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, 2019.

OR

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

Commission File Number:  001‑37858

CANTERBURY PARK HOLDING CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Minnesota		47‑5349765
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
	1100 Canterbury Road
	Shakopee, MN  55379

(Address of principal executive offices and zip code)

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 4,625,421 shares of common stock, $.01 par value, outstanding as of November 1, 2019.

Canterbury Park Holding Corporation

INDEX

			Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	2
		Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	3
		Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019	4
		Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2019 and 2018	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
	Item 4.	Controls and Procedures	25
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	26
	Item 1A.	Risk Factors	26
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
	Item 3.	Defaults Upon Senior Securities	26
	Item 4.	Mine Safety Disclosures	26
	Item 5.	Other Information	26
	Item 6.	Exhibits	27
	Signatures		27

1

PART 1 – FINANCIAL INFORMATION

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	September 30,		December 31,
	2019		2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,269,243	$	4,895,359
Restricted cash		1,791,592		5,058,639
Short-term investments		103,886		206,545
Accounts receivable, net of allowance of $19,250 for both periods		611,999		241,743
Current portion of notes receivable		1,084,003		1,063,650
Inventory		399,311		297,209
Prepaid expenses		468,553		625,024
Income taxes receivable		280,038		417,004
Due from Minnesota horsemen associations		1,093,742		—
Total current assets		7,102,367		12,805,173
LONG-TERM ASSETS
Deposits		49,500		49,500
Restricted cash - long-term portion		1,259,567		1,250,000
TIF receivable		7,921,847		1,908,065
Notes receivable - long-term portion		—		1,078,861
Related party receivable		3,386,500		3,208,400
Operating lease right-of-use assets		76,816		—
Equity investment		2,992,633		2,995,010
Land, buildings and equipment, net		43,049,675		38,131,052
TOTAL ASSETS	$	65,838,905	$	61,426,061
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		3,736,940		3,587,328
Card Casino accruals		2,189,768		1,740,926
Accrued wages and payroll taxes		1,515,237		2,268,351
Cash dividend payable		322,863		316,938
Accrued property taxes		1,236,906		1,001,200
Deferred revenue		1,632,318		979,358
Payable to horsepersons		—		706,122
Line of credit		1,671,990		—
Current portion of finance lease obligations		24,097		23,216
Current portion of operating lease obligations		29,697		—
Total current liabilities		12,359,816		10,623,439
LONG-TERM LIABILITIES
Deferred income taxes		4,456,200		3,970,000
Finance lease obligations, net of current portion		80,087		98,272
Operating lease obligations, net of current portion		47,119		—
Total long-term liabilities		4,583,406		4,068,272
TOTAL LIABILITIES		16,943,222		14,691,711
STOCKHOLDERS’ EQUITY
Common stock, $.01 par value, 10,000,000 shares authorized, 4,619,421 and 4,527,685 respectively, shares issued and outstanding		46,194		45,277
Additional paid-in capital		22,442,735		21,420,886
Retained earnings		26,406,754		25,268,187
Total stockholders’ equity		48,895,683		46,734,350
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	65,838,905	$	61,426,061

See notes to condensed consolidated financial statements.

2

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
OPERATING REVENUES:
Pari-mutuel	$	3,578,841	$	3,955,613	$	8,277,727	$	9,001,324
Card Casino		8,559,935		8,639,310		25,350,903		25,396,780
Food and beverage		3,838,792		3,256,566		7,735,986		6,960,917
Other		2,623,073		2,519,021		5,259,899		5,744,162
Total Net Revenues		18,600,641		18,370,511		46,624,515		47,103,183
OPERATING EXPENSES:
Purse expense		2,085,277		2,339,588		5,441,449		5,687,347
Minnesota Breeders’ Fund		290,104		301,713		813,906		806,274
Other pari-mutuel expenses		293,742		325,680		1,013,793		1,088,956
Salaries and benefits		7,147,203		6,605,051		19,829,175		18,801,475
Cost of food and beverage and other sales		1,571,048		1,320,792		3,398,220		3,010,323
Depreciation and amortization		785,327		659,498		1,987,067		1,895,723
Utilities		567,763		575,912		1,266,681		1,276,138
Advertising and marketing		947,377		1,034,612		1,894,898		2,273,831
Professional and Contracted Services		1,773,826		1,674,958		4,078,565		3,695,176
Loss on disposal of assets		6,376		—		114,413		99,934
Gain on insurance recoveries		—		—		(198,874)		(21,064)
Other operating expenses		1,659,236		1,501,062		4,229,849		4,101,203
Total Operating Expenses		17,127,279		16,338,866		43,869,142		42,715,316
INCOME FROM OPERATIONS		1,473,362		2,031,645		2,755,373		4,387,867
OTHER INCOME
Interest income, net		96,065		8,567		204,623		26,023
Net Other Income		96,065		8,567		204,623		26,023
INCOME BEFORE INCOME TAXES		1,569,427		2,040,212		2,959,996		4,413,890
INCOME TAX EXPENSE		(418,942)		(407,367)		(795,164)		(1,066,000)
NET INCOME	$	1,150,485	$	1,632,845	$	2,164,832	$	3,347,890
Basic earnings per share	$	0.25	$	0.36	$	0.47	$	0.75
Diluted earnings per share	$	0.25	$	0.36	$	0.47	$	0.74
Weighted Average Basic Shares Outstanding		4,604,562		4,497,072		4,583,591		4,467,897
Weighted Average Diluted Shares		4,608,987		4,533,514		4,596,314		4,514,015
Cash dividends declared per share	$	0.07	$	0.07	$	0.21	$	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 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
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, 2018
	Number of	Common		Additional		Retained
	Shares	Stock		Paid-in Capital		Earnings		Total
Balance at December 31, 2017	4,414,492	$	44,145	$	19,865,273	$	20,807,679	$	40,717,097
Exercise of stock options	55,500		555		485,989		—		486,544
Stock-based compensation	—		—		268,816		—		268,816
Dividend distribution	—		—		—		(941,006)		(941,006)
401(K) stock match	24,992		250		404,075		—		404,325
Issuance of deferred stock awards	2,788		28		28		—		56
Shares issued under Employee Stock Purchase Plan	8,582		86		113,496		—		113,582
Net income	—		—		—		3,347,890		3,347,890
Balance at September 30, 2018	4,506,354	$	45,064	$	21,137,677	$	23,214,563	$	44,397,304
For the three months ended September 30, 2018
	Number of	Common		Additional		Retained
	Shares	Stock		Paid-in Capital		Earnings		Total
Balance at June 30, 2018	4,482,567	$	44,826	$	20,816,671	$	21,897,162	$	42,758,659
Exercise of stock options	10,975		110		71,383		—		71,493
Stock-based compensation	—		—		64,950		—		64,950
Dividend distribution	—		—		—		(315,444)		(315,444)
401(K) stock match	8,284		83		127,122		—		127,205
Shares issued under Employee Stock Purchase Plan	4,528		45		57,551				57,596
Net income	—		—		—		1,632,845		1,632,845
Balance at September 30, 2018	4,506,354	$	45,064	$	21,137,677	$	23,214,563	$	44,397,304

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,
	2019		2018
Operating Activities:
Net income	$	2,164,832	$	3,347,890
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,987,067		1,895,723
Stock-based compensation expense		203,333		268,816
Stock-based employee match contribution		567,994		401,850
Deferred income taxes		486,200		518,170
Loss from equity investment		2,377		—
Loss on disposal of assets		114,413		99,934
Gain on insurance recoveries		(198,874)		(21,064)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(166,082)		326,970
Decrease in other current assets		54,370		44,969
Increase (decrease) in income taxes receivable/payable		136,965		(242,196)
Increase in due from Minnesota horsemen associations		(1,093,742)		(387,964)
Decrease in operating lease right-of-use assets		26,296		—
Decrease in operating lease liabilities		(26,296)		—
(Decrease) increase in accounts payable		(189,665)		233,265
Increase in deferred revenue		652,960		379,938
Increase (decrease) in Card Casino accruals		448,842		(1,101,194)
Decrease in accrued wages and payroll taxes		(753,114)		(943,580)
Increase (decrease) in accrued property taxes		235,706		(23,604)
Decrease in payable to horsepersons		(706,122)		(521,613)
Net cash provided by operating activities		3,947,460		4,276,310
Investing Activities:
Additions to land, buildings, and equipment		(12,699,908)		(3,548,124)
Issuance of related party receivable		(178,100)		—
Decrease in notes receivable		1,058,508		1,038,443
Proceeds from sale of investments		102,659		61
Net cash used in investing activities		(11,716,841)		(2,509,620)
Financing Activities:
Proceeds from issuance of common stock		244,350		602,649
Borrowings on line of credit		5,592,246		—
Payments against line of credit		(3,920,256)		—
Cash dividend paid to shareholders		(958,317)		(890,666)
Payments for taxes related to net share settlement of equity awards		(54,934)		—
Principal payments on finance lease		(17,304)		—
Net cash provided by (used in) financing activities		885,785		(288,017)
Net (decrease) increase in cash, cash equivalents, and restricted cash		(6,883,596)		1,478,672
Cash, cash equivalents, and restricted cash at beginning of period		11,203,998		12,025,553
Cash, cash equivalents, and restricted cash at end of period	$	4,320,402	$	13,504,225
Schedule of non-cash investing and financing activities
Additions to buildings and equipment funded through accounts payable	$	339,000	$	178,000
Transfer of future TIF reimbursed costs from PP&E		6,014,000		—
ROU assets obtained in exchange for operating lease obligations		103,000		—
Dividend declared		323,000		315,000
Supplemental disclosure of cash flow information:
Income taxes paid	$	640,000	$	575,000
Interest paid		30,000		—

See notes to condensed consolidated financial statements.

