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Share-based Compensation

3 Months Ended

Dec. 31, 2012

13 Share-based Compensation

(i) Options

The Company grants share options to officers and employees and restricted shares of common stock to its non-employee directors as rewards for their services.

Stock Option Plan

In May 2005, the Board of Directors adopted the China BAK Battery, Inc. 2005 Stock Option Plan (the “Plan”). The Plan originally authorized the issuance of up to 800,000 shares of the Company’s common stock, pursuant to stock options granted under the Plan, or as grants of restricted stock. The exercise price of options granted pursuant to the Plan must be at least equal to the fair market value of the Company’s common stock at the date of the grant. Fair market value is determined at the discretion of the designated committee on the basis of reported sales prices for the Company’s common stock over a ten-business-day period ending on the grant date. The Plan will terminate on May 16, 2055. On July 28, 2008, the Company’s stockholders approved certain amendments to the Plan, including an amendment increasing the total number of shares available for issuance under the Plan to 1,600,000.

Pursuant to the Plan, the Company granted options to purchase 400,000 shares of common stock with an exercise price of $31.25 per share and a contractual life of 6 years on May 16, 2005. In accordance with the vesting provisions of the grants, the options became vested and exercisable under the following schedule:

	Percentage of	Initial
Number of Shares	Options Issued	Vesting Date
160,000	40%	July 1, 2007
120,000	30%	January 1, 2008
120,000	30%	July 1, 2008
400,000	100%

Subsequent to the grant date, options to purchase 40,000 shares of common stock were forfeited because the optionees terminated their employment with the Company. In addition, on September 28, 2006, options to purchase a total of 280,000 shares of common stock were cancelled pursuant to the Termination and Release Agreements signed on that day.

Pursuant to the Plan, the Company also granted options to purchase 300,300 shares of the Company’s common stock with a weighted-average exercise price of $16.45 per share on June 25, 2007. In accordance with the vesting provisions of the grants, the options will become vested and exercisable during the period from March 31, 2007 to February 9, 2012 according to each employee’s respective agreement.

A summary of share option plan activity for these options during the three months ended December 31, 2012 is presented below:

			Weighted	Weighted average
	Number of		average exercise	remaining		Aggregate intrinsic
	shares		price per share	contractual term		value (1)

Outstanding as of October 1, 2012	121,000	$	16.45
Exercised	-		-
Forfeited	-		-
Cancelled	-		-

Outstanding as of December 31, 2012	121,000	$	16.45	0.82years	$	-

Exercisable as of December 31, 2012	121,000	$	16.45	0.82 years	$	-

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on December 31, 2012 ($1.59) in excess of the exercise price multiplied by the number of options outstanding or exercisable.

The weighted-average grant-date fair value of options granted during 2007 was $10.75 per share. Non-cash share-based compensation expense has been fully recorded at end of September 30, 2011. No non-cash share-based compensation expense was recorded for the three months ended December 31, 2011 and 2012 respectively.

The fair value of the above option awards granted on June 25, 2007 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions:

Expected volatility	69.44%
Expected dividends	nil
Expected life	4 - 10 years
Risk-free interest rate	5.09%

As of December 31, 2012, there were no unrecognized compensation costs related to non-vested share options.

Pursuant to the Plan, the Company also granted options to purchase 72,000 shares of common stock with an exercise price of $21.5 per share with a contractual life of 5 years on January 28, 2008. In accordance with the vesting provisions of the grants, the options will become vested and exercisable during the period from April 28, 2008 to January 28, 2011 according to each employee’s respective agreement.

A summary of share option plan activity for these options during the three months ended December 31, 2012 is presented below:

			Weighted	Weighted average
	Number of		average exercise	remaining		Aggregate intrinsic
	shares		price per share	contractual term		value (1)

Outstanding as of October 1, 2012	72,000	$	21.50
Exercised	-		-
Forfeited	-		-
Cancelled	-		-

Outstanding as of December 31, 2012	72,000	$	21.50	0.08 years	$	-

Exercisable as of December 31, 2012	72,000	$	21.50	0.08 years	$	-

The weighted average grant-date fair value of options granted on January 28, 2008 was $17.95 per share. The Company has fully recorded the non-cash share-based compensation expense. No non-cash share-based compensation expense was recorded for the three months ended December 31, 2011 and 2012.

The fair value of the above option awards granted on January 28, 2008 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility	120.23%
Expected dividends	nil
Expected life	5 years
Risk-free interest rate	3.59%

As of December 31, 2012, there were no unrecognized compensation costs related to non-vested share options.

On May 29, 2008, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 216,000 shares of the Company’s common stock to Mr. Xiangqian Li and options to purchase 34,000 shares to five other employees, with an exercise price of $20.9 per share and a contractual life of 5 years. In accordance with the vesting provisions of the grants, the options will become vested and exercisable during the period from September 30, 2008 to May 29, 2012 according to each employee’s respective agreement.

A summary of share option plan activity for these options during the three months ended December 31, 2012 is presented below:

			Weighted	Weighted average
	Number of		average exercise	remaining		Aggregate intrinsic
	shares		price per share	contractual term		value (1)

Outstanding as of October 1, 2012	250,000	$	20.90
Exercised	-		-
Forfeited	-		-
Cancelled	-		-

Outstanding as of December 31, 2012	250,000	$	20.90	0.41 years	$	-

Exercisable as of December 31, 2012	250,000	$	20.90	0.41 years	$	-

The weighted average grant-date fair value of options granted on May 29, 2008 was $11.80 per share. The Company recorded non-cash share-based compensation expense of $6,308 and nil for the three months ended December 31, 2011 and 2012 respectively, in respect of share options granted on May 29, 2008, which was allocated to general and administrative expenses and research and development expenses respectively.

