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Item 5. Market for Registrant’s Common Equity

2021-03-24 compared with 2020-03-26 · 10 added, 371 removed, 19 unchanged (95% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) MARKET INFORMATION

The Company’s common stock trades on the NASDAQ Global Market under the symbol CPHC.

The Company’s common stock trades on the Nasdaq Global Market under the symbol CPHC.

At March 15, 2021, the Company had 615 shareholders of record of its common stock.

Since many holders’

shares are listed under their brokerage firms’

names, the actual number of shareholders is estimated by the Company to be over 2,000.

Since many holders’ shares are listed under their brokerage firms’ names, the actual number of shareholders is estimated by the Company to be over 2,000.

The Company has a dividend policy to pay regular quarterly cash dividends to its shareholders based on the Company’s earnings, projected future earnings and cash requirements.

In 2018 under this policy, the Company paid a $.06 per share dividend in January and $.07 per share dividend in April, July, and October.

On March 16, 2020, the Company announced that due to the effect of the COVID-19 coronavirus, the Company’s Board of Directors had suspended declaring and paying its quarterly cash dividend until the Company's business operations return to normal.

Prior to 2020, the Company had a dividend policy to pay regular quarterly cash dividends to its shareholders based on the Company’s earnings, projected future earnings, and cash requirements.

In 2019, the Company paid a $0.07 per share dividend in January, April, July, and October.

On March 16, 2020, the Company announced that in conjunction with it’s determination to temporarily shut down operations due to concerns and uncertainty about the effect of the COVID-19 coronavirus, the Company’s Board of Directors had suspended declaring and paying its $0.07 quarterly cash dividend that would normally be paid in April 2020.

(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

1 unchanged sentence

Securities Authorized for Issuance Under Equity Compensation Plans

Number of shares

Number of shares of

of common stock to

be issued upon

Weighted-average

remaining available for

exercise price of

future issuance under

equity compensation

options, warrants

plans (excluding shares

Plan Category

in column (a))

Number of shares of common stock to be issued upon exercise of outstanding options, warrants and rights

Weighted-average exercise price of outstanding options, warrants and rights

Number of shares of common stock remaining available for future issuance under equity compensation plans (excluding shares in column (a))

Equity compensation plans approved by security holders:

2 unchanged sentences

Equity compensation plans not approved by security holders:

Stock Option Plan for Non-Employee Consultants and Advisors (1)

Adopted by the Company’s Board of Directors in 1997, the purpose of the Stock Option Plan for Non-Employee Consultants and Advisors is to attract and retain the services of experienced and knowledgeable non-employee consultants and advisors to assist in projects having strategic significance for the Company, to provide an alternative form of cash compensation to such persons and to provide such persons with the opportunity to participate in the Company’s long term progress and success.

(e) REGULATION S-K, ITEM 201(e) INFORMATION

3 unchanged sentences

(g) PURCHASES OF EQUITY SECURITIES BY THE ISSUER

In 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 or block purchases of privately negotiated transactions (the “Stock Repurchase Plan”).

The Company repurchased 216,543 shares under the 2008 Stock Repurchase Plan and in 2012, authorized the repurchase of an additional 100,000 shares of the Company’s common stock.

In 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 or block purchases of privately negotiated transactions (the “Stock Repurchase Plan”).

The Company repurchased 216,543 shares under the 2008 Stock Repurchase Plan and in 2012, authorized the repurchase of an additional 100,000 shares of the Company’s common stock.

No shares were repurchased in 2020 or 2019 , and currently the Company is authorized to repurchase up to 128,781 shares under the Stock Repurchase Plan.

SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data for each of the five fiscal years ended December 31, 2019.

The operating and balance sheet data for the years ended and as of December 31, 2019, 2018, 2017, 2016, and 2015 are derived from our audited consolidated financial statements.

The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

and with our consolidated financial statements and the related notes thereto included elsewhere in this report.

