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 UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

From the transition period from ___________ to ____________.

Commission File Number 001-34715

KAIBO FOODS COMPANY LIMITED

(Exact name of small business issuer as specified in its charter)

Nevada

42-1749358

(State or other jurisdiction of incorporation or

organization)

(IRS Employer Identification No.)

Rm 2102 F&G, Nan Fung Centre, 264-298 Castle Peak Rd

Tsuen Wan, N.T., Hong Kong

(Address of principal executive offices)

(852) 2412-2208

(Issuer's telephone number)

N/A

(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 (§232.405 of this chapter) 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 definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller

reporting company)

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of May 11, 2012, there were 24,003,570 shares of common stock of the issuer outstanding.

TABLE OF CONTENTS

	PART I FINANCIAL STATEMENTS

Item 1	Financial Statements	3

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4	Controls and Procedures	33

	PART II OTHER INFORMATION

Item 1	Legal Proceedings	34

Item 1A	Risk Factors	34

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3	Default upon Senior Securities	34

Item 4	Mine Safety Disclosures	34

Item 5	Other Information	34

Item 6	Exhibits	34

Signatures		35

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KAIBO FOODS COMPANY LIMITED

CONSOLIDATED BALANCE SHEETS

(US dollars in thousands, except share data)

	December 31,		March 31,
	2011		2012
			(Unaudited)
ASSETS

Current assets:
Cash	$	62,971	$	79,688
Trade accounts receivable		20,045		6,991
Inventories		1,315		1,325
Prepayments and other receivables		303		353

Total current assets		84,634		88,357
Property, plant and equipment, net		7,227		8,199
Deposits on property, plant and equipment		11,744		10,869

Total assets	$	103,605	$	107,425
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Trade accounts payable	$	446	$	161
Accruals and other payables		3,328		1,935
Taxes payable		3,000		3,000
Short-term borrowings		3,577		4,365
Derivative instruments		5		-
Due to shareholders		9,442		9,653

Total liabilities (all current)		19,798		19,114

Commitments and contingencies

Shareholders’ equity:
Preferred stock, no par value; 2,000,000 shares authorized; none issued and outstanding on December 31, 2011 and March 31, 2012		-		-
Common stock, par value $0.001 per share; 600,000,000 shares authorized; issued and outstanding 24,003,570 shares on December 31, 2011 and March 31, 2012		24		24
Additional paid in capital		9,526		9,526
Statutory reserve		5,425		5,425
Retained earnings		60,123		64,779
Accumulated other comprehensive income		8,709		8,557
Total shareholders’ equity		83,807		88,311

Total liabilities and shareholders’ equity	$	103,605	$	107,425

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

KAIBO FOODS COMPANY LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except for share and per share data)

	Three Months Ended March 31,
	2011			2012

Sales	$	25,689		$	14,153
Cost of sales		(17,640	)		(9,038	)

Gross margin		8,049			5,115
Operating expenses		(864	)		(633	)
Income from operations		7,185			4,482

Interest expense and other		(107	)		(76	)
Interest income and other		32			250
		(75	)		174

Income before income taxes		7,110			4,656
Income tax expense		-			-

Net income	$	7,110		$	4,656

Net income per share:
Basic	$	0.30		$	0.19

Diluted	$	0.30		$	0.19

Weighted average shares outstanding used in the calculation of net income per share:
Basic		23,416,766			24,003,570

Diluted		24,003,570			24,003,570

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

KAIBO FOODS COMPANY LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands)

	Three Months Ended March 31,
	2011		2012

Net income	$	7,110	$	4,656
Other comprehensive income (loss):
Foreign currency translation adjustments		468		(152	)

Total comprehensive income	$	7,578	$	4,504

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

KAIBO FOODS COMPANY LIMITED

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2012

(UNAUDITED)

(US dollars in thousands, except share data)

	Ordinary shares				Additional paid in capital		Statutory reserve		Retained earnings		Accumulated other comprehensive income			Total
	Shares		Amount

Balances at January 1, 2012		24,003,570	$	24	$	9,526	$	5,425	$	60,123	$	8,709		$	83,807

Net income		-		-		-		-		4,656		-			4,656

Foreign currency translation adjustments		-		-		-		-		-		(152	)		(152	)

Balances at March 31, 2012		24,003,570	$	24	$	9,526	$	5,425	$	64,779	$	8,557		$	88,311

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

KAIBO FOODS COMPANY LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands)

	Three Months Ended March 31,
	2011			2012

Operating activities:
Net income	$	7,110		$	4,656

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		254			268
Fair value change on derivative instruments		61			(5	)

Changes in operating assets and liabilities:
Trade accounts receivable		8,956			13,022
Inventories		(711	)		(12	)
Prepayments and other receivables		960			2
Trade accounts payable		152			(285	)
Accruals and other payables		(1,011	)		(1,389	)

Net cash provided by operating activities		15,771			16,257

Investing activities:
Deposits for property, plant and equipment		(3,287	)		-
Acquisitions of property, plant and equipment		(30	)		(450	)
Net cash used in investing activities		(3,317	)		(450	)

Financing activities:
Proceeds from short-term debt		760			794
Advances from shareholders		1,303			213

Net cash provided by financing activities		2,063			1,007

Increase in cash		14,517			16,814
Effect of exchange rates on changes in cash		293			(97	)
Cash, beginning of period		27,374			62,971

Cash, end of the period	$	42,184		$	79,688

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	46		$	76

Non-cash investing and financing activities:
Transfer of deposits to property, plant and equipment	$	-		$	804

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

ORGANIZATION AND BUSINESS OF THE COMPANY

(a)

Organization:

Kaibo Foods Company Limited (the “Company”) was incorporated in the State of Nevada on December 10, 2007 in the former name of CFO Consultants, Inc (“CFO Consultants”). On March 10, 2011, the Company changed its name from “CFO Consultants, Inc.” to “Kaibo Foods Company Limited”. The Company is primarily engaged in the business of processing potatoes and selling potato starch products in the People’s Republic of China (the “PRC”).

