Select unaudited condensed consolidated statement of cash flow line items, which reflects the adoption of ASU No. 2016-18 are as follows:

In May 2014,Summary of Significant Accounting Policies

Except for the FASB issued ASU No. 2014-09, accounting policies for revenue recognition, promotional allowances, and restricted cash that were updated as a result of our recently adopted accounting pronouncements, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 27, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.

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

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

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

We have two general types of liabilities related to contracts with customers: (1) our MVP Loyalty Program and (2) outstanding chip liability. These are included in the line item card casino accruals on the consolidated balance sheet. We defer the full retail value of these complimentary reward items until the future revenue transaction occurs. We also do not estimate breakage revenue for outstanding chips. Therefore, we do not recognize any contract revenue associated with future performance obligations.

The Company offers certain promotional allowances at no charge to patrons who participate in its player rewards program. The retail value of these promotional items is included as a deduction from pari-mutuel revenues and no longer shown as a separate line item on the Company’s consolidated statements of operations.

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

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

For export revenue, our customer is that a company should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance will become effective in 2018 and will be applied retrospectively to each period presented orthird party wagering site such as a cumulative-effect adjustment as ofrace track, OTB, or advance deposit wagering provider. Therefore, the date of adoption. Duringrevenue we recognize for export revenue is the simulcast host fee we earn for exporting our racing signal to the third party wagering site.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-08, Revenue2016-02, Leases (Topic 842), which requires that lessees recognize assets and liabilities for leases with lease terms greater than 12 months in the statement of financial position and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net); and ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients; which clarified the guidance on certain items such asleases.  The update is effective for fiscal years beginning after December 15, 2018, including interim reporting revenue gross versus net and presentation of sales tax, among other things.periods within those fiscal years.  Early adoption is permitted.  We are assessingcurrently analyzing the impact of this ASU and, at this time, we are unable to determine the impact on the new accounting guidance and currently cannot estimate thestandard, if any, on our consolidated financial statement impact of adoption.statements.

Long Term Incentive Plan and Award of Deferred Stock

The Long Term Incentive Plan (the “LTI Plan”) authorizes the grant of Long Term Incentive Awards that provide an opportunity to Named Executive Officers (“NEOs”) and other Senior Executives to receive a payment in cash or shares of the Company’s common stock to the extent of achievement at the end of a period greater than one year (the “Performance Period”) as compared to Performance Goals established at the beginning of the Performance Period. Currently, there are three awards outstanding that are for three-year periods ending December 31, 2018, 2019, and 2020.

Board of Directors Stock Option and Restricted Stock Grants

The Company’s Stock Plan authorizeswas amended to authorize annual grants of restricted stock deferred stock, andor stock options, or any combination of the three,both, to non-employee members of the Board of Directors at the time of the Company’s annual shareholders meeting as determined by the Board prior to each such meeting. Options granted under the Plan generally expire 10 years after the grant date. Restricted stock and deferred stock grants generally vest 100% one year after the date of the annual meeting at which they were granted, are subject to restrictions on resale for an additional year, and are subject to forfeiture if a board member terminates his or her board service prior to the shares vesting. The Board of Directors’ unvested restricted stock as of September 30, 2017March 31, 2018 was 11,264 shares with a weighted average fair value per share of $10.65. There were no unvested stock options outstanding at September 30, 2017 or DecemberMarch 31, 2016.2018.

Deferred Stock Awards

Prior to January 1, 2016 the Company’s Board awarded deferred compensation to executive officers and key employees that were not performance-based, in the form of Deferred Stockdeferred stock awards under the Company’s Stock Plan. SuchThese deferred stock awards are subject to forfeiture if an employee terminates employment prior to the vesting. Generally, the awards vest ratably over a four-year period and compensation costs are recognized over the vesting period. Compensation costs are recorded in “Salaries and benefits” on the Condensed Consolidated Statements of Operations. As of September 30, 2017, 4,500 sharesThere were not vested with a weighted average fair value of $10.46 per share.no unvested deferred stock awards outstanding at March 31, 2018.

Stock-based compensation expense related to the LTI Plan, deferred stock awards and restricted stock awards are included on theCondensed Consolidated Statements of Operations and totaled $264,000$103,000 and $179,000$91,000 for the ninethree months ended September 30, 2017March 31, 2018 and 2016, respectively.2017.

