XNAS:CBPO China Biologic Products Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10–Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2012

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________to _____________

Commission File Number: 001-34566

CHINA BIOLOGIC PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware 75-2308816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  

18th Floor, Jialong International Building
19 Chaoyang Park Road

Chaoyang District, Beijing 100125
People’s Republic of China

(Address of principal executive offices, Zip Code)

(+86) 10-6598-3111
(Registrant’s telephone number, including area code)

_____________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]      No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]      No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]  Accelerated filer [X]
Non-accelerated filer [  ]
(Do not check if a smaller reporting company)
Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]      No [X]

The number of shares outstanding of each of the issuer’s classes of common stock, as of May 4, 2012 is as follows:

Class of Securities Shares Outstanding
Common Stock, $0.0001 par value 25,601,125


Quarterly Report on Form 10-Q
Three Months Ended March 31, 2012


TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements. 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 23
Item 4. Controls and Procedures. 24

PART II
OTHER INFORMATION

Item 1. Legal Proceedings 25
Item 1A. Risk Factors. 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 25
Item 3. Defaults Upon Senior Securities 26
Item 4. Mine Safety Disclosures. 26
Item 5. Other Information. 26
Item 6. Exhibits 26


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Contents Page(s)
Unaudited Consolidated Balance Sheets 2
Unaudited Consolidated Statements of Comprehensive Income 3
Unaudited Consolidated Statement of Changes in Equity 4
Unaudited Consolidated Statements of Cash Flows 5
Notes to Unaudited Consolidated Financial Statements 7
 

1


CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS

    March 31,     December 31,  
    2012     2011  
             
ASSETS            
Current Assets            

Cash

$  84,974,621   $  89,411,835  

Accounts receivable, net of allowance for doubtful accounts

  24,744,949     16,757,368  

Inventories

  70,584,069     71,338,590  

Other receivables

  2,583,848     2,594,461  

Prepayments and prepaid expenses

  2,232,990     1,591,696  

Deferred tax assets

  1,799,341     1,999,563  

Total Current Assets

  186,919,818     183,693,513  
Property, plant and equipment, net   40,971,107     40,546,539  
Intangible assets, net   5,836,529     6,520,671  
Land use rights, net   5,810,810     5,487,343  
Prepayments and deposits for property, plant and equipment   5,194,009     4,287,492  
Equity method investment   9,429,947     8,357,017  

Total Assets

$  254,162,220   $  248,892,575  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Current liabilities            

Short-term bank loans

$  4,752,000   $  11,018,000  

Accounts payable

  4,149,025     4,996,463  

Due to related parties

  5,818,242     3,319,938  

Other payables and accrued expenses

  22,592,195     30,661,794  

Advance from customers

  4,532,153     4,365,523  

Advance from customers – a related party

  1,017,322     486,602  

Income tax payable

  3,841,803     5,373,633  

Other taxes payable

  2,434,034     2,189,913  

Derivative liabilities - warrants

  4,201,037     5,410,419  

Total Current Liabilities

  53,337,811     67,822,285  
Other payable   345,127     343,477  
Deferred tax liabilities   1,580,698     1,685,772  

Total Liabilities

  55,263,636     69,851,534  
             
Stockholders’ Equity            

Common stock: par value $.0001; 100,000,000 shares authorized; 25,601,125 shares issued and outstanding at March 31, 2012 and December 31, 2011

  2,560     2,560  

Additional paid-in capital

  49,800,730     48,838,311  

Retained earnings

  86,878,117     73,920,811  

Accumulated other comprehensive income

  13,672,665     12,750,682  

Total stockholders’ equity attributable to China Biologic Products, Inc.

  150,354,072     135,512,364  
             

Noncontrolling interest

  48,544,512     43,528,677  
             

Total Equity

  198,898,584     179,041,041  
             

Commitments and contingencies

  -     -  
             

Total Liabilities and Equity

$  254,162,220   $  248,892,575  

See accompanying notes to Unaudited Consolidated Financial Statements.

2


CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

    For the three months ended  
    March 31, 2012     March 31, 2011  
Sales            

External customers

$  47,227,461   $  34,395,238  

Related party

  -     75,584  
Total sales   47,227,461     34,470,822  
             
Cost of sales            

External customers

  15,715,727     9,277,204  

Related party

  -     34,394  
Cost of sales   15,715,727     9,311,598  
             
Gross profit   31,511,734     25,159,224  
             
Operating expenses            

Selling expenses

  4,826,107     2,449,913  

General and administrative expenses

  7,145,794     7,464,141  

Research and development expenses

  710,588     710,991  
             
Income from operations   18,829,245     14,534,179  
             
Other (income) / expenses            

Equity in income of an equity method investee

  (1,022,412 )   (270,394 )

Change in fair value of derivative liabilities

  (1,209,382 )   (1,021,865 )

Interest expense

  608,563     1,680,922  

Interest income

  (543,395 )   (170,131 )

Other expenses, net

  100,989     224,231  
Total other (income) / expenses, net   (2,065,637 )   442,763  
             
Earnings before income tax expense   20,894,882     14,091,416  
             
Income tax expense   3,176,715     4,263,216  
             
Net income   17,718,167     9,828,200  
             
Less: Net income attributable to the noncontrolling interest   4,760,861     3,519,225  
             
Net income attributable to China Biologic Products, Inc.   12,957,306     6,308,975  
             
Earnings per share:            

Basic

$  0.51   $  0.26  

Diluted

$  0.44   $  0.23  
             
Weighted average shares used in computation:            

Basic

  25,601,125     24,351,125  

Diluted

  26,547,885     25,680,648  
             
Other Comprehensive income, net of nil income taxes            
Foreign currency translation adjustment   1,176,957     1,126,414  
             
Comprehensive income   18,895,124     10,954,614  
             
Less: Comprehensive income attributable to the noncontrolling interest   5,015,835     3,787,831  
             
Comprehensive income attributable to China Biologic Products, Inc. $  13,879,289   $  7,166,783  

See accompanying notes to Unaudited Consolidated Financial Statements.

3


CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2012

                            Accumulated other     Equity attributable              
    Common stock     Additional     Retained     comprehensive     to China Biologic     Noncontrolling        
    Shares     Par value     paid-in capital     earnings     income     Products, Inc.     interest     Total equity  
                                                 
Balance as of January 1, 2012   25,601,125   $  2,560   $  48,838,311   $  73,920,811   $  12,750,682   $  135,512,364   $  43,528,677   $  179,041,041  
Comprehensive income                                                

Net income

  -     -     -     12,957,306     -     12,957,306     4,760,861     17,718,167  

Other comprehensive income

  -     -     -     -     921,983     921,983     254,974     1,176,957  
Stock compensation   -     -     962,419     -     -     962,419     -     962,419  
Balance as of March 31, 2012   25,601,125   $  2,560   $  49,800,730   $  86,878,117   $  13,672,665   $  150,354,072   $  48,544,512   $  198,898,584  

See accompanying notes to Unaudited Consolidated Financial Statements.

4


CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

    For the three months ended  
    March 31, 2012     March 31, 2011  
CASH FLOWS FROM OPERATING ACTIVITIES:            

Net income

$  17,718,167   $  9,828,200  

Adjustments to reconcile net income to cash provided by operating activities:

           

Depreciation

  1,096,725     1,108,744  

Amortization

  755,797     884,588  

Loss on sale of property, plant and equipment

  15,092     8,502  

Allowance / (reversal of allowance) for doubtful accounts, net

  58,497     (28,340 )

Write-down of obsolete inventories

  63,982     74,715  

Deferred tax expense / (benefit), net

  98,278     (377,359 )

Stock compensation

  962,419     1,174,882  

Change in fair value of derivative liabilities

  (1,209,382 )   (1,021,865 )

Amortization of deferred note issuance cost

  -     53,388  

Amortization of discount on convertible notes

  -     1,458,489  

Equity in income of an equity method investee

  (1,022,412 )   (270,394 )

Change in operating assets and liabilities

           

Accounts receivable - third parties

  (7,933,930 )   (3,353,933 )

Accounts receivable - a related party

  -     213,283  

Other receivables

  1,698     272,337  

Inventories

  1,146,821     (4,981,926 )

Prepayments and prepaid expenses

  (658,754 )   (1,172,953 )

Accounts payable

  (881,402 )   503,023  

Other payables and accrued expenses

  (3,815,042 )   (1,895,565 )

Due to related parties

  2,482,577     -  

Advance from customers

  139,246     (326,128 )

Advance from customers – a related party

  528,961     -  

Income tax payable

  (1,569,925 )   564,195  

Other taxes payable

  230,789     162,340  
Net cash provided by operating activities   8,208,202     2,878,223  
             
CASH FLOWS FROM INVESTING ACTIVITIES:            

Purchase of property, plant and equipment

  (2,325,870 )   (1,692,558 )

Purchase of intangible assets and land use right

  (318,622 )   (205,422 )
Net cash used in investing activities   (2,644,492 )   (1,897,980 )

See accompanying notes to Unaudited Consolidated Financial Statements.

5


CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDTIED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

    For the three months ended  
    March 31, 2012     March 31, 2011  
             
CASH FLOWS FROM FINANCING ACTIVITIES:            

Proceeds from short term bank loans

  -     6,087,200  

Repayment for short term bank loans

  (6,352,000 )   (3,043,600 )

Acquisition of noncontrolling interest

  -     (7,635,000 )

Dividend paid by subsidiaries to noncontrolling interest shareholders

  (4,382,880 )   (5,589,920 )
Net cash used in financing activities   (10,734,880 )   (10,181,320 )
             
EFFECTS OF EXCHANGE RATE CHANGE IN CASH   733,956     567,480  
             
NET DECREASE IN CASH   (4,437,214 )   (8,633,597 )
             
Cash at beginning of period   89,411,835     64,941,368  
             
Cash at end of period $  84,974,621   $  56,307,771  
             
Supplemental cash flow information            

Cash paid for income taxes

$  4,648,363   $  4,076,381  

Cash paid for interest expense

$  159,217   $  278,610  

Noncash investing and financing activities:

           

Acquisition of property, plant and equipment included in payables

$  347,220   $  2,420,072  

Utilization of prepayments and deposits to acquire property, plant and equipment

$  23,616   $  -  

See accompanying notes to Unaudited Consolidated Financial Statements.