(In thousands except for per share amounts)

Year Ended December 31,

OPERATING DATA

Operating Expenses

Income Before Income Taxes

Income Tax Expense

Basic Net Income per Share

Diluted Net Income per Share

Dividends Declared per Share

Cash Flows from Operating Activities

At December 31,

BALANCE SHEET DATA

Land, Buildings and Equipment, Net

Total Stockholders’

Number of Common Shares Outstanding at Year End

During fiscal year 2015, the Company reduced operating expenses $1,502,000 by recording a $495,000 gain on insurance recoveries, a $347,000 gain on sale of its Shakopee Valley RV Park, and a $660,000 gain on sale of land.

During fiscal year 2016, the Company reduced operating expenses $5,311,000 by recording a $1,465,000 gain on insurance recoveries and a $3,846,000 gain on sale of land.

During fiscal year 2017, the Company reduced operating expenses $141,000 by recording a gain on insurance recoveries.

During fiscal year 2018, the Company reduced operating expenses $2,392,000 by recording a $21,000 gain on insurance recoveries, a $129,580 gain on sale of land, and a $2,241,000 gain on transfer of land.

During fiscal year 2019, the Company reduced operating expenses $211,000 by recording a $199,000 gain on insurance recoveries and a $12,000 gain on sale of assets.

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 consolidated financial statements and the accompanying notes to the consolidated financial statements (the “Notes”).

Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in “Risk Factors”

and “Forward-Looking Statements”

included elsewhere in this Annual Report on Form 10‑K.

RECENT DEVELOPMENT

As previously disclosed, 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 at noon on March 16, 2020 in response to concerns about the COVID-19 coronavirus.

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.

The Company will continue to monitor developments with respect to the COVID-19 coronavirus and provide updated information on its website, or in press releases.

In a separate press also issued on March 16, 12020, the Company announced that in conjunction with its determination to temporarily shut down operations due to concerns and uncertainty about the effect of the COVID-19 coronavirus, the Company’s Board of Directors had suspended declaring and paying its $0.07 quarterly cash dividend that would normally be paid in April 2020.

STRATEGIC OVERVIEW

Canterbury Park Holding Corporation (the “Company,”

“we,”

“our,”

or “us”) hosts pari-mutuel wagering on thoroughbred and quarter horse races and “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 primarily 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 food and beverage, parking, advertising signage, publication sales, and from other entertainment events and activities held at the Racetrack.

The following summarizes our financial performance for the last five years (in 000’s):

Financial Performance Summary

Operating Expenses

Income Before Income Taxes

Income Tax Expense

During fiscal year 2016, the Company reduced operating expenses $5,311,000 by recording a $1,465,000 gain on insurance recoveries and a $3,846,000 gain on sale of land.

During fiscal year 2017, the Company reduced operating expenses $141,000 by recording a gain on insurance recoveries.

During fiscal year 2019, the Company reduced operating expenses $211,000 by recording a $199,000 gain on insurance recoveries and a $12,000 gain on sale of assets.

Our management team has extensive knowledge of the horse racing, Card Casino, and food and beverage operations, and our staff has demonstrated a commitment to enhancing the customer experience.

The Company believes that management has a good relationship with our workforce and is able to retain qualified personnel as demonstrated by our low turnover rate.

Our facilities are modern by racetrack industry standards, and we have invested heavily in the past few years to update and upgrade them to meet the needs of our customers and horsemen.

Our site, in a prime location on the edge of the Minneapolis–St.

Paul metropolitan area in one of the fastest-growing counties in Minnesota, provides us with great long-term growth and development opportunities, and our Board of Directors regularly considers additional uses for underutilized portions of our property.

Our long-term strategic direction is to continue to enhance our Racetrack as a unique gaming and entertainment destination and develop approximately 130 acres of underutilized land not needed for our current business uses.

OPERATIONS REVIEW

YEAR ENDED DECEMBER 31, 2019 COMPARED TO YEAR ENDED DECEMBER 31, 2018

EBITDA represents earnings before interest income, income tax expense, 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.

We present EBITDA as a supplemental disclosure because it is a widely used measure of performance and basis for valuation of companies in our industry.

Other companies that provide EBITDA information may calculate EBITDA differently than we do.

We also compute Adjusted EBITDA, which reflects additional adjustments to Net Income to eliminate unusual or non-recurring items.

