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EX-32.2 - EXHIBIT 32.2 - AMERICAN EDUCATION CENTER, INC.tv493881_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - AMERICAN EDUCATION CENTER, INC.tv493881_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN EDUCATION CENTER, INC.tv493881_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN EDUCATION CENTER, INC.tv493881_ex31-1.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2018, 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: 333-201029

 

AMERICAN EDUCATION CENTER, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada 38-3941544
(State of Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification No.)
   
2 Wall Street, 8th Floor, New York, NY 10005
(Address of Principal Executive Offices) (ZIP Code)

 

(212) 825-0437

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 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 x      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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes x      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. (Check one):

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x
Emerging growth company x  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standard provided pursuant to Section 13(a) of the Exchanger Act. ¨

 

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

 

Yes ¨      No x

 

As of May 15, 2018, the registrant had 41,350,000 shares of common stock issued and outstanding.

 

 

 

 

 

TABLE OF CONTENTS

Index to Form 10-Q

 

    Page
Part I
FINANCIAL INFORMATION
     
Item 1. Financial Statements 4
     
  Consolidated Statements of Balance Sheets 4
     
  Consolidated Statements of Operations and Comprehensive Income 5
     
  Consolidated Statements of Cash Flows 6
     
  Consolidated Statements of Stockholders’ Equity 7
     
  Notes to Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
     
Item 4. Controls and Procedures 34
     
Part II
OTHER INFORMATION
     
Item 1. Legal Proceedings 35
     
Item 1A. Risk Factors 35
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
     
Item 3. Defaults Upon Senior Securities 35
     
Item 4. Mine Safety Disclosures 35
     
Item 5. Other Information 35
     
Item 6. Exhibits 35
     
SIGNATURE 36

 

Throughout this Quarterly Report on Form 10-Q, the “Company”, “we,” “us,” and “our,” refer to (i) American Education Center, Inc., a Nevada corporation (“AEC Nevada”); (ii) American Education Center, Inc., a New York corporation ("AEC New York"); and (iii) AEC Southern Management Co., LTD, a company formed pursuant to the laws of England and Wales (the “AEC Southern UK”) and the subsidiaries of AEC Southern UK unless otherwise indicated or the context otherwise requires.

 

 2 

 

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). The statements herein which are not historical reflect our current expectations and projections about the Company’s future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and our interpretation of what we believe to be significant factors affecting our business, including many assumptions about future events. Such forward-looking statements include statements regarding, among other things:

 

·our ability to produce, market and generate sales of our products and services;
·our ability to develop and/or introduce new products and services;
·our projected future sales, profitability and other financial metrics;
·our future financing plans;
·our anticipated needs for working capital;
·the anticipated trends in our industry;
·our ability to expand our sales and marketing capability;
·acquisitions of other companies or assets that we might undertake in the future;
·competition existing today or that will likely arise in the future; and
·other factors discussed elsewhere herein.

 

Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “will,” “plan,” “could,” “target,” “contemplate,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these or similar words. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors, including the ability to raise sufficient capital to continue the Company’s operations. These statements may be found under Part I, Item 2— “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as elsewhere in this Quarterly Report on Form 10-Q generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, matters described in this Quarterly Report on Form 10-Q.

 

In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Quarterly Report on Form 10-Q will in fact occur.

 

Potential investors should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

 

The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Such statements are presented only as a guide about future possibilities and do not represent assured events, and we anticipate that subsequent events and developments will cause our views to change. You should, therefore, not rely on these forward-looking statements as representing our views as of any date after the date of this Quarterly Report on Form 10-Q.

 

This Quarterly Report on Form 10-Q also contains estimates and other statistical data prepared by independent parties and by us relating to market size and growth and other data about our industry. These estimates and data involve a number of assumptions and limitations, and potential investors are cautioned not to give undue weight to these estimates and data. We have not independently verified the statistical and other industry data generated by independent parties and contained in this Quarterly Report on Form 10-Q. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk.

 

Potential investors should not make an investment decision based solely on our projections, estimates or expectations.

 

 3 

 

 

PART I.

FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AMERICAN EDUCATION CENTER, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 

   March 31,
2018
   December 31,
2017
 
ASSETS        
Current assets:          
Cash  $1,649,116   $2,720,985 
Accounts receivable, net of allowance for doubtful accounts of 2,016,934 and $249,527 at March 31, 2018 and December 31, 2017, respectively   5,513,168    6,482,289 
Prepaid expenses   585,536    307,014 
           
Total current assets   7,747,820    9,510,288 
           
Noncurrent assets:          
Deferred compensation   1,741,668    2,016,668 
Deferred income taxes   79,682    25,641 
Intangible asset, net   408,543    442,588 
Security deposits   266,021    266,021 
           
Total noncurrent assets   2,495,914    2,750,918 
           
TOTAL ASSETS  $10,243,734   $12,261,206 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable and accrued expenses  $3,939,363   $4,070,001 
Taxes payable   407,235    775,220 
Deferred revenue   303,999    20,000 
Advances from clients   15,935    15,371 
Loan from stockholders   -    - 
           
