AMERICAN EDUCATION CENTER, INC. The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the consolidated financial statements of the Company thereto, which appear elsewhere in this Annual Report on Form 10-K, 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 many factors, including those discussed in the "Forward-Looking Statements" set forth elsewhere in this Annual Report on Form 10-K. Overview Leveraging our knowledge of the educational system and environment in theU.S. and our understanding of the market demand 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 experience in theU.S. Our advisory services are specifically designed to address the educational needs of the rising middle-class families inChina . The demand for our advisory services is primarily the result ofChina's decades-long one-child policy, society's focus and emphasis on children's education, and families' desire to gain access toU.S. colleges and universities as well as work experience in theU.S. 24
Having delivered customized ESL training, college and business consulting, and career advisory services to Chinese students and families since 1999, we are one of the most experienced and recognizable holistic solutions providers of education advisory services in theU.S. Through AEC Southern Shenzhen, in fiscal year endedDecember 31, 2020 , we delivered customized high school and college placement and career advisory services to Chinese students wishing to study in theU.S. through referred by AEC New York. Through Zhongwei in fiscal year endedDecember 31, 2020 , we delivered customized high school and college placement and career advisory services through platform for local customers.
Headquartered in
· Placement Advisory Services; · Career Advisory Services; ·Student & Family Services ; and · Other Advisory Services. Placement Advisory Services
Our Placement Advisory Services include Language Training and Placement Advisory, and Elite College 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 obtaining admission toIvy League and other prestigious universities in theU.S. , our Elite College Advisory service is designed to assist qualified Chinese students in applying to prestigious colleges and universities in theU.S. Specifically, we arrange campus tours, assist our student customers with their university applications, provide tailored language training, offer guidance on interview and communication techniques, and follow up on their applications. Once our student customers are admitted into their target universities, our Placement Advisory services further extend to academic and cultural related experiences including, among other things, providing assistance with applying for a second major or minor, transferring to a different university, housing accommodations, and applying for accelerated degrees. To help students optimize their on-campus experience and train their leadership and social skills, we also organize seminars and social events with our partner scholars and universities, non-profit and for-profit business organizations. Additionally, to help enrich their cultural experiences, we organize extracurricular and artistic activities including dance, music, painting, photography, and other performance events. 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. Through this program, our student customers are given opportunities to communicate with professionals in their field of study and to participate in real-world case studies. Our Start-up Advisory program provides advisory services to students and/or their families who want to start or make an investment in a business in theU.S. Collaborating with our strategic partners, 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. 25
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
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 investment projects in theU.S. We also advise corporate clients whose executives are moving to theU.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 inChina to recruit students from theU.S. We customize this service based on our strategic relationship with college and universities in theU.S. and the specific recruitment goals of these universities inChina . The demand for our recruitment services is driven mainly by the lack of an established channel to attract students from theU.S. 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 theU.S. to teach inChina . Such demand covers the need to recruit qualified US educators from Pre K-12
to teach inChina .
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.
· AEC New York capitalizes on the rising demand from the middle-class
families in
It delivers customized high school and college placement and career
advisory services to Chinese students wishing to study in the
advisory services include language training, admission advisory, on-campus
advisory, internship and start-up advisory as well as student and family
services.
