UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

or

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission File Number: 0-51105

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    

Yes ■  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes■  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   No ■

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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes   No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of August 3, 2012, there were 10,342,000 shares of the registrant’s common stock, $0.001 par value, outstanding

TABLE OF CONTENTS

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PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

The consolidated financial statements of ALCO, Inc. and subsidiaries (collectively, the "Company"), included herein were prepared, without audit, pursuant to rules and regulations of the Securities and Exchange Commission.  Because certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America were condensed or omitted pursuant to such rules and regulations, these financial statements should be read in conjunction with the financial statements and notes thereto included in the audited financial statements of the Company as included in the Company's Form 10-K for the year ended December 31, 2011.

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ALCO, INC

CONSOLIDATED BALANCE SHEETS

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ALCO, INC

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

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ALCO, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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ALCO, INC

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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ALCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (UNAUDITED)

Note 1 – Organization and Operations

Description of Business and Basis of Presentation

ALCO, Inc. (“ALCO,” “we,” “us,” the “Company”) was incorporated under the laws of the State of Nevada on June 7, 1999 as Seahorse, Inc. and changed its name to Lotus Capital Corp. (“Lotus”) on September 20, 2004.  The Company changed its name to ALCO, Inc. on February 13, 2006.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the SEC instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included.  Results for the six-month period ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in ALCO’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

The consolidated financial statements include the accounts of the Company and all its majority-owned subsidiaries which require consolidation.  Inter-company transactions have been eliminated in consolidation.

Certain accounting principles, which are stipulated by General Accepted Accounting Principles in the United States (“US GAAP”), are not applicable in the Hong Kong Accounting Standards (“HKAS”).  The difference between HKAS accounts of the Company and its US GAAP financial statements is adjusted in the Company consolidated financial statement.

The Company maintains its books and accounting records in Hong Kong dollar ("HK$"), which is determined as the functional currency.  Assets and liabilities of the Company are translated at the prevailing exchange rate at each year end.  Contributed capital accounts are translated using the historical rate of exchange when capital is injected.  Income statement accounts are translated at the average rate of exchange during the year.  Translation adjustments arising from the use of different exchange rates from period to period are included in the cumulative translation adjustment account in shareholders' equity.  Gain and losses resulting from foreign currency transactions are included in operations.

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation.

Note 2 – Significant Accounting Policies

For significant accounting policies, see notes to the consolidated financial statements included in the Company’s annual report of Form 10-K for the year ended December 31, 2011 filed with the SEC.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  Actual results, when ultimately realized could differ from those estimates.

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Foreign Currency and Other Comprehensive Income

The accompanying financial statements are presented in United States (US) dollars.  The functional currency of Andrew Liu & Co Ltd (“ALC”), Chang An Consultants Ltd (“CAC”) and Edushipasia Limited (“ESA”) is the Hong Kong dollar (HK$).  The financial statements are translated into US dollars from HK$ at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses.  Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

The Hong Kong Monetary Authority (“HKMA”), Hong Kong's central bank, maintains a Linked Exchange Rate System since 1983.  The HKMA operates Convertibility Undertakings on both the strong side and the weak side of the Linked Rate of US$1: HK$7.8.  In fact, the exchange rate for HK$ to US dollars has varied by only 100ths during the first six months of 2012 and 2011.  Thus, the consistent exchange rate used has been 7.80 HK$ per each US dollar.  Since there have been no greater fluctuations in the exchange rate, there is no gain or loss from foreign currency translation and no resulting other comprehensive income or loss.

Foreign currency transactions are those that required settlement in a currency other than HK$.  Gain or loss from foreign currency transactions, or exchange loss, are recognized in income in the period they occur.

The functional currency of Shanghai Heshili Broker Co. Limited (“SHB”) and AL Marine Consulting Services (Shanghai) Ltd (“ALM Shanghai”) is the Chinese Yuan (“CNY”).  The financial statements of SHB and ALM Shanghai are translated into United States dollars in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Code (ASC) No. 830, " Foreign Currency Matters”, using quarter-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for the equity.  Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.

The exchange rates used to translate amounts in CNY into U.S. Dollars for the purposes of preparing the consolidated financial statements were as follows:  

Balance sheet items, as of period-end date: US$0.15736:CNY1

Amounts included in the statements of operations, statements of changes in shareholders’ equity and statements of cash flows for the period: US$0.15751:CNY1

Earnings Per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no dilutive shares for the six months ended June 30, 2012.

Recent Accounting Pronouncements

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

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Note 3 – Cash

Cash balances are held principally at one financial institution and are not insured.  The Company believes it mitigates its risk by investing in or through major financial institutions.  Recoverability is dependent upon the performance of the institution.

Although the cash balances are not insured, however, starting in September 2006, cash balances (except accounts with overdraft facilities) are protected by the Deposit Protection Scheme which is maintaining by the Hong Kong Deposit Protection Board, an independent statutory body established under the Deposit Protection Scheme Ordinance (Cap. 581).

Under the scheme, compensation up to a limit of HK$100,000 (US$12,821) per depositor would be paid from the scheme to depositor if the bank with which the depositor holds his/her eligible deposits fails.  On October 14, 2008, the Hong Kong Government announced that they would use the Exchange Fund to guarantee the repayment of all customer deposits held in authorized institutions in Hong Kong, following the principles of the Deposit Protection Scheme.  This action began on October 14, 2008 and expired at the end of 2010.  Following the enactment of the Deposit Protection Scheme (Amendment) Ordinance 2010 in June 2010, the protection limit of the Deposit Protection Scheme is increased from HK$100,000 per depositor to HK$500,000 (approximately US$64,103) per depositor with effect from January 1, 2011.

Note 4 – Commissions Receivable

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 $1,284,317 and $1,075,578 at June 30, 2012 and December 31, 2011, respectively.

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Note 6 – Property, Plant and Equipment

Depreciation expense for the six-month period ended June 30, 2012 and 2011 were $103,043 and $34,158 respectively.

Loss on disposal of fixed assets for the six-month period ended June 30, 2012 and 2011 were $5,450 and $28,571 respectively.

Note 7 – Fair Value of Available for Sale Marketable Securities Investments and Investment Income

The following are the Company’s investments owned and securities sold by level within the fair value hierarchy at June 30, 2012 and December 31, 2011:

Unrealized gain of $42,770 and unrealized loss of $11,629 for the investments were recognized in the other comprehensive income for the six months ended June 30, 2012 and 2011, respectively.  All these gain and loss are related to the investments listed in the Hong Kong Stock Exchange.

Note 8 – Loan Receivable

On August 4, 2011, the Company subsidiary Andrew Liu & Company Limited (“ALC”) entered into a loan agreement with its clients, Jian Mao International Shipping Co Ltd (“JMISCL”) and Jian Xing Intl Shipping Co Ltd (“JXISCL”).  Under the loan agreement, ALC will make available to JMISCL and JXISCL an on demand loan facility in the principal amount of up to US$3,000,000.  The loan is interest free and secured by the claim proceeds under a claim filed by JMISCL and JXISCL under the terms an existing Hull & Machinery insurance policy insuring a vessel owned and managed by JMISCL and JXISCL respectively.  The loan is payable upon demand at any time following settlement of the claim if the claim proceeds are not adequate to cover the loan in full, and in any event is due and payable in full on or before August 4, 2012.  

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As of June 2012, the outstanding balance of the loan is as follows:

Note 9 – Due to Directors

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

Note 10 – Stock-based Compensation

2010 restricted stock plan

On June 1, 2010, the board of directors approved and the Company granted an award of 198,000 shares of restricted stock to certain key employees and directors of the Company. The award was made pursuant to the 2010 Restricted Share Stock Compensation Plan as approved by the Company’s Board of Directors. Under the plan, a maximum of 500,000 common shares may be delivered in satisfaction of awards. Key employees and directors are eligible to participate in the plan. Each grant of restricted shares under the Plan is subject to certain terms and conditions such as the shares cannot be transferred during the restriction period and the shares will be forfeited if the employment is terminated by the holder or the Company. Restricted stocks are granted at a strike price that is equal to the fair value of the Company’s stock on the date of grant.

The aggregate value of this award was $310,860, as determined by multiplying the number of shares times the fair value of the Company’s stock on June 1, 2010, the date of the grant award. The fair value is based on discounted free cash flow analyses, which involve management’s best estimate of future revenue, operation expenses, investing activities, and financing activities. In the valuation, the free cash flow is projected for five years and is determined by using the Company’s historical figures such as revenue and operation expenses which are compounded annually with 5% growth rate. Free cash flow occurring beyond the five-year projection period is assumed to be in perpetuity and determined by using the Perpetuity Growth Model in which the project net cash flow is divided by the risk-free rate. The sums of the five-year free cash flow together with the perpetual free cash flow are then discounted by the risk free rate. As a result, the fair value of the Company’s stock on the date of the grant award is $1.57 per share. When determining the risk-free rate, Hong Kong unsecured long term loan rate, 7.25%, in effect at the time of grant is used in the calculation.

2011 restricted stock plan

On June 1, 2011, the board of directors approved and the Company granted an award of 25,500 shares of restricted stock to certain key employees of the Company.  The award was made pursuant to the 2010 Restricted Share Stock Compensation Plan mentioned as above.  The aggregate value of this award was $71,145, as determined by multiplying the number of shares times the fair value of the Company’s stock on June 1, 2011, the date of the grant award.  The fair value is calculated based on the same approach mentioned above and the fair value of the Company’s stock on the date of the grant award is $2.79 per share. 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.

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2012 restricted stock plan

On June 1, 2012, the board of directors approved and the Company granted an award of 13,500 shares of restricted stock to a key employee of the Company.  The award was made pursuant to the 2010 Restricted Share Stock Compensation Plan mentioned as above.  The aggregate value of this award was $22,275, as determined by multiplying the number of shares times the fair value of the Company’s stock on June 1, 2012, the date of the grant award.  The fair value is calculated based on the same approach mentioned above and the fair value of the Company’s stock on the date of the grant award is $1.65 per share. When determining the risk-free rate of this award, Hong Kong unsecured long term loan rate, 8.25%, in effect at the time of grant is used in the calculation.

During the six months ended June 30, 2012 and 2011, the Company recognized $36,251 and $46,539 respectively, of stock-based compensation expense.

Note 11 – Related Party Transaction

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

Note 12 – Income Taxes

The Company's effective tax rate for the six months ended June 30, 2012 and 2011 was 23.36% and 18.64%, respectively.  The provisions for income taxes for the periods ended June 30, 2012 and 2011 are summarized as follows:

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

There were no significant permanent or temporary differences.

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Accounting for Uncertainty in Income Taxes

The Company adopted the provisions of Accounting for Uncertainty in Income Taxes on January 1, 2007.  The provisions clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with the standard “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The provisions of Accounting for Uncertainty in Income Taxes also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Based on the Company’s evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.

The Company may from time to time be assessed interest or penalties by major tax jurisdictions.  In the event it receives an assessment for interest and/or penalties, it will be classified in the financial statements as tax expense.

Note 13 – Operating Leases

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

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

Note 14 – Noncontrolling Interest

On February 1, 2012, the Company subsidiary Chang An Consultants Ltd., declared dividends of approximately $314,103. The Company has paid $125,640 to the noncontrolling shareholders.

Note 15 – Commitments and Contingencies

The Company's business operations exist solely in the PRC and are subject to significant risks not typically associated with companies in North America and Western Europe.  These include risks associated with, among others, the political, economic and legal environments and foreign currency limitations.

The Company's results may thus be adversely affected by changes in the political and social conditions in the PRC, and by

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changes in governmental policies, laws, regulations, anti-inflationary measures, currency conversion and remittance limitation, and rates and methods of taxation, among other things.

Note 16 – Subsequent Events

On June 19, 2012, the company agreed to acquire 75% shares of an insurance broker in Asia.  Consideration of the acquisition is around $293,191 in cash and the total assets of the insurance broker are about $823,234.  The acquisition is subject to approval of the local government and relevant application is in progress.  Once the approval is obtained, the acquisition will be completed and the consideration will be fully settled in cash.  As of the report date, the approval is still pending.

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

DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report, including statements in the following discussion, which are not statements of historical fact, are what are known as “forward-looking statements”, which are basically statements about the future.  For that reason, these statements involve risk and uncertainty since no one can accurately predict the future.  Words such as “plans,” “intends,” “will,” “hopes,” “seeks,” “anticipates,” “expects,” and the like, often identify such forward-looking statements, but are not the only indication that a statement is a forward-looking statement.  Such forward-looking statements include statements concerning our plans and objectives with respect to the present and future operations of the Company, and statements which express or imply that such present and future operations will or may produce revenues, income or profits.  Numerous factors and future events could cause the Company to change such plans and objectives, or fail to successfully implement such plans or achieve such objectives, or cause such present and future operations to fail to produce revenues, income or profits.  Therefore, the reader is advised that the following discussion should be considered in light of the discussion of risks and other factors contained in this report on Form 10Q and in the Company’s other filings with the Securities and Exchange Commission.  No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results.

PLAN OF OPERATIONS

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

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

The plans of investment, phone system upgrade and employee hiring will depend on the market situation, associated risk factors and our internal resources.  There is no assurance that we will able to implement these plans within the foreseeable future.  

We do not have any material off-balance sheet arrangements.

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RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2012 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2011 AND THREE MONTHS ENDED JUNE 30, 2012 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2011

Revenue

Six-month end:

Revenue for the six months ending June 30, 2012 was $2,883,208, as compared to $3,317,046 for the same period of 2011.  The decrease of $433,838 or approximately 13% was mainly due to decreases of commission income, consulting income and enrollment fee income.  Commission income is based on a percentage of the premiums paid by the insured, and decreased by $378,640 or 12% when compared to last year.  Most of the decrease was contributed by ALC and CAC.  Total commission income contributed by SHB was $188,679 for the six months ending June 30, 2012, which is approximately 7% of the total commission income of the group for the same period.  If the contribution from SHB is excluded, commission income of the group for the same period of 2012 decreased by 351,956 or 12% as compared to the same period of 2011.  The decrease of commission income was mainly due to average commission earned per client decreased 7% and no. of clients decreased 5% during the period.

Consulting income for the six months period ended June 30, 2012 was $13,933 as compared to $67,452 for the comparable period of 2011.  The decrease of $53,519 or approximately 79% was mainly due to demand of the services decreased.  Enrollment fee for the three months period ended June 30, 2012 were $4,099 as compared to $5,778 for the same period of 2011.  The decrease was mainly due to the decrease of enrollment during the period.  

Three-month end:

Revenues for the three months ending June 30, 2012 were $1,463,921, as compared to revenues of $1,746,746 for the three month ending June 30, 2011.  The decrease of $282,825, or approximately 16%, was mainly due to decreases of commission income, consulting income and enrollment fee income.  Commission income for the three month period ended June 30, 2012 was $1,457,970 as compared to $1,714,464 for the same period of 2011.  Same as the causes stated in the six months ending as the paragraph above, the decrease of $256,494 or approximately 15% was mainly due to the decreases of average commission earned per client and the no. of clients.  Consulting income for the three month period ended June 30, 2012 was $0 compared to $24,613 for the comparable period of 2011.  In addition, enrollment fee income for the three month period ended June 30, 2012 were $868 as compared to $2,586 for the same period of 2011.  Causes for the changes are same as the causes stated in the six months ending as the paragraph above.

Net income before tax and noncontrolling interest

Six-month end:

Net income before tax and noncontrolling interest for the six months ending June 30, 2012 was $345,963 compared to $1,168,193 for the six months period ended June 30, 2011.  The decrease in pre-tax profit of 822,230, or approximately 70%, was mainly because the revenue decreased by 13% and the operating expenses increased by 17% at the same time.  Causes for the revenue decrease were discussed in the section of Revenue above while causes for the operating expense increase will be discussed in the section of Operating expenses below.  

Other income and expense decreased to $22,330 in 2012 from $29,614 in 2011.  The decrease of $7,284 was mainly due to decrease in other revenues which partially offset by the reduction in loss on disposal of fixed asset and the increase in investment income.  Other revenue for the six months period ended June 30, 2012 was $17,677 compared to $49,337 for the comparable period of 2011.  The decrease of $31,660 or approximately 64% was mainly due to a one-time income which is not recurring in nature was received during last year.  

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Investment income increased by 14% to $8,065 in 2012 as compared to $7,065 in 2011.  It was mainly as a result of an increase in dividend income received from publicly traded equity securities owned by the Company.  

Three-month end:

Net income before tax and noncontrolling interest for the three months ending June 30, 2012 was $207,082 compared to $547,673 for the three month period ended June 30, 2011.  The decrease in pre-tax profit of $340,591 or approximately 62%, was mainly due to decrease in revenue decreased by 16% and the operating expenses increased by 6%.

Operating expenses

Operating expenses for the six months ending June 30, 2012 was $2,559,575, as compared to $2,178,467 for the same period of 2011.  The increase of $381,108 or approximately 17% was mainly due to increases in salary, travel expenses, rents, depreciation and amortization, other general and administrative expenses partially offset by a decrease in bad debt expenses.

Operating expenses for the three months ending June 30, 2012 was $1,273,839, as compared to $1,201,330 for the same period ended of 2011.  The increase of $72,509 or approximately 6% was mainly due to increases in salary, rents, other general and administrative expenses partially offset by a decrease in travel expenses, bad debt expenses and depreciation and amortization.

The reasons for the increases and decreases in the major items are as follows:

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Salaries – increased $173,516 or 15% for the six months ended and $5,392 or 1% for the three months ended June 30, 2012 as compared to last year.  The increase was mainly due to increases in pay rates and headcounts.

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Travel Expenses – increased $11,749 or 6% for the six months ended and decreased $46,189 or 37% for the three months ended June 30, 2012 as compared to last year.  The increase during the six months ended was due to more business travels that are in relation to the business during the period of 2012 as compared with 2011.  The decrease during the three months ended was because of the effort of expense control during the period.

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Rent – increased $98,186 or 37% for the six months ended and $66,187 or 50% for the three months ended June 30, 2012 as compared to last year.  The increase was mainly due to increase in rental rate of the old office space, and the new office space was rented for the Hong Kong office.

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Bad debt expenses – decreased by $24,490 or 62% for the six months ended and $50,307 or 91% for the three months ended June 30, 2012 as compared to last year.  The decrease was mainly due to the provision of doubtful debts during the period.

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Depreciation and amortization – increased $69,213 or 155% for the six months ended and decreased $3,947 or 18% for the three months ended June 30, 2012 as compared to last year.  The increase was due to the addition of fixed assets during the six months period of 2012.  In addition, because of the Hong Kong Office was moved to a new location in March 2012, beginning in November 2011, we began to amortize the net book value of the leasehold improvement of the old location over their its remaining life.  Consequently, additional depreciation was charged in 2012.  During the six months ended June 30, 2012, depreciation for fixed assets was $103,043 while amortization charge for intangible asset was $10,859.

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Other general & administrative expenses – increased $52,934 or 12% for the six months ended and increased $101,373 or 45% for the three months ended June 30, 2012 as compared to last year.    In general, the increase was due to the general price inflation in Hong Kong and China, increment of headcount causing office administrative expenses increased, and the upgraded phone system.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow

For the six months ended June 30, 2012, cash provided by the operating activities totaled $248,781.  This was primarily due to net income during the period plus an increase in fiduciary asset, accounts payable, claims payable, deferred revenue and income tax payable / receivable which was partially offset by a decrease in commission receivable, enrollment fee receivable, deposit and prepayment, other receivable, other payable and accrued expenses.  

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Net income after adjustments of non-cash activities for the six months ending June 30, 2012 decreased by $673,976 or 61% as compared to the same period of 2011, the changes in operating assets and liabilities for the six months ending June 30, 2012 increased $694,241 or 79% as compared to the same period of 2011.  As a result, net cash provided by operating activities for the six months ended June 30, 2012 increased by $20,265 or approximately 9% as compared to last year.  

For the six months ended June 30, 2012 and 2011, cash used in investing activities amounted to $139,874 and $22,275, respectively.  The fund was used for the purchase of fixed assets including the furniture & fixtures for the new office and the upgraded phone system.

For the six months ended June 30, 2012 and 2011, cash used in finance activities totaled $165,384 and  $121,553 respectively.  The funds were used for the dividend payment to noncontrolling shareholders, and payments on related party debt which were partially offset by the borrowings on related party.

Assets and liabilities

For the six months ended June 30, 2012, the Group’s balance sheet reflects total assets of $12,623,910 and total liabilities of $1,612,023.  These items decreased $47,785 or approximately 0.4% and $270,204 or approximately 14% respectively when compared to the year ended December 31, 2011.  The decrease of total assets was mainly due to a decrease of cash and cash equivalents, commissions receivable, enrollment fee receivable, tax receivable, intangible asset, deposits and prepayment, and other receivable which was partially offset by an increase of fiduciary asset, property, plant and equipment, and marketable securities.  In addition, the decrease of total liabilities was mainly due to a decrease of other payable, accrued expenses and amount due to directors which was partially offset by an increase of trade accounts payable and claim payable, income tax payable and deferred revenue.

As at June 30, 2012, commission receivable was $254,540 as compared to $399,942 as at December 31, 2011, while trade accounts payable was $1,316,742, as compared to December 31, 2011 balance of $1,054,919.  Each of these changes was due to the timing of commissions received from customers and the timing of making payments to insurers in relation to the period end.  In addition, because the commission income and the average collection period decreased, commission receivable as at June 30, 2012 decreased by $145,402 or 36% as compared to December 31, 2011 balance.  In addition, because certain payment advances made on behalf of customers were refunded, other receivable decreased by $23,619 or 20% 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 $520,176 or 78% 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 $17,929 or 86% as compared to the year end of 2011.

Accrued expenses of $58,882 as at June 30, 2012 reduced by $41,131 or approximately 41% from $100,013 as at December 31, 2011.  The reduction was mainly due to repayment of the accrued expenses which were provided for the year of 2011.  In addition, income tax payable as at June 30, 2012 was $44,095.  It is in relation to the provision of income tax for the six months ending of 2012.

Because the interest rate is maintained at a very low level in the recent years, the Company purchased publicly traded equity securities with high dividend yield since 2008 for long term investment purpose.  The market value of the equity securities was $312,650 and $261,854 as at June 30, 2012 and December 31, 2011 respectively.  The increase of $50,796 or approximately 19% was mainly due to the change of fair values between June 30, 2012 and December 31, 2010 and the addition of equity securities which were acquired during the period.

In August 2011, the Company made a secured loan of $3,000,000 to clients.  During 2011, $1,088,000 or about 36% was repaid. As at June 30, 2012, the balance of such loan was $1,912,000.

The Company has bank and cash equivalents of approximately $8,150,917 as at June 30, 2012.  The Company has sufficient funds to satisfy its financial commitments and working capital requirements for the next twelve months.  During the period end of June 30, 2012, the Company had $0 of commitments for capital expenditures and off-balance sheet arrangements as well as operating lease commitments of $1,060,610.

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OFF BALANCE SHEET ARRANGEMENTS

We do not have any material off-balance sheet arrangements.

RECENT ACCOUNTING PRONOUNCEMENTS

For information about new accounting pronouncements and the potential impact on our Consolidated Financial Statements, see Note 2 of the Notes to Consolidated Financial Statements in this Form 10-Q and Note 2 of the Notes to Consolidated Financial Statements in our 2011 Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4(T). CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company's controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated to principal executive and principal financial officers to allow timely decisions regarding disclosure.

As of the end of the period covered by this report, The Company's management, with the participation of the chief executive officer and the chief financial officer, carried out an evaluation of the effectiveness of the design and operation of the Company's "disclosure, controls and procedures" (as defined in the Exchange Act Rules 13a-15(3) and 15-d-15(3) as of the end of the period covered by this annual report (the "Evaluation Date").  Based on that evaluation, the chief executive officer and the chief financial officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving the objectives of timely alerting them to material information required to be included in our periodic SEC reports and of ensuring that such information is recorded, processed, summarized and reported with the time periods specified.  Our chief executive officer and chief financial officer also concluded that our disclosure controls and procedures were effective as of June 30, 2012 to provide reasonable assurance of the achievement of these objectives.

Changes in Internal Controls Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) or any other factors during the six months ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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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

On June 1, 2012, the Company issued 13,500 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 plan was approved by the board of directors on June 1, 2012.  The shares were issued at a strike price of $1.65, which was equal to the fair value of the Company’s stock on June 1, 2012, the date of grant.  Therefore, the aggregate value of these shares as of the date of issuance was $22,275, of which $619 was recognized as stock-based compensation expense in salaries and compensation expenses during the period ended June 30, 2012.  The balance will be recognized as stock-based compensation expenses in the coming three years.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

The following exhibits are filed herewith:

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

INS XBRL Instance Document

101

SCH XBRL Schema Document

101

CAL XBRL Taxonomy Extension Calculation Linkbase Document

101

LAB XBRL Taxonomy Extension Label Linkbase Document

101

PRE XBRL Taxonomy Extension Presentation Linkbase Document

101

DEF XBRL Taxonomy Extension Definition Linkbase Document

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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:  August 3, 2012

By: /s/ John Liu, Director

Date:  August 3, 2012

By: /s/ Colman Au, Chief Financial Officer

Date:  August 3, 2012

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