The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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.
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.
|
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.
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.
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.
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.
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.
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.
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.
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
|
%
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
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
|
|
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
|
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
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.
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.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
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
|
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
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.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2018
AND 2017
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.
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
|
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2018 AND 2017
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.
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
|
%
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARies
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
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.
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.