Employee Stock Option Grants

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

A summary of stock option activity as of September 30, 2017March 31, 2018 and changes during the ninethree months ended is presented below:

The following is a reconciliation of the numerator and denominator of the earnings per common share computations for the three and nine months ended September 30, 2017March 31, 2018 and 2016:2017:

There were no out of-the-money options at March 31, 2018; thus, all outstanding options to purchase shares of common stock were included in the computation of diluted net income per share.

Options to purchase 30,000 shares of common stock at an average price of $12.33 per share were outstanding but not included in the computation of diluted net income per share for the three and nine months ended September 30,March 31, 2017 because the exercise price of the options exceeded the market price of the Company’s common stock at September 30,March 31, 2017.

Options to purchase 45,000 shares of common stock at an average price of $12.80 per share were outstanding but not included in the computation of diluted net income per share for the three and nine months ended September 30, 2016 because the exercise price of the options exceeded the market price of the Company’s common stock at September 30, 2016.

In May 2016, the Company sold approximately 24 acres of land adjacent to the Racetrack for a total consideration of approximately $4.3 million. Promissory notes receivable consist of two promissory notes totaling $3,191,000 bearing interest at 1.43%. On May 31, 2017, the Company signed an amendment extending the maturity date of the notes to May 2020. Payments totaling $1,094,000 are due annually on May 13^thuntil the notes mature. The promissory notes are secured by the mortgage on approximately 24 acres and management believes no allowance for doubtful accounts is necessary.

The Company has a general credit and security agreement with Bremer Bank,a financial institution, which provides a revolving credit line of up to $6,000,000. This agreement was amended on September 30, 2017 to extend the maturity date to$6,000,000, and expires September 30, 2018. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company. The Company had no borrowings under the credit line during the ninethree months ended September 30, 2017.March 31, 2018.

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

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

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

1 – For the nine months ended September 30, 2016,Segment (loss) income before income taxes for Horse Racing includes the gain on sale of land and gain on insurance recoveries of approximately $3,990,000 and $592,000, respectively.

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

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 $700,000 per operating year, as defined, or 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 will be required to pay these amounts is remote. At the date (if any) that these two conditions are met, the five minimum payments will be discounted back to their present value and the sum of those discounted payments will 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 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 Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community (“SMSC”), which became effective June 4, 2012 and was amended in each of January 2015, 2016, 2017, and 2017,2018, and will expire on December 31, 2022. The CMA contains certain covenants which, if breached, would trigger an obligation to repay a specified amount related to such covenant. At this time, management believes 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 September 30, 2017March 31, 2018 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.

As discussed in Note 7,8, 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. SuchThese payments have no direct impact on the Company’s consolidated financial statements or operations.

Under the terms of the CMA, as amended, the SMSC paid the horsemen $7.2$7.4 million and $6.7$7.2 million in the first ninethree months of 20172018 and 2016,2017, respectively, primarily for purse enhancements for the live race meets in the respective years.

Under the CMA, as amended, SMSC also agreed to make “Marketing Payments” to the Company relating to joint marketing efforts for the mutual benefit of the Company and SMSC, including signage, joint promotions, player benefits and events. The Company did not receive a marketing payment during the 2018 first quarter but expects to receive $1,620,000 in the 2018 second quarter. Under the CMA, the SMSC paid the Company $1,581,000 and $1,197,000 for marketing purposes during the ninethree months ended September 30, 2017 and 2016, respectively.March 31, 2017.

In each of January 2015, 2016, and 2017 the CMA was amended to adjust the payment amounts between the “Purse Enhancement Payments to Horsemen” and “Marketing Payments to Canterbury Park.” SMSC is currently obligated to make the following purse enhancement and marketing payments for 20182019 through 2022:

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

The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s consolidated statements of operations. For the three and nine months ended September 30, 2017,March 31, 2018, the Company recorded $672,000 and $1,298,000$106,000 in other revenue and incurred $569,000 and $1,128,000$49,000 in advertising and marketing expense and $57,000 in depreciation related to the SMSC marketing funds. For the three months ended March 31, 2017, the Company recorded $156,000 in other revenue and $170,000incurred $99,000 in advertising and marketing expense and $57,000 in depreciation related to the SMSC marketing payment. For the three and nine months ended September 30, 2016, the Company recorded $366,000 and $610,000 in other revenue and incurred $312,000 and $440,000 in advertising and marketing expense and $57,000 and $170,000 in depreciation related to the SMSC marketing payment. The excess of amounts received over revenue is reflected as deferred revenue which is included on the consolidated balance sheets.

