UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission File Number: 0-51105

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 o

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 o

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

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

Yes o  No x

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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  

Yes o  No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of August 5, 2011, there were 10,354,000 shares of the registrant’s common stock, $0.001 par value, outstanding

TABLE OF CONTENTS

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PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

The consolidated financial statements of ALCO, Inc. and subsidiaries (collectively, the "Company"), included herein were prepared, without audit, pursuant to rules and regulations of the Securities and Exchange Commission.  Because certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America were condensed or omitted pursuant to such rules and regulations, these financial statements should be read in conjunction with the financial statements and notes thereto included in the audited financial statements of the Company as included in the Company's Form 10-K for the year ended December 31, 2010.

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ALCO, INC

CONSOLIDATED BALANCE SHEETS

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ALCO, INC

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

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ALCO, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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ALCO, INC

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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ALCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (UNAUDITED)

Note 1 – Organization and Operations

Description of Business and Basis of Presentation

ALCO, Inc. (“ALCO,” “we,” “us,” the “Company”) was incorporated under the laws of the State of Nevada on June 7, 1999 as Seahorse, Inc. and changed its name to Lotus Capital Corp. (“Lotus”) on September 20, 2004.  The Company changed its name to ALCO, Inc. on February 13, 2006.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the SEC instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included.  Results for the six-month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in ALCO’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

The consolidated financial statements include the accounts of the Company and all its majority-owned subsidiaries which require consolidation.  Inter-company transactions have been eliminated in consolidation.

Certain accounting principles, which are stipulated by General Accepted Accounting Principles in the United States (“US GAAP”), are not applicable in the Hong Kong Accounting Standards (“HKAS”).  The difference between HKAS accounts of the Company and its US GAAP financial statements is adjusted in the Company consolidated financial statement.

The Company maintains its books and accounting records in Hong Kong dollar ("HK$"), which is determined as the functional currency.  Assets and liabilities of the Company are translated at the prevailing exchange rate at each year end.  Contributed capital accounts are translated using the historical rate of exchange when capital is injected.  Income statement accounts are translated at the average rate of exchange during the year.  Translation adjustments arising from the use of different exchange rates from period to period are included in the cumulative translation adjustment account in shareholders' equity.  Gain and losses resulting from foreign currency transactions are included in operations.

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation.

Note 2 – Significant Accounting Policies

For significant accounting policies, see notes to the consolidated financial statements included in the Company’s annual report of Form 10-K for the year ended December 31, 2010 filed with the SEC.

Use of Estimates

The preparation of financial statements in conformity with US 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 financial statements, and the reported amounts of revenue and expenses during the reporting period.  Actual results, when ultimately realized could differ from those estimates.

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Significant Estimates

Several areas require significant management estimates relating to uncertainties for which it is reasonably possible that there will be a material change in the near term.  The more significant areas requiring the use of management estimates relate to the valuation of accounts receivable and payable, equipment, accrued liabilities, and the useful lives for amortization and depreciation.

Income Taxes

Income tax expense is based on reported income before income taxes.  Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.  In accordance with FASB Accounting Standards Codification TM No. 740, " Income Taxes”, these deferred taxes are measured by applying currently enacted tax laws.  The Company's effective tax rate for six months period ended June 30, 2011 and 2010 was 18.64% and 16.66%, respectively.  The Company did not provide any current or deferred income tax provision or benefit for any period presented to date because book income is substantially equal to taxable income, with only minor timing differences with regard to the depreciation of fixed assets.  Management has determined that any deferred tax asset or liability is inconsequential, and not material to the financial statements.

Fair Value of Measurements

The Company adopted Statement of ASC No. 820, “Fair Value Measurements and Disclosures” (“ASC 820”), effective January 1, 2008.  The provisions of ASC 820 are to be applied prospectively.

ASC 820 clarifies that fair value is an estimate of the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement date).  Under ASC 820, fair value measurements are not adjusted for transaction cost.  ASC 820 provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities

Level 2: Input other than quoted market prices that are observable, either directly or indirectly, and reasonably available.  Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.

Level 3: Unobservable inputs.  Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.

An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Availability of observable inputs can vary and is affected by a variety of factors.  The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.