· AEC Southern Shenzhen and Zhongwei deliver customized high school and
college placement and career advisory services to Chinese students wishing
to study in the U.S. Significant Accounting Policies
The discussion and analysis of our consolidated financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe 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. The consolidated financial statements are comprised of AEC Nevada and its wholly owned subsidiaries, AEC New York, AEC BVI, and AEC Southern UK (until the disposition of AEC Southern UK onMay 1, 2019 ). All significant intercompany accounts and transactions have been eliminated in consolidation. OnMay 1, 2019 , AEC Nevada sold 100% of the equity interest in AEC Southern UK. We have classified the operating results of AEC Southern UK as discontinued operations in the audited consolidated statement for all periods presented in this annually report on Form 10-K. All significant intercompany accounts and transactions have been eliminated in consolidation. 26
As part of the process of preparing our 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 ofDecember 31, 2019 , 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 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. We adoptedFinancial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2016-02 "Leases (Topic 842)" for the three months and nine months endedSeptember 30, 2019 . We first evaluate our leases to determine whether they are classified as a finance lease or as an operating lease. A lease is a finance lease if any of the following criteria are met: (a) ownership transfers, (b) the lease includes an option to purchase the underlying asset, (c) the lease term is for the major part of the remaining economic life of the underlying asset, (d) the present value of the lease payments equals or exceeds the fair value of the underlying asset, or (e) the underlying asset is of a specialized nature that is expected to have no alternative use to the lessor at the end of the lease term. As such, all of our leases are classified as operating leases. We then determine whether the short-term exemption applies. The short-term exemption applies if the lease term 12 months or less and does not include a purchase option whose exercise is reasonably certain. If the short-term exemption applies then lease payments are recognized as expense and no asset or liability is recorded. If the short-term exemption does not apply, then we record an operating lease right-of-use asset and a corresponding operating lease liability equal to the present value of the lease payments. The ten-year commercial real estate lease we entered into inDecember 2014 did not meet the short-term exemption and, accordingly, we recorded the present value of the lease payments as a right-of-use asset and a lease liability in the unaudited consolidated balance sheet. We recognize expense on a straight-line basis over the life of the lease.
Recent Accounting Pronouncements
InJanuary 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 afterDecember 15, 2019 . Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates afterJanuary 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. InOctober 2018 , the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to the Related Party Guidance for Variable Interest Entities. ASU 2018-17 changes how entities evaluate decision-making fees under the variable interest entity guidance. To determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportional basis, rather than in their entirety. This guidance will be adopted using a retrospective approach and is effective for the Company onJanuary 1, 2020 . The Company has evaluated the effect of the adoption of this ASU and the standard did not have an impact on its consolidated financial statements and related disclosures from the adoption of the new guidance. InDecember 2019 , the FASB issued ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU provides an exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. This update also (1) requires an entity to recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, (2) requires an entity to evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which goodwill was originally recognized for accounting purposes and when it should be considered a separate transaction, and (3) requires that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The standard is effective for the Company for fiscal years beginning afterDecember 15, 2020 , with early adoption permitted. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements. The Company has assessed all newly issued accounting pronouncements released during the year endedDecember 31, 2020 and through the date of this filing and believes none of them will have a material impact on the Company's financial statements when or if adopted. 27 Results of Operations Below we have included a discussion of our operating results and material changes in the periods covered by this Annual Report on Form 10-K. For additional information on the potential risks associated with these initiatives and our operations, please refer to the Risk Factors sections starting on page 14 of this Annual Report on Form 10-K.
Year Ended
For year ended December 31,
2020 2019 Variance %
Key revenue streams:
Placement Advisory Services $ 105,380 $ 1,264,107 $ (1,158,727 ) (92 )%
Career Advisory Services 236,612 3,153,605 (2,916,993 ) (92 )
Student & Family Advisory Services - 887,700 (887,700 ) (100 )
Other Advisory Services 507 3,000 (2,493 ) (83 )
Total revenues $ 342,499 $ 5,308,412 $ (4,965,913 ) (94 )%
Gross Profit $ 174,744 $ 2,213,944 $ (2,039,200 ) (92 )%
Gross Margin 51 % 42 %
Revenues
· Total revenues for the year ended
representing a decrease of
in 2019. The decrease was mainly due to the recent outbreak of the
COVID-19 pandemic around the globe, which negatively impacted our services
to current customers who were getting ready to study or work in the U.S. ,
besides the seasonality factors related to the high school/college
admission process. The outbreak of COVID-19 in China since January 2020 ,
coupled with travels bans from China to the US prevented students from
students from
adversely impacted the financial performance of the Company.