Total current liabilities   4,666,532    4,880,592 
           
Noncurrent liabilities:          
Deferred rent   200,575    191,542 
Long-term loan   145,579    145,579 
           
Total liabilities   5,012,686    5,217,713 
           
Stockholders’ equity:          
Preferred stock, $0.001 par value; 20,000,000 shares authorized; none issued   500    500 
Common stock, $0.001 par value; 180,000,000 shares authorized; 41,350,000 shares issued and outstanding at March 31, 2018 and December 31, 2017   41,350    41,350 
Additional paid-in capital   6,021,126    6,021,126 
Retained earnings   (850,165)   973,764 
Accumulated other comprehensive income   18,237    6,753 
           
Total stockholders’ equity   5,231,048    7,043,493 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $10,243,734   $12,261,206 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 4 

 

 

AMERICAN EDUCATION CENTER, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

 

 

   Three Months Ended March 31, 
   2018   2017 
         
Revenues  $1,330,301   $9,458,706 
Cost of revenues    1,046,139    6,195,252 
Gross profit    284,162    3,263,454 
           
Operating expenses:          
Selling and marketing   14,000    132,771 
General and administrative     2,503,102    1,550,601 
Total operating expenses    2,517,102    1,683,372 
           
(Loss) income from operations   (2,232,940)   1,580,082 
Other income    528    - 
           
Income before provision for income taxes   (2,232,412)   1,580,082 
(Benefit) Provision for income taxes    (408,483)   350,285 
           
Net (loss) income   $(1,823,929)  $1,229,797 
           
Other comprehensive income          
Foreign currency translation gain    11,484    - 
Comprehensive (loss) income   $(1,812,445)   1,229,797 
           
(Loss) earnings per share - basic and diluted   $(0.04)  $0.03 
           
Weighted average shares outstanding, basic and diluted    41,350,000    41,350,000 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 5 

 

 

AMERICAN EDUCATION CENTER, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

   Three Months Ended March 31, 
   2018   2017 
         
Cash flows from operating activities:          
Net (loss) income  $(1,823,929)  $1,229,797 
Adjustments to reconcile net income to net cash          
(Used in) operating activities:          
Deferred tax (benefit) provision   (54,041)   61,669 
Deferred rent expense   9,033    15,508 
Deferred compensation   275,000    292,500 
Stock issued for services   -    - 
Stock issued to employees   -    - 
Provision for doubtful accounts   1,767,407    - 
Amortization expense   34,045    34,045 
Change in operating assets and liabilities:          
(Increase) in accounts receivable   (798,286)   (3,623,046)
(Increase) in prepaid expenses   (278,522)   (23,246)
(Decrease) Increase in accounts payable and accrued expenses   (130,638)   934,075 
(Decrease) Increase in taxes payable   (367,985)   281,676 
Increase in deferred revenue   283,999    373,903 
Increase in advances from clients   564    - 
           
Net cash (used in) operating activities   (1,083,353)   (423,119)
           
Effect of exchange rates changes on cash   11,484    - 
           
Net change in cash   (1,071,869)   (423,119)
Cash at beginning of period   2,720,985    2,290,429 
           
Cash at end of period  $1,649,116   $1,867,310 
           
Supplemental disclosure of cash flow information          
           
Cash paid for income taxes  $13,545   $6,940 
           
Cash paid for interest  $-   $- 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 6 

 

 

AMERICAN EDUCATION CENTER, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017

 

 

                           Accumulated     
                   Additional       other     
   Common stock  Preferred Stock  paid-in   Retained   comprehensive     
   Shares   Amount   Shares   Amount   capital   earnings   income   Total 
Balance as of December 31, 2017   41,350,000   $41,350    500,000   $500   $6,021,126   $973,764   $6,753   $7,043,493 
Net income                            (1,823,929)        (1,823,929)
Foreign currency translation gain                                 11,484    11,484 
                                         
Balance as of March 31, 2018-unaudited   41,350,000   $41,350    500,000   $500   $6,021,126   $(850,165)  $18,237   $5,231,048 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 7 

 

  

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARies

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED March 31, 2018 AND 2017

 

 

1.ORGANIZATION AND BUSINESS

 

American Education Center, Inc. (“AEC New York”) is a New York Corporation organized 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 (“AEC Nevada”) in the State of Nevada with the same name. On May 31, 2014, the President and then 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 stockholders of AEC Southern Management Co., Ltd. (“AEC Southern UK”), a company incorporated in December 2015 with a registered capital of 10,000 British Pounds 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. Prior to October 31, 2016, Ye Tian and Rongxia Wang held 51% and 49%, respectively, ownership interest in AEC Southern UK. As a result of the acquisition, AEC Southern UK became a wholly owned subsidiary of the Company.

 

AEC Southern UK holds 100% equity interest in AEC Southern Management Limited, a Hong Kong company (“AEC Southern HK”) incorporated on December 29, 2015, with a registered capital of HK$10,000. AEC Southern UK owns 100% equity interest in Qianhai Meijiao Education Consulting Management Co., Ltd., a foreign wholly owned subsidiary incorporated pursuant to PRC laws (“AEC Southern Shenzhen”) on March 29, 2016, with a registered capital of RMB 5,000,000.