For the year ended December 31, 2019, Adjusted EBITDA excluded the loss on disposal of assets, gain on insurance recoveries, and gain on sale of assets.

For the year ended December 31, 2018, Adjusted EBITDA excluded the loss on disposal of assets, gain on insurance recoveries, gain on sale of assets, and gain on transfer of land.

The following table sets forth a reconciliation of net income, a GAAP financial measure, to EBITDA and Adjusted EBITDA (defined above), which is also a non-GAAP measure, for the years ended:

SUMMARY OF EBITDA DATA

Year Ended December 31,

Interest income, net

Income tax expense

Gain on insurance recoveries

Loss on disposal of assets

Gain on sale of assets

Gain on transfer of land

ADJUSTED EBITDA

Adjusted EBITDA decreased $1,573,000, or 19.8%, and decreased as a percentage of net revenues to 10.7% from 13.4% for 2019 compared to 2018.

Total net revenues for 2019 were $59,227,000, an increase of $85,000, or 0.1%, compared to total net revenues of $59,142,000 for 2018.

Total pari-mutuel revenue decreased 7.6%, Card Casino revenue increased 1.4%, food and beverage revenue increased 10.9%, and other revenue decreased 7.2% in 2019 compared to 2018.

See below for a further discussion of our sources of revenues.

PARI-MUTUEL REVENUES

Year Ended December 31,

Other revenue

Total Pari-Mutuel Revenue

Simulcast only racing days

Live and simulcast racing days

Total Number of Racing Days

Simulcast and Live Racing pari-mutuel revenues include commission and breakage revenues from on-track live and simulcast wagering.

We receive guest fees from out-of-state racetracks and ADW companies for out-of-state wagering on our live races.

Other revenues include source market fees paid by ADW companies for wagers made by Minnesota residents on out-of-state races and proceeds from unredeemed pari-mutuel tickets.

Total 2019 pari-mutuel revenue decreased $806,000, or 7.6%, compared to 2018.

Simulcast revenue decreased $457,000, or 7.9%, in 2019 compared to 2018.

This is partially due to the temporary shutdown of Santa Anita during the 2019 second quarter, one of the most popular horse tracks in the country in terms of simulcast wagering.

Guest fees decreased $280,000, or 18.9%, primarily due to the temporary loss in 2019 of a high-volume waging company due to a contractual dispute between Churchill Downs, the Company’s content provider, and Monarch Content Management.

Live Racing revenue also decreased $144,000, or 6.3%, primarily due to three less live racing days in 2019 compared to 2018.

CARD CASINO REVENUES

Year Ended December 31,

Total Collection Revenue

Other Revenue

Total Card Casino Revenue

The primary source of Card Casino revenue is a percentage of the wagers received from the players as compensation for providing the Card Casino facility and services, referred to as “collection revenue.”

Other Revenue presented above includes fees collected for the administration of tournaments and amounts earned as reimbursement of the administrative costs of maintaining jackpot funds.

Card Casino revenue represented 58.1% and 57.4% of the Company’s net revenues for the years ended December 31, 2019 and 2018, respectively.

Total Card Casino revenue increased $486,000, or 1.4%, in 2019 compared to 2018.

Poker revenue decreased $789,000, or 9.5%, in 2019 compared to 2018.

The decrease in poker revenue is partially due to a rate structure change in 2019 which shifted a higher percentage of wagers to other revenue, as well as a continuing industry decline in the popularity of poker.

Table games collection revenue increased $720,000, or 3.2%, in 2019 compared to 2018.

This is partially due to a higher revenue percentage that was held by the Company in 2019, as well as an increase in volume attributed to our enhanced marketing promotions.

FOOD AND BEVERAGE REVENUES

Food and beverage revenue increased $877,000, or 10.9%, to $8,895,000 for the year ended December 31, 2019 compared to 2018.

This increase is 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 REVENUES

Other revenue decreased $472,000, or 7.2%, to $6,093,000 in 2019 compared to 2018.

This 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 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 $4,096,000, or 8.0%, to $55,591,000 in 2019, from $51,495,000 in 2018.