5

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    OVERVIEW AND BASIS OF PRESENTATION

Business – The Company’s Racetrack operations are conducted at facilities located in Shakopee, Minnesota, approximately 25 miles southwest of downtown Minneapolis. In May 1994, the Company commenced year-round horse racing simulcast operations and hosted the first annual live race meet during the summer of 1995. The Company’s live racing operations are a seasonal business as it hosts live race meets each year from May until September. The Company earns additional pari-mutuel revenue by televising its live racing to out-of-state racetracks around the country. Canterbury Park’s Card Casino operates 24 hours a day, seven days a week and is limited by Minnesota State law to conducting card play on a maximum of 80 tables. The Card Casino currently offers a variety of poker and table games. The Company’s three largest sources of revenues include: Card Casino operations, pari-mutuel operations and food and beverage sales. The Company also derives revenues from related services and activities, such as admissions, advertising signage, publication sales, and from other entertainment events and activities held at the Racetrack. Additionally, the Company is developing approximately 140 acres of underutilized land surrounding the Racetrack in a project known as Canterbury Commons. The Company is pursuing several mixed-use development opportunities for this land, directly and through joint ventures.

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

These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2018, included in its Annual Report on Form 10‑K (the “2018 Form 10‑K”).

The condensed consolidated balance sheets and the related condensed consolidated statements of operations, stockholders’ equity, and the cash flows for the periods ended September  30, 2019 and 2018 have been prepared by Company management. In the opinion of management, all adjustments (which include only normal recurring adjustments, except where noted) necessary to present fairly the financial position, results of operations, statement of stockholders’ equity, and cash flows at September 30, 2019 and 2018 and for the periods then ended have been made.

Effective January 1, 2019, we adopted the requirements of Accounting Standards Update (“ASU”) No 2016‑02, Leases as discussed in Note 2. All amounts and disclosures set forth in this Form 10‑Q have been updated to comply with the new standards.

Restricted Cash – Restricted cash represents refundable deposits and amounts due to horsemen for purses, stakes and awards, and amounts accumulated in card game progressive jackpot pools, the player pool and poker promotional fund to be used to repay card players in the form of promotions, giveaways, prizes, or by other means. Restricted cash also includes a deposit related to its development operations. The Company deposited $1.2 million with a bank in December 2018 to assist Doran Canterbury I  to complete financing for a construction loan. The bank will release the deposit back to the Company when the construction loan is repaid by Doran Canterbury I and converted into a term loan. Because the Company expects this to occur in 2021 or 2022, the Company classified this as long term restricted cash on its consolidated balance sheet.

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.

6

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, $6,299,000 and $5,861,000 for the nine months ended September 30, 2019 and 2018, respectively, related to thoroughbred races. Minnesota Statutes provide that amounts transferred into the trust account are the property of the trust and not of the Company, and therefore these amounts are not recorded on the Company’s Consolidated Balance Sheet.

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

Identification of the contract, or contracts, with a customer

Identification of the performance obligations in the contract

Determination of the transaction price

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

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

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

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

We have two general types of liabilities related to contracts with customers: (1) our MVP Loyalty Program and (2) outstanding chip liability. These are included in the line item Card Casino accruals on the consolidated balance sheet. We defer the full retail value of these complimentary reward items until the future revenue transaction occurs.

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

7

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

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

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

2.    ACCOUNTING STANDARDS AND SIGNIFICANT ACCOUNTING POLICIES

Recently Adopted Accounting Pronouncements

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

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

Summary of Significant Accounting Policies

Except for the accounting policies for leases that were updated as a result of our recently adopted accounting pronouncements, there have been no changes to our significant accounting policies described in the Annual Report on Form 10‑K for the year ended December 31, 2018 filed with the SEC on March 29, 2019, that have had a material impact on our condensed consolidated financial statements and related notes.

8

3.    STOCK-BASED COMPENSATION

Long Term Incentive Plan and Award of Deferred Stock

The Long Term Incentive Plan (the “LTI Plan”) authorizes the grant of Long Term Incentive Awards that provide an opportunity to Named Executive Officers (“NEOs”) and other Senior Executives to receive a payment in cash or shares of the Company’s common stock to the extent of achievement at the end of a period greater than one year (the “Performance Period”) as compared to Performance Goals established at the beginning of the Performance Period. Currently, there are three awards outstanding that are for three-year periods ending December 31, 2019, 2020, and 2021.

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

The Company’s Stock Plan currently authorizes annual grants of restricted stock, deferred stock, stock options, or any combination of the three, to non-employee members of the Board of Directors at the time of the Company’s annual shareholders’ meeting as determined by the Board prior to each such meeting. Options granted under the Plan generally expire 10 years after the grant date. Restricted stock and deferred stock grants generally vest 100% one year after the date of the annual meeting at which they were granted, are subject to restrictions on resale for an additional year, and are subject to forfeiture if a board member terminates his or her board service prior to the shares vesting. The Board of Directors’ unvested deferred stock awards as of September 30, 2019 consisted of 9,416 shares with a weighted average fair value per share of $12.74. There were no unvested restricted stock or stock options outstanding at September 30, 2019.

Stock-based compensation expense related to the LTI Plan, deferred stock awards and restricted stock awards is included on the Condensed Consolidated Statements of Operations and totaled $203,000 and $269,000 for the nine months ended September 30, 2019 and 2018, respectively, and $40,000 and $65,000 for the three months ended September 30, 2019 and 2018, respectively.

