Canterbury Park Holding Corp 10-Q for FY2020 Q3
Canterbury Park Holding Corp (CPHC)
About this 10-Q
Canterbury Park Holding Corp filed this 10-Q on November 10, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $13.3M
- down 28.5% from $18.6M a year earlier
- Net income
- $1.85M
- up 60.7% from net income of $1.15M a year earlier
- Diluted EPS
- $0.39
- up 56.0% from $0.25 a year earlier
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 SEPTEMBER 30, 2020.
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 | ||
| | | ||
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 4,718,825 shares of common stock, $.01 par value, outstanding as of November 1, 2020.
Canterbury Park Holding Corporation
Page | |||
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| Item 1. | Financial Statements (unaudited) | |
| | | |
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 | 2 | ||
| | | |
| | 3 | |
| | | |
| | 4 | |
| | | |
| | 5 | |
| | | |
| | 7 | |
| | | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | ||
27 | |||
27 | |||
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28 | |||
28 | |||
28 | |||
28 | |||
28 | |||
28 | |||
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29 | |||
1
PART 1 – FINANCIAL INFORMATION
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| | (Unaudited) | | | ||
| | September 30, | | December 31, | ||
|
| 2020 |
| 2019 | ||
ASSETS |
| |
|
| |
|
| | | | | | |
CURRENT ASSETS |
| |
|
| |
|
Cash and cash equivalents | | $ | 186,821 | | $ | 355,399 |
Restricted cash | |
| 4,057,079 | |
| 2,308,955 |
Short-term investments | |
| — | |
| 103,886 |
Current portion of related party receivable | | | 568,027 | | | — |
Accounts receivable, net of allowance of $19,250 for both periods | |
| 1,596,559 | |
| 302,037 |
Inventory | |
| 250,190 | |
| 390,118 |
Prepaid expenses | |
| 463,648 | |
| 501,493 |
Income taxes receivable | |
| 1,297,778 | |
| — |
Total current assets | |
| 8,420,102 | |
| 3,961,888 |
| | | | | | |
LONG-TERM ASSETS | |
|
| |
|
|
Deposits | |
| 49,500 | | | 49,500 |
Restricted cash - long-term portion | | | — | | | 1,262,744 |
TIF receivable | | | 10,607,423 | | | 9,708,856 |
Related party receivable | | | 937,528 | | | 3,528,927 |
Operating lease right-of-use assets | | | 47,119 | | | 74,832 |
Equity investment | | | 8,332,052 | | | 2,992,633 |
Land held for development | | | 5,528,673 | | | 9,191,107 |
Property, plant, and equipment, net | |
| 33,718,236 | | | 34,642,595 |
TOTAL ASSETS | | $ | 67,640,633 | | $ | 65,413,082 |
| | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
|
| |
|
|
| | | | | | |
CURRENT LIABILITIES | |
|
| |
|
|
Accounts payable | |
| 2,827,713 | |
| 3,495,238 |
Card Casino accruals | |
| 2,849,564 | |
| 2,167,056 |
Accrued wages and payroll taxes | |
| 1,787,149 | |
| 2,254,379 |
Cash dividend payable | |
| — | |
| 324,439 |
Accrued property taxes | |
| 1,093,921 | |
| 1,019,658 |
Deferred revenue | |
| 542,033 | |
| 1,482,130 |
Payable to horsepersons | |
| 1,538,809 | |
| 557,696 |
Current portion of finance lease obligations | | | 25,431 | | | 24,500 |
Current portion of operating lease obligations | | | 24,333 | | | 29,776 |
Income taxes payable | |
| — | |
| 120,960 |
Total current liabilities | |
| 10,688,953 | |
| 11,475,832 |
| | | | | | |
LONG-TERM LIABILITIES | |
|
| |
|
|
Deferred income taxes | |
| 5,935,200 | |
| 4,404,300 |
Finance lease obligations, net of current portion | | | 52,593 | | | 71,784 |
Operating lease obligations, net of current portion | | | 22,786 | | | 45,056 |
Total long-term liabilities | |
| 6,010,579 | |
| 4,521,140 |
TOTAL LIABILITIES | |
| 16,699,532 | |
| 15,996,972 |
| | | | | | |
STOCKHOLDERS’ EQUITY | |
| | |
|
|
Common stock, $.01 par value, 10,000,000 shares authorized, 4,718,825 and 4,644,522 respectively, shares issued and outstanding | |
| 47,188 | |
| 46,445 |
Additional paid-in capital | |
| 23,418,805 | |
| 22,733,933 |
Retained earnings | |
| 27,475,108 | |
| 26,635,732 |
Total stockholders’ equity | |
| 50,941,101 | |
| 49,416,110 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 67,640,633 | | $ | 65,413,082 |
See notes to condensed consolidated financial statements.
2
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | ||||||||
| | 2020 |
| 2019 | | 2020 |
| 2019 | | ||||
OPERATING REVENUES: | | |
|
| |
| | |
|
| |
| |
Pari-mutuel | | $ | 4,184,533 | | $ | 3,578,841 | | $ | 6,901,142 | | $ | 8,277,727 | |
Card Casino | |
| 7,191,607 | |
| 8,559,935 | |
| 15,547,974 | |
| 25,350,903 | |
Food and beverage | |
| 861,723 | |
| 3,838,792 | |
| 2,091,855 | |
| 7,735,986 | |
Other | |
| 1,062,151 | |
| 2,623,073 | |
| 2,475,857 | |
| 5,259,899 | |
Total Net Revenues | |
| 13,300,014 | |
| 18,600,641 | |
| 27,016,828 | |
| 46,624,515 | |
| | | | | | | | | | | | | |
OPERATING EXPENSES: | |
| | |
|
| |
| | |
|
| |
Purse expense | |
| 2,389,068 | |
| 2,085,277 | |
| 4,094,136 | |
| 5,441,449 | |
Minnesota Breeders’ Fund | |
| 268,887 | |
| 290,104 | |
| 582,058 | |
| 813,906 | |
Other pari-mutuel expenses | |
| 253,665 | |
| 293,742 | |
| 533,205 | |
| 1,013,793 | |
Salaries and benefits | |
| 5,449,631 | |
| 7,147,203 | |
| 12,920,833 | |
| 19,829,175 | |
Cost of food and beverage and other sales | |
| 425,296 | |
| 1,571,048 | |
| 1,060,335 | |
| 3,398,220 | |
Depreciation and amortization | |
| 655,003 | |
| 785,327 | |
| 2,065,496 | |
| 1,987,067 | |
Utilities | |
| 512,315 | |
| 567,763 | |
| 1,004,947 | |
| 1,266,681 | |
Advertising and marketing | |
| 108,628 | |
| 947,377 | |
| 330,792 | |
| 1,894,898 | |
Professional and Contracted Services | |
| 1,026,140 | |
| 1,773,826 | |
| 2,608,869 | |
| 4,078,565 | |
Loss on disposal of assets | |
| 13,407 | |
| 6,376 | |
| 13,407 | |
| 114,413 | |
Gain on insurance recoveries | | | — | | | — | | | — | | | (198,874) | |
Other operating expenses | |
| 1,143,359 | |
| 1,659,236 | |
| 2,925,019 | |
| 4,229,849 | |
Total Operating Expenses | |
| 12,245,399 | |
| 17,127,279 | |
| 28,139,097 | |
| 43,869,142 | |
Gain on transfer of land | | | 2,275,458 | | | — | | | 2,275,458 | | | — | |
INCOME FROM OPERATIONS | |
| 3,330,073 | |
| 1,473,362 | |
| 1,153,189 | |
| 2,755,373 | |
OTHER OPERATING INCOME (LOSS) | |
|
| |
|
| |
|
| |
|
| |
Loss from equity investment | | | (511,616) | | | — | | | (661,255) | | | — | |
Interest income, net | |
| 168,552 | |
| 96,065 | | | 501,600 | | | 204,623 | |
Net Other Operating (Loss) Income | |
| (343,064) | |
| 96,065 | |
| (159,655) | |
| 204,623 | |
INCOME BEFORE INCOME TAXES | |
| 2,987,009 | |
| 1,569,427 | |
| 993,534 | |
| 2,959,996 | |
INCOME TAX BENEFIT (EXPENSE) | |
| (1,137,997) | |
| (418,942) | | | (70,498) | | | (795,164) | |
NET INCOME | | $ | 1,849,012 | | $ | 1,150,485 | | $ | 923,036 | | $ | 2,164,832 | |
| | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.39 | | $ | 0.25 | | $ | 0.20 | | $ | 0.47 | |
Diluted earnings per share | | $ | 0.39 | | $ | 0.25 | | $ | 0.20 | | $ | 0.47 | |
Weighted Average Basic Shares Outstanding | | | 4,708,966 | | | 4,604,562 | | | 4,688,282 | | | 4,583,591 | |
Weighted Average Diluted Shares | | | 4,708,966 | | | 4,608,987 | | | 4,691,378 | | | 4,596,314 | |
Cash dividends declared per share | | $ | 0.00 | | $ | 0.07 | | $ | 0.00 | | $ | 0.21 | |
See notes to condensed consolidated financial statements.
