing segment for use of the facilities. Starting in 2020, the food and beverage segment has not paid a commission to the horse racing segment subsequent to the Company's first temporary shutdown of operations starting March 16, 2020. 

 

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

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

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6.    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 March 4, 2012, was amended in the first quarter of each of 2015, 2016, 2017, 2018, and in June 2020 (as described below in Note 7) and will expire on December 31, 2022. The CMA contains certain covenants that, 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, 2021 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. 

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7.    COOPERATIVE MARKETING AGREEMENT

 

As discussed above in Note 6, on March 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.

 

Because the Company conducted a more limited 2020 live race meet due to the COVID-19 Pandemic, the Company and SMSC entered into the Fifth Amendment Agreement (“Fifth Amendment”) to the CMA effective June 8, 2020. Under the Fifth Amendment, the SMSC agreed to provide up to $5,620,000 for the annual purse enhancement for the year 2020. The annual purse enhancement that the SMSC is obligated to pay under the CMA for 2021 and 2022 was not changed and remains at $7,380,000 per year.

 

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.

 

As noted above and affirmed in the Fifth Amendment, SMSC is obligated to make an annual purse enhancement of $7,380,000 and annual marketing payment of $1,620,000 for 2022. 

 

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, 2021, the Company recorded $47,000 in other revenue, incurred $23,000 in advertising and marketing expense, and incurred $24,000 in depreciation related to the SMSC marketing funds. For the three months ended March 31, 2020, the Company recorded $68,000 in other revenue, incurred $30,000 in advertising and marketing expense, and incurred $38,000 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.

 

 

 

8.  REAL ESTATE DEVELOPMENT

 

Equity Investments

 

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

 

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

 

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. Phase II will include an additional 300 apartment units. Canterbury Development’s equity contribution to Doran Canterbury II for Phase II was approximately 10 acres of land, which were contributed to Doran Canterbury II on July 30, 2020. In connection with its contribution, Canterbury Development became a 27.4% equity member in Doran Canterbury II with Doran owning the remaining 72.6%. As the Company is able to assert significant influence, but not control, over Doran Canterbury II’s operational and financial policies, the Company accounts for the joint venture as an equity method investment.

 

On June 16, 2020, Canterbury Development, entered into an Operating Agreement with an affiliate of Greystone Construction, as the two members of a Minnesota limited liability company named Canterbury DBSV Development, LLC (Canterbury DBSV). Canterbury DBSV was formed as part of a joint venture between Greystone and Canterbury Development LLC for a multi-use development on the 13-acre land parcel located on the southwest portion of the Company’s racetrack. Canterbury Development’s equity contribution to Canterbury DBSV was approximately 13 acres of land, which were contributed to Canterbury DBSV on July 1, 2020. In connection with its contribution, Canterbury Development became a 61.87% equity member in Canterbury DBSV. As the Company is able to assert significant influence, but not control, over Canterbury DBSV’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 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 public 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 property. As of March 31, 2021, the Company recorded a TIF receivable of approximately $12,041,000, which represents $11,193,000 of principal and $848,000 of interest. Management believes future tax revenues generated from current development activity will exceed the Company's development costs and thus, management believes no allowance related to this receivable is necessary. As of December 31, 2020, the Company recorded a TIF receivable of approximately $11,889,000, which represented $11,191,000 of principal and $698,000 of interest. 

 

The Company expects to finance its improvements under the Redevelopment Agreement with funds from its current operating resources and existing credit facility and, potentially, third-party financing sources.

 

The City of Shakopee has authorized changes to the Redevelopment Agreement and the responsibilities of the Company, but the Company, the City of Shakopee and other parties have not formally entered into an agreement that memorializes these changes. The Company will provide updated disclosure when the parties enter into a new agreement. As part of the authorized changes regarding the responsibilities of the Company and the city of Shakopee, improvements on Unbridled Avenue will be primarily constructed by the City of Shakopee. As a result, should Canterbury enter into the agreement that memorializes these changes, the total estimated cost of TIF eligible improvements to be borne by the Company will be reduced by $7,670,000. These improvements were substantially complete as of the date of this filing. 

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Development Agreements

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On April 7, 2020, the Company entered into an agreement to sell approximately 11.3 acres of land on the west side of the Racetrack to a third party for total consideration of approximately $2,400,000. The Company closed on the first phase of this transaction in April 2021, which totaled 7.8 acres of land. The closing of phase two is subject to the satisfaction of certain conditions, and we expect this to occur in 2022. 

 

On April 15, 2020, the Company entered into an agreement to sell approximately 2.4 acres of land on the west side of the Racetrack to a third party for total consideration of approximately $1,100,000. The Company closed on this transaction in April 2021. 

 

 

9.  LEASES

 

The Company determines if an arrangement is a lease or contains a lease at inception. The Company leases some office equipment under finance leases. We also lease equipment related to our horse racing operations under operating leases. For lease accounting purposes, we do not separate lease and nonlease components, nor do we record operating or finance lease assets and liabilities for short term leases.

 

 

As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments. We recognize expense for operating leases on a straight-line basis over the lease term. The Company’s lease agreements do not contain any variable lease payments, material residual value guarantees or any restrictive covenants.

 

Lease costs related to operating leases were $0 and $2,031 for the three months ended March 31, 2021 and 2020, respectively. The total lease expenses for leases with a term of twelve months or less for which the Company elected not to recognize a lease asset or liability was $61,671 and $80,680 for the three months ended March 31, 2021 and 2020, respectively.

 

Lease costs included in depreciation and amortization related to our finance leases were $6,319 for the three months ended March 31, 2021 and 2020. Interest expense related to our finance leases was immaterial.

 

The following table shows the classification of the right of use assets on our consolidated balance sheets:

 

 

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1 – Finance lease assets are net of accumulated amortization of $60,172 and $53,853 as of March 31, 2021 and December 31, 2020, respectively.

 

The following table shows the lease terms and discount rates related to our leases:

 

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The maturity of operating leases and finance leases as of March 31, 2021 are as follows:

 

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10. RELATED PARTY RECEIVABLES

 

In 2019, 2020, and 2021, the Company loaned money to the Doran Canterbury I and II joint ventures in member loans totaling approximately $1,367,000. These member loans bear interest at the rate equal to the Prime Rate plus two percent per annum and totaled $58,000 as of March 31, 2021. The Company expects to be fully reimbursed for these member loans when the joint venture achieves positive cash flow.

 

The Company has also recorded related party receivables of approximately $40,000 as of March 31, 2021, for various related costs incurred by the Company. The Company expects to be fully reimbursed for these costs by the related party in 2021. 

 

 

11. SUBSEQUENT EVENTS

 

In April 2021, the Company closed on two land sales totaling approximately 10 acres of land on the west side of the Racetrack. Total consideration received by the Company for these land sale agreements was approximately $2,500,000.