CANTERBURY PARK HOLDING CORP : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (form 10-Q)

CPHC

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").

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 typically 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.

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.

As a result of the COVID-19 Pandemic, the Company temporary suspended all Card Casino, simulcast, food and beverage, and special events operations at Canterbury Park from March 16, 2020 through June 9, 2020 and from November 21, 2020 through January 10, 2021.

In connection with reopening our pari-mutuel, food and beverage, and Card Casino operations, we adhered to social distancing requirements, which included reduced seating at table games and poker and capacity limitations to follow Minnesota state guidelines. 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 began operating 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 negative impact on the Company's financial condition and operations for the first half of 2021. However, the Company's revenues began to recover starting in the 2021 second quarter. The strong recovery we experienced in 2021 was a result of increased consumer confidence, reduction in capacity restrictions, and faster than anticipated vaccine roll-outs, as well as the success of initiatives begun during the COVID-19 Pandemic to increase attendance at live racing and other events, enhance the player experience, and recruit higher value players. Although the Company has currently appeared to recover from the effects of the COVID-19 Pandemic, the pandemic has caused other global issues that could have a future adverse effect on the Company. Specifically, these issues relate to supply chain issues and labor shortages, which have had some negative impact on our business and may continue to have an impact in the near future. Additionally, the spread of any new COVID-19 variants has had and may in the future have an adverse effect on the Company's financial condition and 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.

--------------------------------------------------------------------------------

Operations Review for the Three Months Ended March 31, 2022:

Total net revenues for the three months ended March 31, 2022 were $13,638,000, an increase of $4,412,000, or 47.8%, compared to total net revenues of $9,226,000 for the three months ended March 31, 2021. The increase consists of increases in pari-mutuel, Card Casino, food and beverage, and other revenues as a result of increased visitation as COVID-19 Pandemic restrictions have been lifted, and social distancing measures and operating capacity limitations have ceased. See below for a further discussion of our sources of revenues.

--------------------------------------------------------------------------------

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 Poker Revenue and Other Table Games Revenue presented above includes fees collected for the administration of tournaments and the poker jackpot and amounts earned as reimbursement of the administrative costs of maintaining table games jackpot funds, respectively.

As indicated by the table above, total Card Casino revenue increased $3,496,000, or 50.9%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase is primarily due to increased visitation as our business recovers from the effects of the COVID-19 Pandemic described above, as well as increased table games drop from the successful marketing efforts to recruit higher value players. The increase is also due to an increase in revenue generated from poker tournaments in the 2022 first quarter.

Food and beverage revenue increased $714,000, or 190.7%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase is primarily due to increased visitation as our business recovers from the effects of the COVID-19 Pandemic described above. Furthermore, the increase is also attributable to hosting larger scale events in the 2022 first quarter, which is more consistent with our pre-COVID food and beverage operations.

Other revenue increased $109,000, or 13.1%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase is primarily due to the reversal of the effects of the COVID-19 Pandemic described above, as well as hosting larger scale events in the 2022 first quarter. The increase is partially offset by the Company receiving $515,000 of COVID-19 relief grants in the 2021 first quarter.

Total operating expenses increased $3,258,000, or 41.0%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase reflects an increase in all of the Company's operating expenses, primarily as a result of the return to normalized operations in the three months ending March 31, 2022 as compared to the prior year which included a temporary suspension of operations through January 10, 2021 and the limitations placed on operations upon reopening. The following paragraphs provide further detail regarding certain operating expenses.

Purse expense increased $461,000, or 47.2%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase is primarily due to increases in pari-mutuel and Card Casino revenues.

Salaries and benefits increased $1,541,000, or 38.8%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase is primarily due to an increase in the number of personnel to support our resumption of normalized operations in the three months ended March 31, 2022 as well as the fact that the majority of employees were placed on an unpaid furlough during the first week of 2021.

Cost of food and beverage sales increased $291,000, or 141.7%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase is primarily due to the increased food and beverage operations as described above.

--------------------------------------------------------------------------------

Advertising and marketing increased $245,000, or 434.0%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase is primarily due to an increase in advertising spend to support our resumption of normalized operations in the 2022 first quarter.

Other operating expenses increased $303,000, or 44.2%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase is primarily due to our resumption of normalized operations including hosting special events and poker tournaments in the 2022 first quarter, as well as the fact the Company focused on minimizing discretionary spend in the 2021 first quarter to preserve cash.

The Company recorded a provision for income taxes of $606,000 and $252,000 for the three months ended March 31, 2022 and 2021, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The increase in our tax expense for the three months ended March 31, 2022 is primarily due to an increase in income before taxes from operations. Our effective tax rate was 25.5% and 31.4% for the three months ended March 31, 2022 and 2021, respectively. The decrease in the effective tax rate is primarily the result of favorable discrete items that occurred during the three months ended March 31, 2022.

The Company recorded net income of $1,774,000 and $551,000 for the three months ended March 31, 2022 and 2021, respectively.

To supplement our financial statements, we also provide investors with information about our EBITDA and Adjusted EBITDA, each of which is a non-GAAP measure, which excludes certain items from net income, a GAAP measure. We define EBITDA as earnings before interest, income tax expense, and depreciation and amortization. We also compute Adjusted EBITDA, which reflects additional adjustments to Net Income to eliminate unusual or non-recurring items, as well as items relating to our real estate development operations and we believe the exclusion of these items allows for better comparability of our performance between periods. For the three months ended March 31, 2022 Adjusted EBITDA excluded depreciation, amortization, and interest expense related to equity investments. Neither EBITDA nor adjusted EBITDA is a measure of performance calculated in accordance with GAAP and should not be considered an alternative to, or more meaningful than, net income as an indicator of our operating performance. EBITDA is presented as a supplemental disclosure because it is a widely used measure of performance and a basis for valuation of companies in our industry. Moreover, other companies that provide EBITDA information may calculate EBITDA differently than we do.

--------------------------------------------------------------------------------

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 months ended March 31, 2022 and 2021:

Adjusted EBITDA increased $2,125,000 for the three months ended March 31, 2022 as compared to the same period in 2021. The increase is due to increased visitation as COVID-19 Pandemic restrictions have been lifted and social distancing measures and operating capacity limitations have ceased. The increase is also due to increased operational efficiencies that have been implemented since the COVID-19 Pandemic. For the three months ended March 31, 2022, Adjusted EBITDA as a percentage of net revenue was 26.0%. For the three months ended March 31, 2021, Adjusted EBITDA as a percentage of net revenue, excluding $515,000 other revenue from COVID-19 relief grants, was 16.3%.

The Company entered into a Cooperative Marketing Agreement (the "CMA") with the Shakopee Mdewakanton Sioux Community, which became effective on March 4, 2012, and was amended in the respective first quarters of 2015, 2016, 2017, 2018, and June 2020 and will expire December 31, 2022. The CMA contains specific covenants that, if breached, would trigger an obligation to repay a specified amount related to these covenants. At this time, management believes that the likelihood that the breach of a covenant would occur and that the Company would be required to pay the specified amount related to a covenant is remote.

The Company continues to analyze the feasibility of various options related to the development of our underutilized land. The Company may incur substantial costs during the feasibility and predevelopment process, but the Company believes available funds are sufficient to cover the near-term costs. See Liquidity and Capital Resources for more information on liquidity and capital resource requirements.

--------------------------------------------------------------------------------

Liquidity and Capital Resources:

The Company has a general credit and security agreement with a financial institution, which provides a revolving credit line up to $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 which matures January 31, 2024. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company. The line of credit also includes collateral in the form of a Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents. As of March 31, 2022, the outstanding balance on the line of credit was $0. As of March 31, 2022, the Company was in compliance with the financial covenants of the general credit and security agreement.

The Company's cash, cash equivalents, and restricted cash balance at March 31, 2022 was $16,857,000 compared to $15,599,000 as of December 31, 2021. The Company believes that unrestricted funds available in its cash accounts, amounts available under its revolving line of credit, along with funds generated from operations and future land sales, will be sufficient to satisfy its liquidity and capital resource requirements for regular operations, as well as its planned development expenses for the next twelve months. However, if the Company engages in any additional significant real estate development, significant improvements to its facilities, the Racetrack or surrounding grounds, or strategic growth or diversification transactions, additional financing would more than likely be required and the Company may seek this additional financing through joint venture arrangements, through incurring debt, or through an equity financing, or a combination of any of these.

Net cash provided by operating activities for the three months ended March 31, 2022 was $2,937,000, primarily as a result of the following: the Company reported net income of $1,774,000, depreciation of $746,000, a loss from equity investment of $240,000, and stock-based compensation and 401(k) match totaling $262,000. Primarily due to timing, the Company also experienced an increase in accounts payable of $239,000 for the three months ended March 31, 2022, offset by a decrease in accounts receivable of $237,000 for the three months ended March 31, 2022.

Net cash provided by operating activities for the three months ended March 31, 2021 was $1,693,000 primarily as a result of the following: The Company reported net income of $551,000, depreciation of $690,000, loss from equity investment of $638,000, and stock-based compensation and 401(k) match totaling $194,000. the Company also experienced an increase in accrued wages and payroll taxes of $996,000 for the three months ended March 31, 2021 due to the timing of our payroll dates as well as the fact the Company's operations were temporarily suspended as of December 31, 2020 resulting in a reduction in payroll costs. This increase was partially offset by a decrease in payables to horsemen of $1,035,000 for the three months ended March 31, 2021.