3
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
For the three months ended September 30, 2020 | | | | | | | | | | | | | | |
| | Number of |
| Common |
| Additional |
| Retained |
| | | |||
| | Shares | | Stock | | Paid-in Capital | | Earnings | | Total | ||||
Balance at June 30, 2020 |
| 4,706,814 | | $ | 47,068 | | $ | 23,096,660 | | $ | 25,626,591 | | $ | 48,770,319 |
| | | | | | | | | | | | | | |
Stock-based compensation |
| | |
| — | |
| 203,966 | |
| — | |
| 203,966 |
Dividend distribution | | — | | | — | | | — | | | (495) | | | (495) |
401(K) stock match |
| 9,657 | |
| 97 | |
| 118,202 | |
| — | |
| 118,299 |
Issuance of deferred stock awards |
| 2,354 | |
| 23 | |
| (23) | |
| — | |
| — |
Net income |
| — | |
| — | |
| — | |
| 1,849,012 | |
| 1,849,012 |
| | | | | | | | | | | | | | |
Balance at September 30, 2020 |
| 4,718,825 | | $ | 47,188 | | $ | 23,418,805 | | $ | 27,475,108 | | $ | 50,941,101 |
| | | | | | | | | | | | | | |
For the nine months ended September 30, 2020 | | | | | | | | | | | | | | |
| | 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 |
| — | |
| — | |
| 271,631 | |
| — | |
| 271,631 |
Dividend distribution | | — | | | — | | | — | | | (4,148) | | | (4,148) |
401(K) stock match |
| 28,154 | |
| 282 | |
| 293,693 | |
| — | |
| 293,975 |
Issuance of deferred stock awards |
| 27,917 | |
| 279 | |
| (72,659) | |
| — | |
| (72,380) |
Shares issued under Employee Stock Purchase Plan | | 3,902 | | | 39 | | | 36,246 | | | — | | | 36,285 |
Net income |
| — | |
| — | |
| — | |
| 923,036 | |
| 923,036 |
| | | | | | | | | | | | | | |
Balance at September 30, 2020 |
| 4,718,825 | | $ | 47,188 | | $ | 23,418,805 | | $ | 27,475,108 | | $ | 50,941,101 |
| | | | | | | | | | | | | | |
For the three months ended September 30, 2019 | | | | | | | | | | | | | | |
| | Number of |
| Common |
| Additional |
| Retained |
| | | |||
| | Shares | | Stock | | Paid-in Capital | | Earnings | | Total | ||||
Balance at June 30, 2019 |
| 4,604,107 | | $ | 46,041 | | $ | 22,223,470 | | $ | 25,579,114 | | $ | 47,848,625 |
| | | | | | | | | | | | | | |
Exercise of stock options |
| 2,500 | |
| 25 | |
| 20,675 | |
| — | |
| 20,700 |
Stock-based compensation | | — | |
| — | |
| 39,825 | |
| — | | | 39,825 |
Dividend distribution |
| — | |
| — | |
| — | |
| (322,845) | |
| (322,845) |
401(K) stock match |
| 12,814 | |
| 128 | |
| 158,765 | |
| — | |
| 158,893 |
Net Income |
| — | |
| — | |
| — | |
| 1,150,485 | |
| 1,150,485 |
| | | | | | | | | | | | | | |
Balance at September 30, 2019 | | 4,619,421 | | $ | 46,194 | | $ | 22,442,735 | | $ | 26,406,754 | | $ | 48,895,683 |
| | | | | | | | | | | | | | |
For the nine months ended September 30, 2019 | | | | | | | | | | | | | | |
| | Number of |
| Common |
| Additional |
| Retained |
| | | |||
| | Shares | | Stock | | Paid-in Capital | | Earnings | | Total | ||||
Balance at December 31, 2018 |
| 4,527,685 | | $ | 45,277 | | $ | 21,420,886 | | $ | 25,268,187 | | $ | 46,734,350 |
| | | | | | | | | | | | | | |
Exercise of stock options |
| 32,810 | |
| 328 | |
| 206,264 | |
| — | |
| 206,592 |
Other share retirements | | (5,863) | | | (59) | | | (27,915) | | | (62,023) | | | (89,997) |
Stock-based compensation |
| — | |
| — | |
| 203,333 | |
| — | |
| 203,333 |
Dividend distribution |
| — | |
| — | |
| — | |
| (964,242) | |
| (964,242) |
401(K) stock match |
| 42,405 | |
| 424 | |
| 567,994 | |
| — | |
| 568,418 |
Issuance of deferred stock awards |
| 10,968 | |
| 110 | |
| (55,044) | |
| — | |
| (54,934) |
Shares issued under Employee Stock Purchase Plan |
| 11,416 | |
| 114 | |
| 127,217 | |
| — | |
| 127,331 |
Net income |
| — | |
| — | |
| — | |
| 2,164,832 | |
| 2,164,832 |
| | | | | | | | | | | | | | |
Balance at September 30, 2019 | | 4,619,421 | | $ | 46,194 | | $ | 22,442,735 | | $ | 26,406,754 | | $ | 48,895,683 |
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, | ||||
| | 2020 |
| 2019 | ||
Operating Activities: |
| | |
| |
|
Net income | | $ | 923,036 | | $ | 2,164,832 |
Adjustments to reconcile net income to net cash provided by operating activities: |
| | |
|
| |
Depreciation |
|
| 2,065,496 |
|
| 1,987,067 |
Stock-based compensation expense |
|
| 271,631 |
|
| 203,333 |
Stock-based employee match contribution |
|
| 293,975 |
|
| 567,994 |
Deferred income taxes |
|
| 1,530,900 |
|
| 486,200 |
Loss from equity investment | | | 661,255 | | | 2,377 |
Loss on disposal of assets |
|
| 13,407 |
|
| 114,413 |
Gain on transfer of land | | | (2,275,458) | | | — |
Gain on insurance recoveries | | | — | | | (198,874) |
Changes in operating assets and liabilities: | | | | | | |
Increase in accounts receivable | | | (1,294,522) | | | (166,082) |
Decrease in other current assets | | | 177,773 | | | 54,370 |
Increase (decrease) in income taxes receivable | | | (1,418,738) | | | 136,965 |
Increase in due from Minnesota horsemen associations | | | — | | | (1,093,742) |
Decrease in operating lease right-of-use assets | | | 27,713 | | | 26,296 |
Decrease in operating lease liabilities | | | (27,713) | | | (26,296) |
Increase in accounts payable | | | (739,214) | | | (189,665) |
(Decrease) increase in deferred revenue | | | (940,097) | | | 652,960 |
Increase in Card Casino accruals | | | 682,508 | | | 448,842 |
Decrease in accrued wages and payroll taxes | | | (467,230) | | | (753,114) |
Increase in accrued property taxes | | | 213,812 | | | 235,706 |
Increase (decrease) in payable to horsepersons | | | 981,113 | | | (706,122) |
Net cash provided by operating activities |
|
| 679,647 |
|
| 3,947,460 |
| | | | | | |
Investing Activities: |
| | |
|
|
|
Additions to property, plant, and equipment |
|
| (1,432,770) |
|
| (6,686,126) |
Additions for TIF eligible improvements | | | (750,983) | | | (6,013,782) |
Decrease (increase) in related party receivable | | | 2,023,372 | | | (178,100) |
Decrease in notes receivable | | | — | | | 1,058,508 |
Proceeds from sale of investments |
|
| 103,886 |
|
| 102,659 |
Net cash used in investing activities |
|
| (56,495) |
|
| (11,716,841) |
| | | | | | |
Financing Activities: |
| | |
|
|
|
Proceeds from issuance of common stock |
|
| 112,876 |
|
| 244,350 |
Payments against line of credit | | | (5,866,416) | | | (3,920,256) |
Borrowings on line of credit | | | 5,866,416 | | | 5,592,246 |
Cash dividend paid to shareholders |
|
| (328,586) |
|
| (958,317) |
Payments for taxes related to net share settlement of equity awards | | | (72,380) | | | (54,934) |
Principal payments on finance lease |
|
| (18,260) |
|
| (17,304) |
Net cash (used in) provided by financing activities |
|
| (306,350) |
|
| 885,785 |
| | | | | | |
Net increase in cash, cash equivalents, and restricted cash |
|
| 316,802 |
|
| (6,883,596) |
| | | | | | |
Cash, cash equivalents, and restricted cash at beginning of period |
|
| 3,927,098 |
|
| 11,203,998 |
| | | | | | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 4,243,900 | | $ | 4,320,402 |
5
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Schedule of non-cash investing and financing activities | | | | | | |
Additions to buildings and equipment funded through accounts payable | | $ | 72,000 | | $ | 339,000 |
Transfer of future TIF reimbursed costs from PP&E | | | 899,000 | | | 6,014,000 |
ROU assets obtained in exchange for operating lease obligations | | | — | | | 103,000 |
Transfer of assets to Doran Canterbury II | | | 1,786,997 | | | — |
Transfer of assets to Canterbury DBSV | | | 2,133,618 | | | — |
Dividend declared | | | — | | | 323,000 |
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Income taxes paid | | $ | 80,000 | | $ | 640,000 |
Interest paid | | | 39,000 | | | 30,000 |
See notes to condensed consolidated financial statements.
6
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 approximately 140 acres of underutilized land surrounding the Racetrack in a project known as Canterbury CommonsTM. 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.
Despite a strong start to the year, the disruptions arising from the COVID-19 Pandemic had a significant impact on the Company's financial condition and operations during the three and nine months ended September 30, 2020. 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 2020 has been material, and the Company expects it will continue to be material. 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. 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.
The Company has no long-term debt and a $6.0 million credit line. 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, 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 2020 financial results. As the impact
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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 subsidiaries Canterbury Park Entertainment, LLC; Canterbury Park Concession, Inc.; and Canterbury Development, LLC). Intercompany accounts and transactions have been eliminated. The preparation of these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2019, included in its Annual Report on Form 10-K (the “2019 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 September 30, 2020 and 2019 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 September 30, 2020 and 2019 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 2019 Form 10-K. There were no material changes in significant accounting policies during the three and nine months ended September 30, 2020.