6


CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012 AND 2011

NOTE 1 – ORGANIZATION BACKGROUND AND PRINCIPAL ACTIVITIES

China Biologic Products, Inc. (the “Company” or “CBP”, formerly known as “GRC Holdings, Inc.”) was originally incorporated in the State of Texas in 1989. On July 19, 2006, the Company and its then principle shareholders entered into a share exchange agreement (the “Exchange Agreement”) with Taibang Biological Ltd. (“Taibang Biological”, formerly known as “Logic Express Ltd.”, a privately held investment holding company incorporated on January 6, 2006 under the laws of the British Virgin Islands, and all the shareholders of Taibang Biological (the “Taibang Biological Shareholders”). Pursuant to the terms of the Exchange Agreement, the Taibang Biological Shareholders transferred to the Company all of their shares in exchange for 18,484,715 shares of the Company’s common shares (the “Share Exchange”). As a result of the Share Exchange, Taibang Biological became a wholly-owned subsidiary of the Company and the Taibang Biological Shareholders received approximately 96.1% of the Company’s issued and outstanding common shares. Immediately prior to the date of the Share Exchange, the Company was a publicly listed shell entity with no operations and, Taibang Biological, through its 82.76% owned subsidiary, Shandong Taibang Biological Products Co. Ltd. (“Shandong Taibang”), was engaged in the research, development, commercialization, manufacture and sale of human blood products primarily in the People’s Republic of China (the “PRC” or China). The Share Exchange was accounted for as a reverse recapitalization, equivalent to the issuance of stock by Taibang Biological for the net monetary assets of the Company accompanied by a recapitalization. After consummation of the Share Exchange, the Company converted into a Delaware corporation and changed its name to China Biologic Products, Inc. on January 10, 2007.

The Company, through its PRC subsidiaries, is a biopharmaceutical company that is principally engaged in the research, development, manufacturing and sales of plasma-based pharmaceutical products in the PRC. The PRC subsidiaries own and operate plasma stations that purchase and collect plasma from individual donors for a fee. The plasma is processed into finished goods after passing through a series of fractionating processes. All of the Company’s products are prescription medicines that require government approval before the products are sold to customers. The Company primarily sells its products to hospitals and inoculation centers directly or through distributors in the PRC.

On September 26, 2008, the Company, through Taibang Biological, entered into an equity purchase agreement with Guiyang Dalin Biologic Technologies Co. Ltd. (“Dalin”, formerly known as “Chongqing Dalin Biologic Technologies Co. Ltd.”), an investment holding company, and certain equity owners of Dalin, to acquire 90% equity interest of Dalin. The purchase consideration for the 90% equity interest in Dalin was RMB 194,400,000 (or approximately $28,479,600) in cash.

At the date of entering into the equity purchase agreement, Dalin held 54% equity interest in Guiyang Qianfeng Biological Products Co., Ltd. (“Qianfeng”), which subsequently changed its name to Guizhou Taibang Biological Products Co., Ltd. (“Guizhou Taibang”) on December 30, 2010. Guizhou Taibang is in compliance with the Good Manufacturing Practices certified by State Food and Drug Administration (“SFDA”) for the manufacturing, sale and distribution of Human Albumin, Human Immunoglobulin, Human Intravenous Immunoglobulin, Human Hepatitis B Immunoglobulin, Human Tetanus Immunoglobulin, Human Rabies Immune Globulin and Placenta Polypeptide.

The Company completed the acquisition of a 90% equity interest in Dalin in January 2009. On December 28, 2009, the Company’s 90% equity interest in Dalin was transferred to Taibang Biotech (Shandong) Co., Ltd. (“Taibang Biotech”, formerly known as “Logic Management Consulting (China) Co., Ltd.”), a wholly owned subsidiary of the Company. The Company established Taibang Biotech in December 2009, for the purpose of being the holding company of the 90% equity interest in Dalin.

On August 5, 2010, Taibang Biotech established a wholly-owned subsidiary, Logic Taibang Biological Institute (Beijing), which subsequently changed its name to Taibang (Beijing) Pharmaceutical Research Institute Co., Ltd. (“Taibang Beijing”) on January 12, 2011. The registered capital of Taibang Beijing is $149,700 (RMB 1 million). Taibang Beijing is principally engaged in the research and development of plasma-based pharmaceutical products. The purpose of setting up Taibang Beijing is to coordinate the research and development activities of the Company’s PRC subsidiaries.

On January 13, 2010, Shandong Taibang acquired the remaining 20% equity interest in Fangcheng Plasma Company from the noncontrolling interest shareholder (see Note 14). Since the additional purchase of 20% equity interest did not result in a change of the Company’s control over Fangcheng Plasma Company, this transaction was accounted for as an equity transaction. After the acquisition, Fangcheng Plasma Company became a wholly-owned subsidiary of Shandong Taibang.

On July 8, 2010, Taibang Biotech entered into an equity purchase agreement with Shandong Taibang, to acquire 100% of the equity interest in Shandong Taibang Medical Company (“Taibang Medical”), a wholly-owned subsidiary of Shandong Taibang. The cash consideration of the 100% equity interest in Taibang Medical was RMB 6,440,000 (approximately $947,327). The transaction was completed on September 23, 2010. The purpose of this transaction is to effectively acquire the 17.24% equity interest in Taibang Medical indirectly held by the noncontrolling interest holder of Shandong Taibang, and to enable the Company to consolidate its resources in the sales and marketing of Shandong Taibang and Guizhou Taibang’s products. This transaction was accounted for as an equity transaction.

On November 11, 2010, the Company established Qianfeng Biological Science Company (“Qianfeng Biologic”) for the purpose of research and development of placenta based products. As of March 31, 2012, Qianfeng Biologic, which is a wholly-owned subsidiary of Guizhou Taibang, did not commence operations.

7


On January 4, 2011, Taibang Biotech entered into an equity transfer agreement (the “Equity Transfer Agreement”) with Shaowen Fan, a PRC individual. Pursuant to the Equity Transfer Agreement, Taibang Biotech agreed to acquire the remaining 10% noncontrolling interest in Dalin from Shaowen Fan for a purchase price of RMB 50 million (approximately $7,635,000). The transaction was completed on January 26, 2011 and Dalin became a wholly-owned subsidiary of Taibang Biotech. The carrying amount of noncontrolling interest in Dalin at time of the transaction was $2,870,065. The excess of the purchase price over the carrying amount of corresponding noncontrolling interest was recorded in additional paid-in capital.

On July 15, 2011, the Guizhou Provincial Health Department issued the revised “Plan for Guizhou Provincial Blood Collection Institutional Setting (2011-2014)”, which stipulates the number of counties that are permitted to set up plasma collection stations in Guizhou Province is limited to four counties (the “Guizhou Plan”). As a result of the implementation of the Guizhou Plan, the licenses of four plasma collection stations in Dan Zhai, Wei Ning, San Sui and Na Yong counties owned by Guizhou Taibang were not renewed after their respective plasma collection permits expired at the end of July 2011. The licenses of its plasma collection stations in Pu Ding and Huang Ping counties (locations permitted under the Guizhou Plan) were renewed until July 31, 2013. In addition, Guizhou Taibang’s inactive plasma collection station in Guizhou Province that was purchased from the government in 2007 is unlikely to obtain a license as planned, because it is located in Zhenyuan County, a county not included in the Guizhou Plan.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The December 31, 2011 consolidated balance sheet was derived from the audited consolidated financial statements of the Company. The accompanying unaudited consolidated financial statements should be read in conjunction with the December 31, 2011 audited consolidated financial statements of the Company included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of March 31, 2012, and the results of operations and cash flows for the three months ended March 31, 2012 and 2011, have been made.

All significant intercompany transactions and balances are eliminated on consolidation.

NOTE 3 – ACCOUNTS RECEIVABLE

Accounts receivable at March 31, 2012 and December 31, 2011 consisted of the following:

    March 31, 2012     December 31, 2011  
Accounts receivable $  25,194,619   $  17,171,460  
Less: Allowance for doubtful accounts   (449,670 )   (414,092 )
   Total $  24,744,949   $  16,757,368  

A provision for doubtful accounts of $34,848 and a reversal of the allowance for doubtful accounts of $8,958 was recorded in the three months ended March 31, 2012 and 2011, respectively. There were no write-off of accounts receivable in the three months ended March 31, 2012 and March 31, 2011, respectively.

NOTE 4 – INVENTORIES

Inventories at March 31, 2012 and December 31, 2011 consisted of the following:

    March 31, 2012     December 31, 2011  
Raw materials $  28,120,606   $  29,403,776  
Work-in-process   20,396,842     21,385,806  
Finished goods   22,066,621     20,549,008  
Total $  70,584,069   $  71,338,590  

Raw materials mainly include the human blood plasma collected from the Company’s plasma stations. Work-in-process represented the intermediate products in the process of production. Finished goods mainly comprised human albumin and human immunoglobulin.

8


NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at March 31, 2012 and December 31, 2011 consisted of the following:

    March 31, 2012     December 31, 2011  
Buildings $  26,231,712   $  25,296,828  
Machinery and equipment   30,351,117     29,891,291  
Furniture, fixtures, office equipment and vehicles   6,596,182     6,445,851  
Total property, plant and equipment, gross   63,179,011     61,633,970  
Accumulated depreciation   (22,895,755 )   (21,744,060 )
Total property, plant and equipment, net   40,283,256     39,889,910  
Construction in progress   687,851     656,629  
Property, plant and equipment, net $  40,971,107   $  40,546,539  

Depreciation expense for the three months ended March 31, 2012 and 2011 was $1,096,725 and $1,108,744, respectively.

