The Hong Kong office was leased from a third party since March 2012. As the Company is continuing growth and meet the Company’s needs, the Hong Kong Office moved to the existing building in March 2012. The existing property is leased from a third party and located in Wanchai, Hong Kong with 6,350 sq. ft and is leased from a third party. As the lease would expire in June 2015, it was renewed for two years in May 2015.
For marketing purpose, the Shanghai office moved to another location in August 2015. The property is leased from another third party.
The Fuzhou office is leased from a third party starting from October 2010.
To cope with the difficult shipping market in 2015, the Company planned to tighten control measures in order to monitor and reduce operating expenses. Management believes that it was successfully completed as travel expenses decreased 8% and other general & administrative expenses decreased 14% when compared to 2014. Although salaries increased 10%, it was because the Company a new department was set up to introduce new consulting service to our clients. Meanwhile, we planned to maintain the certain level of marketing activities to promote the Company to new clients and to strengthen our relationship with our existing clients. We believe that this task was successfully achieved as nearly 50 new clients were acquired during 2015, even though our client retention rate decreased by 1 point to 77% during this year. In addition, we planned to maintain our credit controls to retain, or further reduce, the average collection period for outstanding receivables in order to improve the liquidity. However, because of the shipping market is still difficult, average collection period increased 5 days to 47 days.
Revenue for 2015 was $5,387,117 as compared to $5,337,978 for 2014. The increase of $49,139 or approximately 1%, was mainly due to increase of consulting income which were partially offset with a decrease of commission income, website advertising and enrollment fee income.
Commission income, which is based on a percentage of the premiums paid by the insured, and decreased by $9,715, or 0.2%, when compared to last year. The decrease was mainly contributed by a reduction of commission income for SHB and ALCO Insurance which was partially offset by an increase of commission income for ALC and CAC. If the contributions from SHB and ALCO Insurance are excluded, commission income of the group for 2015 increased by $40,471, or 1%, as compared to 2014. The factors which resulted in the increase of commission income attributable to ALC and CAC were an increase of 6% in average commission earned per client, partially offset by a decrease of 5% in number of clients.
Some clients sold their vessels as scrap during the year because of the poor shipping market. Such sales resulted in lowered demand for insurance. Therefore, the Company’s number of clients decreased during 2015 although there were some new clients were acquired. Average commission earned per client increased during the year because of increases in the commission percentage. In 2015, commission income contributed by ALC, CAC, SHB and ALCO Insurance was 82%, 8%, 1% and 10% respectively, of our total commission income for the year.
Net loss before tax and noncontrolling interest for 2015 was $704,585 compared to $727,769 for 2014. The decrease of $23,184, or approximately 3%, was mainly because of the 1% increase in revenues which partially offset with a 3% increase in operating expenses during 2015. Causes for the revenue increase were discussed in the section of Revenue above, while causes for the operating expense increase will be discussed in the section of Operating expenses below.
Other general & administrative expenses - decreased $58,906, or 6%, for 2015 as compared to last year. The decrease was mainly due to the exchange loss decreased, and the effort of expense control.
Net loss after adjustments of non-cash activities for 2015 decreased by $118,848, or 27%, as compared to 2014. The changes in operating assets and liabilities for 2015 decreased $1,230,442, or 210%, as compared to 2014. As a result, net cash used in operating activities for 2015 increased by $1,349,290 or approximately 911%, as compared to last year.
For the year of 2015 and 2014, cash provided by investing activities amounted to $279,260 when compared to the cash used in investing activities amounted to $1,104,120 respectively. For 2015, the cash inflow was due to loan repayment from third party which partially offset by the cash paid for purchase of fixed assets. For 2014, the fund was mainly used for deposit and prepayment paid for the acquisition of assets, loan made to third party, and cash paid for purchase of fixed assets including a real property located in New York, United States. The cash outflow was partially offset by the loan repayment from third party and sale proceeds from disposal of fixed assets.
Accrued expenses were $146,079 as at December 31, 2015, which represents a decrease of $24,121, or approximately 14%, from $170,200 as at December 31, 2014. The decrease was mainly due to the fact that certain operating expenses which were smaller than last year were accrued in 2015. As at December 31, 2015, no deferred tax asset was provided.
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 December 31, 2015, the market value of the equity securities was $337,847, which represents a decrease of $43,357, or approximately 11%, as compared to the market value of $381,204 for last year. The decrease was mainly due to the change of fair values between December 31, 2015 and December 31, 2014, and the addition of equity securities which were acquired during the year.
As at December 31, 2015, property, plant and equipment were $4,075,442 as compared to $4,035,084 as at December 31, 2014. The increase of $40,358, or approximately 1%, was mainly due to acquisition of fixed assets. Due to the fact that the Company acquired a subsidiary in 2012, certain assets such as customer list and goodwill were recognized in the same year. As of December 31, 2015, the carrying value of customer lists was $0 and the carrying value of goodwill was $69,071. However, due to the fact that the operation of SHB has been changed and its revenue significantly declined during the six month period ended June 30, 2014, the Company concluded that goodwill impairment indicators existed and an interim goodwill impairment assessment was performed at June 30, 2014. Consequently, a goodwill impairment charge of $222,759 was made during 2014 to write off the entire carrying value of SHB’s goodwill.
The Company has bank and cash equivalents of approximately $2,994,776 as at December 31, 2015. The Company has sufficient funds to satisfy its financial commitments and working capital requirements for the next twelve months. As of December 31, 2015, the Company had $0 of commitments for capital expenditures and off-balance sheet arrangements. The company has lease commitments of $768,428.
ALCO’s main subsidiaries, ALC, CAC and ESA use the Hong Kong dollar as its currency. The exchange rate for HK$ to US dollars has varied by very little during the period between 2014 and 2015. 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. There were no material gains or losses recognized as a result of translating foreign currencies to the U.S. or Hong Kong dollar. No assurance can be given as to the future value of foreign currency and how fluctuations in such value could affect ALCO’s earnings.
The functional currency of SHB and ALM Shanghai is the Chinese Yuan (“CNY”) while ALCO Insurance is the Singapore Dollar (“SGD”). The financial statements of SHB, ALM Shanghai and ALCO Insurance are translated into United States dollars in accordance with the Financial Accounting Standards Board (“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 year 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. At December 31, 2015, the cumulative translation adjustment of $88,588 was classified as an item of other comprehensive loss in the shareholders’ equity section of the consolidated balance sheet. For the year ended December 31, 2015, accumulated other comprehensive loss was $10,268.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
AL Marine is the 100% owner of Andrew Liu and Co., Ltd., a corporation principally engaged in the business of marine insurance brokerage in Asia. AL Marine owns 60% of Chang An Consultants Ltd., a joint venture with China Changjiang National Shipping Corporation (“CSC Group”) that serves as a vehicle for the provision of marine insurance brokerage and other marine business services by AL Marine. AL Marine owns 85% of EdushipAsia Ltd. In 2005 and 2004, EdushipAsia Ltd was appointed as an exclusive agent by the Institute of Chartered Shipbrokers (UK) (“ICS”) to set up ICS’s first distant learning centre in Shanghai, PRC. AL Marine owns 100% of AL Marine Holdings (Hong Kong) Limited (“ALM HK”), a corporation principally engaged in the investment holding. ALM HK owns 100% of AL Marine Consulting Services (Shanghai) Ltd (“ALM Shanghai”), a corporation principally engaged in the investment holding. ALM Shanghai, through an agency arrangement, owns 100% of Shanghai Heshili Broker Co. Limited (“SHB”), a corporation principally engaged in the business of general insurance brokerage in China. AL Marine owns 82% of Kim Insurance Brokers Pte Ltd, a corporation principally engaged in the business of general insurance brokerage in Singapore. On March 27, 2013, the Company changed the name of Kim Insurance Brokers Pte Limited to ALCO Insurance Brokers Pte Limited (“ALCO Insurance”).
SHB is 100% beneficially owned by a Chinese party. An agency agreement is entered into between the Chinese party and ALM Shanghai. Under this agreement, the Chinese party is holding the shares of SHB on behalf of ALM Shanghai. The Company does not have any direct ownership interest in SHB.
As a result of our contractual arrangements with SHB above, we bear the risks of, and enjoy the rewards associated with, and therefore are the primary beneficiary of our investments in SHB, and we have begun to consolidate its results of operations in our consolidated financial statements commencing in the fiscal year 2010.
Several areas require significant management estimates relating to uncertainties for which it is reasonably possible that there will be a material change in the near term. Significant estimates include valuation of marketable securities, allowance for doubtful accounts, fair value of share-based compensation, the useful lives and impairment of property, plant and equipment, and impairment of goodwill and intangible assets.
Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful live of our property is 20 years. Land is not depreciated. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and
The functional currency of 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 U.S. dollars are included in determining comprehensive income.
The Company accounts for restricted stock awards and other equity based compensation issued to employees in accordance with ASC 718 “Stock Compensation”. ASC 718 requires companies to recognize an expense in the statement of operations at the grant date of stock awards and other equity based compensation issued to employees.
In May 2015, the FASB issued ASU 2015-09, “Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts”. The amendments in ASU 2015-09 require insurance entities to disclose for annual reporting periods information about the liability for unpaid claims and claim adjustment expenses. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. In addition, the amendments require insurance entities to disclose for annual and interim reporting periods a roll-forward of the liability for unpaid claims and
claim adjustment expenses. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities and expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently in the process of evaluating the 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 amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied rospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-03, “Intangibles-Goodwill and Other (Topic 350); Business Combinations (Topic 805); Consolidation (Topic 810); Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance”. The amendments in this ASU make the guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 effective immediately by removing their effective dates. The amendments also include transition provisions that provide that private companies are able to forgo a preferability assessment the first time they elect the accounting alternatives within the scope of this ASU. Any subsequent change to an accounting policy election requires justification that the change is preferable under Topic 250, Accounting Changes and Error Corrections. The amendments in this ASU also extend the transition guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 indefinitely. While this ASU extends transition guidance for Updates 2014-07 and 2014-18, there is no intention to change how transition is applied for those two ASUs. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
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.
Depreciation expense for 2015 and 2014 was $174,774 and $149,543, respectively. Gain on disposal of fixed assets for the years ended December 31, 2015 and 2014 was $0 and $5,155, respectively.
The Company’s investments measured at fair value on a recurring basis at December 31, 2015 and 2014 are as follows:
On March 4, 2014, ALC entered into a loan agreement with its client, Zhenghe Shipping S.A. (“ZSSA”). Under the loan agreement, ALC would make available to ZSSA an on demand loan facility in the principal amount of $500,000. The loan bears interest at the rate of 5.25% per annum and is unsecured. The loan term is 25 days and is payable in full at any time upon demand. On March 25, 2014, the loan was fully repaid.
On April 30, 2014, ALC entered into a loan agreement with ZSSA. Under the loan agreement, ALC would make available to ZSSA an on demand loan facility in the principal amount of $300,000. The loan bears interest at the rate of 5.25% per annum and is unsecured. The loan term is 30 days and is payable in full at any time upon demand. On May 29, 2014, the loan was fully repaid.
Changes to the carrying amount of goodwill during 2015 were as follows:
The goodwill balance represents the excess of the total excess of the total consideration transferred plus the fair value of non-controlling interest of KIM at the acquisition date over the fair values of the identifiable net assets acquired in connection with the acquisition of KIM.
In the second step of the impairment test, the impairment loss was measured by estimating the implied fair value of the Company’s goodwill and comparing it with its carrying value. Using the Company’s fair value determined in the first step of the goodwill impairment test as the acquisition price in a hypothetical acquisition of the Company, the implied fair value of goodwill was determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. Based on the results of the second step of the goodwill impairment test, it was concluded that the carrying value of goodwill was impaired as of June 30, 2014. Consequently, the Company wrote off the entire carrying value of SHB’s goodwill, and reported this amount as a separate line item in the consolidated statements of operations.
Due to directors represents loans payable that are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand.
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.
During the years ended December 31, 2015 and 2014, the Company recognized $4,815 and $7,425 of stock-based compensation expense, respectively.
As of December 31, 2015, the significant components of the Company’s deferred tax asset and liability are as follows:
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
The Company has seven material operating lease commitments for its facilities. The initial term of the lease arrangement for Director Quarter is two years beginning July 19, 2014 with a minimum lease commitment of $65,385.
For the Fuzhou Office, the initial term of the lease is two years beginning August 16, 2014 with a minimum lease commitment of $28,763.
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 non-controlling shareholder.
On February 17, 2016, the Company’s subsidiary, Chang An Consultants Ltd., declared dividends of HK$2,370,000, or approximately $303,846. 40% of the dividends or $121,538 was paid to the noncontrolling shareholders in February 2016.