(b)

Recapitalization and reorganization:

On October 21, 2010 (the “Closing Date”), CFO Consultants, a U.S. public shell company (now known as the Company) completed a stock exchange transaction (the “Share Exchange”) with the stockholders of Hong Kong Waibo International Limited (“Waibo”), whereby 22,493,475 shares of CFO Consultants’ common stock were agreed to be issued to stockholders of Waibo in exchange for 100% of their outstanding capital stock in Waibo, equal to 96% of all of the Company’s outstanding common stock, after giving effect to the conversion of an outstanding convertible note of the Company held by Millennium Group, Inc. (“Millennium”), in the principal amount of $25. The note was convertible into 586,804 shares of the Company’s common stock.

On the Closing Date, CFO Consultants did not have sufficient authorized shares to complete the issuance of the entire amount of these shares, therefore only 2,361,716 shares were issued to the designee of the shareholders of Waibo at the Closing Date, and no shares were issued to Millennium. After the Closing Date, these shares represented approximately 87% of the total issued and outstanding shares of the Company. On March 10, 2011 the Company increased the total number of authorized shares of common stock. On May 27, 2011 the Company issued the remaining 20,131,759 shares of common stock issuable pursuant to the stock exchange transaction to the designee of the former shareholders of Waibo and issued 586,804 shares of common stock to Millennium in full satisfaction of the convertible note.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

ORGANIZATION AND BUSINESS OF THE COMPANY (Continued)

(b)

Recapitalization and reorganization: (Continued)

On the Closing Date, Waibo became a wholly-owned subsidiary of the Company. The Share Exchange has been accounted for as a reverse acquisition and recapitalization whereby Waibo is deemed to be the accounting acquirer (legal acquiree) and the Company is deemed to be the accounting acquiree (legal acquirer). Accordingly, Waibo’s historical financial statements for the periods prior to the reverse acquisition became those of the Company retroactively restated for, and giving effect to, the number of shares received in the Share Exchange. The assets and liabilities, and revenues and expenses of the Company are included in the accompanying financial statements effective from the Closing Date. The total net liabilities assumed by Waibo as of the Closing Date were $25. The Company is deemed to be a continuation of the business of Waibo.

(c)

Business:

The Company mainly focuses on serving the local market in the PRC. Currently, the Company’s products are sold to customers in twelve provinces and four municipalities in the PRC. Sales of the Company’s products are generated using a combination of direct sales and distributor agreements. The Company created the “Weibao” and “Jiabao” brands with emphasis on high quality, purity, whiteness and consistency. The Weibao brand is targeted at industrial users such as food and pharmaceutical manufacturers, while the Jiabao brand is targeted at food service operators such as restaurants, caterers and the customer retail market.

BASIS OF PRESENTATION

The accompanying interim consolidated financial statements have been prepared by management without audit. Pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s annual audited financial statements for the year ended December 31, 2011, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on April 16, 2012. Amounts as of December 31, 2011 are derived from those audited consolidated financial statements.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

BASIS OF PRESENTATION (continued)

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.

In the opinion of the management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2012, and the results of their operations and cash flows for the three months ended March 31, 2011 and 2012, have been made. The Company’s operations are seasonal; therefore, the results of operations for the three months ended March 31, 2011 and 2012 are not necessarily indicative of the operating results for the full year.

The Company generally halts its production process from May through July for its production facilities located in the Yunnan and Guizhou provinces. The potato planting season typically begins in March, and potatoes are harvested from early July until the end of December. The harvested potatoes can typically be stored up to four months in cellars by farmers, allowing the facilities in Yunnan and Guizhou to expand their production period through April of each year.

The Company’s production facility in Gansu is located in a colder region in the PRC and typically halts production from January through February and resumes production from March to May. However, during the first quarter of 2012, the weather was colder than in prior years. As a result, production in Gansu was suspended for the entire first quarter of 2012. The Gansu facility also halts production from June through July and resumes production in August.

During the off season, the production facilities perform routine maintenance on their production lines.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES

Information about the organization of the Company, significant accounting policies, and recent accounting standards are included in the Company’s December 31, 2011 consolidated financial statements. However, certain selected accounting policies are described below:

(a)

Allowance for doubtful accounts

An allowance for doubtful accounts is provided based on an evaluation of the collectability of accounts receivable, and other receivables. This evaluation primarily consists of an analysis based on current information available about the customer or borrower. Receivable losses are charged against the allowance when the Company believes the uncollectability of the receivable is confirmed. Subsequent recoveries, if any, are credited to the allowance. No allowance for doubtful accounts was deemed necessary as of December 31, 2011 and March 31, 2012.

(b)

Inventories

Inventory is stated at the lower of cost or market. Inventory is valued using the weighted-average method, which approximates actual cost. Capitalized costs include materials, labor and manufacturing overhead related to the purchase and production of inventories. Excess and obsolete inventory reserves are established based upon the Company’s evaluation of the quantity of inventory on hand relative to demand. No reserve for obsolete inventory was deemed necessary as of December 31, 2011 and March 31, 2012.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)

(c)

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Expenditures for routine repairs and maintenance are expensed as incurred.

Depreciation is calculated on the straight-line basis over each asset’s estimated useful life down to the estimated residual value of each asset. Estimated useful lives are as follows:

Land use rights		52-55 years
Buildings		20 years
Motor vehicles		5 years
Plant and machinery		10 years
Other equipment		5 years

The Company reviews and evaluates its property, plant and equipment for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Recoverability is measured by comparing the total estimated future cash flows on an undiscounted basis to the carrying amount of the assets. If such assets are considered to be impaired, an impairment loss is measured and recorded based on discounted estimated future cash flows. The Company’s estimates of future cash flows are based on numerous assumptions, and it is possible that actual future cash flows will be significantly different than the estimates which are subject to significant risks and uncertainties. Management believes that there is no impairment to property, plant and equipment as of December 31, 2011 and March 31, 2012.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)

(d)

Fair value accounting

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 820-10 (“FASB ASC 820-10”) establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). As required by FASB ASC 820-10, assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy under FASB ASC 820-10 are described below:

Level 1

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2

Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

As of March 31, 2012, derivative instruments are measured at fair value on a recurring basis within Level 2 (See Note 10). The Company did not have any assets or liabilities measured on a recurring basis within Level 1 or Level 3.