NOTE 6 – INTANGIBLE ASSETS, NET

Intangible assets at March 31, 2012 and December 31, 2011 consisted of the following:

    March 31, 2012  
    Weighted                    
    average     Gross           Net  
    amortization     carrying     Accumulated     carrying  
    period     amount     amortization     amount  
Amortizing intangible assets:                        

Permits and licenses

  10 years   $  4,978,219   $  (1,674,735 ) $  3,303,484  

GMP certificate

  5.8 years     2,520,904     (1,516,271 )   1,004,633  

Long-term customer-relationship

  4 years     7,504,992     (6,097,806 )   1,407,186  

Others

        234,511     (113,285 )   121,226  

Total

      $  15,238,626   $  (9,402,097 ) $  5,836,529  
                         
    December 31, 2011  
    Weighted                    
    average     Gross           Net  
    amortization     carrying     Accumulated     carrying  
    period     amount     amortization     amount  
Amortizing intangible assets:                        

Permits and licenses

  10 years   $  4,946,791   $  (1,562,105 ) $  3,384,686  

GMP certificate

  5.8 years     2,504,990     (1,364,070 )   1,140,920  

Long-term customer-relationship

  4 years     7,457,612     (5,593,209 )   1,864,403  

Others

        233,030     (102,368 )   130,662  

Total

      $  15,142,423   $  (8,621,752 ) $  6,520,671  

Aggregate amortization expense for amortizing intangible assets was $723,016 and $852,993 for the three months ended March 31, 2012 and 2011, respectively. Estimated amortization expenses for the next five fiscal years are $1,113,559 in 2013, $556,428 in 2014, $556,375 in 2015, $539,059 in 2016 and $526,664 in 2017.

NOTE 7 – LAND USE RIGHTS, NET

At March 31, 2012 and December 31, 2011, land use rights represented:

    March 31, 2012     December 31, 2011  
Land use rights $  6,375,855   $  6,018,783  
Accumulated amortization   (565,045 )   (531,440 )
Land use rights, net $  5,810,810   $  5,487,343  

Aggregate amortization expense for amortizing land use right was $32,781 and $31,595 for the three months ended March 31, 2012 and 2011, respectively.

9


NOTE 8 – SHORT-TERM BANK LOANS

The Company’s bank loans as of March 31, 2012 and December 31, 2011 consisted of the following:

    Maturity     Annual              
Loans   date     interest rate     March 31, 2012     December 31, 2011  
Short-term bank loan, secured(1)   March 22, 2012     6.06%     -     3,148,000  
Short-term bank loan, unsecured   January 29, 2012     5.81%     -     1,574,000  
Short-term bank loan, unsecured   January 29, 2012     6.06%     -     1,574,000  
Short-term bank loan, unsecured   May 19, 2012     6.31%     4,752,000     4,722,000  
Total             $ 4,752,000   $  11,018,000  

Interest expense on short-term bank loans was $159,217 and $70,376 for the three months ended March 31, 2012 and 2011, respectively.

The Company did not have any revolving line of credit as of March 31, 2012.

(1)As of December 31, 2011, the secured loan was secured by the Company’s buildings with a net carrying amount of $1,644,480.

NOTE 9 – INCOME TAX

In February, 2009, Shandong Taibang received its High and New Technology Enterprise certificate from the Shandong provincial government; and in October 2011, Shandong Taibang received a notice from the Shandong provincial government that its High and New Technology Enterprise qualification has been renewed which entitled it to the preferential income tax rate of 15% for an additional three years effective retroactively from January 1, 2011 to December 31, 2013.

Guizhou Taibang was entitled to the preferential income tax rate of 15% under the 10-year Western Development Tax Concession, which ended in 2010. According to CaiShui [2011] No. 58 dated July 27, 2011, qualified enterprises located in the western regions of PRC are entitled to continue to pay income taxes at the preferential income tax rate of 15% effective retroactively from January 1, 2011. Management believes Guizhou Taibang is a qualified enterprise located in the western regions and therefore is subject to the preferential tax rate of 15% from 2011 to 2020.

The Company’s effective income tax rate was 15% and 30% for the three months ended March 31, 2012 and 2011, respectively. For the three months ended March 31, 2012, the effective income tax rates of the PRC entities and the non-PRC entities were approximately 15% and 0%, respectively.

As of and for the three months ended March 31, 2012, the Company did not have any unrecognized tax benefits and thus no interest and penalties related to unrecognized tax benefits were recorded. In addition, the Company does not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months.

NOTE 10 – WARRANTS AND OPTIONS

Warrants

In connection with the issuance of convertible notes in 2009, the Company issued warrants to purchase up to 1,194,268 shares of common stock of the Company to the investors at an exercise price of $4.80 per share.

The fair values of the warrants outstanding as of March 31, 2012 and December 31, 2011 were determined based on the Binominal option pricing model, using the following key assumptions:

    March 31, 2012     December 31, 2011  
Expected dividend yield   0%     0%  
Risk-free interest rate   0.06%     0.05%  
Time to maturity (in years)   0.18     0.43  
Expected volatility   52.0%     80.0%  
Fair value of underlying common shares (per share) $  9.28   $  10.46  

Changes in the management’s estimates and assumptions regarding the expected volatility could significantly impact the estimated fair value of the warrants determined under the Binominal option pricing model and, as a result, the net income and the net income attributable to the Company’s stockholders.

10


For the three months ended March 31, 2012 and 2011, the unrealized gains arising from the decrease in fair value of warrants were $1,209,382 and $513,828, respectively. As of March 31, 2012 and December 31, 2011, there were 937,500 Warrants outstanding that will expire if unexercised by June 2012.

Options

Effective May 9, 2008, the Board of Directors adopted the China Biologic Products, Inc. 2008 Equity Incentive Plan, or the 2008 Plan. The 2008 Plan provides for grants of stock options, stock appreciation rights, performance units, restricted stock, restricted stock units and performance shares. A total of five million (5,000,000) shares of the Company’s common stock may be issued pursuant to the 2008 Plan. The exercise price per share for the shares to be issued pursuant to an exercise of a stock option will be no less than the fair market value per share on the grant date, except that, in the case of an incentive stock option granted to a person who holds more than 10% of the total combined voting power of all classes of the Company’s stock or any of its subsidiaries, the exercise price will be no less than 110% of the fair market value per share on the grant date. No more than an aggregate of 500,000 shares (or for awards denominated in cash, the fair market value of 5,000,000 shares on the grant date) may be subject to awards under the 2008 Plan to any individual participant in any one fiscal year. No awards may be granted under the 2008 Plan after May 9, 2018, except that any award granted before then may extend beyond that date.

On May 9, 2008, the Board of Directors granted options to certain directors and employees for the purchase of 937,500 shares of the Company’s common stock at an exercise price of $4.00 that vested immediately. These options expire on June 1, 2018.

On July 24, 2008, the Board of Directors granted options to three independent directors for the purchase of 60,000 shares of the Company’s common stock at an exercise price of $4.00, of which 30,000 shares vested on January 24, 2009 and the remaining 30,000 shares vested on July 24, 2009. These options expire on July 24, 2018.

On January 7, 2010, the Board of Directors granted options to one employee for the purchase of 50,000 shares of the Company’s common stock at an exercise price of $12.60 that vested immediately. These options expire on January 7, 2020.

On February 4, 2010, the Board of Directors granted options to a newly appointed director for the purchase of 20,000 shares of the Company’s common stock at an exercise price of $10.66, of which 10,000 shares vested on August 4, 2010 and the remaining 10,000 shares vested on February 4, 2011. These options expire on February 4, 2020.

On July 11, 2010, the Board of Directors granted options to four directors and certain employees for the purchase of 160,000 shares and 811,000 shares of the Company’s common stock at an exercise price of $12.26, respectively. These options vest in 12 equal quarters with an initial vesting date of October 11, 2010. These options expire on July 11, 2020.

On January 1, 2011, the Board of Directors granted options to each of the three independent directors for the purchase of 30,000 shares of the Company’s common stock at an exercise price of $16.39. These options vest in four equal quarters over twelve months with an initial vesting date of April 1, 2011. These options expire on January 1, 2021.

On February 1, 2011, the Board of Directors granted options to the Company’s president for the purchase of 25,000 shares of the Company’s common stock at an exercise price of $15.97. These options vest in four equal quarters over twelve months with an initial vesting date of May 1, 2011. These options expire on February 1, 2021.

On February 27, 2011, the Board of Directors granted options to each of the two new directors for the purchase of 20,000 shares of the Company’s common stock at an exercise price of $17.00, of which 10,000 shares vested on August 27, 2011 and the remaining 10,000 shares vested on February 27, 2012. These options expire on February 27, 2021.

On October 6, 2011, the Board of Directors granted options to a newly appointed director for the purchase of 20,000 shares of the Company’s common stock at an exercise price of $5.97, of which 10,000 shares vest on April 7, 2012 and the remaining 10,000 shares vest on October 7, 2012. These options expire on October 6, 2021.

On March 19, 2012, the Board of Directors granted options to a newly appointed director for the purchase of 20,000 shares of the Company’s common stock at an exercise price of $9.16, of which 10,000 shares vest on September 20, 2012 and the remaining 10,000 shares vest on March 20, 2013. These options expire on March 19, 2022.

