AMCT American ED Center Inc (CE)

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FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

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 the sole shareholder of AEC New York exchanged his 200 shares for 10,563,000 shares of AEC Nevada. The share exchange resulted in AEC New York becoming a wholly owned subsidiary of AEC Nevada (hereinafter the “Company”).

On October 31, 2016, the Company completed an acquisition transaction through a share exchange with two then stockholders, Rongxia Wang and Ye Tian, of AEC Southern Management Co., Ltd. (“AEC Southern UK”), a company 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 (the “AEC Southern UK Share Exchange”). As a result of the AEC Southern UK Share Exchange, AEC Southern UK became a wholly owned subsidiary of the Company.

AEC Southern UK held 100% 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 owned 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.

On May 1, 2019, the Company sold 100% of the equity interest in AEC Southern UK to three individuals who were Ye Tian, Rongxia Wang and Weishou Li, for a consideration of 1,000,000 shares of outstanding shares of AEC Nevada.

On July 13, 2018, pursuant to a Business Purchase Agreement (the “Purchase Agreement”), the Company acquired 51% issued and outstanding equity interest of American Institute of Financial Intelligence LLC (“AIFI”), a New Jersey corporation incorporated on May 10, 2017, in exchange of 100,000 shares of the Company common stock issued to the then sole shareholder of AIFI. As a result, AIFI became a 51% majority owned subsidiary of the Company.

On October 23, 2018, AEC Nevada incorporated a subsidiary, AEC Management Ltd. (“AEC BVI”) in the British Virgin Islands, pursuant to the laws of British Virgin Islands. AEC BVI is a wholly owned subsidiary of AEC Nevada, and as of the date of this report, does not have significant business activities.

On April 22, 2019, AEC Southern UK sold 100% of equity interest of AEC Southern HK to AEC Management Ltd. Upon the execution and delivery of the Share Transfer Agreement, AEC Southern HK and its subsidiary became wholly-owned subsidiaries of AEC BVI.

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARies

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The Company’s corporate structure is as follows:

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

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARies

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Basis of Consolidation and Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments considered necessary to give a fair presentation have been included. Interim results are not necessarily indicative of full-year results. Certain prior year balances have been reclassified to conform to the current year’s presentation; none of these reclassifications had an impact on reported financial position or cash flows for any of the periods presented. The information in this Form 10-Q should be read in conjunction with information included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on April 16, 2019.

Cash

Cash consists of all cash balances and liquid investments with an original maturity of three months or less are considered as cash equivalents.

Accounts Receivable

Accounts receivable are carried at net realizable value. The Company maintains an allowance for doubtful accounts, periodically evaluates its accounts receivable balances and makes general and/or specific allowances when there is doubt as to their collectability. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balances, customers’ historical payment history, their current credit-worthiness and current economic trends. Accounts receivable are written off against the allowance only after exhaustive collection efforts. As of June 30, 2019 and December 31, 2018, the allowance for doubtful accounts was $1,142,088 and $1,189,147 for AEC NY, $0 and $0 for AEC BVI, and $4,595,823 and $4,595,823 for AEC UK, which is now discontinued operating, respectively.

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

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Foreign Currency Translation

The Company’s functional currency is US dollars. The company has two bank accounts located in the PRC. Translation adjustments arising from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive income included in statements of changes in stockholders’ equity. Gain and losses from foreign currency transactions are included in the consolidated statements of operations and comprehensive income.

Revenue Recognition

The Company adopted ASU No. 2014-09, Topic 606 on January 1, 2018, using the modified retrospective method. ASC 606 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation.

AEC New York delivers customized high school and college placement, career advisory as well as student and family services. Fees related to such advisory services 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.

Prior the disposal of AEC Southern UK on May 1, 2019, AEC Southern UK delivers customized corporate training and advisory services. It received monthly non-refundable retainer payments and recognizes revenue when services are rendered.

AEC Shenzhen delivers customized high school and college placement and career advisory services. Fees related to such advisory services are generally paid to the Company in advance and they are recorded as deferred revenue. Revenues are recognized proportionally as services are rendered or upon completion.

