NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
1.
|
ORGANIZATION AND BUSINESS
|
American Education Center,
Inc. (“AEC New York”) is a New York corporation incorporated on November 8, 1999 and is licensed by the Education
Department of the State of New York to engage in education related consulting services.
On May 7, 2014, the President
and then sole shareholder of AEC New York formed a new company, American Education Center, Inc. in the State of Nevada (“AEC
Nevada”). On May 31, 2014, the President and the sole shareholder of AEC New York exchanged his 200 shares for 10,563,000
shares of AEC Nevada. The share exchange resulted in AEC New York becoming a wholly owned subsidiary of AEC Nevada (hereinafter
the “Company”).
On October 31, 2016, the Company
completed an acquisition transaction through a share exchange with two then stockholders, Rongxia Wang and Ye Tian, of AEC Southern
Management Co., Ltd. (“AEC Southern UK”), a company formed in December 2015 pursuant to the laws of England and Wales.
The Company acquired 100% of the outstanding shares of AEC Southern UK in exchange for 1,500,000 shares of its common stock valued
at $210,000 (the “AEC Southern UK Share Exchange”). As a result of the AEC Southern UK Share Exchange, AEC Southern
UK became a wholly owned subsidiary of the Company.
AEC Southern UK held 100% of
the equity interests in AEC Southern Management Limited, a Hong Kong company (“AEC Southern HK”) formed on December
29, 2015. AEC Southern HK then formed Qianhai Meijiao Education Consulting Management Co., Ltd. (“AEC Southern Shenzhen”)
on March 29, 2016 pursuant to PRC laws, with a registered capital of RMB 5,000,000. Therefore, under PRC laws, AEC Southern Shenzhen
was a foreign wholly owned subsidiary of AEC Southern UK.
On July 13, 2018, pursuant
to a Business Purchase Agreement (the “Purchase Agreement”), the Company acquired 51% of the issued and outstanding
equity interests of American Institute of Financial Intelligence LLC (“AIFI”), a New Jersey limited liability company
formed on May 10, 2017, in exchange for 100,000 shares of the Company common stock issued to the then sole shareholder of AIFI.
As a result, AIFI became a 51% majority owned subsidiary of the Company.
On October 23, 2018, AEC Nevada
incorporated a subsidiary, AEC Management Ltd. (“AEC BVI”) in the British Virgin Islands, pursuant to the laws of
British Virgin Islands. AEC BVI is a wholly owned subsidiary of AEC Nevada, and as of the date of this report, does not have significant
business activities.
On April 22, 2019, AEC Southern
UK sold 100% of the equity interests of AEC Southern HK to AEC BVI and AEC Southern HK and its subsidiary became wholly-owned
subsidiaries of AEC BVI.
On May 1, 2019, the Company
sold 100% of the equity interest in AEC Southern UK to three individuals who were Ye Tian, Rongxia Wang and Weishou Li, and received
a consideration of 1,000,000 shares of outstanding shares of AEC Nevada.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
1.
|
ORGANIZATION AND BUSINESS (continued)
|
The Company’s corporate
structure is as follows:
Headquartered in New York with
operations in the People’s Republic of China (“PRC”), the Company covers two market segments through two subsidiaries:
|
|
(1)
|
AEC New York capitalizes on the rising demand
of middle-class families in China for quality education and work experiences in the United States (“US”) and delivers
customized high school and college placement and career advisory services to Chinese students wishing to study in the US.
Its advisory services include language training, college admission advisory, on-campus advisory, internship and start-up advisory
as well as student and family services.
|
|
|
(2)
|
AEC BVI delivers customized high school and
college placement and career advisory services to Chinese students wishing to study in the U.S. Currently, the revenue of
AEC Southern is all generated from AEC Southern Shenzhen.
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Consolidation and
Presentation
The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission (“SEC”). These consolidated financial statements include the accounts of the Company and its subsidiaries.
All significant intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all
adjustments considered necessary to give a fair presentation have been included. Interim results are not necessarily indicative
of full-year results. Certain prior year balances have been reclassified to conform to the current year’s presentation;
none of these reclassifications had an impact on reported financial position or cash flows for any of the periods presented. The
information in this Form 10-Q should be read in conjunction with information included in the Company’s annual report on
Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on April 16, 2019.
Cash
Cash consists of all cash balances
and liquid investments with an original maturity of three months or less are considered as cash equivalents.
Accounts Receivable
Accounts receivable are carried
at net realizable value. The Company maintains an allowance for doubtful accounts, periodically evaluates its accounts receivable
balances and makes general and/or specific allowances when there is doubt as to their collectability. In evaluating the collectability
of individual receivable balances, the Company considers many factors, including the age of the balances, customers’ historical
payment history, their current credit-worthiness and current economic trends. Accounts receivable are written off against the
allowance only after exhaustive collection efforts. As of September 30, 2019 and December 31, 2018, the allowance for doubtful
accounts was $1,952,458 and $1,189,147 for AEC NY, $0 and $0 for AEC BVI.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Foreign Currency Translation
The Company’s functional
currency is US dollars. The company has two bank accounts located in the PRC. Translation adjustments arising from the use of
different exchange rates from period to period are included as a separate component of accumulated other comprehensive income
included in statements of changes in stockholders’ equity. Gain and losses from foreign currency transactions are included
in the consolidated statements of operations and comprehensive income.
Revenue Recognition
The Company adopted ASU No.
2014-09, Topic 606 on January 1, 2018, using the modified retrospective method. ASC 606 requires the use of a new five-step model
to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the
customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable
consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction
price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies
the performance obligation.
AEC
New York delivers customized high school and college placement, career advisory as well as student and family services. Fees related
to such advisory services that are collected from individuals are generally paid to the Company in advance and they are recorded
as deferred revenue. Revenues are recognized proportionally as services are rendered or upon completion. Fees related to our advisory
services provided by AEC New York to corporate customers (such as staffing agencies and placement agencies) are generally collected
after services are provided, and are recorded as accounts receivable.
Prior
the disposal of AEC Southern UK on May 1, 2019, AEC Southern UK delivered customized corporate training and advisory services.
It received monthly non-refundable retainer payments and recognized revenue as services were rendered.
AEC
Shenzhen delivers customized high school and college placement and career advisory services. Fees related to such advisory services
are generally paid to the Company in advance and they are recorded as deferred revenue. Revenues are recognized proportionally
as services are rendered or upon completion.
For
the three months ended September 30, 2019, approximately 1.4 million, or more than 80%, of the revenue was recorded as accounts
receivable and approximately $120,000 of the revenue was realized from deferred revenue.
Intangible Asset
The Company’s finite-lived
intangible asset consists of a customized online campus system that was acquired from a third party. The system is used to provide
online training for career advisory services and corporate training and advisory services. The asset was recorded at cost on the
acquisition date and is amortized on a straight-line basis over its economic useful life.
The Company reviews its finite-lived
intangible asset for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of the asset to be held and used is measured by a comparison of the carrying amount of an asset
to its undiscounted future net cash flows expected to be generated by the asset. If such asset is not recoverable, a potential
impairment loss is recognized to the extent the carrying amount of the asset exceeds its fair value. Fair value is generally determined
using a discounted cash flow approach.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Stock-Based Compensation
The Company uses the fair value-based
method for stock issued for services rendered and therefore all awards to employees and non-employees will be recorded at the
market price on the date of the grant and expensed over the required period of services to be rendered.
The fair value of stock options
issued to third party consultants and to employees, officers and directors are recorded in accordance with the measurement and
recognition criteria of FASB ASC 505-50, “Equity-Based Payments to Non-Employees” and FASB ASC 718, “Compensation
– Stock Based Compensation,” respectively.
The options are valued using
the Black-Scholes valuation model. This model is affected by the Company’s stock price as well as assumptions regarding
a number of subjective variables. These subjective variables include but are not limited to the Company’s expected stock
price volatility over the expected term of the awards, and actual and projected stock option and warrant exercise behaviors and
forfeitures.
Income Taxes
The Company accounts for income
taxes in accordance with FASB ASC 740, “Income Taxes,” which requires the recognition of deferred income taxes for
differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and
liabilities represent the future tax consequences for those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset
future taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected
to be realized.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Income Taxes
(continued)
ASC 740 also addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.
Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is “more likely than
not” that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of
the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest
benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on derecognition
of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting
for interest and penalties associated with tax positions. At September 30, 2019 and December 31, 2018, the Company does not have
a liability for any unrecognized tax benefits.
The income tax laws of various
jurisdictions in which the Company and its subsidiaries operate are summarized as follows:
United States (“US”)
On December 22, 2017, the U.S.
Tax Cuts and Jobs Act (TCJA) was signed into law. The TCJA results in significant revisions to the U.S. corporate income tax system,
including a reduction in the U.S. corporate income tax rate, implementation of a territorial system and a one-time deemed repatriation
tax on untaxed foreign earnings. Generally, the impacts of the new legislation would be required to be recorded in the period
of enactment.
The Company is subject to Federal
corporate income tax in the US at 21%. Provisions for income taxes for the United States have been made for the nine months ended
September 30, 2019.
United Kingdom (“UK”)
According to current England
and Wales income tax law, resident companies are taxable in the United Kingdom on their worldwide profits and subject to an opt-out
for non-UK permanent establishments (PEs), while non-resident companies are subject to UK corporation tax only on the trading
profits attributable to a UK PE, or the trading profits attributable to a trading of dealing in or developing UK land, plus UK
income tax on any other UK source income.
AEC Southern UK was formed
in the United Kingdom and is governed by the income tax laws of England and Wales.
On May 1, 2019, the Company
sold 100% of the equity interests in AEC Southern UK to three individuals and AEC Southern UK is no longer a subsidiary of the
Company. Since AEC Southern UK had no PEs in the UK as of May 1, 2019 and had no UK-source income during 2018, the Company is
not subject to tax on non-UK source income.
British Virgin Island
(“BVI”)
According to BVI corporate
taxation, there is a zero-rated income tax regime for all BVI-domiciled corporate entities, and there is no concept of residence
applicable to BVI corporate taxation.
AEC BVI was incorporated in
the BVI and is governed by the laws of the BVI.
Hong Kong
AEC Southern HK was formed
in Hong Kong. Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong Kong source income.
The People's Republic
of China (“PRC”)
AEC Southern Shenzhen was incorporated
in the PRC. Pursuant to the income tax laws of China, the Company is not subject to tax on non-China source income. The Company
is subject to corporate tax in China at 25% for the net taxable income. AEC Southern Shenzhen has no income tax for the nine months
ended September 30, 2019 due to the net operating loss for the period.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
The provisions of ASC 740-10-25,
“Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial
statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This ASC also provides
guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated with tax positions, and related disclosures.
Fair Value Measurements
FASB ASC 820, “Fair Value
Measurement,” specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques
reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs).
In accordance with ASC 820, the following summarizes the fair value hierarchy:
|
Level 1 Inputs –
|
Unadjusted quoted market prices
for identical assets and liabilities in an active market that the Company has the ability to access.
|
|
|
|
|
Level 2 Inputs –
|
Inputs other than the quoted prices in active
markets that are observable either directly or indirectly.
|
|
|
|
|
Level 3 Inputs –
|
Inputs based on prices or valuation techniques
that are both unobservable and significant to the overall fair value measurements.
|
FASB ASC 820 requires the use
of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within
different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level
input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs
and minimize the use of unobservable inputs.
The Company did not identify
any assets or liabilities that are required to be presented at fair value on a recurring basis. Non-derivative financial instruments
include cash, accounts receivable, prepaid expenses, accounts payable and accrued expenses, taxes payable, and loan from stockholders.
As of September 30, 2019 and December 31, 2018, the carrying values of these financial instruments approximated their fair values
due to their short-term nature.
Use of Estimates
The preparation of the consolidated
financial statements in accordance with GAAP requires management to make estimates and assumptions that affect certain 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 revenues and expenses during the reporting periods. Actual results could differ from those estimates.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Earnings (Loss) per Share
Earnings (loss) per share is
calculated in accordance with FASB ASC 260, “Earnings Per Share.” Basic earnings (loss) per share is based
upon the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the assumption
that all dilutive convertible shares and stock options are converted or exercised. Dilution is computed by applying the treasury
stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time
of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during
the period. Options and warrants are only dilutive when the average market price of the underlying common stock exceeds the exercise
price of the options or warrants because it is unlikely they would be exercised if the exercise price were higher than the market
price.
Noncontrolling interest
According to Financial Accounting
Standards Board (FASB) Statement No. 160, the noncontrolling interest shall be reported in the consolidated statement of financial
position within equity, separately from the parent’s equity. That amount shall be clearly identified and labeled, for example,
as noncontrolling interest in subsidiaries. An entity with noncontrolling interests in more than one subsidiary may present those
interests in aggregate in the consolidated financial statements。
Bargain Purchase
According to Financial Accounting
Standards Board (FASB) Statement No. 141 (revised 2007), a barging purchase is defined as a business combination in which the
total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred
plus any noncontrolling interest in the acquiree, and it requires the acquirer to recognize that excess in earnings as a gain
attributable to the acquire.
Contingent Consideration
The Company recognizes the
fair value of any contingent consideration that is transferred to the seller in a business combination on the date at which control
of the acquiree is obtained. This value is generally determined through a probability-weighted analysis of the expected cash flows.
Contingent consideration is
classified as a liability or as equity on the basis of the definitions of an equity instrument and a financial liability. The
contingent consideration is payable in cash and, accordingly, the Company classified its contingent consideration as a liability.
It is not remeasured, and any gain or loss on settlement at an amount different from its carrying value will be recognized in
net income in the period during which it is settled.
Leases
On January 1, 2019, the Company
adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which supersedes the
lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities
and corresponding right-of-use (ROU) assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing
and uncertainty of cash flows arising from leasing arrangements.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
The Company adopted the new
guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date
of initial application and not restating comparative periods. The most significant impact was the recognition of ROU assets and
lease liabilities for operating leases, while accounting for finance leases remained substantially unchanged.
The Company determined if an
arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets
and short- and long-term lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment,
other current liabilities, and other long-term liabilities in our consolidated balance sheets.
As of adoption of ASC 842 and
as of January 1, 2019, the Company was not a party to finance lease arrangements.
ROU assets represent the Company’s
right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease
payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the Company use the industry
incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
The Company use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made
and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain
that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Under the available practical
expedient, the Company account for the lease and non-lease components as a single lease component.
Adoption of the standard resulted
in the initial recognition of $2,016,142 of ROU assets and $2,237,583 of lease liabilities on our consolidated balance sheet at
adoption on January 1, 2019 related to office space lease commitment on March 1, 2015. The difference of $221,441 represented
deferred rent for leases that existed as of the date of adoption, which was an offset to the opening balance of right-of-use assets.
The adoption of the standard on January 1, 2019 did not have a material impact on our consolidated statements of income, stockholders’
equity and cash flows.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
3.
|
RECENTLY ISSUED ACCOUNTING STANDARDS
|
In August 2014, the FASB issued
an accounting standard update which requires management to assess whether there are conditions or events, considered in the aggregate,
that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial
statements are issued. If substantial doubt exists, additional disclosures are required. This update was effective for the Company's
annual period ended January 28, 2017. The adoption of the new standard did not have a material impact on the Company’s consolidated
financial position, results of operations, cash flows or disclosures.
In February 2016, the FASB
issued ASU 2016-02, “Leases.” The new standard establishes a right-of-use (“ROU”) model that requires
a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases
will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income
statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing
at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. The Company has adopted the requirements of ASU 2016-02 on January 1, 2019, the first day of fiscal
year 2019, and using the modified retrospective approach, electing the package of practical expedients, and the practical expedient
to not separate lease and non-lease components for operating leases. We also elected the modified retrospective approach that
permits adoption of the new standard prospectively, as of the effective date, without adjusting comparative periods presented.
The current adjustment has been disclosed and presented on the Company’s balance sheet.
In January 2017, the FASB issued
accounting standard update which simplifies the test for goodwill impairment. To address concerns over the cost and complexity
of the two-step goodwill impairment test, the amendments in this update remove the second step of the test. An entity will apply
a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount
over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend
the optional qualitative assessment of goodwill impairment. This update is effective for annual or any interim goodwill impairment
tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company adopted the update in the fourth quarter of 2018. The adoption
of the new standard did not have an impact on our consolidated financial statements.
In May 2017, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, Scope of Modification
Accounting, which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the
types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification
accounting under ASC 718. For all entities, this ASU is effective for annual reporting periods, including interim periods within
those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim
period. The adoption of this ASU has no material impact on the Company’s consolidated financial statements.
In February 2018, the FASB
issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220). The amendments in this update affect
any entity that is required to apply the provisions of Topic 220, Income Statement—Reporting Comprehensive Income, and has
items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required
by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years.
In March 2018, the FASB issued
ASU 2018-05: Income Taxes (Topic 740) that addresses the recognition of provisional amounts in the event that the accounting is
not complete and a reasonable estimate can be made. The guidance allows for a measurement period of up to one year from the enactment
date to finalize the accounting related to the TCJA.
AMERICAN EDUCATION
CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
4.
|
CONCENTRATION OF CREDIT AND BUSINESS RISK
|
The Company maintains its cash
accounts at two commercial banks in the US, two commercial banks in the PRC and one commercial bank in Hong Kong. The Federal
Deposit Insurance Corporation covers funds held in US banks and insures $250,000 per depositor, per insured bank, for each account
ownership category. Funds held in the PRC banks are covered by Deposit Insurance Ordinance (index: 000014349/2015-00031) that
insures RMB500,000 for the total of all depository accounts. The Hong Kong Deposit Protection Board covers funds held in HK banks
and it insures HK$500,000 per bank for the total of all depository accounts. As of September 30, 2019, the Company’s US
bank accounts had cash balances in excess of federally insured limits of approximately $261,103. The Company performs ongoing
evaluation of its financial institutions to limit its concentration of risk exposure. Management believes this risk is not significant
due to the financial strength of the financial institutions utilized by the Company.
The following table represents
major customers that individually accounted for more than 10% of the Company’s gross revenue for the nine months ended September
30, 2019 and 2018:
|
|
|
2019
|
|
|
|
|
Gross
Revenue
|
|
|
Percentage
|
|
|
Accounts
Receivable
|
|
|
Percentage
|
|
|
Customer 1
|
|
$
|
2,223,080
|
|
|
|
47.3
|
%
|
|
$
|
1,976,639
|
|
|
|
34.3
|
%
|
|
Customer 2
|
|
$
|
1,141,900
|
|
|
|
24.3
|
%
|
|
|
1,723,520
|
|
|
|
29.9
|
%
|
|
|
|
2018
|
|
|
|
|
Gross
Revenue
|
|
|
Percentage
|
|
|
Accounts
Receivable
|
|
|
Percentage
|
|
|
Customer 1
|
|
$
|
1,490,120
|
|
|
|
29.8
|
%
|
|
$
|
626,812
|
|
|
|
17.4
|
%
|
|
Customer 2
|
|
|
1,067,300
|
|
|
|
21.3
|
%
|
|
|
1,215,140
|
|
|
|
33.6
|
%
|
|
Customer 3
|
|
|
535,200
|
|
|
|
10.7
|
%
|
|
|
84,700
|
|
|
|
2.3
|
%
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
5.
|
DISCONTINUED OPERATIONS
|
On May 1, 2019, AEC Nevada
sold 100% of the equity interest in AEC Southern UK to three individuals, Ye Tian, Rongxia Wang and Weishou Li, and received a
consideration of 1,000,000 shares of outstanding shares of AEC Nevada which was valued at $660,000 and the debt owed to AEC Southern
UK in the amount of $268,475 was forgiven by AEC Southern UK. The Company has classified the results of AEC Southern UK as discontinued
operations in the unaudited consolidated statement of income for all periods presented. Additionally, the related assets and liabilities
associated with the discontinued operations in the prior year consolidated balance sheet are classified as discontinued operations.
The Company recognized a gain of $928,475 from the disposition.
Pursuant to ASC Topic 205-20,
Presentation of Financial Statements - Discontinued Operations, the results of operations for the nine months ended September
30, 2019 and year ended December 31, 2018 from discontinued operations have been classified to loss from discontinued operations
line on the accompanying consolidated statements of operations and comprehensive loss presented herein. The assets and liabilities
also have been classified as discontinued operations in the Company’s consolidated financial statements as of September
30, 2019 and December 31, 2018.
The carrying amount of the
major classes of assets and liabilities of discontinued operation as of May 1, 2019 and December 31, 2018 consist of the following:
|
|
|
May
1,
2019
|
|
|
December
31,
2018
|
|
|
Assets of discontinued operation:
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
391
|
|
|
$
|
391
|
|
|
Accounts receivable
|
|
|
4,864,297
|
|
|
|
4,595,823
|
|
|
Allowance for doubtful account
|
|
|
(4,595,823
|
)
|
|
|
(4,595,823
|
)
|
|
Deferred compensation
|
|
|
550,001
|
|
|
|
916,668
|
|
|
Total assets of discontinued operation
|
|
$
|
818,866
|
|
|
$
|
917,059
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operation:
|
|
|
|
|
|
$
|
-
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,881,404
|
|
|
$
|
1,881,404
|
|
|
Other payables
|
|
|
-
|
|
|
|
-
|
|
|
Total liabilities of discontinued
operation
|
|
$
|
1,881,404
|
|
|
$
|
1,881,404
|
|
The summarized operating result
of discontinued operation included in the Company’s consolidated statements of operation consist of the following:
|
|
|
From
January 1
to
May 1, 2019
|
|
|
Revenues
|
|
$
|
-
|
|
|
Cost of revenues
|
|
|
-
|
|
|
Gross profit
|
|
|
-
|
|
|
Operating expenses
|
|
|
(366,667
|
)
|
|
Other income (expenses), net
|
|
|
-
|
|
|
Loss before income tax
|
|
|
(366,667
|
)
|
|
Income tax expense
|
|
|
-
|
|
|
Loss from discontinued operation
|
|
|
(366,667
|
)
|
|
Total loss from discontinued operations, net of income
taxes
|
|
$
|
(366,667
|
)
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
Operating segments have been
determined on the basis of reports reviewed by the Company’s Chief Executive Officer (CEO) who is the chief operating decision
maker of the Company. The CEO evaluates the business from a geographic perspective, assesses performance and allocates resources
on this basis. The reportable segments are as follows:
After the discontinued operations
of AEC Southern UK, the Company has two operating segments: AEC New York and AEC BVI.
|
|
·
|
AEC New York delivers placement, career and
other advisory services Its advisory services include language training, admission advisory, on-campus advisory, internship
and start-up advisory as well as other advisory services.
|
|
|
·
|
AEC BVI delivers customized high school and
college placement and career advisory services to Chinese students wishing to study in the U.S. Currently, the revenue of
AEC BVI all generated from AEC Southern Shenzhen.
|
The following table shows an
analysis by segment of the assets and liabilities of continuing and discontinued operations as of September 30, 2019 and December
31, 2018:
|
|
|
|
|
|
September
30, 2019
|
|
|
|
|
AEC
New
York
|
|
|
AEC
BVI
|
|
|
AEC
Southern
|
|
|
Total
|
|
|
Segment assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets from continuing
operations
|
|
$
|
7,518,712
|
|
|
$
|
774,162
|
|
|
$
|
-
|
|
|
$
|
8,292,874
|
|
|
Segment assets of discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Segment assets
|
|
$
|
7,518,712
|
|
|
$
|
774,162
|
|
|
$
|
-
|
|
|
$
|
8,292,874
|
|
|
Segment liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment liabilities from continuing operations
|
|
$
|
5,357,205
|
|
|
$
|
806,560
|
|
|
$
|
-
|
|
|
$
|
6,163,765
|
|
|
Segment liabilities
of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Segment liabilities
|
|
$
|
5,357,205
|
|
|
$
|
806,560
|
|
|
$
|
-
|
|
|
$
|
6,163,765
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
|
|
AEC New
York
|
|
|
AEC BVI
|
|
|
AEC
Southern
|
|
|
Total
|
|
|
Segment assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets from continuing
operations
|
|
$
|
6,206,780
|
|
|
$
|
99,933
|
|
|
$
|
-
|
|
|
$
|
6,306,713
|
|
|
Segment assets
of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
917,059
|
|
|
|
917,059
|
|
|
Segment assets
|
|
$
|
6,206,780
|
|
|
$
|
99,993
|
|
|
$
|
917,059
|
|
|
$
|
7,223,772
|
|
|
Segment liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment liabilities from continuing
operations
|
|
$
|
3,394,637
|
|
|
$
|
52,608
|
|
|
$
|
-
|
|
|
$
|
3,447,245
|
|
|
Segment liabilities
of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
1,881,404
|
|
|
|
1,881,404
|
|
|
Segment liabilities
|
|
$
|
3,394,637
|
|
|
$
|
52,608
|
|
|
$
|
1,881,404
|
|
|
$
|
5328,649
|
|
The Company recorded a total
gain of $928,475 from disposal of discontinued operation, including current period of operation loss of $366,667 before disposal.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
6.
|
SEGMENT REPORTING (Continued)
|
Revenues from external customers,
and gross profit for each business are as follows:
|
|
|
For the nine
months ended September 30, 2019
|
|
|
|
|
AEC New York
|
|
|
AEC BVI
|
|
|
Total
|
|
|
Segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Placement advisory
|
|
$
|
1,141,900
|
|
|
$
|
122,987
|
|
|
$
|
1,264,887
|
|
|
Career advisory
|
|
|
2,548,885
|
|
|
|
-
|
|
|
|
2,548,885
|
|
|
Student & Family advisory
|
|
|
887,700
|
|
|
|
-
|
|
|
|
887,700
|
|
|
Other advisory
|
|
|
3,000
|
|
|
|
-
|
|
|
|
3,000
|
|
|
Total revenue from continued operations
|
|
$
|
4,581,485
|
|
|
$
|
122,987
|
|
|
$
|
4,704,472
|
|
|
Total revenue from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Gross profit
|
|
$
|
1,945,284
|
|
|
$
|
110,112
|
|
|
$
|
2,055,396
|
|
|
|
|
For the three
months ended September 30, 2019
|
|
|
|
|
AEC New York
|
|
|
AEC BVI
|
|
|
Total
|
|
|
Segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Placement advisory
|
|
$
|
343,100
|
|
|
$
|
89,271
|
|
|
$
|
432,371
|
|
|
Career advisory
|
|
|
731,610
|
|
|
|
-
|
|
|
|
731,610
|
|
|
Student & Family advisory
|
|
|
400,700
|
|
|
|
-
|
|
|
|
400,700
|
|
|
Other advisory
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total revenue from continued operations
|
|
$
|
1,475,410
|
|
|
$
|
89,271
|
|
|
$
|
1,564,681
|
|
|
Total revenue from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Gross profit
|
|
$
|
607,896
|
|
|
$
|
76,396
|
|
|
$
|
684,292
|
|
|
|
|
For the nine months ended September
30, 2018
|
|
|
|
|
AEC New
York
|
|
|
AEC
BVI
|
|
|
Total
|
|
|
Segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate training & advisory
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Placement advisory
|
|
|
515,701
|
|
|
|
-
|
|
|
|
515,701
|
|
|
Career advisory
|
|
|
1,074,325
|
|
|
|
1465
|
|
|
|
1,075,790
|
|
|
Student & Family advisory
|
|
|
3,410,620
|
|
|
|
-
|
|
|
|
3,410,620
|
|
|
Total revenue
|
|
$
|
5,000,646
|
|
|
$
|
1465
|
|
|
$
|
5,002,111
|
|
|
Gross profit
|
|
$
|
1,622,885
|
|
|
$
|
1465
|
|
|
$
|
1,624,350
|
|
|
|
|
For three months ended September
30, 2018
|
|
|
|
|
AEC
New York
|
|
|
AEC
BVI
|
|
|
Total
|
|
|
Segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate training & advisory
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Placement advisory
|
|
|
472,825
|
|
|
|
-
|
|
|
|
472,825
|
|
|
Career advisory
|
|
|
252,600
|
|
|
|
1465
|
|
|
|
254,065
|
|
|
Student & Family advisory
|
|
|
1,176,420
|
|
|
|
-
|
|
|
|
1,176,420
|
|
|
Total revenue
|
|
$
|
1,901,845
|
|
|
$
|
1465
|
|
|
$
|
1,903,310
|
|
|
Gross profit
|
|
$
|
540,384
|
|
|
$
|
1465
|
|
|
$
|
541,849
|
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
On October 31, 2016 (the “Grant
Date”), 1,500,000 shares of common stock of the Company were granted to AEC Southern UK’s CEO which were expected
to vest over a three-year period commencing November 1, 2016. The shares were valued using the market price of the Company’s
common stock on the grant date of $0.14 per share. On the Grant Date, $210,000 was recognized as deferred compensation, which
was expensed over the three-year vesting period using the straight-line method. On December 31, 2017, the remaining deferred compensation
was expensed due to the resignation of AEC Southern UK’s CEO.
On December 31, 2016, 6,000,000
shares of common stock of the Company were granted to AEC Southern UK’s Chairman which were expected to vest over a three-year
period commencing November 1, 2016. The shares were valued using the market price of the Company’s common stock on the grant
date of $0.55 per share. On December 31, 2016, $3,300,000 was recognized as deferred compensation, which was expensed over the
remaining two year and ten months using the straight-line method. Before the disposal, the remaining deferred compensation was
$550,001.
Stock compensation expense
was $366,664 for the four months before the disposal of AEC Southern UK.
The Company has security deposits
with the landlord for its New York office and the office in Shenzhen, China of $284,544 and $266,021 as of September 30, 2019
and 2018. As of September 30, 2019, AEC New York has security deposits of $266,021 and AEC Shenzhen has security deposits of $18,523.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
Investment Valuation
The Company continually reviews
its investments to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors
the Company considers in its determination are the length of time that the fair value of the investment is below the Company’s
carrying value; the financial condition, operating performance and the prospects of the equity investee; and other company specific
information such as industry data, general economic conditions, cash flows forecasts or any recent financing rounds. If the decline
in fair value is deemed to be other than temporary, the carrying value of the equity investee is written down to fair value.
On July 10, 2018, the Company
issued 100,000 shares of the Company’s common stock (the “Consideration Shares”) to FIFPAC, Inc., the
100% equity owner of AIFI (the “Seller”), at a purchase price of $0.48 per share, in exchange for a 51% equity
ownership in AIFI pursuant to the Purchase Agreement. Please refer to Footnote 16 Business Acquisition.
As of September 30, 2019 and
December 31, 2018, fixed asset, net as follows:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Electronic equipment
|
|
$
|
4,565
|
|
|
$
|
-
|
|
|
Office furniture
|
|
|
796
|
|
|
|
-
|
|
|
Less: accumulated depreciation
|
|
|
(262
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed asset - net
|
|
$
|
5,099
|
|
|
$
|
-
|
|
For the three and nine months
ended September 30, 2019, amortization expense was $262, and $262 respectively.
|
11.
|
INTANGIBLE ASSET, NET
|
The Company’s customized
online campus system is being amortized on a straight-line basis over four and a half years. The gross carrying amount and accumulated
amortization of this asset as of September 30, 2019 and December 31, 2018 are as follows:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Intangible asset: online campus system
|
|
$
|
612,814
|
|
|
$
|
612,814
|
|
|
Intangible asset: learning platform
|
|
|
120,000
|
|
|
|
120,000
|
|
|
Less: accumulated amortization
|
|
|
(423,542
|
)
|
|
|
(312,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset - net
|
|
$
|
309,272
|
|
|
$
|
420,407
|
|
For the three and nine months
ended September 30, 2019 and 2018, amortization expense was $37,045, $111,135 and $37,035, $105,135, respectively.
The following table is the
future amortization expense to be recognized:
|
Year Ending December 31,
|
|
|
|
|
2019
|
|
|
37,046
|
|
|
2020
|
|
|
148,181
|
|
|
2021
|
|
|
46,045
|
|
|
2022
|
|
|
12,000
|
|
|
2022
|
|
|
66,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
309,272
|
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
The Company receives advance
payments for services to be performed and recognizes revenue when services have been rendered. The deferred revenues as of September
30, 2019 and December 31, 2018 were $335,600 and $252,925, respectively.
|
13.
|
RELATED-PARTY TRANSACTIONS
|
The Company’s CEO has
a 34% interest in Columbia International College, Inc. (“CIC”). The Company prepaid CIC $96,000 for 2019 student consulting
services which are expected to be fully delivered and accounted for in 2019.
The Company’s CEO has
a 40% interest in Wall Street Innovation Center, Inc. (“WSIC”), a corporation incorporated in the state of New York
that focuses on career and business development activities. AEC New York’s Chief Operating Officer currently serves as the
President and CEO of WSIC. In the course of delivering career advisory services, the Company has engaged WSIC to assist in certain
career development activities. The Company prepaid WSIC $99,628 for business consulting services to be delivered in 2019, which
are expected to be completed in 2019.
The Company’s CEO received
12,500,000 shares of Series B Convertible Preferred Stock of the Company (“Series B Preferred Stock”), par value $0.001
per share as a reward for his dedicated services to the Company on November 26, 2018.
The Company borrowed $419,680
(translated from ¥3,000,000) from a shareholder of the Company during the nine months ended September 30, 2019. The amounts
due to this related party were $419,680 as of September 30, 2019. The amounts are non-interest bearing, non-secure and due on
demand.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
On December 1, 2014, an unrelated
party loaned the Company $295,579, with interest at 10%. The Company repaid $150,000 on November 10, 2017. The remaining is to
be repaid on December 13, 2019. Interests are to be paid on the last day of each quarter from 2015 to 2019, except for the last
payment which shall be made on December 12, 2019. The outstanding balance of the principal was $145,579 as
of September 30, 2019.
Interest expenses for the three
months ended September 30, 2019 and 2018 were $14,558 and $10,918, respectively.
|
15.
|
OPERATING LEASE RIGHT-OF-USE ASSET / OPERATING LEASE LIABILITY
|
In December 2014, the Company
entered into a lease for 10,086 square feet of office space in New York, NY, with an unrelated party, expiring on July 31, 2025.
The lease commenced on March 1, 2015 and the Company received two months of free rent. Due to free rent and escalating monthly
rental payments, utilities, real estate taxes, insurance and other operating expenses, the lease is being recognized on a straight-line
basis of $34,065 per month for financial statement purposes.
We determined the present value
of the future lease payments using a discount rate of 8.5%, our incremental borrowing rate based on current SBA loan rate, resulting
in an initial right-of-use asset of $2,016,142 and lease liability of $2,237,583, which are being amortized ratably over
the term of the lease.
In May 2019, the Company entered
into a lease of office space in Shenzhen, Guangdong, PRC with an unrelated party, expiring on April 30, 2024. The lease commenced
on May 1, 2019. We determined the present value of the future lease payment using a discount rate of 8.5%, our incremental borrowing
rate based on current SBA loan rate, resulting in an initial right-of-use asset of $414,157 (RMB2,899,099) and lease liability of
$399,048 (RMB2,793,341), which are being amortized ratably over the term of the lease. As September 30, 2019, the amount updated
due to foreign currency translation as initial right-of-use asset of $405,565 (RMB2,899,099) and lease liability of $390,770 (RMB2,793,341).
As of September 30, 2019, the
balance of the right-of-use asset was $2,218,061, and lease liability was $2,460,200 (including $311,883 for current portion and
$2,148,317 for noncurrent portion).
Rent expense was approximately
$133,155, $358,232, and $95,492, $283,370 for the three months and nine months ended September 30, 2019 and 2018, respectively.
Future minimum lease commitments
are as follows on September 30, 2019:
|
Year Ending December 31,
|
|
Gross Lease
Payment
|
|
|
2019
|
|
|
119,894
|
|
|
2020
|
|
|
510,185
|
|
|
2021
|
|
|
536,426
|
|
|
2022 and thereafter
|
|
|
1,915,327
|
|
|
|
|
$
|
3,081,832
|
|
|
Less: Present value adjustment
|
|
|
(621,632
|
)
|
|
Operating lease liability
|
|
$
|
2,460,200
|
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
The component of deferred tax
assets at September 30, 2019 and December 31, 2018 are as follows:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Net operating loss carryforwards
|
|
|
496,336
|
|
|
|
727,000
|
|
|
Allowance for bad debt
|
|
|
442,460
|
|
|
|
432,202
|
|
|
Accelerated Depreciation
|
|
|
(38,748
|
)
|
|
|
(38,895
|
)
|
|
Allowance for deferred tax asset
|
|
|
(648,120
|
)
|
|
|
(692,101
|
)
|
|
Deferred tax asset, net
|
|
$
|
251,928
|
|
|
$
|
428,206
|
|
The provision for income taxes
and deferred income taxes for the three months and nine months ended September 30, 2019 and 2018 are as follows:
|
|
|
For the three months
ended September 30,
|
|
|
For the nine months
ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,013
|
)
|
|
$
|
(24,969
|
)
|
|
$
|
43,654
|
|
|
$
|
-
|
|
|
State
|
|
|
4,952
|
|
|
|
(18,843
|
)
|
|
|
40,488
|
|
|
|
-
|
|
|
Foreign
|
|
|
(265
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
50,762
|
|
|
Total current
|
|
|
3,674
|
|
|
|
(43,812
|
)
|
|
|
84,142
|
|
|
|
50,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(61,092
|
)
|
|
|
24,938
|
|
|
|
103,230
|
|
|
|
31,232
|
|
|
State
|
|
|
(48,238
|
)
|
|
|
11,924
|
|
|
|
73,048
|
|
|
|
24,014
|
|
|
Foreign
|
|
|
-
|
|
|
|
(36,862
|
)
|
|
|
-
|
|
|
|
(106,008
|
)
|
|
Total deferred
|
|
|
(109,330
|
)
|
|
|
-
|
|
|
|
176,278
|
|
|
|
(50,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(105,656
|
)
|
|
$
|
(43,812
|
)
|
|
$
|
260,420
|
|
|
$
|
-
|
|
The Company conducts business
globally and, as a result, files income tax returns in the US federal jurisdiction, state and city, and foreign jurisdictions.
In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including jurisdictions
in the US. The Company is subject to income tax examinations of US federal, state, and city for 2018, 2017 and 2016 tax years.
The Company, to its knowledge, is not currently under examination nor has it been notified by the authorities.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
16.
|
Income taxes
(continued)
|
A reconciliation of the provision
for income taxes, with the amount computed by applying the statutory federal income tax rate for the three months and nine months
ended September 30, 2019 and 2018 is as follows:
|
|
|
For the three
months
ended September 30,
|
|
|
For the nine
months
ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Tax at federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
State and local taxes, net of federal benefit
|
|
|
11.0
|
|
|
|
11.0
|
|
|
|
11.0
|
|
|
|
(11.0
|
)
|
|
Tax impact of foreign operations
|
|
|
-
|
|
|
|
13.3
|
|
|
|
-
|
|
|
|
(0.9
|
)
|
|
Non-deductible/ non-taxable items
|
|
|
-
|
|
|
|
(10.4
|
)
|
|
|
-
|
|
|
|
(9.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
32
|
%
|
|
|
12.9
|
%
|
|
|
32
|
%
|
|
|
-
|
%
|
|
17.
|
FINANCIAL INSTRUments
|
Fair values
The Company’s financial
instruments from continuing operations approximate include cash and cash equivalents and prepaid expenses and other current assets
which approximate to fair value due to their short-term nature and include cash accounts. The Company’s borrowings approximate
fair value as the rates of interest are similar to what they would receive from other financial institutions. The carrying amounts
of these financial assets and liabilities are a reasonable estimate of their fair values because of their current nature.
The Company’s financial
instruments from discontinued operations include cash and cash equivalents, net accounts receivable, prepaid expenses and other
current assets, accounts payable, accrued expenses and other current liabilities, advance from customers, and income tax payable.
The carrying amounts of these financial instruments are a reasonable estimate of their fair values because of their current nature.
The following table summarizes
the carrying values of the Company’s financial assets and liabilities:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Cash and cash equivalents of continuing operations
|
|
$
|
990,073
|
|
|
$
|
1,985,133
|
|
|
Accounts receivable, prepaid expenses and other current assets
|
|
|
4,233,897
|
|
|
|
3,206,946
|
|
|
Other assets of discontinued operations
|
|
|
-
|
|
|
|
917,059
|
|
|
Other financial liabilities(i)
|
|
|
4,015,448
|
|
|
|
3,225,784
|
|
|
liabilities of discontinued operations
|
|
$
|
-
|
|
|
$
|
1,881,404
|
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
17.
|
FINANCIAL INSTRUments
(Continued)
|
|
|
(i)
|
Accounts payable, accrued expenses and other current liabilities,
advance from customers, and income tax payable.
|
The Company classifies its
fair value measurements in accordance with the three-level fair value hierarchy as follows:
Level 1 – Unadjusted
quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs other
than quoted prices that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived
from prices), and
Level 3 – Inputs that
are not based on observable market data.
The financial assets
and liabilities carried at fair value on a recurring basis at September 30, 2019 are as follows:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations
|
|
$
|
990,073
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
990,073
|
|
|
Cash and cash equivalents of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other financial assets of continuing operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other financial assets of discontinued operations
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total Financial assets
|
|
$
|
990,073
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
990,073
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities of continuing operations
|
|
$
|
4,015,448
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,015,448
|
|
|
Other liabilities of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total Financial Liabilities
|
|
$
|
4,015,448
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,015,448
|
|
The financial assets and liabilities carried at
fair value on a recurring basis at September 30, 2018 are as follows:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
of continuing operations
|
|
$
|
1,787,564
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,787,564
|
|
|
Cash and cash equivalents of discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other financial assets of continuing
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other financial
assets of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
Financial Assets
|
|
$
|
1,787,564
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,787,564
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities of continuing operations
|
|
$
|
3,968,925
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,968,925
|
|
|
Other liabilities
of discontinued operations
|
|
|
1,881,404
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,881,404
|
|
|
Total
Financial Liabilities
|
|
$
|
5,850,329
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,850,329
|
|
Interest rate and credit risk
Financial instruments that
potentially subject the Company to concentrations of credit risks consist principally of cash and cash equivalents, and net accounts
receivable. The Company minimizes the interest rate and credit risk of cash by placing deposits with financial institutions located
in the United States and Mainland China. Management believes that there is no significant credit risk arising from the Company’s
financial instruments.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
17.
|
FINANCIAL INSTRUments
(Continued)
|
Financial assets past due
The following table provides
information regarding the aging of financial assets that are past due, but which are not impaired at September 30, 2019:
|
|
|
Less than
90 days
|
|
|
90 days to
1 year
|
|
|
Over
1
year
|
|
|
Carrying
Value
|
|
|
Accounts receivable, net
|
|
$
|
1,355,060
|
|
|
$
|
2,451,365
|
|
|
$
|
-
|
|
|
$
|
3,806,425
|
|
|
Other receivable
|
|
$
|
-
|
|
|
$
|
31,539
|
|
|
$
|
-
|
|
|
$
|
31,539
|
|
|
Total accounts receivable, net
|
|
$
|
1,355,060
|
|
|
$
|
2,482,904
|
|
|
$
|
-
|
|
|
$
|
3,837,963
|
|
The Company determines past
due amounts by reference to terms agreed with individual clients. None of the net amounts outstanding have been challenged by
the respective clients and the Company continues to conduct business with them on an ongoing basis and does not consider its current
accounts receivable to be past due.
The Company did not grant any
stock options during the nine months ended September 30, 2019.
The following is a summary
of stock option activities:
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at December 31, 2018
|
|
|
3,200,000
|
|
|
$
|
2.45
|
|
|
|
6.87
years
|
|
|
$
|
-
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled and expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
3,200,000
|
|
|
$
|
2.45
|
|
|
|
4.12
years
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2019
|
|
|
2,266,666
|
|
|
$
|
3.18
|
|
|
|
5.14
years
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
2,266,666
|
|
|
$
|
3.18
|
|
|
|
5.14
years
|
|
|
$
|
-
|
|
The aggregate intrinsic value
is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s
common stock. There were no options exercised during the nine months ended September 30, 2019 and 2018.
There was no compensation expense
related to any of the options above because the value ascribed to these options was not material.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
Certificate of Amendment
to Increase Authorized Stock
On November 6, 2018, the board
of directors of the Company, with the written consent of a majority of the holders of the shares of the Company’s Common
Stock issued and outstanding and the Company’s preferred stock issued and outstanding, voting together as a single class,
authorized the Company to (i) increase the number of authorized shares of Common Stock from 180,000,000 to 450,000,000 and the
number of authorized shares of preferred stock from 20,000,000 to 50,000,000 (the “Authorized Stock Increase”), and
(ii) file a Certificate of Amendment with the Secretary of State of the State of Nevada to effect the Authorized Stock Increase.
On November 8, 2018, the Company
filed a Certificate of Amendment with the Secretary of State of the State of Nevada to effect the Authorized Stock Increase, which
became effective upon filing.
Stocks issued for business
acquisition
On July 10, 2018, the Company
issued 100,000 shares of the Company’s common stock (the “Consideration Shares”) to FIFPAC, Inc,
the 100% equity owner of AIFI, at a purchase price of $0.48 per share, in exchange for 51% equity ownership of the AIFI
pursuant to the Purchase Agreement. Refer to Footnote 16 Business Acquisition.
Stocks issued to employees
and for services
In July and August 2018, the
Company entered into agreements pursuant to which it issued an aggregate of 448,000 shares of the Company’s common stock
to 18 individuals who are either employees of the Company or have been service providers to the Company, for employment-based
compensation or services provided, respectively. Subsequently, pursuant to such agreements, the Company issued an aggregate of
433,000 shares of the Company’s common stock to 10 out of the 18 individuals in the amount of $199,840 and 15,000 shares
of the Company’s common stock for services rendered in the amount of $7,000, prior to December 31, 2018.
In May 2019, the Company entered
into agreements pursuant to which it issued an aggregate of 200,000 shares of the Company’s common stock to 4 individuals
who have been service providers to the Company for services provided.
Stocks issued for cash investment
On November 26, 2018, the Company,
entered into a Share Issuance Agreement (the “Share Issuance Agreement”) with China Cultural Finance Holdings Company
Limited, a British Virgin Islands company and a shareholder of the Company (the “Holder”), whereby the Company agreed
to issue 7,199,113 of shares of the Company’s common stock at $0.10 per share, to the Holder in exchange for an RMB5,000,000
investment (the “CCFH Investment”) in the Company’s subsidiary, AEC Southern Shenzhen. The transactions underlying
the Share Issuance Agreement were closed on the same day and the shares of common stock were issued to the Holder (the “CCFH
Share Issuance”). The Company received $127,606 (HKD 1,000,000) as of September 30, 2019.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
20.
|
SERIES B PREFERRED STOCK
|
Designation of Series
B Convertible Preferred Stock
On November 13, 2018, the Company
filed with the Secretary of State of the State of Nevada a Certificate of Designation of Series B Convertible Preferred Stock
(the “Certificate of Designation”), which became effective upon filing. The Certificate of Designation established
and designated the Series B Convertible Preferred Stock (“Series B Preferred Stock”) and the rights, preferences,
privileges, and limitations thereof, summarized in the following:
The Company designated 25,000,000
shares as Series B Preferred Stock out of the 50,000,000 unissued shares of preferred stock of the Company, par value $0.001 per
share. Series B Preferred Stock is senior in rights of payment, including dividend rights and liquidation preference, to the Company’s
common stock but junior to Series A Preferred Stock with respect to liquidation preference.
Holders of shares of Series
B Preferred Stock are entitled to vote with shareholders of the Company’s common stock, voting together as a single class,
except on matters that require a separate vote of the holders of Series B Preferred Stock. In any such vote, each share of Series
B Preferred Stock is entitled to 20 votes per share.
Each share of Series B Preferred
Stock shall, upon the approval of the board of directors of the Company and without the payment of additional consideration by
such holder thereof, be convertible into one fully paid and non-assessable share of the Company’s common stock at a conversion
price of $1 per share.
Manager Share Issuance
On November 26, 2018, the Company
entered into a Manager Share Issuance Agreement (the “Manager Share Issuance Agreement”) with Mr. Max P. Chen, the
Chief Executive Officer, President, and Chairman of the Board of the Company (“Mr. Chen”), whereby the Company agreed
to reward Mr. Chen for his dedicated services to the Company by issuing 12,500,000 shares of Series B Preferred Stock to him with
resale restrictions. The transactions underlying the Manager Share Issuance Agreement closed on the same day and 12,500,000 shares
of Series B Preferred Stock were issued to Mr. Chen. The Company recognized stock compensation expense of $1,250,000 for the year
ended December 31, 2018.
Stocks issued for exchange
agreement
On November 26, 2018, the Company
entered into an Exchange Agreement (the “Exchange Agreement”) with the Holder, whereby the Company agreed to issue
12,500,000 shares of Series B Convertible Preferred Stock of the Company (“Series B Preferred Stock”), par value $0.001
per share, and 7,500,000 shares of common stock with resale restrictions to the Holder in exchange for 500,000 shares of Series
A Convertible Preferred Stock of the Company, par value $0.001 per share (the “Series A Preferred Stock”), held by
the Holder. The transactions underlying the Exchange Agreement closed on the same day and 12,500,000 shares of Series B Preferred
Stock and 7,500,000 shares of Common Stock were issued to the Holder. The Series A Preferred Stock were returned to the Company
and cancelled.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARies
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
On July 10, 2018, the Company
entered into the Purchase Agreement with the 100% owner of AIFI which closed on the same date.
Pursuant to the Purchase Agreement,
on July 10, 2018, the Company issued the Consideration Shares to the Seller, for a purchase price of $0.48 per share, in exchange
for 51% equity ownership of AIFI. Pursuant to ASC 805, the Company recognized a gain of $13,200 on the effective date of July
10, 2018.
According to the Purchase Agreement,
the contingent consideration consisted of compensatory arrangement for services to be performed by the owner of the acquiree,
and such amounts are to be determined in the future by both parties; therefore, the fair value cannot be determined at the acquisition
date. The Company as an acquirer did not recognize a liability at the acquisition date.
The following table summarizes
the consideration paid and the amounts of net assets acquired as of the date of acquisition:
|
Fair value of net asset acquired (AIFI’s net identified assets)
|
|
$
|
120,000
|
|
|
Less:
|
|
|
|
|
|
Fair value of consideration transferred (FMV of AEC’s
100k shares issued)
|
|
|
(48,000
|
)
|
|
Fair value of noncontrolling interest
(120k x 49%)
|
|
|
(58,800
|
)
|
|
|
|
$
|
(106,800
|
)
|
|
|
|
|
|
|
|
Gain on barging purchase
|
|
$
|
13,200
|
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
|
22.
|
COMMITMENTS & CONTINGENCY
|
A contingency should be recognized
at its acquisition date fair value if that value can be determined. (The guidance in Topic 820 is used to determine fair value).
If the acquisition-date fair value of contingency cannot be determined, then an asset or liability is recognized for the contingency
if it’s probable at the acquisition date that such asset or liability exists and if its amount is reasonable estimable.
A contingency is not recognized
for a contingency in the accounting for a business combination if: a) its fair value cannot be determined and b) the probable
and reasonably estimate criteria are not met. Instead, the contingency is disclosed and accounted for subsequent to the acquisition
date in accordance with Topic 450.
Pursuant to the Purchase Agreement,
the contingent consideration consisted of compensatory arrangement for services to be performed by the officers of the acquiree,
and such amounts are to be determined in the future by both parties; therefore the fair value cannot be determined at the acquisition
date. The Company as an acquirer did not recognize a liability at the acquisition date.
Substantial doubt about the
Company’s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate
that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that
the financial statements are issued. Our current operating results indicate that substantial doubt exists related to the Company's
ability to continue as a going concern. We believe that the new education platforms acquired may mitigate the substantial doubt
raised by our current operating results and satisfying our estimated liquidity needs 12 months from the date of the financial
statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability
of additional debt financing, or whether such actions would generate the expected liquidity as currently planned.
The Company’s management
has performed subsequent events procedures through the date the financial statements were available to be issued. There were no
subsequent events requiring adjustment to or disclosure in the consolidated financial statements except for the following.
On November 11, 2019, the Company
borrowed $142,110 (translated from RMB 1,000,000) from a related party for working capital purpose. The aggregate amount due to
this related party was $561,790 as of November 11, 2019. The amounts are non-interest bearing, non-secure and due on demand.