The fair values of each option granted on each of the aforementioned dates are estimated on the respective dates of grant using the Black-Scholes option pricing model with the following major assumptions:

Granted on   May 9,     July 24,     January 7,     February 4,     July 11,     January 1,     February 1,     February 27,     October 6,     March 19,  
    2008     2008     2010     2010     2010     2011     2011     2011     2011     2012  
Expected dividend yield   0%     0%     0%     0%     0%     0%     0%     0%     0%     0%  
Risk-free interest rate   3.56%     3.56%     2.62%     2.29%     1.85%     2.01%     1.95%     2.16%     0.96%     1.13%  
Expected term (in years)   5     5     5     5     6.5     5     5     5     5     5  
Expected volatility   59.4%     81.2%     130.0%     130.0%     135.0%     70.0%     70.0%     70.0%     65.0%     52.0%  

11



The volatility of the Company’s common stock was estimated by management based on the historical volatility of the Company’s common stock. The risk free interest rate was based on Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods applicable to the estimated term of the options. The expected dividend yield was based on the Company’s current and expected dividend policy. The expected term is based on the simplified method by averaging the vesting term and contractual term. Changes in the management’s estimates and assumptions regarding the expected volatility could significantly impact the estimated fair values of the share options determined under the Black-Scholes option pricing model and, as a result, the net income and the net income attributable to the Company’s stockholders. The weighted average grant date fair value of options granted during the three months ended March 31, 2012 was $4.17. During the three months ended March 31, 2012, no options were exercised and no option was forfeited. For the three months ended March 31, 2012 and 2011, the Company recorded stock compensation expense of $962,419 and $1,174,882, respectively, in general and administrative expenses. As of March 31, 2012, approximately $4,499,945 of stock compensation expense with respect to non-vested stock options is to be recognized over approximately 1.28 years.

NOTE 11 – STATUTORY RESERVES

Each of the Company’s PRC subsidiaries are required to allocate at least 10% of its after tax profits, as determined under generally accepted accounting principal in the PRC, to its statutory surplus reserve until the reserve balance reaches 50% of the respective registered capital. The accumulated balance of the statutory reserve as of March 31, 2012 and December 31, 2011 was $31,290,192 and $30,753,726, respectively.

NOTE 12 – FAIR VALUE MEASUREMENTS

Management used the following methods and assumptions to estimate the fair value of financial instruments at the relevant balance sheet dates:

  • Short-term financial instruments (including accounts receivables, other receivables, short-term bank loans, accounts payable, other payables and accrued expenses, and amount due to related parties) – The carrying amounts of the short-term financial instruments approximate their fair values because of the short maturity of these instruments.

  • Long-term other payable – The fair value of the Company’s long-term other payable is estimated by discounting future cash flows using current market interest rates offered to the Company and its subsidiaries for debts with substantially the same characteristics and maturities. The carrying amounts of long-term payable approximate their fair values.

  • Derivative liabilities (the warrants) – The estimated fair values were determined by using Binominal Option Pricing Model with Level 2 inputs. The following table sets forth, by level within the fair value hierarchy, the Company’s financial instruments that were measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011.

    Fair Value Measurements Using:  
          Quoted Prices              
          in Active Markets     Significant        
          for Identical     Other     Significant  
          Financial Assets     Observable     Unobservable  
          and Liabilities     Inputs     Inputs  
March 31, 2012   Total     Level 1     Level 2     Level 3  
Liabilities at fair value:                        
Derivative liabilities—Warrants $  4,201,037   $  -   $  4,201,037   $  -  
                         
December 31, 2011   Total     Level 1     Level 2     Level 3  
Liabilities at fair value:                        
Derivative liabilities—Warrants $  5,410,419   $  -   $  5,410,419   $  -  

12


NOTE 13 – SALES

The Company’s sales are primarily derived from the manufacture and sale of Human Albumin and Immunoglobulin products. The Company’s sales by significant types of product for the three months ended March 31, 2012 and 2011 are as follows:

    For the three months ended  
    March 31 2012     March 31, 2011  
Human Albumin $  25,790,283   $  19,701,586  
Immunoglobulin products:            
       Human Hepatitis B Immunoglobulin   1,259,585     2,215,681  
       Human Immunoglobulin for Intravenous Injection   15,261,726     10,427,387  
       Human Rabies Immunoglobulin   981,559     750,069  
       Human Tetanus Immunoglobulin   1,434,036     1,188,936  
       Human Immunoglobulin   110,099     -  
Placenta Polypeptide   2,110,809     -  
Others   279,364     187,163  
Total $  47,227,461   $  34,470,822  

NOTE 14 – COMMITMENTS AND CONTINGENCIES

Operating lease commitments

Total operating lease commitments for rental of offices and land use rights and buildings of the Company’s PRC subsidiaries as of March 31, 2012 is as follows:

12-month period ending March 31,      
2013 $  315,031  
2014   56,030  
2015   56,030  
2016   56,030  
2017   54,648  
Years after   147,423  
Total minimum payments required $  685,192  

For the three months ended March 31, 2012 and 2011, total lease expense amounted to $72,400 and $61,084, respectively.

Legal proceedings

Bobai County Collection Station

In January 2007, the Company’s PRC subsidiary, Shandong Taibang, advanced $413,697 (RMB3.0 million) to Feng Lin, the then 20% noncontrolling interest shareholder of Fang Cheng Plasma Company, a Company’s majority owned subsidiary, for the purpose of establishing or acquiring a plasma collection station. Mr. Lin and Shandong Taibang intended to establish the Bobai Kangan Plasma Collection Co., Ltd. (“Bobai”) in Bobai County, Guangxi. On January 18, 2007, Shandong Taibang signed a letter of intent to acquire the assets of the Bobai Plasma Collection Station, which was co-owned by Mr. Lin and Mr. Keliang Huang. However, in January 2007, Hua Lan Biological Engineering Co., Ltd. (“Hua Lan”) filed suit in the District Court of Hong Qi District, Xin Xiang City, Henan Province, alleging that Feng Lin, Keliang Huang and Shandong Taibang established and/or sought to operate the Bobai Plasma Collection Station using a permit for collecting and supplying human plasma in Bobai County, that was originally granted to Hua Lan by the government of the Guangxi region, without Hua Lan’s permission. The establishment and registration of Bobai was never realized as a result of this law suit. On January 29, 2007, on Hua Lan’s motion, the District Court entered an order to freeze funds in the amount of approximately $386,100 (RMB3,000,000) held by the defendants in the case, including approximately $65,750 (RMB500,000) in funds held in Shandong Taibang’s bank account in Tai’an City. A hearing was held on June 25, 2007 and judgment was entered against the defendants along with a $226,780 (RMB1,700,000) joint financial judgment. The Company appealed the District Court judgment to the Xinxiang City Intermediate Court. In November 2007, the Xinxiang City Intermediate Court affirmed the judgment against the three defendants and increased the amount of the joint financial judgment to approximately $405,954 (RMB3,000,000).

13


In January 2008, Hua Lan enforced the judgment granted by the Xinxiang City Intermediate Court to freeze the Company’s bank accounts. Shandong Taibang filed a separate action against Hua Lan before the Tai’an City District Court to seek recovery of any losses in connection with Hua Lan’s claim and to request that the Tai’an City District Court preserve Hua Lan’s property or freeze up to approximately $411,300 (RMB 3 million) of Hua Lan’s assets to secure the return of such funds to the Company.  Shandong Taibang increased its loss contingency reserve during its fourth quarter of 2007 from approximately $75,593 (RMB566,667) to $133,400 (RMB1,000,000) to cover its share of the enforcement of this judgment. During the fourth quarter of 2008, the full amount of the judgment, including Feng Lin and Keliang Huang’s portions of the judgment and the related fees, of approximately $456,222 (RMB3,109,900) was withdrawn from Shandong Taibang’s account. The Company recorded Feng Lin and Keliang Huang’s portion of the judgment, of approximately $304,143 (RMB2,073,234), as receivable as a result of the withdrawal. As of December 31, 2008, the Company determined that it is unlikely that the Company will be able to recover such receivable from those two individuals and wrote off the receivable as bad debt expense. In January 2010, Feng Lin transferred his 20% equity in Fang Cheng Plasma Company as a repayment for such receivable he owed to the Company. As a result, the Company is now the 100% owner of the Fang Cheng Plasma Company.

In October 2009, Shandong Taibang appealed to the High Court of Henan Province requesting the court to reverse judgments from the Hong Qi District Court based on Shandong Taibang’s belief that Hua Lan’s involvement in Bobai was in violation of PRC Blood Products Regulations since Hua Lan did not invest, as Shandong Taibang did, in Bobai as required by the Regulation. The Company is awaiting the judgment of the Henan High Court as of the date of this report. The Henan High Court has recommended that the Company and Hua Lan to settle the case outside the court. In light of the foregoing, it is unlikely that the Company’s plan acquisition of the assets of Bobai will go forward.

Dispute among Guizhou Taibang Shareholders over Raising Additional Capital

On May 28, 2007, 91% controlling interest of Guizhou Taibang’s shareholders approved a plan to raise additional capital from private strategic investors through the issuance of an additional 20,000,000 shares of Guizhou Taibang equity interests at RMB2.80 per share. The plan required all existing Guizhou Taibang shareholders to waive their rights of first refusal to subscribe for the additional shares. The remaining 9% noncontrolling interest shareholder of Guizhou Taibang’s shares, Guizhou Jie’an Company, or Jie’an, did not support the plan and did not agree to waive its right of first refusal. On May 29, 2007, the controlling interest shareholders caused Guizhou Taibang to sign an Equity Purchase Agreement with certain investors, pursuant to which the investors agreed to invest an aggregate of RMB50,960,000 (approximately $7,475,832) in exchange for 18,200,000 shares, or 21.4%, of Guizhou Taibang’s equity interests. At the same time, Jie’an also subscribed for 1,800,000 shares, representing its 9% pro rata share of the 20,000,000 shares being offered. The proceeds from all parties were received by Guizhou Taibang in accordance with the agreement.