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

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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.

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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, 2019 and December 31, 2018, the Company does not have a liability for any unrecognized tax benefits.

The income tax laws of various jurisdictions in which the Company and its subsidiaries operate are summarized as follows:

United States (“US”)

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (TCJA) was signed into law. The TCJA results in significant revisions to the U.S. corporate income tax system, including a reduction in the U.S. corporate income tax rate, implementation of a territorial system and a one-time deemed repatriation tax on untaxed foreign earnings. Generally, the impacts of the new legislation would be required to be recorded in the period of enactment.

The Company is subject to Federal corporate income tax in the US at 21%. No provisions for income taxes for the United States have been made for the six months ended June 30, 2019 due to the taxable income offset by net operating loss in prior year.

United Kingdom (“UK”)

According to current England and Wales income tax law, resident companies are taxable in the United Kingdom on their worldwide profits and subject to an opt-out for non-UK permanent establishments (PEs), while non-resident companies are subject to UK corporation tax only on the trading profits attributable to a UK PE, or the trading profits attributable to a trading of dealing in or developing UK land, plus UK income tax on any other UK source income.

AEC Southern UK was incorporated in the United Kingdom and is governed by the income tax laws of England and Wales.

Since AEC Southern UK had no PE in UK as May 1, 2019 and had no UK-Source income during 2018, the Company is not subject to tax on non-UK source income. The Company took full allowance of deferred tax assets which the Company does not expect to utilize in the near future.

British Virgin Island (“BVI”)

According to BVI corporate taxation, for basis companies, there is a zero-rated income tax regime for all BVI-domiciled corporate entities, and there is no concept of residence applicable to BVI corporate taxation.

AEC BVI was incorporated in the BVI and is governed by the taxation of BVI.

Hong Kong

AEC Southern HK was formed in Hong Kong. Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong Kong source income.

The People's Republic of China (“PRC”)

AEC Southern Shenzhen was incorporated in the PRC. Pursuant to the income tax laws of China, the Company is not subject to tax on non-China source income.

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

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FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

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:

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 June 30, 2019 and December 31, 2018, the carrying values of these financial instruments approximated their fair values due to their short-term nature.

Use of Estimates

The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

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Earnings (Loss) per Share

Earnings (loss) per share is calculated in accordance with FASB ASC 260, “ Earnings Per Share .” Basic earnings (loss) per share is based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the assumption that all dilutive convertible shares and stock options are converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Options and warrants are only dilutive when the average market price of the underlying common stock exceeds the exercise price of the options or warrants because it is unlikely they would be exercised if the exercise price were higher than the market price.

Noncontrolling interest

According to Financial Accounting Standards Board (FASB) Statement No. 160, the noncontrolling interest shall be reported in the consolidated statement of financial position within equity, separately from the parent’s equity. That amount shall be clearly identified and labeled, for example, as noncontrolling interest in subsidiaries. An entity with noncontrolling interests in more than one subsidiary may present those interests in aggregate in the consolidated financial statements 。

Bargain Purchase

According to Financial Accounting Standards Board (FASB) Statement No. 141 (revised 2007), a barging purchase is defined as a business combination in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree, and it requires the acquirer to recognize that excess in earnings as a gain attributable to the acquire.

Contingent Consideration

The Company recognizes the fair value of any contingent consideration that is transferred to the seller in a business combination on the date at which control of the acquiree is obtained. This value is generally determined through a probability-weighted analysis of the expected cash flows.

Contingent consideration is classified as a liability or as equity on the basis of the definitions of an equity instrument and a financial liability. The contingent consideration is payable in cash and, accordingly, the Company classified its contingent consideration as a liability. It is not remeasured, and any gain or loss on settlement at an amount different from its carrying value will be recognized in net income in the period during which it is settled.

Leases

On January 1, 2019, the Company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use (ROU) assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements.

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

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FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

The Company adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while accounting for finance leases remained substantially unchanged.

The Company determined if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and short- and long-term lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.

As of adoption of ASC 842 and as of January 1, 2019, the Company was not a party to finance lease arrangements.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the Company use the industry incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Under the available practical expedient, the Company account for the lease and non-lease components as a single lease component.

Adoption of the standard resulted in the initial recognition of $2,016,142 of ROU assets and $2,237,583 of lease liabilities on our consolidated balance sheet at adoption on January 1, 2019 related to office space lease commitment on March 1, 2015. The difference of $221,441 represented deferred rent for leases that existed as of the date of adoption, which was an offset to the opening balance of right-of-use assets. The adoption of the standard on January 1, 2019 did not have a material impact on our consolidated statements of income, stockholders’ equity and cash flows.

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

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FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

In August 2014, the FASB issued accounting standard update which requires management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued. If substantial doubt exists, additional disclosures are required. This update was effective for the Company's annual period ended January 28, 2017. The adoption of the new standard did not have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases.” The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has adopted the requirements of ASU 2016-02 on January 1, 2019, the first day of fiscal year 2019, and using the modified retrospective approach, electing the package of practical expedients, and the practical expedient to not separate lease and non-lease components for operating leases. We also elected the modified retrospective approach that permits adoption of the new standard prospectively, as of the effective date, without adjusting comparative periods presented. The current adjustment has been disclosed and presented on balance sheet.

In January 2017, the FASB issued accounting standard update which simplifies the test for goodwill impairment. To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this update remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This update is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted the update in the fourth quarter of 2018. The adoption of the new standard did not have an impact on our consolidated financial statements.

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. For all entities, this ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The adoption of this ASU 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

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FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

The Company maintains its cash accounts at two commercial banks in the US, two commercial banks in the PRC and one commercial bank in Hong Kong. The Federal Deposit Insurance Corporation covers funds held in US banks and insures $250,000 per depositor, per insured bank, for each account ownership category. Funds held in the PRC banks are covered by Deposit Insurance Ordinance (index: 000014349/2015-00031) that insures RMB500,000 for the total of all depository accounts. The Hong Kong Deposit Protection Board covers funds held in HK banks and it insures HK$500,000 per bank for the total of all depository accounts. As of June 30, 2019, the Company’s US bank accounts had cash balances in excess of federally insured limits of approximately $1,105,860. 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 six months ended June 30, 2019 and 2018:

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

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FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

On May 1, 2019, AEC Nevada sold 100% of the equity interest in AEC Southern UK to three individuals who were Ye Tian, Rongxia Wang and Weishou Li, for a consideration of 1,000,000 shares of outstanding shares of AEC Nevada which was valued at $660,000 and the debt owed to AEC Southern UK in the amount of $268,475 was forgiven by AEC Southern UK. The Company has classified the results of AEC Southern UK as discontinued operations in the unaudited consolidated statement of income for all periods presented. Additionally, the related assets and liabilities associated with the discontinued operations in the prior year consolidated balance sheet are classified as discontinued operations. The Company recognized a gain of $928,475 from the disposition.

Pursuant to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the results of operations for the years ended June 30, 2019 and 2018 from discontinued operations have been classified to loss from discontinued operations line on the accompanying consolidated statements of operations and comprehensive loss presented herein. The assets and liabilities also have been classified as discontinued operations in the Company’s consolidated financial statements as of June 30, 2019 and December 31, 2018.

The carrying amount of the major classes of assets and liabilities of discontinued operation as of May 1, 2019 and December 31, 2018 consist of the following:

The summarized operating result of discontinued operation included in the Company’s consolidated statements of operation consist of the following:

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

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FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

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 evaluates the business from a geographic perspective, assesses performance and allocates resources on this basis. The reportable segments are as follows:

Prior discontinued operations, the Company has two operating segments: AEC New York and AEC BVI.