The fair value of the above option awards granted on May 29, 2008 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility	59.48%
Expected dividends	nil
Expected life	5 years
Risk-free interest rate	4.01%

As of December 31, 2012, there were no unrecognized compensation costs related to non-vested share options.

On June 22, 2009, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 385,640 shares of the Company’s common stock to certain key employees, officers and consultants with an exercise price of $14.05 per share and a contractual life of 7 years. In accordance with the vesting provisions of the grants, the options will become vested and exercisable over five years in twenty equal quarterly installments on the first day of each fiscal quarter beginning on October 1, 2009.

A summary of share option plan activity for these options during the three months ended December 31, 2012 is presented below:

				Weighted
			Weighted	average
			average	remaining		Aggregate
	Number of		exercise price	contractual		intrinsic
	shares		per share	term		value (1)

Outstanding as of October 1, 2011	328,671	$	14.05
Exercised	-		-
Forfeited	-		-
Cancelled	-		-

Outstanding as of December 31, 2012	328,671	$	14.05	3.50 years	$	-

Exercisable as of December 31, 2012	230,070	$	14.05	3.50 years	$	-

The weighted average grant-date fair value of options granted on June 22, 2009 was $12.30 per share. The Company recorded non-cash share-based compensation expense of $159,014 and of $86,582 for the three months ended December 31, 2011 and 2012, respectively.

The fair value of the above option awards granted on June 22, 2009 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility	111.03%
Expected dividends	nil
Expected life	7 years
Risk-free interest rate	3.69%

As of December 31, 2012, there were unrecognized compensation costs of $237,773 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 1.75 years.

On June 26, 2009, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 15,000 shares of the Company’s common stock to certain key management with an exercise price of $16.20 per share and a contractual life of 7 years. In accordance with the vesting provisions of the grants, the options will become vested and exercisable over five years in twenty equal quarterly installments beginning on the first day of each fiscal quarter beginning on October 1, 2009.

A summary of share option plan activity for these options during the three months ended December 31, 2012 is presented below:

			Weighted	Weighted
			average	average
			exercise	remaining	Aggregate
	Number of		price	contractual	intrinsic
	shares		per share	term	value (1)

Outstanding as of October 1, 2011	15,000	$	16.20
Exercised	-		-
Forfeited	15,000		-
Cancelled	-		-

Outstanding as of December 31, 2012	-		-	-	-

Exercisable as of December 31, 2012	-		-	-	-

The weighted average grant-date fair value of options granted on June 26, 2009 was $14.30 per share. The Company recorded non-cash share-based compensation expense of $8,709 and $nil for the three months ended December 31, 2011 and 2012 in respect of share options granted on June 26, 2009 which was allocated to research and development expense.

The fair value of the above option awards granted on June 26, 2009 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility	113.58%
Expected dividends	nil
Expected life	7 years
Risk-free interest rate	3.51%

As of December 31, 2012, there were no unrecognized compensation costs related to the above non-vested share options.

On April 8, 2010, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 20,000 shares of the Company’s common stock to certain key management with an exercise price of $12.15 per share and a contractual life of 7.5 years. In accordance with the vesting provisions of the grants, the options will become vested and exercisable in eight equal installments beginning on each quarter after September 30, 2010.

A summary of share option plan activity for these options during the three months ended December 31, 2012 is presented below:

			Weighted	Weighted average		Aggregate
	Number of		average exercise	Remaining		intrinsic
	Shares		price per share	contractual Term		value (1)

Outstanding as of October 1, 2011	20,000	$	12.15
Exercised	-
Forfeited	-		-
Cancelled	-		-
Outstanding as of December 31, 2012	20,000	$	12.15	4.75 years	$	-
Exercisable as of December 31, 2012	12,500	$	12.15	4.75 years	$	-

The weighted average grant-date fair value of options granted on April 8, 2010 was $7.05 per share. The Company recorded non-cash share-based compensation expense of $10,516 and $4,510 for the three months ended December 31, 2011 and 2012, respectively, for the share options granted on April 8, 2010 which was allocated to research and development expense.

The fair value of the above option awards granted on April 8, 2010 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility	51.79%
Expected dividends	nil
Expected life	7.5 years
Risk-free interest rate	3.90%

As of December 31, 2012, there were unrecognized compensation costs of $4,193 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 0.5 years.

(ii) Restricted Shares

Pursuant to the Plan and in accordance with the China BAK Battery, Inc. Compensation Plan for Non-Employee Directors, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of 100,000 restricted shares to Chief Executive Officer, Mr. Xiangqian Li with a fair value of $14.05 per share on June 22, 2009. In accordance with the vesting schedule of the grant, the restricted shares will vest in twenty equal quarterly installments on the first day of each fiscal quarter beginning on October 1, 2009.

The Company recorded non-cash share-based compensation expense of $54,074 and $29,954 for the three months ended December 31, 2011 and 2012 respectively, for the restricted shares granted on June 22, 2009, which was allocated to general and administrative expenses.

As of December 31, 2012, there were unrecognized stock-based compensation costs of $84,742 associated with these restricted shares granted to Mr. Xiangqian Li. These costs are expected to be recognized over a weighted-average period of 1.75 years.

As the Company itself is an investment holding company which is not expected to generate operating profits to realize the tax benefits arising from its net operating loss carried forward, no income tax benefits were recognized for such stock-based compensation cost under stock option plan for the three months ended December 31, 2011 and 2012.