Valuation of Goodwill and Other Intangible Assets

The Company records the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired as goodwill.  Current authoritative guidance requires goodwill to be tested for impairment annually as well as when an event or change in circumstance indicates impairment may have occurred.  Goodwill is tested for impairment by comparing the fair value of the Company’s individual reporting units to their carrying amount to determine if there is potential goodwill impairment.  If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value.

Long-lived assets, including fixed assets and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual

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disposition.  If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the long-lived asset to its estimated fair value.  The determination of future cash flows, as well as the estimated fair value of long-lived assets, involves significant estimates on the part of management.  In order to estimate the fair value of a long-lived asset, the Company may engage a third-party to assist with the valuation.  If there is a material change in economic conditions or other circumstances influencing the estimate of future cash flows or fair value, the Company could be required to recognize impairment charges in the future.

Related Party Transactions

The Company rented an office space in Hong Kong and rents a quarter in Shanghai from a company owned by directors of the Company.

Foreign Currency and Other Comprehensive Income

The accompanying financial statements are presented in United States (US) dollars.  The functional currency of Andrew Liu & Co Ltd (“ALC”), Chang An Consultants Ltd (“CAC”) and Edushipasia Limited (“ESA”) is the Hong Kong dollar (HK$).  The financial statements are translated into US dollars from HK$ at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses.  Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

The Hong Kong Monetary Authority (“HKMA”), Hong Kong's central bank, maintains a Linked Exchange Rate System since 1983.  The HKMA operates Convertibility Undertakings on both the strong side and the weak side of the Linked Rate of US$1: HK$7.8.  In fact, the exchange rate for HK$ to US dollars has varied by only 100ths during the first quarter of 2011 and 2010.  Thus, the consistent exchange rate used has been 7.80 HK$ per each US dollar.  Since there have been no greater fluctuations in the exchange rate, there is no gain or loss from foreign currency translation and no resulting other comprehensive income or loss.

Foreign currency transactions are those that required settlement in a currency other than HK$.  Gain or loss from foreign currency transactions, or exchange loss, are recognized in income in the period they occur.

The functional currency of Shanghai Heshili Broker Co. Limited (“SHB”) is the Chinese Yuan (“CNY”).  The financial statements of SHB are translated into United States dollars in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Code (ASC) No. 830, " Foreign Currency Matters”, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for the equity.  Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.

The exchange rates used to translate amounts in CNY into U.S. Dollars for the purposes of preparing the consolidated financial statements were as follows:  

Balance sheet items, as of period-end date:

US$0.15437:CNY1

Amounts included in the statements of operations, statements of changes in shareholders’ equity and statements of cash flows for the period: US$0.15276:CNY1

Earnings Per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no dilutive shares for the six months ended June 30, 2011.

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Recent Accounting Pronouncements

In January 2010, the FASB issued authoritative guidance which requires additional disclosures about transfers between Levels 1 and 2 of the fair value hierarchy and disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. This guidance was effective for the Company January 1, 2010, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. The adoption of this guidance, which is related to disclosure only, did not have a material impact on the Company’s financial position or results of operations.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of VIEs. This amendment requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity for financial reporting purposes. The amendment requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This amendment was effective for the Company beginning January 1, 2010. The Company adopted the amendment January 1, 2010 and it did not have any impact on the Company’s financial position or results of operations.

In October 2009, the FASB issued authoritative guidance about the accounting for revenue contracts containing multiple elements, allowing the use of companies’ estimated selling prices as the value for deliverable elements under certain circumstances and to eliminate the use of the residual method for allocation of deliverable elements. This guidance is effective for the Company beginning January 1, 2011. The Company does not expect that this standard will have a significant impact on its financial position or results of operations.

The Company does not believe that there are any new pronouncements that have been recently issued that might have a material impact on its consolidated financial statements other than those which have been disclosed.

Note 3 – Cash

Cash balances are held principally at one financial institution and are not insured.  The Company believes it mitigates its risk by investing in or through major financial institutions.  Recoverability is dependent upon the performance of the institution.

Although the cash balances are not insured, however, starting in September 2006, cash balances (except accounts with overdraft facilities) are protected by the Deposit Protection Scheme which is maintaining by the Hong Kong Deposit Protection Board, an independent statutory body established under the Deposit Protection Scheme Ordinance (Cap. 581).

Under the scheme, compensation up to a limit of HK$100,000 (US$12,821) per depositor would be paid from the scheme to depositor if the bank with which the depositor holds his/her eligible deposits fails.  On October 14, 2008, the Hong Kong Government announced that they would use the Exchange Fund to guarantee the repayment of all customer deposits held in authorized institutions in Hong Kong, following the principles of the Deposit Protection Scheme.  This action began on October 14, 2008 and expired at the end of 2010.  Following the enactment of the Deposit Protection Scheme (Amendment) Ordinance 2010 in June 2010, the protection limit of the Deposit Protection Scheme is increased from HK$100,000 per depositor to HK$500,000 (approximately US$64,103) per depositor with effect from January 1, 2011.

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Note 4 – Commissions Receivable

Note 5 – Fiduciary Asset

Fiduciary asset consists of cash balances held by a bank, mainly consisting of premiums collected from customers and payable to insurers, and claims received from insurers and payable to policyholders. The fiduciary asset had a balance of $2,062,628 and $964,542 at June 30, 2011 and December 31, 2010, respectively.

Note 6 – Due From Related Party

In February 2010, Fortune Ocean Ltd, a corporation owned by directors of the company, sold the properties of Room 501, 502A and 502B of the Hong Kong Office to a third party.  In this connection, the company ceased renting the properties from Fortune Ocean Ltd starting in March 2010.  The amount of US$23,077 due from Fortune Ocean Ltd is the rental deposit and has not been returned to the company yet.    

Note 7 – Prepayment

Prepayment of $77,283 paid in June 2011 is in relation to capital injection for a new entity named AL Marine Consulting Services (Shanghai) Ltd (“ALM Shanghai”) in China.

Note 8 – Property, Plant and Equipment

Depreciation expense for the six-month period ended June 30, 2011 and 2010 were $34,158 and $18,986 respectively.

Loss on disposal of fixed assets for the six-month period ended June 30, 2011 and 2010 were $28,571 and $1,809 respectively.

Note 9 – Goodwill and Other Intangible Assets

On December 16, 2010 (the “Acquisition Date”), the company acquired all of the outstanding stock of Shanghai Heshili Broker Co. Limited (“SHB”).  The total amount of cash paid for the acquisition was $852,223, in which $249,034 and $62,418 were allocated to goodwill and identifiable intangible assets respectively.  The allocation was carried out in accordance with the purchase acquisition accounting and based on the estimated fair values of such assets as of the date of acquisition.  Goodwill

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represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets.  

Fair value of goodwill will be evaluated under the Company’s annual goodwill impairment testing.  None of the goodwill is expected to be deductible for income tax purposes.  During the six months period ended June 30, 2011, certain assets and liabilities of SHB amounting to $40,729 were identified.  Thus, fair values of the assets, liabilities, and goodwill have been adjusted as follows:

The above estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the Acquisition Date.  Measurement period adjustments reflect new information obtained about facts and circumstances that existed as of the Acquisition Date.  The Company considers that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the Company is waiting for additional information necessary to finalize those fair values.  Thus, the provisional measurements of fair value set forth above are subject to change.  Such changes are not expected to be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one-year from the Acquisition Date.

Intangible asset is in relation to the acquired customer list with a useful life of 3 years.  Amortization expense for the six-month period ended June 30, 2011 of the intangible asset is $10,531.

The unaudited pro forma information of the Company set forth below gives effect to the acquisition of SHB as if it had been consummated as of the beginning of the applicable period.  The unaudited pro forma information has been derived from the historical consolidated financial statement of the Company and of SHB.  The unaudited pro forma information is for illustrative purposes only.

Note 10 – Fair Value of Available for Sale Marketable Securities Investments and Investment Income

The following are the Company’s investments owned and securities sold by level within the fair value hierarchy at June 30, 2011 and December 31, 2010:

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Investment in available for sale securities listed above are carried at fair value. The Company is able to value its available for sale securities based on quoted fair values for identical instruments, which resulted in the Company reporting its securities as Level 1.

Unrealized loss of $11,629 and $70,099 for the investments were recognized in the other comprehensive income for the six months ended June 30, 2011 and 2010, respectively.  All these gain and loss are related to the investments listed in the Hong Kong Stock Exchange.

Note 11 – Other Receivable

Other receivable consists of consulting income receivable, investment income receivable and unsecured, due on demand short-term advances that the Company makes from time-to-time to third-party entities less allowances for doubtful accounts.

Note 12 – Due to Directors

Amounts due to directors represent loans payable that are unsecured, non-interest bearing and are due on demand.

Note 13 – Related Party Transaction

The Company rents office space in Hong Kong and Shanghai from companies owned by directors of the Company.  The relevant rent expenses consist of following:

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In February 2010, Fortune Ocean Ltd sold the properties of Room 501, 502A and 502B of the Hong Kong Office to a third party.  In this connection, the company ceased paying rent to Fortune Ocean Ltd starting in March 2010.

Note 14 – Income Taxes

The Company's effective tax rate for the six months ended June 30, 2011 and 2010 was 18.64% and 16.66%, respectively.  The provisions for income taxes for the periods ended June 30, 2011 and 2010 are summarized as follows:

A reconciliation between the income tax computed at the U.S. statutory rate and the Company’s provision for income tax is as follows:

There were no significant permanent or temporary differences.

Accounting for Uncertainty in Income Taxes

The Company adopted the provisions of Accounting for Uncertainty in Income Taxes on January 1, 2007.  The provisions clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with the standard “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The provisions of Accounting for Uncertainty in Income Taxes also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Based on the Company’s evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.

The Company may from time to time be assessed interest or penalties by major tax jurisdictions.  In the event it receives an assessment for interest and/or penalties, it will be classified in the financial statements as tax expense.

Note 15 – Operating Leases

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Future minimum lease payments for operating leases for the succeeding years consists of following:

The Company has seven material operating lease commitments for its facilities.  The initial term of the lease arrangement for Director Quarter is two years beginning July 19, 2010 with a minimum lease commitment of $127,692.  For the Shanghai Office (both room 706 and 707 of Union Building), the initial term of the leases are one year beginning January 1, 2011 with a total minimum lease commitment of $19,328.  For the SHB Office, the initial term of the lease is one year beginning January 1, 2011 with a minimum lease commitment of $13,938.  All the lease arrangements mentioned above have no renewal option and rent holiday.  

For the Hong Kong Office of Room 501 and 502, Bank of America Tower, the initial term of the lease is two years beginning March 1, 2010 with a minimum lease commitment of $103,426.  This lease arrangement has no rent holiday but have a renewal option that, when the lease is ended in February 2012, the company can renew the lease for two years (from March 1, 2012 to February 28, 2014) at the prevailing market rent.

For the Hong Kong Office of Room 505, Bank of America Tower, the initial term of the lease is two years beginning November 15, 2009 with a minimum lease commitment of $25,600.  This lease arrangement has a three-month rent free period from November 15, 2009 to February 14, 2010.  In addition, when the lease is ended in 2011, the company has an option to renew the lease for two years (from November 15, 2011 to November 14, 2013) at the prevailing market rent.  

For the Fuzhou Office, the initial term of the lease is two years beginning August 1, 2010 with a minimum lease commitment of $22,256.  This lease arrangement has a one-month rent free period from August 1 to August 31, 2010.  In addition, the lease arrangement has no renewal option.

Note 16 – Noncontrolling Interest

On February 25, 2011, the Company’s subsidiary Chang An Consultants Ltd., declared dividend for approximately $321,795. The company has paid $128,717 to the noncontrolling shareholders.

Note 17 – Commitments and Contingencies

The Company's business operations exist solely in the PRC and are subject to significant risks not typically associated with companies in North America and Western Europe.  These include risks associated with, among others, the political, economic

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and legal environments and foreign currency limitations.

The Company's results may thus be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies, laws, regulations, anti-inflationary measures, currency conversion and remittance limitation, and rates and methods of taxation, among other things.

Note 18 – Stock-based Compensation

On June 1, 2010, the board of directors approved and the Company granted an award of 198,000 shares of restricted stock to certain key employees and directors of the Company. The award was made pursuant to the 2010 Restricted Share Stock Compensation Plan as approved by the Company’s Board of Directors. Under the plan, a maximum of 500,000 common shares may be delivered in satisfaction of awards. Key employees and directors are eligible to participate in the plan. Each grant of restricted shares under the Plan is subject to certain terms and conditions such as the shares cannot be transferred during the restriction period and the shares will be forfeited if the employment is terminated by the holder or the Company. Restricted stocks are granted at a strike price that is equal to the fair value of the Company’s stock on the date of grant.

The aggregate value of this award was $310,860, as determined by multiplying the number of shares times the fair value of the Company’s stock on June 1, 2010, the date of the grant award. The fair value is based on discounted free cash flow analyses, which involve management’s best estimate of future revenue, operation expenses, investing activities, and financing activities. In the valuation, the free cash flow is projected for five years and is determined by using the company’s historical figures such as revenue and operation expenses which are compounded annually with 5% growth rate. Free cash flow occurring beyond the five-year projection period is assumed to be in perpetuity and determined by using the Perpetuity Growth Model in which the project net cash flow is divided by the risk-free rate. The sums of the five-year free cash flow together with the perpetual free cash flow are then discounted by the risk free rate. As a result, the fair value of the Company’s stock on the date of the grant award is $1.57 per share. When determining the risk-free rate, Hong Kong unsecured long term loan rate, 7.25%, in effect at the time of grant is used in the calculation.

On June 1, 2011, the board of directors approved and the Company granted an award of 25,500 shares of restricted stock to certain key employees of the Company.  The award was made pursuant to the 2010 Restricted Share Stock Compensation Plan mentioned as above.  The aggregate value of this award was $71,145, as determined by multiplying the number of shares times the fair value of the Company’s stock on June 1, 2011, the date of the grant award.  The fair value is calculated based on the same approach mentioned above and the fair value of the Company’s stock on the date of the grant award is $2.79 per share. When determining the risk-free rate of this award, Hong Kong unsecured long term loan rate, 7.25%, in effect at the time of grant is used in the calculation.

During the six months ended June 30, 2011 and 2010, the Company recognized $46,539 and $8,635 respectively, of stock-based compensation expense.

Note 19 – Subsequent Events

A new entity named AL Marine AL Marine Consulting Services (Shanghai) Ltd (“ALM Shanghai”) was legally and established in China on July 19, 2011.  AL Marine indirectly owns 100% of ALM Shanghai through ALM HK.  ALM Shanghai is set up for holding all the interest of SHB.

On August 4, 2011, the company subsidiary Andrew Liu & Company Limited (“ALC”) entered into a loan agreement with its clients, Jian Mao International Shipping Co Ltd (“JMISCL”) and Jian Xing Intl Shipping Co Ltd (“JXISCL”).  Under the loan agreement, ALC will make available to JMISCL and JXISCL an on demand loan facility in the principal amount of up to US$3,000,000.  The loan is interest free and secured by the claim proceeds under a claim filed by JMISCL and JXISCL under the terms an existing Hull & Machinery insurance policy insuring a vessel owned and managed by JMISCL and JXISCL respectively.  The loan is payable upon demand at any time following settlement of the claim if the claim proceeds are not adequate to cover the loan in full, and in any event is due and payable in full on or before August 4, 2012.  

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

DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report, including statements in the following discussion, which are not statements of historical fact, are what are known as “forward-looking statements”, which are basically statements about the future.  For that reason, these statements involve risk and uncertainty since no one can accurately predict the future.  Words such as “plans,” “intends,” “will,” “hopes,” “seeks,” “anticipates,” “expects,” and the like, often identify such forward-looking statements, but are not the only indication that a statement is a forward-looking statement.  Such forward-looking statements include statements concerning our plans and objectives with respect to the present and future operations of the Company, and statements which express or imply that such present and future operations will or may produce revenues, income or profits.  Numerous factors and future events could cause the Company to change such plans and objectives, or fail to successfully implement such plans or achieve such objectives, or cause such present and future operations to fail to produce revenues, income or profits.  Therefore, the reader is advised that the following discussion should be considered in light of the discussion of risks and other factors contained in this report on Form 10Q and in the Company’s other filings with the Securities and Exchange Commission.  No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results.

PLAN OF OPERATIONS

In order to deal with the worldwide financial and shipping turmoil began in 2008, the company implemented a plan in 2009 and 2010 to improve our cost competitiveness and enhance the credit control and marketing function.  From the result of 2009 and 2010, it clearly shows that ALCO’s plan is successful.

Although recovery is noted in the worldwide economy and financial market, depression of world trade and piracy issue still bothers the shipping industry especially the charters and shipowners.  Therefore, in 2011, the company will continue to enhance our credit control and marketing functions.  

For enhancement of our credit control, we are continuing our effort to closely monitor the aging of client premium receivables and trying to increase the receivable turnover further.  Since 2009, we established a marketing function, the main responsibilities of which are maintaining our existing client base and promoting the company’s business to potential new clients.  Additional headcounts are added to this new function in 2010.  The company will allocate more resources to the marketing function in 2011.

In order to expand our insurance brokerage business, the company has been looking for investment opportunities in Asia since last year.  In December 2010, the company acquired a general insurance broker firm in China for this purpose.  We will continue to seek investment opportunities in 2011.  In addition, the company does have a plan to hire additional employees in the next twelve months to enhance our operations including operations and supporting functions.  However, the plans of investment and employee hiring will depend on the market situation, associated risk factors and our internal resources.  There is no assurance that we will able to implement these plans within the foreseeable future.  

We do not have any material off-balance sheet arrangements.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2011 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2010 AND THREE MONTHS ENDED JUNE 30, 2011 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2010

Revenue

Revenues for the six months ending June 30, 2011 were $3,366,383, as compared to the revenues of $2,966,348 for the six months period ended June 30, 2010.  This increase of $400,035 or approximately 13% was mainly due to an increase of

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commission income, consulting income and other revenue partially offset by a decrease of enrollment fee.  Commission income, which is based on a percentage premium paid by the insured, for the six months period ended June 30, 2011 was $3,236,816 as compared to $2,896,627 for the same period of 2010.  The increase of commission income of $340,189 or approximately 12% was mainly due to the increase of  insurance call and premium rates in the market.  Another reason of the commission income increase is because of the addition of SHB which was newly acquired in last year.  Commission income contributed by SHB was $215,363 in the first half of 2011.  It is approximately 6.7% of the total commission income of the group for the same period.  If the contribution from SHB is excluded, commission income increased by $124,826 or 4.3% as compared to the last period.

Consulting income for the six months period ended June 30, 2011 was $67,452 compared to $35,500 for the comparable period of 2010.  The increase of $31,952 or approximately 90% was mainly due to demand of the services increased.  Enrollment fee for the six months period ended June 30, 2011 were $5,778 as compared to $14,458 for the same period of 2010.  The decrease was mainly due to the decrease of enrollment during the period.  Other income for the six months period ended June 30, 2011 was $49,337 compared to $12,763 for the comparable period of 2010.  The increase of $36,574 or approximately 287% was mainly due to a one-time income which is not recurring in nature was received during the period.  

Revenues for the three months ending June 30, 2011 were $1,773,564, as compared to revenues of $1,808,671 for the three months ending June 30, 2010.  This decrease of $35,107, or approximately 2%, was mainly due to decreases in commission income, and enrollment fee partially offset by an increase of consulting income and other revenues.  Commission income for the three month period ended June 30, 2011 was $1,714,464 as compared to $1,762,760 for the same period of 2010.  The decrease of commission income $48,296 or approximately 3%, was mainly due to a slight decrease in client demand during the three months period.  Consulting income for the three month period ended June 31, 2011 was $24,613 compared to $19,000 for the comparable period of 2010.  In addition, enrollment fee and other revenue for the three month period ended June 30, 2011 was $2,586 and $26,818 as compared to $14,074 and $7,754 respectively for the same period of 2010.  Causes for the changes for the three months ended June 30, 2011 and 2010 are same as the causes stated in the six months ending as the paragraph above.

Net income before tax and noncontrolling interest

Net income before tax and noncontrolling interest for the six months ending June 30, 2011 was $1,168,193 compared to $1,294,247 for the six months period ended June 30, 2010.  The decrease in pre-tax profit of $126,054, or approximately 10%, was mainly because the increase in operating expenses is greater than the increase in revenue during the six-month period.  Causes for the revenue increase were discussed in the section of Revenue above while causes for the operating expense increase will be discussed in the section of Operating expenses below.  

Net income before tax and noncontrolling interest for the three months ending June 30, 2011 was $547,673 compared to $1,111,569 for the three month period ended June 30, 2010.  The decrease in pre-tax profit of $563,896, or approximately 51%, was also due to the increase in operating expenses is greater than the increase in revenues during the three months ended June 31, 2011.  Causes for these changes are same as the causes stated in the six months ending as the paragraph above.

Operating expenses

Operating expenses for the six months ending June 30, 2011 was $2,178,467, as compared to $1,677,964 for the six month period ended June 30, 2010.  The increase of $500,503 or approximately 30% was mainly due to increases in salary, travel expenses, rents, bad debt expenses, depreciation and amortization, and other general and administrative expenses.

Operating expenses for the three months ending June 30, 2011 was $1,201,330, as compared to $700,491 for the three month period ended June 30, 2010.  The increase of $500,839 or approximately 71% was mainly due to increase in salaries, travel expenses, rent, bad debt expenses, depreciation and amortization, and other general and administrative expenses.

The reasons for the increases and decreases in the major items are as follows:

n

Salaries – increased $244,430 or 26% for the six months ended and increased $187,046 or 41% for the three months ended June 30, 2011 as compared to last year.  The increase in salary expenses was mainly due to increases in pay rates and headcounts.

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Travel Expenses – increased $34,077 or 21% for the six months ended and increased $56,745 or 85% for the three months ended June 30, 2011.  The increase was due to more business travels that are in relation to the business during the period of 2011 as compared with 2010.

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Rent – Increased $22,495 or 9% for the six months ended and increased $12,033 or 10% for the three months ended June 30, 2011.  The increase was mainly due to the new office spaces were rented for the Fuzhou office and SHB.

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Bad debt expenses – increased by $24,272 or 161% for the six months ended and increased $177,972 or 145% for the three months ended June 30, 2011 as compared to last year.  The increase was mainly due to an increase in the provision of doubtful debts during the period.

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Depreciation and amortization – increased by $25,703 or 135% for the six months ended and increased $12,779 for the three months ended June 30, 2011 as compared to last year.  The increase was primarily due to the addition of fixed assets during 2011, and the amortization charge for the acquired intangible asset in relation to SHB.  During the six months ended June 30, 2011, depreciation for fixed assets was $34,158 while amortization charge for intangible asset was $10,531.

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Other general & administrative expenses – increased $149,523 or 51% for the six months ended and increased $54,264 or 32% for the three months ended June 30, 2011 as compared to last year.  In general, the increase was due to the general price inflation, increment of headcount causing office administrative expense and staff medical increased, and the growth of client base causing telecommunication and postage expenses increased.  Another reason is that additional consulting and legal expenses incurred for the company’s consulting service and the daily operation of SHB during the period.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow

For the six months ended June 30, 2011, cash provided by operating activities totaled $228,516.  This was primarily due to net income during the period plus an increase in commission receivable, enrolment fee receivable, fiduciary asset, other receivable, accounts payable, claims payable, deferred income and income tax payable which was partially offset by a decrease in deposit, other payable and accrued expenses.  

Although the net income after adjustments of non-cash activities for the first half of 2011 decreased by $13,546 or 1% as compared to the same period of 2010, the changes in operating assets and liabilities for the six months ended June 30, 2011 increased $360,039 or 29% as compared to the same period of 2010.  As a result, net cash provided by operating activities for the six months ended June 30, 2011 increased by $346,493, or approximately 294%, as compared to last year.  

For the six months ended June 30, 2011and June 30, 2010, cash used in investing activities amounted to $22,275 and $21,074, respectively.  The fund was used for the purchase of fixed assets.

For the six months ended June 30, 2011, cash used in finance activities totaled $121,553.  The funds were used for the dividend payment to minority shareholders and payments on related party debt which were partially offset by the borrowings on related party.  For the same period of 2010, net cash used by financing activities amounted to $76,967.  The funds were used for the repayment of obligation under finance leases, dividend payment to minority shareholders, and payments on related party debt which were partially offset by the borrowings on related party.

Assets and liabilities

For the six months ended June 30, 2011, the Group’s balance sheet reflects total assets of $12,214,295 and total liabilities of $1,868,336.  These items increased $1,330,943 or approximately 12% and $459,042 or approximately 33% respectively when compared to the year ended December 31, 2010.  The increase of total assets was mainly due to an increase of cash and cash equivalents, commissions receivable, enrollment fee receivable, fiduciary asset, prepayment and other receivables which was partially offset by a decrease of property, plant and equipment, goodwill and intangible asset, deposits, and investment in available for sale securities.  In addition, the increase of total liabilities was mainly due to an increase of trade accounts payable, claim payable, income tax payable, amount due to directors and deferred revenue which was partially offset by a decrease of other payable and accrued expenses.

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As at June 30, 2011, commission receivable was $358,472 as compared to $208,843 as at December 31, 2010, while trade accounts payable was $1,254,796, as compared to December 31, 2010 balances of $879,087.  Each of these changes was due to the timing of commissions received from customers and the timing of making payments to insurers and customers in relation to the period end.  In addition, because the rate of insurance premium paid by customers to insurers was raised, cash and cash equivalents, fiduciary asset and other receivable increased during the period ended June 30, 2011.  Furthermore, because certain claim proceeds were received from insurers on behalf of customers but had not been paid yet, the claim payable increased by 86% as compared to the year end of 2010.  In addition, because certain payments were made during the period ended June 30, 2011, other payable decreased by 22% as compared to the year end of 2010.

Accrued expenses of $66,116 as at June 30, 2011 significant reduced by $98,636 or approximately 60% from $164,752 as at December 31, 2010.  The reduction was mainly due to repayment of the accrued expenses which were provided for the year of 2010.  In addition, income tax payable as at June 30, 2011 was $297,245.  It is in relation to the provision of income tax for the first half of 2011.

Because the interest rate is maintained at a very low level in the recent years, the company purchased publicly traded equity securities with high dividend yield since 2008 for long term investment purpose.  The market value of the equity securities was $335,464 and $340,401 as at June 30, 2011 and December 31, 2010 respectively.  The decrease of $4,937 or approximately 1% was mainly due to the change of fair values between June 30, 2011 and December 31, 2010 which was partially offset by the addition of equity securities which were acquired during the period.

The Company has bank and cash equivalents of approximately $8,149,887 as at June 30, 2011.  The Company has sufficient funds to satisfy its financial commitments and working capital requirements for the next twelve months.  During the period end of June 30, 2011, the Company had $0 of commitments for capital expenditures and off-balance sheet arrangements as well as operating lease commitments of $312,240.

OFF BALANCE SHEET ARRANGEMENTS

We do not have any material off-balance sheet arrangements.

RECENT ACCOUNTING PRONOUNCEMENTS

For information about new accounting pronouncements and the potential impact on our Consolidated Financial Statements, see Note 2 of the Notes to Consolidated Financial Statements in this Form 10-Q and Note 2 of the Notes to Consolidated Financial Statements in our 2010 Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4(T). CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company's controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management,

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including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated to principal executive and principal financial officers to allow timely decisions regarding disclosure.

As of the end of the period covered by this report, The Company's management, with the participation of the chief executive officer and the chief financial officer, carried out an evaluation of the effectiveness of the design and operation of the Company's "disclosure, controls and procedures" (as defined in the Exchange Act Rules 13a-15(3) and 15-d-15(3) as of the end of the period covered by this annual report (the "Evaluation Date").  Based on that evaluation, the chief executive officer and the chief financial officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving the objectives of timely alerting them to material information required to be included in our periodic SEC reports and of ensuring that such information is recorded, processed, summarized and reported with the time periods specified.  Our chief executive officer and chief financial officer also concluded that our disclosure controls and procedures were effective as of June 30, 2011 to provide reasonable assurance of the achievement of these objectives.

Changes in Internal Controls Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) or any other factors during the three months ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not applicable.

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

On June 1, 2011, we issued 25,500 shares of restricted stock to certain key employees of the Company under the 2010 Restricted Share Stock Compensation Plan.  The plan was approved by the board of directors on May 31, 2010.  The restricted shares which were issued subject to certain terms and conditions such as that the shares may not be transferred during the applicable restriction period and that the shares will be forfeited if the employment is terminated by the holder or the Company.  The shares were issued in reliance upon an exemption from registration provided by Regulation S under the Securities Act of 1933.  The shares were issued at a strike price of approximately $2.79, which was equal to the fair value of the Company’s stock on June 1, 2011, the date of grant.  Therefore, the aggregate value of these shares as of the date of issuance was $71,145, of which $3,953 was recognized as stock-based compensation expense in salaries and compensation expenses during the six months ended June 30, 2011.  The balance will be recognized as stock-based compensation expenses in the coming three years.  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are filed herewith:

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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.

ALCO, INC.

(Registrant)

By: /s/ Andrew Liu, CEO and Chairman

Date:  August 5, 2011

By: /s/ John Liu, Director

Date:  August 5, 2011

By: /s/ Colman Au, Chief Financial Officer

Date:  August 5, 2011

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