Employee Stock Option Grants

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

A summary of stock option activity as of September 30, 2019 and changes during the nine months then ended is presented below:

				Weighted
		Weighted		Average
		Average		Remaining		Aggregate
		Exercise		Contractual		Grant Date
Stock Options		Price		Term		Fair Value
Outstanding at January 1, 2019	75,062	$	7.95
Granted	-		-
Exercised	(32,810)		6.30
Expired/Forfeited	(502)		6.00
Outstanding at September 30, 2019	41,750	$	9.27		0.6 Years	$	387,180
Exercisable at September 30, 2019	41,750	$	9.27		0.6 Years	$	387,180

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4.    NET INCOME PER SHARE COMPUTATIONS

The following is a reconciliation of the numerator and denominator of the earnings per common share computations for the three and nine months ended September  30, 2019 and 2018:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net income (numerator) amounts used for basic and diluted per share computations:	$	1,150,485	$	1,632,845	$	2,164,832	$	3,347,890
Weighted average shares (denominator) of common stock outstanding:
Basic		4,604,562		4,497,072		4,583,591		4,467,897
Plus dilutive effect of stock options		4,425		36,442		12,723		46,118
Diluted		4,608,987		4,533,514		4,596,314		4,514,015
Net income per common share:
Basic	$	0.25	$	0.36	$	0.47	$	0.75
Diluted		0.25		0.36		0.47		0.74

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, 2019 because the exercise price of the options exceeded the market price of the Company’s common stock at September 30, 2019.

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

5.    PROMISSORY NOTES RECEIVABLE

In May 2016, the Company sold approximately 24 acres of land adjacent to the Racetrack for a total consideration of approximately $4.3 million. Promissory notes receivable consists of two promissory notes totaling $1,080,000 bearing interest at 1.43%. On May 31, 2017, the Company signed an amendment extending the maturity date of the notes to May 2020. Payments totaling $1,094,000 are due annually on May 13until the notes mature. The promissory notes are secured by the mortgage on approximately 24 acres of land and management believes no allowance for collectability is necessary. See Note 13 for further details.

6.    GENERAL CREDIT AGREEMENT

The Company has a general credit and security agreement with a financial institution, which provides a revolving credit line up to $8,000,000 and allows for letters of credit in the aggregate amount of up to $2,000,000 to be issued under the credit agreement. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company. This agreement was amended as of September 30, 2019 to extend the maturity date to September 30, 2020. As of September 30, 2019, the outstanding balance on the line of credit was $1,671,990. The Company had no borrowings under the credit line as of December 31, 2018.

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7.    OPERATING SEGMENTS

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

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

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

	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
	September 30, 2019
Segment Assets	$	33,223	$	3,425	$	25,486	$	28,097	$	90,231

	Nine Months Ended September 30, 2018
	Horse Racing		Card Casino		Food and Beverage		Development		Total
Net revenues from external customers	$	14,333	$	25,397	$	7,373	$	-	$	47,103
Intersegment revenues		746		-		1,054		-		1,800
Net interest income		(3)		-		-		29		26
Depreciation		1,758		5		133		-		1,896
Segment (loss) income before income taxes		(766)		5,772		739		(8)		5,737
Segment tax expense (benefit)		(504)		1,394		178		(2)		1,066
	December 31, 2018
Segment Assets	$	35,992	$	623	$	23,680	$	24,647	$	84,942

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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, 2019
	2019		2018
Revenues
Total net revenue for reportable segments	$	48,622	$	48,903
Elimination of intersegment revenues		(1,997)		(1,800)
Total consolidated net revenues	$	46,625	$	47,103

Income before income taxes
Total segment income before income taxes	$	3,837	$	5,737
Elimination of intersegment income before income taxes		(877)		(1,323)
Total consolidated income before income taxes	$	2,960	$	4,414

	September 30,		December 31,
	2019		2018
Assets
Total assets for reportable segments	$	90,231	$	84,942
Elimination of intercompany balances		(24,392)		(23,516)
Total consolidated assets	$	65,839	$	61,426

8.    COMMITMENTS AND CONTINGENCIES

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

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

The Company is periodically involved in various claims and legal actions arising in the normal course of business. Management believes that the resolution of any pending claims and legal actions at September 30, 2019 and as of the date of this report, will not have a material impact on the Company’s consolidated financial positions or results of operations.

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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. 

9.    COOPERATIVE MARKETING AGREEMENT

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

Under the terms of the CMA, as amended, the SMSC made payments of $7.4 million during the first nine months of 2019 and 2018, primarily for purse enhancements for the live race meets in the respective years.

Under the CMA, as amended, SMSC also agreed to make “Marketing Payments” to the Company relating to joint marketing efforts for the mutual benefit of the Company and SMSC, including signage, joint promotions, player benefits, and events. The SMSC paid the Company $1,620,000 for marketing purposes during each of the nine month periods ended September 30, 2019 and 2018.

In the respective first quarters of 2015, 2016, 2017, and 2018, the CMA was amended to adjust the payment amounts between the “Purse Enhancement Payments to Horsemen” and “Marketing Payments to Canterbury Park.” SMSC is currently obligated to make the following purse enhancement and marketing payments for 2020 through 2022:

	Purse Enhancement Payments to		Marketing Payments to
Year	Horsemen (1)		Canterbury Park
2020		7,380,000		1,620,000
2021		7,380,000		1,620,000
2022		7,380,000		1,620,000

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

The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s condensed consolidated statements of operations. For the three 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. For the three and nine months ended September 30, 2018, the Company recorded $491,000 and $1,169,000 in other revenue and incurred $434,000 and $999,000 in advertising and marketing expense and $57,000 and $170,000 in depreciation related to the SMSC marketing funds.

