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Share-based Compensation

3 Months Ended

Dec. 31, 2013

14. 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.

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, 2013 is presented below:

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

Outstanding as of October 1, 2013	136,560		$	14.05	2.7 years
Exercised	-			-
Cancelled	-			-
Forfeited	(131,960	)		14.05
Outstanding as of December 31, 2013	4,600		$	14.05	2.45 years	$	-
Exercisable as of December 31, 2013	4,600		$	14.05	2.45 years	$	-

⁽¹⁾ The intrinsic values of option at December 31, 2013 was zero since the per share market values of common stock of $2.22, was lower than the exercise price of the option of $14.05 per share.

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 $86,582 and of $32,932 for the three months ended December 31, 2012 and 2013 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, 2013, there were unrecognized compensation costs of $32,216 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 0.75 year.

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 period ended December 31, 2013 is presented below:

			Weighted	Weighted
			average	average		Aggregate
	Number of		exercise	remaining		intrinsic
	shares		price per share	contractual term		value ⁽¹⁾
Outstanding as of October 1, 2013	20,000	$	12.15	4.00 years
Exercised	-		-
Forfeited	-		-
Cancelled	-		-
Outstanding as of December 31, 2013	20,000	$	12.15	3.75 years	$	-
Exercisable as of December 31, 2013	20,000	$	12.15	3.75 years	$	-

⁽¹⁾ The intrinsic values of option at December 31, 2013 was zero since the per share market values of common stock of $2.22, was lower than the exercise price of the option of $12.15 per share.

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 $4,510 and nil for the three months ended December 31, 2012 and 2013, respectively, in respect of 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, 2013, there were no unrecognized compensation costs related to the above non-vested share options.

(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 the 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 $29,954 and $11,089 for the three months ended December 31, 2012 and 2013, respectively, in respect of the restricted shares granted on June 22, 2009, which was allocated to general and administrative expenses.

As of December 31, 2013, there was unrecognized stock-based compensation costs of $12,511 associated with these restricted shares granted to Mr. Xiangqian Li. These costs are expected to be recognized over a weighted-average period of 0.75 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, 2012 and 2013.