The carrying value of financial instruments including cash, trade accounts receivable and payable, and short-term borrowings approximate fair value due to their short maturities. The fair value of amounts due to shareholders is not practicable to estimate, due to the related party nature of the underlying transactions.

(e)

Revenue recognition

The Company generates its revenues from the sale of potato starch products.

Revenues from product sales are recognized only when persuasive evidence of an arrangement exists; delivery has occurred and any necessary customer acceptance has been received; the price to the customer is fixed or determinable, and collectability is reasonably assured. Generally, these criteria are met upon shipment of products and transfer of title to customers.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)

(f)

Income taxes

Income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry forwards. Deferred taxes are measured by applying enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled.

The Company recognizes the financial statement impact of a tax position taken or expected to be taken in a tax return in its consolidated financial statements when it is more-likely-than-not that the position will be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.

The Company files income tax returns in various foreign jurisdictions. Various foreign jurisdiction tax years remain open to examination; however, the Company believes any additional assessment, if any, will be immaterial to its consolidated financial statements. The Company does not believe there will be any material changes in its tax positions over the next 12 months. Interest and penalties accrued on any unrecognized tax benefits, if any, will be recognized as a component of income tax expense. As of March 31, 2012 the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the three months ended March 31, 2011 and 2012.

(g)

Foreign currency translation

The functional currency of the Company’s wholly-owned subsidiary, Waibo, is the Hong Kong Dollar (“HK$”). The functional currency of the Company’s wholly-owned PRC subsidiaries is the Chinese Renminbi Yuan, (“RMB”). The RMB is not freely convertible into foreign currencies. The Company’s Hong Kong and PRC subsidiaries’ financial statements are maintained in their respective functional currencies. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods, which were not significant during three months ended March 31, 2011 or 2012.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)

(g)

Foreign currency translation (Continued)

For financial reporting purposes, the consolidated financial statements of the Company have been translated into United States dollars (“US$”). Assets and liabilities are translated at exchange rates at the balance sheet dates, revenue and expenses are translated at 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 as a foreign currency translation adjustment to other comprehensive income, a component of shareholders’ equity.

The exchange rates applied are as follows:

	March 31,		December 31,		March 30,
	2011		2011		2012
Conversion from HK$ into US$:
Period end exchange rate		7.78		7.77		7.77
Average periodic exchange rate		7.79		7.78		7.76

Conversion from RMB into US$:
Period end exchange rate		6.54		6.29		6.30
Average periodic exchange rate		6.58		6.45		6.30

(h)

Earnings per share

ASC 260 “Earnings Per Share” requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

Earnings per basic share of common stock is based on the weighted average number of shares of common stock outstanding during each respective period. Earnings per diluted share of common stock adds to basic weighted shares the weighted average number of shares issuable under convertible securities and warrants outstanding during each respective period, using the if-converted and treasury-stock methods (See Note 8).

INVENTORIES

Inventories consist of:

	December 31,		March 31,
	2011		2012
			(Unaudited)

Raw materials	$	369	$	455
Finished goods		946		870

	$	1,315	$	1,325

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of:

	December 31,			March 31,
	2011			2012
				(Unaudited)
At cost:
Land use rights	$	747		$	745
Buildings		2,281			2,276
Motor vehicles		334			334
Plant and machinery		10,020			10,004
Other equipment		95			95
Construction in progress		184			1,439
		13,661			14,893
Less accumulated depreciation		(6,434	)		(6,694	)

	$	7,227		$	8,199

At December 31, 2011 and March 31, 2012, property and equipment with carrying amounts of $5.4 million and $5.2 million, respectively, were pledged as collateral for bank facilities granted to the Company (Note 6). Depreciation expense for the three months ended March 31, 2011 and 2012 was approximately $0.3 million for each period.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

DEBT

Short-term borrowings:

	December 31,		March 31,
	2011		2012
			(Unaudited)

Secured bank borrowings	$	3,577	$	4,365

As of March 31, 2012, the Company has borrowings from banks, expiring at various dates through August 1 2012, primarily used to finance working capital requirements. The bank borrowings are in the form of credit facilities, which provide for borrowings of up to $4.4 million as of March 31, 2012. All amounts available to the Company from the bank are based on the amount of collateral pledged. All banking facilities available to the Company were fully utilized as of March 31, 2012. Each draw on the bank facilities has a fixed term of twelve months for repayment. The interest rates on these borrowings are fixed at 6.56% to 7.87% per annum as of March 31, 2012. The weighted average short-term borrowing rate was 5.56% and 7.11% for the three months ended March 31, 2011 and 2012, respectively. These borrowings are collateralized by certain property, plant and equipment of the Company.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

INCOME TAXES

Pre-tax income from operations for the three months ended March 31, 2011 and 2012, was not taxable. The Company and its subsidiaries are incorporated in the following jurisdictions:

(a)

United States of America

No U.S. corporate income taxes are provided for in these consolidated financial statements, as the Company did not generate any taxable income in the U.S.

(b)

Hong Kong

No provision has been made for Hong Kong profits tax as the Company did not earn income subject to Hong Kong profits tax.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

INCOME TAXES (Continued)

(c)

PRC

Pursuant to the circular entitled Scope of Preliminary Processing of Agricultural Products Entitled to Preferential Enterprise Income Tax Policies (Trial Implementation) published by Ministry of Finance (“MOF”) and State Administrative of Taxation (“SAT”), the Company’s PRC subsidiaries have been entitled to full exemption from PRC corporate income tax beginning January 1, 2008. The exemption currently is not subject to any limitations.