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.

In March 2016, the FASB issued ASU 2016-09, “Improvements“Improvements to Employee Share-Based Payment Accounting”Accounting”, which requires companies to recognize additional tax benefits or expenses related to the vesting or settlement of employee share based awards as income tax provisionexpense or benefit in the income statement in the reporting period in which they occur. In addition, ASU 2016-09 requires that all tax related cash flows resulting from share-based payments, including the excess tax benefits related to settlement of stock-based awards, be classified as cash flows from operating activities in the statement of cash flows. The Company adopted this ASU at March 31, 2017. The adoption of ASU 2016-09 required no retrospective adjustments to the financial statements. In addition there was no material cumulative-effect adjustment to retained earnings. Upon adoption, the Company is required to recognize all excess tax benefits in the statement of earnings.

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. The Operating Agreement has a stated effective date of March 1, 2018.

Doran Canterbury I, LLC was formed as part of a joint venture between Doran and Canterbury Development LLC to construct a luxury apartment complex on land adjacent to the Company’s Racetrack (the “Project”). Doran Canterbury I, LLC will pursue development of Phase I of the Project, which will include approximately 300 units, a heated parking ramp, and a clubhouse. Under the Operating Agreement, Doran will lead the development, design and construction of the Phase I apartment complex, provide property management and leasing services, and be responsible for the day-to-day operations of the Project. Further information about the Operating Agreement and Project is presented under Item 1.01 of the Company’s Form 8-K dated April 2, 2018 and filed with the Commission on April 6, 2018.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Canterbury Park Holding Corporation, our operations, our financial results and financial condition and our present business environment. This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes to the financial statements (the “Notes”).

Overview:

Canterbury Park Holding Corporation (the “Company,” “we,” “our,” or “us”) conducts pari-mutuel wagering operations and hosts “unbanked” card games at its Canterbury Park Racetrack and Card Casino facility (the “Racetrack”) in Shakopee, Minnesota, which is approximately 25 miles southwest of downtown Minneapolis. The Racetrack is the only facility in the State of Minnesota that offers live pari-mutuel thoroughbred and quarter horse racing.

The Company’s pari-mutuel wagering operations include both wagering on thoroughbred and quarter horse races during live meets at the Racetrack each year from May through September, and year-round wagering on races held at out-of-state racetracks that are televised simultaneously at the Racetrack (“simulcasting”). Unbanked card games, in which patrons compete against each other, are hosted in the Card Casino at the Racetrack. The Card Casino operates 24 hours a day, seven days a week. The Card Casino offers both poker and table games at up to 80 tables. The Company also derives revenues from related services and activities, such as concessions, parking, advertising signage, publication sales, and from other entertainment events and activities held at the Racetrack.

Recent Reorganization. The Company was incorporated as a Minnesota corporation in October 2015. The Company is a successor corporation to another corporation, also named Canterbury Park Holding Corporation, that was incorporated in 1994 (“CPHC”). Effective as of the close of business on June 30, 2016, CPHC’s business and operations were reorganized into a holding company structure (the “Reorganization”) pursuant to an Agreement and Plan of Merger dated as of March 1, 2016 that was approved by CPHC’s shareholders on June 28, 2016.

Further information regarding the Reorganization is set forth at Note 1 in the Notes to Condensed Consolidated Financial Statements under Part I above and in the Company’s Registration Statement on Form S-4 (File No. 333-210877) filed with the SEC on April 22, 2016, which information is incorporated herein by reference.

For purposes of this Report on Form 10-Q, when the term “Company” is used with reference to information covering or related to periods up to and including June 30, 2016, such term refers to the operations of CPHC prior to the Reorganization.

Operations Review for the Three and Nine Months Ended September 30, 2017:March 31, 2018:

EBITDA

EBITDA represents earnings before interest, income tax expense, and depreciation and amortization. EBITDA is not a measure of performance or liquidity calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), and should not be considered an alternative to, or more meaningful than, net income as an indicator of our operating performance or cash flows from operating activities as a measure of liquidity. EBITDA is presented as a supplemental disclosure because it is a widely used measure of performance and a basis for valuation of companies in our industry. Moreover, other companies that provide EBITDA information may calculate EBITDA differently than we do. Adjusted EBITDA reflects additional adjustments to net income to eliminate unusual items. For the three months ended September 30, 2016,March 31, 2018, adjusted EBITDA excluded the gain on insurance recoveries. For the nine months ended September 30, 2016, adjusted EBITDA excluded the gain on sale of land and gain on insurance recoveries.

