The Shanghai offices have been leased from a third party since December 2007. For expansion purpose, another flat in the same building is leased from another third party starting in December 2010.
For the 2013 fiscal year, management believes it will be a difficult year because the shipping market is still poor. Therefore, the Company plans to continue to enhance its marketing function, such as setting up a new liaison office and hiring more marketing representatives in this field. In addition, for the newly acquired Singapore firm, we will intend to take steps designed to streamline its existing policies and procedures to increase its efficiency. Furthermore, we intend to set up a marine insurance brokerage business and establish a new customer base in Singapore through this firm. Furthermore, in order to cope with the difficult shipping market, the Company intends to continue to tighten control measures, such as budget controls, in order to monitor and reduce operating expenses.
Commission income is based on a percentage of the premiums paid by the insured, and decreased by $535,044 or 8% when compared to last year. The decrease mainly came from ALC and CAC and was mainly due to the fact that the number of clients decreased 14% even though average commission earned per client increased 7% during the year. Main reason for the decrease of number of clients was that the shipping market was difficult in 2012, some clients sold their vessels as scrap because of the poor shipping market, giving rise to lowered demand for insurance. In addition, average commission earned per client increased because of a rise in insurance premium was seen during the year. In 2012, total commission income contributed by ALC, CAC, SHB and KIM was 84%, 9%, 6% and 1% respectively.
Salaries - increased by $385,120 or 15% from $2,629,036 in 2011 to $3,014,156 in 2012. The increase was mainly due to increases in headcounts and pay rates during the year of 2012. In addition, pursuant to the Restricted Share Stock Compensation Plan which was implemented in June 2010, $87,890 was recognized as stock-based compensation expense in salaries during the year ended December 31, 2012. The amount of stock based compensation decreased $11,983, or approximately 12%, as compared to 2011 because certain restricted share stocks were forfeited from the employees resigned during the year.
Travel expenses - decreased by $95,513 or 18% from $537,960 in 2011 to $442,447 in 2012. The decrease was mainly because of the effort of expense control during the year.
Rents - increased by $113,804 or 22% from $525,292 in 2011 to $639,096 in 2012. 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.
Depreciation and amortization - increased by $50,308 or 45% from $112,564 in 2011 to $162,872 in 2012. The increase was due to the addition of fixed assets during the whole year 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 its reduced remaining life. Consequently, additional
depreciation was charged in 2012. In addition, amortization for intangible asset acquired from KIM was charged starting in October 2012. During the year ended December 31, 2012, depreciation for fixed assets was $138,119 while amortization charge for intangible asset was $24,753.
Other general & administrative expenses - increased $141,990 or 15% for 2012 as compared to last year. In general, the increase was due to the general price inflation, increases in headcount which caused office administrative expenses and staff medicals expenses to increase. Another reason is that additional telecommunication expense was incurred for the Company’s new telephone system, and the operation expenses of KIM started to consolidate into the Company during the year. Furthermore, the Company incurred the provision of legal cost of $19,230 for the legal proceeding, which is discussed in Part I, Item 3 and Part II, Item 8 of this Form 10-K, was made in 2012.
For 2012, cash used in investing activities amounted to $344,174 compared to $1,923,170 for 2011. The funds were used for the acquisition of KIM and purchases of fixed assets.
As of December 31, 2012, the Company’s balance sheet reflects total current assets of $12,164,668, which increased by $532,253 (or 5%) as compared to $11,632,415 as of December 31, 2011. Total current liabilities as of December 31, 2012 were $1,960,988, which increased by $78,761 or 4% as compared to $1,882,227 as of December 31, 2011. The increase of total current assets was mainly due to increases of enrollment fee receivable, fiduciary asset and tax receivable which were partially offset by a decrease of cash and cash equivalents, commission receivable and other receivable. The increase of total current liabilities was mainly due to increases of trade accounts payable, claims payable and accrued expenses, partially offset by a decrease of other payable and due to directors. Non-current deferred tax liability of $19,270 was recognized.
As of December 31, 2012, commission receivable was $207,094 as compared to $399,942 in 2011, while trade accounts payable and other payable were $1,577,668 and $131,363 respectively, as compared to December 31, 2011 balances of $1,054,919 and $663,450. Each of these changes was due to the timing of commissions received from customers and making payments to insurers at the year end. In addition, because the commission income and the average collection period decreased, commission receivable as at December 31, 2012 decreased by $192,848 or 48% as compared to December 31, 2011 balance. In addition, because certain payment advances made on behalf of customers were refunded, other receivable decreased by $32,099 or 27% 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 $532,087 or 80% 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 2011.
In addition, the Company provided a deferred tax liability of $19,270 in 2012. Such liability is primarily attributable to the different methods used in the calculation of depreciation of property, plant and equipment for financial reporting purpose and for income tax purpose.
Amounts included in the statements of operations, statements of changes in shareholders’ equity and statements of cash flows for the year: US$0.15751:CNY1 and US$0.79845:SGD1
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
Under the current Chinese regulations, there are restrictions on the percentage interest foreign or foreign-invested companies may have in Chinese companies providing insurance brokerage services in China. In addition, the operation by foreign or foreign-invested companies of insurance brokerage business in China is subject to government approval. In order to comply with these restrictions and other Chinese rules and regulations, ALM Shanghai entered into an exclusive agreement with SHB. Under the agreement, the Company provides all management and administration services and financial support to SHB for its operations. SHB is prohibited from entering into any exclusive agreement without the Company’s prior approval.
The Company faces a number of risks and challenges since its assets are located in Hong Kong, a Special Administrative Region of the People's Republic of China ("PRC"), and its revenues are derived from its operations therein. The PRC is a developing country with an early stage market economic system, overshadowed by the state. Its political and economic systems are very different from the more developed countries and are in a state of change. The PRC also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and in its relationships with other countries, including the United States. Such shocks, instabilities and crises may in turn significantly and negatively affect the Company's performance.
According to the requirements of ASC 810, we have evaluated our relationships with SHB. We have concluded that SHB is a VIE, and the Company is the primary beneficiary of the VIE. Accordingly, we adopted the provisions of ASC 810 and consolidated SHB into our financial statements as of and for the year ended December 31, 2012.
The company’s VIE consolidated net assets were US$822,990 at December 31, 2012.
The consolidated financial statements have been prepared in accordance with US GAAP and the instructions to Form 10-K and Regulation S-K. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flows at December 31, 2012 and 2011 for all periods presented have been made.
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.
Input other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.
In 2012, 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 no impairment of goodwill. Through the review completed in 2012, the Company concluded that there were no events or circumstances that triggered impairment, and 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$0.15751:CNY1
The functional currency of KIM is the Singapore Dollar (“SGD”). The financial statements of KIM 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.
Amounts included in the statements of operations, statements of changes in shareholders’ equity and statements of cash flows for the year: US$0.79845:SGD1
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 year ended December 31, 2012.
In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2013-02 is not expected to have a material impact on the Company’s consolidated financial statements.
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 assets balance for December 31, 2012 and 2011 are as follows:
Depreciation expense for 2012 and 2011 was $138,119 and $91,271 respectively. Loss on disposal of fixed assets for the year ended December 31, 2012 and 2011 was $5,863 and $31,767 respectively.
The unaudited pro forma information of the Company set forth below gives effect to the acquisition of KIM as if it had been consummated as of the beginning of the applicable period. The unaudited pro forma information has been derived from the historical consolidated financial statement of the Company and of KIM. The unaudited pro forma information is for illustrative purposes only.
The following are the Company’s investments owned and securities sold short by level within the fair value hierarchy at December 31, 2012 and 2011 are as follows:
As of December 2012 and 2011, the outstanding balance of the loan is as follows:
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 by the fair value of the Company’s stock on June 1, 2010, the date of grant. 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.
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 by the fair value of the Company’s stock on June 1, 2011, the date of grant. 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 grant is $2.79 per share. When determining the risk-free rate of this award, Hong Kong unsecured long term loan rate, 7.25%, in effect at the time of grant is used in the calculation.
During the year ended December 31, 2012 and 2011, the Company recognized $87,890 and $99,873 respectively, of stock-based compensation expense.
As of December 31, 2012, the significant components of the Company’s deferred tax liability are as follows:
Future minimum lease payments for operating leases for the succeeding years consists of following:
The Company has eight material operating lease commitments for its facilities. The initial term of the lease arrangement for Director Quarter is two years beginning July 19, 2012 with a minimum lease commitment of $201,602.
For the Shanghai Office, the initial term of the lease is one year beginning January 1, 2013 with a minimum lease commitment of $16,807. For the Office of ALM Shanghai, the initial term of the lease is one year beginning January 1, 2013 with a minimum lease commitment of $25,892. For the SHB Office, the initial term of the lease is one year beginning January 1, 2013 with a minimum lease commitment of $28,481. All the lease arrangements mentioned above have no renewal option and rent holiday.
For the Singapore Office of KIM, the initial term of the lease is three years beginning February 1, 2013 with a minimum lease commitment of $325,520. This lease arrangement has a 46 days rent free period from December 17, 2012 to January 31, 2013. When the lease is ended in February 2016, the Company can renew the lease for three years (from February 1, 2016 to February 2019) at the prevailing market rent.
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.