A reconciliation of the PRC tax rate to the actual provision for taxes is as follows:

	Three Months Ended March 31,
	2011			2012
	(Unaudited)			(Unaudited)

PRC tax rate		15	%		15	%

Computed expected income tax expense	$	1,067		$	698
Tax exempt income – PRC subsidiaries		(1,095	)		(712	)
Hong Kong holding company losses		28			14

	$	-		$	-

Pursuant to the New Tax Law, dividends declared by the Company’s PRC subsidiaries to their parent companies incorporated in Hong Kong are subject to withholding tax. In accordance with Caishui (2008) No. 1 (“Circular 1”) issued by State Tax Authorities in February 2008, undistributed profits from the PRC subsidiaries up to December 31, 2007 are exempt from withholding tax when they are distributed in the future. Therefore, during the years ended December 31, 2009 and 2010 the Company recorded a provision for dividend withholding tax on distributable profits that were earned subsequent to January 1, 2008 resulting in an outstanding liability of $3 million as of December 31, 2011 and March 31, 2012 relating to these withholding taxes. No provision for dividend withholding tax has been provided since October 1, 2010, as our Board of Directors and management have approved a plan to reserve all profits earned after October 1, 2010 for the Company’s business expansion in future.

No deferred tax assets or liabilities have been recorded, as there were no significant temporary differences that give rise to a deferred tax asset or liability as of December 31, 2011 and March 31, 2012.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

NET INCOME PER SHARE

Basic income per share is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted income per share assumes the conversion, exercise or issuance of all potential common stock instruments, such as warrants and convertible debt, unless the effect is anti-dilutive.

The following is a reconciliation of the denominators for the weighted average number of shares outstanding used in the calculation of basic income per share for the three months ended March 31, 2011 and 2012:

	2011		2012
	(Unaudited)		(Unaudited)

Shares issued beginning of period		3,285,007		24,003,570
Effect of reverse merger ⁽¹⁾		20,131,759		-

Basic weighted average shares – end of period		23,416,766		24,003,570

(1)

Earnings per share for periods prior to the reverse merger have been restated to reflect the equivalent number of shares to be received pursuant to the Share Exchange by the Waibo shareholders.

The following is a reconciliation of the denominators for the weighted average number of shares outstanding used in the calculation of diluted income per share for the three months ended March 31, 2011 and 2012:

	2011		2012
	(Unaudited)		(Unaudited)

Basic weighted average shares – end of period		23,416,766		24,003,570
Effect of convertible debt		586,804		-

Diluted weighted average shares – end of period		24,003,570		24,003,570

As of March 31, 2011 and 2012 the Company had warrants outstanding to purchase 171,536 shares of common stock, which were considered anti-dilutive as the exercise prices of the warrants exceeded the average market price of the Company’s common stock.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

9. RELATED PARTY BALANCES AND TRANSACTIONS

The amounts due to shareholders as of March 31, 2011 and 2012 and transactions during the respective periods are as follows:

	2011		2012
	(Unaudited)		(Unaudited)

Balance at January 1,	$	2,870	$	9,442
Cash advances from shareholders		1,300		213
Exchange difference		-		(2	)

Balance at March 31,	$	4,170	$	9,653

The amounts due to shareholders are unsecured, non-interest bearing and have no fixed terms of repayment. Cash advances received from shareholders are primarily used by the Company to finance working capital requirements.

10. DERIVATIVE INSTRUMENTS

The Company has warrants outstanding to purchase an aggregate of 171,536 shares of the Company’s common stock at an exercise price of $5.23 per share or on a cashless exercise basis, which expire on March 10, 2014.

If at any time prior to the exercise of the warrants, the Company enters into an agreement to issue shares of its common stock at a price less than that obtained for the common stock and warrants which were issued in December 2010, the exercise price of the warrants will be adjusted downward as to obtain an equivalent number of shares of common stock at the lower issuance price. As a result, the warrants are not considered to be indexed to the Company’s common stock and are therefore accounted for as a derivative liability instrument in the Company’s consolidated balance sheet. As of December 31, 2011 and March 31, 2012, the Company valued the warrants at approximately $5 and $ Nil, respectively, using a binominal model and has reported the warrants as a liability on its consolidated balance sheet under the caption “Derivative Instruments”. The change in fair value of the derivative instruments during the three months ended March 31, 2011 and 2012 was approximately $61 and $5 respectively. Changes to the fair value of the Derivative Instruments are reported in the Company’s statement of operations under the caption “Interest expenses and other” and “Interest income and other” respectively.

The assumptions used in the binominal model to estimate the fair value of the warrants are as follows:

	December 31,			March 31,
	2011			2012
				(Unaudited)
Stock price	$	1.00		$	0.50
Risk free interest rate		1.17	%		1.17	%
Expected term	1.98 years			1.73 years
Expected volatility		65	%		65	%
Expected dividend yield		0	%		0	%

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

11. CONCENTRATION OF RISK

Financial instruments that potentially subject the Company to a significant concentration of credit risk consist principally of the following:

(a)

Cash

The Company maintains its cash and cash deposits primarily with various China State-owned banks and Hong Kong-based financial institutions. The Company performs periodic evaluations of the relative credit standing of those financial institutions.

(b)

Trade receivables

The Company sells potato starch to customers in the PRC. Management considers that the Company’s current customers are generally creditworthy and credit is extended based on an evaluation of the customers’ financial condition. Therefore, collateral is generally not required. The Company evaluates accounts receivable for potential credit losses based on its loss history and aging analysis. Such losses have been within management’s expectations. At December 31, 2011 and March 31, 2012, the five largest customers accounted for 25% and 30% of trade receivables, respectively. No single customer exceeds 10% of trade receivables. For the three months ended March 31, 2011 and 2012, the five largest customers accounted for 22% and 27% net of sales, respectively.