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

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10.  REAL ESTATE DEVELOPMENT

Equity Investment

On April 2, 2018, the Company’s subsidiary Canterbury Development LLC, entered into an Operating Agreement (“Operating Agreement”) with an affiliate of Doran Companies (“Doran”), a national commercial and residential real estate developer, as the two members of a Minnesota limited liability company named Doran Canterbury I, LLC (Doran Canterbury I). Doran Canterbury I was formed as part of a joint venture between Doran and Canterbury Development LLC to construct an upscale apartment complex on land adjacent to the Company’s Racetrack (the “Project”). Doran Canterbury 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, which is expected to begin upon rental stabilization of Phase I. Phase II will include an additional 300 apartment units. Canterbury Development’s equity contribution to Doran Canterbury II for Phase II will be approximately 10 acres of land. In connection with its contribution, Canterbury Development became a 27.4% equity member in Doran Canterbury II with Doran owning the remaining 72.6%. 

Tax Increment Financing

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

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

The Redevelopment Agreement provides that if the Company does not proceed with the improvements to Shenandoah Drive on or before December 15, 2018 or the improvements to Barenscheer Boulevard on or before December 15, 2019, the City of Shakopee has the right to construct the improvements itself and assess the Company for the costs of these improvements. As of December 2018, the Company was proceeding with the improvements to Shenandoah Drive. 

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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 September 30, 2018. The total amount of funding that Canterbury will be paid as reimbursement under the TIF program for these improvements is not guaranteed, however, and will depend on future tax revenues generated from the developed property. As of September 30, 2019, the Company recorded a TIF receivable of $7,922,000, which represents $7,861,000 of principal and $61,000 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. 

11.  LEASES

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

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

Lease costs related to operating leases were $31,463 for the nine months ended September 30, 2019. 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 $434,332 for the nine months ended September 30, 2019.

Lease costs included in depreciation and amortization related to our finance leases were $18,701 for the nine months ended September 30, 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:

	Balance Sheet Location	September 30, 2019
Assets
Finance	Land, buildings and equipment, net (1)	104,184
Operating	Operating lease right-of-use assets	76,816
Total Leased Assets		$ 181,000

1  – Finance lease assets are net of accumulated amortization of $18,701 as of September 30, 2019

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

	September 30, 2019
Weighted average remaining lease term (in years):
Finance	4.0
Operating	1.3
Weighted average discount rate (%):
Finance	5.0%
Operating	5.4%

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The maturity of operating leases and finance leases as of September 30, 2019 are as follows:

Nine Months Ended September 30, 2019	Operating leases		Finance leases
2019 remaining	$	2,079	$	7,185
2020		31,349		28,743
2021		23,100		28,743
2022		23,100		28,743
2023		—		21,685
Total minimum lease obligations		79,628		115,099
Less: amounts representing interest		(2,812)		(10,915)
Present value of minimum lease payments		76,816		104,184
Less: current portion		(29,697)		(24,097)
Lease obligations, net of current portion	$	47,119	$	80,087

12.  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%. The note will mature at the earliest of (i) the date of closing by Doran Canterbury II, LLC on Phase II Project Financing; (ii) the closing on any purchase of the Phase II Land by Doran Shakopee, LLC pursuant to its option under Section 3.9(a) of the Doran Canterbury II Operating Agreement; (iii) the date of final determination that the Phase II Project will not be developed by Doran Canterbury II, LLC; or (iv) three (3) years following the date of the note. Management believes no allowance for doubtful accounts is necessary.

In 2018, the Company incurred $268,000 of costs for preliminary grading work on parcels of land the Company has designated for Doran Canterbury II. The Company will be fully reimbursed for these costs upon the commencement of the Doran Canterbury II project and thus, recorded the amount as a receivable. Although there is a possibility Doran Canterbury II will not materialize, the Company currently believes this likelihood is remote.

In July 2019, the Company contributed a member loan of $178,100 to the Doran Canterbury I joint venture.  The member loan bears interest at the rate equal to the Prime Rate plus two percent annum. The Company expects to be fully reimbursed for the member loan upon positive cash flow from the joint venture.

13.  SUBSEQUENT EVENTS

As described in Note 5, the Company has a promissory note receivable related to a 2016 land sale with a maturity date of May 2020. On November 1, 2019, the Company received a payment of $982,639, which represented $975,363 of principal and $7,276 in interest related to the note receivable. This resulted in an increase to Cash and cash equivalents of $982,639 and a decrease to our Current portion of notes receivable for the same amount. The remaining difference between the Current portion of notes receivable balance and payment received will be recorded as a loss on sale of asset in the 2019 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 September, and year-round wagering on races held at out-of-state racetracks that are televised simultaneously at the Racetrack (“simulcasting”).  Unbanked card games, in which patrons compete against each other, are hosted in the Card Casino at the Racetrack.  The Card Casino operates 24 hours a day, seven days a week.  The Card Casino offers both poker and table games at up to 80 tables.   The Company also derives revenues from related services and activities, such as concessions, parking, advertising signage, publication sales, and from other entertainment events and activities held at the Racetrack.

Operations Review for the Three and Nine Months Ended September 30, 2019:

EBITDA

EBITDA represents earnings before interest, income tax expense, and depreciation and amortization. EBITDA is not a measure of performance or liquidity calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), and should not be considered an alternative to, or more meaningful than, net income as an indicator of our operating performance or cash flows from operating activities as a measure of liquidity.  EBITDA is presented as a supplemental disclosure because it is a widely used measure of performance and a basis for valuation of companies in our industry.  Moreover, other companies that provide EBITDA information may calculate EBITDA differently than we do.  Adjusted EBITDA reflects additional adjustments to net income to eliminate unusual items. For the three and nine months ended September 30, 2019, adjusted EBITDA excluded the loss on disposal of assets and gain on insurance recoveries.

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The following table sets forth a reconciliation of net income, a GAAP financial measure, to EBITDA and to adjusted EBITDA (defined above) which are non-GAAP financial measures, for the three and nine months ended September 30, 2019 and 2018:

Summary of EBITDA Data

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
NET INCOME	$	1,150,485	$	1,632,845	$	2,164,832	$	3,347,890
Interest income, net		(96,065)		(8,567)		(204,623)		(26,023)
Income tax (benefit) expense		418,942		407,367		795,164		1,066,000
Depreciation		785,327		659,498		1,987,067		1,895,723
EBITDA		2,258,689		2,691,143		4,742,440		6,283,590
Gain on insurance recoveries		—		—		(198,874)		(21,064)
Loss on disposal of assets		6,376		—		114,413		99,934
ADJUSTED EBITDA	$	2,265,065	$	2,691,143	$	4,657,979	$	6,362,460

Adjusted EBITDA decreased $426,000 or 15.8% and decreased as a percentage of net revenues to 12.2% from 14.6% for the three months ended September 30, 2019 as compared to the same period in 2018. Adjusted EBITDA decreased $1,704,000 or 26.8% and decreased as a percentage of net revenues to 10.0% from 13.5% for the nine months ended September 30, 2019 as compared to the same period in 2018. The decreases are primarily due to increased operating expenses compared to the same periods in 2018.

Revenues:

Total net revenues for the three months ended September 30, 2019 were $18,601,000, an increase of $230,000, or 1.3%, compared to total net revenues of $18,371,000 for the three months ended September 30, 2018. This increase primarily consists of increases in food and beverage and other revenue of 17.9% and 4.1%, respectively, slightly offset by a decrease in pari-mutuel revenue of 9.5%.  Total net revenues for the nine months ended September 30, 2019 were $46,625,000, a decrease of $479,000, or 1.0%, compared to net revenues of $47,103,000 for the nine months ended September 30, 2018. This decrease primarily consists of decreases in pari-mutuel and other revenue of 8.0% and 8.4%, respectively, partially offset by an increase in food and beverage revenues of 11.1%. See below for a further discussion of our sources of revenues.

Pari-Mutuel Data Revenue:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Simulcast	$	1,257,000	$	1,420,000	$	4,108,000	$	4,473,000
Live racing		1,239,000		1,353,000		2,151,000		2,295,000
Guest fees		785,000		926,000		1,203,000		1,483,000
Other revenue		298,000		257,000		816,000		750,000
Total Pari-Mutuel Revenue	$	3,579,000		3,956,000	$	8,278,000	$	9,001,000
Racing Days
Simulcast only racing days		55		51		207		204
Live and simulcast racing days		37		41		66		69
Total Number of Racing Days		92		92		273		273

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Total pari-mutuel revenue decreased $377,000, or 9.5%,  for the three months ended September 30, 2019  compared to the same period in 2018. The decrease is partially due to a reduction in the volume of simulcast wagering. Additionally, guest fees and live racing revenue also decreased as a result of four fewer live racing days compared to the 2018 third quarter. Pari-mutuel revenue decreased $724,000, or 8.0%, for the nine months ended September 30, 2019 compared to the same period in 2018. The decrease is partially due to decreased simulcast wagering as a result of the temporary shutdown during the 2019 second quarter of Santa Anita, one of the most popular horse tracks in the country in terms of simulcast wagering. Guest fees also decreased primarily due to the temporary loss of a high-volume wagering company due to a contractual dispute between Churchill Downs, the Company’s content provider, and Monarch Content Management. However, this dispute was substantially resolved during the 2019 third quarter. Live racing revenue also decreased due to three less live racing days in 2019 compared to 2018.

Card Casino Revenue:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Poker Games	$	1,789,000	$	1,955,000	$	5,542,000	$	6,187,000
Table Games		5,821,000		5,990,000		17,212,000		16,996,000
Total Collection Revenue		7,610,000		7,945,000		22,754,000		23,183,000
Other Revenue		950,000		694,000		2,597,000		2,214,000
Total Card Casino Revenue	$	8,560,000	$	8,639,000	$	25,351,000	$	25,397,000

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 $79,000, or 0.9%, and $46,000, or 0.2%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. 

