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 June 30, 2011





OR





o
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
26-3552213(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 August 19, 2011, there were 24,003,570 shares of common stock of the issuer outstanding.










TABLE OF CONTENTS





PART I FINANCIAL STATEMENTSItem 1
Financial Statements


3Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations


20Item 3
Quantitative and Qualitative Disclosures About Market Risk


31Item 4
Controls and Procedures


31PART II OTHER INFORMATIONItem 1
Legal Proceedings


32Item 1A
Risk Factors


32Item 2
Unregistered Sales of Equity Securities and Use of Proceeds


32Item 3
Default upon Senior Securities


32Item 4
[Removed and Reserved]


32Item 5
Other Information


32Item 6
Exhibits


32Signatures



33




2




PART I. FINANCIAL INFORMATION





Item 1. Financial Statements





KAIBO FOODS COMPANY LIMITED


CONSOLIDATED BALANCE SHEETS


(US dollars in thousands, except share data)


December 31,


June 30,2010


2011(Unaudited)ASSETSCurrent assets:Cash

$
27,374


$
53,629Trade accounts receivable


22,165



-Inventories


1,596



269Prepayments and other receivables


1,296



502Total current assets


52,431



54,400Property, plant and equipment, net


7,657



7,370Deposits on property, plant and equipment


-



8,622Total assets

$
60,088


$
70,392LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities:Trade accounts payable

$
240


$
-Accruals and other payables


3,530



938Taxes payable


2,949



2,947Short-term borrowings


2,655



1,935Convertible note


25



-Derivative instruments


55



148Due to shareholders


2,870



5,681Total liabilities (all current)


12,324



11,649Commitments and contingenciesShareholders’ equity:Preferred stock, no par value; 2,000,000 shares authorized; none issued and outstanding on December 31, 2010 and June 30, 2011


-



-Common stock, par value $0.001 per share; 600,000,000 shares authorized; issued and outstanding 3,285,007 and 24,003,570 shares on December 31, 2010 and June 30, 2011 respectively


3



24Additional paid in capital


9,122



9,526Statutory reserve


5,425



5,425Retained earnings


28,044



37,371Accumulated other comprehensive income


5,170



6,397Total shareholders’ equity


47,764



58,743Total liabilities and shareholders’ equity

$
60,088


$
70,392




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




3




KAIBO FOODS COMPANY LIMITED


CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)


(US dollars in thousands)




Three Months Ended

June 30,


Six Months Ended

June 30,2010


2011


2010

2011Sales

$
12,018


$
11,411


$
28,991


$
37,100Cost of sales


(6,971
)


(8,124
)


(16,599
)


(25,764
)Gross margin


5,047



3,287



12,392



11,336Operating expenses


(1,124
)


(1,036
)


(1,878
)


(1,900
)Income from operations


3,923



2,251



10,514



9,436Interest expense and other


(39
)


(83
)


(78
)


(190
)Interest income and other


17



49



319



81(22
)


(34
)


241



(109
)Income before income taxes


3,901



2,217



10,755



9,327Income tax expense


(423
)


-



(1,113
)


-Net income

$
3,478


$
2,217


$
9,642


$
9,327Net income per share:Basic

$
0.15


$
0.09


$
0.43


$
0.40Diluted

$
0.15


$
0.09


$
0.43


$
0.39Weighted average shares outstanding used

in the calculation of net income per share (Note 8):Basic


22,493,475



23,742,768



22,493,475



23,578,867Diluted


22,493,475



24,003,570



22,493,475



24,003,570




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




4




KAIBO FOODS COMPANY LIMITED


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(UNAUDITED)


(US dollars in thousands)





Three Months Ended

June 30,


Six Months Ended

June 30,2010


2011


2010


2011Net income

$
3,478


$
2,217


$
9,642


$
9,327Other comprehensive income:Foreign currency translation adjustments


539



759



397



1,227Total comprehensive income

$
4,017


$
2,976


$
10,039


$
10,554




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




5





KAIBO FOODS COMPANY LIMITED


CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY


SIX MONTHS ENDED JUNE 30, 2011


(UNAUDITED)


