KAOPU GROUP INC - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2018

OR

For the transition period from ______ to __________

COMMISSION FILE NUMBER: 333-194583

LONGBAU GROUP, INC.

(Exact name of registrant as specified in its charter)

No.100-11, Sec. 1, Zhongqing Rd.,

North Dist., Taichung City 404,

Taiwan (R.O.C.)

(Address of principal executive offices)

+852 58059452

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer 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, a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

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 July 31, 2018, there are a total of 30,500,000 shares of common stock issued and outstanding. 

TABLE OF CONTENTS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievement expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described under Part 1 Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

Forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report and the documents that we reference in this report, or that we filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

OTHER PERTINENT INFORMATION

References in this report to “we,” “us,” “our” and the “Company” and words of like import refer to Longbau Group, Inc. and its subsidiaries.

Our business is conducted in Hong Kong using the Hong Kong Dollar (HKD), the currency of Hong Kong, in Taiwan using NT$, the currency of Taiwan, and our financial statements are presented in United States dollars (“USD” or “$”).   In this report, we refer to assets, obligations, commitments and liabilities in our financial statements in USD.   These dollar references are based on the exchange rate of NT$ to USD, determined as of a specific date.   Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of USD which may result in an increase or decrease in the amount of our obligations (expressed in USD) and the value of our assets, including accounts receivable (expressed in USD).

PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Longbau Group, Inc.

Consolidated Balance Sheets

June 30, 2018 and December 31, 2017

(Unaudited)

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

Longbau Group, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

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

Longbau Group, Inc.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2018 and 2017

(Unaudited)

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

Longbau Group, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Organization and Operations

Longbau Group, Inc. (the Company) was incorporated in the State of Delaware on December 23, 2013.

Business operations include sales of life, property and casualty insurance products underwritten by insurance companies as well as insurance brokerage services and consulting for other providers of deferred preneed funeral and cemetery services, preneed cemetery and funeral activities, sales of burial vaults, urns and other funeral related and consumer products and cemetery property.

Operating subsidiaries include Long Bao Life Technology Co., Ltd. (Long Bao Life) and Ho-Cheng Insurance Brokers Co., Ltd. (Ho-Cheng Insurance).

Long Bao Life provides “pre-need” and “at need” funeral services and sells funeral related products, such as urns, in Taiwan. A pre-need death care contract enables a customer to make his/her own funeral arrangements in advance and prepay for the funeral, which reduces the burden of the family at the time of bereavement as well as avoids the influence of rising costs. In addition, the Company provides consulting services to customers prior to the purchase.

Ho-Cheng Insurance, an insurance intermediary company, focuses on sales of life, property and casualty insurance products underwritten by insurance companies as well as insurance brokerage services. Ho-Cheng Insurance has been cooperating with many insurance companies operating in Taiwan to distribute a wide variety of insurance products to customers.

Note 2 – Summary of Significant Accounting Policies

Interim financial statements

The accompanying Consolidated Balance Sheet as of December 31, 2017, which was derived from audited financial statements, and the unaudited interim financial statements included herein, presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosure are adequate to make the information presented not misleading. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements contained in the Company's 2017 Annual Report on Form 10-K, and it is suggested that these consolidated financial statements be read in conjunction therewith.

Basis of Presentation

The accompanying consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company’s functional currency is the Taiwanese Dollar (“Taiwanese $” or “NT$”); however, the accompanying consolidated financial statements were translated and presented in United States Dollars (“$” or “USD”).

The following table details the exchange rates used for the respective periods:

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to allowance for sales return and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Revenue Recognition

Long Bao Life sells its merchandise and services on both a preneed and atneed basis.

Revenue is recognized when control of the performance obligation is transferred to the customer. Our performance obligations include funeral and cemetery merchandise and services. Control transfers when merchandise is delivered, or services are performed.

We sell price-guaranteed preneed contracts through various programs providing for future merchandise and services at prices prevailing when the agreements are signed. Revenue associated with sales of preneed contracts is deferred until merchandise is delivered or the services are performed, generally at the time of need. In situations in which we have no further obligation or involvement related to the merchandise, we recognize revenue and record the cost of sales upon the earlier of vendor storage of these items or delivery in the cemetery. There is no general right of return for delivered items.

The total consideration received for contracts with customers is allocated to each performance obligation based on relative selling price. Relative selling prices are determined by either the amount we sell the performance obligation for on a stand-alone basis or our best estimate of the amount we would sell it for based on an adjusted market assessment approach that is consistent with our historical pricing practices.

Payment on atneed contracts is generally due at the time the merchandise is delivered or the services are performed. For preneed contracts, payment generally occurs prior to our fulfillment of the performance obligations. Pursuant to the Taiwanese law, all or a portion of the proceeds from merchandise or services sold on a preneed basis may be required to be deposited into trust funds. When we receive payments from the customer, we deposit the amount required by law into the merchandise and service trusts and reclassify the corresponding amount from Deferred revenue, net into Deferred receipts held in trust. Amounts are withdrawn from the merchandise and service trusts when we fulfill the performance obligations. We defer investment earnings related to these merchandise and service trusts until the associated merchandise is delivered or services are performed. In addition, we are entitled to retain a portion of collected customer payments when a customer cancels a preneed contract; these amounts are also recognized in revenue.

Costs related to delivery or performance of merchandise and services are charged to expense when merchandise is delivered, or services are performed. Incremental direct selling costs are deferred and recognized when the associated performance obligation is fulfilled based on specific identification in the fulfillment of a contract. All other selling costs are expensed as incurred.

Ho-Cheng Insurance’s revenue is from insurance agency and brokerage services. The Company sells insurance products to customers and obtains commissions from the respective insurance carriers according to the terms of each insurance company service agreement. The Company recognizes revenue when the following have occurred: persuasive evidence of an agreement between the insurance company and insured exists, services were provided, the fee for such services is fixed or determinable and collectability of the fee is reasonably assured. Insurance agency services are considered complete, and revenue is recognized, when an insurance policy becomes effective. The Company recognizes revenue from insurance carriers on a gross basis. The commission paid by the Company to its agents are recorded as cost of revenues.

Basic and Diluted Earnings Per Share

Basic earnings per share (“EPS”) is based on the weighted average number of common shares outstanding. Diluted EPS is based on the assumption that all dilutive securities are converted. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. There were no potentially dilutive securities outstanding during the periods presented.

Accounting Standards Adopted in 2018

We have adopted the following recent accounting pronouncements in these financial statements with no significant impact on reported financial position, results of operations or cash flow:

Revenue Recognition

In May 2014, the FASB issued "Revenue from Contracts with Customers", which replaced existing revenue recognition guidance. During 2016, the FASB made several amendments to the new standard that clarified guidance on several matters, including principal vs. agent considerations, identifying performance obligations, sales taxes, and licensing.

The new standard, as amended, requires that we recognize revenue in the amount to which we expect to be entitled for delivery of promised goods and services to our customers. The new standard also resulted in enhanced revenue-related disclosures, including any significant judgments and changes in judgments. Additionally, the new standard requires the deferral of incremental direct selling costs to the period in which the related revenue is recognized.

We adopted the new standards on January 1, 2018 using the modified retrospective method. The timing of revenue recognition for our preneed contracts remained consistent between the new and previous standards. There was no material impact on our consolidated financial statements from adopting the new standard but we have expanded disclosure about our revenues in Footnote 2.

The following recent accounting pronouncements are currently being evaluated for implementation and could potentially have a significant impact on future financial position results of operations or cash flow:

In February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This ASU is effective for all interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We expect to adopt ASU 2016-02 beginning January 1, 2019 and are in the process of assessing the impact that this new guidance is expected to have on our financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09, Modification Accounting for Share-Based Payment Arrangements. The standard amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The new standard is effective for fiscal years beginning after December 15, 2017. There was no impact on the financial statements of adopting this new standard on January 1, 2018.

Subsequent Events

The Company’s policy is to evaluate events and transactions through the date the financial statements are available for release for potential disclosure as subsequent events.

Note 3 – Going Concern Considerations

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations, has a substantial working capital deficiency and substantial accumulated deficits and comprehensive loss that raise substantial doubt about its ability to continue as a going concern. Management's plans to address these issues are to achieve and maintain profitability which depends on the growth of our market share, the acceptance of our services by our customers, the competitiveness of our death care management consultant services, and our ability to control our costs and expenses. Additionally, our controlling shareholders will continue to contribute capital if required as they did in 2017 and 2016. Our plans also include raising substantial capital from share purchase agreements from outside entities.

Note 4 – Trust Investments

The cost and market values associated with preneed contract trust investments at June 30, 2018 are detailed below:

Where quoted prices are available in an active market, investments held by the trust are classified as Level 1 investments pursuant to the three-level valuation hierarchy. The Company’s Level 1 investments include cash and money market accounts and mutual funds. There are no Level 2 and Level 3 investments in the Company’s trust portfolio as of June 30, 2018.

Note 5 – Related Party Transactions

Sales

During the six months ended June 30, 2018 and 2017, the Company’s Chief Executive Officer, affiliated and family members purchased certain products from the Company for $13,302 and $12,840, respectively.

Other payable

As of June 30, 2018 and December 31, 2017, the Company had a liability of $19,497 and $0, respectively, to its Chief Executive Officer for short-term borrowings. The liability is non-interest bearing and are payable on demand.

Lease

During the six months ended June 30, 2018 and 2017, the Company leased offices from the Company’s Chief Executive Officer and two directors. Total lease expense to the related parties during the six months ended June 30, 2018 and 2017 were $42,742 and $32,917, respectively.

Commission cost

During the six months ended June 30, 2018 and 2017, the Company incurred $3,672 and $4,016 of commission costs to a company controlled by a family member of the Company’s Chief Executive Officer. As of June 30, 2018 and December 31, 2017, amount payable to the affiliated company for commissions were $241 and $1,561, respectively.

Note 6 – Commitments and Contingencies

Pursuant to the preneed contracts with the customers, the Company agreed to pay interest starting from the date that the full contract price is collected by the Company. The interest is calculated based on 80% of the contract price at a rate of 5% per annum for contracts entered in or prior to February 2009 and based on 100% of the contract price at a rate of 2.37% per annum for contracts entered after February 2009 but before February 2011. Starting from March 2011, interest is calculated based on 100% of the contract price at the one-year certified deposit rate of postal service announced by the Chunghwa Post Co., Ltd. in Taiwan. The interest is paid annually and included in cost of revenues in the statement of operations. Interest expense related to the preneed contracts were $47,180 and $19,318 for the six months ended June 30, 2018 and 2017, respectively.

Note 7 – Segment Reporting

The Company uses the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company has three reportable segments: Long Bao Life that mainly sells funeral services products; Ho-Cheng Insurance that is an insurance broker; and Longbau Taiwan and Long Group, Inc. that provides consulting services. The following tables summarize the Company’s segment information for the six months ended June 30, 2018 and 2017 and as of June 30, 2018 and December 31, 2017:

Note 8 – Subsequent Events

The Company has evaluated transactions and events form the balance sheet date through the date these financial statements are available for release and has determined there are no events and or transactions require disclosure as subsequent events.

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

You should read this Management’s Discussion and Analysis in conjunction with the Consolidated Financial Statements and Related Notes. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We sell death care management consultant services through Longbau Hong Kong, our operating company in Hong Kong, to public consumers across Taiwan. In September 2014, we established another subsidiary in Taiwan, Longbau Taiwan, to provide death care consulting service and sell death care products across Taiwan. Longbau Taiwan is 100% owned by Longbau Hong Kong.

We will be providing a variety of death care management consultancy services. We consult on the purchase of cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis. In addition, the Company specializes in the consultancy for deferred preneed funeral and cemetery receipts held in trust, preneed cemetery activities, preneed funeral activities, preneed funeral and cemetery, burial vaults, cemetery property, and cemetery property revenue.

On December 29, 2016, we, Long Bao Life Technology Co., Ltd (“Long Bao Life”), the shareholders of Long Bao Life, and Tsai Ko, our CEO, entered into a share exchange agreement whereby we issued 250,000 shares of our common stock to Long Bao Life shareholders in exchange for 100% of Long Bao Life's issued and outstanding ownership interests. Upon completion of the foregoing transaction, Long Bao Life became our wholly-owned subsidiary. Long Bao Life was a private company incorporated in Taiwan in 2007.

Long Bao Life provides pre-need and at need funeral services and sells funeral related products, such as urns, in Taiwan. A pre-need death care contract enables a customer to make his/her own funeral arrangements in advance and prepay for the funeral, which reduces the burden of the family at the time of bereavement as well as avoids the influence of rising costs. In addition, the company provides consulting services to customer prior to the purchase. Long Bao Life utilizes various systems, including multi-level marketing ("MLM") system, to sell the preneed contracts and other products. Under the MLM system, the salespeople are compensated not only for sales they generate, but also for the sales of the other salespeople that they recruit. This recruited sales force is referred to as the participant's "downline", and can provide multiple levels of compensation. MLM is one type of direct selling. The salespeople are expected to sell products directly to consumers by means of relationship referrals and word of mouth marketing. MLM salespeople not only sell the Long Bao Life products but also encourage others to join the Long Bao Life as a distributor. Long Bao Life also sales its preneed contracts and other products through agents where it pays a fixed amount of commission.

On December 29, 2016, we, Ho-Cheng Insurance Brokers Co., Ltd. (“Ho-Cheng Insurance”), the shareholders of Ho-Cheng Insurance and Tsai Ko entered into a share exchange agreement whereby we issued 250,000 shares of our common stock to Ho-Cheng Insurance shareholders in exchange for 100% of Ho-Cheng Insurance’s issued and outstanding ownership interests. Upon completion of the foregoing transaction, Ho-Cheng Insurance became our wholly-owned subsidiary. Ho-Cheng Insurance was a private company incorporated in Taiwan in 2001.

Ho-Cheng Insurance, a Taiwan based insurance intermediary company focuses on sales of life, property and casualty insurance products underwritten by insurance companies as well as insurance brokerage services. The company has been cooperating with many insurance companies operating in Taiwan to distribute a wide variety of insurance products to customers.

Long Bao Life, Ho-Cheng and us were entities under common control and had been since the earliest period presented in these consolidated financial statements included elsewhere in this Form 10-Q; therefore, the consolidated financial statements have been presented as if the acquisitions of Long Bao Life and Ho-Cheng Insurance had occurred at the beginning of the period for which consolidated financial statements are presented.

Results of Operations

For the three months ended June 30, 2018 and 2017

Revenues.  For the three months ended June 30, 2018, we generated revenues of $2,368,701 as compared to $1,150,331 for three months ended June 30, 2017, an increase of $1,218370 or 106%. The increase is principally due to more sales of insurance products.

Cost of revenues. For the three months ended June 30, 2018, our cost of revenues was $1,731,203 as compared to $554,436 for the three months ended June 30, 2017, an increase of $1,176,767 or 212%. The increase is principally due to more personnel costs incurred in 2018. As a percentage of revenues, our cost of revenue for the three months ended June 30, 2018 and 2017 were 73% and 48%, respectively. We had a lower margin in 2018 primarily due to higher personnel costs.

General and administrative expenses.  For the three months ended June 30, 2018, we had general and administrative expenses of $408,530 as compared to $589,883 for the three months ended June 30, 2017, a decrease of $181,353 or 31%. As a percentage of revenues, our general and administrative expenses for the three months ended June 30, 2018 and 2017 were 21% and 51%, respectively. The decrease in dollars is principally due to decreases in professional fees.

Other income (expense).  For the three months ended June 30, 2018, we had net other income of $129,822 as compared to net other income of $14,633 for the three months ended June 30, 2017, an increase of $115,189. The difference is principally due an investment income of $46,680 recognized in and dividend income received in 2018 versus in 2017 there was less investment income realized.

Net loss.  For the three months ended June 30, 2018, we had net income of $329,989 as compared to a net income of $22,028 for the three months ended June 30, 2017, an increase in net income of $307,961. The increase in net income is mainly due to the decrease in operating expenses.

For the six months ended June 30, 2018 and 2017

Revenues.  For the six months ended June 30, 2018, we generated revenues of $ 3,665,551 as compared to $3,385,684 for six months ended June 30, 2017, an increase of $ 279,867 or 8%. Revenues from our funeral services segment increased by $12,297 or 1.7% from $703,738 in 2017 to $716,035 in 2018. The increase is principally due to the net increase of revenues from preneed contract deliveries and funeral hosting fees earned, which is offset by the decrease of sales of urns. Revenues from our insurance segment increased by $319,525 or 12% from $2,681,946 in 2017 to $3,001,471 in 2018. The increase is principally due to more sales of our insurance products. We had no revenues from our consulting services segment during the six months ended June 30, 2018 and 2017.

Cost of revenues. For the six months ended June 30, 2018, our cost of revenues was $2,614,739 as compared to $2,153,453 for the six months ended June 30, 2017, an increase of $ 461,286 or 21%. The increase is principally due to more personnel costs incurred in 2018. As a percentage of revenues, our cost of revenue for the six months ended June 30, 2018 and 2017 were 71% and 64%, respectively.

General and administrative expenses.  For the six months ended June 30, 2018, we had general and administrative expenses of $774,932 as compared to $997,749 for the six months ended June 30, 2017, a decrease of $222,817 or 22%. As a percentage of revenues, our general and administrative expenses for the six months ended June 30, 2018 and 2017 were 24% and 29%, respectively. The decrease in dollars is principally due to decreases in professional fees.

Other income (expense).  For the six months ended June 30, 2018, we had net other income of $ 102,745 as compared to net other expense of $53,939 for the six months ended June 30, 2017, an increase of $ 156,684 or 290%. The increase is principally more realized investment income in 2018 and the dividend income receipted in 2018.

Net loss.  For the six months ended June 30, 2018, we had net income of $ 318,900 as compared to a net income of $103,419 for the six months ended June 30, 2017, an increase in net income of $215,481. The increase in net income is mainly due to the increase in total revenues.

Liquidity and Capital Resources Operations

As of June 30, 2018, we had cash on hand of $464,159.

Operating activities. For the six months ended June 30, 2018, we have cash provided by operating activities of $13,200as compared to cash used in operating activities of $11,545 for the six months ended June 30, 2017. The increase is principally due to changes in accounts receivable and deferred contract revenues.

Investing activities. For the six months ended June 30, 2018, we used cash in investing activities of $131,503 as compared to cash used in investing activities of $157,145 for the six months ended June 30, 2017. We purchased less property and equipment in 2018.

Financing activities. For the six months ended June 30, 2018, we did not have any cash inflow or outflow from the financing activities as compared to $92,841 for the six months ended June 30, 2017. During the six months ended June 30, 2017, we received capital contribution of $92,841.

We plan to fund our operations from loans from our major shareholders and we may raise equity capital by offering shares of our common stock to investors as well as from our operations.

Although the Company believes its revenues from operations will eliminate the need to raise additional funding to expand its business operations over the next 12 months, there is no guarantee additional funding will not be required. If financing is needed and we are not able to raise the capital necessary to fund our business expansion objectives, we may have to delay the implementation of our business plan.

We do not currently have any arrangements for financing. Obtaining additional funding will be subject to a number of factors, including general market conditions, investor acceptance of our business plan and initial results from our business operations. These factors may impact the timing, amount, terms or conditions of additional financing available to us. The most likely source of future funds available to us is through the sale of additional shares of common stock or advances from our major shareholders or directors and, if we are able to obtain equity financing, it will likely result in significant additional dilution to the interests of our current stockholders and may include liquidation or other preferences that adversely affect your right as a stockholder. The Company may obtain financing by issuing debt which may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. There can be no assurance that we will be able to obtain such additional financing is needed and if we cannot receive such financing we may be forced to suspend or cease operations.

Critical Accounting Policies

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("US GAAP"). US GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expenses amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

We believe the following is among the most critical accounting policies that impact our consolidated financial statements. We suggest that our significant accounting policies, as described in our financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to allowance for sales return and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Inventory

Inventory is valued at the lower of the inventory’s cost or net realizable value. Management compares the cost of inventory with its market value and an allowance is made to write down inventory to the net realizable value, if lower.

Trust Investments

Pursuant to Taiwanese law, 75% of the proceeds from preneed sales of merchandise and services are put into trust until such time that the Company meets the requirements for releasing trust amount, which is generally when the service and merchandise are delivered, when the preneed contract is canceled and when the balance of the trust fund exceeds 75% of the proceeds from sales of preneed contracts. The legal beneficiary of the trust is the Company and the trust is managed by the Company. The investments of such trust funds are classified as trading securities and are reported at fair market value; therefore, the unrealized gains and losses are included in the statement of operations. Targets that the trust fund can invest in are regulated by the authorities. On an annual basis, the Company is obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including all investment income.

Deferred Commission Costs

The Company defers certain direct costs related to the acquisition of new preneed contracts. Such costs are expensed as the revenues are recognized.

Deferred Preneed Contract Revenues and Deferred Revenues

The Company sells preneed contracts whereby the customer enters into arrangements for future merchandise and services prior to the time of need. As these contracts are entered into prior to the delivery of the related merchandise and services, the amount collected in advance is recorded in deferred preneed contract revenues. If a preneed contract is terminated upon a customer’s request, a refund equal to total amount collected by the Company minus 20% of the contract price will be made when the termination is not made within 14 days from the contract initiation date. Full refund will be made when the termination is made within 14 days. We do not record accounts receivable in accordance with the contractual payment date given the nature of our merchandise and services, the nature of our contracts with customers, and the timing of the delivery of our services.

The Company also offers its merchandise and provides funeral hosting services on a stand-alone at need basis. The amount collected from customer before the merchandises and services are delivered is recorded in deferred revenues on the balance sheet.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

Revenue Recognition

We sell our merchandise and services on both a preneed and atneed basis.

Revenue is recognized when control of the performance obligation is transferred to the customer. Our performance obligations include funeral and cemetery merchandise and services. Control transfers when merchandise is delivered, or services are performed.

We sell price-guaranteed preneed contracts through various programs providing for future merchandise and services at prices prevailing when the agreements are signed. Revenue associated with sales of preneed contracts is deferred until merchandise is delivered or the services are performed, generally at the time of need. In situations in which we have no further obligation or involvement related to the merchandise, we recognize revenue and record the cost of sales upon the earlier of vendor storage of these items or delivery in the cemetery. There is no general right of return for delivered items.

The total consideration received for contracts with customers is allocated to each performance obligation based on relative selling price. Relative selling prices are determined by either the amount we sell the performance obligation for on a stand-alone basis or our best estimate of the amount we would sell it for based on an adjusted market assessment approach that is consistent with our historical pricing practices.

Payment on atneed contracts is generally due at the time the merchandise is delivered or the services are performed. For preneed contracts, payment generally occurs prior to our fulfillment of the performance obligations. Pursuant to the Taiwanese law, all or a portion of the proceeds from merchandise or services sold on a preneed basis may be required to be deposited into trust funds. When we receive payments from the customer, we deposit the amount required by law into the merchandise and service trusts and reclassify the corresponding amount from Deferred revenue, net into Deferred receipts held in trust. Amounts are withdrawn from the merchandise and service trusts when we fulfill the performance obligations. We defer investment earnings related to these merchandise and service trusts until the associated merchandise is delivered or services are performed. In addition, we are entitled to retain a portion of collected customer payments when a customer cancels a preneed contract; these amounts are also recognized in revenue.

Costs related to delivery or performance of merchandise and services are charged to expense when merchandise is delivered, or services are performed. Incremental direct selling costs are deferred and recognized when the associated performance obligation is fulfilled based on specific identification in the fulfillment of a contract. All other selling costs are expensed as incurred.

Ho-Cheng Insurance’s revenue is from insurance agency and brokerage services. The Company sells insurance products to customers, and obtains commissions from the respective insurance carriers according to the terms of each insurance company service agreement. The Company recognizes revenue when the following have occurred: persuasive evidence of an agreement between the insurance company and insured exists, services were provided, the fee for such services is fixed or determinable and collectability of the fee is reasonably assured. Insurance agency services are considered complete, and revenue is recognized, when an insurance policy becomes effective. The Company recognizes revenue from insurance carriers on a gross basis. The commission paid by the Company to its agents are recorded as cost of revenues.

Accounting Standards Adopted in 2018

We have adopted the following recent accounting pronouncements in these financial statements with no significant impact on reported financial position, results of operations or cash flow:

In May 2014, the FASB issued "Revenue from Contracts with Customers", which replaced existing revenue recognition guidance. During 2016, the FASB made several amendments to the new standard that clarified guidance on several matters, including principal vs. agent considerations, identifying performance obligations, sales taxes, and licensing.

The new standard, as amended, requires that we recognize revenue in the amount to which we expect to be entitled for delivery of promised goods and services to our customers. The new standard also resulted in enhanced revenue-related disclosures, including any significant judgments and changes in judgments. Additionally, the new standard requires the deferral of incremental direct selling costs to the period in which the related revenue is recognized.

We adopted the new standards on January 1, 2018 using the modified retrospective method. The timing of revenue recognition for our preneed contracts remained consistent between the new and previous standards. There was no material impact on our consolidated financial statements from adopting the new standard but we have expanded disclosure about our revenues in the notes to our financial statements.

The following recent accounting pronouncements are currently being evaluated for implementation and could potentially have a significant impact on future financial position results of operations or cash flow:

In February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This ASU is effective for all interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We expect to adopt ASU 2016-02 beginning January 1, 2019 and are in the process of assessing the impact that this new guidance is expected to have on our financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09, Modification Accounting for Share-Based Payment Arrangements. The standard amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The new standard is effective for fiscal years beginning after December 15, 2017. There was no impact on the financial statements of adopting this new standard on January 1, 2018.

Off-Balance Sheet Arrangements

None. 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Not Applicable.

ITEM 4. INTERNAL CONTROLS OVER FINANCIAL REPORTING.

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Tsai Ko, our Chief Executive Officer and Yueh-Kuei Ko, the Company’s Chief Financial Officer, concluded that as of June 30, 2018, our disclosure controls and procedures were not effective due to the following material weaknesses in our control environment and financial reporting process consisting of the following as of June 30, 2018:

Changes in Internal Control over Financial Reporting.

During the three months ended June 30, 2018, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

Not applicable.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS

(a)           Exhibits:

*The certification attached as Exhibits 32.1 and 32.2 accompany this quarterly report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q report to be signed on its behalf by the undersigned, thereunto duly authorized.