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, $2,885,000 and $6,299,000 for the nine months ended September 30, 2020 and 2019, 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.
Reclassifications – Prior period financial statements have been reclassified to conform to current period presentations. Certain land costs have been reclassified on the December 31, 2019 Consolidated Balance Sheets from Property, plant, and equipment, net to Land held for development.
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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.
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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 are two awards outstanding that are for three-year periods ending December 31, 2020 and 2021. 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 other awards designed to retain NEOs and other Senior Executives as described below under “Employee Deferred Stock Awards.”
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. On June 25, 2020, 17,975 shares of deferred stock awards were granted to non-employee members of the Board of Directors with a price per share equal to the market value on the date of grant of $11.07. The vesting schedule of these awards is described above. There were no unvested restricted stock or stock options outstanding at September 30, 2020.
Employee Deferred Stock Awards
On June 25, 2020, 47,000 shares of deferred stock awards were granted to employees pursuant to the Company’s Stock Plan with a price per share equal to the market price on the date of grant of $11.07. The vesting schedule of the awards is as follows: (i) 60% vesting and being issued in December 2020, (ii) 20% vesting and being issued in March 2022, and (iii) 20% vesting and being issued in March 2023. The Company’s Board of Directors designated those portions of the deferred stock awards vesting in 2020 as awards under the Company’s 2020 annual incentive plan and designed those portions of the awards scheduled to vest in 2022 and 2023 as 2020 awards under the Company’s LTI Plan. The compensation cost associated with this grant of deferred stock awards is $466,000, which is being recognized over the respective vesting periods.
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 $272,000 and $203,000 for the nine months ended September 30, 2020 and 2019, respectively and $204,000 and $40,000 for the three months ended September 30, 2020 and 2019, 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.
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A summary of stock option activity as of September 30, 2020 and changes during the nine months then ended is presented below:
| | | | | | | | | | | |
| | | | | | | Weighted | | | | |
| | | | Weighted | | Average | | | | ||
| | | | Average | | Remaining | | Aggregate | |||
| | Number of | | Exercise | | Contractual | | Grant Date | |||
Stock Options | | Options | | Price | | Term | | Fair Value | |||
| | | | | | | | | | | |
Outstanding at January 1, 2020 | | 33,250 | | $ | 9.64 | | | | | | |
Granted | | - | | | - | | | | | | |
Exercised | | (24,250) | | | 8.28 | | | | | | |
Expired/Forfeited | | - | | | - | | | | | | |
Outstanding at September 30, 2020 | | 9,000 | | $ | 13.30 | | | 0.3 Years | | $ | 119,700 |
| | | | | | | | | | | |
Exercisable at September 30, 2020 | | 9,000 | | $ | 13.30 | | | 0.3 Years | | $ | 119,700 |
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, 2020 and 2019:
|
| Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net income (numerator) amounts used for basic and diluted per share computations: | | $ | 1,849,012 | | $ | 1,150,485 | | $ | 923,036 | | $ | 2,164,832 |
| | | | | | | | | | | | |
Weighted average shares (denominator) of common stock outstanding: | |
|
| |
|
| |
|
| |
|
|
Basic | |
| 4,708,966 | |
| 4,604,562 | |
| 4,688,282 | |
| 4,583,591 |
Plus dilutive effect of stock options | |
| — | |
| 4,425 | |
| 3,096 | |
| 12,723 |
Diluted | |
| 4,708,966 | |
| 4,608,987 | |
| 4,691,378 | |
| 4,596,314 |
| | | | | | | | | | | | |
Net income per common share: | |
|
| |
|
| |
|
| |
|
|
Basic | | $ | 0.39 | | $ | 0.25 | | $ | 0.20 | | $ | 0.47 |
Diluted | |
| 0.39 | |
| 0.25 | |
| 0.20 | |
| 0.47 |
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 nine months ended September 30, 2020 and September 30, 2019 because the exercise price of the options exceeded the market price of the Company’s common stock at September 30, 2020 and September 30, 2019.
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 $6.0 million and allows for letters of credit in the aggregate amount of up to $2.0 million to be issued under the credit agreement. As of September 30, 2020, 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 $4,750,000. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company. This agreement was amended as of September 30, 2020 to extend the maturity date to December 31, 2020. As of September 30, 2020, the outstanding balance on the line of credit was $0.
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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.
The following tables represent a disaggregation of revenues from contracts with customers along with the Company’s operating segments (in 000’s):
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | |||||||||||||
|
| Horse Racing |
| Card Casino |
| Food and Beverage |
| Development |
| Total | |||||
Net revenues from external customers | | $ | 9,284 | | $ | 15,548 | | $ | 2,161 | | $ | 24 | | $ | 27,017 |
Intersegment revenues | |
| 72 | |
| — | |
| 374 | |
| — | |
| 446 |
Net interest (expense) income | |
| (36) | |
| — | |
| — | |
| 538 | |
| 502 |
Depreciation | |
| 1,491 | |
| 411 | |
| 163 | |
| — | |
| 2,065 |
Segment (loss) income before income taxes | |
| (2,697) | |
| 3,322 | |
| (528) | |
| 1,968 | |
| 2,065 |
Segment tax expense (benefit) | |
| (267) | |
| 235 | |
| (37) | |
| 139 | |
| 70 |
| | | | | | | | | | | | | | | |
| | September 30, 2020 | |||||||||||||
Segment Assets | | $ | 34,295 | | $ | 3,102 | | $ | 25,028 | | $ | 30,324 | | $ | 92,749 |
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 | |||||||||||||
|
| Horse Racing |
| Card Casino |
| Food and Beverage |
| Development |
| Total | |||||
Net revenues from external customers | | $ | 13,018 | | $ | 25,351 | | $ | 8,244 | | $ | 12 | | $ | 46,625 |
Intersegment revenues | |
| 909 | |
| — | |
| 1,088 | |
| — | | | 1,997 |
Net interest (expense) income | |
| (20) | |
| — | |
| — | |
| 225 | | | 205 |
Depreciation | |
| 1,702 | |
| 111 | |
| 174 | |
| — | | | 1,987 |
Segment (loss) income before income taxes | |
| (1,863) | |
| 4,765 | |
| 855 | |
| 80 | | | 3,837 |
Segment tax expense (benefit) | |
| (736) | |
| 1,280 | |
| 230 | |
| 21 | | | 795 |
| | | | | | | | | | | | | | | |
| | December 31, 2019 | |||||||||||||
Segment Assets | | $ | 31,618 | | $ | 3,327 | | $ | 25,430 | | $ | 29,074 | | $ | 89,449 |
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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):
| | | | | | |
|
| Nine Months Ended September 30, 2020 | ||||
|
| 2020 |
| 2019 | ||
Revenues | | | | | | |
Total net revenue for reportable segments | | $ | 27,463 |
| $ | 48,622 |
Elimination of intersegment revenues | |
| (446) |
|
| (1,997) |
Total consolidated net revenues | | $ | 27,017 |
| $ | 46,625 |
| | | | | | |
Income before income taxes |
| | |
| | |
Total segment income before income taxes | | $ | 2,065 |
| $ | 3,837 |
Elimination of intersegment loss before income taxes | |
| (1,071) |
|
| (877) |
Total consolidated income before income taxes | | $ | 994 |
| $ | 2,960 |
|
| September 30, |
| December 31, | ||
|
| 2020 |
| 2019 | ||
Assets |
| |
|
| |
|
Total assets for reportable segments | | $ | 92,749 | | $ | 89,449 |
Elimination of intercompany balances | |
| (25,108) | |
| (24,036) |
Total consolidated assets | | $ | 67,641 | | $ | 65,413 |
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 September 30, 2020 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.
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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.
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 terms of the CMA, as amended, the SMSC made payments of $5.6 million and $7.4 million during the first nine months of 2020 and 2019, respectively, primarily for purse enhancements for the respective live race meets.
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 Fifth Amendment, the SMSC is not required to pay the Company a 2020 annual marketing payment, but the Company will use previously paid but unspent funds for these purposes.
As noted above and affirmed in the Fifth Amendment, SMSC is obligated to make the following purse enhancement and marketing payments for 2021 through 2022:
| | Purse Enhancement Payments to | | Marketing Payments to | ||
Year |
| Horsemen (1) | | Canterbury Park | ||
2021 | |
| $ 7,380,000 | |
| $ 1,620,000 |
2022 | |
| $ 7,380,000 | |
| $ 1,620,000 |
| |
| | |
| |
(1) Includes $100,000 each year payable to various horsemen associations.
The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s condensed consolidated statements of operations. For the three and nine months ended September 30, 2020, the Company recorded $490,000 and $811,000 in other revenue, respectively, incurred $449,000 and $694,000 in advertising and marketing expense, respectively, and incurred $41,000 and $117,000 in depreciation, respectively, related to the SMSC marketing funds. For the three and nine months ended September 30, 2019, the Company recorded $569,000 and $1,031,000 in other revenue, respectively, incurred $512,000 and $861,000 in advertising and marketing expense, respectively, and incurred $57,000 and $170,000 in depreciation, respectively, 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.
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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.