(c)

Commodity risk

The cash flows and profitability of the Company’s current operations are significantly affected by the market price of potato starch and potatoes. These commodity prices can fluctuate widely and are affected by factors beyond the Company’s control.

(d)

Foreign currency risk

The RMB is not freely convertible into foreign currencies. The State Administration for Foreign Exchange, under the authority of People’s Bank of China, controls the conversion of the RMB into foreign currencies. The value of the RMB is subject to changes in China government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China.

12. COMMITMENTS AND CONTINGENCIES

(a)

Capital commitments

In August 2010, the Company entered into agreements with the People’s Government of the Zhaoyang District, Yunnan Province to purchase property, plant and equipment totaling approximately $19 million related to the construction of production facilities. As of March 31, 2012, the Company has purchased $1.4 million of property, plant and equipment under these agreements and has made $10.9 million of deposits under these agreements. Therefore, as of March 31, 2012, the commitment has been reduced to $6.7 million. In addition, as of March 31, 2012, the company has contracts with vendors to purchase equipment relating to the construction of production facilities for $10.2 million.

KAIBO FOODS COMPANY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

(US dollars in thousands, except share amounts)

12. COMMITMENTS AND CONTINGENCIES (Continued)

(b)

Lease commitments

Operating lease commitments include commitments under non-cancellable lease agreements for the Company’s office premises, as well as a land lease. The leases expire from July 2012 through October 2042. The yearly future minimum rental payments required as of March 31, 2012 were as follows:

	Amount
2012 (nine months)	$	71
2013		69
2014		24
2015		24
2016		24
Thereafter		616

	$	828

Rent expense under operating leases for the three months ended March 31, 2011 and 2012 was approximately $0.1 million for each period.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Disclaimer Regarding Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “believes,” “management believes” and similar language. Except for the historical information contained herein, the matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report are forward-looking statements that involve risks and uncertainties. The factors listed in the section captioned “Risk Factors,” as well as any cautionary language in this report provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those projected. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this Quarterly Report.

OVERVIEW

We are a premium native potato starch manufacturer in the PRC. Our corporate headquarters is based in Hong Kong and our operational headquarters is based in Kunming city, Yunnan province. We began operations in 2004 and have factories located in Yunnan, Guizhou and Gansu provinces of China.

We primarily sell our products to distributors and food processing companies in the PRC.

Our products are currently sold under the “Wei Bao” and “Jiabao” brand names. The Wei Bao brand is targeted primarily to food processors and our Jiabao brand is targeted to food service operators. We believe that our company is one of the top 5 premium starch potato processors in the PRC, with a production capacity of 111,500 metric tons per year. In 2008, we received the “China’s Potato Starch Industry Top Ten Best Selling Products”, “China’s Potato Starch Industry Top Ten Customer Satisfaction Product” and “China’s Potato Starch Industry Top Ten Best Brands” awards. Our Jiabao brand created in 2007 is gaining the acceptance of our target customers.

Reverse acquisition and reorganization

On October 21, 2010 (the “Closing Date”), CFO Consultants, a U.S. public shell company (now known as the Company) completed a stock exchange transaction (the “Share Exchange”) with the stockholders of Hong Kong Waibo International Limited (“Waibo”), whereby 22,493,475 shares of CFO Consultants’ common stock were agreed to be issued to stockholders of Waibo in exchange for 100% of their outstanding capital stock in Waibo, equal to 96% of all of the Company’s outstanding common stock, after giving effect to the conversion of an outstanding convertible note of the Company held by Millennium Group, Inc. (“Millennium”), in the principal amount of $25,000. The note was convertible into 586,804 shares of the Company’s common stock.

The Share Exchange has been accounted for as a reverse acquisition and recapitalization, whereby Waibo is the surviving and continuing entity for financial reporting purposes and is deemed to be the acquirer. The Share Exchange is accounted for as a reverse acquisition and recapitalization because (i) after the business combination the Waibo Shareholders held approximately 96% of our issued and outstanding shares of common stock and (ii) we had no prior operations.

Sales

We normally enter into six-month agreements with our customers. The agreement specifies the quantity that the customer believes they will buy during the forthcoming nine months and the negotiated price per metric ton. Our customers are not charged a penalty for failing to purchase the quantities set forth in our contracts. However, historically our customers have purchased the set amount in the contracts. In the event the market price exceeds the 10% of the price stipulated in the contract, the agreed price stated on the agreement will be adjusted to the reflect the current market price.

We sell premium quality native potato starch, which is usually sold for 5-10% more than the average market price.

We have established an extensive distribution network in the PRC. During the three months ended March 31, 2012, 40.3% and 59.7% of our products were sold to manufacturers and distributors respectively.

Revenue from sales of our native potato starch is recognized upon delivery of our products to the railway station nearest to our respective factories at which time the significant risks and rewards of ownership of our products are transferred to the customers.

The main factors that affect our revenue include the following:

(a)	Competition

We expect to face competition from potato starch producers with more than 20,000 metric tons of annual production capacity and new entrants. Our future revenue growth depends on our ability to compete effectively against such competitors and on key considerations including the price and quality of our products. If we are unable to retain existing customers and secure new ones, or fail to develop new products to meet the needs of our customers, our revenue and profitability may be adversely affected.

(b)	Stable supply of raw materials

Profitability in the potato starch industry is materially affected by the need to maintain a sufficient supply of potatoes at stable prices from farmers. These commodity prices are determined by supply and demand. While the potato starch industry has historically not been subject to wide fluctuations and cycles, we cannot eliminate the risk of increased operating costs from potato price increases, and it is very difficult to predict when and if price spiral cycles will occur.

(c)	Alternative raw materials or production technology

If a new source of starch is discovered as a substitute to native potato starch or new production technologies are developed that render our production facilities obsolete, our revenue and profitability may be adversely affected.