Total operating expenses as a percentage of net revenues increased to 93.9% in 2019 from 87.1% in 2018.

Excluding the reduction in operating expenses from all gains and losses from both years, total operating expenses increased $1,775,000, or 3.3% in 2019 compared to 2018.

Total purse expense decreased $202,000, or 2.8%, in 2019 compared to 2018.

The decrease is due to a decrease in pari-mutuel revenue, as well as a change in the purse payment structure related to changes in our horsemen contract effective January 1, 2019.

The purse expense decrease was primarily a timing difference that resulted in a higher purse expense in the 2019 first quarter.

Although pari-mutuel revenue decreased, the increase in Card Casino revenues resulted in a higher MBF expense (shown below).

As discussed in greater detail in Item 1 above, Minnesota law requires us to allocate a portion of Card Casino revenues, wagering handle on simulcast and live horse races, and ADW source market fees for future payment as purses for live horse races and other authorized uses.

While most of these amounts were paid into the purse funds for thoroughbred and quarter horse races, Minnesota law requires that a portion of the amounts allocated for purses be paid into the Minnesota Breeders’

Fund (the “MBF”).

Minnesota Breeders’

Purse Expense

Simulcast Racing

Salaries and benefits expense increased $1,205,000, or 5.0%, in 2019 compared to 2018.

The increase is due to the State of Minnesota 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 strategic growth initiatives.

Cost of food and beverage sales increased $489,000, or 13.6%, in 2019 compared to 2018.

The increase is primarily due to higher food and beverage revenues.

Advertising and marketing costs decreased $347,000, or 13.9%, in 2019 compared to 2018.

The decrease is primarily attributable to the decreased expenditures related to RiverSouth, an area wide marketing initiative that is designed to increase visitors to Shakopee’s entertainment, hospitality, and retail businesses.

Professional and contracted services increased $492,000, or 11.0%, in 2019 compared to 2018.

The increase is primarily 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 2019, the Company recorded a loss on disposal of assets totaling $262,000.

Included in this amount is the write-off of assets disposed of in remodeling the Card Casino.

The Company also recorded a loss on disposal of assets related to development site work costs.

Additionally, the Company disposed of assets related to its RV Park as a result of developing the property around the Racetrack.

During 2019, the Company recorded a gain on insurance recoveries of $199,000 as a result of insurance proceeds related to water damage incurred at the Racetrack.

On October 6, 2015, the Company sold six acres of land adjacent to the Racetrack for $1,459,000 and recorded a gain of $660,000, reported on the Consolidated Statements of Operations –

Gain on sale of land.

This transaction was structured as a “deferred exchange using a qualified intermediary”

pursuant to Internal Revenue Code (IRC) Section 1031 exchange (“1031 Exchange”) for income tax purposes.

Under the agreement, the Company had the option to repurchase up to one acre within three years from closing date at the sale price of approximately $240,000 per acre.

According to ASC 360‑20‑40‑38 - Derecognition, the Company recorded the repurchase option acre as a deferred gain liability in the amount of $240,000 on the Consolidated Balance Sheets.

Since the risks and rewards were not completely transferred to the buyer based on the repurchase option the Company maintained the asset on our financials in the amount of $110,000.

In October 2018, the repurchase option expired and the Company did not repurchase the land.

Therefore, the Company recognized the gain of $130,000 on the Consolidated Statement of Operations for the year ended December 31, 2018.

In 2018, the Company recorded a $2,241,000 gain on transfer of land as a result of transferring approximately 13 acres of land to the Doran Canterbury I joint venture.

Net Income for the years 2019 and 2018 was $2,718,000 and $5,718,000, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements have been prepared in conformity with U.S.

GAAP and are based upon certain critical accounting policies.

These policies may require management to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole, and information available from other outside sources.

Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period.

Actual results may differ from those initial estimates.

Our critical accounting policies are:

revenue recognition;

property and equipment;

income tax expense.

Our significant accounting policies and recently adopted accounting policies are more fully described in Note 2 to the Notes to Consolidated Financial Statements included in Item 8.

Financial Statements and Supplementary Data of this Annual Report on Form 10‑K.