In June 2007, Jie’an brought suit in the High Court of Guizhou Province, China, against Guizhou Taibang and the three other original Guizhou Taibang shareholders, alleging the illegality of the Equity Purchase Agreement. In its complaint, Jie’an alleged that it had a right to acquire the shares waived by the original Guizhou Taibang shareholders and offered to the investors in connection with the Equity Purchase Agreement. On September 12, 2008, the Guizhou High Court ruled against Jie’an and sustained the Equity Purchase Agreement. On November 2008, Jie’an appealed the Guizhou High Court judgment to the People’s Supreme Court in Beijing. On May 13, 2009, the People’s Supreme Court sustained the original ruling and denied the rights of first refusal of Jie’an over the additional shares waived by the original Guizhou Taibang’s shareholders. The registration of the new investors as Guizhou Taibang’s shareholders and the related increase in registered capital of Guizhou Taibang with the Administration for Industry and Commerce are still pending. On January 27, 2010, the strategic investors brought suit in the High Court of Guizhou Province against Guizhou Taibang alleging Guizhou Taibang’s failure to register their equity interest in Guizhou Taibang with the local Administration for Industry and Commerce (“AIC”) and requesting the distribution of their share of Guizhou Taibang’s dividends. Dalin was also joined as a co-defendant as it is the controlling interest shareholder and exercises control over Guizhou Taibang’s day-to-day operations. The Company does not expect the strategic investors to prevail because, upon evaluation of the Equity Purchase Agreement, the Company believes that the Equity Purchase Agreement is void due to certain invalid pre-conditions and the absence of shareholder authorization of the initial investment. In the event that Guizhou Taibang is required to return the original investment amount to the strategic investors, Guizhou Taibang has set aside the strategic investors’ initial fund along with RMB12,807,960 (approximately $2,028,781) in accrued interest, and RMB509,600 (approximately $80,721) for the 1% penalty imposed by the agreement for any breach as of December 31, 2010. If strategic investors prevail in their suit, Dalin’s interests in Guizhou Taibang could be reduced to approximately 41.3% . The High Court of Guizhou heard the case on April 8, 2010 and encouraged, and accepted by both parties, to settle the dispute outside the court but both parties failed to reach a mutual agreeable term.

14


On October 14, 2010, the High Court of Guizhou ruled in favor of the Company and denied the strategic investors’ right as shareholders of Guizhou Taibang, as well as their entitlement to the dividends. In light of the Guizhou ruling, in November 2010 the Company returned the proceeds in the amount of RMB 11,200,000 (approximately $1,762,880) to one of the strategic investors. On October 26, 2010, the other strategic investors appealed to, and subsequently accepted by, the PRC Superior Court in Beijing on the ruling. On October 9, 2011, the PRC Supreme Court overruled the decision of the High Court of Guizhou and remanded the suit to the High Court of Guizhou for retrial. On December 29, 2011, High Court of Guizhou accepted the case for retrial. On January 5, 2012, the strategic investors re-filed their case to the High Court of Guizhou requesting, in addition to the registration of the new shares, the distribution of dividends and interest in the amount of RMB 18,349,345 (approximately $2,906,536) and RMB 2,847,000 (approximately $450,965), respectively. The Company is awaiting the hearing as of the date of this report.

During the second quarter of 2010, Jie’an requested that Guizhou Taibang register its 1.8 million shares of additional capital infusion with the local AIC, pursuant to the Equity Purchase Agreement, and such request was approved by the controlling interest shareholders of Guizhou Taibang in a shareholders meeting held in the second quarter of 2010. However, the Board of Directors of the Company is withholding its required ratification of the shareholders’ approval of Jie’an’s request until the outcome of the ongoing litigations. On March 20, 2012, the Company received a subpoena that Jie’an brought suit in the People’s Court of Huaxi District, Guizhou Province against Guizhou Taibang, alleging Guizhou Taibang’s withholding of its request. Jie’an requested that Guizhou Taibang registers its 1.8 million shares of capital infusion, pay dividends associated with these shares, as well as the related interest and penalty from May 2007 to December 2011 amounting to RMB 25,000,000 (approximately $3,970,000) in aggregate, and return the over-paid subscription of RMB 1,440,000 (approximately $228,672), as well as the interest and penalty, amounting to RMB 10,000,000 (approximately $1,588,000) in aggregate. The People’s Court of Huaxi District, Guizhou Province, China has accepted Jie’an’s suit and will hear the case on May 15, 2012. If the Company decides to ratify the approval or the case is ruled in Jie’an’s favor, Dalin’s ownership in Guizhou Taibang will be diluted from 54% to 52.54% and Jie’an may be entitled to receive its pro rata share of Guizhou Taibang’s profits since the date of Jie’an’s capital contribution became effective. As this case is closely tied to the outcome of the strategic investors’ dispute stated above, the Company does not expect Jie’an to prevail. As of March 31, 2012, the Company had, in its balance sheet, payables to Jie’an in the amounts of RMB 5,040,000 (approximately $798,336) for the additional funds received in relation to the 1.8 million shares of capital infusion, RMB 1,440,000 (approximately $228,096) for the over-paid subscription and RMB 2,230,576 (approximately $353,323) for the accrued interest.

Guizhou Taibang’s Guarantee to a Third Party

In 2007, as a condition to purchase Huang Ping Plasma Station, Guizhou Taibang entered into an agreement with Guizhou Zhongxin Investment Company, or Zhongxin, in which Guizhou Taibang agreed to repay Zhongxin’s debt out of Guizhou Taibang’s payables to Zhongxin arising from plasma purchased from Zhongxin. In the same agreement, Guizhou Taibang also delivered a guarantee to the Huang Ping County Hospital, the former co-owner of the Huang Ping Plasma Station, that it would pay RMB3,074,342 (approximately, $451,006) in debt that Zhongxin owed to the hospital. On June 1, 2009, Huang Ping Hospital brought suit, in the Huang Ping County People’s Court of Guizhou Province, against Zhongxin for non-payment of its payables and debt due to Huang Ping Hospital and against Guizhou Taibang as the guarantor. On November 2, 2009, the court ruled in favor of the plaintiff and Guizhou Taibang as the guarantor became obligated to repay the Zhongxin’s debt to the Huang Ping Hospital on behalf of Zhongxin. In October 2009, Guizhou Taibang appealed to the Middle Court of Kaili District in Guizhou Province which sustained the original judgment on April 8, 2010. Under the Equity Transfer Agreement pursuant to which the Company acquired a 90% interest in Dalin, Guizhou Taibang’s then shareholders, provide that the sellers will be responsible, based on their pro rata equity interest in Guizhou Taibang, for damages incurred by Guizhou Taibang from Zhongxin’s debt and that the sellers will repay Dalin their pro rata share of payments made by Guizhou Taibang to creditors in connection with Zhongxin’s debt within 10 days after payment by Guizhou Taibang. The RMB3,074,342 contingent liability and proportionate share of the liability to be recovered from the sellers were reflected in the consolidated financial statements as of December 31, 2009. On December 31, 2010, Guizhou Taibang brought suit against Zhongxin in the Middle Court of Guiyang City, to recover the full judgment amount of RMB3,074,342 plus court fee of RMB32,340 that Guizhou Taibang has already paid on behalf of Zhongxin.

On September 13, 2010, Zhongxin countersued the Company for a consideration of RMB500,000 (approximately $74,850) for the alleged loss of its share of income from the Huang Ping Plasma Station since the Company acquired the station in April 2007. The Company believes Zhongxin’s claim is unwarranted since the Company acquired the station from its rightful owner, the Treasury Department of Huangping County, Guizhou Province.

NOTE 15 – RELATED PARTY TRANSACTIONS

The related party balances resulting from transactions undertaken by the Company with related parties are presented as follows:

                                             Liabilities   Purpose     March 31, 2012     December 31, 2011  
                   
Advance from customers – a related party(1)   Advance   $  1,017,322   $  486,602  
Other payable – a related party(2)   Loan   $  2,292,073   $  2,277,603  
Other payable – a related party (3)   Contribution   $  1,402,278   $  1,042,335  
Other payable – a related party (1)   Commission   $  2,123,891   $  -  

15


(1) During the year ended December 31, 2011, Guizhou Taibang signed an agency contract with Guizhou Eakan Co., Ltd. (“Guizhou Eakan”), an affiliate of one of the Guizhou Taibang’s noncontrolling interest shareholders, pursuant to which Guizhou Taibang would pay commission to Guizhou Eakan for the promotion of the product of Placenta Polypeptide. As of March 31, 2012, Guizhou Taibang accrued commission payable of $2,123,891 for service rendered by Guizhou Eakan.

As of March 31, 2012 and December 31, 2011, Guizhou Taibang received $1,017,322 and $486,602 in advance from Guizhou Eakan for the product Placenta Polypeptide that has not yet been delivered by Guizhou Taibang. The payment was made by Guizou Eakan on behalf of the customers.

Prior to the signing of the agency contract with Guizhou Eakan, Guizhou Taibang provided processing services to Guizhou Eakan and received processing fees amounted to nil and $75,584 for the three months ended March 31, 2012 and 2011, respectively.

(2) Guizhou Taibang has payables to Guizhou Eakan Investing Corp., amounting to approximately $2,292,073 (RMB14,470,160). Guizhou Eakan Investing Corp. is one of the noncontrolling interest shareholders of Guizhou Taibang. Guizhou Taibang borrowed this interest free advance for working capital purpose. The balance is due on demand.

(3) Guizhou Taibang has payables to Jie’an, a noncontrolling interest shareholder of Guizhou Taibang, amounting to approximately $1,048,955 (RMB 6,622,205). In 2007, Guizhou Taibang received additional contributions from Jie’an of $962,853 to maintain Jie’an equity interest in Guizhou Taibang at 9%. However, due to a legal dispute among shareholders over raising additional capital as discussed in the legal proceeding section (see Note 14), the money received was not registered as additional capital contributions. During the second quarter of 2010, Jie’an requested that Guizhou Taibang register its 1.8 million shares of additional capital contribution with the local Administration for Industry and Commerce, pursuant to the equity purchase agreement, and such registration was approved by the controlling interest shareholders of Guizhou Taibang in a shareholder meeting held in the second quarter of 2010. However, the Board of Directors of the Company is withholding its required ratification of the shareholders’ approval of Jie’an’s request until the completion of the ongoing litigations. If the Company decided to ratify the approval, Dalin’s ownership in Guizhou Taibang will be diluted from 54% to 52.54% and Jie’an will be entitled to receive its pro rata share of Guizhou Taibang’s profits since the date of Jie’an’s capital contribution became effective. As this case is closely tied to the outcome of the strategic investors’ dispute stated above, the Company has set aside Jie’an’s additional fund of RMB 6,480,000 (approximately $1,026,432), the over-paid subscription of RMB 1,440,000 (approximately $228,672) along with RMB 2,230,576 (approximately $353,323) in accrued interest and penalty as of March 31, 2012.