(d)	Our production capacity

We currently have a production capacity of 111,500 metric tons per year for native potato starch. As of March 31, 2012, our production capacity utilization was 65.2%. We plan to establish new production lines for native potato starch, modified potato starch and whole potato starch. We plan to increase our production capacity to 176,500 metric tons by 2012. Should we able to increase our production capacity in time to meet any increase in demand, future growth of our revenue will be significantly improved.

(e)	Growth of native potato starch industry

The PRC continues to experience exponential economic and population growth. The per capita usage of potato starch in the PRC is mere 0.8kg per annum, compared to 10kg in developed regions such as Europe and Japan. With the increase in disposable income of the population and the per capita usage of potato starch, we believe that the demand for our products will continue to rise and improve our revenue and profitability.

Cost of sales

Our cost of sales comprises cost of raw material, direct labor and production overhead, which accounted for 83.5%, 3.1% and 13.4% of our cost of sales respectively for the three months ended March 31, 2012.

Potatoes are a key raw material and we source them from farmers in Yunnan, Gansu and Guizhou provinces in the PRC.

Direct labor includes salaries, wages and staff related costs of plant operators and those who are directly involved in the production of our products. Overhead consists mainly of depreciation charges on machinery, utilities (water and electricity) and other factory related costs.

In addition to the volume of production, our costs of sales are affected by, (i) factors affecting the costs of raw materials, namely, the market demand and supply conditions for potatoes, and harvesting conditions; (ii) factors affecting labor costs, namely demand and supply of labor, general wage levels, and government regulations; as well as (iii) factors affecting general manufacturing overhead, namely, our depreciation expense resulting from capital expenditures and general prices of utilities charges.

Operating expenses

Our operating expenses consist of selling and distribution costs and administrative expenses.

Our selling and distribution costs consisted of transportation costs, salaries and staff welfare expenses of sales personnel, entertainment expenses and telecommunication expenses incurred by our sales personnel. Our facilities are strategically located near railways, which we use as the main method of transporting our products. We only pay for shipment of our products to the railway station. Our customers pay for the railway transfer fee. Transportation costs accounted for an average of 61.1% of our selling and distribution costs incurred for the three months ended March 31, 2012.

Our administrative and other expenses consisted of salaries and staff related expenses for administrative personnel, depreciation charges, entertainment expenses and other office related expenses. The major components of administrative and other expenses include salaries and depreciation, which accounted for an average of 16.4% and 1.6% of our administrative expenses incurred for the three months ended March 31, 2012.

Other non-operating income

Other non-operating income consists of government subsidies, bank interest income and other items. All of our PRC subsidiaries are accredited with “Leading Enterprise” status, which has entitled them to receive various forms of preferential treatment from the local and state governments including government subsidies and infrastructural assistance. The subsidies received related to agriculture land development fund contributions, commitment to produce high quality native potato starch and our contribution to rural agriculture development.

Interest expense

Our interest expense consists mainly of interest on bank borrowings, which were incurred for working capital purposes.

Income tax expenses

The PRC has enacted a tax policy that entitles a foreign corporation to a full exemption from both PRC state and local corporate income tax for the first two profitable calendar years of its operations and thereafter a 50% relief from the PRC state corporate income tax and full exemption from local corporate income tax for the following three calendar years. Our PRC subsidiaries, namely Yunnan WeiLi, Guizhou WeiLi and Gansu WeiBao, qualify for such tax exemptions. The circular entitled “Scope of Preliminary Processing of Agricultural Products Entitled to Preferential Enterprise Income Tax Policies (Trial Implementation)” published by Ministry of Finance and State Administrative of Taxation, entitled us to a full exemption from PRC corporate income tax since January 1, 2008. Our native potato starch qualifies for this exemption and as a result none of our subsidiaries are subject to PRC corporate income tax.

Pursuant to the New Tax Law, dividends declared by our PRC subsidiaries to their parent company incorporated in Hong Kong are subject to withholding tax of 5% or 10%. In accordance with Caishui (2008) No. 1 issued by State Tax Authorities, undistributed profits from our PRC subsidiaries up to December 31, 2007 will be exempt from withholding tax when they are distributed in the future. As a result, a provision for dividend withholding tax has been made starting January 1, 2008. No provision for dividend withholding tax has been provided since October 1, 2010, as our Board of Directors and management have adopted a plan to reserve all profits earned after October 1, 2010 for our business expansion in the future. As a United States public company, we do not intend to pay such dividends.

Seasonality

From May through July, we typically halt our production process at our facilities located in Yunnan and Guizhou provinces. The potato-planting season typically begins in March and the potatoes are delivered to our facilities from August until December. The farmers store remaining unsold potatoes in cellars for up to four months, which allows us to expand our production period until April.

Our Gansu factory is in one of the colder regions in China and typically halts production during January and February and resumes production from March to May. However, during the first quarter of 2012, the weather was colder than in prior years. As a result, production in Gansu was suspended for the entire first quarter of 2012. It typically shuts down again during June and July and resumes production in August. During the off-season, we spend time performing routine maintenance.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have identified certain accounting policies that are significant to the preparation of the financial statements. Critical accounting policies are those that are both most important to the portrayal of our results of operations and financial condition and require management’s most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of the financial statements.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Expenditures for routine repairs and maintenance are expensed as incurred.

Depreciation is calculated on the straight-line basis over each asset’s estimated useful life down to the estimated residual value of each asset. Estimated useful lives are as follows:

Land use rights	52-55 years
Buildings	20 years
Motor vehicles	5 years
Plant and machinery	10 years
Other equipment	5 years

We review and evaluate property, plant and equipment for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets. An impairment loss is measured and recorded based on discounted estimated future cash flows. Our estimates of future cash flows are based on numerous assumptions, and it is possible that actual future cash flows will be significantly different than the estimates which are subject to significant risks and uncertainties. Management believes that there is no impairment to property, plant and equipment as of March 31, 2012.

Revenue recognition

We generate our revenues from the sale of native potato starch products. Revenues from product sales are recognized only when persuasive evidence of an arrangement exists; delivery has occurred and the customers' acceptance has been received; the price to the customer is fixed or determinable; and collectability is reasonably assured. Generally, these criteria are met upon shipment of products and transfer of title to customers.