(US dollars in thousands, except share data)




Common stock


Additional

paid in


Statutory


Retained


Accumulated other

comprehensiveShares


Amount


capital


reserve


earnings


income


TotalBalances at January 1, 2011


3,285,007


$
3


$
9,122


$
5,425


$
28,044


$
5,170


$
47,764Issuance of shares in connection with stock exchange transaction (Note 1 (b)):- Issued to designee of the Waibo shareholders


20,131,759



20



(20
)


-



-



-



-- Issued to Millennium upon conversion of convertible note and other payable


586,804



1



424



-



-



-



425Net income


-



-



-



-



9,327



-



9,327Foreign currency translation adjustments


-



-



-



-



-



1,227



1,227Balances at June 30, 2011


24,003,570


$
24


$
9,526


$
5,425


$
37,371


$
6,397


$
58,743




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




6





KAIBO FOODS COMPANY LIMITED


CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


(US dollars in thousands)





Six Months Ended

June 30,2010


2011Operating activities:Net income

$
9,642


$
9,327Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


483



518Fair value change on derivative instruments


-



93Changes in operating assets and liabilities:Trade accounts receivable


18,139



22,374Inventories


995



1,345Prepayments and other receivables


317



(53
)Taxes payable


(199
)


-Trade accounts payable


(14
)


(241
)Accruals and other payables


(1,174
)


(2,227
)Net cash provided by operating activities


28,189



31,136Investing activities:Deposits for property, plant and equipment


-



(7,669
)Acquisitions of property, plant and equipment


(133
)


(82
)Net cash used in investing activities


(133
)


(7,751
)Financing activities:Proceeds from short-term debt


1,466



766Payment on short-term debt


(1,466
)


(1,532
)Payment of dividends


(22,775
)


-Advances from shareholders


3,029



2,814Repayment of advances from shareholders


(2,073
)


-Net cash (used in) provided by financing activities


(21,819
)


2,048Net increase in cash


6,237



25,433Effect of exchange rates on changes in cash


271



822Cash, beginning of period


22,131



27,374Cash, end of the period

$
28,639


$
53,629Supplemental disclosure of cash flow information:Cash paid during the period for:Interest

$
78


$
190Income taxes

$
1,312


$
-Non cash investing and financing activities:Conversion of convertible note and other payable into common stock (Note 6 (b))

$
-


$
425





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




7


KAIBO FOODS COMPANY LIMITED
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 THREE AND SIX MONTHS ENDED JUNE, 2010 AND 2011
 (UNAUDITED)
 (US dollars in thousands)


1.
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 $25,000 (Note 6).  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.





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 $25,000.  The Company is deemed to be a continuation of the business of Waibo.





On March 10, 2011, the Company filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with the Secretary of State of the State of Nevada for the purpose affecting a 1 for 16.09 reverse stock split (the “Reverse Stock Split”).  In addition to setting forth the terms of the Reverse Stock Split, the Amendment also (i) increased the total number of authorized shares of capital stock of the Company from 75,000,000 to 600,000,000 shares of common stock; (ii) provided for a class of 2,000,000 shares of blank check preferred stock; (iii) elected for the Company not to be governed by the business combination statute under the Nevada Private Corporations Law; and (iv) changed the name of the Company to “Kaibo Foods Company Limited”. All shares and per share amounts for periods prior to March 10, 2011 in these financial statements have been given effect to the Reverse Stock Split.




On March 23, 2011, the Company was approved to change to its stock symbol on the OTC Bulletin Board and now trades under the stock symbol “KKFC”.




8





KAIBO FOODS COMPANY LIMITED
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 THREE AND SIX MONTHS ENDED JUNE, 2010 AND 2011
 (UNAUDITED)
 (US dollars in thousands)





1.
ORGANIZATION AND BUSINESS OF THE COMPANY (Continued)





(c)
Business:





The Company mainly focuses on serving the local market in the PRC.  Currently, the Company’s potato starch 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.





2.
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, 2010, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 31, 2011.  Amounts as of December 31, 2010 are derived from those audited consolidated financial statements.




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 June 30, 2011, and the results of their operations and cash flows for the six months ended June 30, 2010 and 2011, have been made.  The Company’s operations are seasonal; therefore, the results of operations for the three and six months ended June 30, 2011, 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 in March.  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.




9




KAIBO FOODS COMPANY LIMITED


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


THREE AND SIX MONTHS ENDED JUNE, 2010 AND 2011


(UNAUDITED)


(US dollars in thousands)




3.
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, 2010 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, 2010 and June 30, 2011.




(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, 2010 and June 30, 2011.




(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 yearsBuildings

20 yearsMotor vehicles

5 yearsPlant and machinery

10 yearsOther 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, 2010 and June 30, 2011.




10




KAIBO FOODS COMPANY LIMITED


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


THREE AND SIX MONTHS ENDED JUNE, 2010 AND 2011


(UNAUDITED)


(US dollars in thousands)




3.
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 June 30, 2011, 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 payables, 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.




(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.




11


KAIBO FOODS COMPANY LIMITED
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 THREE AND SIX MONTHS ENDED JUNE, 2010 AND 2011
 (UNAUDITED)
 (US dollars in thousands)




3.
SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)




(f)
Income taxes (continued)




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 jurisdictional 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 June 30, 2011, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the six months ended June 30, 2010 and 2011.




(g)
Foreign currency translation




The functional currency of Waibo, the Company’s wholly-owned subsidiary, 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 in 2010 or 2011.




For financial reporting purposes, the consolidated financial statements of the Company have been translated into United States dollars (“$”). 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:




June 30,


December 31,


June 30,2010


2010


2011Conversion from HK$ into $:Period end exchange rate


7.79



7.77



7.78Average periodic exchange rate


7.77



7.77



7.78Conversion from RMB into $:Period end exchange rate


6.78



6.59



6.46Average periodic exchange rate


6.82



6.76



6.53




12




KAIBO FOODS COMPANY LIMITED


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


THREE AND SIX MONTHS ENDED JUNE, 2010 AND 2011


(UNAUDITED)


(US dollars in thousands)




3.
SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)




(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).




4.
INVENTORIES




Inventories consist of:




December 31,


June 30,2010


2011(Unaudited)Raw materials

$
454


$
254Finished goods


1,142



15$
1,596


$
269





5.
PROPERTY, PLANT AND EQUIPMENT




Property, plant and equipment consist of:




December 31,


June 30,2010


2011(Unaudited)At cost:Land use rights

$
713


$
727Buildings


2,176



2,221Motor vehicles


318



326Plant and machinery


9,481



9,670Other equipment


75



81Construction in progress


4



8212,767



13,107Less accumulated depreciation


(5,110
)


(5,737
)$
7,657


$
7,370




At December 31, 2010 and June 30, 2011, property and equipment with carrying amounts of $5.3 million and $5.6 million, respectively, were pledged as collateral for the Company’s bank facilities (Note 6). Depreciation expense for the six months ended June 30, 2010 and 2011 was approximately $0.5 million for each period.
  13




KAIBO FOODS COMPANY LIMITED


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


THREE AND SIX MONTHS ENDED JUNE, 2010 AND 2011


(UNAUDITED)


(US dollars in thousands)




6.
DEBT




(a)
Short-term borrowings:




December 31,


June 30,2010


2011(Unaudited)Secured bank borrowings

$
2,655


$
1,935




As of June 30, 2011, the Company has borrowings from banks, expiring at various dates through June 2, 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 $1.9 million as of June 30, 2011. All amounts available to the Company from the banks are based on the amount of collateral pledged. All banking facilities available to the Company were fully utilized as of June 30, 2011.  Each draw on the bank facilities has a fixed term of twelve months for repayment. The interest rates on these borrowings are fixed at 5.56% to 7.26% per annum as of June 30, 2011.  The weighted average short-term borrowing rate was 5.15% and 5.75% for the six months ended June 30, 2010 and 2011, respectively.  These borrowings are collateralized by certain property, plant and equipment of the Company.




(b)
Convertible note:





On August 20, 2010, CFO Consultants issued a convertible note with principal amount of $25,000, and maturity date of August 20, 2012, to Millennium.  Millennium is a consulting services firm that is owned and managed by an individual whose father is a shareholder of the Company.  The convertible note was issued to Millennium as a non-refundable retainer to pay for Millennium to complete due diligence on CFO Consultants and to secure its assistance with future advice and assistance on new business directions including possible acquisitions.  CFO Consultants also engaged Millennium pursuant to a consulting agreement to assist them in connection with new business development strategies and options.





Under a consulting agreement, Millennium was to also receive a $400,000 cash payment if it was involved in assisting or advising the Company on any acquisition that is completed. On October 21, 2010, Millennium elected to convert the entire balance of the convertible note plus accrued interest into 586,804 shares of the Company’s common stock.  The fair value of the consideration received by Millennium (the 586,804 shares of common stock) was determined to be approximately $400,000 at the date Millennium provided the Company with its notice to convert (October 21, 2010).  However, the Company did not have sufficient authorized shares to complete the conversion at that time.  Therefore, this amount was reported as a liability within “Accruals and Other Payables” as of December 31, 2010.  On May 27, 2011, the Company issued 586,804 shares of common stock to Millennium to complete the conversion.  Accordingly, both the carrying amount of the $25,000 convertible note and the $400,000 liability were reclassified to common stock and additional paid in capital of the Company at the date of conversion.




7.
INCOME TAXES




Pre-tax income from operations for the three and six months ended June 30, 2010 and 2011, was taxable in the following jurisdiction:




Three Months Ended

June 30,


Six Months Ended

June 30,2010


2011


2010


2011(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)Current income tax expenses - PRC

$
423


$
-


$
1,113


$
-




14




KAIBO FOODS COMPANY LIMITED


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


THREE AND SIX MONTHS ENDED JUNE, 2010 AND 2011


(UNAUDITED)


(US dollars in thousands)





7.
INCOME TAXES (continued)




(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.




(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

June 30,


Six Months Ended

June 30,2010


2011


2010


2011(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)PRC tax rate


15
%


15
%


15
%


15
%Computed expected income tax expense

$
585


$
331


$
1,613


$
1,399Tax exempt income – PRC subsidiaries


(589
)


(341
)


(1,624
)


(1,437
)Hong Kong holding company losses


4



10



11



38PRC withholding tax on dividends


423







1,113



-$
423


$
-


$
1,113


$
-




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.  As a result, current income tax for six months ended June 30, 2010 includes a provision for dividend withholding tax for distributable profits that were earned subsequent to January 1, 2008.  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, 2010 and June 30, 2011.




15




KAIBO FOODS COMPANY LIMITED


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


THREE AND SIX MONTHS ENDED JUNE, 2010 AND 2011


(UNAUDITED)


(US dollars in thousands)





8.
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 and six months ended June 30, 2010 and 2011:


Three Months Ended

June 30,


Six Months Ended

June 30,2010


2011


2010


2011(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)Shares issued


2,361,716



3,611,009



2,361,716



3,447,108Effect of reverse merger (1)


20,131,759



20,131,759



20,131,759



20,131,759Basic weighted average shares –end of period


22,493,475



23,742,768



22,493,475



23,578,867




(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 and six months ended June 30, 2010 and 2011:




Three Months Ended

June 30,


Six Months Ended

June 30,2010


2011


2010


2011(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)Shares issued


22,493,475



23,742,768



22,493,475



23,578,867Effect of convertible debt


-



260,802



-



424,703Diluted weighted average shares-end of period


22,493,475



24,003,570



22,493,475



24,003,570




As of June 30, 2011, the Company has warrants outstanding to purchase 171,536 shares of common stock, which were considered anti-dilutive, as exercise prices of the warrants exceeded the average market price of the Company’s common stock.  As of June 30, 2010, the Company had no potentially dilutive securities outstanding.




16





KAIBO FOODS COMPANY LIMITED


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


THREE AND SIX MONTHS ENDED JUNE, 2010 AND 2011


(UNAUDITED)


(US dollars in thousands)





9.
RELATED PARTY BALANCES AND TRANSACTIONS




The amounts due to shareholders as of June 30, 2010 and 2011 and transactions during the respective periods are as follows:




2010


2011(Unaudited)


(Unaudited)Balance at January 1,

$
596


$
2,870Cash advances from shareholders


3,029



2,814Repayment of cash advances from shareholders


(2,073
)


-Exchange difference


(37
)


(3
)Balance at June 30,

$
1,515


$
5,681





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 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, 2010, the Company valued the warrants at approximately $55,000 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 and six months ended June 30, 2011 was approximately $32,000 and $93,000, respectively. Changes to the fair value of the Derivative Instruments are reported in the Company’s statement of operations under the caption “Interest expense and other”.




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




December 31,


June 30,2010


2011(Unaudited)Stock price

$
2.41


$
3.25Risk free interest rate


0.98
%


1.17
%Expected  term

3.0 years


2.48 yearsExpected volatility


51
%


66
%Expected dividend yield


0
%


0
%





17





KAIBO FOODS COMPANY LIMITED


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


THREE AND SIX MONTHS ENDED JUNE, 2010 AND 2011


(UNAUDITED)


(US dollars in thousands)





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  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, 2010 and June 30, 2011, the five largest customers accounted for 26% and nil of trade receivables, respectively.  No single customer exceeded 10% of trade receivables as of December 31, 2010 and June 30, 2011.  For the three ended June 30, 2010 and 2011, the five largest customers accounted for 27% and 26% of net sales, and for the six months ended June 30, 2010 and 2011, 24% and 21% of net 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 June 30, 2011, the Company has purchased $0.1 million of property, plant and equipment under these agreements and has made $8.6 million of deposits under these agreements. Therefore, as of June 30, 2011, the commitment has been reduced to $10.3 million.




18




KAIBO FOODS COMPANY LIMITED


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


THREE AND SIX MONTHS ENDED JUNE, 2010 AND 2011


(UNAUDITED)


(US dollars in thousands)




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 2011 through October 2042.  The annual future minimum rental payments required as of June 30, 2011 were as follows:




Amount2011 (six months)

$
1022012


832013


322014


232015


23Thereafter


612$
875




Rent expense under operating leases for the three and six months ended June 30, 2010 and 2011 was approximately $0.1 million for each period.




19




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, we completed a reverse acquisition transaction with Kaibo Foods Holdings Limited (f/k/a CFO Consultants, Inc.) through a share exchange with former shareholders of Kaibo Foods Holdings Limited.





Pursuant to the Exchange Agreement by and among the Company, Waibo, the holders of all outstanding shares of Waibo (the “Waibo Shareholders”) and Orion Investment Inc. (the “Company’s Principal Shareholder”), we acquired all of the outstanding shares of Waibo (the “Waibo Shares”) from the Waibo Shareholders and the Waibo Shareholders transferred all of the Waibo Shares to us. In exchange, we agreed to issue to the Waibo Shareholders or their designee, an aggregate of 22,493,475 shares of common stock (the “Exchange Shares”), equal to 96% of all of our outstanding common stock, after giving effect to the conversion of an outstanding convertible note of the Company held by Millennium Group, Inc., in the principal amount of $25,000 (the “Convertible Note”). The Convertible Note was convertible into 586,804 shares of common stock. On the Closing Date, we did not have sufficient authorized shares to complete the issuance of the entire amount of Exchange Shares and shares issuable pursuant to the Convertible Note, so only 2,361,716 shares of common stock were issued to the designee of the Waibo Shareholders at the closing, and no shares were issued to the holder of the Convertible Note.  After the Closing Date, these shares represented approximately 87% of the total issued and outstanding shares of the Company. On March 10, 2011 we increased the total number of authorized shares of our common stock.  On May 27, 2011 we 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.




20




The business combination was accounted for as a reverse acquisition and recapitalization, whereby we were the surviving and continuing entity for financial reporting purposes and are deemed to be the acquirer of Waibo.  The business combination 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 (87% based on the actual number of shares issued on the Closing Date) 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 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 six months ended June 30, 2011, 50.5% and 49.5% 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 June 30, 2011, our production capacity utilization was 67% (an average of 6 months) 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 184,500 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.





21




(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 is comprised of cost of raw material, direct labor and production overhead, which accounted for 90.5%, 1.3% and 8.2% of our cost of sales respectively for the six months ended June 30, 2011.





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 67.1% of our selling and distribution costs incurred for the six months ended June 30, 2011.





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 49.4% and 2.4% of our administrative expenses incurred for the six months ended June 30, 2011.





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.





22





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, has 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.  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 judgments, 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 yearsBuildings
20 yearsMotor vehicles
5 yearsPlant and machinery
10 yearsOther equipment
5 years




23




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 June 30, 2011.





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 June 30, 2011.





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 June 30, 2011.





Results of Operations





Comparison of the three and six months ended June 30, 2011 and 2010.





Sales





Three Months Ended

June 30,


Six Months Ended

June 30,2010


2011


2010


2011(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)(Dollars in thousands except units and per unit data)Revenue

$
12,018


$
11,411


$
28,991


$
37,100Gross profit

$
5,047


$
3,287


$
12,392


$
11,336Unit sales (metric tons)


15,975



9,540



38,715



31,560Selling price per unit

$
752


$
1,196


$
749


$
1,176Gross profit per unit

$
316


$
345



320


$
359Gross profit as a % of revenue


42.0
%


28.8
%


42.7
%


30.6
%




24




Our sales decreased by 5.1% from $12.0 million for the second quarter of 2010 to $11.4 million for the second quarter of 2011 due to the decrease of our sales volume offset by the increase in average unit selling price.





The price of agricultural products has increased significantly since the third quarter of 2010 and became relatively stable during the first quarter of 2011, which resulted in an increase in purchase price of potatoes by 94.0% from RMB400 ($59) per metric ton for the three months ended June 30, 2010 to RMB775 ($119) per metric ton compared with June 30, 2011.  We were able to pass through the increase in the purchase price of potatoes to our customers and increased our average selling price by 59.0% in the second quarter of 2011 compared to that of 2010.





However, the price of potatoes has surged sharply to an unusually high level since the middle of April 2011 due to the following reasons:





a.)
Price distortion due to speculation in the potato market




b.)
A dwindling supply of potatoes for the season





We can pass through the incremental cost of potatoes to our customers only if the increment is reasonable and acceptable to our downstream industries.  Because the purchase price of potatoes was at an unusually high level during the quarter, making our products much less affordable to our customers, we chose to suspend our production lines in the middle of April 2011, which was earlier than we would typically suspend production for the season.  Accordingly, our sales volume decreased by 34.9% for the second quarter of 2011 compared to that of 2010.





However, our sales revenue increased by 28.0% from $29.0 million for the six months of 2010 to $37.1 million for the six months of 2011 due to increase of our average unit selling price offset by decrease of sales volume as mentioned above.





Cost of sales





Our cost of sales increased by 16.5% from $7.0 million for the second quarter of 2010 to $8.1 million for the second quarter of 2011, primarily due to corresponding increases in the average purchase price of potatoes offset by decrease in sales volume.





Our cost of sales increased by 55.2% from $16.6 million for the six months of 2010 to $25.8 million for the six months of 2011, primarily due to corresponding increases in the average purchase price of potatoes offset by decrease in sales volume.





Gross profit and gross profit margin





The price of agricultural products has increased significantly since the third quarter of 2010.  The increase in the average purchase price of potatoes in 2011 has resulted in an increase in the ratio of our cost of sales as a percentage to our sales.





Though our gross profit margin decreased from 42.0% for the second quarter of 2010 to 28.8% for the second quarter of 2011, we passed through the increase in the purchase price of potatoes to our customers and improved our gross profit per unit by 9.2% from $316 per metric ton in 2010 to $345 per metric ton in 2011.  Due to early suspension of our production in response to the unusually high price of potatoes since the middle of April 2011, our gross profit decreased from $5.0 million for the second quarter of 2010 to $3.3 million for the second quarter of 2011.





Likewise, our gross profit decreased from $12.4 million for the six months of 2010 to $11.3 million for the six months of 2011 due to the decrease in sales volume offset by the increase in selling price.  Our gross profit margin decreased from 42.7% for the six months of 2010 to 30.6% for the six months of 2011 due to the increase in the purchase price of potatoes.




25




Operating expenses





Operating expenses remained stable at $1.0 million for the second quarter of 2011 as compared to the same period in 2010 and were stable at $1.9 million for the first six months of 2011 as compared to the same period in 2010.





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 provided for the dividend withholding tax from 5% to 10% on dividends declared by the PRC subsidiaries to their parent company incorporated in Hong Kong.





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.





26





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.





The following table sets out a summary of our cash flow during the six months ended June 30, 2010 and 2011:





Six Months Ended

June 30,2010


2011(Dollars in thousands)Net cash provided by operating activities

$
28,189


$
31,136Net cash used in investing activities


(133)



(7,751)Net cash (used in) provided by financing activities


(21,819)



2,048Net increase in cash and cash equivalents


6,237



25,433Effect of foreign exchange rate on changes in cash and cash equivalents


271



822Cash and cash equivalents at beginning of year


22,131



27,374Cash and cash equivalents at end of year

$
28,639


$
53,629





Cash flow from operating activities





We derive our cash flow 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 six months ended June 30, 2011, we had net cash generated from operating activities of $31.1 million, which was primarily contributed by net income before working capital changes of $9.3 million and a decrease, representing customer repayments, in trade accounts receivable of $22.4 million.  The decrease in trade accounts receivable and resulting increase in cash payments was primarily due to seasonality of sales.





For the six months ended June 30, 2010, we had net cash generated from operating activities of $28.2 million, which was primarily contributed by net income before working capital changes of $9.6 million and a decrease, representing customer repayments, in trade accounts receivable of $18.1 million.  The decrease in trade accounts receivable and resulting increase in cash payments was primarily due to seasonality of sales.





Cash flow from investing activities





Our cash outflow from investing activities is principally for purchases of property, plant and equipment during the six months ended June 30, 2010 and 2011.





Cash flow from financing activities





We derive our cash inflow 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.





27





For the six months ended June 30, 2011, we had net cash provided by financing activities of $2.0 million, which was due primarily to the net advances received from shareholders of $2.8 million, offsetting by net payment of short-term debt of $0.8 million.





For the six months ended June 30, 2010, we had net cash used in financing activities of $21.8 million, which was due to the cash outflow used to pay dividends of $22.8 million.





NET CURRENT ASSETS





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





December 31,


June 30,2010


2011Current assets:Cash

$
27,374


$
53,629Trade accounts receivable, net


22,165



-Inventories


1,596



269Prepayments and other receivables


1,296



50252,431



54,400Current liabilities:Trade accounts payable


240



-Accruals and other payables


3,530



938Income taxes payable


2,949



2,947Short term borrowings


2,655



1,935Convertible note


25



-Derivative instruments


55



148Due to shareholders


2,870



5,68112,324



11,649Net current assets

$
40,107


$
42,751





We had net current assets of $42.8 million as of June 30, 2011.  The improvement in net current assets as of June 30, 2011 from December 31, 2010 of $2.7 million was primarily due to an increase in cash as a result of the cash inflow from operating activities offset by cash outflow used in investing activities of $7.8 million.





Trade accounts receivable





Our trade accounts receivable represent receivables from customers for sales of products. We had trade accounts receivable of $22.2 million and nil as of December 31, 2010 and June 30, 2011, respectively.  The decrease in trade receivables as of June 30, 2011 was due primarily to seasonality of sales.





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





Year Ended

December 31,

Six Months Ended

June 30,2010

2011Trade accounts receivable turnover days (note)


80



54





Note:
Trade accounts receivable turnover days is equal to the average trade accounts receivable divided by sales and multiplied by 365 days (181 days for the six months ended June 30, 2011). 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.




28




The significant drop in trade accounts receivable turnover days for six months ended June 30, 2011 to 54 days was a result of zero trade accounts receivable being outstanding as of June 30, 2011 due to seasonality.





Inventories





Our inventories decreased to $0.3 million as of June 30, 2011 from $1.6 million as of December 31, 2010 due to seasonality of sales.





The table below sets out our inventory turnover days for the periods indicated:





Year Ended

December 31,

Six Months Ended

June 30,2010

2011Inventory turnover days (note)


13



7





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 (181 days for the six months ended June 30, 2011).  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 significant drop in inventory turnover days for six months ended June 30, 2011 to 7 days was a result of suspension of our production process due to seasonality.





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 $2.9 million and $5.7 million as of December 31, 2010 and June 30, 2011 are unsecured, interest free and have no fixed terms of repayment.





29




Property, plant and equipment





Net plant and machinery and other office equipment, amounted to $7.7 million and $7.4 million as of December 31, 2010 and June 30, 2011, respectively.  We had no significant additions to property, plant and equipment during the periods presented.  Deposits of $8.6 million were made to purchase additional property, plant and equipment during the six months ended June 30, 2011.





Capital Expenditures





The following table sets out the historical capital expenditures, including deposits made for property, plant and equipment, during the period indicated:





Year Ended

December31,


Six Months Ended

June 30,2010


2011Furniture, fixtures and office equipment

$
133


$
7,751





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





December 31,2011


2012


2013(for the

remaining 6

months)Land use rights

$
-


$
9,288


$
36,068Buildings


-



8,452



10,526Plant and machinery


8,050



-



13,622$
8,050


$
17,740


$
60,216





We expect that the capital expenditures for the three years ending December 2013 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 cash generated from operating activities.





COMMITMENT 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 June 30, 2011, the Company has purchased $0.1 million of property, plant and equipment under these agreements and has made $8.6 million of deposits under these agreements. Therefore, as of June 30, 2011 the commitment has been reduced to $10.3 million.




30




(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 2011 through October 2042. The yearly future minimum rental payments required as of June 30, 2011 were as follows:




(Dollars in thousands)2011 (six months)

$
1022012


832013


322014


232015


23Thereafter


612$
875





Item 3. Quantitative and Qualitative Disclosures About Market Risk





Not Applicable.





Item 4. Controls and Procedures





Disclosure Controls and Procedures





Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of June 30, 2011, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are 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 such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.





Changes in Internal Control over Financial Reporting





There has been no change in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




31




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.  [Removed and Reserved]





Item 5.  Other Information





None.





Item 6.  Exhibits.





(b)   Exhibits





Exhibit No.

Description31.1*

Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*

Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*

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.





32




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 LIMITEDDate: August 19, 2011
By:
/s/ Joanny KwokJoanny Kwok,Chief Executive Officer and President(Principal Executive Officer)
  Date: August 19, 2011
By:
/s/ Ken TsangKen Tsang,Chief Financial Officer(Principal Financial Officer)





33





EXHIBIT INDEX




Exhibit No.

Description31.1*

Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*

Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*

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.





34