NOTE 16 - EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted net income per share of common stock for the periods indicated:

    For the three months ended  
    March 31, 2012     March 31, 2011  
Numerator used in basic net income per share of common stock:            
Net income attributable to China Biologic Products, Inc. $  12,957,306   $  6,308,975  
Change in fair value of derivative liabilities (warrants)   (1,209,382 )   (513,828 )
Numerator used in diluted net income per share of common stock $  11,747,924   $  5,795,147  

Weighted average shares:

    For the three months ended  
    March 31, 2012     March 31, 2011  
Basic   25,601,125     24,351,125  
Effect of dilutive common share equivalents:            
Diluted effect of warrants   474,014     659,993  
Diluted effect of stock option   472,746     669,530  
             
Diluted   26,547,885     25,680,648  
             
Net income per share of common stock - basic $  0.51   $  0.26  
Net income per share of common stock - diluted $  0.44   $  0.23  

During the three months ended March 31, 2012, 1,184,000 options with an average exercise price of $12.80 were excluded from the calculation of diluted net income per share of common stock since they were antidilutive.

During the three months ended March 31, 2011, the embedded conversion option in the convertible notes and 1,126,000 options with an average exercise price of $12.84 were excluded from the calculation of diluted earnings per share since they were antidilutive.

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NOTE 17 – CONCENTRATIONS AND CREDIT RISKS

The Company’s operations are carried out in the PRC and are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other matters.

The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for its bank accounts located in the United States or may exceed Hong Kong Deposit Protection Board insured limits for its bank accounts located in Hong Kong. Cash balances maintained at financial institutions or state-owned banks in the PRC are not covered by insurance. Total cash in banks as of March 31, 2012 and December 31, 2011 amounted to $84,204,083 and $88,957,826, respectively, of which $194,401 and $236,373 are insured, respectively. The Company has not experienced any losses in uninsured bank deposits and does not believe that it is exposed to any significant risks on and cash held in bank accounts.

The Company’s major product, human albumin: 20%/10ml, 20%/25ml, 20%/50ml, 10%/10ml, 10%/25ml and 10%/50ml, accounted for 54.6% and 57.2% of the total sales for the three months ended March 31, 2012 and 2011, respectively. If the market demands for human albumin cannot be sustained in the future or the price of human albumin decreases, the Company’s operating results could be adversely affected.

All of the Company’s customers are located in the PRC and India. As of March 31, 2012 and 2011, the Company had no significant concentration of credit risk. There were no customers that individually comprised 10% or more of the sales during the three months ended March 31, 2012 and 2011, respectively. No individual customer represented 10% or more of trade receivables at March 31, 2012 and December 31, 2011, respectively. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers.

There were no supplier that comprised 10% or more of the total purchases for the three months ended March 31, 2012 and 2011, respectively. There was no supplier that represented more than 10% of accounts payables at March 31, 2012 and 2011, respectively.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; expectations regarding governmental approvals of our new products; expected preferential tax treatment of our PRC subsidiary, Guizhou Taibang; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A “Risk Factors” described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:

  • “China Biologic,” the “Company,” “we,” “us,” or “our,” are to the combined business of China Biologic Products, Inc., Delaware corporation, and its direct and indirect subsidiaries;

  • “Taibang Biological” are to our wholly owned subsidiary Taibang Biological Limited, a BVI company, formerly Logic Express Limited;

  • “Taibang Holdings” are to our wholly-owned subsidiary Taibang Holdings (Hong Kong) Limited, a Hong Kong company, formerly Logic Holdings (Hong Kong) Limited;

  • “Taibang Biotech” are to our wholly owned subsidiary Taibang Biotech (Shandong) Co., Ltd., a PRC company, formerly Logic Management and Consulting (China) Co., Ltd.;

  • “Taibang Beijing” are to our wholly owned subsidiary Taibang (Beijing) Pharmaceutical Research Institute Co., Ltd., a PRC company, formerly Logic Taibang Biotech Institute (Beijing);

  • “Dalin” are to our wholly owned subsidiary Guiyang Dalin Biologic Technologies Co., Ltd., a PRC company;

  • “Shandong Taibang” are to our majority owned subsidiary Shandong Taibang Biological Products Co. Ltd., a sino-foreign joint venture incorporated in China;

  • “Taibang Medical” are to our wholly owned subsidiary Shandong Taibang Medical Company, a PRC company;

  • “Guizhou Taibang” are to our majority owned subsidiary Guizhou Taibang Biological Products Co., Ltd., a PRC company, formerly Guiyang Qianfeng Biological Products Co., Ltd.;

  • “Huitian” are to our equity method investment Xi’an Huitian Blood Products Co., Ltd., a PRC company;

  • “BVI” are to the British Virgin Islands;

  • “Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China;

  • “PRC” and “China” are to the People’s Republic of China;

  • “SEC” are to the Securities and Exchange Commission;

  • “Securities Act” are to the Securities Act of 1933, as amended;

  • “Exchange Act” are to the Securities Exchange Act of 1934, as amended;

  • “Renminbi” and “RMB” are to the legal currency of China; and

  • “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States.

Overview of Our Business

We are a biopharmaceutical company, through our indirect majority-owned PRC subsidiaries, Shandong Taibang and Guizhou Taibang, and our minority-owned PRC investee, Huitian, principally engaged in the research, development, manufacturing and sales of human plasma-based pharmaceutical products in China. Shandong Taibang operates from our manufacturing facility located in Tai’an, Shandong Province and Guizhou Taibang operates from our manufacturing facility located in Guiyang, Guizhou Province. Our minority owned investee, Huitian, operates from its facility in Shaanxi Province. The human plasma-based biopharmaceutical manufacturing industry in China is highly regulated by both provincial and central governments. Accordingly, the manufacturing process of our products is strictly monitored from the initial collection of plasma from human donors to finished products. Our principal products include our approved human albumin and immunoglobulin products.

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We are approved to sell human albumin with dosages of 20%/10ml, 20%/25ml, 20%/50ml, 10%/10ml, 10%/25ml, 10%/50ml and 25%/50ml. Human albumin is our top-selling product. Sales of these human albumin products represented approximately 54.6% and 57.2% of our total sales for each of the three months ended March 31, 2012 and 2011, respectively. Human albumin is principally used to increase blood volume while immunoglobulin, one of our other major products, is used for certain disease prevention and cures. Our approved human albumin and immunoglobulin products use human plasma as the basic raw material. Albumin has been used for almost 50 years to treat critically ill patients by replacing lost fluid and maintaining adequate blood volume and pressure. All of our products are prescription medicines administered in the form of injections.

We currently sell our products primarily to customers in the PRC, mainly hospitals and inoculation centers directly or through approved distributors. We usually sign short-term contracts with customers and therefore our largest customers have changed over the years. For the three months ended March 31, 2012 and 2011, our top 5 customers in aggregate accounted for approximately 17.2% and 13.5%, respectively, of our total sales. As we continue to diversify our geographic presence, customer base and product mix, we expect that our largest customers will continue to change from year to year.

We operate and manage our business as a single segment. We do not account for the results of our operations on a geographic or other basis.

Our principal executive offices are located at 18th Floor, Jialong International Building, 19 Chaoyang Park Road, Chaoyang District, Beijing 100125, the People’s Republic of China. Our corporate telephone number is (86) 10-6598-3111 and our fax number is (86)10-6598-3222. We maintain a website at http://www.chinabiologic.com that contains information about our company, but that information is not part of this report.

First Quarter Financial Performance Highlights

The following are some financial highlights for the three months ended March 31, 2012:

  • Sales: Sales increased by $12,756,639, or 37.0%, to $47,227,461 for the three months ended March 31, 2012, from $34,470,822 for the same period in 2011.

  • Gross profit: Gross profit increased by $6,352,510, or 25.2%, to $31,511,734 for the three months ended March 31, 2012, from $25,159,224 for the same period in 2011.

  • Income from operations: Income from operations increased by $4,295,066, or 29.6%, to $18,829,245 for the three months ended March 31, 2012, from $14,534,179 for the same period in 2011.

  • Net income attributable to controlling company: Net income increased by $6,648,331, or 105.4%, to $12,957,306 for the three months ended March 31, 2012, from $6,308,975 for the same period in 2011.

  • Fully diluted net income per share: Fully diluted net income per share was $0.44 for the three months ended March 31, 2012, as compared to $0.23 for the same period in 2011.

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Results of Operations

The following table sets forth key components of our results of operations for the periods indicated.

(All amounts, other than percentages, in U.S. dollars)

    Three Months Ended     $      %  
    March 31,     Increase     Increase  
    2012     2011     (Decrease)     (Decrease)  
SALES                        

External customers

$  47,227,461   $  34,395,238   $  12,832,223     37.3%  

Related party

  -     75,584     (75,584 )   (100.0% )
Total sales   47,227,461     34,470,822     12,756,639     37.0%  
COST OF SALES                        

External customers

  15,715,727     9,277,204     6,438,523     69.4%  

Related party

  -     34,394     (34,394 )   (100.0% )
Total cost of sales   15,715,727     9,311,598     6,404,129     68.8%  
GROSS PROFIT   31,511,734     25,159,224     6,352,510     25.2%  
OPERATING EXPENSES                        

Selling expenses

  4,826,107     2,449,913     2,376,194     97.0%  

General and administrative expenses

  7,145,794     7,464,141     (318,347 )   (4.3% )

Research and development expenses

  710,588     710,991     (403 )   (0.1% )
Total operating expenses   12,682,489     10,625,045     2,057,444     19.4%  
INCOME FROM OPERATIONS   18,829,245     14,534,179     4,295,066     29.6%  
OTHER (INCOME) / EXPENSES                        

Equity in income of an equity method investee

  (1,022,412 )   (270,394 )   (752,018 )   278.1%  

Change in fair value of derivative liabilities

  (1,209,382 )   (1,021,865 )   (187,517 )   18.4%  

Interest expense

  608,563     1,680,922     (1,072,359 )   (63.8% )

Interest income

  (543,395 )   (170,131 )   (373,264 )   219.4%  

Other (income)/expenses, net

  100,989     224,231     (123,242 )   (55.0% )
Total other (income)/expenses, net   (2,065,637 )   442,763     (2,508,400 )   (566.5% )
EARNINGS BEFORE INCOME TAX EXPENSE   20,894,882     14,091,416     6,803,466     48.3%  
INCOME TAX EXPENSES   3,176,715     4,263,216     (1,086,501 )   (25.5% )
NET INCOME $  17,718,167   $  9,828,200   $  7,889,967     80.3%  
Less: Net income attributable to noncontrolling interest   4,760,861     3,519,225     1,241,636     35.3%  
NET INCOME ATTRIBUTABLE TO COMPANY $  12,957,306   $  6,308,975   $  6,648,331     105.4%  

Sales. Our sales increased by 37.0%, or $12,756,639, to $47,227,461 for the three months ended March 31, 2012, compared to $34,470,822 for the three months ended March 31, 2011. The increase in sales during 2012 was primarily attributable to a mix of price and volume increases in certain of our plasma based products. In addition, foreign exchange translation accounted for 5.7% of the sales increase.