The following table sets forth a reconciliation of net income, a GAAP financial measure, to EBITDA and to adjusted EBITDA (defined above) which are non-GAAP financial measures, for the three and nine months ended September 30, 2017March 31, 2018 and 2016:2017:

Summary of EBITDA Data

Adjusted EBITDA increased $544,000$463,000 or 33.2%,30.7% and increased as a percentage of net revenues to 12.4%16.1% from 9.9%13.2% for the three months ended September 30, 2017March 31, 2018 as compared to the same period in 2016. Adjusted EBITDA increased $2,195,000, or 67.3%, and increased as a percentage of net revenues to 12.2% from 8.0% for the nine months ended September 30, 2017 as compared to the same period in 2016.2017. The increase for the three and nine months ended September 30, 2017March 31, 2018 is primarily due to the increase in revenues compared to the same periodsperiod in 2016.2017.

Revenues:

Total net revenues for the three months ended September 30, 2017March 31, 2018 were $17,667,000,$12,220,000, an increase of $1,036,000,$777,000, or 6.2%6.8%, compared to total net revenues of $16,630,000$11,443,000 for the three months ended September 30, 2016.March 31, 2017. This increase primarily consists of increases in pari-mutuel andother, card casino and pari-mutuel revenue of 8.8%23.9%, 7.4% and 8.9%2.3%, respectively, partially offset by a decrease in food and beverage revenue of 7.6%3.1%. Total net revenues for the nine months ended September 30, 2017 were $44,956,000, an increase of $4,094,000, or 10.0%, compared to total net revenues of $40,863,000 for the nine months ended September 30, 2016. This increase primarily consists of increases in pari-mutuel, food and beverage and card casino revenue of 11.7%, 2.1% and 11.0%, respectively. See below for a further discussion of our sources of revenues.

Pari-Mutuel Revenue:

1 – Includes source market fees received pursuantTotal pari-mutuel revenue increased $34,000, or 2.3%, for the three months ended March 31, 2018, compared to Advanced Deposit Wagering (ADW) legislation effective November 1, 2016.the same period in 2017. Simulcast revenue increased $27,000 primarily due to a change in the racing calendar as a major racing day was included in the first quarter of 2018 and included in the second quarter of 2017.

Card Casino Revenue:

Total pari-mutuel revenue increased $311,000, or 8.8%, for the three months ended September 30, 2017, compared to the same period in 2016. The increase in other pari-mutuel revenue is due to receipt of $155,000 in source market fees received under Advanced Deposit Wagering (ADW) legislation that took effect on November 1, 2016. The ADW legislation allows Minnesota residents to engage in pari-mutuel wagering on out-of-state horse races online with a prefunded account through an ADW provider. The Company receives a percentage of monies wagered (generally 3.25% to 5.0%) by Minnesota residents through the ADW provider as a source market fee. The Company receives 72% of the gross source market fees less the amount of at least 50% for purses and breeders’ awards. The percentage of source marketing fee retained by the Company is recorded as operating revenue and the percentage to the purses and breeders’ awards are recorded as operating expenses. Simulcast revenue increased $92,000 primarily due to a small group of individual players who placed a significantly high volume of bets in the quarter. Total pari-mutuel revenue increased $931,000, or 11.7%, for the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to $655,000 received in ADW source market fees in the first nine months of 2017. Additionally, on-track live racing revenue increased $249,000 primarily due to an increase in statutory take-out levels as compared to 2016 when the Company reduced the take-out on its live races as a promotion to increase wagering dollars (“handle”), but also resulted in substantially reduced revenue.

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, which is 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.

As indicated in the table above, total Card Casino revenue increased $655,000,$572,000, or 8.9%, and $2,352,000 or 11.0%7.4%, for the three and nine months respectively, ended September 30, 2017March 31, 2018 compared to the same periodsperiod in 2016.2017. The increases areincrease is a result of increased play on table games. In management’s judgement, increased play is attributable to expanded promotional efforts and players spendingwagering more money due to a stronger economy, as well as an overall increase in card casino marketing initiatives.strong economy. Also, higher jackpots on certainspecific games drovecontributed to increased play.