Revenue recognition - Racing revenue is generated by pari-mutuel wagering on live and simulcast racing content.

Additionally, we also generate revenue through sponsorships, admissions, concessions, and publications.

Our racing revenue and income are influenced by our racing calendar.

Therefore, revenue and operating results for any interim quarter are not generally indicative of the revenue and operating results for the year and may not be comparable with results for the corresponding period of the previous year.

We recognize pari-mutuel revenue upon occurrence of the live race that is presented for wagering after that live race is made official by the respective state’s racing regulatory body.

We recognize other operating revenue such as sponsorships, admissions, concessions, and publication revenue once delivery of the product or service has occurred.

Card Casino revenue is a percentage of the wagers received from the players as compensation for providing the Card Casino facility and services, referred to as “collection revenue.”

Property and Equipment - We have significant capital invested in our property and equipment, which represents approximately 66% of our total assets at December 31, 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, we will determine whether an impairment loss should be recognized.

An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset.

As of December 31, 2019, we have determined that no impairment of these assets exists.

Income taxes - We use estimates and judgments for financial reporting to determine our current tax liability and deferred taxes.

In accordance with the liability method of accounting for income taxes, we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns.

Adjustments to deferred taxes are determined based upon changes in differences between the book basis and tax basis of our assets and liabilities and measured by enacted tax rates we estimate will be applicable when these differences are expected to reverse.

Changes in current tax laws, enacted tax rates or the estimated level of taxable income or non-deductible expense could change the valuation of deferred tax assets and liabilities and affect the overall effective tax rate and tax provision.

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 2020 is $10.00 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 2019, 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 June 4, 2012, the Company entered into the CMA with the SMSC.

The primary purpose of the CMA is to increase purses paid during live horse racing at Canterbury Park’s Racetrack in order to strengthen Minnesota’s thoroughbred and quarter horse industry.

Under the CMA, 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, the SMSC paid the horsemen $7.3 million for purse enhancements for the years ended December 31, 2019 and 2018.

Under the CMA, the SMSC also agreed to make “Marketing Payments”

to the Company relating to joint marketing efforts for the mutual benefit of the Company and SMSC, including signage, joint promotions, player benefits and events.

Under the CMA, the SMSC paid the Company $1,620,000 for marketing purposes for 2019 and 2018.

The CMA was amended in January 2015, January 2016, January 2018, and March 2018 to adjust the payment amounts between the “Purse Enhancement Payments to Horsemen”

and “Marketing Payments to Canterbury Park.”

Under the CMA as most recently amended, the SMSC has agreed to make the following purse enhancement and marketing payments for 2020 through 2022:

Purse Enhancement Payments to

Marketing Payments to Canterbury

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

The amounts received from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s consolidated statements of operations.

For the year ended December 31, 2019, the Company recorded $1,114,000 in other revenue and incurred $888,000 in advertising and marketing expense and $226,000 in depreciation related to the SMSC marketing payment.

For the year ended December 31, 2018, the Company recorded $1,275,000 in other revenue and incurred $1,049,000 in advertising and marketing expense and $226,000 in depreciation related to the SMSC marketing payment.

The excess of amounts received over revenue is reflected as deferred revenue on the company’s consolidated balance sheets.

The Company has agreed for the term of the CMA that it would not promote or lobby the Minnesota legislature for expanded gambling authority and would support the SMSC’s lobbying efforts against expanding gambling authority.

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 would 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.

If 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 generally accepted accounting principles.

The purchase price would be further increased if payments become due under the “20% of Net Pretax Profit”

The first payment is to be made 90 days after the end of the third operating year in which off-track betting is conducted by the Company.

Remaining payments would be made within 90 days of the end of each of the next four operating years.

The Company entered into a CMA with the Shakopee Mdewakanton Sioux Community that became effective on June 4, 2012 and has been amended, as discussed above.

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 that the likelihood that the breach of a covenant will occur and that the Company will be required to pay the specified amount related to such covenant is remote.

The Company is periodically involved in various claims and legal actions arising in the normal course of business.