Most of our approved products recorded price increases ranging from approximately 2.8% to 10.7%, except for human hepatitis B immunoglobulin products, which decreased by approximately 27.0% . For the three months ended March 31, 2012 as compared to the three months ended March 31, 2011, the average price for our approved human albumin products, which contributed 54.6% to our total sales, increased by approximately 9.2% and, excluding the foreign exchange translation effect, their average price in RMB term increased by approximately 4.7% . The average price for our approved human hepatitis B immunoglobulin products, which contributed 2.7% to our total sales, decreased by approximately 27.0% and, excluding the foreign exchange translation effect, their average price in RMB term decreased by approximately 30.0% The average price for our approved human immunoglobulin for intravenous injection, or IVIG products, which contributed 32.3% to our total sales, increased by approximately 10.7%, and excluding the foreign exchange translation effect, their average price in RMB term increased by approximately 6.1% . The average price for our approved human rabies immunoglobulin products, which contributed 2.1% to our total sales, increased by approximately 2.8% and, excluding the foreign exchange translation effect, their average price in RMB term decreased by approximately 1.4% . The average price for our approved human tetanus immunoglobulin products, which contributed 3.0% to our total sale, increased by approximately 9.2% and, excluding the foreign exchange translation effect, their average price in RMB term decreased by approximately 4.6% . The general price increases of our human albumin product and immunoglobulin product group was primarily attributable to the shortage in supply of such products in the first quarter of 2012 as the market began to be impacted by the Guizhou plasma stations closure. The price decrease in human hepatitis B immunoglobulin products in RMB terms was mainly due to our participation in a public health program sponsored by PRC’s Ministry of Health benefiting migrant workers. The sales price of products participating in this public health program is lower than normal retail price in order to benefit migrant workers.

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During the three months ended March 31, 2012, volume in sales for our human albumin, IVIG, human rabies immunoglobulin products and human tetanus immunoglobulin products increased by 19.8%, 32.2%, 27.2% and 10.5%, respectively, and volume in sales for our human hepatitis B immunoglobulin decreased by 22.1% as compared to the three months ended March 31, 2011. The sales volume of human hepatitis B immunoglobulin products decreased mainly due to the decrease in demand as the new government program emphasizes on application of the products on newborns, but not pre-natal mothers.

Cost of sales. Our cost of sales increased by $6,404,129, or 68.8%, to $15,715,727 for the three months ended March 31, 2012, from $9,311,598 for the same period in 2011. Cost of sales as a percentage of sales was 33.3% for the three months ended March 31, 2012, as compared to 27.0% for the same period in 2011. The increase in cost of sales, as well as the increase in cost of sales as a percentage of sales, was mainly due to the increase in sales and the increase in cost of plasma paid to donors, which was in line with the industry-wide trend. In an effort to increase plasma collection volume and expand our donor base, we increased the nutrition fees paid to donors.

Gross profit and gross margin. Our gross profit increased by $6,352,510, or 25.2%, to $31,511,734 for the three months ended March 31, 2012, from $25,159,224 for the same period in 2011. As a percentage of sales, our gross profit margin decreased by 6.3% to 66.7% for the three months ended March 31, 2012, from 73.0% for the same period in 2011. The decrease in gross profit margin was mainly due to the higher raw material costs as discussed above, which outpaced the price increases of our other products.

Operating expenses. Our total operating expenses increased by $2,057,444, or 19.4%, to $12,682,489, for the three months ended March 31, 2012, from $10,625,045 for the same period in 2011. The increase was primarily attributable to a 97.0% increase in our selling expenses, which was offset by the 4.3% decrease in our general and administrative expenses during the 2012 period. As a percentage of sales, total expenses decreased by 3.9% to 26.9% for the three months ended March 31, 2012, from 30.8% for the same period in 2011.

Selling expenses. For the three months ended March 31, 2012, our selling expenses increased to $4,826,107, from $2,449,913 for the three months ended March 31, 2011, an increase of $2,376,194, or 97.0% . As a percentage of sales, our selling expenses for the three months ended March 31, 2012 increased by 3.1% to 10.2%, from 7.1% for the three months ended March 31, 2011. The increase in selling expenses was primarily due to our increased promotional and conference activities as we continued our efforts in expanding our customer base into hospitals and inoculation centers throughout the PRC. We believe targeting these direct sales channels enables the Company to maximize the prices and serve the customers best.

General and administrative expenses. For the three months ended March 31, 2012, our general and administrative expenses decreased to $7,145,794, from $7,464,141 for the three months ended March 31, 2011, a decrease of $318,347, or 4.3% . General and administrative expenses as a percentage of sales decreased by 6.6% to 15.1% for the three months ended March 31, 2012, from 21.7% for the three months ended March 31, 2011. The decrease in general and administrative expenses was mainly due to a decrease in expenses related to legal and accountants, office expense, as well as non-cash employee stock compensation, which is offset by the $0.4 million of compensation paid to dismissed employees due to the closure of Guizhou’s plasma stations.

Research and development expenses. For the three months ended March 31, 2012 and 2011, our research and development expenses were $710,588 and $710,991, respectively, a decrease of $403, or 0.1% . As a percentage of sales, our research and development expenses for the three months ended March 31, 2012 and 2011 were 1.5% and 2.1%, respectively. The research and development expenses remains at the same level as we are still awaiting SFDAs approval of two new products, Human Prothrombin Complex Concentrate and Human Coagulation Factor VIII. We expect to receive the approval for these two new products in later part of 2012 or early 2013 due to the delay of the SFDA approval process.

Change in fair value of derivative liabilities. The embedded derivatives (including the conversion option) in our senior secured convertible notes and warrants issued in June 2009 are classified as derivative liabilities carried at fair value. For the three months ended March 31, 2012 and 2011, we recognized a gain from the change in fair value of derivative liabilities in the amounts of $1,209,382 and $1,021,865, respectively. The recognized gain from the change in the fair value of derivative liabilities in the three months ended March 31, 2012 is mainly due to a decrease in the price of our common stock from $10.46 as of December 31, 2011 to $9.28 as of March 31, 2012.

Interest (income) expense. Our interest expense decreased by $1,072,359 to $608,563 for the three months ended March 31, 2012, from $1,680,922 for the same period in 2011. Our interest income increased by $373,264 to $543,395, for the three months ended March 31, 2012, from $170,131 for the same period in 2011. The decrease in interest expense was primarily due to the convertible notes had been fully converted prior to the first quarter of 2012.

Income tax. Our provision for income taxes decreased by $1,086,501, or 25.5%, to $3,176,715 for the three months ended March 31, 2012, from $4,263,216 for the same period in 2011. Our effective income tax rates were 15.2% and 30.3% for the three months ended March 31, 2012 and 2011, respectively. The decrease of the effective income tax rate was mainly attributable to the decrease in applicable income tax rate of Shandong Taibang and Guizhou Taibang from 25% for the three months ended March 31, 2011 to 15% for the three months ended March 31, 2012.

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According to the PRC’s central government policy, new or high technology companies will enjoy a preferential tax treatment of 15%, instead of 25% under the Enterprise Income Tax Law. In February 2009, Shandong Taibang was granted the High and New Technology Enterprise status; and in October 2011, Shandong Taibang renewed its High and New Technology Enterprise qualification which entitled it to the preferential income tax rate of 15% for an additional three years effective retroactively from January 1, 2011 to December 31, 2013. Further, Guizhou Taibang was entitled to the preferential income tax rate of 15% under the 10-year Western Development Tax Concession, which was ended in 2010. According to CaiShui [2011] No. 58 dated July 27, 2011, qualified enterprises located in the western regions of PRC are entitled to a preferential income tax rate of 15% effective retroactively from January 1, 2011. Management believes Guizhou Taibang will be treated as a qualified enterprise located in the western regions and therefore be subject to income tax at a preferential tax rate of 15% from 2011 to 2020. As of March 31, 2012, all other PRC subsidiaries of the Company are subjected to the regular 25% tax rate.

Our company’s PRC subsidiaries have cash balance of $83.8 million as of March 31, 2012 which is planned to be permanently reinvested in the PRC. The distributions from our PRC subsidiaries are subject to the U.S. federal income tax at 34%, less any applicable foreign tax credits. Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred tax liabilities on undistributed earnings of our PRC subsidiaries.

Net income attributable to Company. As a result of the cumulative effects of foregoing factors, our net income attributable to Company increased by $6,648,331, or 105.4%, to $12,957,306 for the three months ended March 31, 2012, from $6,308,975 for the same period in 2011, and our net income attributable to Company as a percentage of total sales was 27.4% and 18.3% for the three months ended March 31, 2012 and 2011, respectively.

Liquidity and Capital Resources

To date, we have financed our operations primarily through cash flows from operations, augmented by short-term bank borrowings and equity contributions by our stockholders. As of March 31, 2012, we had $84,974,621 in cash, primarily consisting of cash on hand and demand deposits.