 

 8 

 

 

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARies

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

1.ORGANIZATION AND BUSINESS (continued)

 

The Company’s corporate structure is as follows:

 

 

Headquartered in New York with operations in People’s Republic of China (“PRC”), the Company covers two market segments:

 

(1)AEC New York capitalizes on the rising demand from the middle-class families in China for quality education and working experience in the United States (“US”). It 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 Southern UK delivers customized corporate training and advisory services to corporate clients in China in the food industry on subjects such as human resource management, organizational management, and information on local food safety regulations.

 

 9 

 

 

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARies

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Consolidation and Presentation

 

The accompanying unaudited 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 unaudited 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, 2017 filed with the SEC on April 17, 2018.

 

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 March 31, 2018 and December 31, 2017, the allowance for doubtful accounts was $2,016,934 and $249,527, respectively.

 

 10 

 

 

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Foreign Currency Translation

 

The Company’s functional currency is US dollars. The company has one bank account 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

 

Revenue is recorded pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, “Revenue Recognition,” when persuasive evidence of an arrangement exists, delivery of the services has occurred, the fee is fixed or determinable and collectability is reasonably assured.

 

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 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.

 

AEC Southern UK delivers customized corporate training and advisory services. It receives monthly non-refundable retainer payments and recognizes revenue when services are rendered.

 

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.

 

 11 

 

 

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

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.

 

 12 

 

 

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

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 March 31, 2018 and December 31, 2017, 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 corporate income tax in the US at 34% and 21%, respectively, for the year 2017 and 2018. Provisions for income taxes in the United States have been made for taxable income the Company had in the US for the three months ended 2017, but no provision for income taxes was made for the three months ended March 31, 2018 due to operating loss.

 

United Kingdom (“UK”)

 

AEC Southern UK was incorporated in the United Kingdom and is governed by the income tax laws of England and Wales. According to current England and Wales income tax law, the applicable income tax rate for AEC Southern UK is 20%.

 

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.

 

 13 

 

 

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

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 March 31, 2018 and December 31, 2017, the carrying values of these financial instruments approximated their fair values due to their short-term nature.

 

Use of Estimates

 

The preparation of the unaudited 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.

 

 14 

 

 

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

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.

 

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AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

3.RECENTLY ISSUED ACCOUNTING STANDARDS

 

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 is currently evaluating the impact of pending adoption of the new standard on its 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 is not expected to have a material effect on the Company’s consolidated financial statements.

 

In February 2018, the FASB issue 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 issue 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.

 

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AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

4.CONCENTRATION OF CREDIT AND BUSINESS RISK

 

The Company maintains its cash accounts at three commercial banks in the US and one commercial bank in the PRC and Hong Kong, respectively. The Federal Deposit Insurance Corporation covers funds held in US banks and it insures $250,000 per bank 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. Fund held in the PRC bank is covered by Deposit Insurance Ordinance (index: 000014349/2015-00031) that insures CNY¥500,000 for the total of all depository accounts. As of March 31, 2018, the Company’s US bank accounts had cash balances in excess of federally insured limits of approximately $1,059,071. 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 three months ended March 31, 2018 and 2017:

 

   2018 
                 
   Gross
Revenue
   Percentage   Accounts
Receivable
   Percentage 
                 
Customer 1  $220,000    16.5%  $517,840    9.4%
Customer 2   201,800    15.2%   201,800    3.7%
Customer 3   194,600    14.6%   194,600    3.5%
Customer 4   168,400    12.7%   125,289    2.3%
Customer 5   161,000    12.1%   683,122    12.4%
Customer 6   158,900    11.9%   236,740    4.3%

 

   2017 
                 
   Gross
Revenue
   Percentage   Accounts
Receivable
   Percentage 
                     
Customer 1  $5,609,000    59.3%  $5,504,000    84.2%
                     
Customer 2   1,768,000    18.7%   215,000    3.0%

 

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AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

5.SEGMENT REPORTING

 

Operating segments have been determined on the basis of reports reviewed by Chief Executive Officer (CEO) who is the chief operating decision maker of the Company. The CEO considers the business from a geographic perspective and assesses performance and allocates resources on this basis. The reportable segments are as follows:

 

The Company has two operating segments: AEC New York and AEC Southern UK.

 

·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 Southern UK delivers customized corporate training and advisory services to corporate clients in China in the food industry to help them comply with local food safety regulations and standards.

