Attached files
file | filename |
---|---|
EX-31 - EXHIBIT 31.1 - ALCO, INC. | exhibit311.htm |
EX-32 - EXHIBIT 32.1 - ALCO, INC. | exhibit321.htm |
EX-32 - EXHIBIT 32.2 - ALCO, INC. | exhibit322.htm |
EX-31 - EXHIBIT 31.2 - ALCO, INC. | exhibit312.htm |
EXCEL - IDEA: XBRL DOCUMENT - ALCO, INC. | Financial_Report.xls |
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 September 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
ALCO, INC. |
(Exact name of registrant as specified in its charter) |
Nevada | 11-3644700 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Suite 501, Bank of America Tower |
(Address of principal executive offices) |
852-2521-0373 |
(Registrants telephone number, including area code) |
None |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
1
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 issuers classes of common stock, as of the latest practicable date. As of November 3, 2011, there were 10,348,000 shares of the registrants common stock, $0.001 par value, outstanding
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION | 3 | |
| ITEM 1. FINANCIAL STATEMENTS | 3 |
| CPMSOLIDATED BALANCE SHEETS (UNAUDITED) | 4 |
| CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) | 5 |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | 6 |
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY | 8 |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | 9 |
| ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 18 |
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 22 |
| ITEM 4(T). CONTROLS AND PROCEDURES | 22 |
PART II OTHER INFORMATION | 23 | |
| ITEM 1. LEGAL PROCEEDINGS | 23 |
| ITEM 1A. RISK FACTORS | 23 |
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 23 |
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES | 23 |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 23 |
| ITEM 5. OTHER INFORMATION | 23 |
| ITEM 6. EXHIBITS | 24 |
2
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.
3
ALCO, INC
CONSOLIDATED BALANCE SHEETS
|
| September 30, 2011 |
| December 31, 2010 |
ASSETS |
| (Unaudited) |
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents | $ | 6,976,537 | $ | 8,051,872 |
Commissions receivable, net |
| 584,784 |
| 208,843 |
Enrollment fee receivable |
| 3,797 |
| 809 |
Fiduciary asset |
| 2,816,898 |
| 964,542 |
Amount due from related party |
| 23,077 |
| 23,077 |
Loan receivable |
| 3,000,000 |
| - |
Total current assets |
| 13,405,093 |
| 9,249,143 |
|
|
|
|
|
Property, plant and equipment, net |
| 242,679 |
| 296,313 |
Goodwill |
| 208,305 |
| 249,034 |
Intangible asset |
| 48,414 |
| 62,418 |
|
|
|
|
|
Other non-current assets: |
|
|
|
|
Deposits |
| 156,214 |
| 144,017 |
Investment in available for sale securities |
| 267,484 |
| 340,401 |
Other receivable |
| 179,250 |
| 542,026 |
Total other non-assets |
| 602,948 |
| 1,026,444 |
|
|
|
|
|
Total Assets | $ | 14,507,439 | $ | 10,883,352 |
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
Current Liabilities: |
|
|
|
|
Trade accounts payable | $ | 2,107,977 | $ | 879,087 |
Claim payable |
| 57,087 |
| 19,645 |
Other payable |
| 644,770 |
| 240,370 |
Accrued expenses |
| 64,793 |
| 164,752 |
Income tax payable |
| 476,840 |
| 94,527 |
Due to directors |
| 16,648 |
| 8,996 |
Deferred revenue |
| 5,417 |
| 1,917 |
Total Current Liabilities | $ | 3,373,532 | $ | 1,409,294 |
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
ALCO, Inc. stockholders' equity: |
|
|
|
|
Preferred stock, par value $0.01, 5,000,000 shares authorized; no shares issued and outstanding | $ | - | $ | - |
Common stock, par value $0.001, 50,000,000 shares authorized;10,348,000 and 10,342,000 shares issued and outstanding |
| 10,348 |
| 10,342 |
Additional Paid-in capital |
| 190,763 |
| 118,784 |
Accumulated other comprehensive income |
| 44,948 |
| 103,784 |
Retained earnings |
| 10,795,046 |
| 9,110,581 |
Total ALCO, Inc. stockholders' equity |
| 11,041,105 |
| 9,343,491 |
Noncontrolling interest |
| 92,802 |
| 130,567 |
Total stockholders equity |
| 11,133,907 |
| 9,474,058 |
|
|
|
|
|
Total Liabilities and Stockholders' Equity | $ | 14,507,439 | $ | 10,883,352 |
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements |
4
ALCO, INC
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, | ||||
|
| 2011 |
| 2010 |
|
| 2011 |
| 2010 |
Revenues |
|
|
|
|
|
|
|
|
|
Commission income | $ | 2,134,147 | $ | 1,463,975 |
| $ | 5,370,963 | $ | 4,360,602 |
Consulting income |
| 12,690 |
| 12,000 |
|
| 80,142 |
| 47,500 |
Website advertising |
| 3,500 |
| 3,500 |
|
| 10,500 |
| 10,500 |
Enrolment fee income |
| 1,693 |
| 1,108 |
|
| 7,471 |
| 15,566 |
Other revenues |
| 6,765 |
| 8,640 |
|
| 56,102 |
| 21,403 |
Total revenues |
| 2,158,795 |
| 1,489,223 |
|
| 5,525,178 |
| 4,455,571 |
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
Salaries |
| 587,651 |
| 485,611 |
|
| 1,777,336 |
| 1,430,866 |
Travel expenses |
| 178,140 |
| 97,160 |
|
| 377,681 |
| 262,624 |
Rents |
| 126,697 |
| 122,003 |
|
| 391,017 |
| 363,828 |
Bad debt expenses |
| 24,757 |
| 173,527 |
|
| 64,089 |
| 188,587 |
Depreciation and amortization |
| 22,346 |
| 9,962 |
|
| 67,035 |
| 28,948 |
Other general and administrative |
| 233,854 |
| 99,652 |
|
| 674,754 |
| 391,026 |
Total Operating Expenses |
| 1,173,445 |
| 987,915 |
|
| 3,351,912 |
| 2,665,879 |
|
|
|
|
|
|
|
|
|
|
Income from Operations |
| 985,350 |
| 501,308 |
|
| 2,173,266 |
| 1,789,692 |
|
|
|
|
|
|
|
|
|
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
Interest income |
| 1,053 |
| 87,880 |
|
| 2,836 |
| 89,726 |
Investment income |
| 3,064 |
| 2,627 |
|
| 10,129 |
| 8,453 |
Gain (Loss) on disposal of fixed assets |
| 15,188 |
| - |
|
| (13,383) |
| (1,809) |
Total Other Income (Expense) |
| 19,305 |
| 90,507 |
|
| (418) |
| 96,370 |
|
|
|
|
|
|
|
|
|
|
Income before provision for Income Taxes |
| 1,004,655 |
| 591,815 |
|
| 2,172,848 |
| 1,886,062 |
Provision for Income Taxes |
| 179,664 |
| 106,058 |
|
| 397,430 |
| 321,692 |
Net Income |
| 824,991 |
| 485,757 |
|
| 1,775,418 |
| 1,564,370 |
Less: Net income attributable to the noncontrolling interest |
| (37,825) |
| (29,226) |
|
| (90,953) |
| (81,051) |
Net Income attributable to ALCO, Inc. | $ | 787,166 | $ | 456,531 |
| $ | 1,684,465 | $ | 1,483,319 |
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
Net income |
| 824,991 |
| 485,757 |
|
| 1,775,418 |
| 1,564,370 |
Other Comprehensive Income (loss) |
|
|
|
|
|
|
|
|
|
Marketable securities |
| (71,032) |
| 29,961 |
|
| (82,661) |
| (40,138) |
Foreign currency translation adjustments |
| 8,543 |
| - |
|
| 23,825 |
| - |
Comprehensive Income | $ | 762,502 | $ | 515,718 |
| $ | 1,716,582 | $ | 1,524,232 |
Less: comprehensive income attributable to non-controlling interest |
| (37,825) |
| (29,226) |
|
| (90,953) |
| (81,051) |
Comprehensive Income attributable to ALCO, Inc. |
| 724,677 |
| 486,492 |
|
| 1,625,629 |
| 1,443,181 |
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
Net income attributable to ALCO, Inc |
|
|
|
|
|
|
|
|
|
common shareholders | $ | 0.08 | $ | 0.04 |
| $ | 0.16 | $ | 0.14 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
| 10,348,065 |
| 10,344,087 |
|
| 10,345,319 |
| 10,236,440 |
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements |
5
ALCO, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
| Nine Months Ended September 30, | ||
|
|
| 2011 |
| 2010 |
Operating Activities |
|
|
|
|
|
Net income |
| $ | 1,775,418 | $ | 1,564,370 |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
Bad debt |
|
| 64,089 |
| 188,587 |
Depreciation expense |
|
| 51,134 |
| 28,948 |
Amortization expense |
|
| 15,901 |
| - |
Stock-based compensation |
|
| 71,985 |
| 33,493 |
Loss on disposal of fixed assets |
|
| 13,383 |
| 1,809 |
Changes in operating assets and liabilities: |
|
|
|
|
|
(Increase)/Decrease in commission receivable |
|
| (402,432) |
| 120,969 |
(Increase)/Decrease in enrolment fee receivable |
|
| (2,988) |
| (198) |
(Increase)/Decrease in deposit and prepayment |
|
| (11,932) |
| (57,944) |
(Increase)/Decrease in fiduciary asset |
|
| (1,852,344) |
| (2,410,836) |
(Increase)/Decrease in other receivable |
|
| 356,869 |
| (64,191) |
Increase/(Decrease) in accounts payable |
|
| 1,228,890 |
| 4,080,153 |
Increase/(Decrease) in claims payable |
|
| 37,441 |
| 22 |
Increase/(Decrease) in other payable |
|
| 403,290 |
| 52,152 |
Increase/(Decrease) in accrued expenses |
|
| (99,996) |
| (71,872) |
Increase/(Decrease) in deferred revenue |
|
| 3,500 |
| 3,500 |
Increase/(Decrease) in income tax payable |
|
| 381,924 |
| 321,692 |
Net cash provided by operating activities |
|
| 2,034,132 |
| 3,790,654 |
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
Loan made to third parties |
|
| (3,000,000) |
| (3,500,000) |
Prepayment relating to acquisition |
|
| - |
| (851,626) |
Cash paid for purchase of fixed assets |
|
| (23,328) |
| (33,912) |
Sale proceed for disposal of fixed assets |
|
| 15,377 |
| - |
Net cash used in investing activities |
|
| (3,007,951) |
| (4,385,538) |
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
Dividend paid to minority shareholders |
|
| (128,718) |
| (76,923) |
Repayment of obligations under finance leases |
|
| - |
| (207) |
Borrowings on related party debt |
|
| 74,587 |
| 19,129 |
Principal payments on related party debt |
|
| (66,936) |
| (18,967) |
Net cash used in financing activities |
|
| (121,067) |
| (76,968) |
|
|
|
|
|
|
Net (decrease) / increase in cash and cash equivalent |
|
| (1,094,886) |
| (671,852) |
Effect of exchange rate changes on cash and cash equivalent |
|
| 19,551 |
| - |
Cash and cash equivalent at beginning of period |
|
| 8,051,872 |
| 6,587,876 |
Cash and cash equivalent at end of period |
| $ | 6,976,537 | $ | 5,916,024 |
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
Interest paid |
| $ | (2,836) | $ | - |
Income taxes paid |
| $ | 14,454 | $ | - |
|
|
|
|
|
|
Non-Cash Transactions |
|
|
|
|
|
Dividend received |
| $ | 9,745 | $ | 8,430 |
Restricted shares issued |
| $ | 6 |
| - |
6
Purchase price allocation adjustment |
| $ | 40,729 |
| - |
Change in fair value for Available-for-sales securities |
| $ | 82,661 | $ | (40,138) |
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements |
7
|
|
|
|
|
|
| ALCO, Inc Shareholders |
|
|
|
|
|
| ||
|
|
|
|
|
|
| Accumulated Other Comprehensive Income (loss) |
|
|
|
|
|
|
|
|
| Common Stock |
| Additional Paid-in Capital |
|
| Retained Earnings |
| Total Stockholders' Equity |
| Non-controlling Interest |
| Total Equity | |||
| Shares |
| Par Value |
|
|
|
|
|
| ||||||
Balance, January 1, 2010 | 10,150,000 | $ | 10,150 | $ | 60,363 | $ | 120,213 | $ | 7,623,855 | $ | 7,814,581 | $ | 105,149 | $ | 7,919,730 |
Restricted stock issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued | 198,000 |
| 198 |
| (198) |
|
|
|
|
| - |
|
|
| - |
Stock forfeited | (6,000) |
| (6) |
| 6 |
|
|
|
|
| - |
|
|
| - |
Stock based compensation |
|
|
|
| 58,613 |
|
|
|
|
| 58,613 |
|
|
| 58,613 |
Unrealized loss on marketable securities |
|
|
|
|
|
| (40,029) |
|
|
| (40,029) |
|
|
| (40,029) |
Foreign currency translation adjustments |
|
|
|
|
|
| 23,600 |
|
|
| 23,600 |
|
|
| 23,600 |
Net Income |
|
|
|
|
|
|
|
| 1,486,726 |
| 1,486,726 |
| 102,341 |
| 1,589,067 |
Dividend paid |
|
|
|
|
|
|
|
|
|
|
|
| (76,923) |
| (76,923) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010 | 10,342,000 |
| 10,342 |
| 118,784 |
| 103,784 |
| 9,110,581 |
| 9,343,491 |
| 130,567 |
| 9,474,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued | 25,500 |
| 26 |
| (26) |
|
|
|
|
| - |
|
|
| - |
Stock forfeited | (19,500) |
| (20) |
| 20 |
|
|
|
|
| - |
|
|
| - |
Stock based compensation |
|
|
|
| 71,985 |
|
|
|
|
| 71,985 |
|
|
| 71,985 |
Unrealized loss on marketable securities |
|
|
|
|
|
| (82,661) |
|
|
| (82,661) |
|
|
| (82,661) |
Foreign currency translation adjustments |
|
|
|
|
|
| 23,825 |
|
|
| 23,825 |
|
|
| 23,825 |
Net Income |
|
|
|
|
|
|
|
| 1,684,465 |
| 1,684,465 |
| 90,953 |
| 1,775,418 |
Dividend paid |
|
|
|
|
|
|
|
|
|
|
|
| (128,718) |
| (128,718) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2011 (Unaudited) | 10,348,000 |
| 10,348 |
| 190,763 |
| 44,948 |
| 10,795,046 |
| 11,041,105 |
| 92,802 |
| 11,133,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements |
8
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 nine-month period ended September 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 ALCOs 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 Companys 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.
9
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 nine months period ended September 30, 2011 and 2010 was 18.29% and 17.06%, 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 liabilitys 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 Companys 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
10
disposition. If such cash flows are not sufficient to support the assets 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) and AL Marine Consulting Services (Shanghai) Ltd (ALM Shanghai) is the Chinese Yuan (CNY). The financial statements of SHB and ALM Shanghai 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 quarter-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$0.15606:CNY1
Amounts included in the statements of operations, statements of changes in shareholders equity and statements of cash flows for the period:
US$0.15377:CNY1 (for SHB)
US$0.15634:CNY1 (for ALM Shanghai)
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
11
the potential common shares had been issued and if the additional common shares were dilutive. There were no dilutive shares for the nine months ended September 30, 2011.
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 Companys 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 Companys 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
|
| September 30, |
| December 31, |
Cash consist of the following: |
| 2011 |
| 2010 |
|
|
|
|
|
Cash in hand | $ | 7,739 | $ | 4,755 |
Cash in bank - Saving & Checking |
|
|
|
|
China Construction Bank (Asia) (formerly known as Bank of America (Asia)) |
| 6,286,662 |
| 7,487,205 |
United Overseas Bank |
| 7,838 |
| 5,773 |
Bank of China |
| 72,070 |
| 4,176 |
Sun Hung Kei Financial |
| 57 |
| 106 |
Bank of Shanghai |
| 598,112 |
| 538,400 |
Industrial and Commercial Bank of China |
| 531 |
| 516 |
Hui Shang Bank |
| 3,528 |
| 10,941 |
| $ | 6,976,537 | $ | 8,051,872 |
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
12
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.
Note 4 Commissions Receivable
|
| September 30, |
| December 31, |
Commissions receivable consist of the following: |
| 2011 |
| 2010 |
|
|
|
|
|
Commissions receivable | $ | 1,200,555 | $ | 773,391 |
Less: allowances for doubtful accounts |
| (615,771) |
| (564,548) |
| $ | 584,784 | $ | 208,843 |
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 $2,816,898 and $964,542 at September 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 Property, Plant and Equipment
|
|
|
|
|
|
| September 30, |
| December 31, |
Property, Plant and Equipment consists of the following: |
| 2011 |
| 2010 |
|
|
|
|
|
Furniture and fixtures | $ | 187,365 | $ | 181,912 |
Office equipment |
| 178,582 |
| 171,960 |
Leasehold improvements |
| 208,253 |
| 196,221 |
Motor Vehicle |
| 80,670 |
| 109,559 |
|
| 654,870 |
| 659,652 |
Less: Accumulated depreciation |
| (412,191) |
| (363,339) |
| $ | 242,679 | $ | 296,313 |
Depreciation expense for the nine-month period ended September 30, 2011 and 2010 were $51,134 and $28,948 respectively.
Loss on disposal of fixed assets for the nine-month period ended September 30, 2011 and 2010 were $13,383 and $1,809 respectively.
Note 8 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 represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets.
13
Fair value of goodwill will be evaluated under the Companys annual goodwill impairment testing. None of the goodwill is expected to be deductible for income tax purposes. During the nine months period ended September 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:
| December 16, 2010 (As initially reported) |
| Measurement Period Adjustments |
| December 16, 2010 (As adjusted) | |
Property, plant and equipment | $ | 76,717 | $ | - | $ | 76,717 |
Intangible asset |
| 62,418 |
| - |
| 62,418 |
Cash in banks |
| 557,645 |
| - |
| 557,645 |
Accounts receivable |
| 38,619 |
| 36,851 |
| 75,470 |
Other receivable |
| - |
| 12,661 |
| 12,661 |
Total identifiable assets |
| 735,399 |
| 49,512 |
| 784,911 |
|
|
|
|
|
|
|
Current liabilities |
| 132,210 |
| 8,783 |
| 140,993 |
Total liabilities assumed |
| 132,210 |
| 8,783 |
| 140,993 |
|
|
|
|
|
|
|
Net identifiable assets acquired |
| 603,189 |
| 40,729 |
| 643,918 |
Goodwill |
| 249,034 |
| (40,729) |
| 208,305 |
Net assets acquired |
| 852,223 |
| - |
| 852,223 |
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 nine-month period ended September 30, 2011 of the intangible asset is $15,901.
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.
|
| Period Ended September 30, | ||
|
| 2011 |
| 2010 |
Net Revenue | $ | 5,525,178 | $ | 4,968,622 |
|
|
|
|
|
Net Income | $ | 1,775,418 | $ | 1,525,498 |
Note 9 Fair Value of Available for Sale Marketable Securities Investments and Investment Income
The following are the Companys investments owned and securities sold by level within the fair value hierarchy at September 30, 2011 and December 31, 2010:
14
Assets |
| Fair value |
| Fair value Hierarchy | |||
|
| September 30, 2011 |
| December 31, 2010 |
|
| |
|
|
|
|
|
|
| |
Stocks | $ | 267,484 | $ | 340,401 |
| Level 1 | |
|
|
|
|
|
|
|
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 $82,661 and $40,138 for the investments were recognized in the other comprehensive income for the nine months ended September 30, 2011 and 2010, respectively. All these gain and loss are related to the investments listed in the Hong Kong Stock Exchange.
|
| Period ended September 30, | ||
Investment Income |
| 2011 |
| 2010 |
|
|
|
|
|
Dividend from the publicly traded equity securities | $ | 10,129 | $ | 8,453 |
Note 10 Loan Receivable
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.
As of September 2011, the outstanding balance of the loan is as follows:
|
|
|
|
|
| September 30, |
|
|
|
|
|
| 2011 |
|
|
|
|
|
|
|
Loan amount |
|
| $ | 3,000,000 | ||
Less: Repayment |
|
|
| - | ||
Balance |
|
| $ | 3,000,000 |
Note 11 Due to Directors
|
| September 30, |
| December 31, |
Due to directors consist of the following: |
| 2011 |
| 2010 |
|
|
|
|
|
Andrew Liu Fu Kang |
| 15,951 |
| 8,851 |
John Liu Shou Kang |
| 697 |
| 145 |
| $ | 16,648 | $ | 8,996 |
Amounts due to directors represent loans payable that are unsecured, non-interest bearing and are due on demand.
Note 12 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:
15
|
|
|
| Period ended September 30, | ||
|
|
|
| 2011 |
| 2010 |
Location |
| Landlord |
|
|
|
|
|
|
|
|
|
|
|
HK Office Room 501 & 502A |
| Fortune Ocean Ltd | $ | - | $ | 23,846 |
HK Office Room 502B |
| Fortune Ocean Ltd |
| - |
| 7,692 |
Shanghai Quarter |
| Fortune Ocean and Andrew Liu Fu Kang |
| 23,077 |
| 23,077 |
Director (Andrew) Quarter |
| First Pacific Development Ltd |
| 15,000 |
| 15,000 |
|
|
| $ | 38,077 | $ | 69,615 |
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 13 Income Taxes
The Company's effective tax rate for the nine months ended September 30, 2011 and 2010 was 18.29% and 17.06%, respectively. The provisions for income taxes for the periods ended September 30, 2011 and 2010 are summarized as follows:
|
| Period ended September 30, | ||
Hong Kong only: |
| 2011 |
| 2010 |
|
|
|
|
|
Current | $ | 397,430 | $ | 321,692 |
Deferred |
| - |
| - |
| $ | 397,430 | $ | 321,692 |
A reconciliation between the income tax computed at the U.S. statutory rate and the Companys provision for income tax is as follows:
|
| Period ended September 30, | ||
|
| 2011 |
| 2010 |
|
|
|
|
|
U.S. statutory rate |
| 34.00% |
| 34.00% |
|
|
|
|
|
Foreign income not recognized in the U.S. |
| -34.00% |
| -34.00% |
Miscellaneous permanent differences |
| 1.79% |
| 0.56% |
Hong Kong income tax rate |
| 16.50% |
| 16.50% |
Provision for income tax |
| 18.29% |
| 17.06% |
There were no significant permanent or temporary differences.
The Company adopted the provisions of Accounting for Uncertainty in Income Taxes on January 1, 2007. For details, see notes to the consolidated financial statements included in the Companys annual report of Form 10-K for the year ended December 31, 2010 filed with the SEC.
Note 14 Operating Leases
Future minimum lease payments for operating leases for the succeeding years consists of following:
16
|
| Oct 2011 Sep 2012 |
| Oct 2012 Sep 2013 |
| Oct 2013 and thereafter |
| Total |
|
|
|
|
|
|
|
|
|
Carmel Hill, Hong Kong (Director Quarter) | $ | 95,769 | $ | - | $ | - | $ | 95,769 |
Room 501 and 502, Bank of America Tower, Hong Kong (Hong Kong Office) |
| 64,641 |
| - |
| - |
| 64,641 |
Room 505, Bank of America Tower, Hong Kong (Hong Kong Office) |
| 6,400 |
| - |
| - |
| 6,400 |
Room 706, Union Building, Shanghai, China (Shanghai Office) |
| 5,924 |
| - |
| - |
| 5,924 |
Room 707, Union Building, Shanghai, China (Shanghai Office) |
| 3,846 |
| - |
| - |
| 3,846 |
Union Building, Shanghai, China (SHB Office) |
| 7,045 |
| - |
| - |
| 7,045 |
Sino Plaza, Fuzhou (Fuzhou Office) |
| 17,307 |
| - |
| - |
| 17,307 |
| $ | 200,932 | $ | - | $ | - |
| 200,932 |
The Company has seven material operating lease commitments for its facilities. For details of the leases, see notes to the consolidated financial statements included in the Companys annual report of Form 10-K for the year ended December 31, 2010 filed with the SEC.
Note 15 Noncontrolling Interest
On February 25, 2011, the Companys subsidiary Chang An Consultants Ltd., declared dividend for approximately $321,795. The Company has paid $128,718 to the noncontrolling shareholders.
Note 16 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 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 17 Stock-based Compensation
2010 restricted stock plan
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 Companys 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 Companys stock on the date of grant.
17
The aggregate value of this award was $310,860, as determined by multiplying the number of shares times the fair value of the Companys stock on June 1, 2010, the date of the grant award. The fair value is based on discounted free cash flow analyses, which involve managements 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 companys 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 Companys 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.
2011 restricted stock plan
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 Companys 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 Companys 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 nine months ended September 30, 2011 and 2010, the Company recognized $71,985 and $33,493 respectively, of stock-based compensation expense.
ITEM 2. MANAGEMENTS 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 Companys 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 ALCOs 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
18
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 companys 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
NINE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2010 AND THREE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2010
Revenue
Revenues for the nine months ending September 30, 2011 were $5,525,178, as compared to the revenues of $4,455,571 for the nine months period ended September 30, 2010. This increase of $1,069,607 or approximately 24% was mainly due to an increase of 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 nine months period ended September 30, 2011 was $5,370,963 as compared to $4,360,602 for the same period of 2010. The increase of commission income of $1,010,361 or approximately 23% was mainly due to the increase of number of clients as well as 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 $364,613 in the nine months period of 2011. It is approximately 6.4% of the total commission income of the group for the same period. If the contribution from SHB is excluded, commission income of the group increased by $645,748 or 15% as compared to the last period.
Consulting income for the nine months period ended September 30, 2011 was $80,142 compared to $47,500 for the comparable period of 2010. The increase of $32,642 or approximately 69% was mainly due to demand of the services increased. Enrollment fee for the nine months period ended September 30, 2011 were $7,471 as compared to $15,566 for the same period of 2010. The decrease was mainly due to the decrease of enrollment during the period. Other income for the nine months period ended September 30, 2011 was $56,102 compared to $21,403 for the comparable period of 2010. The increase of $34,699 or approximately 162% 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 September 30, 2011 were $2,158,795, as compared to revenues of $1,489,223 for the three months ending September 30, 2010. The increase of $669,572, or approximately 45%, was due to the increases in commission income, consulting income and enrollment fee partially offset by a decrease of other revenues. Commission income for the three month period ended September 30, 2011 was $2,134,147 as compared to $1,463,975 for the same period of 2010. Same to the nine months ending, the increase of commission income $670,172 or approximately 46%, was also mainly due to increases of number of clients and insurance call and premium rates in the market. Consulting income for the three month period ended September 30, 2011 was $12,690 compared to $12,000 for the comparable period of 2010. In addition, enrollment fee and other revenue for the three month period ended September 30, 2011 was $1,693 and $6,765 as compared to $1,108 and $8,640 respectively for the same period of 2010. Causes for the changes for the three months ended September 30, 2011 and 2010 are same as the causes stated in the nine months ending as the paragraph above.
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Net income before tax and noncontrolling interest
Net income before tax and noncontrolling interest for the nine months ending September 30, 2011 was $2,172,848 compared to $1,886,062 for the nine months period ended September 30, 2010. The increase in pre-tax profit of $286,786, or approximately 15%, was mainly because the increase in revenue is greater than the increase in operating expenses during the nine-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 September 30, 2011 was $1,004,655 compared to $591,815 for the three month period ended September 30, 2010. The increase in pre-tax profit of $412,840, or approximately 70%, was also due to the increase in revenue is greater than the increase in operating expenses during the three months ended September 30, 2011. Causes for these changes are same as the causes stated in the nine months ending as the paragraph above.
Operating expenses
Operating expenses for the nine months ending September 30, 2011 was $3,351,912, as compared to $2,665,879 for the nine month period ended September 30, 2010. The increase of $686,033 or approximately 26% was mainly due to increases in salary, travel expenses, rents, depreciation and amortization, and other general and administrative expenses, partially offset by a decrease in bad debt expenses.
Operating expenses for the three months ending September 30, 2011 was $1,173,445, as compared to $987,915 for the three month period ended September 30, 2010. Causes of the increase of $185,530 or approximately 19% were same to the nine months ending as above.
The reasons for the increases and decreases in the major items are as follows:
n
Salaries increased $346,470 or 24% for the nine months ended and increased $102,040 or 21% for the three months ended September 30, 2011 as compared to last year. The increase in salary expenses was mainly due to increases in pay rates and headcounts. Another reason is that a new employee restricted stock scheme has been implemented starting in June 2011.
n
Travel Expenses increased $115,057 or 44% for the nine months ended and increased $80,980 or 83% for the three months ended September 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.
n
Rent Increased $27,189 or 7% for the nine months ended and increased $4,694 or 4% for the three months ended September 30, 2011. The increase was mainly due to the new office spaces were rented for the Fuzhou office and SHB.
n
Bad debt expenses decreased by $124,498 or 66% for the nine months ended and decreased $148,770 or 86% for the three months ended September 30, 2011 as compared to last year. The decrease was mainly due to a decrease in the provision of doubtful debts during the period.
n
Depreciation and amortization increased by $38,087 or 132% for the nine months ended and increased $12,384 for the three months ended September 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 nine months ended September 30, 2011, depreciation for fixed assets was $51,134 while amortization charge for intangible asset was $15,901.
n
Other general & administrative expenses increased $283,728 or 73% for the nine months ended and increased $134,202 or 135% for the three months ended September 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 companys consulting service and the daily operation of SHB during the period.
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LIQUIDITY AND CAPITAL RESOURCES
Cash flow
For the nine months ended September 30, 2011, cash provided by operating activities totaled $2,034,132. This was primarily due to net income during the period plus an increase in commission receivable, enrolment fee receivable, deposit and prepayment, fiduciary asset, accounts payable, claims payable, other payable, deferred revenue and income tax payable which was partially offset by a decrease in other receivable, and accrued expenses.
Although the net income after adjustments of non-cash activities for the nine months ending September 30, 2011 increased by $174,703 or 10% as compared to the same period of 2010, the changes in operating assets and liabilities for the nine months ended September 30, 2011 decreased $1,931,225 or 98% as compared to the same period of 2010. As a result, net cash provided by operating activities for the nine months ended September 30, 2011 decreased by $1,756,522, or approximately 46%, as compared to last year.
For the nine months ended September 30, 2011 and 2010, cash used in investing activities amounted to $3,007,951 and $4,385,538, respectively. The fund was used for making loan to the third parties, paying fund in relation to acquisition of SHB, and purchase of fixed assets.
For the nine months ended September 30, 2011, cash used in finance activities totaled $121,067. 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 $76,968. 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 nine months ended September 30, 2011, the Groups balance sheet reflects total assets of $14,507,439 and total liabilities of $3,373,532. These items increased $3,624,087 or approximately 33% and $1,964,238 or approximately 139% respectively when compared to the year ended December 31, 2010. The increase of total assets was mainly due to an increase of commission receivable, enrollment fee receivable, fiduciary asset, deposit, and loan receivable which was partially offset by a decrease of cash and cash equivalents, property, plant and equipment, goodwill and intangible asset, investment in available for sale securities and other receivable. In addition, the increase of total liabilities was mainly due to an increase of trade accounts payable, claim payable, other payable, income tax payable, amount due to directors and deferred revenue which was partially offset by a decrease of accrued expenses.
As at September 30, 2011, commission receivable was $584,784 as compared to $208,843 as at December 31, 2010, while trade accounts payable was $2,107,977, 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 and commission income increased, commission receivable and fiduciary asset increased during the period ended September 30, 2011. In addition, because certain payment advances made on behalf of customers were refunded, other receivable decreased by $362,776 or 67% as compared to the year end of 2010. Furthermore, because certain fund and claim proceeds were received on behalf of customers but had not been paid yet, the claim payable and other payable increased by 191% and 168% respectively as compared to the year end of 2010.
Accrued expenses of $64,793 as at September 30, 2011 reduced by $99,959 or approximately 61% 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 September 30, 2011 was $476,840. It is in relation to the provision of income tax for the nine months ending 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 $267,484 and $340,401 as at September 30, 2011 and December 31, 2010 respectively. The decrease of $72,917 or approxi
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mately 21% was mainly due to the change of fair values between September 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 $6,976,537 as at September 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 September 30, 2011, the Company had $0 of commitments for capital expenditures and off-balance sheet arrangements as well as operating lease commitments of $200,932.
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 Commissions 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 issuers management, 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 Companys 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 September 30, 2011 to provide reasonable assurance of the achievement of these objectives.
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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 nine months ended September 30, 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 Companys 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 $6,045 was recognized as stock-based compensation expense in salaries and compensation expenses during the nine months ended September 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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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.
101
INS XBRL Instance Document
101
SCH XBRL Schema Document
101
CAL XBRL Taxonomy Extension Calculation Linkbase Document
101
LAB XBRL Taxonomy Extension Label Linkbase Document
101
PRE XBRL Taxonomy Extension Presentation Linkbase Document
101
DEF XBRL Taxonomy Extension Definition Linkbase Document
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: November 3, 2011
By: /s/ John Liu, Director
Date: November 3, 2011
By: /s/ Colman Au, Chief Financial Officer
Date: November 3, 2011
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