Canterbury Park Holding Corp quarterly report, Q1 FY2019

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Canterbury Park Holding Corporation — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless noted. The company operates a Minnesota racetrack and year-round Card Casino and is developing surrounding real estate. Live racing is seasonal, generally running May through September.

Financial performance

  • Revenue: $11.59 million, down 5.1% from $12.22 million. Card Casino revenue fell 4.6% to $7.90 million; pari-mutuel revenue fell 3.2% to $1.49 million. Food and beverage revenue rose 3.8% to $1.35 million, while other revenue declined 22.9% to $0.85 million.
  • Profitability: Operating loss was $23,000, compared with operating income of $1.36 million. Net income was $57,000 ($0.01 per diluted share), versus $990,000 ($0.22 per diluted share). Net margin was approximately 0.5%, compared with 8.1%.
  • Expenses and margins: Operating expenses increased 6.9% to $11.61 million, exceeding revenue. Adjusted EBITDA, a non-GAAP measure, was $716,000, down 63.7%; adjusted EBITDA margin fell to 6.2% from 16.1%.
  • Cash flow: Operating activities provided $1.46 million, down from $2.42 million. Investing activities used $4.80 million, primarily for property and equipment additions, versus $1.23 million. Financing activities used $228,000, including $317,000 in dividends paid.
  • Liquidity and obligations: Cash, cash equivalents and restricted cash totaled $7.64 million at quarter-end, down from $11.20 million at December 31, 2018. Of this, unrestricted cash and equivalents were $371,000; restricted cash was $7.26 million. Current assets were $8.99 million versus current liabilities of $10.98 million. The company reported no revolver borrowings; its credit facility provides up to $8 million, with maturity extended to September 30, 2019. Finance lease obligations totaled approximately $116,000; no other conventional debt balance is identified in the filing.
  • Other balance-sheet items: Total assets were $61.91 million and stockholders’ equity was $46.77 million at March 31, 2019. TIF receivable was $3.61 million. The company also reported a $3.21 million related-party receivable and a $2.14 million promissory-note receivable, including current and long-term portions.

Changes and management commentary

  • Management attributed lower Card Casino revenue to unusually inclement weather, remodeling and expansion work that reduced gaming tables and food service in January and February, and road construction that affected access and parking. The remodeled card room reopened in March.
  • Pari-mutuel revenue was affected in part by the temporary shutdown of Santa Anita during the quarter. Other revenue was lower partly because of a short-term Super Bowl-related rental contract that benefited Q1 2018.
  • Operating cost increases included higher salaries and benefits from construction-related labor inefficiencies and Minnesota’s minimum-wage increase, and higher professional and contracted services. Purse expense rose partly due to a horsemen-contract payment-structure change; management described this as primarily a timing difference expected to reduce purse expense in Q2 and Q3.
  • Q1 2019 included a $113,000 loss on disposal of assets, primarily related to the Card Casino remodeling. Q1 2018 included a $21,000 gain on insurance recoveries.

Outlook, risks and unusual matters

  • Management said available unrestricted cash, the revolving facility and operating cash flow should cover regular operations and planned 2019 development expenses. Additional significant real estate development would likely require additional financing.
  • The company is obligated to fund infrastructure improvements under a Shakopee redevelopment agreement. Estimated eligible improvement costs are $23.34 million; reimbursement through tax increments is not guaranteed and depends on future tax revenues. At March 31, the company had recorded a $3.61 million TIF receivable. On April 25, 2019, it purchased adjacent land and buildings for approximately $1.0 million for access and road improvements.
  • The Canterbury Commons apartment project is being developed with Doran. Phase I is planned for approximately 300 units; Phase II, also expected to comprise approximately 300 units, is contingent on Phase I reaching rental stabilization. The company holds a 27.4% interest in the joint ventures and has a related-party loan to Doran Family Holdings bearing 5% interest.
  • The Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community runs through December 31, 2022. It provides purse-enhancement payments directly to horsemen and marketing payments to Canterbury Park; the company also agreed not to lobby for expanded gambling authority during the agreement term. Management considered potential covenant-breach payments remote.
  • Internal controls: Management concluded internal control over financial reporting was not effective because of a material weakness tied to the accounting for the Doran Canterbury I land contribution. The error involved initially recognizing the gain before financing was secured; financing was secured in December 2018, when the company recorded a $2.2 million gain. A remediation plan was underway but was not complete as of the filing.
  • Other risks cited include attendance and wagering trends, competition, labor and purse costs, regulatory or legislative changes, and the performance and financing of real estate development. Management reported no material impact expected from pending ordinary-course claims and legal actions.

Most important facts to verify

  • Whether revenue and earnings recover after the Card Casino remodeling, access disruption and seasonal start of live racing.
  • Unrestricted liquidity and the status, renewal or replacement of the $8 million credit facility before its September 30, 2019 maturity.
  • Progress and total funding for TIF infrastructure, including the amount ultimately reimbursed from future tax increments.
  • Doran project financing, Phase I rental stabilization, related-party receivable repayment and the prospects for Phase II.
  • Whether the company completes remediation of the material weakness and demonstrates effective financial-reporting controls.
  • Whether the expected Q2–Q3 purse-expense timing benefit and operating-cost trends materialize.