In accordance with ASC 610-20, we determined that we do not have a controlling financial interest in the Doran Canterbury II and Canterbury DBSV joint ventures and the arrangements meet the criteria to be accounted for as a contract. Therefore, we derecognized the land and recognized a full gain (approximately $2,275,000) between the carrying amount of the land and the estimated fair value of the land transferred. In future periods, the Company will recognize its proportionate share of Doran Canterbury II and Canterbury DBSV’s earnings (after the effect of basis differences) as an increase or decrease in its Equity investment and as Income or Loss from Investment in these joint ventures.
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Tax Increment Financing
On August 8, 2018, the City Council of the City of Shakopee, Minnesota approved a Contract for Private Redevelopment (“Redevelopment Agreement”) between the City of Shakopee Economic Development Authority (“Shakopee EDA”) and Canterbury Park Holding Corporation and its subsidiary Canterbury Development LLC in connection with a Tax Increment Financing District (“TIF District”) that the City had approved in April 2018. The City of Shakopee, the Shakopee EDA and the Company entered into the Redevelopment Agreement on August 10, 2018.
Under the Redevelopment Agreement, the Company agreed to undertake a number of specific infrastructure improvements within the TIF District, including the development of public streets, utilities, sidewalks, and other public infrastructure. More specifically, the Company is obligated to construct improvements on Shenandoah Drive and Unbridled Avenue (formerly Barenscheer Boulevard) with these improvements required to be substantially complete on or before December 31, 2019 and December 31, 2020, respectively. As of September 30, 2020, improvements to Shenandoah Drive were substantially complete. 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. These improvements were well underway as of the date of this filing.
Under the Redevelopment Agreement, the City of Shakopee has agreed that a portion of the tax increment revenue generated from the developed property will be paid to the Company to reimburse it for its expense in constructing infrastructure improvements. The total estimated cost of TIF eligible improvements to be borne by the Company is $23,336,500. A detailed Schedule of the Public Improvements under the Redevelopment Agreement, the timeline for their construction and the source and amount of funding is set forth on Exhibit C of the Redevelopment Agreement, which was filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 31, 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 September 30, 2020, the Company recorded a TIF receivable of $10,607,000, which represents $10,056,000 of principal and $551,000 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.
Development Agreements
On March 13, 2020, the Company entered into an agreement to sell approximately 12 acres of land on the east side of the Racetrack to a third party for total consideration of approximately $2,500,000. Closing is subject to the satisfaction of certain customary conditions. The Company expects the transaction to close in 2021.
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. Closing is subject to the satisfaction of certain customary conditions. The Company expects the transaction to close in 2021.
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. Closing is subject to the satisfaction of certain customary conditions. The Company expects the transaction to close in 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.
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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 $19,974 and $31,463 for the nine months ended September 30, 2020 and 2019, 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 $256,967 and $434,332 for the nine months ended September 30, 2020 and 2019, respectively.
Lease costs included in depreciation and amortization related to our finance leases were $18,701 and $18,701 for the nine months ended September 30, 2020 and 2019. 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:
| | | | Nine Months Ended September 30, | ||||
| | Balance Sheet Location | | 2020 |
| 2019 | ||
Assets | | | | | | | | |
Finance | | Land, buildings and equipment, net (1) | | $ | 78,024 | | $ | $ 104,184 |
Operating | | Operating lease right-of-use assets | | | 47,119 | | | 76,816 |
Total Leased Assets | | | | $ | 125,143 | | $ | $ 181,000 |
1 – Finance lease assets are net of accumulated amortization of $50,208 and $18,701 as of September 30, 2020 and 2019, respectively.
The following table shows the lease terms and discount rates related to our leases:
| Nine Months Ended September 30, | ||
| 2020 | | 2019 |
Weighted average remaining lease term (in years): | | | |
Finance | 2.9 | | 4.0 |
Operating | 0.8 | | 1.3 |
Weighted average discount rate (%): | | | |
Finance | 5.0% | | 5.0% |
Operating | 5.5% | | 5.4% |
The maturity of operating leases and finance leases as of September 30, 2020 are as follows:
Nine Months Ended September 30, 2020 |
| Operating leases | | Finance leases | ||
2020 remaining |
| $ | 2,079 | | $ | 7,185 |
2021 |
| | 23,100 | | | 28,743 |
2022 | | | 23,100 | | | 28,743 |
2023 | | | — | | | 19,332 |
Total minimum lease obligations |
| | 48,279 | | | 84,003 |
Less: amounts representing interest | | | (1,160) | | | (5,979) |
Present value of minimum lease payments | | | 47,119 | | | 78,024 |
Less: current portion |
| | (24,333) | | | (25,431) |
Lease obligations, net of current portion | | $ | 22,786 | | $ | 52,593 |
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10. RELATED PARTY RECEIVABLES
On December 20, 2018, the Company entered into a loan agreement with Doran Family Holdings, which is the controlling partner in the Doran Canterbury I joint venture. The Company loaned Doran Family Holdings $2,910,000 net of loan origination fees, and received a promissory note totaling $2,940,000 bearing interest at 5%. On August 3, 2020, the Company received payment for this promissory note of $2,940,000.
In 2018, the Company incurred $268,000 of costs for preliminary grading work on parcels of land the Company had designated for Doran Canterbury II. The Company was to be fully reimbursed for these costs upon the commencement of the Doran Canterbury II project and thus, recorded the amount as a receivable. On August 3, 2020, the Company received payment for this receivable of $268,000.
In 2019 and 2020, the Company loaned money to the Doran Canterbury I joint venture in five separate loans in the amounts of $178,100, $137,000, $232,900, $171,250, and $191,800. These member loans bear interest at the rate equal to the Prime Rate plus two percent per annum. The Company expects to be fully reimbursed for these member loans when the joint venture achieves positive cash flow.
In 2020, the Company recorded a related party receivable of $143,000 for landscaping and irrigation costs incurred by the Company on parcels of land the Company had designated for Doran Canterbury II. The Company expects to be fully reimbursed for these costs by Doran Canterbury II in the 2020 fourth quarter.
In 2020, the Company recorded a related party receivable of $408,000 for various development related costs incurred by the Company on parcels of land the Company had designed for Canterbury DBSV. The Company expects to be fully reimbursed for these costs by Canterbury DBSV in the 2020 fourth quarter.
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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 March, 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.
COVID-19 Pandemic:
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.
In connection with reopening our pari-mutuel, food and beverage, and Card Casino operations, we are adhering to social distancing requirements, which include reduced seating at table games and poker and capacity limitations to follow Minnesota state guidelines. Additionally, there is uncertainty around the impact the COVID-19 Pandemic will have on operations in the months that follow reopening, including the impact to changes in attendance driven by concerns about COVID-19.
Despite a strong start to the year, the disruptions arising from the COVID-19 Pandemic had a significant impact on the Company's financial condition and operations during the three and nine months ended September 30, 2020. 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 2020 will be material, but cannot be reasonably estimated at this time as it is unknown when the COVID-19 Pandemic
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will end, when or how quickly the current restrictions will be modified or cease to be necessary and the resulting impact on the Company’s business and the willingness of customers to spend on entertainment in venues such as ours.
We are mitigating negative impacts to our operating results by taking signification actions, as discussed below.
During the temporary closures and suspension of the Company’s operations described above, all Canterbury Park employees, except for a limited number of key personnel required for basic ongoing maintenance, security, and management needs, were placed on an unpaid furlough. The Company also implemented a salary reduction for all remaining non-furloughed employees based on a combination of the employee’s salary and the employee’s responsibilities during the temporary shutdown. Upon the Company’s reopening of operations, the Company has implemented a salary reduction for the management team, which is in effect through the remainder of 2020. Additionally, pandemic-related restrictions on our special events and group sales operations will impact our non-gaming business for at least the next several months. To address this near-term challenge, the Company recently made the very difficult decision to align staffing levels with the current level of our non-gaming business. These actions included leaving vacant positions unfilled, furloughing team members, pay reductions for senior leadership and some job eliminations.
On March 16, 2020, the Company announced that the Company’s Board of Directors had suspended the Company’s quarterly cash dividend until the Company’s business operations return to normal.
Other additional measures taken by the Company include postponing non-essential capital expenditures, reducing operating costs, and substantially reducing discretionary spending.
We expect these measures to partially mitigate the impacts of the COVID-19 Pandemic on our full year 2020 financial results. The Company has no long-term debt and a $6.0 million credit line that, when combined with the Company’s existing cash and any cash generated from operations, is anticipated to provide the Company with the necessary liquidity and financial flexibility to manage through this challenging operating environment. Additionally, the Company generated substantial cash inflows from its development operations in 2020 with receiving approximately $3.2 million of its related party receivable in connection with the closing of the Doran Canterbury II project.
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.
Operations Review for the Three and Nine Months Ended September 30, 2020:
Revenues:
Total net revenues for the three months ended September 30, 2020 were $13,300,000, a decrease of $5,301,000, or 28.5%, compared to total net revenues of $18,601,000 for the three months ended September 30, 2019. Total net revenues for the nine months ended September 30, 2020 were $27,017,000, a decrease of $19,608,000, or 42.1%, compared to total net revenues of $46,625,000 for the nine months ended September 30, 2019. This decrease consists of decreases in card casino, food and beverage, and other revenues, partially offset by an increase in pari-mutuel revenues. See below for a further discussion of our sources of revenues.
Pari-Mutuel Revenue:
|
| Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 | ||||
Simulcast | | $ | 1,056,000 | | $ | 1,257,000 | | $ | 2,290,000 | | $ | 4,108,000 |
Live racing | | | 600,000 | | | 1,239,000 | | | 723,000 | | | 2,151,000 |
Guest fees | | | 2,108,000 | | | 785,000 | | | 2,665,000 | | | 1,203,000 |
Other revenue | | | 420,000 | | | 298,000 | |
| 1,223,000 | |
| 816,000 |
Total Pari-Mutuel Revenue | | $ | 4,184,000 | | $ | 3,579,000 | | $ | 6,901,000 | | $ | 8,278,000 |
| | | | | | | | | | | | |
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Total pari-mutuel revenue increased $605,000, or 16.9%, for the three months ended September 30, 2020 compared to the same period in 2019. The increase is due to an increase in guest fees due to increased out of state handle as a result of racing weekdays in 2020 and other revenue due to an increase in Advanced Deposit Wagering (ADW). These increases are partially offset by a decrease in simulcast and live racing revenue due to decreased attendance, primarily due to capacity limitations caused by the COVID-19 Pandemic as described above. Pari-mutuel revenue decreased $1,377,000, or 16.6%, for the nine months ended September 30, 2020 compared to the same period in 2019. The decreases are due to a reduction in simulcast and live racing revenue due to the COVID-19 Pandemic described above, including the fact that these operations were closed from March 16, 2020 until June 10, 2020. These decreases are partially offset by an increase in guest fees and other revenue.
Card Casino Revenue:
| Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
| 2020 | | 2019 | | 2020 | | 2019 | ||||
Poker Games | $ | 1,291,000 | | $ | 1,789,000 | | $ | 2,949,000 | | $ | 5,542,000 |
Table Games | | 5,331,000 | | | 5,821,000 | | | 11,156,000 | | | 17,212,000 |
Total Collection Revenue | | 6,622,000 | | | 7,610,000 | | | 14,105,000 | | | 22,754,000 |
Other Poker Revenue | | 245,000 | | | 594,000 | | | 729,000 | | | 1,542,000 |
Other Table Games Revenue | | 325,000 | | | 356,000 | | | 714,000 | | | 1,055,000 |
Total Card Casino Revenue | $ | 7,192,000 | | $ | 8,560,000 | | $ | 15,548,000 | | $ | 25,351,000 |
The primary source of Card Casino revenue is a percentage of the wagers received from 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, amounts earned as reimbursement of the administrative costs of maintaining jackpot funds, and amounts related to the outstanding chip liability that we expect will not be redeemed in the future.
As indicated by the table above, total Card Casino revenue decreased $1,368,000, or 16.0%, and $9,803,000, or 38.7%, for the three and nine months ended September 30, 2020, compared to the same periods in 2019. These decreases are due to the COVID-19 Pandemic described above. When the Company reopened its table games operations on June 15, 2020 and poker operations on July 9, 2020, this included reduced seating at tables and capacity limitations to follow Minnesota state guidelines.
Food and Beverage Revenue:
Food and beverage revenue decreased $2,977,000, or 77.6%, and $5,644,000, or 73.0%, for the three and nine months ended September 30, 2020 compared to the same periods in 2019. These decreases are primarily due to decreased attendance, primarily due to capacity limitations mandated across the Company’s operations as a result of the COVID-19 Pandemic described above.
Other Revenue:
Other revenue decreased $1,561,000, or 59.5%, and $2,784,000, or 52.9% for the three and nine months ended September 30, 2020 compared to the same periods in 2019. These decreases are primarily due to decreased attendance, primarily due to capacity limitations mandated across the Company’s operations as a result of the COVID-19 Pandemic described above.
Operating Expenses:
Total operating expenses decreased $4,882,000, or 28.5%, and $15,730,000, or 35.9%, for the three and nine months ended September 30, 2020 compared to the same periods in 2019. These decreases in operating expenses reflect reductions in the majority of the Company’s operating expense line items, primarily as a result of the Company’s temporary suspension of operations through June 9, 2020, limited operations upon reopening and efforts to manage
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expenses in light of revenue declines due to the COVID-19 Pandemic. The following paragraphs provide further detail regarding certain operating expenses.
Purse expense increased $304,000, or 14.6%, for the three months ended September 30, 2020 compared to the same period in 2019. The increase is due to a substantial increase in out of state wagering, partially offset by decreases in simulcast, live racing, and Card Casino revenues. Purse expense decreased $1,347,000, or 24.8%, for the nine months ended September 30, 2019 compared to the same period in 2019. The decrease is due to a reduction in Pari-Mutuel and Card Casino revenues.
Salaries and benefits decreased $1,698,000, or 23.8%, and $6,908,000, or 34.8%, for the three and nine months ended September 30, 2020, compared to the same periods in 2019. The decreases are due primarily to the COVID-19 Pandemic, which resulted in the majority of Company employees being placed on an unpaid furlough during the temporary suspension of operations. Labor costs have also significantly declined upon reopening in June due to the Company’s limited operations requiring significantly reduced number of personnel. Additionally, labor costs were unusually high as a percentage of revenues in 2019 as a result of inefficiencies caused by the Card Casino construction in January and February and re-opening in March 2019.
Cost of food and beverage sales decreased $1,146,000 or 72.9%, and $2,338,000, or 68.8%, for the three and nine months ended September 30, 2020, compared to the same periods in 2019. The decreases are due to lower food and beverage revenues due to decreased attendance, primarily due to capacity limitations mandated across the Company’s operations as a result of the COVID-19 Pandemic.
Advertising and marketing decreased $839,000 or 88.5%, and $1,564,000, or 82.5%, for the three and nine months ended September 30, 2020, compared to the same periods in 2019. The decreases are due to a reduction in advertising and marketing spend due to capacity limitations mandated across the Company’s operations as a result of the COVID-19 Pandemic.
During the nine months ended September 30, 2019, the Company recorded a loss on disposal of assets totaling $114,000. This primarily related to a write-off of assets disposed of in remodeling our Card Casino. Also, during the same period, the Company recorded a gain on insurance recoveries of $199,000 as a result of insurance proceeds related to flood damage incurred at the Racetrack.
During the 2020 third quarter, the Company recorded a gain on transfer of land of $2,275,000 as a result of transferring land to the Doran Canterbury II and Canterbury DBSV joint ventures.
Net income for the three months ended September 30, 2020 and 2019 $1,849,000 and $1,150,000, respectively. Net income for the nine months ended September 30, 2020 and 2019 was $923,000 and $2,165,000, respectively.
EBITDA
To supplement our financial statements, we also provide investors with information about our EBITDA and Adjusted EBITDA, each of which is a non-GAAP measure, which excludes certain items from net income (loss), a GAAP measure. We define EBITDA as earnings before interest, income tax (benefit) expense, and depreciation and amortization. We define Adjusted EBITDA as earnings before interest income, income tax (benefit) expense, depreciation and amortization, as well as excluding gain on transfer of land, gain on insurance recoveries, and loss from disposal of assets. Neither EBITDA nor adjusted EBITDA is a measure of performance calculated in accordance with GAAP and should not be considered an alternative to, or more meaningful than, net income as an indicator of our operating performance. 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 EBITDA to eliminate unusual items and we believe the exclusion of these items allows for better comparability of our performance between periods.
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The following table sets forth a reconciliation of net income, a GAAP financial measure, to EBITDA and to adjusted EBITDA (defined above) which are non-GAAP financial measures, for the three and nine months ended September 30, 2020 and 2019:
Summary of EBITDA Data
|
| Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
NET INCOME | | $ | 1,849,012 | | $ | 1,150,485 | | $ | 923,036 | | $ | 2,164,832 |
Interest income, net | |
| (168,552) | |
| (96,065) | |
| (501,600) | |
| (204,623) |
Income tax expense | |
| 1,137,997 | |
| 418,942 | |
| 70,498 | |
| 795,164 |
Depreciation | |
| 655,003 | |
| 785,327 | |
| 2,065,496 | |
| 1,987,067 |
EBITDA | |
| 3,473,460 | |
| 2,258,689 | |
| 2,557,430 | |
| 4,742,440 |
Gain on insurance recoveries | | | — | | | — | | | — | | | (198,874) |
Gain on transfer of land | | | (2,275,458) | | | — | | | (2,275,458) | | | — |
Loss on disposal of assets | |
| 13,407 | |
| 6,376 | |
| 13,407 | |
| 114,413 |
ADJUSTED EBITDA | | $ | 1,211,409 | | $ | 2,265,065 | | $ | 295,379 | | $ | 4,657,979 |
Adjusted EBITDA decreased $1,054,000, or 46.5%, for the three months ended September 30, 2020 as compared to the same period in 2019. Adjusted EBITDA decreased $4,363,000, or 93.7%, for the nine months ended September 30, 2020 compared to the same period in 2019. The decreases are due to the effects of the COVID-19 Pandemic described above.
Contingencies:
The Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community, which became effective on March 4, 2012, and was amended in the respective first quarters of 2015, 2016, 2017, 2018, and June 2020 and will expire December 31, 2022. The CMA contains specific covenants that, if breached, would trigger an obligation to repay a specified amount related to these covenants. 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 a 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 near-term costs. See Liquidity and Capital Resources for more information on liquidity and capital resource requirements.
Liquidity and Capital Resources:
The Company has a general credit and security agreement with a financial institution, which provides a revolving credit line up to $6.0 million and allows for letters of credit in the aggregate amount of up to $2.0 million to be issued under the credit agreement. As of September 30, 2020, 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 $4,750,000. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company. This agreement was amended as of September 30, 2020 to extend the maturity date to December 31, 2020. As of September 30, 2020, there were no amounts outstanding on the line of credit.