Food and Beverage Revenue:

Food and beverage revenue increased $582,000, or 17.9%, and $775,000, or 11.1%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases are primarily attributable to hosting a three-day music festival in the 2019 third quarter, as well as the opening of the Trifecta Café and remodeled Card Casino in March 2019. This was slightly offset by a reduction in live racing days in 2019 compared to 2018.

Other Revenue:

Other revenue increased $104,000, or 4.1%, for the three months ended September 30, 2019 compared to the same period in 2018. The increase is primarily due to hosting a three-day music festival in the 2019 third quarter. Other revenue decreased $484,000, or 8.4%, for the nine months ended September 30, 2019 compared to the same period in 2018. The decrease is primarily due to a short-term customer rental agreement in the first quarter of 2018, related to the Super Bowl held in Minneapolis, as well as decreased advertising revenue payments for RiverSouth, an area wide marketing initiative. A portion of these advertising revenue payments were reimbursed costs based on the terms of the CMA agreement and are included as an expense in our Consolidated Statement of Operations.

Operating Expenses:

Total operating expenses increased $788,000, or 4.8%, and $1,154,000, or 2.7%, for the three and nine months ended September 30, 2019 compared to the same periods in 2018. The following paragraphs provide further detail regarding certain operating expenses.

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Purse expense decreased $254,000, or 10.9%, and $246,000, or 4.3% for the three and nine months ended September 30, 2019 compared to the same periods in 2018.  The decreases are due to lower pari-mutuel revenues, as well as a change in the purse payment structure related to changes in our horsemen contract effective January 1, 2019. This purse expense decrease was primarily a timing difference that resulted in higher purse expense in the 2019 first quarter. 

Salaries and benefits increased $542,000, or 8.2%, and $1,028,000, or 5.5%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases are primarily due to labor costs associated with the State of Minnesota’s mandated increase of $0.21 in the minimum wage effective January 1, 2019 and increases relating to the Card Casino construction in January and February and re-opening in March 2019. Furthermore, the Company added several new exempt level positions to support its growth initiatives, primarily in food and beverage.

Cost of food and beverage sales increased $250,000, or 18.9%, and $388,000, or 12.9% for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases are primarily due to higher food and beverage revenues.

Advertising and marketing decreased $87,000, or 8.4%, and $379,000, or 16.7%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The decreases are primarily due to decreased expenditures related to RiverSouth.

Professional and contracted services increased $99,000, or 5.9%, and $383,000, or 10.4%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases are due to professional fees for its development initiatives, legal and consulting costs, as well as increased contracted services for the three-day music festival held in July 2019.

During the nine months ended September 30, 2019, the Company recorded a loss on disposal of assets totaling $115,000. 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.

Net income for the three months ended September 30, 2019 and 2018 was $1,150,000 and $1,633,000, respectively. Net income for the nine months ended September 30, 2019 and 2018 was $2,165,000 and $3,348,000, respectively.

Contingencies:

The Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community, which became effective on September 4, 2012, and was amended in January 2015, 2016, 2017, and 2018, 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 $8,000,000 and allows for letters of credit in the aggregate amount of up to $2,000,000 to be issued under the credit agreement. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company. This agreement was amended as of September 30, 2019 to extend the maturity date to September 30, 2020. As of September 30, 2019, the outstanding balance on the line of credit was $1,671,990.

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The Company’s cash,  cash equivalents, and restricted cash balance at September 30, 2019 was $4,320,000 compared to $11,204,000 as of December 31, 2018. The Company believes that unrestricted funds available in its cash accounts, amounts available under its revolving line of credit, along with funds generated from operations, will be sufficient to satisfy its liquidity and capital resource requirements for regular operations, as well as its planned development expenses during 2019. However, if the Company engages in any additional significant real estate development, additional financing would more than likely be required.

Operating Activities

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.

Net cash provided by operating activities for the nine months ended September 30, 2018 was $4,276,000, due in part to net income of $3,348,000, depreciation of $1,895,723, and stock-based compensation and 401(k) match totaling $671,000. The Company also experienced an increase in accounts payable of $233,000 and deferred revenue of $380,000. This was partially offset by a decrease in card casino accruals of $1,100,000 and accrued wages and payroll taxes of $944,000.

Investing Activities

Net cash used in investing activities for the first nine months of 2019 was $11,717,000,  primarily for additions to land, buildings, and equipment, including additions related to the Card Casino remodel and roadwork costs related to our development activities. This was partially offset by a decrease in notes receivable of $998,000.

Net cash used in investing activities for the first nine months of 2018 was $2,510,000, primarily for additions to land, buildings, and equipment. This was partially offset by a decrease in notes receivable of $1,038,000.  

Financing Activities

Net cash 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 purchases of stock through the Employee Stock Purchase Plan and the exercise of stock options, partially offset by cash dividends paid to shareholders.

Net cash used in financing activities during the first nine months of 2018 was $288,000.

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 2018 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.

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Property and Equipment - We have significant capital invested in our property and equipment, which represents 65.4% of our total assets at September 30, 2019. 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 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, 2019.

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.

Commitments and Contractual Obligations:

The Company entered into the CMA with the SMSC on September 4, 2012, that was amended in January 2015, 2016, 2017, and 2018 and expires December 31, 2022.  See “Cooperative Marketing Agreement” below.

Legislation:

Minimum Wage Legislation

In 2014, Minnesota legislation enacted into law an increase in the minimum wage that must be paid to most Company employees.  Beginning January 1, 2018, the minimum wage was set to increase at the beginning of each year by the rate of inflation with a maximum increase of up to 2.5% per year. The minimum wage for 2019 is $9.86 per hour. Prior to August 1, 2014, the Company employed a large number of individuals who received an hourly wage equal to or slightly above $7.25 per hour. As a result, this legislation had an adverse financial impact on the Company in 2014 through 2018, and will continue to have an adverse impact on the Company. We have implemented measures to partially mitigate the impact of this increase by raising our prices and reducing our employee count. These measures could themselves have an adverse effect because higher prices and diminished service levels may discourage customers from visiting the Racetrack.

Cooperative Marketing Agreement:

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

Under the terms of the CMA, as amended, the SMSC paid the horsemen $7.4 million during the first nine months of 2019 and 2018, primarily for purse enhancements for the live race meets in the respective years.

Under the CMA, as amended, SMSC also agreed to make “Marketing Payments” to the Company relating to joint marketing efforts for the mutual benefit of the Company and SMSC, including signage, joint promotions, player benefits and events. The SMSC paid the Company $1,620,000 for marketing purposes during each of the nine month periods ended September 30, 2019 and 2018.

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In each of the respective first quarters of January 2015, 2016, 2017, and 2018, the CMA was amended to adjust the payment amounts between the “Purse Enhancement Payments to Horsemen” and “Marketing Payments to Canterbury Park.” SMSC is currently obligated to make the following purse enhancement and marketing payments for 2020 through 2022:

	Purse Enhancement Payments to		Marketing Payments to
Year	Horsemen (1)		Canterbury Park
2020		7,380,000		1,620,000
2021		7,380,000		1,620,000
2022		7,380,000		1,620,000

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

The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s condensed consolidated statements of operations. For the three 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. For the three and nine months ended September 30, 2018, the Company recorded $491,000 and $1,169,000 in other revenue and incurred $434,000 and $999,000 in advertising and marketing expense and $57,000 and $170,000 in depreciation 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 10 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:

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material fluctuations in attendance at the Racetrack;

decline in interest in wagering on horse races at the Racetrack, at other tracks, or on unbanked card games offered at the Card Casino;

competition from other venues offering unbanked card games or other forms of wagering;

greater-than-anticipated expenses or a lower-than-anticipated return on the development of our underutilized land, including our joint venture to develop a luxury apartment complex;

competition from other sports and entertainment options;

increases in compensation and employee benefit costs;

increases in the percentage of revenues allocated for purse fund payments;

higher-than-expected expenses related to new marketing initiatives;

the impact of wagering products and technologies introduced by competitors;

legislative and regulatory decisions and changes, 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;

· 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.

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ITEM 3:    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Note 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 Rule 13a-15(b) as of the end of the period covered by this report. Based upon this review, these officers have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that the disclosure controls are also effective to ensure that information required to be disclosed in the Company’s Exchange Act reports is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

(b)      Changes in Internal Control over Financial Reporting:

There have been no 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, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  

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PART II

OTHER INFORMATION

Item 1.      Legal Proceedings

Not Applicable.

Item 1A.   Risk Factors

There have been no changes to the Risk Factors listed in the Form 10-K for the year ended December 31, 2018.

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

(a)Not Applicable.

(b)Not Applicable.

(c)On December 17, 2007, the Company’s Board of Directors adopted a plan that authorized the repurchase of up to 250,000 shares of the Company’s common stock pursuant to Exchange Act Rule 10b‑18 in open market transactions, block purchases of privately negotiated transactions (the “2008 Stock Repurchase Plan”). From its adoption until August 13, 2012, the Company repurchased 216,543 shares under the 2008 Stock Repurchase Plan and, on that date, authorized the repurchase of an additional 100,000 shares of the Company’s common stock. The Company did not repurchase any shares during the third quarter of 2019. The maximum number of shares that may yet be purchased under the above authorizations is 128,781 as of September  30, 2019.

Item 3.     Defaults upon Senior Securities

Not Applicable.

Item 4.     Mine Safety Disclosures

Not Applicable.

Item 5.     Other Information

  Not Applicable.

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Item 6.     Exhibits

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (rules 13a‑14 and 15d‑14 of the Exchange Act).
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (rules 13a‑14 and 15d‑14 of the Exchange Act).
32	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
99.1	Press Release dated November 12, 2019 announcing 2019 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, 2019, formatted in eXtensible Business Reporting Language XBRL: (i) Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018,  (ii) Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2019 and September 30, 2018,  (iii) Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months ended September 30, 2019 and September 30, 2018, (iv) Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2019 and September 30, 2018, and (v) Notes to Financial Statements.

SIGNATURES

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

	Canterbury Park Holding Corporation
Dated:  November 13, 2019	/s/ Randall D. Sampson
	Randall D. Sampson,
	President and Chief Executive Officer
Dated:  November 13, 2019	/s/ Randy J. Dehmer
	Randy J. Dehmer, Chief Financial Officer

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