Inventories

Inventory is stated at the lower of cost or market. Inventory is valued using the weighted average method, which approximates actual cost. Capitalized costs include materials, labor and manufacturing overhead related to the purchase and production of inventories. Excess and obsolete inventory reserves are established based upon our evaluation of the quantity of inventory on hand relative to demand. The total reserve for obsolete inventory was zero as of March 31, 2012.

Allowance for Doubtful Accounts

An allowance for doubtful accounts is provided based on an evaluation of the collectability of accounts receivable, and other receivables. An allowance for doubtful accounts is provided, when considered necessary, primarily consisting of an analysis based on current information available about the customer or borrower. Receivable losses are charged against the allowance when our management believes the uncollectability of the receivable is confirmed. Subsequent recoveries, if any, are credited to the allowance. Total allowance for doubtful accounts was zero as of March 31, 2012.

Results of Operations

Comparison of the three months ended March 31, 2012 and 2011.

	Three Months Ended March 31,
	2011			2012
	(Dollars in thousands except units and per unit data)
Revenue	$	25,689		$	14,153
Gross profit	$	8,049		$	5,115
Unit sales (metric tons)		22,020			14,940
Selling price per unit		1,167			947
Gross profit per unit	$	365.5		$	342.4
Gross profit as a % of revenue		31.3	%		36.1	%

Sales

During first quarter of 2012, the weather in Gansu was colder than it was in prior years. As a result, production of our Gansu factory was seriously affected and suspended during the whole first quarter of 2012. This suspension was longer than expected as our Gansu factory would typically resume production in mid February. Accordingly, our sales volume decreased by 32.2% from 22,020 metric tons in 2011 to 14,940 metric tons in 2012. In addition, our unit selling price decreased by 18.9% as the price of potatoes has fallen sharply since the third quarter of 2011. As a result of these factors, our sales decreased by 44.9% from $25.7 million in 2011 to $14.2 million in 2012.

Cost of sales

Our cost of sales decreased by 48.8% from $17.6 million in the first quarter of 2011 to $9.0 million in the first quarter of 2012, primarily due to corresponding decreases in the sales volume and the average purchase price of potatoes.

Gross profit and gross profit margin

Despite the 18.9% decrease in our unit selling price, we still maintained our profitability as our gross profit per unit only slightly declined by 6.3% from $365.5 in 2011 to $342.4 in 2012. Our gross profit margin increased from 31.3% in 2011 to 36.1% in 2012 due to lower raw material cost changing the ratio of cost of sales as a percentage to sales.

Operating expenses

Operating expenses decreased by 26.7% from $0.9 million for the first quarter of 2011 to $0.6 million for the first quarter of 2012 due to lower operating expenses of our Gansu factory as a result of longer suspension of production than last year.

Interest income and other

Interest income and other increased by 681.3% to $0.3 million for the first quarter of 2012 mainly due to additions of government subsidies received in the first quarter of 2012.

Income tax expense

The PRC subsidiaries have been entitled to full exemption on enterprise income tax in the PRC since January 1, 2008.

Income tax expense is required to be recorded for dividend withholding taxes from 5% to 10% on dividends declared by the PRC subsidiaries to their parent company incorporated in Hong Kong. However, our Board of Directors and management decided to reserve all profits earned after October 1, 2010 for our business expansion in the future and therefore no provision for dividend withholding tax has been provided since October 1, 2010.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed operations primarily through internally generated cash, loans borrowed from banks and advances from shareholders. Going forward, we believe our sources of liquidity will be satisfied by using a combination of cash provided by our operating activities and proceeds from future offerings after the reverse merger.

The following table sets out a summary of our cash flow during the three months ended March 31, 2011 and 2012:

	Three Months Ended March 31,
	2011			2012

	(Dollars in thousands)
Net cash provided by operating activities	$	15,771		$	16,257
Net cash used in investing activities		(3,317	)		(450	)
Net cash provided by financing activities		2,063			1,007
Net increase in cash and cash equivalents		14,517			16,814
Effect of foreign exchange rate on changes in cash and cash equivalents		293			(97	)
Cash and cash equivalents at beginning of year		27,374			62,971
Cash and cash equivalents at end of year	$	42,184		$	79,688

Cash flows from operating activities

We derive our cash flows from operating activities principally from receipt of payments for sales of our products. Our cash outflow from operating activities is principally from purchases of raw materials.

For the three months ended March 31, 2012, we had net cash generated from operating activities of $16.3 million, which was primarily contributed by net income before working capital changes of $4.7 million and a decrease, representing customer repayments, in trade accounts receivable of $13.0 million. The decrease in trade accounts receivable was primarily due to seasonality of sales and suspension of production of our Gansu factory due to cold weather in 2012.

For the three months ended March 31, 2011, we had net cash generated from operating activities of $15.8 million, which was primarily contributed by net income before working capital changes of $7.2 million and a decrease, representing customer repayments, in trade accounts receivable of $9.0 million. The decrease in trade accounts receivable was primarily due to seasonality of sales.

Cash flows from investing activities

Our cash outflows from investing activities is principally for purchases of property, plant and equipment during the three months ended March 31, 2011 and 2012.

Cash flows from financing activities

We derive our cash inflows from financing activities principally from bank borrowings and advances from shareholders. Our cash outflow from financing activities relates primarily to repayment of bank borrowings, advances to shareholders and the payment of dividends.

For the three months ended March 31, 2012, we had net cash provided by financing activities of $1.0 million, which was due to advances received from shareholders of $0.2 million, and proceeds from short term debt of $0.8 million.

For the three months ended March 31, 2011, we had net cash provided by financing activities of $2.1 million, which was due to advances received from shareholders of $1.3 million, and proceeds from short term debt of $0.8 million.