Total revenues for the year ended
the operations of AEC BVI, which deliver customized high school and
college placement and career advisory services to Chinese students seeking
to study in the U.S. · Revenues for the year ended
services decreased by
2019. The decrease in our placement advisory services was due to the
decrease in service requests. For the year ended
revenues from our career advisory services and student & family advisory
services reduced substantially, primarily due to the decreased request
from negative impact of the COVID-19.
We expect the impact of COVID-19 on our business, especially on school
application and career advisory services, will continue in 2021, due to
restrictions on domestic and international travels, delay of the spring
semester and cancellation of overseas exams, as well as difficulty to
obtain valid visas. We will continually monitor the development of theepidemic as well as the impact on our operations and financial performance
and actively adjust our operational strategies and make efforts on cost
control and reducing expenditures. We will also strive to expand our
market in
because the high expectation that the demand for the educational services
will still keep increasing due to the continued population growth in
as well as the increasing disposable income thanks to the increasing level
of urbanization.
· In addition, the Chinese government offers incentives and benefits though
its Talents Policy to Chinese students who return to China to work and
live there. This Talents Policy has encouraged many of our clients who
recently graduated or are about to graduate to go back to
of staying in the
placement advisory and student & family advisory services. Additionally,
the decrease in the value of
restrictive
Chinese students to choose to apply to universities and colleges in
non-
than staying in the
are expanding our local services in the PRC, concentrating on new services
promotion and increasing our mergers and acquisitions efforts by focusing
on researching, identifying prospective targets, negotiating and executing
on this strategy.
28
Gross Profit & Gross Margin
· Our gross profit for the year ended
representing a decrease of
total revenue due to the decrease of services request while we have been
improving efficiency, and efficient work with our vendors, which has been
an intentional effort since 2017.
· Our gross margin was approximately 51% in 2020, as compared to
approximately 42% in 2019.
The following table summarizes changes in operating expenses and provision for income taxes for the periods presented:
For the year ended December 31,
2020 2019 Variance %
Operating expenses
Sales and marketing $ 74,321 $ 317,248 $ (242,927 ) (77 )%Research and development expenses 26,570 -
26,570 100 General and administrative 3,520,076 3,763,455 (243,379 ) (6 ) Total operating expenses$ 3,620,967 $ 4,080,703 $ (459,736 ) (11 )% Income taxes benefit$ (446,824 ) $ (31,472 ) $ (415,352 ) NM
Net (loss) from continuing operations
including noncontrolling interest
NM %
Operating Expenses
· Total operating expenses decreased by
year ended December 31, 2019 . The decrease mainly represents the net
effect of the decrease of the operational office expenses, and the
increase of the professional fee and marketing expense.
Income Tax Benefit
· Income tax expense of $446,824 for the year ended December 31, 2019
represents the net effect of tax payable reversal and net loss for the
period.
Net Loss
· The net loss of
mainly to the decrease in revenue.
Liquidity and Capital Resources
Discontinued Operations OnMay 1, 2019 , the Company sold AEC Southern UK to three individuals, Ye Tian, Rongxia Wang andWeishou Li . As a result, (1) the financial results of AECSouthern UK were reflected in our consolidated statement of income, retrospectively, as discontinued operations beginning in the first quarter of 2019; and (2) the related assets and liabilities associated with AEC Southern UK in the consolidated balance sheet for the three months endedSeptember 30, 2018 andDecember 31, 2018 , respectively, are classified as discontinued operations. See "Note 5 - Discontinued Operations" to our unaudited consolidated financial statements included in this report. 29
As ofDecember 31, 2020 , we had cash of$ 911,658 , a decrease of$123,737 from$1,035,395 as ofDecember 31, 2019 . We have financed our operations primarily through cash flow from operating and financing 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.