Management believes that the resolution of any pending claims and legal actions at December 31, 2019 and as of the date of this report will not have a material impact on the Company’s consolidated financial position or results of operations.

The Company has committed to payment of statutory distributions under a $500,000 bond issued to the MRC as required under Minnesota law.

The Company was not required to make any payments related to this bond in 2019 or 2018, and there is no liability related to this bond on the balance sheet as of December 31, 2019.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS FROM OPERATING ACTIVITIES

Cash provided by operating activities for 2019 was $6,738,000 as a result of net income of $2,718,000 and was increased by noncash charges from depreciation of $2,680,000, stock-based compensation expense of $235,000, stock-based employee match contribution of $689,000, and a loss on disposal of assets of $262,000.

Cash from operating activities was reduced by a gain on insurance recoveries of $199,000.

The Company also experienced an increase in deferred revenue of $503,000.

This was partially offset by a decline in accounts payable of $1,384,000.

Cash provided by operating activities for 2018 was $6,333,000 primarily as a result of net income of $5,718,000.

Cash from operating activities was increased by noncash charges from depreciation of $2,564,000, stock-based compensation expense of $346,000, and a stock-based employee match contribution of $525,000.

Cash from operating activities was reduced by a gain on transfer of land of $2,241,000 and gain on sale of land of $130,000.

This was partially offset by a decline in Card Casino accruals of $1,190,000.

CASH FLOWS FROM INVESTING ACTIVITIES

Net cash used in investing activities for 2019 of $13,037,000 was used primarily for additions to land, buildings, and equipment, including the costs of TIF eligible public infrastructure improvements, and the issuance of a note receivable to a related party.

This was partially offset by a decrease in notes receivable.

Net cash used in investing activities for 2018 of $6,628,000 was used primarily for additions to land, buildings, and equipment, and the issuance of a note receivable to a related party.

This was partially offset by a decrease in notes receivable and proceeds received from insurance recoveries.

CASH FLOWS FROM FINANCING ACTIVITIES

Net cash used by financing activities for 2019 was $978,000 and primarily consisted of $1,281,000 cash dividend paid to shareholders, partially offset by proceeds from issuance of common stock of $383,000.

Net cash used by financing activities for 2018 was $526,000 and primarily consisted of $1,206,000 cash dividend paid to shareholders, partially offset by proceeds from issuance of common stock of $686,000.

CASH AND CAPITAL RESOURCES

At December 31, 2019, we had cash, cash equivalents, and restricted cash of $3,927,000 compared to $11,204,000 at December 31, 2018.

This $6,747,000 decrease consisted of $6,738,000 of net cash provided by operating activities, offset by $13,037,000 of net cash used in investing activities and $978,000 of net cash used in financing activities.

The Company has a general credit and security agreement with a financial institution.

This agreement was amended as of September 30, 2019 to extend the maturity date to September 30, 2020.

The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company.

The Company had borrowings of $5,933,000 under the credit line during the year ended December 31, 2019.

As of December 31, 2019, the outstanding balance on the line of credit was $0.

The credit agreement contains covenants requiring the Company to maintain certain financial ratios.

The Company was in compliance with these requirements at all times throughout 2019.

Our three largest sources of revenue:

pari-mutuel wagering, Card Casino operations, and food and beverage, are all based on cash transactions.

Consequently, we have significant inflows of cash on a daily basis.

We designate cash balances that will be required to satisfy certain short-term liabilities such as progressive jackpots, the player pool, and amounts due horsemen for purses and awards as “restricted”

as a separate balance sheet item.

The Company offers unbanked table games that refer to a wagering system or game where wagers “lost”

or “won”

by the host are accumulated into a “player pool”

to enhance the total amount paid back to players in any other card game.

The Company is required to return accumulated player pool funds to the players through giveaways, promotional items, prizes or by other means.

The player pool liability was $640,000 and $983,000 at December 31, 2019 and 2018, respectively.

Additionally, the table games jackpot pool was $670,000 and $385,000 at December 31, 2019 and 2018, respectively.

The Card Casino offers progressive jackpots for poker games.

Amounts collected for these jackpot funds are accrued as liabilities until paid to winners.