The following table shows an analysis segment assets and liabilities of continuing and discontinued operations as of June 30, 2019 and December 31, 2018:

The Company recorded a total gain of $928,475 from disposal of discontinued operation, including current period of operation loss of $366,667 before disposal. The investment in subsidiary account in AEC NY was adjusted to $0 in 2018 due to the operation loss of discontinued operation.

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

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

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FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

On October 31, 2016 (the “Grant Date”), 1,500,000 common stock of the Company were granted to AEC Southern UK’s CEO that are expected to vest over a three-year period commencing November 1, 2016. The shares were valued using the market price of the Company’s common stock on the grant date of $0.14 per share. On the Grant Date, $210,000 was recognized as deferred compensation, which was expensed over the three-year vesting period using the straight-line method. On December 31, 2017, the remaining deferred compensation was expensed due to the resignation of AEC Southern UK’s CEO.

On December 31, 2016, 6,000,000 stock of the Company were granted to the AEC Southern UK’s Chairman and are expected to vest over a three-year period commencing November 1, 2016. The shares were valued using the market price of the Company’s common stock on the grant date of $0.55 per share. On December 31, 2016, $3,300,000 was recognized as deferred compensation, which was expensed over the remaining two year and ten months using the straight-line method. Before the disposal, the remaining deferred compensation was $550,001.

Stock compensation expense was $366,664 for the four months before the disposal of AEC Southern UK.

The Company has security deposits with the landlord for its New York office and the office in Shenzhen, China of $284,270 and $266,021 as of June 30, 2019 and 2018.

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

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FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

Investment Valuation

The Company continually reviews its investments to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company’s carrying value; the financial condition, operating performance and the prospects of the equity investee; and other company specific information such as industry data, general economic conditions, cash flows forecasts or any recent financing rounds. If the decline in fair value is deemed to be other than temporary, the carrying value of the equity investee is written down to fair value.  

On July 10, 2018, the Company issued 100,000 shares of the Company’s common stock (the “Consideration Shares”) to FIFPAC, Inc., the 100% equity owner of AIFI (the “Seller”), at a purchase price of $0.48 per share, in exchange for 51% equity ownership of the AIFI pursuant to the Purchase Agreement. Refer to Footnote 16 Business Acquisition.

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 June 30, 2019 and 2018 are as follows:

For the three and six months ended June 30, 2019 and 2018, amortization expense was $37,045, $74,090 and $34,045, $68,090, respectively.

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

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

The Company receives advance payments for services to be performed and recognizes revenue when services have been rendered. The deferred revenues as of June 30, 2019 and 2018 were $295,350 and $299,924, respectively. 

The Company’s CEO has a 34% interest in Columbia International College, Inc. (“CIC”). The Company prepaid CIC $96,000 for 2019 student consulting services, which is expected to be fully delivered and accounted for in 2019.

The Company’s CEO has a 40% interest in Wall Street Innovation Center, Inc. (“WSIC”), a corporation incorporated in the state of New York that focuses on career and business development activities. AEC New York’s Chief Operating Officer currently serves as the President and CEO of WSIC. In the course of delivering career advisory services, the Company has engaged WSIC to assist in certain career development activities. The Company prepaid WSIC $99,628 for business consulting services to be delivered in 2019, which is expected to be completed in 2019.

The Company’s CEO received 12,500,000 shares of Series B Convertible Preferred Stock of the Company (“Series B Preferred Stock”), par value $0.001 per share for reward of his dedicated services to the Corporation on November 26, 2018.

The Company borrowed $436,885 (translated from ¥3,000,000) from the shareholder during the six months ended June 30, 2019. The amounts due to related party were $436,885 and $0 as of June 30, 2019 and December 31, 2018, respectively. The amounts are non-interest bearing, non-secure and due on demand. 

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

On December 1, 2014, an unrelated party loaned the Company $295,579, with interest at 10%. The Company repaid $150,000 on November 10, 2017. The remaining is to be repaid on December 13, 2019. Interests are expected to be paid on the last day of each quarter from 2015 to 2019, except for the last payment which shall be made on December 12, 2019. The outstanding balance was $145,579 as of June 30, 2019.