Year Ended December 31,
2020 2019 Variance %
Net cash used in operating activities
Net cash used in continuing operating
activities $ (877,658 ) $ (1,600,034 ) $ 722,376 NM %
Net cash used in by discontinued
operating activities - - - NM
Net cash used in operating activities
NM %
Net cash used in investing activities
Net cash used in continuing investing
activities $ 97,219 $ (7,011 ) $ 104,230 NM %
Net cash used in discontinued
investing activities - - - NM
Net cash used in investing activities
NM %
Net cash provided by financing
activities
Net cash provided by continuing
financing activities $ 674,611 $ 655,024 $ 19,587 3 %
Net cash provided by discontinued
financing activities - - - NM
Net cash provided by financing
activities $ 674,611 655,024 19,587 3 %
Effect of exchange rates changes on
cash (17,909 ) 2,283 (20,192 ) NM
Net change in cash $ (123,737 ) $ (949,738 ) $ 826,001 NM %
Cash Flow from Operating Activities
· Net cash used in operating activities for the year ended December 31 ,
2020, was
$1,600,034 for the year endedDecember 31, 2019 . · These changes are primarily attributable to the combination of the following: seasonality, where a significant portion of our clients engage our services in the fourth quarter of the fiscal year.
Cash Flow from Investing Activities
· Net cash provided by investing activities for the year ended
2020 was $97,219 from acquisition of new business and net cash used
investing activities was $7,011 during the year ended December 31, 2019 .
Cash Flow in Financing Activities
· Net cash provided by financing activities for the year ended
2020 was
ended December 31, 2019 was $655,024 . The decrease represents the net
effect of the repayment of the short-term loan, the receipts of the
short-term loans from stockholder of $536,457 and the fund from SBA due to
the outbreak of pandemic.
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was
enacted on
was informed by its lender,
Bank received approval from the
to fund the Company's request for a loan under the SBA's Paycheck
Protection Program ("PPP Loan") created as part of the recently enacted
CARES Act administered by the SBA. Per the terms of the PPP Loan, the
Company received total proceeds of
with the requirements of the CARES Act, the Company intends to use the
proceeds from the PPP Loan primarily for payroll costs. The PPP Loan has a
1.00% interest rate, and is subject to the terms and conditions applicable
to all loans made pursuant to the Paycheck Protection Program as
administered by the SBA under the CARES Act. The PPP Loan Forgiveness has
been applied. As of the date of this report, such application is still
pending for approval.
On April 24, 2020 , AEC New York received an advance in the amount of
$9,000 from the U.S. Small Business Administration ("SBA") under the
Economic Injury Disaster Loan ("EIDL") program administered by the SBA,
which program was expanded pursuant to the CARES Act. On June 1, 2020,
Company received approval for a loan under the SBA's EIDL program from
SBA. Per the terms of the EIDL, the Company received total proceeds of
$150,000 . The EIDL Loan has a 3.75% interest rate, and is subject to the
terms and conditions applicable to all loans made pursuant to the EIDLProgram as administered by the SBA. Company has used all the proceeds of
this loan solely as working capital to alleviate economic injury caused by
COVID-19 occurring in 2020.
30
Working Capital
The following table sets forth our working capital.
Year ended December 31,
2020 2019 Variance %
Total current assets $ 1,266,151 $ 4,163,050 $ (2,896,899 ) (70 )%
Total current liabilities 3,579,624 4,147,871 (568,247 ) (14 )
Working capital $ (2,313,473 ) $ 15,179 $ (2,328,652 ) NM %
Current ratio 0.35 1.00
· As of
a decrease of $2,328,652 from a working capital surplus of $15,179 as of
December 31, 2019 . The decrease in working capital surplus was
attributable mainly to uncollectible accounts receivable from AEC NewYork. Because some of our client companies were suffered from the outbreak
of the pandemic, we'll continue tracking and keeping in touch with them.
· 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 incuradditional 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.
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 customers,
specifically our placement advisory, career advisory and student andfamily services, all related to business of AEC New York. 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 admissions. 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 academic year, i.e. the fall semester.
Subsequent Events Management has evaluated subsequent events for recognition and disclosure through the date these financial statements were filed with theUnited States Securities and Exchange Commission and concluded that no other subsequent event or transactions have occurred that required recognition or disclosure in our consolidated financial statements.
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