The following table provides the statements of net cash flows for the periods indicated:

Cash Flow

    Three Months Ended March 31,  
    2012     2011  
Net cash provided by operating activities $  8,208,202   $  2,878,223  
Net cash used in investing activities   (2,644,492 )   (1,897,980 )
Net cash used in financing activities   (10,734,880 )   (10,181,320 )
Effects of exchange rate change on cash   733,956     567,480  
Net decrease in cash   (4,437,214 )   (8,633,597 )
Cash at beginning of the period   89,411,835     64,941,368  
Cash at end of the period $  84,974,621   $  56,307,771  

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2012 was $8,208,202, as compared to $2,878,223 for the three months ended March 31, 2011. For the three months ended March 31, 2012 and 2011, our net income was $17,718,167 and $9,828,200, respectively, and our net non-cash operating expense was $1,172,319 and $3,065,350, respectively.

Among the non-cash operating items for the three months ended March 31, 2012 and 2011, our depreciation and amortization expense was $1,852,522 and $1,993,332, respectively, our stock compensation expense was $962,419 and $1,174,882, respectively, the amortization of discount on convertible notes was zero and $1,458,489, respectively, and our income from change in fair value of derivative liabilities was $1,209,382 and $1,021,865, respectively.

We had a net cash outflow of working capital of $10,328,961 and $10,015,327 for the three months ended March 31, 2012 and 2011, respectively. Among these cash outflows, the increase in accounts receivable for the three months ended March 31, 2012 and 2011 were $7,933,930 and $3,140,650, respectively. As we increased our sales directly to end-users, such as hospitals and inoculation centers that have extended credit terms, we experienced a slower turn-over with our accounts receivable.

Investing Activities

Our use of cash for investing activities is primarily for the acquisition of property, plant and equipment and intangibles, and advances on non-current assets.

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Net cash used in investing activities for the three months ended March 31, 2012 was $2,644,492, as compared to $1,897,980 for the three months ended March 31, 2011. During the three months ended March 31, 2012 and 2011, we paid $2,325,870 and $1,692,558, respectively, for acquiring equipment for Guizhou Taibang and for buildings and construction in progress at Shandong Taibang.

Financing Activities

Net cash used in financing activities for the three months ended March 31, 2012 totaled $10,734,880, as compared to $10,181,320 for the three months ended March 31, 2011. The net cash used in financing activities in the three months ended March 31, 2012 was mainly due to a $6,352,000 repayment of a short-term bank loan and a $4,382,880 dividend paid by our subsidiaries to the noncontrolling interest shareholders. The net cash used in financing activities in 2011 was mainly due to a$7,635,000 payment to acquire the remaining 10% interest in our 90% majority-owned subsidiary.

Management believes that the Company has sufficient cash on hand and continuing positive cash inflow, from the sale of its plasma-based products in the PRC market, for its operations.

Obligations under Material Contracts

The following table sets forth our material contractual obligations as of March 31, 2012:

    Payments Due by Period  
          Less than                 More than  
Contractual Obligations   Total     1 year     1-3 years     3-5 years     5 years  
Short-term bank loan, unsecured $  4,752,000   $  4,752,000   $  -   $  -   $  -  
Due to related parties   5,818,242     5,818,242     -     -     -  
Operating lease commitment   685,192     315,031     112,060     110,678     147,423  
Total $  11,255,434   $  10,885,273   $  112,060   $  110,678   $  147,423  

Seasonality of our Sales

Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.

Inflation

Inflation does not materially affect our business or the results of our operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.

Critical Accounting Policies

Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our operations are carried out in the PRC and we are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC economy. Our results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

23


Interest Rate Risk

We are exposed to interest rate risk primarily with respect to our short-term and long-term bank loans. Although our short-term loans are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There was no material changes in interest rates for short-term bank loans renewed during the three months ended March 31, 2012.

A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding borrowings as of March 31, 2012 would decrease net income before provision for income taxes by approximately $11,880 for the three months ended March 31, 2012. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

Foreign Exchange Risk

While our reporting currency is the U.S. Dollar, all of our consolidated revenues and consolidated costs and majority of expenses are denominated in RMB. All of our assets are denominated in RMB, except certain cash balances. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB. If RMB depreciates against the U.S. Dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. Dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of stockholder’s equity. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk, and we have not entered into foreign exchange contracts for speculative or trading purposes.

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly involved in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar or Euro in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen involvement in the foreign exchange market.

Account Balances

We maintain balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States or may exceed Hong Kong Deposit Protection Board insured limits for the banks located in Hong Kong. Balances at financial institutions or state-owned banks within the PRC are not covered by insurance. Total cash in banks as of March 31, 2012 and December 31, 2011 amounted to $84,204,083 and $88,957,826, respectively, $194,401 and $236,373 of which are covered by insurance, respectively. We have not experienced any losses in such accounts and we do not believe that we are exposed to any significant risks on our cash in bank accounts.

Inflation

Inflationary factors such as increases in the cost of our sales and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.

Market for Human Albumin and IVIG

Our two major products, human albumin and IVIG, accounted for 54.6% and 32.3% of the total sales for the three months ended March 31, 2012, respectively. If the market demands for human albumin or IVIG cannot be sustained in the future or if there is substantial price decrease in either or both products, our operating results could be materially and adversely affected.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

24


As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Chao Ming Zhao and our Chief Financial Officer, Mr. Y. Tristan Kuo, of the effectiveness of the design and operation of our disclosure controls and procedures, as of March 31, 2012. Based on that evaluation, Mr. Zhao and Mr. Kuo concluded that our disclosure controls and procedures were effective as of March 31, 2012.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the first quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. Other than the legal proceedings described in Item 3 “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2011, we are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results. Investors are directed to Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2011 for the description of these legal proceedings. There have been no material developments to these legal proceedings except for the following.

Dispute among Guizhou Taibang Shareholders over Raising Additional Capital

On March 20, 2012, the Company received a subpoena that Jie’an brought suit in the People’s Court of Huaxi District, Guizhou Province against Guizhou Taibang, alleging Guizhou Taibang’s withholding of its request. Jie’an requested that Guizhou Taibang registers its 1.8 million shares of capital infusion, pay dividends associated with these shares, as well as the related interest and penalty from May 2007 to December 2011 amounting to RMB 25,000,000 approximately $3,970,000) in aggregate, and return the over-paid subscription of RMB 1,440,000 (approximately $228,672), as well as the interest and penalty, amounting to RMB 10,000,000 (approximately $1,588,000) in aggregate. The People’s Court of Huaxi District, Guizhou Province, China has accepted Jie’an’s suit and will hear the case on May 15, 2012. If the Company decides to ratify the approval or the case is ruled in Jie’an’s favor, Dalin’s ownership in Guizhou Taibang will be diluted from 54% to 52.54% and Jie’an may be entitled to receive its pro rata share of Guizhou Taibang’s profits since the date of Jie’an’s capital contribution became effective. As this case is closely tied to the outcome of the strategic investors’ dispute stated above, the Company does not expect Jie’an to prevail. As of March 31, 2012, the Company had, in its balance sheet, payables to Jie’an in the amounts of RMB 5,040,000 (approximately $798,336) for the additional funds received in relation to the 1.8 million shares of capital infusion, RMB 1,440,000 (approximately $228,096) for the over-paid subscription, and RMB 2,230,576 (approximately $353,323) for the accrued interest.

ITEM 1A. RISK FACTORS.

Our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 contains a detailed discussion of risk factors that could materially adversely affect our business, our operating results, or our financial condition. The following risk factor should be read in conjunction with that discussion. Except for the addition of this risk factor, there are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011.

Our independent registered public accounting firm’s audit documentation related to their audit reports included in our annual report may include audit documentation located in the Peoples’ Republic of China. The Public Company Accounting Oversight Board (“PCAOB”) currently cannot inspect audit documentation located in China and, as such, you may be deprived of the benefits of such inspection.

Our independent registered public accounting firm that issued an audit opinion in the financial statements included in our annual report for the fiscal year ended December 31, 2011 filed with the U.S. Securities and Exchange Commission, or SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB. Since the significant portion of the audit is conducted in China and the work papers related to such portion are located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, the work papers of our auditors that are located in China are not currently inspected by the PCAOB.

Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. However, the PCAOB is currently unable to inspect an auditor’s audit work related to a company’s operations in China and where such documentation of the audit work is located in China. As a result, our investors may be deprived of the benefits of PCAOB’s oversight of our auditors through such inspections.

The inability of the PCAOB to conduct inspections of our auditors’ work papers in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may consequently lose confidence in our reported financial information and procedures and the quality of our financial statements.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

We have not sold any equity securities during the first quarter of 2012 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during quarter. No repurchases of our common stock were made during the first quarter of 2012.

25


ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the first quarter of 2012, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6. EXHIBITS.

The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.

26


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1935, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 8, 2012 CHINA BIOLOGIC PRODUCTS, INC.
     
  By: /s/ Chao Ming Zhao
    Chao Ming Zhao, Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Y. Tristan Kuo
    Y. Tristan Kuo, Chief Financial Officer
    (Principal Financial Officer and Principal
    Accounting Officer)


EXHIBIT INDEX

Exhibit No. Description
3.1(1) Certificate of Incorporation of the Company.
3.2(2) Amended and Restated Bylaws of the Company.
10.1(3) Director Agreement, by and between the Company and Yungang Lu, dated March 19, 2012.
10.2 (4) Indemnity Agreement, by and between the Company and Yungang Lu, dated March 19, 2012.
31.1 Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith)

(1) Previously filed as Exhibit 3.1 of the registration statement on Form SB-2 on September 5, 2007.
(2) Previously filed as Exhibit 3.2 of the annual report on Form 10-K on March 31, 2009.
(3) Previously filed as Exhibit 10.1 of the current report on Form 8-K on March 23, 2012.
(4) Previously filed as Exhibit 10.2 of the current report on Form 8-K on March 23, 2012.


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