At December 31, 2019 and 2018, accrued jackpot funds totaled $134,000 and $24,000, respectively.

The MRC regulates the operation of the player pool and progressive jackpot pools.

These liabilities have the potential for significant fluctuation on a daily basis.

All games in the Card Casino are played using chips.

The value of chips issued and outstanding, referred to as the “outstanding chip liability,”

was $963,000 and $398,000 at December 31, 2019 and 2018, respectively.

This liability has the potential for significant fluctuation on a daily basis depending upon the demand for chip redemptions and sales.

Our second largest individual operating expense item is purse expense.

Pursuant to an agreement with the MHBPA, we transferred into a trust account or paid directly to the MHBPA, approximately $6,314,000 and $6,442,000 in purse funds related to thoroughbred races for 2019 and 2018, respectively.

Minnesota law provides that amounts transferred into this trust account are the property of the trust and not the Company.

There were no unpaid purse fund obligations due to the MHBPA at December 31, 2019 or 2018.

RECENT DEVELOPMENT

The Company will continue to monitor developments with respect to the COVID-19 coronavirus and provide updated information on its website, or in press releases.

In a separate press also issued on March 16, 2020, the Company announced that in conjunction with its determination to temporarily shut down operations due to concerns and uncertainty about the effect of the COVID-19 coronavirus, the Company’s Board of Directors had suspended declaring and paying its $0.07 quarterly cash dividend that would normally be paid in April 2020.

As a result of the temporary suspension of operations, the Company’s three main sources of income and cash flow, revenues from simulcasting, its card casino, and food and beverage ceased operating on March 16, 2020.

In the second quarter ended June 30, 2019, the Company had revenue of $2,546,000 from live racing and simulcasting, $8,891,000 from the Card Casino and $2,544,000 from food and beverage.

The Company cannot currently predict when it will be able to resume simulcasting or reopen its Card Casino, or whether it will be able to commence live racing on its projected May 15, 2020 date.

The Company’s food and beverage revenue is drive primarily by it simulcasting, live racing and its card casino guests.

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 for the foreseeable future, unless it is unable to.

OFF-BALANCE SHEET ARRANGEMENTS

The Company currently has no off-balance sheet arrangements and has no intent to enter into any such agreements in the near future.

RELATED PARTY TRANSACTIONS

For a description of the nature and extent of related party transactions, see Note 15.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

In March 2014, the Company entered into a seven-year agreement with a new totalizator provider.

Pursuant to the agreement, the vendor provides totalizator equipment and related software that records and processes all wagers and calculates odds and payoffs.

The amounts charged to operations for totalizator expenses for the years ended December 31, 2019 and 2018 were $233,000 and $230,000, respectively.

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.

See Note 13 for a more detailed description of the agreement.

Subsequent to December 31, 2019, there have been no material changes outside the ordinary course of business to our contractual obligations as set forth above.

As of December 31, 2019, we had no borrowings pursuant to our line of credit and were not party to finance lease obligations, significant purchase obligations or other long-term obligations, other than described above.

FORWARD-LOOKING STATEMENTS

From time-to-time, in reports filed with the Securities and Exchange Commission, in press releases, and in other communications to shareholders or the investing public, we may make forward-looking statements concerning possible or anticipated future financial performance, prospective business activities or plans that are typically preceded by words such as “believes,”

“expects,”

“anticipates,”

“intends”

or similar expressions.

For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in federal securities laws.

Shareholders and the investing public should understand that these forward-looking statements are subject to risks and uncertainties that could affect our actual results and cause actual results to differ materially from those indicated in the forward-looking statements.

These risks and uncertainties include, but are not limited to:

material fluctuations in attendance at the Racetrack;

any effect that the coronavirus (COVID-19) may have on us as an entertainment venue or on the economy generally;

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;

our ability to obtain, on acceptable terms, an extension to the ten-year Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community, which expires in 2022;

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 funding 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 a 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 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;

other factors that are beyond our ability to control or predict.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pursuant to Item 3.05(e) of Regulation S-K, Canterbury Park Holding Company is not required to provide the information requested by this Item as it qualifies as a smaller reporting company.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity