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Share-based Compensation

9 Months Ended

Jun. 30, 2016

16.

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 and employees 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 17, 2015, the Company’s stockholders approved an amendment to Section 1.7 of the Plan that if an option terminates without being wholly exercised, new options or restricted stock may be granted hereunder covering the number of shares to which such option termination relates. Section 1.7 of the Plan originally provided that only new options may be granted in this case.

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 as of September 30, 2015 and June 30, 2016 is presented below:

				Weighted
				average		Weighted average		Aggregate
	Number of			exercise price		remaining		intrinsic
	shares			per share		contractual term		value ⁽¹⁾
Outstanding as of October 1, 2015	4,200		$	14.05		0.45 years
Exercised	-
Expired	(4,200	)		(14.05	)
Cancelled	-
Forfeited	-

Outstanding as of June 30, 2016	-		$	-		-	$	-

Exercisable as of June 30, 2016	-		$	-		-	$	-

As of September 30, 2015 and June 30, 2016, there were no unrecognized compensation costs related to the above non-vested share options.

(ii) Restricted Shares

Restricted shares granted on June 30, 2015

On June 12, 2015, the Board of Director approved the China BAK Battery, Inc. 2015 Equity Incentive Plan (the “2015 Plan”) for Employees, Directors and Consultants of the Company and its Affiliates. The maximum aggregate number of Shares that may be issued under the Plan is ten million (10,000,000) Shares.

On June 30, 2015, pursuant to the 2015 Plan, the Compensation Committee of the Company’s Board of Directors granted an aggregate of 690,000 restricted shares of the Company’s common stock, par value $0.001, to certain employees, officers and directors of the Company with a fair value of $3.24 per share on June 30, 2015. In accordance with the vesting schedule of the grant, the restricted shares will vest in twelve equal quarterly installments on the last day of each fiscal quarter beginning on June 30, 2015 (i.e. last vesting period: quarter ending March 31, 2018). The Company recognizes the share-based compensation expenses on a graded-vesting method.

The Company recorded non-cash share-based compensation expense of $210,129 for the three months ended June 30, 2016, in respect of the restricted shares granted on June 30, 2015, of which $170,332, $25,470 and $14,327 were allocated to general and administrative expenses, research and development expenses and sales and marketing expenses and $904,948 for the nine months ended June 30, 2016, in respect of the restricted shares granted on June 30, 2015, of which $739,278, $106,029 and $59,641 were allocated to general and administrative expenses, research and development expenses and sales and marketing expenses, respectively. The Company recorded non-cash share-based compensation expense of $192,429 for the three and nine months ended June 30, 2015, in respect of the restricted shares granted on June 30, 2015, of which $157,569, $22,310 and $12,550 were allocated to general and administrative expenses, research and development expenses and sales and marketing expense, respectively.

As of June 30, 2016, non-vested restricted shares granted on June 30, 2015 is as follows:

Non-vested shares as of September 30, 2015	575,000
Granted	-
Vested	(167,500	)
Forfeited ^Note	(22,500	)
Non-vested shares as of June 30, 2016	385,000

Note:

During the three and nine month period June 30, 2016, 22,500 restricted shares were forfeited following the resignation of Mr. Chunzhi Zhang, an independent director on January 14, 2016. Unrecognized compensation cost of $48,172 was recognized as non-cash share-based compensation expenses to general and administrative expenses for the nine month period June 30, 2016.

As of June 30, 2016, there was unrecognized stock-based compensation of $580,484 associated with the above restricted shares. As of June 30, 2016, 231,665 vested shares were issued and 50,835 vested shares were to be issued. On July 5, 2016, the remaining 50,835 vested shares were issued.

Restricted shares granted on April 19, 2016

On April 19, 2016, pursuant to the Company’s 2015 Equity Incentive Plan, the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”) granted an aggregate of 500,000 restricted shares of the Company’s common stock, par value $0.001 (the “Restricted Shares”), to certain employees, officers and directors of the Company, of which 220,000 restricted shares were granted to the Company’s executive officers and directors. There are three types of vesting schedules. First, if the number of restricted shares granted is below 3,000, the shares will vest annually in 2 equal installments over a two year period with the first vesting on June 30, 2017. Second, if the number of restricted shares granted is larger than or equal to 3,000 and is below 10,000, the shares will vest annually in 3 equal installments over a three year period with the first vesting on June 30, 2017. Third, if the number of restricted shares granted is above or equal to 10,000, the shares will vest semi-annually in 6 equal installments over a three year period with the first vesting on December 31, 2016. The fair value of these restricted shares was $2.68 per share on April 19, 2016. The Company recognizes the share-based compensation expenses over the vesting period (or the requisite service period) on a graded-vesting method.

The Company recorded non-cash share-based compensation expense of $166,616 for the three and nine months ended June 30, 2016, in respect of the restricted shares granted on April 19, 2016 of which $126,295, $21,660, $10,330 and $8,331 were allocated to general and administrative expenses, research and development expenses, sales and marketing expenses and cost of revenues, respectively.

As of June 30, 2016, non-vested restricted shares granted on April 19, 2016 are as follows:

	Non-vested shares as of September 30, 2015		-
	Granted		500,000
	Vested		-
	Forfeited		-
	Non-vested shares as of June 30, 2016		500,000

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 three and nine months ended June 30, 2015 and 2016.