 

Revenues from external customers, gross profit, segment assets and liabilities for each business are as follows:

 

   For the three months ended March 31, 2018 
   AEC New York   AEC Southern UK   Total 
Segment revenue:               
Corporate training & advisory  $-   $-   $- 
Placement advisory   56,001    -    56,001 
Career advisory   161,000    -    161,000 
Student & Family advisory   1,113,300    -    1,113,300 
Total revenue  $1,330,301   $-   $1,330,301 
Gross profit  $284,162   $-   $284,162 

 

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AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

5.SEGMENT REPORTING (continued)

 

   For the three months ended March 31, 2017 
  

AEC New York

   AEC Southern UK   Total 
Segment revenue:               
Corporate training & advisory  $   $7,377,213   $7,377,213 
Placement advisory   59,438    -    59,438 
Career advisory   900,725    -    900,725 
Student & Family advisory  $1,121,330   $-   $1,121,330 
Total revenue  $2,081,493   $7,377,213   $9,458,706 
Gross profit  $460,164    $ 2,803,290   $3,263,454 

 

   March 31, 2018 
   AEC New York   AEC Southern UK   Total 
Segment assets and liabilities:               
Segment assets  $5,279,724   $4,964,010   $10,243,734 
Segment liabilities  $3,102,509   $1,910,177   $5,012,686 

 

   December 31, 2017 
   AEC New York   AEC Southern UK   Total 
Segment assets and liabilities:               
Segment assets  $5,008,678   $7,252,528   $12,261,206 
Segment liabilities  $2,483,434   $2,734,279   $5,217,713 

 

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AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

6.DEFERRED COMPENSATION

 

On October 31, 2016, 1,500,000 common shares were granted to AEC Southern UK’s CEO that will 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 will be expensed over the three-year vesting period using the straight-line method. At 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 were granted to the AEC Southern UK’s Chairman and 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 will be expensed over the remaining two year and ten months using the straight-line method. At March 31, 2018, the remaining deferred compensation was $1,741,668.

 

Future amortization of the deferred compensation is as follows:

 

Year Ending December 31,    
     
2018   825,000 
2019   916,668 
      
Total  $1,741,668 

 

Stock compensation expense was $275,000, and $292,500 for the three months ended March 31, 2018 and 2017, respectively.

 

7.SECURITY DEPOSITS

 

The Company has security deposits with the landlord for its New York office of $266,021 as of March 31, 2018 and December 31, 2017.

 

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AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

8.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 March 31, 2018 and December 31, 2017 are as follows:

 

   March 31,
2018
   December 31,
2017
 
         
Intangible asset  $612,814   $612,814 
Less: accumulated amortization   (204,271)   (170,226)
           
Intangible asset - net  $408,543   $442,588 

 

For the three months ended March 31, 2018 and 2017, amortization expense was $34,045, and $34,045, respectively.

 

The following table is the future amortization expense to be recognized:

 

Year Ending December 31,    
     
2018   102,136 
2019   136,181 
2020   136,181 
2021   34,045 
      
Total  $408,543 

 

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AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

9.DEFERRED REVENUE

 

The Company receives advance payments for services to be performed and recognizes revenue when services have been rendered. The deferred revenue at March 31, 2018 and December 31, 2017 was $303,999 and $20,000, respectively.

 

10.RELATED-PARTY TRANSACTIONS

 

The Company’s CEO has a 34% interest in Columbia International College, Inc. (“CIC”). The Company conducts no transaction with CIC between December 31, 2017 and March 31, 2018.

 

The Company’s CEO has a 40% interest in Wall Street Innovation Center, Inc. (“WSIC”), a company 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/CEO of WSIC. In the course of delivering career advisory services, the Company has engaged WSIC to assist in certain career development activities. Included in accounts payable is an amount due to WSIC of $372 and $372 as of March 31, 2018 and December 31, 2017. Additionally, the Company had entered into a sublease agreement with WSIC in March 2016, which was subsequently terminated on June 30, 2017.

 

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AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

11.LONG-TERM LOAN

 

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. Interest will be paid on the last day of each quarter from 2015 to 2019, except for the last payment on December 12, 2019. Interest expense for the three months ended March 31, 2018 and 2017 was $3,639, and $7,389, respectively.

 

12.LEASE COMMITMENTS

 

In December 2014, the Company entered into a lease for office space 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 which creates deferred rent as shown on the balance sheets. In February 2016, the Company entered into a sublease agreement to lease space to WSIC for an annual rental of $250,000. The sublease income was netted against the Company’s rent expense. The sublease commenced on March 1, 2016 and terminated on June 30, 2017(see Note 10). Rent expense was approximately $102,195, and $39,698 for the three months ended March 31, 2018 and 2017, respectively.

 

Future minimum lease commitments are as follows:

 

Year Ending December 31,  Gross Lease
Payment
 
     
2018   285,699 
2019   388,333 
2020   418,604 
2021   439,350 
2022 and thereafter   1,666,383 
      
Total  $3,198,369 

 

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AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

13.Income taxes

 

The component of deferred tax assets at March 31, 2018 and December 31, 2017 is as follows:

 

   March 31, 2018   December 31, 2017 
         
Net operating loss carryforwards  $(42,240)  $- 
Allowance for doubtful accounts   45,120    63,441 
Accelerated Depreciation   320    (37,800)
Deferred tax asset, net  $3,200   $25,641 

 

The provision for income taxes for the three months ended March 31, 2018 and 2017 are as follows:

 

   

For the three months ended

March 31,

 
    2018     2017  
             
Current:                
Federal   $ -     $ -  
State     -       288,616  
Foreign     -       -  
Total Current     -       288,616  
      -          
Deferred:                
Federal     14,138       39,083  
State     3.815       22,586  
City     4,488          
Foreign     (76,482)        -  
                 
Total Deferred     (54,041)       61,669  
Total   $ (54,041)     $ 350,285  

 

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 and UK. The Company is subject to income tax examinations of US federal, state, and city for 2016, 2015 and 2014 tax years and in the UK for 2016. The Company is not currently under examination nor has it been notified by the authorities.

 

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AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED March 31, 2018 AND 2017

 

 

13.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 ended March 31, 2018 and 2017 is as follows:

 

   March 31, 2018   March 31, 2017 
         
Tax at federal statutory rate   21%   34.0%
State and local taxes, net of federal benefit   11    10.8 
Tax impact of foreign operations   -    (20.0)
Non-deductible/non-taxable items   -    (0.1)
Net operating loss carryforwards   -    - 
Others   -    (2.6)
Total   32%   22.1%

 

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AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARies

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

 

14.STOCK OPTIONS

 

The Company didn’t grant any options during the three months ended March 31, 2018.

 

The following is a summary of stock option activity:

 

   Shares   Weighted
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Life
   Aggregate
Intrinsic
Value
 
                 
Outstanding at December 31, 2017   3,200,000   $2.45    5.87 years   $- 
Granted   -    -    -    - 
Exercised   -    -    -    - 
Cancelled and expired   -    -    -    - 
Forfeited   -    -    -    - 
                     
Outstanding at March 31, 2018   3,200,000   $2.45    5.62 years   $- 
                     
Vested and expected to vest at March 31, 2018   1,203,333   $1.32    

 

4.29 years

   $- 
                     
Exercisable at March 31, 2018   1,203,333   $1.32    4.29 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 three months ended March 31, 2018 and 2017.

 

There was no compensation expense related to all the above options because the value ascribed to these options was not material.

 

15.SUBSEQUENT EVENTS

 

The Company’s management has performed subsequent events procedures through May 15, 2018, which is the date the financial statements were available to be issued. There were no subsequent events requiring adjustment to the financial statements or disclosure as stated herein.

 

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

 

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the unaudited condensed consolidated financial statements of the Company for the three months ended March 31, 2018 and 2017, and should be read in conjunction with such financial statements and related notes included in this report. Except for the historical information contained herein, the following discussion, as well as other information in this report, contain “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the “safe harbor” created by those sections.  Actual results and the timing of the events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the “Forward-Looking Statements” set forth elsewhere in this Quarterly Report on Form 10-Q.

 

Overview

 

Leveraging our knowledge of the educational system and environment in the United States and our understanding of the market demands for education services in the PRC and its changing business economy, we specialize in the delivery of customized high school and college placement advisory services as well as career advisory services to Chinese students wishing to study and gain post-graduate work experiences in the United States. Our advisory services are specifically designed to address the educational needs of the rising middle-class families in China. The demand for our advisory services is primarily the result of China’s decades-long one-child policy, society’s focus and emphasis on children’s education, and families’ desire to gain access to U.S. colleges and universities as well as work experience in the U.S.

 

Additionally, recognizing the needs for enterprise training in China, since October 2016, we also deliver customized corporate training and advisory services to customers in China in the food industry to help them meet the related regulatory standards. The demand for such corporate training and advisory services in China has escalated in recent years and is driven mainly by China’s growing economy and desire to improve its competitiveness by meeting or setting international standards.

 

Headquartered in New York with operations in PRC (People’s Republic of China), our key advisory services include:

 

·Placement Advisory Services;
·Career Advisory Services;
·Student & Family Services;
·Other Recruitment & Placement Services; and
·Compliance Training & Advisory Services.

 

Placement Advisory Services

 

Since 1999, we have been delivering customized Language Training & Placement Advisory services to Chinese students. Our one-stop advisory service encompasses ESL training and assistance throughout the high school/college application and admission process.

 

Targeting the needs of Chinese families in getting admissions to ivy league colleges, our Elite College Advisory service is designed to assist qualified Chinese students gain access and apply to prestigious colleges and universities in the US. Specifically, we arrange campus tours, provide tailored language training, offer guidance on interview and communication techniques, and follow-up on their applications.

 

Once students are admitted into their target universities, our advisory services include, among other things, assistance in connection with their application for a second major, transfers, housing accommodations, and accelerated degree application. To help students optimize their on-campus experience and enhance their leadership and social skills, we would enroll them into seminars and social events that we partner with scholars and universities, business and non-profit organizations. To help enrich their cultural experience, we would arrange extracurricular activities such as organized artistic endeavors including dance, music, painting, photography and other performance events.

 

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Career Advisory Services

 

Our Internship Advisory program focuses on student’s career development by helping them identify and secure suitable internship and part-time or full-time work opportunities that are appropriate for their educational background and experience level. Through this program, we strive to help students map and navigate their career path and counsel them on matters including academic improvement to career assistance. Our student customers have chances to communicate with professionals in the field and participate in real-world case studies.

 

Our Start-up Advisory program is designed to provide incubator services to students and/or their families who desire to start or make an investment in a business in the US. Our services include (i) recommending alternative business development opportunities; (ii) assistance with business plan development; (iii) assistance with accounting and financial management, marketing, product and project design; and (iv) assistance in project financing.

 

Student & Family Advisory Services

 

Our Student & Family Advisory Services are designed to assist our students and/or their families in the process of settling down in the U.S., so they can effectively focus on their studies.

 

Through our business partners, we assist the students’ families with purchasing real estate properties, organizing their personal financial management and investment needs, getting insurance and starting businesses. Our American Dream Program helps students’ families find good investment projects in the U.S. We also advise Chinese and corporate clients whose executives are moving to the U.S. for work. The scope of our services includes assistance with business consulting, relocation and other aspects of family support services.

 


Other Advisory Services

 

Through our Foreign Student Recruitment services, we assist universities in China to recruit students from the US. We customize this service based on our strategic relationship with college and universities in the US and the specific recruitment goals of these universities in China. The demand for our recruitment services is driven mainly by the lack of an established channel to attract students from the US and the needs by the Chinese universities to expand and diversify their student body.

 

Our Foreign Educator Placement services are designed to meet the increasing demand for experienced educators and teachers from the US to teach in China. Such demand covers the need to recruit qualified US educators from Pre K-12 to teach in China.

 

Corporate Training & Advisory Services

 

Our Corporate Training & Advisory service is delivered by our wholly owned subsidiary, AEC Southern UK. We currently focus on corporate training in human resources management and organizational management for the general corporate market, as well as information sessions on local food industry regulations and the International Organization for Standardization (“ISO”). We advise on relevant training guidelines designed to further clients’ understanding of the pertinent compliance requirements, best practices, and/or relevant certification requirements.

 

Pursuant to Accounting Standard Codification 280 “Segment Reporting” (“ASC 280”), we have identified two reporting segments: AEC New York and AEC Southern UK. These two segments engage two sets of customers and vendors to generate revenue and incur expenses; they generate separate financial information; and based on their financial reports and other segment specific information, our chief operating decision maker determines the resources to be allocated and evaluates the performance, of each segment.

 

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·AEC New York capitalizes on the rising demand from the middle-class families in China for quality education and working experience in the United States. It 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, admission advisory, on-campus advisory, internship and start-up advisory as well as student and family services.

 

·AEC Southern UK delivers customized corporate training services on subjects such as human resource management, organizational management, as well as information on local food safety regulations and the ISO.

 

Please refer to our Form 10-K for fiscal year of 2017, which was filed on April 17th, 2018 for more detailed information about our operations.

  

Significant Accounting Policies 

 

The discussion and analysis of our consolidated financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The consolidated financial statements are comprised of AEC Nevada and its wholly owned subsidiaries, AEC New York and AEC Southern UK. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

As part of the process of preparing our unaudited condensed consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. As of March 31, 2018, the Company does not have a liability for any unrecognized tax benefits.

 

We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our unaudited condensed consolidated financial statements when we deem it necessary.

 

We have determined significant accounting principles with policies that involve the most complex and subjective decisions or assessments. While our significant accounting policies are more fully described in Note 2 to our financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Both operating groups are reported under the same accounting policies/estimations.

 

Revenue is recognized when the following criteria are met: (1) when persuasive evidence of an arrangement exists; (2) delivery of the services has occurred; (3) the fee is fixed or determinable; and (4) collectability of the resulting receivable is reasonably assured. Advisory services fees paid in advance will be reflected as deferred revenue, and they are recognized proportionally as services are completed. Fees related to compliance training and advisory services are recognized upon completion of such services.

 

Recent Accounting Pronouncements 

 

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 is currently evaluating the impact of pending adoption of the new standard on its consolidated financial statements.

 

 29 

 

 

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 is not expected to have a material effect on the Company’s consolidated financial statements

 

In February 2018, the FASB issue 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 issue 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.

 

The Company has assessed all newly issued accounting pronouncements released during the three months ended March 31, 2018 and through the date of this filing, and believes that none of them will have a material impact on the Company’s financial statements when or if adopted.

 

Results of Operations

 

Below we have included a discussion of our operating results and material changes in the periods covered by this Form 10-Q periodic report. For additional information on the potential risks associated with these initiatives and our operations, please refer to the Risk Factors sections in our annual report on Form 10-K for the year ended December 31, 2017.

 

Three Months Ended March 31, 2018 as Compared to Three Months Ended March 31, 2017

 

   For the three months ended March 31, 
   2018   2017   Variance   % 
Key revenue streams:                    
Corporate Training & Advisory Services  $-   $7,377,213   $(7,377,213)   NM%
Placement Advisory Services   56,001    59,438    (3,437)   (6)
Career Advisory Services   161,000    900,725    (739,725)   (82)
Student & Family Advisory   1,113,300    1,121,330    (8,030)   (1)
Total revenues  $1,330,301   $9,458,706   $(8,128,405)   (86)%
Gross Profit  $284,162   $3,263,454   $(2,979,292)   (91)%
Gross Margin   21%   35%          

 

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Revenue

 

·Total revenues for the three months ended March 31, 2018 were $1,330,301, representing a decrease of $(8,128,405), or 86% from $9,458,706 for the same period in 2017. The decrease was attributed mainly to revenues from our corporate training and advisory services delivered by AEC Southern UK. Total revenues for the three months ended March 31, 2018 were all generated from AEC New York.