The Company’s cash, cash equivalents, and restricted cash balance at September 30, 2020 was $4,244,000 compared to $3,927,000 as of December 31, 2019. 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 and future land sales, will be sufficient to satisfy its liquidity and capital resource requirements for regular operations, as well as its planned development expenses during 2020. However, if the Company engages in any additional significant real estate development, additional financing would more than likely be required and the Company may seek this additional financing through joint venture arrangements, through incurring debt, or through an equity financing, or a combination of any of these.
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Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2020 was $680,000 primarily as a result of the following: The Company reported net income of $923,000, depreciation of $2,065,000, loss from equity investment of $661,000, and stock-based compensation and 401(k) match totaling $566,000. Cash used in operations was reduced by a gain on transfer of land of $2,275,000. The Company also experienced an increase in accounts receivable of $1,295,000.
Net cash provided by operating activities for the nine months ended September 30, 2019 was $3,947,000 primarily as a result of the following: The Company reported net income of $2,165,000, which included a loss on disposal of assets of $114,000. Cash from operating activities was increased by noncash charges from depreciation of $1,987,000 and stock-based compensation and 401(k) match totaling $771,000. The Company also experienced an increase in deferred revenue of $653,000 and card casino accruals of $449,000, slightly offset by an increase in an amount due from Minnesota horsemen associations of $1,094,000 and accrued wages and payroll taxes of $753,000.
Investing Activities
Net cash used in investing activities for the first nine months of 2020 and 2019 was $56,000 and $11,717,000, respectively, primarily for additions to property, plant, and equipment and additions for TIF eligible improvements. This is partially offset by a decrease in related party receivables in 2020 and a decrease in notes receivable in 2019.
Financing Activities
Net cash used in financing activities during the first nine months of 2020 was $306,000, primarily due to cash dividends paid to shareholders. Net used provided by financing activities during the first nine months of 2019 was $886,000, relating primarily to borrowings on the line of credit and proceeds from the issuance of common stock, partially offset by cash dividends paid to shareholders.
In March 2020, the Company’s Board of Directors suspended the Company’s quarterly cash dividend, beginning with the cash dividend that would normally have been paid in April 2020.
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 2 to our consolidated financial statements in our 2019 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 49.8% of our total assets at September 30, 2020. We use 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
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which the carrying value of the asset exceeds the fair value of the asset. We have determined that no impairment of these assets exists at September 30, 2020.
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 use our judgment in determining the assumptions used to determine the fair value of equity instruments granted using a Black-Scholes model. The Company also grants Long Term Incentive Awards under the Long Term Incentive Plan (the “LTI Plan”) under which Company executive officers and other senior executives have the opportunity to receive a payout of shares of the Company’s common stock at the end of a three-year period. Management must make a number of assumptions to estimate future results to determine the compensation expense of the LTI Plan. As a result of the COVID-19 Pandemic, the Company has temporarily suspended its LTI Plan until there is more certainty about the Company’s future operations.
Commitments and Contractual Obligations:
The Company entered into the CMA with the SMSC on June 4, 2012, that was amended in January 2015, 2016, 2017, March 2018, and June 2020 and expires December 31, 2022. See “Cooperative Marketing Agreement” below.
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. 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 terms of the CMA, as amended, the SMSC made payments of $5.6 million and $7.4 million during the first nine months of 2020 and 2019, respectively, primarily for purse enhancements for the respective live race meets.
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 Fifth Amendment, the SMSC is not required to pay the Company a 2020 annual marketing payment, but the Company will use previously paid but unspent funds for these purposes.
As noted above and affirmed in the Fifth Amendment, SMSC is obligated to make the following purse enhancement and marketing payments for 2021 through 2022:
| | Purse Enhancement Payments to | | Marketing Payments to | ||
Year |
| Horsemen (1) | | Canterbury Park | ||
2021 | |
| $ 7,380,000 | |
| $ 1,620,000 |
2022 | |
| $ 7,380,000 | |
| $ 1,620,000 |
| |
| | |
| |
(1) Includes $100,000 each year payable to various horsemen associations.
The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s condensed consolidated statements of operations. For the three and nine months ended September 30, 2020, the Company recorded $490,000 and $811,000 in other revenue, respectively, incurred $449,000 and $694,000 in
25
advertising and marketing expense, respectively, and incurred $41,000 and $117,000 in depreciation, respectively, related to the SMSC marketing funds. For the three and nine months ended September 30, 2019, the Company recorded $569,000 and $1,031,000 in other revenue, respectively, incurred $512,000 and $861,000 in advertising and marketing expense, respectively, and incurred $57,000 and $170,000 in depreciation, respectively, related to the SMSC marketing funds.
Under the CMA, the Company has agreed for the 10-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.
Redevelopment Agreement:
As mentioned above in note 8 of Notes to Financial Statements, on August 10, 2018, the City of Shakopee, the City of Shakopee Economic Development Authority, and the Company entered into a Redevelopment Agreement in connection with a Tax Increment Financing District (“TIF District”) that the City had approved in April 2018. Under the Redevelopment Agreement, the Company has agreed to undertake a number of specific infrastructure improvements within the TIF District, including the development of public streets, utilities, sidewalks, and other public infrastructure and the City of Shakopee agreed that a portion of the tax revenue generated from the developed property will be paid to the Company to reimburse it for its expense in constructing these improvements. 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.
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 that are typically preceded by words such as “believes,” “expects,” “anticipates,” “intends” or similar expressions. For these 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 these forward-looking statements are subject to risks and uncertainties that could affect our actual results and cause actual results to differ materially from those indicated in the forward-looking statements. These risks and uncertainties include, but are not limited to:
| ● | material fluctuations in attendance at the Racetrack; |
| ● | any short-term or long-term effect that the COVID-19 Pandemic may have on the economy generally, or us as an entertainment venue, including reluctance from customers to visit our Racetrack or Card Casino or social distancing measures that we may voluntarily take that would limit attendance at our facilities; |
| ● | the fact that due to the COVID-19 Pandemic, our non-real estate development operations were closed from March 16, 2020 to mid-June and early July 2020, when we resumed these operations on a more limited basis in light of restrictions imposed by Minnesota regulatory bodies; |
| ● | 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, including our joint venture to develop a luxury apartment complex; |
| ● | competition from other sports and entertainment options; |
26
| ● | 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, including decision or actions related to sports betting that would adversely affect our betting environment; |
| ● | any legal, judicial, legislative or regulatory action or event that would adversely affect our ten-year Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community, which enhances the purses for daily racing at Canterbury Park and supports cooperative marketing programs for the two organizations, benefiting the stability and quality of live horse racing; |
| ● | the fact that under the Redevelopment Agreement with the City of Shakopee, the Company has agreed to undertake a number of specific infrastructure improvements within the TIF District, and the amounts that Canterbury Park will be paid as reimbursement under the TIF program for these improvements is not guaranteed, but will depend in part on future tax revenues generated from the developed property; |
| ● | the success of the Company’s Canterbury Commons real estate development, including our reliance upon our joint venture partner Doran Companies to construct and profitably operate the upscale apartment complex; |
| ● | our success in our joint ventures and pending real estate developments; |
| ● | the fact that 2019 first quarter construction activity in our Card Casino resulted in a decline in Card Casino revenues and any future construction activity may result in similar decline; |
| ● | the fact the infrastructure improvements that we are making pursuant to the Redevelopment Agreement with the City of Shakopee together with improvements we are making to our parking facilities may disrupt traffic flow in a manner that discourages our customers from visiting our facilities, thereby affecting our revenue and profitability; |
| ● | our ability to develop and maintain high-quality food and beverage offerings that we can market and sell to our Racetrack and Card Casino patrons, as well as future residents of the new Triple Crown Apartments at Canterbury that are being developed by the Doran–Canterbury joint ventures; |
| ● | 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
Not Applicable.
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, Randy J. Dehmer, have reviewed the Company’s disclosure controls and procedures pursuant to Exchange Act
27
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.
(b) Changes in Internal Control over Financial Reporting:
There have been no significant 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, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
Not Applicable.
There have been no changes to the Risk Factors listed in our Annual Report on Form 10-K for the year ended December 31, 2019, as updated by our subsequently filed Quarterly Reports on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults upon Senior Securities
Not Applicable.
Item 4. Mine Safety Disclosures
Not Applicable.
Not Applicable.