Net cash used in investing activities for the first three months of 2022 was $1,124,000, primarily due to additions to land, buildings, and equipment and an equity investment contribution. Net cash used in investing activities for the first three months of 2021 was $54,000, primarily for additions to land, buildings, and equipment. This was partially offset by a decrease in related party receivables for the three months ended March 31, 2021.

Net cash used in financing activities during the first three months of 2022 was $555,000, primarily due to cash dividends paid to shareholders and payments for taxes of equity awards. Net cash provided by financing activities during the first three months of 2021 was $16,000 due to proceeds from the issuance of common stock upon exercise of stock option awards, partially offset by payments for taxes of equity awards.

Critical Accounting Policies Estimates:

The preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires us to make estimates and judgments that are subject to an inherent degree of uncertainty. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. The development and selection of critical accounting estimates, and the related disclosures, have been reviewed with the Audit Committee of our Board of Directors. We believe the current assumptions and other considerations used to estimate amounts reflected in our Condensed Consolidated Financial Statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our Condensed Consolidated Financial Statements, the resulting changes could have a material adverse effect on our financial condition, results of operations and cash flows.

--------------------------------------------------------------------------------

Estimate of the allowance for doubtful accounts - Property Tax Increment Financing "TIF" Receivable

As of March 31, 2022, the Company recorded a TIF receivable on its Consolidated Balance Sheet of approximately $12,668,000, which represents $11,180,000 of principal and $1,488,000 of interest. The TIF receivable requires significant management estimates and judgement pertaining to whether an allowance for doubtful accounts is necessary. The TIF receivable was generated in connection with the Contract for Private Redevelopment, in which the City of Shakopee has agreed that a portion of the future tax increment revenue generated from the developed property around the Racetrack will be paid to the Company to reimburse it for expenses in constructing public infrastructure improvements.

The Company typically performs an annual collectability analysis of the TIF receivable in the fourth quarter of each year, or more frequently if indicators of potential uncollectability exist. The Company utilizes the assistance of a third party to assist with the projected tax increments. The quantitative analysis includes assumptions based on the market values of the completed development projects within Canterbury Commons, which derives the future projected tax increment revenue. The Company uses the analysis to determine if the future tax increment revenue will exceed the Company's development costs on infrastructure improvements. As a result of our analysis for the year ended December 31, 2021, management believes the TIF receivable will be fully collectible and no allowance related to this receivable is necessary. There were no indicators of potential uncollectability in the quarter ended March 31, 2022.

Commitments and Contractual Obligations:

The Company entered into the CMA with the SMSC on June 4, 2012, that was amended in January 2015, 2016, 2017, March 2018, and June 2020 and expires December 31, 2022. See "Cooperative Marketing Agreement" below.

Cooperative Marketing Agreement:

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

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

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

The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company's condensed consolidated statements of operations. For the three months ended March 31, 2022, the Company recorded $112,000 in other revenue, incurred $65,000 in advertising and marketing expense, and incurred $47,000 in depreciation related to the SMSC marketing funds. For the three months ended March 31, 2021, the Company recorded $47,000 in other revenue, incurred $23,000 in advertising and marketing expense, and incurred $24,000 in depreciation related to the SMSC marketing funds.

--------------------------------------------------------------------------------

Under the CMA, the Company has agreed for the term of the CMA, which has a stated term ending 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.

As mentioned above in Note 8 of Notes to Financial Statements, on August 10, 2018, the City of Shakopee, the City of Shakopee Economic Development Authority, and the Company entered into a Redevelopment Agreement in connection with a Tax Increment Financing District ("TIF District") that the City had approved in April 2018. Under the Redevelopment Agreement, the Company has agreed to undertake a number of specific infrastructure improvements within the TIF District, including the development of public streets, utilities, sidewalks, and other public infrastructure and the City of Shakopee agreed that a portion of the tax revenue generated from the developed property will be paid to the Company to reimburse it for its expense in constructing these improvements. The Company expects to finance its improvements under the Redevelopment Agreement with funds from its current operating resources and existing credit facility and, potentially, third-party financing sources.

On January 25, 2022, the Company received the fully executed First Amendment to the Contract for Private Redevelopment among the Company, the City of Shakopee, and the Shakopee EDA, which is effective as of September 7, 2021. Under the First Amendment and as part of the authorized changes regarding the responsibilities of the Company and the City, improvements on Unbridled Avenue will be primarily constructed by the City of Shakopee. As a result, the total estimated cost of TIF eligible improvements to be borne by the Company will be reduced by $5,744,000 to an amount not to exceed $17,592,881.

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:

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses