2. STOCK-BASED COMPENSATION

Stock-based compensation is recorded at fair value as of the date of grant and included in the salaries and benefits expense line item on the consolidated statements of operations and amounted to $70,638 and $211,201 for the three and nine months ended September 30, 2013, respectively, compared to $61,757 and $153,315 for the three and nine months ended September 30, 2012, respectively.

Board of Director Restricted Stock Grants

Pursuant to Board action taken on April 15, 2011 and shareholder approval on June 2, 2011, the Company’s Stock Plan was amended to authorize annual grants of restricted stock or stock options, or both, as determined by the Board. Pursuant to the amended Stock Plan, on June 7, 2012, 2,364 shares of restricted stock were granted to each of the five non-employee members of the Board of Directors. The restricted stock vested after one year and is subject to restrictions on resale for an additional year. The compensation cost associated with the total grant of 11,820 shares was $149,996 and was recognized as expense over the one-year vesting period. As of September 30, 2013, there was no unrecognized compensation cost related to this restricted stock grant.

Additionally, on January 4, 2013, 1,250 shares of restricted stock were granted to a newly named non-employee member of the Board of Directors. The restricted stock will vest 100% after one year and will be subject to restrictions on resale for an additional year. The compensation cost associated with this restricted stock grant of 1,250 shares for the nine months ended September 30, 2013 was $9,375. As of September 30, 2013, there was $3,125 of total unrecognized compensation cost related to this restricted stock grant which is expected to be recognized over 0.2 years.

Finally, on May 30, 2013, 2,840 shares of restricted stock were granted to each of the six non-employee members of the Board of Directors. The restricted stock will vest 100% after one year and will be subject to restrictions on resale for an additional year. The compensation cost associated with the total grant of 17,040 shares for the nine months ended September 30, 2013 was $59,981. As of September 30, 2013, there was $119,962 of total unrecognized compensation cost related to this restricted stock grant which is expected to be recognized over 0.7 years.

Employee Stock Option and Deferred Stock Award Grants

On February 25, 2010, 86,500 incentive stock options were granted to employees with an exercise price equal to the market price on the date of grant of $8.28. The options vested over a 42-month period and expire in ten years. The compensation cost associated with this grant of employee options was $282,355 and was recognized as expense over the 42-month vesting period. The compensation cost associated with these options included in salaries and benefits expense for the nine months ended September 30, 2013 and 2012 was $47,059 and $52,942, respectively. As of September 30, 2013, there was no unrecognized compensation cost related to these stock options.

Additionally, on December 13, 2012, 20,500 shares of deferred stock awards were granted to employees with a price per share equal to the market price on the date of grant of $9.84. The awards vest ratably over a four-year period. The compensation cost associated with this grant of employee awards is $172,200 to be recognized as expense over the four-year vesting period. The compensation cost related to these awards included in salaries and benefits expense for the nine months ended September 30, 2013 was $32,288. As of September 30, 2013, there was $138,119 of total unrecognized compensation cost related to these deferred stock awards which is expected to be recognized over 3.2 years.

The number of shares that may be issued pursuant to restricted stock granted and the weighted average fair value during the periods presented were:

Nine Months Ended

September 30, 2013

September 30, 2012

Weighted

Average

Fair Value

Grant

Per Share

Grant

Per Share

Board restricted stock

18,290

10.52

11,820

12.69

Total shares

18,290

11,820

A summary of stock option activity as of September 30, 2013 and changes during the nine months then ended is presented below:



					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
	Number of		Exercise		Contractual		Grant Date
Stock Options	Shares		Price		Term		Fair Value

Outstanding at January 1, 2013		292,267	$	10.13

Granted		-		-
Exercised		(3,265)	$	6.87
Expired/Forfeited		(15,000)	$	13.86

Outstanding at September 30, 2013		274,002	$	9.97		4.9 Years	$	2,731,257

Exercisable at September 30, 2013		274,002	$	9.97		4.9 Years	$	2,731,257

A summary of stock option activity as of September 30, 2012 and changes during the nine months then ended is presented below:



					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
	Number of		Exercise		Contractual		Grant Date
Stock Options	Shares		Price		Term		Fair Value

Outstanding at January 1, 2012		318,002	$	9.21

Granted		-		-
Exercised		(22,750)	$	7.07
Expired/Forfeited		(250)		8.28

Outstanding at September 30, 2012		295,002	$	10.10		5.6 Years	$	2,980,782

Exercisable at September 30, 2012		266,377	$	10.40		5.5 Years	$	2,769,987

Employee Stock Ownership Plan

Prior to 2008, the Company contributed shares of its common stock to its Employee Stock Ownership Plan (the “ESOP”). However, no contributions have been made from January 1, 2008 to date, and the Company has not taken any action to reinstate contributions to the ESOP. During the first quarter of 2013, the Company’s Board of Directors approved an action to combine the ESOP with the 401(k) Plan to create a KSOP Plan. This KSOP Plan will allow the Company to use Company stock to match contributions from its employees should it so choose. This combination became effective on July 15, 2013.

Employee Stock Purchase Plan

On April 3, 1995, the Board of Directors adopted an Employee Stock Purchase Plan (the “ESPP”). Pursuant to Board action taken in September 2011, the ESPP was amended so that stock is issued in three-month phases. The plan issued 2,003 shares during the third quarter of 2013 and 2,102 shares during the third quarter of 2012. The ESPP has issued a total of 258,418 shares since its inception. Pursuant to Board action taken on June 2, 2012, and effective during the third quarter of 2012, the discount offered to employees as part of the ESPP was raised from 5% to 10%.

Stock Appreciation Rights (“SARs”)

As part of the Cooperative Marketing Agreement (the “Agreement”) discussed in Note 7, on June 14, 2012, the Company signed a Stock Appreciation Rights Agreement (the “SAR Agreement”) and issued SARs to non-employees. The SAR Agreement granted rights to non-employees to benefit from the appreciation in the value of 165,000 shares of Company common stock above $14.30 per share, a price agreed upon by the two parties. Each right represents the right to be paid the appreciation in the value of one share of stock above $14.30. Ten percent of the rights (16,500 rights) vested immediately and the remaining rights vest at the rate of 16,500 per year beginning in January 2013. The SAR Agreement provides for the cash payment of the excess of the fair market value of Canterbury Park Holding Corporation’s common stock price on the date of exercise over the grant price. SARs have no effect on dilutive shares or shares outstanding as any appreciation of the Company’s common stock value over the grant price is paid in cash and not in common stock. The SAR Agreement and all rights granted expire on December 31, 2022.

The fair value of SARs is revalued (mark-to-market) each reporting period using the Black-Scholes valuation model based on the Company’s period-end stock price. The expected term of the SARs granted is based on the contractual term. Expected volatility is based on the historical volatility of the Company’s stock for the length of time corresponding to the expected term of the SARs. The expected dividend yield is based on the Company’s anticipated dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the reporting date for the length of time corresponding to the expected term of the SARs.

The following weighted-average assumptions were used in calculating the fair value of SARs during the nine-month period ended September 30, 2013, using the Black-Scholes valuation model:


	September 30, 2013
Expected dividend yield		0.00	%
Expected weighted-average volatility		48.7	%
Risk-free interest rate		2.49	%
Expected term of SARs (in years)		9.25

There were no exercises during the three or nine-month periods ended September 30, 2013. The total liability of the SARs at September 30, 2013 was $475,466.

Changes to the Company’s non-vested SARs during the nine-month period ended September 30, 2013, are as follows:



	SARs		Fair Value (*)
Non-vested SARs at December 31, 2012		148,500	$	5.24
Granted		—		—
Vested		(16,500)	$	5.03
Cancellations		—		—
Non-vested SARs at September 30, 2013		132,000	$	5.03

* Weighted-average