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31.1 | | |
| | |
31.2 | | |
| | |
32 | | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
| | |
99.1 | | Press Release dated November 9, 2020 announcing 2020 Third Quarter Results. |
| | |
101 | | The following financial information from Canterbury Park Holding Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020, formatted in eXtensible Business Reporting Language XBRL: (i) Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, (ii) Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2020 and September 30, 2019, (iii) Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months ended September 30, 2020 and September 30, 2019, (iv) Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2020 and September 30, 2019, and (v) Notes to Financial Statements. |
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 10, 2020 | /s/ Randall D. Sampson |
| |
| Randall D. Sampson, |
| Executive Chairman, President, and Chief Executive Officer (Principal Executive Officer) |
| |
Dated: November 10, 2020 | /s/ Randy J. Dehmer |
| Randy J. Dehmer, Chief Financial Officer (Principal Financial and Accounting Officer) |
| |
29
Exhibit 31.1
CERTIFICATION
I, Randall D. Sampson certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Canterbury Park Holding Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case on an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and; |
| 5. | I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: November 10, 2020 | CANTERBURY PARK HOLDING CORPORATION |
| |
| /s/ Randall D. Sampson |
| Randall D. Sampson |
| Executive Chairman, President, and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Randy J. Dehmer certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Canterbury Park Holding Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case on an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and; |
| 5. | I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: November 10, 2020 | CANTERBURY PARK HOLDING CORPORATION |
| |
| /s/ Randy J. Dehmer |
| Randy J. Dehmer |
| Chief Financial Officer |
Exhibit 32
CERTIFICATION
Pursuant to 18 U.S.C. 1350, the undersigned Chief Executive Officer and Chief Financial Officer of Canterbury Park Holding Corporation (the “Company”) herby certifies that:
| (1) | The accompanying quarterly report on Form 10-Q for the period ended September 30, 2020 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| CANTERBURY PARK HOLDING CORPORATION |
| |
Dated: November 10, 2020 | /s/ Randall D. Sampson |
| Randall D. Sampson, |
| Executive Chairman, President, and Chief Executive Officer |
| |
| |
Dated: November 10, 2020 | /s/ Randy J. Dehmer |
| Randy J. Dehmer |
| Chief Financial Officer |
Exhibit 99.1
CANTERBURY PARK HOLDING CORPORATION REPORTS
THIRD QUARTER RESULTS
Shakopee, MN – November 9, 2020 – Canterbury Park Holding Corporation (“Canterbury” or “the Company”) (NASDAQ: CPHC), today reported financial results for the third quarter ended September 30, 2020. The results reflect the ongoing impact of the COVID-19 pandemic, including the state mandated capacity limitations and weakened visitor demand subsequent to the reopening of Canterbury Park.
($ in thousands, except per share data and percentages)
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | Nine Months Ended September 30, | | ||||||||||||
| |
| |
| Increase |
| | |
| |
| Increase | | ||||
| 2020 | | 2019 | | (Decrease) | | | 2020 | | 2019 | | (Decrease) | | ||||
Net revenues | $ | 13,300 | | $ | 18,601 | | (28.5) | % | | $ | 27,017 | | $ | 46,625 | | (42.1) | % |
| | | | | | | | | | | | | | | | | |
Adjusted EBITDA(1) | | 1,211 | | | 2,265 | | (46.5) | % | | | 295 | | | 4,658 | | (93.7) | % |
| | | | | | | | | | | | | | | | | |
Net income(2) | $ | 1,849 | | $ | 1,150 | | 60.7 | % | | $ | 923 | | $ | 2,165 | | (57.4) | % |
| | | | | | | | | | | | | | | | | |
Basic EPS | $ | 0.39 | | $ | 0.25 | | 56.0 | % | | $ | 0.20 | | $ | 0.47 | | (57.4) | % |
Diluted EPS | $ | 0.39 | | $ | 0.25 | | 56.0 | % | | $ | 0.20 | | $ | 0.47 | | (57.4) | % |
| (1) | Adjusted EBITDA, a non-GAAP measure, excludes certain items from net (loss) income, a GAAP measure. Non-GAAP financial measures are not intended to be considered in isolation from, a substitute for, or superior to GAAP results. Definitions, disclosures and reconciliations of non-GAAP financial information are included later in the release. |
| (2) | Net income for the three and nine month periods ended September 30, 2020 include the benefit of a $2.3 million gain related to transfers of land to the Doran Canterbury II and Canterbury DBSV joint ventures. |
Management Commentary
“While our third quarter results reflect the continued impact of the Covid-19 pandemic on all aspects of our operations at Canterbury Park, the quick actions we took to reduce labor and other operating expenses along with our disciplined approach to conserving cash have helped ensure we have the liquidity and flexibility to position the Company for long-term health and growth,” said Randy Sampson, President and Chief Executive Officer of Canterbury Park. “Notwithstanding the pandemic restrictions, since reopening in June, our financial performance consistently improved throughout the quarter. As a result, we were able to generate positive cash flow in the third quarter of 2020.
“Our operations included month-over-month improvement in table games revenue in our Card Casino throughout the third quarter of 2020 compared to the prior year. While July was down by double digits compared to a year ago, it steadily improved and was down single digits in August and up slightly in September. In our racing and pari-mutuel operations, we completed a safe and modified 53-day race meet. Due to capacity being limited to approximately 10% of the average number of visitors we would normally accommodate, and as a result of the loss of 12 racing days, we saw a 65% decrease in on-track wagering on our live races. However, our decision to shift our racing schedule to weekday afternoons allowed us to increase our market penetration, resulting in a 116% year-over-year increase in handle from out-of-state wagering outlets. We continue to work closely with state and local officials to increase capacity in our Card Casino and our simulcast wagering location in a safe manner and to communicate our health and safety efforts to our guests. We expect that when allowed to operate without the current restrictions and as guest visitation begins to return to pre-pandemic levels, the financial performance of these operations will continue to improve.
“Notwithstanding the partial recovery in our Card Casino and pari-mutuel businesses, pandemic-related restrictions on our special events and group sales operations impacted the third quarter operating performance and will continue to impact our non-gaming business for at least the next several months. To address this near-term challenge, we recently made the difficult decision to align staffing levels with the current level of our non-gaming business. These actions included leaving vacant positions unfilled, furloughing team members, pay reductions for senior leadership and some job eliminations. While the decision to undertake these actions was very painful to make, they have allowed us to reduce expenses to a level that we believe will help us sustain our long-term viability. We greatly appreciate the patience and support of our team members during this period of uncertainty caused by the COVID-19 pandemic, and we look forward to a brighter future as restrictions on our operations ease.
“Importantly, the pandemic has not had any notable impact on our consistent progress in unlocking value for our shareholders by monetizing the excess acreage around Canterbury Park through the development of Canterbury Commons™. Development activity for this unique and new residential, commercial and retail community remains busy with six active projects on approximately 50 acres of land currently underway in various stages of development, pre-development or approvals. Committed development projects to date include the Triple Crown Residences and the southwest development ground development which include a number of commercial pad-ready sites for future development. The residential population at Canterbury Commons is beginning to be established as leasing activity accelerates for the upscale apartments at the Triple Crown Residences. In addition, the new corporate headquarters for Greystone Construction, which represents the first commercial development at Canterbury Commons, is progressing. It is very encouraging to see the daily transformation taking place, and we believe that bringing a new population center to the doorstep of Canterbury Park will drive new energy and economic benefits for our Card Casino, racing and hospitality operations. We are making progress on additional agreements to further monetize the remaining excess real estate. Overall, we expect the development of Canterbury Commons will provide for a long-term stream of cash flow and create value from our excess land which we believe is not currently reflected in our share valuation.”
Mr. Sampson concluded, “Prior to the pandemic, we were achieving consistent operating improvement and expect we can regain that momentum as normalized operations resume. In the interim, we remain focused on providing an outstanding and safe entertainment experience at Canterbury Park while maintaining the cost and cash management discipline needed to ensure that we can execute on growth opportunities in the future. We are confident Canterbury Park has the balance sheet and financial flexibility to support our current operations and to execute on future growth initiatives for our Card Casino, pari-mutuel and hospitality operations at the appropriate time while unlocking value through the development of Canterbury Commons.”
Canterbury Commons Development Update
Development of Canterbury Commons began in 2018 with the first of two joint venture agreements between Canterbury and Doran Companies (“Doran”) for the development of the upscale Triple Crown Residences at Canterbury Park. Construction of the 321-unit first phase, which is being developed pursuant to the first joint venture agreement, began in late 2018 with initial occupancy on June 1, 2020. As of the end of October 2020, approximately 150 units were available for occupancy. Leasing activity for these units has been strong and is anticipated to continue as the remaining first phase units are expected to be released and available for occupancy beginning December 2020 and into the first quarter of 2021. In August 2020, Doran exercised its option for Phase II of the project, which will include an additional 300 residential units, and the Company entered into a second joint venture agreement with Doran. Pursuant to this second agreement, in early August 2020, the Company transferred roughly 10 acres of land to the second joint venture with Doran. In addition to receiving 27.4% ownership in the Doran Phase II joint venture, the exchange resulted in the repayment of a $2.9 million note receivable which was on the Company’s balance sheet as a related party receivable as of June 30, 2020. Groundwork on the Doran Canterbury II site began in October 2020, paving the way for the ground-up construction of the second phase of apartments, which is anticipated to begin in the spring of 2021.
Development work related to the Company’s joint venture with Greystone Construction (“Greystone”) is also underway on the southwest portion of the Canterbury Commons site. Pursuant to this joint venture, Greystone is developing a 13-acre land parcel with potential uses expected to include hospitality, dining, residential, commercial and service-oriented retail. Greystone’s development work to date is primarily for a new 28,000 square foot office building, with Greystone committed to occupy the second floor as its new corporate headquarters. The project is expected to be completed by July 2021.
In addition, development work by Pulte Homes of Minnesota on 109 new row homes and townhome residences at Canterbury Commons is expected to start in the spring of 2021 following approvals. Lifestyle Communities is working on its approvals with the City of Shakopee for a new cooperative community featuring a 56-unit, four-story building with over 5,000 square feet of amenity spaces that is expected to begin construction in the fall of 2021.
The Company expects that road work on Unbridled Avenue on the north side of Canterbury Park will be completed at the end of November 2020, providing a new entrance from Canterbury Road that will significantly improve access to Canterbury Park and Canterbury Commons.
Finally, the Company is making further progress with developer and partner selection for the balance of the approximately 140 acres that will comprise Canterbury Commons, with a focus on additional commercial development of office, retail, hotel and entertainment spaces. Canterbury expects to make additional announcements of new development partners in the future for this phase of development.
