CPHC 10-Q Quarter ended June 30, 2021

1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

Upon the reopening of operations on January 10, 2021, the Company has remained open through the remainder of the six months ended June 30, 2021, but operated under capacity restraints through May 27, 2021. Effective May 28, 2021, all capacity limits, restrictions on large gatherings and other restrictions, which had been implemented in response to the impact of the COVID- 19 Pandemic, were lifted and our Racetrack operated under pre-pandemic guidelines. Our Card Casino also began operating without capacity restrictions effective May 28, 2021, but we maintained and intend to maintain certain operational changes and improvements initiated in 2020 in response to the COVID- 19 Pandemic.

The disruptions arising from the COVID- 19 Pandemic had a significant impact on the Company's financial condition and operations during the six months ended June 30, 2021 and 2020. While revenues have begun to recover, not all revenue generating departments have reached pre-pandemic levels, and we believe the COVID- 19 Pandemic could have an adverse effect on our financial condition and results of operations in the near term, particularly if there is a resurgence of restrictions due to the spread of COVID- 19 variants. With the recent increase in consumer confidence, reduction in capacity restrictions, and faster than anticipated vaccine roll-out, we are seeing a positive inflection in visitation that we expect will continue the strong recovery we are currently experiencing.

The Company has no long-term debt and a $ 10,000,000 credit line, of which $ 8,750,000 is available as of June 30, 2021. As of June 30, 2021, the outstanding balance on the line of credit was $ 0 . 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 the remainder of this challenging operating environment. Throughout this pandemic, we have taken significant actions to mitigate the negative effects on our operations, including initiating workforce reductions and furloughs, implementing reductions in executive pay and board cash retainer, suspending the Company’s quarterly cash dividend, postponing non-essential capital expenditures, reducing operating costs, and substantially reducing discretionary spending. We expect these countermeasures to partially mitigate the impact of the COVID- 19 Pandemic on our full year 2021 financial results. As the impact of the COVID- 19 Pandemic on the economy and our operations evolves, we will continue to assess the impact on the Company and respond accordingly.

Summary of Significant Accounting Policies – A detailed description of our significant accounting policies can be found in our most recent Annual Report on the 2020 Form 10 -K. There were no material changes in significant accounting policies during the three and six months ended June 30, 2021 .

2. STOCK-BASED COMPENSATION

Long Term Incentive Plan and Award of Deferred Stock

The Long Term Incentive Plan (the “LTI Plan”) authorizes the grant of Long Term Incentive Awards that provide an opportunity to Named Executive Officers (“NEOs”) and other Senior Executives to receive a payment in cash or shares of the Company’s common stock to the extent of achievement at the end of a period greater than one year (the “Performance Period”) as compared to Performance Goals established at the beginning of the Performance Period. Currently, there is one award outstanding for the three -year period ending December 31, 2021. Beginning in 2020, and as a result of the COVID- 19 Pandemic, the Company temporarily suspended the granting of performance awards under its LTI Plan until there is more certainty about the Company’s future operations, and instead granted deferred stock awards designed to retain NEOs and other Senior Executives in lieu of LTI Plan awards for 2020 or 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. Deferred stock awards represent the right to receive shares of the Company's common stock upon vesting. 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 unvested deferred stock awards outstanding as of June 30, 2021 to our non-employee directors consisted of 10,710 shares with a weighted average fair value per share of $ 14.00 . There were no unvested restricted stock or stock options outstanding at June 30, 2021 .

Employee Deferred Stock Awards

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

During the six months ended June 30, 2021, the Company granted employees deferred stock awards totaling 27,900 shares of common stock, with a vesting term of approximately three years and a fair value of $ 13.33 per share. During the six months ended June 30, 2020, the Company granted employees deferred stock awards totaling 47,000 shares of common stock with a fair value of $ 11.07 per share. 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.

Employee deferred stock transactions during the six months ended June 30, 2021 are summarized as follows:

Stock-based compensation expense related to the LTI Plan, deferred stock awards, and restricted stock awards is included on the Condensed Consolidated Statements of Operations and totaled approximately $ 270,000 and $ 68,000 for the six months ended June 30, 2021 and 2020 , respectively, and approximately $ 166,000 and $ 10,000 for the three months ended June 30, 2021 and 2020, respectively.