Interest expenses for the three months ended June 30, 2019 and 2018 were $10,918 and $7,279, respectively.

In December 2014, the Company entered into a lease for 10,086 square feet of office space in New York, NY, with an unrelated party, expiring on July 31, 2025. The lease commenced on March 1, 2015 and the Company received two months of free rent. Due to free rent and escalating monthly rental payments, utilities, real estate taxes, insurance and other operating expenses, the lease is being recognized on a straight-line basis of $34,065 per month for financial statement purposes.

We determined the present value of the future lease payments using a discount rate of 8.5%, our incremental borrowing rate based on current SBA loan rate, resulting in an initial right-of-use asset of $2,016,142 and lease liability of $2,237,583, which are being amortized ratably over the term of the lease.

In May 2019, the Company entered into a lease of office space in Shenzhen, Guangdong, PRC with an unrelated party, expiring on April 30, 2024. The lease commenced on May 1, 2019. We determined the present value of the future lease payment using a discount rate of 8.5%, our incremental borrowing rate based on current SBA loan rate, resulting in an initial right-of-use asset of $414,157 and lease liability of $399,048, which are being amortized ratably over the term of the lease.

As of June 30, 2019, the balance of the right-of-use asset was $2,310,795, and lease liability was $2,545,878 (including $296,624 for current portion and $2,249,254 for noncurrent portion).

Rent expense was approximately $102,195, $225,078, and $88,081, $204,390 for the three months and six months ended June 30, 2019 and 2018, respectively.

Future minimum lease commitments are as follows on June 30, 2019:

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

The component of deferred tax assets at June 30, 2019 and December 31, 2018 are as follows:

The provision for income taxes and deferred income taxes for the three months and six months ended June 30, 2019 and 2018 are as follows:

The Company conducts business globally and, as a result, files income tax returns in the US federal jurisdiction, state and city, and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including jurisdictions in the US. The Company is subject to income tax examinations of US federal, state, and city for 2018, 2017 and 2016 tax years. The Company is not currently under examination nor has it been notified by the authorities.

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate for the three months and six months ended June 30, 2019 and 2018 is as follows:

Fair values

The Company’s financial instruments from continuing operations approximate include cash and cash equivalents and prepaid expenses and other current assets which approximate to fair value due to their short-term nature and include cash accounts. The Company’s borrowings approximate fair value as the rates of interest are similar to what they would receive from other financial institutions. The carrying amounts of these financial assets and liabilities are a reasonable estimate of their fair values because of their current nature.

The Company’s financial instruments from discontinued operations include cash and cash equivalents, net accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities, advance from customers, and income tax payable. The carrying amounts of these financial instruments are a reasonable estimate of their fair values because of their current nature.

The following table summarizes the carrying values of the Company’s financial assets and liabilities:

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

The Company classifies its fair value measurements in accordance with the three-level fair value hierarchy as follows:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities

Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices), and

Level 3 – Inputs that are not based on observable market data.

The financial assets and liabilities carried at fair value on a recurring basis at June 30, 2019 are as follows:

The financial assets and liabilities carried at fair value on a recurring basis at June 30, 2018 are as follows:

Interest rate and credit risk

Financial instruments that potentially subject the Company to concentrations of credit risks consist principally of cash and cash equivalents, and net accounts receivable. The Company minimizes the interest rate and credit risk of cash by placing deposits with financial institutions located in the United States and Mainland China. Management believes that there is no significant credit risk arising from the Company’s financial instruments.

AMERICAN EDUCATION CENTER, Inc. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

Financial assets past due

The following table provides information regarding the aging of financial assets that are past due, but which are not impaired at June 30, 2019:

The Company determines past due amounts by reference to terms agreed with individual clients. None of the net amounts outstanding have been challenged by the respective clients and the Company continues to conduct business with them on an ongoing basis and does not consider its current accounts receivable to be past due.

The Company did not grant any stock options during the six months ended June 30, 2019.

The following is a summary of stock option activities: