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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, 2012


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.)


25th Floor, Fortis Bank Tower

No. 77-79 Gloucester Road

Wanchai, Hong Kong

(Address of principal executive offices)


852-2521-0373

(Registrant’s 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 issuer’s classes of common stock, as of the latest practicable date.  As of November XX, 2012, there were 10,342,000 shares of the registrant’s common stock, $0.001 par value, outstanding



TABLE OF CONTENTS


PART 1 - FINANCIAL INFORMATION

3

 

 

 

 

ITEM 1.  FINANCIAL STATEMENTS

3

 

 

 

 

CONSOLIDATED 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 STOCKHOLDER EQUITY (UNAUDITED)

7

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8

 

 

 

 

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

16

 

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

20

 

 

 

 

ITEM 4(T). CONTROLS AND PROCEDURES

20

 

 

 

PART II - OTHER INFORMATION

21

 

 

 

 

ITEM 1. LEGAL PROCEEDINGS

21

 

 

 

 

ITEM 1A. RISK FACTORS

21

 

 

 

 

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

21

 

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

21

 

 

 

 

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

21

 

 

 

 

ITEM 5. OTHER INFORMATION

21

 

 

 

 

ITEM 6. EXHIBITS

22




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, 2011.




3






ALCO, INC

CONSOLIDATED BALANCE SHEETS

 

 

September 30, 2012

 

December 31, 2011

ASSETS

 

(Unaudited)

 

 

Current Assets:

 

 

 

 

Cash and cash equivalents

$

8,710,041

$

8,203,957

Commissions receivable, net

 

285,514

 

399,942

Enrollment fee receivable

 

8,952

 

7,380

Fiduciary asset

 

3,084,311

 

1,075,578

Loan receivable

 

1,912,000

 

1,912,000

Tax receivable

 

-

 

33,558

Total Current Assets

 

14,000,818

 

11,632,415

 

 

 

 

 

Property, plant and equipment, net

 

233,921

 

186,501

Goodwill

 

208,306

 

208,306

Intangible asset

 

27,048

 

43,153

 

 

 

 

 

Other non-current assets:

 

 

 

 

Deposits and prepayment

 

153,050

 

219,482

Marketable securities

 

336,365

 

261,854

Other receivable

 

81,945

 

119,984

Total other non-assets

 

571,360

 

601,320

 

 

 

 

 

Total Assets

$

15,041,453

$

12,671,695

 

 

 

 

 

LIABILITIES

 

 

 

 

Current Liabilities:

 

 

 

 

Trade accounts payable

$

3,214,173

$

1,054,919

Claim payable

 

40,973

 

20,744

Other payable

 

94,084

 

663,450

Accrued expenses

 

66,068

 

100,013

Income tax payable

 

141,878

 

-

Due to directors

 

1,440

 

41,184

Deferred revenue

 

5,417

 

1,917

Total Current Liabilities

$

3,564,033

$

1,882,227

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

ALCO, Inc. shareholders' 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; 10,342,000 and 10,348,000 shares issued and outstanding

 

10,342

 

10,348

Additional paid-in capital

 

280,728

 

218,651

Accumulated other comprehensive income

 

102,780

 

37,379

Retained earnings

 

10,973,218

 

10,398,787

Total ALCO, Inc. shareholders' equity

 

11,367,068

 

10,665,165

Noncontrolling interest

 

110,352

 

124,303

Total equity

 

11,477,420

 

10,789,468

 

 

 

 

 

Total Liabilities and Stockholders' Equity

$

15,041,453

$

12,671,695

 

 

 

 

 

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,

Revenues

 

2012

 

2011

 

2012

 

2011

Commission income

$

1,560,559

$

2,134,147

$

4,418,735

$

5,370,963

Consulting income

 

22,517

 

12,690

 

36,450

 

80,142

Website advertising

 

3,500

 

3,500

 

10,500

 

10,500

Enrollment fee income

 

3,851

 

1,693

 

7,950

 

7,471

Total revenues

 

1,590,427

 

2,152,030

 

4,473,635

 

5,469,076

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

Salaries

 

632,364

 

587,651

 

1,995,565

 

1,777,336

Travel expenses

 

117,645

 

178,140

 

328,935

 

377,681

Rents

 

130,479

 

126,697

 

492,985

 

391,017

Bad debt expenses

 

(1,504)

 

24,757

 

13,338

 

64,089

Depreciation and amortization

 

18,912

 

22,346

 

132,814

 

67,035

Other general and administrative

 

181,618

 

233,854

 

675,452

 

674,754

Total operating expenses

 

1,079,514

 

1,173,445

 

3,639,089

 

3,351,912

 

 

 

 

 

 

 

 

 

Income from Operations

 

510,913

 

978,585

 

834,546

 

2,117,164

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

Interest income

 

984

 

1,053

 

3,022

 

2,836

Investment income

 

3,207

 

3,064

 

11,272

 

10,129

Other revenues

 

3,740

 

6,765

 

21,417

 

56,102

Gain (loss) on disposal of fixed assets

 

(201)

 

15,188

 

(5,651)

 

(13,383)

Total other income

 

7,730

 

26,070

 

30,060

 

55,684

 

 

 

 

 

 

 

 

 

Income Before Provision for Income Taxes

 

518,643

 

1,004,655

 

864,606

 

2,172,848

Provision for income taxes

 

97,658

 

179,664

 

178,485

 

397,430

Net Income

 

420,985

 

824,991

 

686,121

 

1,775,418

Less: Net income attributable to the noncontrolling interest

 

(44,667)

 

(37,825)

 

(111,690)

 

(90,953)

Net Income attributable to ALCO, Inc.

$

376,318

$

787,166

$

574,431

$

1,684,465

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

Net income

 

420,985

 

824,991

 

686,121

 

1,775,418

Other Comprehensive Income (loss)

 

 

 

 

 

 

 

 

Marketable securities

 

20,515

 

(71,032)

 

63,285

 

(82,661)

Foreign currency translation adjustments

 

(1,786)

 

8,543

 

2,116

 

23,825

Comprehensive Income

$

439,714

$

762,502

$

751,522

$

1,716,582

Less: comprehensive income attributable to non-controlling interest

 

(44,667)

 

(37,825)

 

(111,690)

 

(90,953)

Comprehensive Income attributable to ALCO. Inc.

 

395,047

 

724,677

 

639,832

 

1,625,629

 

 

 

 

 

 

 

 

 

Basic and Fully Diluted Earnings per Share

 

 

 

 

 

 

 

 

Net income attributable to ALCO, Inc

 

 

 

 

 

 

 

 

common shareholders

$

0.04

$

0.08

$

0.06

$

0.16

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

10,342,000

 

10,348,065

 

10,342,701

 

10,345,319

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements



5






ALCO, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

Operating Activities

 

 

 

 

 

Net income

 

$

686,121

$

1,775,418

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

Bad debt

 

 

13,338

 

64,089

Depreciation expense

 

 

116,545

 

51,134

Amortization expense

 

 

16,269

 

15,901

Stock-based compensation

 

 

62,071

 

71,985

Loss on disposal of fixed assets

 

 

5,651

 

13,383

Changes in operating assets and liabilities:

 

 

 

 

 

(Increase)/Decrease in commission receivable

 

 

101,059

 

(402,432)

(Increase)/Decrease in enrolment fee receivable

 

 

(1,572)

 

(2,988)

(Increase)/Decrease in deposit and prepayment

 

 

66,437

 

(11,932)

(Increase)/Decrease in fiduciary asset

 

 

(2,008,731)

 

(1,852,344)

(Increase)/Decrease in other receivable

 

 

26,853

 

356,869

Increase/(Decrease) in accounts payable

 

 

2,159,253

 

1,228,890

Increase/(Decrease) in claims payable

 

 

20,229

 

37,441

Increase/(Decrease) in other payable

 

 

(569,373)

 

403,290

Increase/(Decrease) in accrued expenses

 

 

(33,952)

 

(99,996)

Increase/(Decrease) in deferred revenue

 

 

3,500

 

3,500

Increase/(Decrease) in income tax payable

 

 

175,430

 

381,924

Net cash provided by operating activities

 

 

839,128

 

2,034,132

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Loan made to third parties

 

 

                    -

 

(3,000,000)

Cash paid for purchase of fixed assets

 

 

(169,608)

 

(23,328)

Sales proceeds for disposal of fixed assets

 

 

                    -

 

15,377

Net cash used in investing activities

 

 

(169,608)

 

(3,007,951)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Dividend paid to minority shareholders

 

 

(125,641)

 

(128,718)

Borrowings on related party debt

 

 

9,963

 

74,587

Principal payments on related party debt

 

 

(49,707)

 

(66,936)

Net cash used in financing activities

 

 

(165,385)

 

(121,067)

 

 

 

 

 

 

Net increase/ (decrease) in cash and cash equivalent

 

 

504,135

 

(1,094,886)

Effect of exchange rate changes on cash and cash equivalent

 

 

1,949

 

19,551

Cash and cash equivalents at beginning of period

 

 

8,203,957

 

8,051,872

Cash and cash equivalents at end of period

 

$

8,710,041

$

6,976,537

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

                    -

$

         (2,836)

Income taxes paid

 

$

3,049

$

14,454

 

 

 

 

 

 

Non-Cash Transactions

 

 

 

 

 

Dividend received

 

$

11,226

$

9,745

Purchase price allocation adjustment

 

$

-

 

40,729

Change in fair value for Available-for-sales securities

 

$

63,285

$

82,661

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements



6







ALCO, INC

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


 

 

 

 

 

 

 

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, 2011

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

-

 

-

 

99,873

 

-

 

-

 

99,873

 

-

 

99,873

Unrealized loss on marketable securities

-

 

-

 

-

 

(91,370)

 

-

 

(91,370)

 

-

 

(91,370)

Foreign currency translation adjustments

-

 

-

 

-

 

24,965

 

-

 

24,965

 

-

 

24,965

Net income

-

 

-

 

-

 

 

 

1,288,206

 

1,288,206

 

122,454

 

1,410,660

Dividend paid

-

 

-

 

-

 

-

 

-

 

-

 

(128,718)

 

(128,718)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

10,348,000

 

10,348

 

218,651

 

37,379

 

10,398,787

 

10,665,165

 

124,303

 

10,789,468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Stock issued

13,500

 

14

 

(14)

 

-

 

-

 

-

 

-

 

 

  Stock forfeited

(19,500)

 

(20)

 

20

 

-

 

-

 

-

 

-

 

-

Stock based compensation

-

 

-

 

62,071

 

-

 

-

 

62,071

 

-

 

62,071

Unrealized loss on marketable securities

-

 

-

 

-

 

63,285

 

-

 

63,285

 

-

 

63,285

Foreign currency translation adjustments

-

 

-

 

-

 

2,116

 

-

 

2,116

 

-

 

2,116

Net income

-

 

-

 

-

 

-

 

574,431

 

574,431

 

111,690

 

686,121

Dividend paid

-

 

-

 

-

 

-

 

-

 

-

 

(125,641)

 

(125,641)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2012 (Unaudited)

10,342,000

 

10,342

 

280,728

 

102,780

 

10,973,218

 

11,367,068

 

110,352

 

11,477,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements


 



7






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, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. 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, 2011.


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, 2011 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.






8






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 2012 and 2011.  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$0.15694:CNY1


Amounts included in the statements of operations, statements of changes in shareholders’ equity and statements of cash flows for the period: US$0.15733: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 nine months ended September 30, 2012.


Recent Accounting Pronouncements


The Company has evaluated all the recent accounting pronouncements through the filing date and believes that none of them will have a material effect on the Company.





9






Note 3 – Cash

 

 

September 30,

 

December 31,

Cash consist of the following:

 

2012

 

2011

 

 

 

 

 

Cash in hand

$

8,519

$

6,163

Cash in bank - Saving & Checking

 

 

 

 

China Construction Bank (Asia) (formerly known as Bank of America (Asia))

 

7,971,059

 

7,552,133

United Overseas Bank

 

7,761

 

5,915

Bank of China

 

169,329

 

55,034

Sun Hung Kei Financial

 

121

 

42

Bank of Shanghai

 

546,839

 

581,130

Industrial and Commercial Bank of China

 

3

 

4

Hui Shang Bank

 

0

 

3,536

Fixed deposit

 

6,410

 

-

 

$

8,710,041

$

8,203,957


The Company established a bank guarantee of HK$45,000 (approximately US$5,770) credit line with the China Construction Bank (Asia).  The interest rate and charges are subject to change from time to time.  The bank guarantee credit line is pledged of $6,410 fixed deposit as shown as above.  On September 30, 2012, a bank guarantee of $5,540.81 was provided and the detail is described in “Note 15 – Commitments and Contingencies” as below.


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.



Note 4 – Commissions Receivable

 

 

September 30,

 

December 31,

Commissions receivable consist of the following:

 

2012

 

2011

 

 

 

 

 

Commissions receivable

$

500,018

$

620,353

Less: allowances for doubtful accounts

 

214,504

 

220,411

 

$

285,514

$

399,942



Note 5 – Fiduciary Asset


Fiduciary assets are 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.


When the Company receives a premium from a customer, it debits the lump sum amount into one bank account and establishes a schedule to keep track of the amount of premium payable to the insurer.  At the monthly closing, the Company reclassifies the amount of premium payable to insurers as fiduciary assets.  Also, when the Company receives a claim on behalf of a policy



10






holder, it debits fiduciary assets and credits claims payable and other payables, if necessary.  The fiduciary asset had a balance of $3,084,311 and $1,075,578 at September 30, 2012 and December 31, 2011, respectively.



Note 6 – Property, Plant and Equipment


 

 

September 30,

 

December 31,

Property, Plant and Equipment consists of the following:

 

2012

 

2011

 

 

 

 

 

Furniture and fixtures

$

36,531

$

186,792

Office equipment

 

190,537

 

178,230

Leasehold improvements

 

35,549

 

203,831

Motor Vehicle

 

90,917

 

61,899

 

 

353,534

 

630,752

Less: Accumulated depreciation

 

119,612

 

444,251

 

$

233,921

$

186,501


Depreciation expense for the nine-month period ended September 30, 2012 and 2011 were $116,545 and $51,134 respectively.


Loss on disposal of fixed assets for the nine-month period ended September 30, 2012 and 2011 were $5,651 and $13,383 respectively.



Note 7 – 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 September 30, 2012 and December 31, 2011:


Assets

 

Fair value

 

Fair value Hierarchy

 

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Stocks

$

336,365

$

261,854

 

Level 1

 

 

 

 

 

 

 


Unrealized gain of $63,285 and unrealized loss of $82,661 for the investments were recognized in the other comprehensive income for the nine months ended September 30, 2012 and 2011, respectively.  All these gain and loss are related to the investments listed in the Hong Kong Stock Exchange.


 

 

Period ended September 30,

Investment Income

 

2012

 

2011

 

 

 

 

 

Dividend from the publicly traded equity securities

$

11,272

$

             10,129



Note 8 – 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.  




11






On August 4, 2012, ALC entered into a loan extension agreement with JMISCL and JXISCL.  Under the extension agreement, the payable due date is extended one year to August 4, 2013.  All terms and conditions of the loan agreement remain unchanged.


As of September 2012 and December 2011, the outstanding balance of the loan is as follows:

 

 

September 30,

 

December 31,

 

 

2012

 

2011

 

 

 

 

 

Loan amount

$

3,000,000

$

3,000,000

Less: Repayment

 

(1,088,000)

 

(1,088,000)

Balance

$

1,912,000

$

1,912,000



Note 9 – Due to Directors

 

 

September 30,

 

December 31,

Due to directors consist of the following:

 

2012

 

2011

 

 

 

 

 

Andrew Liu Fu Kang

$

743

$

40,487

John Liu Shou Kang

 

697

 

697

 

$

1,440

$

41,184


Due to director represents loans payable that are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand.



Note 10 – 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 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.


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 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.



12






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.


2012 restricted stock plan


On June 1, 2012, the board of directors approved and the Company granted an award of 13,500 shares of restricted stock to a key employee 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 $22,275, as determined by multiplying the number of shares times the fair value of the Company’s stock on June 1, 2012, 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 $1.65 per share. When determining the risk-free rate of this award, Hong Kong unsecured long term loan rate, 8.25%, in effect at the time of grant is used in the calculation.


During the nine months ended September 30, 2012 and 2011, the Company recognized $62,071 and $71,985 respectively, of stock-based compensation expense.



Note 11 – Related Party Transaction


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


 

 

 

 

Period ended September 30,

Location

 

Landlord

 

2012

 

2011

 

 

 

 

 

 

 

Shanghai Quarter

 

Fortune Ocean and Andrew Liu Fu Kang

$

23,077

$

23,077

Director (Andrew) Quarter

 

First Pacific Development Ltd

 

3,333

 

15,000

 

 

 

$

26,410

$

38,077



Note 12 – Income Taxes


The Company's effective tax rate for the nine months ended September 30, 2012 and 2011 was 20.64% and 18.29%, respectively.  The provisions for income taxes for the periods ended September 30, 2012 and 2011 are summarized as follows:


 

 

Period ended September 30,

Hong Kong only:

 

2012

 

2011

 

 

 

 

 

Current

$

178,485

$

397,430

Deferred

 

                 -   

 

                 -   

 

$

178,485

$

397,430


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

 

 

Period ended September 30,

 

 

2012

 

2011

 

 

 

 

 

U.S. statutory rate

 

34.00%

 

34.00%

 

 

 

 

 

Foreign income not recognized in the U.S.

 

-34.00%

 

-34.00%

Miscellaneous permanent differences

 

4.14%

 

1.79%

Hong Kong income tax rate

 

           16.50%   

 

16.50%                  

Provision for income tax

 

20.64%

 

18.29%




13






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 13 – Operating Leases


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


 

 

Oct 2012 – Sep 2013

 

Oct 2013 – Sep 2014

 

Oct 2014 and thereafter

 

Total

 

 

 

 

 

 

 

 

 

25th Floor, Fortis Tower, Hong Kong (New Hong Kong Office)

$

312,615

$

312,615

$

234,462

$

859,692

Union Building, Shanghai, China (Shanghai Office)

 

4,181

 

-

 

-

 

4,181

Union Building, Shanghai, China (ALM Shanghai Office)

 

6,441

 

            -

 

-

 

6,441

Union Building, Shanghai, China (SHB Office)

 

7,085

 

-

 

-

 

7,085

Sino Plaza, Fuzhou (Fuzhou Office)

 

42,643

 

30,113

 

-

 

72,756

 

$

372,965

$

342,728

$

234,462

$

950,155


The Company has five material operating lease commitments for its facilities as of September 30, 2012. For details of the leases, see notes to the consolidated financial statements included in the Company’s annual report of Form 10-K for the year ended December 31, 2011 filed with the SEC.



Note 14 – Noncontrolling Interest


On February 1, 2012, the Company subsidiary Chang An Consultants Ltd., declared dividends of approximately $314,103. The Company has paid $125,641 to the noncontrolling shareholders.



Note 15 – Commitments and Contingencies


The Company provided a bank guarantee of US$5,540.81 in respect of an insurance policy to a client in August 2012.  The guarantee is callable upon the client’s defaults in payment of the deferred calls and supplementary calls under the insurance policy.


The Company's business operations exist solely in the PRC and are subject to significant risks not typically associated with



14






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 16 – Subsequent Events


On October 1, 2012, the Company entered into an agreement to acquire 82% of the outstanding shares of an insurance broker in Asia for a cash consideration of Singapore Dollar 454,272 (approximately $370,800).  The net assets of the insurance broker totaled Singapore Dollar 382,062 (approximately $311,900) as of September 30, 2012.  The acquisition had been approved by the local government.  The acquisition was completed on November 5, 2012 and the consideration was fully settled in cash on November 6, 2012.





15






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


According to the plan of operations last year, the Company would enhance the credit control and marketing functions.  After reviewing the result of 2011, we can conclude that the plan is successful.  Regarding credit control, our enhancements are operated effectively as the receivable turnover ratio for ALC and CAC was improved from 7.84 in the full year of 2010 to 9.79 in 2011.  It means the average collection period for outstanding receivables dropped from 47 days in 2010 to 37 days in 2011.  Regarding the marketing function, more resources, including both additional personnel and IT applications, were allocated during 2011.  Consequently, positive results were noted as the number of customers increased 5% during 2011.


For the 2012 fiscal year, the Company will continue to seek to enhance its credit control and marketing functions in order to maintain competitiveness.  In addition, in order to expand its insurance brokerage business, the Company has been looking for investment opportunities in Asia since 2009.  In December 2010, the Company acquired a general insurance brokerage firm in China as the first step in an effort to grow its business through acquisition.  Based upon the results of operation for the 2011 fiscal year, management believes the initial acquisition was successful and is continuing to seek additional suitable investment opportunities in 2012.  Furthermore, in order to enhance the Company’s operations and supporting function, we have a plan to upgrade our existing phone system and hire additional employees in the next twelve months.  


The plans of investment, phone system upgrade 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, 2012 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2011 AND THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2011


Revenue


Nine-month end:


Revenue for the nine months ending September 30, 2012 was $4,473,635, as compared to $5,469,076 for the same period of 2011.  The decrease of $995,441 or approximately 18% was mainly due to decreases of commission income, consulting income



16






and enrollment fee income.  


Commission income is based on a percentage of the premiums paid by the insured, and decreased by $952,228 or 18% when compared to last year.  Most of the decrease was contributed by ALC.  Total commission income contributed by SHB was $262,481 for the nine months ending September 30, 2012, which is approximately 5.9% of the total commission income of the group for the same period.  If the contribution from SHB is excluded, commission income of the group for the same period of 2012 decreased by $850,096 or 17% as compared to the same period of 2011.  The decrease of commission income was mainly due to the fact that average commission earned per client decreased 4% and number of clients decreased 13% during the period.  Average commission earned per client decreased because the shipping market was difficult and some clients’ vessels were laid up.  Therefore, insurance premiums for these laid-up vessels were reduced.  Subsequently, commission income earned by the Company dropped at the same time. In addition, the main reason for the decrease of number of clients was that some clients sold their vessels as scrap because of the poor shipping market, giving rise to lowered demand for insurance.


Consulting income for the nine months period ended September 30, 2012 was $36,450 as compared to $80,142 for the comparable period of 2011.  The decrease of $43,692, or approximately 55%, was mainly due to decrease of demand of the services. In addition, one of the major clients set up their own in-house consulting team, contributing to the decrease in the demand of consulting service.  Enrollment fee for the nine months period ended September 30, 2012 were $7,950 as compared to $7,471 for the same period of 2011.


Three-month end:


Revenues for the three months ending September 30, 2012 were $1,590,427, as compared to revenues of $2,152,030 for the three month ending September 30, 2011.  The decrease of $561,603, or approximately 26%, was mainly due to decreases of commission income and enrollment fee income which is partially offset with an increase of consulting income.  


Commission income for the three months period ended September 30, 2012 was $1,560,559 as compared to $2,134,147 for the same period of 2011.  Same as the causes stated in the nine months ending as the paragraph above, the decrease of $573,588 or approximately 27% was mainly due to the decreases of average commission earned per client and the number of clients.  


Consulting income for the three months period ended September 30, 2012 was $22,517 compared to $12,690 for the comparable period of 2011.  The increase was due to an increase in the demand for services during the third quarter of 2012.  In addition, enrollment fee income for the three month period ended September 30, 2012 were $3,851 as compared to $1,693 for the same period of 2011.  Causes for the changes are same as the causes stated in the nine months ending as the paragraph above.


As mentioned in the above paragraph, decrease of revenue for the nine months period ended September 2012 was mainly due to the poor shipping market.  In order to improve this situation, the Company would continue to enhance its marketing functions, such as setting up new liaison office and hiring more talents in this field.  In addition, the Company acquired an insurance broker in Asia in November 2012 which would help improve the company’s revenue in the coming years.


Net income before tax and noncontrolling interest


Nine-month end:


Net income before tax and noncontrolling interest for the nine months ending September 30, 2012 was $864,606 compared to $2,172,848 for the nine months period ended September 30, 2011.  The decrease of 1,308,242, or approximately 60%, was mainly because the revenue decreased by 18% while the operating expenses increased by 8.6% during the period.  Causes for the revenue decrease 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.  


Other income and expense decreased to $30,060 in 2012 from $55,684 in 2011.  The decrease of $25,624 was mainly due to decrease in other revenues which partially offset by the reduction in loss on disposal of fixed asset and the increase in interest income and investment income.  Other revenue for the nine months period ended September 30, 2012 was $21,417 compared to $56,102 for the comparable period of 2011.  The decrease of $34,685, or approximately 62%, was mainly due to the fact that a



17






one-time income, which is not recurring in nature, was received during 2011.  


Investment income increased by 11% to $11,272 in 2012 as compared to $10,129 in 2011.  It was mainly a result of an increase in dividend income received from publicly traded equity securities owned by the Company.  


Three-month end:


Net income before tax and noncontrolling interest for the three months ending September 30, 2012 was $518,643 compared to $1,004,655 for the three months period ended September 30, 2011.  The decrease in pre-tax profit of $486,012, or approximately 48%, was mainly due to the fact that revenue decreased by 26% in 2012 as compared to the same period of 2011,  partially offset by an 8% decrease in operating expenses in 2012 as compared to 2011.


Operating expenses


Operating expenses for the nine months ending September 30, 2012 were $3,639,089, as compared to $3,351,912 for the same period of 2011.  The increase of $287,177 or approximately 8.6% was mainly due to increases in salary, rents, depreciation and amortization, partially offset by a decrease in travel expenses, bad debt expenses, and other general and administrative expenses.


Operating expenses for the three months ending September 30, 2012 were $1,079,514, as compared to $1,173,445 for the same period ended of 2011.  The decrease of $93,931 or approximately 8% was mainly due to decreases in travel expenses, bad debt expenses, depreciation and amortization, and other general and administrative expenses partially offset by an increase in salaries and rents.


The reasons for the increases and decreases in the major items of operating expense in 2012, as compared to the same period of 2011, are as follows:


n

Salaries – increased $218,229 or 12% for the nine months ended and $44,713 or 8% for the three months ended September 30, 2012 as compared to last year.  The increase was mainly due to increases in pay rates and headcounts.

n

Travel Expenses – decreased $48,746 or 13% for the nine months ended and decreased $60,495 or 34% for the three months ended September 30, 2012 as compared to last year.  The decrease was because of the effort of expense control during the period.

n

Rent – increased $101,968 or 26% for the nine months ended and $3,782 or 3% for the three months ended September 30, 2012 as compared to last year.  The increase was mainly due to increase in rental rates of the old office spaces, and the fact that new office space was rented for the Hong Kong office.

n

Bad debt expenses – decreased by $50,751 or 79% for the nine months ended and $26,261 or 106% for the three months ended September 30, 2012 as compared to last year.  The decrease was mainly because the provision of doubtful debts dropped during the period.

n

Depreciation and amortization – increased $65,779 or 98% for the nine months ended and decreased $3,434 or 15% for the three months ended September 30, 2012 as compared to last year.  The increase was due to the addition of fixed assets during the nine months period of 2012.  In addition, because the Hong Kong Office was moved to a new location in March 2012, beginning in November 2011, we amortized the net book value of the leasehold improvement of the old location over their remaining life.  Consequently, additional depreciation was charged in 2012.  During the nine months ended September 30, 2012, depreciation for fixed assets was $116,545 while amortization charge for intangible asset was $16,269.

n

Other general & administrative expenses – decreased $698 or 0.1% for the nine months ended and $52,236 or 22% for the three months ended September 30, 2012 as compared to last year.  The decrease was due to the closure of SHB’s Hefei branch in last year and the effort of expense control.



LIQUIDITY AND CAPITAL RESOURCES


Cash flow




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For the nine months ended September 30, 2012, cash provided by the operating activities totaled $839,128.  This was primarily due to net income during the period plus an increase in enrollment fee, fiduciary asset, accounts payable, claims payable, deferred revenue and income tax payable which was partially offset by a decrease in commission receivable, deposit and prepayment, other receivable, other payable and accrued expenses.


Net income after adjustments of non-cash activities for the nine months ending September 30, 2012 decreased by $1,091,915 or 55% as compared to the same period of 2011, the changes in operating assets and liabilities for the nine months ending September 30, 2012 decreased $103,089 or 244% as compared to the same period of 2011.  As a result, net cash provided by operating activities for the nine months ended September 30, 2012 decreased by $1,195,004 or approximately 59% as compared to last year.  


For the nine months ended September 30, 2012 and 2011, cash used in investing activities amounted to $169,608 and $3,007,951, respectively.  For 2012, the fund was used for the purchase of fixed assets including the furniture & fixtures for the new office and the upgraded phone system.  For 2011, the fund was mainly used for providing a loan to a third party and purchase of fixed assets.


For the nine months ended September 30, 2012 and 2011, cash used in finance activities totaled $165,385 and $121,067 respectively.  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.


Assets and liabilities


For the nine months ended September 30, 2012, the Group’s balance sheet reflects total assets of $15,041,453 and total liabilities of $3,564,033. These items increased $2,369,758 or approximately 18.7% and $1,681,806 or approximately 89% respectively when compared to the year ended December 31, 2011.  The increase of total assets was mainly due to an increase of cash and cash equivalents, enrollment fee receivable, fiduciary asset, property, plant and equipment, and marketable securities which was partially offset by a decrease of commissions receivable, tax receivable, intangible asset, deposits and prepayment, and other receivable.  In addition, the increase of total liabilities was mainly due to an increase of trade accounts payable, claim payable, income tax payable, deferred revenue, which was partially offset by a decrease of other payable, accrued expenses and due to directors.


As at September 30, 2012, commission receivable was $285,514 as compared to $399,942 as at December 31, 2011, while trade accounts payable was $3,214,173, as compared to December 31, 2011 balance of $1,054,919.  Each of these changes was due to the timing of commissions received from customers and the timing of making payments to insurers in relation to the period end.  In addition, because the commission income and the average collection period decreased, commission receivable as at September 30, 2012 decreased by $114,428 or 29% as compared to December 31, 2011 balance.  In addition, because certain payment advances made on behalf of customers were refunded, other receivable decreased by $38,039 or 32% as compared to the year end of 2011.  Furthermore, because certain fund received on behalf of customers had been paid during the period, the other payable decreased $569,366 or 86% as compared to the year end of 2011.  On the other hand, certain claim proceeds were received on behalf of customers but had not been paid yet, the claim payable increased by $20,229 or 98% as compared to the year end of 2011.


Accrued expenses of $66,068 as at September 30, 2012 reduced by $33,945 or approximately 34% from $100,013 as at December 31, 2011.  The reduction was mainly due to repayment of the accrued expenses which were provided for the year of 2011.  In addition, income tax payable as at September 30, 2012 was $141,878.  It is in relation to the provision of income tax for the nine months ending of 2012.


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 $336,365 and $261,854 as at September 30, 2012 and December 31, 2011 respectively.  The increase of $74,511 or approximately 28% was mainly due to the change of fair values between September 30, 2012 and December 31, 2011 and the addition of equity securities which were acquired during the period.


In August 2011, the Company made a secured loan of $3,000,000 to clients.  During 2011, $1,088,000 or about 36% was repaid.



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As at September 30, 2012, the balance of such loan was $1,912,000.


The Company has bank and cash equivalents of approximately $8,710,041 as at September 30, 2012.  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, 2012, the Company had $0 of commitments for capital expenditures and off-balance sheet arrangements and operating lease commitments of $950,155.



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 2011 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, 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 September 30, 2012 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, 2012, 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


 Not applicable.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES


Not applicable.



ITEM 4. MINE SAFETY DISCLOSURES


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







22







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 13, 2012


  

By: /s/ John Liu, Director


Date:  November 13, 2012



By: /s/ Colman Au, Chief Financial Officer


Date:  November 13, 2012




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