 

·The decline in revenue from our corporate training & advisory services was primarily due to strict regulation of the People’s Bank of China (PBOC) and State Administration of Foreign Exchange (SAFE) on the flow of foreign exchange in and out of the PRC. We typically accept payments from our AEC Southern UK clients in the dollar denominations while AEC Southern UK clients are located in the PRC.  In addition, service delivery was temporarily suspended due to our ongoing optimization of the training model to enhance the business as well as the expiration of agreement with one of the two clients of AEC Southern UK. The restricted flow of foreign exchange from the PRC and the inconsistent and generally unfavorable interpretation of the relevant regulations, and the rising costs of doing business in the PRC have negatively affected AEC Southern UK’s business operations in the PRC (People’s Republic of China). AEC Southern UK is seeking solutions, namely implementing corporate training services into an online platform and planning to expand its corporate training offerings from the food industry to general management advisory services that may appeal to a wider range of businesses.

 

·Our revenues from placement advisory services normally fluctuate as a result of seasonal or other factors related to the high school/college admission process. Revenues from our placement advisory services decreased by $3,437, or approximately 5.8% from $59,438 for the same period in 2017. The decrease in our placement advisory services was due to the allocate our resources to elite college advisory services. Revenues for our career advisory services decreased by $739,725, or 82% from $900,725 for the same period in 2017, primarily due to decreased services requests. Revenues from student & family advisory services decreased by $8,030 from $1,121,330 for the same period in 2017, mainly due to timing of services being requested.

 

Gross Profit & Gross Margin

 

·Our gross profit for the three months ended March 31, 2018 was $287,162, representing a decrease of $2,979,292, or 91% from $3,263,454 for the three months ended March 31, 2017. The decrease was attributed mainly to the delivery of corporate training and advisory services from AEC Southern UK. The service delivery was temporarily suspended due to the restricted flow of foreign exchange, the ongoing optimization of the training model to enhance our business, as well as the expiration of a service agreement with one of the two clients of AEC Southern UK.

 

·Our gross margin was approximately 21% for the three months ended March 31, 2018, as compared to approximately 35% for the same period in 2017. As gross profit for this period was all generated from AEC New York, gross margin for AEC New York for the three months ended March 31, 2018 was decreased by 1%, or 22% from the same period in 2017.

 

Operating Expenses

 

·Total operating expenses increased by $833,730 or 50% as compared to the three months ended March 31, 2017. The increase was attributed to higher general and administrative (G&A) expenses of approximately $800,000 from payroll expense, professional fee, and uncollectible accounts receivable.

 

Income Tax Benefits

 

·Income tax benefits of $408,483 for the three months ended March 31, 2018 represent the net effect of tax payable reversal and net loss for the period.

 

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Net Loss

 

·Net loss of $1,823,929 for the three months ended March 31, 2018 was due to the decrease in revenue and higher operating expense.

 

Liquidity and Capital Resources

 

Cash Flows and Working Capital

 

As of March 31, 2018, we had cash of $1,649,116, a decrease of $1,071,869 from $2,720,985 as of December 31, 2017. We have financed our operations primarily through cash flow from operating activities. We require cash for working capital, payment of accounts payables and accrued expenses, salaries, commissions and related benefits, and other operating expenses and income taxes. The following table sets forth a summary of our cash flows for the periods indicated.

 

   Three months ended March 31, 
   2018   2017   Variance   % 
Net cash used in operating activities  $(1,083,353)  $(423,119)  $(660,234)   156%
Effect of exchange rates changes on cash   11,484    -    11,484    NM 
Net change in cash  $(1,071,869)  $(423,119)  $(648,750)   153%

 

Cash Flow from Operating Activities

 

·Net cash used in operating activities for the three months ended March 31, 2018 was $1,083,353, increased by $660,234, or 156% for the three months ended March 31, 2017. The increase in net cash used in operations in 2018 was primarily attributable to the combination of the following: we now pay our service providers faster; tax benefit due to the net loss; and asset write-off due to the uncollectible accounts receivable.

 

Cash Flow from Investing Activities

 

·We had no cash flow from investing activities during the three months ended March 31, 2018 and 2017.

 

Cash Flow in Financing Activities

 

·We had no cash flow from financing activities during the three months ended March 31, 2018 and 2017.

 

Working Capital 

 

The following table sets forth our working capital.

 

   March 31,   December 31,         
   2018   2017   Variance   % 
                 
Total current assets  $7,747,820   $9,510,288   $(1,762,468)   (19)
Total current liabilities   4,666,532    4,880,592    (214,060)   (4)
Working capital  $3,081,288   $4,629,696   $(1,548,408)   (33)%
Current ratio   1.7    1.9           

 

  · As of March 31, 2018, we had working capital surplus of $3,081,288, a decrease of $1,548,408 from a working capital surplus of $4,629,696 as of December 31, 2017. The decrease in working capital surplus was attributable mainly to uncollectible accounts receivable from AEC Southern UK.

 

  · We believe that our working capital will be sufficient to enable us to meet our cash requirements for the next 12 months. However, we may incur additional expenses as we seek to expand our operations by establishing additional representative offices in our major market—the PRC, increasing our marketing efforts, and hiring more personnel to support our growing operations. We believe we have adequate working capital to fund future growth activities.

  

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Off-Balance Sheet Arrangements

 

We did not have, during the periods presented, and we are currently not party to, any off-balance sheet arrangements.

 

Seasonality  

 

We experience seasonality in business with students as chief customers, particularly AEC New York’s student consulting/college application business. The seasonality reflects the general trend of the industry of admissions and education related services, corresponding to the predominantly fall semester start dates of educational institutions. Our services are higher in the fourth and first quarters of our fiscal year than the other two quarters, reflecting the engagement for services of educational institutions admissions predominantly occurring in the fourth quarter and first quarter of a calendar year, and other consulting services corresponding to the beginning of the academic year, i.e. the fall semester.

 

There is no noticeable seasonality for consulting services for companies, namely company consulting services in AEC New York’s business and executive/staff training services in AEC Southern UK’s business.

 

Subsequent Event

 

The Company’s management has performed subsequent events procedures through May 15, 2018, which is the date the consolidated financial statements were available to be issued. There were no subsequent events requiring adjustment to or disclosure in the consolidated financial statements.  

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES 

 

Evaluation of Disclosure Control and Procedures.  

 

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-Q, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer (CEO), as appropriate to allow timely decisions regarding required disclosure.

 

During the three months ended March 31, 2018, procedures have been established to ensure that all significant, non-routine events and pending transactions must be evaluated by our CEO for disclosures in our consolidated financial statements and public filings.

 

We performed an evaluation, under the supervision and with the participation of our management, including our CEO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, our CEO have concluded that, as of March 31, 2018, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported properly within the time periods specified by the SEC, and did not provide reasonable assurance that information required to be disclosed by the Company in such reports would be accumulated and communicated to the Company’s management, including its CEO, as appropriate, to allow timely decisions regarding required disclosure. Such conclusion was based solely on the fact that the Company identified deficiencies in its internal control over financial reporting as of March 31, 2018. We have identified the following weaknesses and deficiencies in disclosure control and procedures.

 

Lack of financial expert - We currently do not have a CFO with significant U.S. publicly reporting company experience, nor do we have a financial expert in our management team.

 

Lack of segregation of duties - Our CEO has also acted as our interim CFO since February 5, 2018, when our previous CFO designated from his position. Therefore, all accounting information is currently reviewed only by one person.

 

Other deficiencies - We have limited administrative and accounting resources, outdated accounting software and generally weak accounting processes and internal control procedures. Additionally, we have inadequate segregation of duties in certain accounting processes, including the payroll, cash receipts and disbursements processes in our accounting system, partly as a result of our limited size and accounting staff. We have taken steps to remediate these issues and expect to have improved controls and documentation in place by the end of the quarterly period June 30, 2018.

 

Changes in internal control over financial reporting

 

In August 2017, the Company engaged a seasoned finance executive with over 25 years of professional experience in auditing and SEC reporting as well as internal controls and risk management as its senior financial advisor to assist senior management in the assessment of its finance and accounting functions, and development of an actionable plan to strengthen the Company’s internal control over financial reporting as well as its ability to comply with rules and regulations. In light of the structure and discipline that has been established during the year ended December 31, 2017, the Company appointed the senior financial advisor as its chief financial officer effective October 1, 2017. The chief financial officer resigned for personal reasons by February 5, 2018. Our CEO, Max P. Chen, has acted as the interim CFO since February 5, 2018, while the Company is currently seeking a CFO with significant experience in public reporting company.

 

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PART II

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm business. We are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

ITEM 1A. RISK FACTORS

 

During the three months ended March 31, 2018, there were no material changes to the risk factors previously disclosed in the “Risk Factors” Section in our annual report on Form 10-K for the period ended December 31, 2017, filed on April 17, 2018.

 

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

There were no issuance of options or shares, registered or not, during three-month period ended March 31, 2018. 

  

ITEM 3. DEFAULT UPON SENIOR SECURITIES.

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURE.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed herewith:

 

Exhibit No.   Description
     
31.1   Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2   Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), 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 Taxonomy Extension Schema Document **
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document **
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document **
101.LAB   XBRL Taxonomy Extension Label Linkbase Document **
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document **

 

 

*Filed herewith.
**Furnished herewith.

 

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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.

 

May 15, 2018    
     
  AMERICAN EDUCATION CENTER INC.
     
     
  By: /s/ Max P. Chen
    Max P. Chen
    President, Sole Director, Chief Executive Officer,
interim Chief Financial Officer and Secretary
    (Principal Executive Officer, Principal Financial
    Officer and Principal Accounting Officer)

 

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