ALCO rents its facilities from third parties. As of December 31, 2014, ALCO leased approximately 13,846 square feet of office space for its operations. Its current leased properties are:
ALCO’s current total monthly rental payment for the facilities mentioned as above is approximately US$43,977. We intend to renew these leases upon their expiration.
Commission income, which is based on a percentage of the premiums paid by the insured, and decreased by $431,849, or 8%, when compared to last year. The decrease was mainly contributed by a reduction of commission income for SHB, ALC and CAC which was partially offset by an increase of commission income for ALCO Insurance. If the contributions from SHB and ALCO Insurance are excluded, commission income of the group for 2014 decreased by $194,091, or 4%, as compared to 2013. The factors which resulted in the decrease of commission income attributable to ALC and CAC were a decrease of 6% in average commission earned per client, partially offset by an increase of 4% 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. However, the Company’s number of clients still increased during 2014 because of our marketing activities and acquisition of new clients. Average commission earned per client decreased during the year because of decreases in the commission percentage. In 2014, commission income contributed by ALC, CAC, SHB and ALCO Insurance was 80%, 9%, 1.3% and 10% respectively, of our total commission income for the year.
Net loss before tax and noncontrolling interest for 2014 was $727,769 compared to income before tax and noncontrolling interest $11,821 for 2013. The increase of $715,948, or approximately 6057%, was mainly because of the 8% decrease in revenues combined with a 4% increase in operating expenses during 2014. 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. In addition, the increase in operating expenses was mainly because the goodwill impairment charge of $222,759 was made during the year. If the impairment charge is excluded, the operating expenses only increased by 1%.
Total operating expenses were $6,159,718 for 2014, as compared to $5,902,488 for 2013. The increase of $257,230, or approximately 4%, was mainly due to the goodwill impairment charge of $222,759 and increases in salary, travel, depreciation and amortization expenses which were partially offset by decreases in rents, bad debts expenses and other general and administrative expenses. If the impairment charge is excluded, the operating expenses only increased by 1% from 2013 to 2014.
Travel expenses - increased by $28,033, or 7%, from $393,763 in 2013 to $421,796 in 2014. The increase was because more business trips were taken during 2014 to establish relationships with new clients and maintain relationships with existing clients.
Rents - decreased by $3,489, or 0.5%, from $705,797 in 2013 to $702,308 in 2014. The decrease was mainly due to the fact that the separate office space for SHB was not renewed, and instead, SHB and the Company’s Shanghai office share the same office space with SHB. This decrease was partially offset by an increase which was due to new office spaces were rented for the Dalian office and an increase in rental rates during the year.
Bad debt expenses - decreased by $111,255, or 104%, from $106,569 in 2013 to ($4,686) in 2014. The decrease was mainly because the provision of doubtful debts decreased during the year.
Depreciation and amortization - increased by $26,258, or 19%, from $135,206 in 2013 to $161,464 in 2014. The Company acquired real property in the United Kingdom in July 2013, and acquired real property located in the United States, in July 2014. The Company began to claim depreciation deductions for these properties immediately following their acquisition. As a result, during 2014, depreciation for fixed assets was $149,543, an increase of $48,544, or 48%, from $100,999 in 2013. The increase in depreciation expense for fixed assets was partially offset by a decrease in amortization expense for intangible assets. The amortization expense for intangible assets was $11,921 for 2014, which was a decrease of $22,286, or 65%, as compared to 2013. Amortization expenses decreased in 2014 as compared to 2013 because the acquired customer base which was being amortized, had been fully amortized during the year.
Impairment of goodwill - due to the fact that the operation of SHB had changed and its revenue significantly declined during 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.
Net loss after adjustments of non-cash activities for 2014 increased by $610,901, or 355%, as compared to 2013. The changes in operating assets and liabilities for 2014 increased $324,042, or 123%, as compared to 2013. As a result, net cash provided by operating activities for 2014 decreased by $286,859, or approximately 66%, as compared to last year.
payable, and current portion of obligation from capital lease, partially offset by decreases of claims payable, due to directors and deferred revenue.
As at December 31, 2014, loan receivable was $1,912,000, which decreased by $1,100,000, or 37%, as compared to last year. The decrease was due to receipt of payment of the loan by the client. Tax payable as at December 31, 2014 was $10,429, it is in relation to the provision of income tax for 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 December 31, 2014, the market value of the equity securities was $381,204, which represents a decrease of $32,124, or approximately 8%, as compared to the market value of $413,328 for the last year. The decrease was mainly due to the change of fair values between December 31, 2014 and December 31, 2013, and the addition of equity securities which were acquired during the year.
As at December 31, 2014, property, plant and equipment were $4,035,084 as compared to $2,248,611 as at December 31, 2013. The increase of $1,786,473, or approximately 79%, was mainly due to acquisition of a real property in United States. 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, 2014, the carrying value of customer lists was $8,585 and the carrying value of goodwill was $73,997. 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 Earnings per share is determined by dividing the net earnings by the weighted average number of outstanding shares during that period.
The balance sheets of ALC, CAC and ESA were translated at year-end exchange rates. Income and expenses were translated at exchange rates in effect during the year, substantially the same as the year-end rates.
Amounts included in the statements of operations, statements of changes in shareholders’ equity and statements of cash flows for the year: US$0.16137:CNY1 and US$0.78377:SGD1
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013...
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013..
We have audited the accompanying consolidated balance sheets of ALCO, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2014 and 2013 and the related consolidated statements of operations and comprehensive income, changes in equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(LOSS) FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
The Company’s VIE consolidated net assets were US$548,316 at December 31, 2014.
The Company invests idle cash primarily in money market accounts, certificates of deposit and short-term commercial paper. Money market funds and all highly liquid debt instruments with an original maturity of three months or less are considered cash equivalents.
Allowances are applied to commissions and other receivables where events or changes in circumstance indicate that the balances may not be collectible. The identification of doubtful debts requires the use of judgment and estimates as mentioned above. Where the expectation on or the actual recoverability of commissions and other receivables is different from the original estimate, such difference will impact the carrying value of commissions and other receivables and doubtful debts expenses in the periods in which such estimate is changed or the receivable are collected.
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 accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in the income statement in the year of disposition.
The Company adopted ASU 2011-08 "Intangibles-Goodwill and Other", which amends the guidance in ASC 350-20 on testing for goodwill impairment. The revised guidance allows entities testing for goodwill impairment to have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. In the qualitative assessment, the Company followed the steps specified in ASC 350-20-35-3C to evaluate the fair values of goodwill and considered all known events and circumstances that might trigger an impairment of goodwill. The assessment indicated impairment of goodwill existed and an interim goodwill impairment assessment was required at June 30, 2014. The detail is described in “Note 9 - Goodwill” as below. In addition, there was no expectation that a reporting unit or a significant portion of a reporting unit would be sold or otherwise disposed of in the following year.
Amounts included in the statements of operations, statements of changes in shareholders’ equity and statements of cash flows for the year: US$0.16137:CNY1
equity. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.
In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The Company does not expect the adoption to have a significant impact on its consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period”. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation - Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial position and results of operations.
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.
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 with effect from January 1, 2011.
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 $2,015,759 and $1,936,194 at December 31, 2014 and 2013 respectively.
Depreciation expense for 2014 and 2013 was $149,543 and $100,999, respectively. Gain on disposal of fixed assets for the years ended December 31, 2014 and 2013 was $5,155 and $0, respectively.
Unrealized loss of $51,178 and unrealized gain of $13,377 for the investment in marketable securities were recognized in the other comprehensive income for 2014 and 2013, respectively. All these gain and loss are related to the marketable securities listed in the Hong Kong Stock Exchange.
On August 4, 2011, the Company’s 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 $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, 2012, 2013 and 2014, ALC entered into loan extension agreements with JMISCL and JXISCL, respectively. Under the three extension agreements, the payable due date is extended to August 4, 2015. All terms and conditions of the loan agreement and the balance of the loan remain unchanged.
Changes to the carrying amount of goodwill during 2014 were as follows:
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 recorded a goodwill impairment charge of $222,759 during 2014 to write off the entire carrying value of SHB’s goodwill, and reported this amount as a separate line item in the consolidated statements of operations.
During the years ended December 31, 2014 and 2013, the Company recognized $7,425 and $36,205 of stock-based compensation expense, respectively.
The Company's effective tax rate for 2014 and 2013 was -12.07% and -364.62%, respectively. The provisions for income taxes for 2014 and 2013 are summarized as follows:
As of December 31, 2014, the significant components of the Company’s deferred tax asset and liability are as follows:
For the Fuzhou Office, the initial term of the lease is two years beginning August 16, 2014 with a minimum lease commitment of $75,323.