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Share-based Compensation

6 Months Ended

Mar. 31, 2012

12	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 4,000,000 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 8,000,000.

Pursuant to the Plan, the Company granted options to purchase 2,000,000 shares of common stock with an exercise price of US$6.25 per share 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
800,000	40%	July 1, 2007
600,000	30%	January 1, 2008
600,000	30%	July 1, 2008
2,000,000	100%

Subsequent to the grant date, options to purchase 200,000 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 1,400,000 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 1,501,500 shares of the Company’s common stock with a weighted-average exercise price of US$3.28 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 six months ended March 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	605,000	$	3.29
Exercised	-		-
Forfeited	-		-
Cancelled	-		-

Outstanding as of March 31, 2012	605,500	$	3.29	1.2 years	$	-

Exercisable as of March 31, 2012	605,500	$	3.29	0.3 years	$	-

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on March 31, 2012 (US$1.03) 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 US$2.15 per share. The Company recorded non-cash share-based compensation expense of US$49,224 for the six months ended March 31, 2011, in respect of share options granted on June 25, 2007, which was allocated to cost of revenues, sales and marketing expenses, general and administrative expenses and research and development expenses respectively. No non-cash share-based compensation expense was recorded for the six months ended March 31, 2012.

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 March 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 360,000 shares of common stock with an exercise price of US$4.30 per share 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 six months ended March 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	360,000	$	4.30
Exercised	-		-
Forfeited	-		-
Cancelled	-		-

Outstanding as of March 31, 2012	360,000	$	4.30	0.8 years	$	-

Exercisable as of March 31, 2012	360,000	$	4.30	0.8 years	$	-

The weighted average grant-date fair value of options granted on January 28, 2008 was US$3.59 per share. The Company recorded non-cash share-based compensation expense of US$14,812 for the six months ended March 31, 2011, in respect of share options granted on January 28, 2008, which was allocated to general and administrative expenses and research and development expenses respectively. No non-cash share-based compensation expense was recorded for the six months ended March 31, 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 March 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 1,080,000 shares of the Company’s common stock to Mr. Xiangqian Li and options to purchase 170,000 shares to five other employees, with an exercise price of US$4.18 per share. 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 six months ended March 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	1,250,000	$	4.18
Exercised	-		-
Forfeited	-		-
Cancelled	-		-

Outstanding as of March 31, 2012	1,250,000	$	4.18	1.6 years	$	-

Exercisable as of March 31, 2012	980,000	$	4.18	0.34 years	$	-

The weighted average grant-date fair value of options granted on May 29, 2008 was US$2.36 per share. The Company recorded non-cash share-based compensation expense of US$121,198 and US$12,548 for the six months ended March 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 March 31, 2012, there were unrecognized compensation costs of US$3,976 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 0.1 year.

On June 22, 2009, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 1,928,200 shares of the Company’s common stock to certain key employees, officers and consultants with an exercise price of US$2.81 per share. 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 six months ended March 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	1,643,355	$	2.81
Exercised	-		-
Forfeited	-		-
Cancelled	-		-

Outstanding as of March 31, 2012	1,643,355	$	2.81	4.1 years	$	-

Exercisable as of March 31, 2012	757,440	$	2.81	4.1 years	$	-

The weighted average grant-date fair value of options granted on June 22, 2009 was US$2.46 per share. The Company recorded non-cash share-based compensation expense of US$519,752 and of US$295,926 for the six months ended March 31, 2011 and 2012, respectively, in respect of share options granted on June 22, 2009, which was allocated to general and administrative expenses and research and development expenses 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 March 31, 2012, there were unrecognized compensation costs of US$545,286 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 0.9 year.

On June 26, 2009, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 75,000 shares of the Company’s common stock to certain key management with an exercise price of US$3.24 per share. 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 six months ended March 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	75,000	$	3.24
Exercised	-		-
Forfeited	-		-
Cancelled	-		-

Outstanding as of March 31, 2012	75,000	$	3.24	4.1 years	$	-

Exercisable as of March 31, 2012	30,000	$	3.24	4.1 years	$	-

The weighted average grant-date fair value of options granted on June 26, 2009 was US$2.86 per share. The Company recorded non-cash share-based compensation expense of US$25,716 and US$15,136 for the six months ended March 31, 2011 and 2012, respectively, in respect of share options granted on June 26, 2009, which was allocated to research and development expenses.