Summary of 2020 Third Quarter Operating Results
Net revenues for the three months ended September 30, 2020 decreased 28.5% to $13.3 million compared to $18.6 million for the same period in 2019. Pari-mutuel revenues increased $606,000, or 16.9%, over the prior-year period due to an increase in out of state handle, partially offset by decreases in simulcast wagering and in live racing revenue due to state-mandated capacity limitations reducing visitors to approximately 10% of the prior-year period and an 18.5% reduction in the number of days in the racing season. For the three months ended September 30, 2020, Card Casino revenues decreased $1.4 million, or 16.0%, as compared to the same period in 2019, food and beverage revenues decreased $3.0 million, or 77.6%, as compared to the same period in 2019, and other revenues decreased $1.6 million, or 59.5%, as compared to the same period in 2019. These decreases are the result of business limitations due to the COVID-19 pandemic.
Operating expenses for the three months ended September 30, 2020 were $12.2 million, a decrease of $4.9 million, or 28.5%, compared to operating expenses of $17.1 million for the same period in 2019. This year-over-year decrease in operating expenses reflects reductions in the majority of the Company’s operating expenses, primarily a result of its limited operations and active efforts to reduce expenses to preserve cash.
During the 2020 third quarter, the Company recorded a $2.3 million gain related to the transfers of land to the Doran Canterbury II and Canterbury DBSV joint ventures. This gain, along with reductions in operating expenses proportionately greater than the reductions in revenue for the third quarter 2020, were the contributors to an increase in income from operations of $1.9 million in the third quarter 2020 as compared to the prior year period.
The Company recorded net income of $1.8 million, or diluted earnings per share of $0.39, for the three months ended September 30, 2020. Net income and diluted earnings per share for the three months ended September 30, 2019 were $1.2 million and $0.25, respectively. The increase in net income in the third quarter 2020 as compared to the third quarter 2019 was primarily due to the gain on the land transfers that occurred in the third quarter 2020 and did not occur in the prior-year period.
Adjusted EBITDA, a non-GAAP measure, for the three months ended September 30, 2020 was $1.2 million compared to $2.3 million in the same period in 2019.
Summary of 2020 Year-to-Date Operating Results
Net revenues for the nine months ended September 30, 2020 decreased 42.1% to $27.0 million, compared to $46.6 million for the same period in 2019. The year-over-year decrease in net revenues reflects declines across the Company’s operations, primarily as a result of the temporary suspension of operations from March 16, 2020 through June 9, 2020 and the limitations placed on its operations since reopening.
Operating expenses for the nine months ended September 30, 2020 were $28.1 million, a decrease of $15.7 million, or 35.9%, compared to operating expenses of $43.9 million for the same period in 2019. The year-over-year decrease in operating expenses reflects reductions in a majority of the Company’s operating areas, primarily as a result of the temporary suspension of operations from March 16, 2020 through June 9, 2020 and the limitations placed on operations since reopening. In the second quarter of 2019, the Company recorded a gain on insurance recoveries of $199,000, which was accounted for as a reduction in operating expenses.
The Company recorded net income of $923,000, or diluted earnings per share of $0.20, for the nine months ended September 30, 2020. Net income and diluted earnings per share for the nine months ended September 30, 2019 were $2.2 million and $0.47, respectively.
Adjusted EBITDA, a non-GAAP measure, for the nine months ended September 30, 2020 was $295,000 compared to $4.7 million in the same period in 2019.
Additional Financial Information
Further financial information for the third quarter ended September 30, 2020 is presented in the accompanying tables at the end of this press release. Additional information will be provided in the Company’s Quarterly Report on Form 10-Q that will be filed with the Securities and Exchange Commission on or about November 10, 2020.
Use of Non-GAAP Financial Measures
To supplement our financial statements, we also provide investors with information about our EBITDA and Adjusted EBITDA, each of which is a non-GAAP measure, which excludes certain items from net income a GAAP measure. We define EBITDA as earnings before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as earnings before interest income, income tax expense (benefit), depreciation and amortization, as well as excluding gain on insurance recoveries, gain on transfer of land, and loss from disposal of assets. Neither EBITDA nor adjusted EBITDA is a measure of performance calculated in accordance with generally accepted accounting principles ("GAAP"), and should not be considered an alternative to, or more meaningful than, net income as an indicator of our operating performance. We have presented EBITDA as a supplemental disclosure because it is a widely used measure of performance and basis for valuation of companies in our industry. Other companies that provide EBITDA information may calculate EBITDA differently than we do. We have presented Adjusted EBITDA as a supplemental disclosure because it enables investors to understand our results excluding the effect of these items.
About Canterbury Park
Canterbury Park Holding Corporation (Nasdaq: CPHC) owns and operates Canterbury Park Racetrack and Card Casino in Shakopee, Minnesota, the only thoroughbred and quarter horse racing facility in the State. The Company generally offers live racing from May to September. The Card Casino hosts card games 24 hours a day, seven days a week, dealing both poker and table games. The Company also conducts year-round wagering on simulcast horse racing and hosts a variety of other entertainment and special events at its Shakopee facility. The Company is redeveloping 140 acres of underutilized land surrounding the Racetrack in a project known as Canterbury Commons™. The Company is pursuing several mixed-use development opportunities for this land, directly and through joint ventures. For more information about the Company, please visit www.canterburypark.com.
Cautionary Statement
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, business activities or plans. These statements are typically preceded by the words “believes,” “expects,” “anticipates,” “intends” or similar expressions. For these 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 these 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. We report these risks and uncertainties in our Annual Report on Form 10-K filed with the SEC and subsequently filed Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. They include, but are not limited to: the effect that the COVID-19 coronavirus pandemic and resulting precautionary measures may have on us as an entertainment venue or on the economy generally, including the fact that we temporarily suspended all card casino, simulcast, and special events operations at Canterbury Park from March 16, 2020 through June 9, 2020, that since June 9, 2020 we have been open and operating on a much more limited basis to comply with state law and health protocols, reductions in the number of visitors due to their COVID-19 concerns, and that we operated a reduced schedule consisting of a 53-day live race meet in 2020; material fluctuations in attendance at the Racetrack; material changes in the level of wagering by patrons; any decline in interest in the unbanked card games offered in the Card Casino; competition from other venues offering unbanked card games or other forms of wagering; 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 expense related to new marketing initiatives; the impact of wagering products and technologies introduced by competitors; the general health of the gaming sector; legislative and regulatory decisions and changes; our ability to successfully develop our real estate, including our reliance on our current and future development partners; temporary disruptions or changes in access to our facilities caused by ongoing infrastructure improvements; and other factors that are beyond our ability to control or predict.
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Investor Contact: | |
Randy Dehmer | Richard Land, Jim Leahy |
Vice President and Chief Financial Officer | JCIR |
Canterbury Park Holding Corporation | 212-835-8500 or cphc@jcir.com |
952-233-4828 or investorrelations@canterburypark.com
- Financial tables follow -
CANTERBURY PARK HOLDING CORPORATION’S
SUMMARY OF OPERATING RESULTS
(UNAUDITED)
| Three months ended | | Nine months ended | ||||||||
| September 30, | | September 30, | ||||||||
| 2020 | | 2019 | | 2020 | | 2019 | ||||
Net Operating Revenues | $ | 13,300,014 | | $ | 18,600,641 | | $ | 27,016,828 | | $ | 46,624,515 |
Operating Expenses | | (12,245,399) | | | (17,127,279) | | | (28,139,097) | | | (43,869,142) |
Gain on Transfer of Land | | 2,275,458 | | | - | | | 2,275,458 | | | - |
Income from Operations | | 3,330,073 | | | 1,473,362 | | | 1,153,189 | | | 2,755,373 |
Other Operating (Loss) Income, net | | (343,064) | | | 96,065 | | | (159,655) | | | 204,623 |
Income Tax Expense | | (1,137,997) | | | (418,942) | | | (70,498) | | | (795,164) |
Net Income | $ | 1,849,012 | | $ | 1,150,485 | | $ | 923,036 | | $ | 2,164,832 |
Basic Net Income Per Common Share | $ | 0.39 | | $ | 0.25 | | $ | 0.20 | | $ | 0.47 |
Diluted Net Income Per Common Share | $ | 0.39 | | $ | 0.25 | | $ | 0.20 | | $ | 0.47 |
RECONCILIATION OF NET INCOME TO EBITDA AND ADJUSTED EBITDA
(UNAUDITED)
| Three months ended | | Nine months ended | ||||||||
| September 30, | | September 30, | ||||||||
| 2020 | | 2019 | | 2020 | | 2019 | ||||
NET INCOME | $ | 1,849,012 | | $ | 1,150,485 | | $ | 923,036 | | $ | 2,164,832 |
Interest income, net | | (168,552) | | | (96,065) | | | (501,600) | | | (204,623) |
Income tax expense | | 1,137,997 | | | 418,942 | | | 70,498 | | | 795,164 |
Depreciation | | 655,003 | | | 785,327 | | | 2,065,496 | | | 1,987,067 |
EBITDA | | 3,473,460 | | | 2,258,689 | | | 2,557,430 | | | 4,742,440 |
Gain on insurance recoveries | | - | | | - | | | - | | | (198,874) |
Gain on transfer of land | | (2,275,458) | | | - | | | (2,275,458) | | | - |
Loss on disposal of assets | | 13,407 | | | 6,376 | | | 13,407 | | | 114,413 |
ADJUSTED EBITDA | $ | 1,211,409 | | $ | 2,265,065 | | $ | 295,379 | | $ | 4,657,979 |