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 June 30, 2021 and changes during the six months then ended is presented below:

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3. NET INCOME (LOSS) PER SHARE COMPUTATIONS

The following is a reconciliation of the numerator and denominator of the earnings (loss) per common share computations for the three and six months ended June 30, 2021 and 2020 :

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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 (loss) per share for the three months ended June 30, 2020 because the exercise price of the options exceeded the market price of the Company’s common stock at June 30, 2020. There were no out-of-the money stock options at June 30, 2021.

4. GENERAL CREDIT AGREEMENT

The Company has a general credit and security agreement with a financial institution, which provides a revolving credit line up to $ 10,000,000 and allows for letters of credit in the aggregate amount of up to $ 2,000,000 to be issued under the credit agreement. As of June 30, 2021 , the bank issued a $ 1,250,000 letter of credit on behalf of the Company and therefore, the Company has an available credit line up to $ 8,750,000 . The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company. The line of credit also includes collateral in the form of a Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents. As of June 30, 2021 , the outstanding balance on the line of credit was $0.

5. OPERATING SEGMENTS

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

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

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

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

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6. COMMITMENTS AND CONTINGENCIES

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

The Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community (“SMSC”), which became effective March 4, 2012, was amended in the first quarter of each of 2015, 2016, 2017, 2018, and in June 2020 ( as described below in Note 7 ) and will expire on December 31, 2022. The CMA contains certain covenants that, if breached, would trigger an obligation to repay a specified amount related to such covenant. At this time, management believes it unlikely that any breach of a covenant will occur, and that therefore the possibility that the Company will be required to pay the specified amount related to any covenant breach is remote.

The Company is periodically involved in various claims and legal actions arising in the normal course of business. Management believes that the resolution of any pending claims and legal actions at June 30, 2021 and as of the date of this report, will not have a material impact on the Company’s consolidated financial positions or results of operations.

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

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7. COOPERATIVE MARKETING AGREEMENT

As discussed above in Note 6, on March 4, 2012, the Company entered into the CMA with the SMSC. The primary purpose of the CMA is to increase purses paid during live horse racing at Canterbury Park’s Racetrack in order to strengthen Minnesota’s thoroughbred and quarter horse industry. Under the CMA, as amended, this is achieved through “Purse Enhancement Payments to Horsemen” paid directly to the MHBPA. These payments have no direct impact on the Company’s consolidated financial statements or operations.

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

Under the CMA, as amended, SMSC also agreed to make “Marketing Payments” to the Company relating to joint marketing efforts for the mutual benefit of the Company and SMSC, including signage, joint promotions, player benefits, and events.

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

The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s condensed consolidated statements of operations. For the three and six months ended June 30, 2021, the Company recorded $ 366,000 and $ 413,000 in other revenue, respectively, incurred $ 342,000 and $ 365,000 in advertising and marketing expense, respectively, and incurred $ 24,000 and $ 48,000 in depreciation, respectively, related to the SMSC marketing funds. For the three and six months ended June 30, 2020, the Company recorded $ 253,000 and $ 321,000 in other revenue, respectively, incurred $ 215,000 and $ 245,000 in advertising and marketing expense, respectively, and incurred $ 38,000 and $ 76,000 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.

8. REAL ESTATE DEVELOPMENT

Equity Investments

On April 2, 2018, the Company’s subsidiary Canterbury Development LLC, entered into an Operating Agreement (“Operating Agreement”) with an affiliate of Doran Companies (“Doran”), a national commercial and residential real estate developer, as the two members of a Minnesota limited liability company named Doran Canterbury I, LLC (“Doran Canterbury I”). Doran Canterbury I was formed as part of a joint venture between Doran and Canterbury Development LLC to construct an upscale apartment complex on land adjacent to the Company’s Racetrack (the “Project”). Doran Canterbury I has completed developing Phase I of the Project, which includes 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 LLC, 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 LLC'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.