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WARRANTS AND OPTIONS
 6 Months Ended
Jun. 30, 2012
WARRANTS AND OPTIONS [Text Block]

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.

In June 2012, the warrants to purchase 937,500 shares of common stock of the Company were exercised and the Company received proceeds of $4,500,000. At the time of the exercise, the fair value of the warrants was $3,641,279. For the three months ended June 30, 2012 and 2011, the gains arising from the decrease in fair value of warrants were $559,758 and $5,393,760, respectively. For the six months ended June 30, 2012 and 2011, the gains arising from the decrease in fair value of warrants were $1,769,140 and $5,907,588, respectively. As of December 31, 2011, there were 937,500 warrants outstanding. As of June 30, 2012, there were no warrants outstanding.

The fair value of the warrants that were exercised on June 6 and June 4, 2012, and outstanding as of December 31, 2011 was determined based on the Binominal option pricing model, using the following key assumptions:

    June 6, 2012     June 4, 2012     December 31, 2011  
Expected dividend yield   0%     0%     0%  
Risk-free interest rate   0.05%     0.04%     0.05%  
Time to maturity (in years)   -     -     0.43  
Expected volatility   47.4%     37.3%     80.0%  
Fair value of underlying common shares (per share) $   9.22   $   8.55   $   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.

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 500,000 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 with 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 with 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 with 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 with 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 with 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 with 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 with 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.

On April 20, 2012, 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 $9.61, of which 10,000 shares vest on October 21, 2012 and the remaining 10,000 shares vest on April 21, 2013. These options expire on April 20, 2022.

On May 10, 2012, the Board of Directors granted options to the Company’s chief executive officer for the purchase of 300,000 shares of the Company’s common stock at an exercise price of $9.23. These options vest in 12 equal quarters with an initial vesting date of August 11, 2012. These options expire on May 10, 2022.

 

The fair value of each option granted in 2011 and 2012 are estimated on the respective dates of grant using the Black-Scholes option pricing model with the following major assumptions:

Granted on   January 1,     February 1,     February 27,     October 6,     March 19,     April 20,     May 10,  
    2011     2011     2011     2011     2012     2012     2012  
Expected dividend yield   0%     0%     0%     0%     0%     0%     0%  
Risk-free interest rate   2.01%     1.95%     2.16%     0.96%     1.13%     0.84%     0.77%  
Expected term (in years)   5     5     5     5     5     5     6  
Expected volatility   70.0%     70.0%     70.0%     65.0%     52.0%     105.0%     105.0%  

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. 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 June 30, 2012 was $7.09. The weighted average grant date fair value of options granted during the six months ended June 30, 2012 was $6.93. During the six months ended June 30, 2012, no options were exercised and no option was forfeited. For the three months ended June 30, 2012 and 2011, the Company recorded stock compensation expense of $1,030,539 and $1,243,405, respectively, in general and administrative expenses. For the six months ended June 30, 2012 and 2011, the Company recorded stock compensation expense of $1,992,958 and $2,418,287, respectively, in general and administrative expenses. As of June 30, 2012, approximately $5,879,304 of stock compensation expense with respect to non-vested stock options is to be recognized over approximately 2.86 years.