Food and Beverage Revenue:

Food and beverage revenue decreased $262,000,$42,000, or 7.6%3.1%, for the three months ended September 30, 2017March 31, 2018 compared to the same period in 2016.2017. The decrease is attributable to six less live racing days compared to the 2016 third quarter. Additionally, there was a decline in attendance for a concert conductedat several special events held by the Company in the 2017 thirdfirst quarter compared to the 2016 third quarter. Food and beverage revenue increased $143,000, or 2.1%, for the nine months ended September 30, 2017 compared to the same periodattendance in 2016 due to hosting more special events in the nine months ended September 30, 2017 compared to the same period in 2016.2017.

Other Revenue:

Compared to the same periods in 2016, other

Other revenue increased $335,000,$212,000, or 14.3%23.9%, and $682,000, or 14.2% for the three and nine months respectively, ended September 30, 2017March 31, 2018 compared to the same periodsperiod in 2016.2017. The increases areincrease is primarily due to increased admission revenue from a greater numbershort-term customer rental agreement in the first quarter of premium priced live racing days during 2017 and event admission revenue from a greater number of special events hosted. Also, the Company received higher payments under the CMA for joint marketing efforts with the SMSC. See “Cooperative Marketing Agreement” below. The amounts earned from the marketing payments are offset by an increase in other expenses2018, related to RiverSouth, which isthe Super Bowl held in Minneapolis. A portion of the revenues are reimbursed costs based on the terms of the contract. These costs are included as an area wide marketing association that promotes Shakopee entertainment venues.expense in our Consolidated Statement of Operations.

Operating Expenses:

The Company’sTotal operating expenses duringincreased $282,000, or 2.7%, for the 2017 third quarter were $16,130,000, an increase of $1,058,000, or 7.0%, from the third quarter 2016 expenses of $15,072,000, and the Company’s operating expenses during the ninethree months ended September 30, 2017 were $41,367,000, an increase of $6,483,000, or 18.6%, from $34,883,000March 31, 2018 compared to the same period in the nine months ended September 30, 2016. Operating expenses in the 2016 third quarter included an insurance recovery of $592,276 related to storm damage in 2014 that was accounted for as a reduction in operating expense. The 2016 year-to-date operating expenses reflect the previously reported $3,990,519 pretax gain on sale of land in the 2016 second quarter that was also accounted for as a reduction in operating expense. Excluding insurance recoveries from 2016, operating expenses for the third quarter 2017 increased $396,000 or 2.5%. Excluding insurance recoveries and gain on sale of land from 2016, operating expenses for the nine month period ended September 30, 2017 increased $1,781,000 or 4.5%.2017. The following paragraphs provide further detail regarding certain operating expenses.

Purse expense increased $97,000,$113,000, or 4.5%10.0%, and $427,000, or 8.5% for the three and nine months respectively, ended September 30, 2017March 31, 2018 compared to the same periodsperiod in 2016. Also, Minnesota Breeders’ Fund expense increased $33,000, or 13.1%, and $169,000, or 26.6%, for the three and nine months, respectively, ended September 30, 2017 compared to the same periods in 2016.2017. The increases areincrease is primarily due to increased payments into the purse fund because of greater Card Casino revenues and increased purse fund payments due to ADW source market arrangements.fee revenues.

Salaries and benefits increased $330,000,$303,000, or 5.3%, and $739,000, or 4.3%5.9%, for the three and nine months respectively, ended September 30, 2017March 31, 2018 compared to the same periodsperiod in 2016.2017. The increases areincrease is partially due to the State of Minnesota mandated increase of $0.50$0.15 in the minimum wage effective August 2016, as well as an increase in employee incentive compensation resulting from an increase in performance from operations.January 1, 2018. Additionally, two executive positions were open and unfilled during the majority of the 2017 first quarter.

The gain on sale of land is due to the sale of approximately 24 acres of land adjacent to the Racetrack for a total consideration of $4.3 million.

During 2014, the Company incurred damage to buildings from multiple severe storms at the Racetrack. As of September 30, 2016, the Company recognized a $592,000 insurance recoveries gain in the Consolidated Statements of Operations as “Gain on insurance recoveries.”