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 March 31, 2012, there were unrecognized compensation costs of US$32,420 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 0.7 year.

On April 8, 2010, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 100,000 shares of the Company’s common stock to certain key management with an exercise price of US$2.43 per share. 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, 2011.

A summary of share option plan activity for these options during the six months ended March 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	100,000	$	2.43
Exercised	-		-
Forfeited	-		-
Cancelled	-		-

Outstanding as of March 31, 2012	100,000	$	2.43	5.4 years	$	-

Exercisable as of March 31, 2012	25,000	$	2.43	5.4 years	$	-

The weighted average grant-date fair value of options granted on April 8, 2010 was US$1.41 per share. The Company recorded non-cash share-based compensation expense of US$26,926 and US$20,941 for the three months ended March 31, 2011 and 2012 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 March 31, 2012, there were unrecognized compensation costs of US$23,207 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 1.2 years.

On May 26, 2011, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 160,800 shares of the Company’s common stock to certain key management with an exercise price of US$1.28 per share. In accordance with the vesting provisions of the grants, the options will become vested and exercisable in twelve equal installments beginning on each quarter after September 30, 2011.

A summary of share option plan activity for these options during the six months ended March 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	160,800	$	1.28
Exercised	-		-
Forfeited	-		-
Cancelled	-		-

Outstanding as of March 31, 2012	160,800	$	1.28	5.0 years	$	-

Exercisable as of March 31, 2012	40,200	$	1.28	5.0 years	$	-

The weighted average grant-date fair value of options granted on May 26, 2011 was US$0.65 per share. No non-cash share-based compensation expense was recorded for the six months ended March 31, 2011. The Company recorded non-cash share-based compensation expense of US$29,882 for the three months ended March 31, 2012 in respect of share options granted on May 26, 2011, which was allocated to general and administrative expenses.

The fair value of the above option awards granted on May 26, 2011 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility		50.90%
Expected dividends		nil
Expected life		6.0 years
Risk-free interest rate		3.06%

As of March 31, 2012, there were unrecognized compensation costs of US$43,386 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 2.1 years.


	(ii)	Restricted Shares

Pursuant to the Plan and in accordance with the China BAK Battery, Inc. Compensation Plan for Non-Employee Directors, the Company granted 5,000 restricted shares to each of the existing elected independent directors with a fair value of US$1.68 per share on July 1, 2010. The eligible directors shall vest in their rights under the restricted shares according to the following schedule:

(i)	25% of the restricted shares granted will immediately vest on the grant date; and

(ii)	The remaining 75% of the restricted shares will vest in three equal quarterly installments on the last day of each subsequent quarter or in three equal quarterly installments on the last day of each calendar quarter beginning on the last day of the first full calendar quarter after the grant date.

The Company recorded non-cash share-based compensation expense of US$6,854 for the nine months ended March 31, 2010, in respect of the restricted shares granted in July 1, 2010, which was allocated to general and administrative expenses.

The first and second 25% of the restricted shares were already issued as fully paid shares of common stock to the Company’s three independent directors on August 4, 2010 and October 6, 2010. According to the resolution of Compensation Committee on December 28, 2010, the third and forth 25% of the restricted shares were cancelled. As of March 31, 2012, there were no unrecognized compensation costs associated with these restricted shares granted to non-employee directors.

Pursuant to the Plan, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of 500,000 restricted shares to Chief Executive Officer, Mr. Xiangqian Li with a fair value of US$2.81 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 US$169,853 and of US$100,298 for the six months ended March 31, 2011 and 2012 respectively in respect of the restricted shares granted on June 22, 2009, which was allocated to general and administrative expenses.

As of March 31, 2012, there were unrecognized stock-based compensation costs of US$189,922 associated with these restricted shares granted to Mr. Xiangqian Li. These costs are expected to be recognized over a weighted-average period of 1.7 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 the Stock Option Plan for the six months ended March 31, 2011 and 2012.