ALCO, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | |
| | | Nine months ended September 30, |
| | | 2015 | | 2014 |
Operating Activities | | | | | |
Net loss | | $ | (266,084) | $ | (561,723) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | |
Bad debt expense (recovery) | | | (7,654) | | 75,555 |
Depreciation expense | | | 122,673 | | 110,724 |
Amortization expense | | | 8,291 | | 6,007 |
Stock-based compensation | | | 3,093 | | 5,568 |
Gain on disposal of fixed assets | | | - | | (5,159) |
Stock dividend received | | | (16,200) | | (15,029) |
Impairment of goodwill | | | - | | 222,524 |
Changes in operating assets and liabilities: | | | | | |
Decrease in commission receivable | | | 66,241 | | 122,128 |
(Increase)/Decrease in enrolment fee receivable | | | 8,044 | | (1,733) |
(Increase)/Decrease in deposit and prepayment | | | (21,876) | | 21,399 |
(Increase)/Decrease in fiduciary asset | | | 95,586 | | (183,530) |
Decrease in other receivable | | | 51 | | 106,797 |
Decrease in tax receivable | | | 66,017 | | 146,085 |
Increase/(Decrease) in accounts payable | | | (222,466) | | 128,063 |
Increase in claims payable | | | 19,637 | | 18,043 |
Increase in other payable | | | 27,313 | | 11,611 |
Decrease in accrued expenses | | | (137,759) | | (126,621) |
Decrease in deferred revenue | | | - | | (667) |
Net cash provided by (used in) operating activities | | | (255,093) | | 80,042 |
| | | | | |
Investing Activities | | | | | |
Prepayment for asset acquisition | | | - | | (303,548) |
Short-term investment | | | (254) | | (290) |
Loan made to third parties | | | - | | (1,580,000) |
Loan repayment from third parties | | | - | | 2,680,000 |
Cash paid for purchase of fixed assets | | | (195,481) | | (1,765,945) |
Sales proceeds from disposal of fixed assets | | | - | | 16,381 |
Net cash used in investing activities | | | (195,735) | | (953,402) |
| | | | | |
Financing Activities | | | | | |
Dividend paid to minority shareholders | | | (130,769) | | (143,077) |
Repayment of obligations under long-term loans | | | (9,314) | | (4,850) |
Borrowings on related party debt | | | 252,762 | | 18,086 |
Principal payments on related party debt | | | (58,284) | | (18,388) |
Net cash provided by (used in) financing activities | | | 54,395 | | (148,229) |
| | | | | |
Net decrease in cash and cash equivalents | | | (396,433) | | (1,021,589) |
Effect of exchange rate changes on cash and cash equivalents | | | (2,944) | | (4,464) |
Cash and cash equivalent at beginning of period | | | 4,048,846 | | 5,183,870 |
Cash and cash equivalent at end of period | | $ | 3,649,469 | $ | 4,157,817 |
| | | | | |
9
| | | | | |
Supplemental Disclosures of Cash Flow Information: | | | | | |
Interest paid | | $ | 1,642 | $ | 977 |
Income taxes paid | | $ | - | $ | 96,477 |
| | | | | |
Non-Cash Transactions Dividend received | | $ | 12,130 | | 11,158 |
Acquisition of assets by long-term loans | | $ | (60,000) | $ | 32,036 |
Change in fair value for available-for-sales securities | | $ | (86,174) | $ | (22,452) |
| | | | | |
See Notes to Unaudited Consolidated Financial Statements |
10
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 in the United States of America (“US GAAP”) 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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in ALCO’s Annual Report on Form 10-K for the year ended December 31, 2014.
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.
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, 2014 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.
Foreign Currency and Other Comprehensive Loss
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 2015 and 2014. 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.
11
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 FASB Accounting Standards Codification TM (ASC) No. 830, " Foreign Currency Matters”, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for the equity. Translation adjustments resulting from the process of translating the local currency financial statements into US dollars are included in determining comprehensive income.
The exchange rates used to translate amounts in CNY into US Dollars for the purposes of preparing the consolidated financial statements were as follows:
Balance sheet items, as of year-end date: US$0.15637:CNY1
Amounts included in the statements of operations, statements of changes in shareholders’ equity and statements of cash flows for the year: US$0.15919:CNY1
The functional currency of ALCO Insurance Brokers Pte Limited (“ALCO Insurance”) is the Singapore Dollar (“SGD”). The financial statements of ALCO Insurance are translated into United States dollars in accordance with ASC 830, "Foreign Currency Matters”, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for the equity. Translation adjustments resulting from the process of translating the local currency financial statements into US dollars are included in determining comprehensive income.
The exchange rates used to translate amounts in SGD into US Dollars for the purposes of preparing the consolidated financial statements were as follows:
Balance sheet items, as of year-end date: US$0.69601:SGD1
Amounts included in the statements of operations, statements of changes in shareholders’ equity and statements of cash flows for the year: US$0.72683:SGD1
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-month period ended September 30, 2015.
Recent Accounting Pronouncements
In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis”. The amendments in the ASU provide an additional requirement for a limited partnership or similar entity to qualify as a voting interest entity and also amend the criteria for consolidating such an entity. In addition, the new guidance amends the criteria for evaluating fees paid to a decision maker or service provider as a variable interest and amends the criteria for evaluating the effect of fee arrangements and related parties on a variable interest entity primary beneficiary determination. This standard is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the
12
impact of the adoption on its consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”. The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
Note 3 – Cash
| | | | |
| | September 30, | | December 31, |
Cash consist of the following: | | 2015 | | 2014 |
| | | | |
Cash in hand | $ | 34,656 | $ | 27,947 |
Cash in bank - Saving & Checking | | | | |
China Construction Bank (Asia) (formerly known as Bank of America (Asia)) | | 2,113,192 | | 2,828,125 |
United Overseas Bank | | 758,622 | | 564,775 |
Bank of China | | 296,898 | | 72,079 |
Sun Hung Kei Financial | | 126 | | 198 |
Bank of Shanghai | | 439,422 | | 549,167 |
Industrial and Commercial Bank of China | | 134 | | 137 |
Cash in bank – Fixed deposit | | 6,419 | | 6,418 |
| $ | 3,649,469 | $ | 4,048,846 |
The Company established a bank guarantee of HK$45,000 (approximately $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 $6,419 fixed deposit as shown as above. On February 20, 2015, the bank guarantee expired and no bank guarantee was provided thereafter.
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 (approximately $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 $64,103) per depositor effective from January 1, 2011.
13
Note 4 – Commissions Receivable
| | | | |
| | September 30, | | December 31, |
Commissions receivable consist of the following: | | 2015 | | 2014 |
| | | | |
Commissions receivable | $ | 609,190 | $ | 503,392 |
Less: allowances for doubtful accounts | | (270,635) | | (180,803) |
| $ | 338,555 | $ | 322,589 |
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 policyholder, it debits fiduciary assets and credits claims payable and other payables, if necessary. The fiduciary asset had a balance of $1,904,073 and $2,015,759 at September 30, 2015 and December 31, 2014, respectively.
Note 6 – Fair Value of 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, 2015 and December 31, 2014:
| | | | | | |
Assets | | Fair value | | Fair value Hierarchy |
| | September 30, 2015 | | December 31, 2014 | | |
| | | | | | |
Marketable securities | $ | 307,156 | $ | 381,204 | | Level 1 |
Short-term investment | $ | 98,018 | $ | 105,723 | | Level 1 |
| | | | | | |
The Company’s short-term investment represents the certificate of deposit with the maturity of one year with the financial institution.
Unrealized loss of $86,174 and $22,452 for marketable securities were recognized in the other comprehensive income for the nine months ended September 30, 2015 and 2014, respectively. All these losses are related to marketable securities listed in the Hong Kong Stock Exchange.
Income from marketable securities consists of the following:
| | | | |
| | Nine Months Ended September 30, |
| | 2015 | | 2014 |
| | | | |
Dividend from marketable securities | $ | 16,200 | $ | 15,029 |
Note 7 – Due to Directors
| | | | |
| | September 30, | | December 31, |
Due to directors consists of the following: | | 2015 | | 2014 |
| | | | |
Andrew Liu Fu Kang | $ | 194,701 | $ | 145 |
John Liu Shou Kang | | 588 | | 666 |
| $ | 195,289 | $ | 811 |
14
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 8 – Stock-based Compensation
During the nine months ended September 30, 2015 and 2014, the Company recognized $3,093 and $5,568 of stock-based compensation expense, respectively.
Note 9 – 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 | | 2015 | | 2014 |
| | | | | | |
Shanghai Quarter | | Fortune Ocean and Andrew Liu Fu Kang | $ | 23,077 | $ | 23,077 |
| | | $ | 23,077 | $ | 23,077 |
Note 10 – Income Taxes
The Company's effective tax rate for the nine months ended September 30, 2015 and 2014 was -32.55% and -9.67%, respectively. The provisions for income taxes for the periods ended September 30, 2015 and 2014 are summarized as follows:
| | | | |
| | Nine Months Ended September 30, |
Hong Kong only: | | 2015 | | 2014 |
| | | | |
Current | $ | 65,337 | $ | 49,506 |
Deferred | | - | | - |
| $ | 65,337 | $ | 49,506 |
A reconciliation between the income tax computed at the US statutory rate and the Company’s provision for income tax is as follows:
| | | | |
| | Nine Months Ended September 30, |
| | 2015 | | 2014 |
| | | | |
US statutory rate | | 34.00% | | 34.00% |
| | | | |
Foreign income not recognized in the US | | -34.00% | | -34.00% |
Effect of income tax exemptions and reliefs | | 3.94% | | |
Effect of valuation allowance on deferred income tax assets | | -52.03% | | -26.17% |
Effect of income tax difference under different tax jurisdictions | | -0.96% | | |
Hong Kong income tax rate | | 16.50% | | 16.50% |
Provision for income tax | | -32.55% | | -9.67% |
Note 11 – Loans Receivable
On August 4, 2011, the Company’s subsidiary, ALC, entered into a loan agreement with its clients, Jian Mao International
15
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 $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 August 4, 2012, the balance of the loan is $1,912,000.
On August 4 of each year from 2012 through 2015, ALC entered into a loan extension agreement with JMISCL and JXISCL. Under the terms of four extension agreements, the payable due date is extended to August 4, 2016. All terms and conditions of the loan agreement and the balance of the loan remain unchanged.
Note 12 – Long-term Loans
On June 12, 2014, the Company’s subsidiary, ALC, entered into a loan agreement with Hitachi Credit (HK) Ltd in relation to the acquisition of a motor vehicle, which was pledged to secure the loan. The total amount of the loan obtained is $32,036, bearing annual interest rate of 2.28% for 48 months.
On June 22, 2015, the Company’s subsidiary, KIM, entered into a loan agreement with DBS Bank Ltd in relation to the acquisition of a new motor vehicle, which was pledged to secure the loan. The total amount of the loan obtained is $60,000, bearing annual interest rate of 2.28% for 60 months.
The principal of the loans due within one year is classified as current liability and included in “long-term loan, current” as of balance sheet date.
Note 13 –Noncontrolling Interest
On March 13, 2015, the Company’s subsidiary, Chang An Consultants Ltd., declared dividends of HK$2,550,000, or $326,923. The Company has paid 40% of the dividends or $130,769 to the noncontrolling shareholders.
Note 14 –Subsequent event
On October 1, 2015, the Company’s board of directors approved to grant an award of 25,500 shares of restricted stock to key employees pursuant to the 2010 Restricted Share Stock Compensation Plan.
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, 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
16
Form 10-K 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
To cope with the difficult shipping market in 2014, there were several tasks in the management’s plan of operations for 2014. The first task was tightening control measures to monitor and reduce operating expenses. Management believes that this task was successfully completed as other general and administrative expense decreased 10% in 2014 when compared to 2013. Although salaries and travel expenses increased 6% and 7% respectively, it was because the level of marketing activities increased in 2014. The second task was enhancing our credit controls to improve the average collection period for outstanding receivables. Management believes that the enhancement was successful although the average collection period increased from 34 days in 2013 to 35 days in 2014. The third task was carrying out an audit review for our Singapore subsidiary. This task was completed and no significant finding was noticed during the audit. The fourth task was organizing marketing activities with our business partners and putting more effort into acquiring new clients. We believe that this task was successfully achieved as our client retention rate increased by 1 point to 78% and 68 new clients were acquired during 2014.
Management believes that the 2015 fiscal year will still be a difficult year even though the shipping market is expected to be improved to some extent. However, many companies, including us, have been facing pressures from increasing operating costs such as salaries and rent. Therefore, the Company plans to continue to tighten control measures in order to monitor and reduce operating expenses. Meanwhile, we will maintain the current level of marketing activities to promote the Company to new clients and to strengthen our relationship with our existing clients. In addition, because current market conditions are still bad, with many shipping companies facing liquidity problems, we will maintain our credit controls to retain, or further reduce, the average collection period for outstanding receivables.
We believe the plans mentioned above will help to turn the Company back to profitability. However, implementation of the plans will depend on the market situation, associated risk factors and our internal resources. There is no assurance that we will be 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, 2015 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2014
Revenue
Nine-month end:
Revenue for the nine months ended September 30, 2015 was $4,000,372, as compared to $3,780,820 for the same period of 2014. The increase of $219,552 or approximately 6% was mainly due to increases of commission income and consulting income which partially offset with decreases of enrollment fee income and website advertising.
Commission income is based on a percentage of the premiums paid by the insured, and increased by $199,322 or 5% when compared to the same period in last year. The increase was mainly contributed by ALC and CAC which was partially offset by a decrease of SHB and ALCO Insurance. If the contributions from SHB and ALCO Insurance are excluded, commission income of the group for the same period of 2015 increased by $235,888 or 7% as compared to the same period of 2014. The factors which resulted in the increase of commission income attributable to ALC and CAC were an increase of 12% in average commission earned per client, partially offset by a decrease of 2% in number of clients.
Some clients sold their vessels as scrap during the period because of the poor shipping market. Such sales result in lowered demand for insurance. However, the Company’s average commission earned per client still increased during the period because of our marketing activities. During the period of 2015, total commission income contributed by ALC, CAC, SHB
17
and ALCO Insurance was 82%, 8%, 1% and 9% respectively.
Consulting income for the nine months period ended September 30, 2015 was $43,095 as compared to $18,000 for the comparable period of 2014. The increase of $25,095 or approximately 139% was mainly due to the fact that demand for the services increased. Enrollment fee for the nine months period ended September 30, 2015 were $6,181 as compared to $10,379 for the same period of 2014. The decrease was mainly due to the decrease of enrollment during the period.
Three-month end:
Revenue for the three months ended September 30, 2015 was $1,541,207, as compared to $1,410,883 for the same period of 2014. The increase of $130,324 or approximately 9% was mainly due to increases of commission income and consulting income which partially offset with a decrease of enrollment fee income.
Commission income for the three months period ended September 30, 2015 was $1,508,798 as compared to $1,396,438 for the same period of 2014. The increase of $112,360 or approximately 8% was mainly due to the reasons stated in the Nine-month end paragraph above. Consulting income for the three months period ended September 30, 2015 was $28,711 compared to $6,000 for the comparable period of 2014. The increase of $22,711 or approximately 379% was mainly due to the service demand increased. Enrollment fee for the three months period ended September 30, 2015 were $3,698 as compared to $8,445 for the same period of 2014. The decrease of $4,747 was mainly due to the decrease of enrollment during the period.
Operating expenses
Operating expenses for the nine months ended September 30, 2015 were $4,328,543, as compared to $4,382,180 for the same period of 2014. The decrease of $53,637 or approximately 1% was mainly due to the goodwill impairment charge of $222,524 made in 2014 and decreases of travel, bad debt and other general and administrative expenses which were partially offset by increases in salary, rent, depreciation and amortization. If the impairment charge is excluded, the operating expenses increased 4%.
Operating expenses for the three months ended September 30, 2015 were $1,469,761, as compared to $1,424,901 for the same period of 2014. The increase of $44,860 or approximately 3% was mainly due to the increases of salary, rent, depreciation and amortization, which were partially offset by decreases in travel, bad debt and other general and administrative.
The reasons for the increases and decreases in the major items of operating expense in 2015, as compared to the same period of 2014, are as follows:
·
Salaries – increased $301,100 or 12% for the nine months ended and $165,223 or 20% for the three months ended September 30, 2015 as compared to the same period of 2014. The increase was mainly due to increases in pay rates and headcounts.
·
Travel Expenses – decreased $22,141 or 7% for the nine months ended and $32,849 or 23% for the three months ended September 30, 2015 as compared to the same period of 2014. The decrease was due to the effort of expense control.
·
Rent – increased $42,900 or 8% for the nine months ended and $31,304 or 18% the three months ended September 30, 2015 as compared to the same period of last year. The increase was mainly due to the new office space rent for Shanghai office and rental rates increased.
·
Bad debt expenses – decreased $83,209 or 110% for the nine months ended and $39,191 or 108% for the three months ended September 30, 2015 as compared to the same period of last year. The decrease was mainly due to the provision of doubtful debts decreased during the period.
·
Depreciation and amortization – increased $14,233 or 12% for the nine months ended and $8,561 or 23% for the three months ended September 30, 2015 as compared to the same period of last year. Because the real property located in United States purchased in July 2014, depreciation of the buildings started to charge at that time. During the nine months ended September 30, 2015, depreciation for fixed assets was $122,673, an increase of $11,949, or 11%, from $110,724 in the comparable period of 2014, which was caused by the reason stated as above. Regarding the amortization charged for intangible asset, it was $8,291 for the nine months ended September 30, 2015.
·
Other general & administrative expenses – decreased $83,996 or 13% for the nine months ended and $87,774 or 40%
18
the three months ended September 30, 2015 as compared to the same period of last year. The decrease was mainly due to the exchange gain generated by ALCO Insurance, and the effort of expense control.
Net loss before tax and noncontrolling interest
Nine-month end:
Net loss before tax and noncontrolling interest for the nine months ended September 30, 2015 was $200,747 compared to net loss before tax and noncontrolling interest of $512,217 for the nine months period ended September 30, 2014. The decrease in the net loss of $311,470, or approximately 61%, was mainly because the 6% increase in revenues and 1% decrease in operating expenses during the period. Causes for the revenue increase were discussed in the section of Revenue above, while causes for the operating expense decrease were discussed in the section of Operating expenses above.
In addition, the decrease in operating expenses was mainly because the goodwill impairment charge of $222,524 was made during the nine months period ended September 30, 2014. If the impairment charge is excluded, the operating expenses increased 4%.
Other income increased to $127,424 for the nine months ended September 30, 2015 from $89,143 for the same period of 2014. The increase of $38,281 or approximately 43% was mainly due to the increase in investment income and other income which was partially offset by the decreases in interest income and gain on disposal of fixed assets. Interest income decreased by 87% to $2,534 during the period. The decrease was due to the loans made to third party in 2014 but no such income in 2015. Investment income increased by 8% to $16,200 for the nine months ended September 30, 2015 as compared to $15,029 in the comparable period of 2014. It was mainly as a result of an increase in dividend income received from publicly traded equity securities owned by the Company.
Other income for the nine months period ended September 30, 2015 was $110,332 compared to $50,839 for the comparable period of 2014. The increase of $59,493 or approximately 117% mainly due to increased commissions from business referral and other business services we provided to clients, and the receipt of allowance from government in relation to the Company joined an employment programme organized by the government, and a receipt of cash refund from the provident fund scheme.
Three-month end:
Net profit before tax and noncontrolling interest for the three months ended September 30, 2015 was $89,962 as compared to $955 for the three months period ended September 30, 2014. The increase of $89,007 was mainly due to 9% increase in revenues and 3% increase in operating expenses during the period. Causes for the revenue increase were discussed in the section of Revenue above, while causes for the operating expense increase were discussed in the section of Operating expenses above.
Net income and loss
The Company incurred a net loss of $382,126 during the nine months period ended September 30, 2015. In order to return the company to profitability, we will continue to implement our operations plan which is stated in the “PLAN OF OPERATIONS” section above. In accordance with our operations plan, we will continue to put efforts into establishment of new clients, credit control and control on expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow
For the nine months ended September 30, 2015, cash used in operating activities totaled $255,093. This was primarily due to the net loss during the period plus a decrease in commission receivable, enrollment fees, fiduciary assets, other receivable, tax receivable, accounts payable, accrued expenses, which was partially offset by an increase in deposit and prepayment, claims payable, and other payable.
19
Net loss after adjustments of non-cash activities for the nine months ended September 30, 2015 decreased by $5,652, or 1% as compared to the same period of 2014. The changes in operating assets and liabilities for the nine months ended September 30, 2015 decreased $340,787 or 141% as compared to the same period of 2014. As a result, net cash used in operating activities for the nine months ended September 30, 2015 amounted to $255,093, as compared to cash provided by operating activities with $80,042 for the same period of last year.
For the nine months ended September 30, 2015, cash used in investing activities amounted to $195,735 as compared to cash provided by investing activities with $953,402 for the same period of last year. For 2015, the fund was mainly used for the purchase of fixed assets. For 2014, loan repaid from third party was $2,680,000 and sales proceed for disposal of fixed assets was $16,381, which was partially offset by the loan made to third parties totaled $1,580,000, prepayment for asset acquisition amounted to $303,548, and the purchase of fixed assets totalled $1,765,945.
For the nine months ended September 30, 2015 and 2014, cash provided by financing activities amounted to $54,395 as compared to cash used in finance activities totaled $148,229. For 2015, borrowings on related party debt was $252,762, which was partially offset by repayment on related party debt totaled $58,284, dividend payment to minority shareholders with $130,769 and repayment of obligations under long-term loans amounted to $9,314. For 2014, the funds were mainly used for the dividend payment to minority shareholders amounted to $143,077, repayment of obligations under long-term loans totaled $4,850 and principal payments on related party debt amounted to $18,388, which was partially offset by the borrowings on related party debt with $18,086.
Assets and liabilities
For the nine months ended September 30, 2015, the Group’s balance sheet reflects total assets of $12,749,504 and total liabilities of $2,942,024. Total assets decreased by $509,986, or approximately 4%, and total liabilities increased by $70,553, or approximately 2%, when compared to the year ended December 31, 2014. The decrease of total assets was mainly due to decreases of cash and cash equivalents, short-term investment, enrolment fee receivable, fiduciary asset, goodwill, intangible asset, and marketable securities, which was partially offset by increases of commission receivable, property, plant and equipment, deposit and prepayment, and other receivable. In addition, the increase of total liabilities was mainly due to increases of claims payable, other payable, tax payable, due to directors and long-term loans, which were partially offset by decreases of trade accounts payable and accrued expenses.
As at September 30, 2015, commission receivable was $338,555 as compared to $322,589 as at December 31, 2014, while trade accounts payable was $2,235,608 as compared to December 31, 2014 balance of $2,376,271. 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 commission income increased, commission receivable as at September 30, 2015 increased by $15,966 or 5% as compared to December 31, 2014 balance. In addition, because certain advances on behalf of customers were paid, other receivable increased by $4,016 or 3% as compared to the year end of 2014. Furthermore, because certain fund received on behalf of customers had been received during the period, the other payable increased $24,348 or 11% as compared to the year end of 2014. On the other hand, certain claim proceeds received on behalf of customers had been received, the claim payable increased by $19,637 or 27% as compared to the year end of 2014.
As at September 30, 2015, loan receivable was $1,912,000 which remained unchanged during the period. Accrued expenses of $31,344 as at September 30, 2015, reduced by $138,856 or approximately 82% from $170,200 as at December 31, 2014. The reduction was mainly due to the payment of accrued expenses which were provided for the year of 2014.
Because the interest rate is maintained at a very low level in the recent years, since 2008, the Company has purchased publicly traded equity securities with high dividend yields for long term investment purpose. As of September 30, 2015, the market value of the equity securities was $307,156, which represents a decrease of $74,048 or approximately 19% as compared to the market value of $381,204 for the last year. The decrease was due to the change of fair values between September 30, 2015 and December 31, 2014.
As at September 30, 2015, property, plant and equipment were $4,101,101 as compared to $4,035,084 as at December 31, 2014. The increase of $66,017 or approximately 2% was mainly due to acquisition of vehicle and office equipment. Due to the fact that the Company acquired a subsidiary in 2012, certain assets such as customer list and goodwill were recognized
20
in the same year. As of September 30, 2015, the carrying value of customer lists was $0 and the carrying value of goodwill was $68,434.
The Company has bank and cash equivalents of approximately $3,649,469 as at September 30, 2015. The Company has sufficient funds to satisfy its financial commitments and working capital requirements for the next twelve months. As of September 30, 2015, the Company had $0 of commitments for capital expenditures and off-balance sheet arrangements. The company has lease commitments of $810,235.
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 2014 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, 2015 to provide reasonable assurance of the achievement of these objectives.
Changes in Internal Controls Over Financial Reporting
21
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, 2015, 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.
22
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.
23
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, 2015
By: /s/ John Liu, Director
Date: November 13, 2015
By: /s/ Colman Au, Chief Financial Officer
Date: November 13, 2015
24