Professional and contracted servicesUtilities expense increased $20,000,$37,000, or 1.3%, and $237,000, or 7.1%13.2%, for the three and nine months respectively, ended September 30, 2017March 31, 2018, compared to the same periodsperiod in 2016.2017. The nine month increase is primarily due to increased live racing contracted services as a result of additional live racing weekselectricity, water and increased consulting fees, primarily related to development initiatives.sewer rates.

Advertising and marketing increased $286,000, or 28.2% and otherOther operating expenses decreased $165,000,$122,000, or 11.4%10.0%, for the three months ended September 30, 2017March 31, 2018, compared to the same period in 2016.2017. This decrease is primarily due to a reclassificationdecrease in real estate tax expense as the Company is capitalizing all real estate taxes payable in Canterbury Development LLC, a subsidiary of expenses associated with RiverSouth.the Company, while Canterbury Development LLC completes activities necessary to prepare the property for its intended use.

Income tax expense decreased $36,000, or 5.7%, and $975,000, or 40.3% for the three and nine months, respectively, ended September 30, 2017 compared to the same periods in 2016. The decreases related to tax expense associated with the gain on sale of land and gain on insurance recoveries in 2016 that did not recur in 2017. The effective rate was approximately 41% for both periods ended September 30, 2017 and 2016.

Net income for the three months ended September 30,March 31, 2018 and 2017 was $990,000 and 2016 was $953,000 and $926,000, respectively. Net income for the nine months ended September 30, 2017 and 2016 was $2,182,000 and $3,511,000,$513,000, respectively.

Contingencies:

The Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community which became effective on June 4, 2012, and was amended in January 2015, 2016, 2017 and 2017,2018, and will expire December 31, 2022. The CMA contains certainspecific covenants which,that, if breached, would trigger an obligation to repay a specified amount related to such covenant.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 sucha 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:

Net cash provided by operating activities for the ninethree months ended September 30, 2017March 31, 2018 was $5,104,000$2,422,000 primarily from net income of $2,182,000,$990,000, depreciation of $1,869,000,$635,000, and stock-based compensation and 401(k) match totaling $614,000.$220,000. The Company also experienced an increase in card casino accruals and accrued property taxes of $285,000 and $243,000, respectively, as well as a decrease in accounts receivable of $665,000. This was partially offset by a decrease in accrued wages and payroll taxes of $1,140,000.

Net cash provided by operating activities for the three months ended March 31, 2017 was $3,107,000 primarily from net income of $513,000, depreciation of $645,000, and stock-based compensation and match of $198,000. The Company also experienced an increase in accounts payable and deferred revenue of $623,000$1,553,000 and a decrease in income taxes receivableamounts payable to horsepersons of $511,000.$465,000. This was partially offset by an increasea decrease in restricted cash of $769,000.

Net cash provided by operating activities for the nine months ended September 30, 2016 was $2,543,000 primarily as a result of the following: The Company reported net income of $3,511,000, depreciation of $1,867,000,accrued wages and deferred incomepayroll taxes of $973,000. The Company also experienced an increase in accounts payable and deferred revenue of $1,634,000 and Card Casino accruals of $621,000. This was partially offset by an increase in restricted cash of $574,000 and due from Minnesota horsemen associations of $1,101,000, and partially offset by the gain on disposal of assets relating to the sale of land of $3,990,000 and gain on insurance recoveries of $592,000.totaling $560,000.

Net cash used in investing activities for the first ninethree months of 2018 and 2017 was $3,219,000,$1,226,000 and $672,000, respectively, primarily for building remodel projects. Net cash used in investing activities for the first nine months of 2016 was $3,777,000, primarily for building remodel projects and the purchase of land.

Net cash provided by financing activities during the first three months of 2018 was $17,000, as a result of proceeds from purchases of stock through the Employee Stock Purchase Plan and the exercise of stock options, offset by the payment of cash dividends to shareholders. Net cash used in financing activities during the first ninethree months of 2017 was $499,000, primarily for$68,000, relating to cash dividends paid to shareholders, partially offset by proceeds from purchases of stock through the Employee Stock Purchase Plan and proceeds received upon the exercise of stock options. Net cash used in financing activities during the first nine months of 2016 was $2,589,000, primarily for principal payments of capital lease obligations and payment of cash dividends to shareholders.