NET CURRENT ASSETS

The following table sets out our current assets and current liabilities as at the dates indicated:

	December 31,		March 31,
	2011		2012
Current assets:
Cash	$	62,971	$	79,688
Trade accounts receivable, net		20,045		6,991
Inventories		1,315		1,325
Prepayments and other receivables		303		353
		84,634		88,357

Current liabilities:
Trade accounts payable		446		161
Accruals and other payables		3,328		1,935
Income taxes payable		3,000		3,000
Short term borrowings		3,577		4,365
Derivative instruments		5		-
Due to shareholders		9,442		9,653
		19,798		19,114
Net current assets	$	64,836	$	69,243

We had net current assets of $69.2 million as of March 31, 2012. The improvement in net current assets as of March 31, 2012 from December 31, 2011 of $4.4 million was primarily due to increase in cash and cash equivalents as a result of the cash inflow from operating activities.

Trade accounts receivable

Our trade accounts receivable represent receivables from customers for sales of products. We had trade accounts receivable of $20.0 million and $7.0 million as of December 31, 2011 and March 31, 2012, respectively. The decrease in trade receivables as of March 31, 2012 was due primarily to seasonality of sales

The table below sets out our trade accounts receivable turnover days for the period indicated:

	Year Ended		Three Months Ended
	December 31,		March 31,
	2011		2012

Trade accounts receivable turnover days (note)		71		86

Note:

Trade accounts receivable turnover days is equal to the average trade accounts receivable divided by sales and multiplied by 365 days (90 days for the March 31, 2012 period). Average trade accounts receivable are equal to trade accounts receivable at the beginning of the year plus trade accounts receivable at the end of the year and divided by two.

The increase in trade accounts receivable turnover days in 2012 to 86 days was as a result of low trade accounts receivable being outstanding as of March 31, 2012, as a result of seasonality of sales and suspension of production of our Gansu factory due to cold weather in 2012.

Inventories

Our inventories remained constant at $1.3 million of March 31, 2012 and December 31, 2011.

The following table sets out the summary of balance of our inventories as of the dates indicated:

	December 31,		March 31,
	2011		2012

Raw materials	$	369	$	455
Finished goods		946		870
	$	1,315	$	1,325

The following table sets out the inventory turnover days as of the dates indicated:

	Year Ended December 31,		Three Months Ended March 31
	2011		2012

Inventory turnover days		7		13

Note:

The calculation of inventory turnover days is based on the average inventory balances divided by cost of goods sold and multiplied by 365 days for the year (90 days for the March 31, 2012 period). Average inventory balances are equal to inventory balance at the beginning of the year plus inventory balances at the end of the year and divided by two.

The increase in inventory turnover days was due primarily to seasonality of sales and suspension of production of our Gansu factory due to cold weather in 2012.

Trade accounts payable

Our trade accounts payable primarily represented the amount we owed to our suppliers for the purchase of raw materials, mainly potatoes, packaging materials and coal.

Due to shareholders

The balances of amount due to shareholders of $9.4 million and $9.7 million as of December 31, 2011 and March 31, 2012 are unsecured, interest free and have no fixed terms of repayment.

Property, plant and equipment

Net plant and machinery and other office equipment, amounted to $7.2 million and $8.2 million as of December 31, 2011 and March 31, 2012, respectively. We had approximately $1.2 million additions to property, plant and equipment, mainly for our modified starch factory, during the three months ended March 31, 2012.. Deposits of $10.9 million were made to purchase additional property, plant and equipment during the three months ended March 31, 2012.

Capital Expenditures

The following table sets out the historical capital expenditures during the period indicated:

	Year Ended		Three Months Ended March 31,
	December 31, 2011		2012
	(Dollars in thousands)

Furniture, fixtures and office equipment	$	10,937	$	450

The following table sets out our projected capital expenditures for the three years ending December 31, 2013:

	December 31,
	2012		2013		2014
	(Dollars in thousands)
Land use rights	$	7,949	$	9,539	$	37,043
Buildings		7,949		8,680		10,811
Plant and machinery		22,258		-		13,990
	$	38,156	$	18,219	$	61,844

We expect that the capital expenditures for the three years ending December 2014 will be primarily used for land use rights, buildings, and plant and machinery to establish new production lines for native potato starch, modified potato starch and whole potato starch.

We expect to finance our projected capital expenditures mainly by the net proceeds we receive from any future equity offerings and from cash generated from our continuing operating activities.

COMMITMENT AND CONTINGENCIES

(a)	Capital commitments

(b)	Lease commitments

Operating lease commitments include commitments under non-cancellable lease agreements for our office premises, as well as a land lease. The leases expire from July 2012 through October 2042. The yearly future minimum rental payments required as of March 31, 2012 were as follows:

	(Dollars in thousands)
2012	$	71
2013		69
2014		24
2015		24
2016		24
Thereafter		616
	$	828

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

(a) Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have conducted an evaluation of the effectiveness, as of March 31, 2012, of the design and operation of our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Based on our evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that information is accumulated and communicated to allow timely decisions regarding required disclosures due to the material weaknesses in our internal control over financial reporting as described in Item 9A of the Company’s Form 10-K for the year ended December 31, 2011.

Changes in Internal Control Over Financial Reporting

No changes in the Company's internal control over financial reporting have come to management's attention during the Company's last fiscal quarter that have materially affected, or are likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Not applicable to smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Item 5. Other Information

None.

Item 6. Exhibits.

(b) Exhibits

Exhibit No.		Description
31.1	*	Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	*	Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	*	Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	KAIBO FOODS COMPANY LIMITED

Date: May 15, 2012	By:	/s/ Joanny Kwok
	Joanny Kwok, Chief Executive Officer and President
	(Principal Executive Officer)

Date: May 15, 2012	By:	/s/ Ken Tsang
	Ken Tsang, Chief Financial Officer
	(Principal Financial Officer)

EXHIBIT INDEX

Exhibit No.		Description
31.1	*	Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	*	Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	*	Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith.

KAIBO FOODS Co Ltd 10-Q