The Company has a general credit and security agreement with Bremer Bank,a financial institution, which provides a revolving credit line of up to $6,000,000. This agreement was amended on September 30, 2017 to extend the maturity date to September 30, 2018. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company. As of September 30, 2017,March 31, 2018, there were no borrowings under this agreement

The Company’s cash and cash equivalent balance at September 30, 2017March 31, 2018 was $7,685,000$9.9 million compared to $6,299,000$8.9 million at December 31, 2016.2017. The Company believes that unrestricted funds available in its cash accounts, amounts available under its revolving line of credit, along with funds generated from operations, will be sufficient to satisfy its liquidity and capital resource requirements for regular operations, as well as predevelopment expenses during 2017.2018. However, if the Company engages in any significant real estate development, additional financing would more than likely be required.

Critical Accounting Policies and Estimates:

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are included in Note 1 to our consolidated financial statements in our 20162017 Annual Report on Form 10-K. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Property and Equipment - We have significant capital invested in our property and equipment, which represents 68.9%68.7% of our total assets at September 30, 2017.March 31, 2018. We utilizeuse our judgment in various ways including: determining whether an expenditure is considered a maintenance expense or a capital asset; determining the estimated useful lives of assets; and determining if or when an asset has been impaired or has been disposed. Management periodically reviews the carrying value of property and equipment for potential impairment by comparing the carrying value of these assets with their related expected undiscounted future net cash flows. If the sum of the related expected future net cash flows is less than the carrying value, management would determine how much of an impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. To date, weWe have determined that no impairment of these assets exists.exists at March 31, 2018.

Stock-Based Compensation –Accounting guidance requires measurement of services provided in exchange for a share-based payment based on the grant date fair market value. We utilizeuse our judgment in determining the assumptions used to determine the fair value of equity instruments granted using a Black-Scholes model. The Company also grants Long Term Incentive Awards under the Long Term Incentive Plan (the “LTI Plan”) under which Company executive officers and other senior executives have the opportunity to receive a payout of shares of the Company’s common stock at the end of a three-year period. Management must make a number of assumptions to estimate future results to determine the compensation expense of the LTI Plan.

Commitments and Contractual Obligations:

The Company entered into the CMA with the SMSC on June 4, 2012, that was amended in January 2015, 2016, 2017, and 20172018 and expires December 31, 2022. See “Cooperative Marketing Agreement” below. 

Legislation:

Minimum Wage Legislation

Legislation that was

Minnesota legislation enacted into law in 2014 increased the minimum wage that must be paid to most company employees from $7.25 to $8.00 on August 1, 2014, and from $8.00 to $9.00 per hour on August 1, 2015. A further increase2015, and from $9.00 to $9.50 per hour went into effect on August 1, 2016. In addition, startingStarting January 1, 2018, the minimum wage will 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 2018 is $9.65 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 has had an adverse financial impact on us in 2016 and2014 through 2017 and will continue to have an adverse impact.impact on us. We have implemented measures to partially mitigate the impact of this increase by raising our prices and/orand reducing our employee count. However, theseThese measures could themselves have an adverse effect because either higher prices andor 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, as amended, this is achieved through “Purse Enhancement Payments to Horsemen” paid directly to the MHBPA. SuchThese payments have no direct impact on the Company’s consolidated financial statements or operations.

Under the terms of the CMA, as amended, the SMSC paid the horsemen $7.2$7.4 million and $6.7$7.2 million in the first ninethree months of 20172018 and 2016,2017, respectively, primarily for purse enhancements for the live race meets in the respective years.

Under the CMA, as amended, SMSC also agreed to make “Marketing Payments” to the Company relating to joint marketing efforts for the mutual benefit of the Company and SMSC, including signage, joint promotions, player benefits and events. The Company did not receive a marketing payment during the 2018 first quarter, but expects to receive $1,620,000 in the 2018 second quarter. Under the CMA, the SMSC paid the Company $1,581,000 and $1,197,000 for marketing purposes during the three months ended September 30, 2017 and 2016, respectively.March 31, 2017.

In each of January 2015, 2016, and 2017 the CMA was amended three times to adjust the payment amounts between the “Purse Enhancement Payments to Horsemen” and “Marketing Payments to Canterbury Park.” SMSC is currently obligated to make the following purse enhancement and marketing payments for 20182019 through 2022: