The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
|
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 HK owns 100% equity interest in Qianhai Education Consulting Management Co.,
Ltd., a foreign wholly owned subsidiary incorporated pursuant to the PRC laws (“AEC Southern Shenzhen”) on March 29,
2016, with a registered capital of RMB 5,000,000.
The Company’s corporate
structure is as follows:
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARies
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
|
1.
|
ORGANIZATION AND BUSINESS (continued)
|
Headquartered in New York with
operations in the PRC (People’s Republic of China), 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 compliance training and advisory services to corporate clients
in China in the food industry to help them comply with local food safety regulations and standards. Currently, its training program
focuses on food industry regulatory compliance in various geographical regions of Nanning, Qingdao and Shenzhen, ISO compliance,
human resources management and organizational management.
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARies
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Consolidation and
Presentation
The accompanying unaudited condensed
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 condensed 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, 2016 filed with the SEC on April 17, 2017.
Cash
Cash consists of all cash balances
and liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are carried
at net realizable value. The Company maintains an allowance for doubtful account, 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. At September 30, 2017 and December 31, 2016, the allowance for doubtful accounts was
$108,300 and $63,000, respectively.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
|
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 condensed
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 compliance 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 compliance 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 AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
|
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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Income Taxes
(continued)
ASC 740 also addresses the determination
of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under
ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is “more likely than not”
that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on derecognition of
income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for
interest and penalties associated with tax positions. At September 30, 2017 and December 31, 2016, 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”)
The Company is subject to corporate
income tax in the US at 34%. Provisions for income taxes in the United States have been made for taxable income the Company had
in the US for the three and nine months ended September 30, 2017 and 2016.
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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
|
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.
At September 30, 2017 and December 31, 2016, 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
condensed 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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
|
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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
|
3.
|
RECENTLY ISSUED ACCOUNTING STANDARDS
|
In May 2014, the FASB issued
Accounting Standards Update (the “ASU”) No. 2014-09, "
Revenue from Contracts with Customers (Topic 606)
.''
This guidance supersedes current guidance on revenue recognition in Topic 605, "
Revenue Recognition
.'' In addition,
there are disclosure requirements related to the nature, amount, timing, and uncertainty of revenue recognition. In August 2015,
the FASB issued ASU No.2015-14 to defer the effective date of ASU No. 2014-09 for all entities by one year. For public business
entities that follow U.S. GAAP, the deferral results in the new revenue standard being effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for interim and annual periods
beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-12, “
Revenue from Contracts with Customers
,”
with respect to Principal versus Agent Considerations. In April 2016, the FASB issued ASU No. 2016-12, “
Revenue from Contracts
with Customers
,” with respect to Identifying Performance Obligations and Licensing. In April 2016, the FASB additionally
issued ASU No. 2016-12, “
Revenue from Contracts with Customers
,” with respect to Narrow-Scope Improvements and
Practical Expedients. In December 2016, the FASB issued ASU No. 2016-20, “
Revenue from Contracts with Customers
,”
with respect to Technical Corrections and Improvements. The Company does not believe the adoption will have a material impact on
its consolidated financial statements.
In April 2016, FASB issued ASU
No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments
clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance.
The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for
the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments
for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018,
for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after
December 15, 2016, including interim reporting periods within that reporting period. The Company does not anticipate that this
adoption will have a significant impact on its consolidated financial position, results of operations, or cash flows.
In May 2016, the FASB issued
ASU No. 2016-11,Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of
Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, which is rescinding
certain SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition. The Company does not anticipate that this
adoption will have a significant impact on its consolidated financial position, results of operations, or cash flows.
In May 2016, FASB issued ASU
No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which is intended
to not change the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing
the potential for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both
at transition and on an ongoing basis. The Company does not anticipate that this adoption will have a significant impact on its
consolidated financial position, results of operations, or cash flows.
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 March 2016, the FASB issued
ASU 2016-09, Compensation – Stock Compensation (ASC 718): Improvements to Employee Share-Based Payment Accounting. The objective
is to identity, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can
be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas
for simplification include the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. Some of the areas apply only to nonpublic entities. For public business entities, the ASU is effective
for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities,
the ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning
after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts
the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that
interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The adoption of ASU 2016-09
did not impact 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 its consolidated financial statements.
In August 2016, the FASB
has issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash
flows. The amendments provide guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt
Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates
That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments
Made after a Business Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of
Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from
Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and
Application of the Predominance Principle. The amendments are effective for public business entities for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are
effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after
December 15, 2019. Early adoption is permitted, including adoption in an interim period. The amendments should be applied
using a retrospective transition method to each period presented. If it is impracticable to apply the
amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the
earliest date practicable. The Company expects that the adoption of this ASU would not have a material impact on the
Company’s consolidated financial statements.
In November 2016, the FASB issued
ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. The amendments address diversity in practice that exists in the classification
and presentation of changes in restricted cash on the statement of cash flows. The amendment is effective for public companies
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not anticipate
that this adoption will have a significant impact on its consolidated financial position, results of operations, or cash flows.
In January 2017, the FASB issued
ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business. The amendments in this ASU is to clarify
the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting
including acquisitions, disposals, goodwill, and consolidation. The amendments are effective for public business entities for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments
in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning
after December 15, 2019. The Company does not believe the adoption of this ASU would have a material effect on its consolidated
financial statements.
In January 2017, the FASB issued
ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic
323). The amendments amended Accounting Changes and Error Corrections (Topic 250) to state that registrants should consider additional
qualitative disclosures if the impact of an issued but not yet adopted ASU is unknown or cannot be reasonably estimated and to
include a description of the effect of the accounting policies that the registrant expects to apply, if determined. Transition
guidance included in certain issued but not yet adopted ASUs was also updated to reflect this amendment. The Company does not expect
that the adoption of this guidance will have a material impact on its consolidated financial statements.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
|
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. At September 30, 2017, the Company’s US bank accounts had cash balances in excess
of federally insured limits of approximately $409,000. The Company performs ongoing evaluation of its financial institutions to
limit its concentration of risk exposure. Management believes this risk is not significant due to the financial strength of the
financial institutions utilized by the Company.
The following table represents
major customers that individually accounted for more than 10% of the Company’s gross revenue for the nine months ended September
30, 2017 and 2016:
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Revenue
|
|
|
Percentage
|
|
|
Accounts
Receivable
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
$
|
12,180,697
|
|
|
|
59.8
|
%
|
|
$
|
3,376,689
|
|
|
|
51.1
|
%
|
Customer 2
|
|
|
2,826,640
|
|
|
|
13.9
|
%
|
|
|
2,244,716
|
|
|
|
34.0
|
%
|
Customer 3
|
|
|
2,376,125
|
|
|
|
11.7
|
%
|
|
|
301,219
|
|
|
|
4.6
|
%
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Revenue
|
|
|
Percentage
|
|
|
Accounts
Receivable
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
$
|
1,621,590
|
|
|
|
33.2
|
%
|
|
$
|
468,650
|
|
|
|
58.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer 2
|
|
|
814,000
|
|
|
|
16.7
|
%
|
|
|
-
|
|
|
|
-
|
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
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 student & family 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 compliance 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 nine months ended September 30, 2017
|
|
|
|
AEC New York
|
|
|
AEC Southern UK
|
|
|
Total
|
|
Segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compliance training & advisory
|
|
$
|
-
|
|
|
$
|
15,007,337
|
|
|
$
|
15,007,337
|
|
Placement advisory
|
|
|
677,640
|
|
|
|
-
|
|
|
|
677,640
|
|
Career advisory
|
|
|
2,438,035
|
|
|
|
-
|
|
|
|
2,438,035
|
|
Student & Family advisory
|
|
|
2,256,130
|
|
|
|
-
|
|
|
|
2,256,130
|
|
Total revenue
|
|
$
|
5,371,805
|
|
|
$
|
15,007,337
|
|
|
$
|
20,379,142
|
|
Gross profit
|
|
$
|
1,776,618
|
|
|
$
|
4,931,595
|
|
|
$
|
6,708,213
|
|
|
|
For the three months ended September 30, 2017
|
|
|
|
AEC New York
|
|
|
AEC Southern UK
|
|
|
Total
|
|
Segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compliance training & advisory
|
|
$
|
-
|
|
|
$
|
3,738,741
|
|
|
$
|
3,738,741
|
|
Placement advisory
|
|
|
141,432
|
|
|
|
-
|
|
|
|
141,432
|
|
Career advisory
|
|
|
841,290
|
|
|
|
-
|
|
|
|
841,290
|
|
Student & Family advisory
|
|
|
494,280
|
|
|
|
-
|
|
|
|
494,280
|
|
Total revenue
|
|
$
|
1,477,002
|
|
|
$
|
3,738,741
|
|
|
$
|
5,215,743
|
|
Gross profit
|
|
$
|
468,135
|
|
|
$
|
856,808
|
|
|
$
|
1,324,943
|
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
|
5.
|
SEGMENT REPORTING (continued)
|
|
|
For the nine months ended September 30, 2016
|
|
|
|
AEC
New York
|
|
|
AEC Southern UK
|
|
|
Total
|
|
Segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Placement advisory
|
|
|
958,618
|
|
|
|
-
|
|
|
|
958,618
|
|
Career advisory
|
|
|
1,302,074
|
|
|
|
-
|
|
|
|
1,302,074
|
|
Student & Family advisory
|
|
|
2,619,922
|
|
|
$
|
-
|
|
|
$
|
2,619,922
|
|
Total revenue
|
|
$
|
4,880,614
|
|
|
$
|
-
|
|
|
$
|
4,880,614
|
|
Gross profit
|
|
$
|
981,582
|
|
|
$
|
-
|
|
|
$
|
981,582
|
|
|
|
For the three months ended September 30, 2016
|
|
|
|
AEC
New York
|
|
|
AEC Southern UK
|
|
|
Total
|
|
Segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Placement advisory
|
|
|
18,550
|
|
|
|
-
|
|
|
|
18,550
|
|
Career advisory
|
|
|
400,000
|
|
|
|
-
|
|
|
|
400,000
|
|
Student & Family advisory
|
|
$
|
551,409
|
|
|
$
|
-
|
|
|
$
|
551,409
|
|
Total revenue
|
|
|
969,959
|
|
|
|
|
|
|
|
969,959
|
|
Gross profit
|
|
$
|
175,686
|
|
|
$
|
-
|
|
|
$
|
175,686
|
|
|
|
September 30, 2017
|
|
|
|
AEC New York
|
|
|
AEC Southern UK
|
|
|
Total
|
|
Segment assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
2,449,870
|
|
|
$
|
9,070,512
|
|
|
$
|
11,520,382
|
|
Segment liabilities
|
|
$
|
2,297,525
|
|
|
$
|
3,288,198
|
|
|
$
|
5,585,723
|
|
|
|
December 31, 2016
|
|
|
|
AEC New York
|
|
|
AEC Southern UK
|
|
|
Total
|
|
Segment assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
2,878,133
|
|
|
$
|
6,619,460
|
|
|
$
|
9,497,593
|
|
Segment liabilities
|
|
$
|
2,925,200
|
|
|
$
|
1,780,710
|
|
|
$
|
4,705,910
|
|
The Company had only one segment,
AEC New York, during the three and nine months ended September 30, 2016.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
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 September 30, 2017, the remaining deferred compensation was $145,833.
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 September 30, 2017, the remaining deferred compensation was $2,291,668.
Future amortization of the deferred
compensation is as follows:
Year Ending December 31,
|
|
|
|
|
|
|
|
2017
|
|
$
|
292,500
|
|
2018
|
|
|
1,170,000
|
|
2019
|
|
|
975,001
|
|
|
|
|
|
|
Total
|
|
$
|
2,437,501
|
|
Stock compensation expense was
$292,500, $877,500, $0, and $0 for the three and nine months ended September 30, 2017 and 2016, respectively.
The Company has security deposits
with the landlord for its New York office of $266,021 as of September 30, 2017 and December 31, 2016.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
The Company’s customized
online campus system is being amortized on a straight-line basis over four and a half years. The gross carrying amount and accumulated
amortization of this asset as of September 30, 2017 and December 31, 2016 are as follows:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Intangible asset
|
|
$
|
612,814
|
|
|
$
|
612,814
|
|
Less: accumulated amortization
|
|
|
(136,181
|
)
|
|
|
(34,045
|
)
|
|
|
|
|
|
|
|
|
|
Intangible asset - net
|
|
$
|
476,633
|
|
|
$
|
578,769
|
|
For the three and nine months
ended September 30, 2017 and 2016, amortization expense was $34,045, $102,136, $0, and $0, respectively.
The following table is the future
amortization expense to be recognized:
Year Ending December 31,
|
|
|
|
|
|
|
|
2017
|
|
$
|
34,045
|
|
2018
|
|
|
136,181
|
|
2019
|
|
|
136,181
|
|
2020
|
|
|
136,181
|
|
2021
|
|
|
34,045
|
|
|
|
|
|
|
Total
|
|
$
|
476,633
|
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSE CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
The
Company receives advance payments for services to be performed and recognizes revenue when services have been rendered. The deferred
revenue at September 30, 2017 and December 31, 2016 was $100,000 and $177,132, respectively.
|
10.
|
RELATED-PARTY TRANSACTIONS
|
The
loan from stockholders of $113,906 as of September 30, 2017 and December 31, 2016, represented an unsecured non-interest bearing
loan, arising from expenses paid on behalf of the Company. The loan was due on demand and was repaid in full on November 4, 2017.
The
Company’s CEO has a 34% interest in Columbia International College, Inc. (“CIC”). In the normal course of business,
the Company conducts certain transactions with CIC. Included in accounts receivable is an amount due from CIC of $21,500 as of
September 30, 2017 and December 31, 2016. The Company paid $0, $0, $25,000, and $245,000 for consulting services to CIC for the
three and nine months ended September 30, 2017 and 2016, respectively.
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 $110,000 as of September
30, 2017 and December 31, 2016, respectively. 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2017 AND 2016
On December 1, 2014, an unrelated
party loaned the Company $295,579, with interest at 10%. The loan 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
and nine months ended September 30, 2017 and 2016 was $7,389, $22,167, $7,389, and $22,167, respectively. The Company repaid $150,000
on November 10, 2017.
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 $34,066 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 (see Note 10). The sublease commenced on March
1, 2016 and terminated on June 30, 2017. The sublease income was netted against the Company’s rent expense. Rent expense
was approximately $102,198, $200,159, $33,000 and $168,000 for the three and nine months ended September 30, 2017 and 2016, respectively.
Future minimum lease commitments
are as follows:
Year Ending December 31,
|
|
Gross Lease
Payment
|
|
|
|
|
|
2017
|
|
$
|
93,164
|
|
2018
|
|
|
378,862
|
|
2019
|
|
|
388,333
|
|
2020
|
|
|
418,604
|
|
2021
|
|
|
439,350
|
|
2022 and thereafter
|
|
|
1,666,383
|
|
|
|
|
|
|
Total
|
|
$
|
3,384,696
|
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
The component of deferred tax
assets at September 30, 2017 and December 31, 2016 is as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
-
|
|
|
|
162,954
|
|
Allowance for doubtful accounts
|
|
|
44,540
|
|
|
|
28,350
|
|
Accelerated Depreciation
|
|
|
(11,104
|
)
|
|
|
(12,150
|
)
|
Deferred tax asset
|
|
|
33,436
|
|
|
|
179,154
|
|
Valuation allowance
|
|
|
-
|
|
|
|
(81,218
|
)
|
Deferred tax asset, net
|
|
$
|
33,436
|
|
|
$
|
97,936
|
|
The provision for income taxes
for the three and nine months ended September 30, 2017 and 2016 are as follows:
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(28,753
|
)
|
|
$
|
(24,007
|
)
|
|
$
|
85,795
|
|
|
$
|
(24,007
|
)
|
State
|
|
|
(14,734
|
)
|
|
|
4,906
|
|
|
|
51,462
|
|
|
|
4,956
|
|
Foreign
|
|
|
(38,147
|
)
|
|
|
-
|
|
|
|
184,698
|
|
|
|
-
|
|
Total current
|
|
|
(81,634
|
)
|
|
|
(19,101
|
)
|
|
|
321,955
|
|
|
|
(19,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
10,217
|
|
|
|
(56,927
|
)
|
|
|
49,300
|
|
|
|
(73,719
|
)
|
State
|
|
|
(7,386
|
)
|
|
|
-
|
|
|
|
15,200
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
2,831
|
|
|
|
(56,927
|
)
|
|
|
64,500
|
|
|
|
(73,719
|
)
|
Total
|
|
$
|
(78,803
|
)
|
|
$
|
(76,028
|
)
|
|
$
|
386,455
|
|
|
$
|
(92,770
|
)
|
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 UNADUTED CONDENSE CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017 AND 2016
|
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 and nine months ended
September 30, 2017 and 2016 is as follows:
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State and local taxes, net of federal benefit
|
|
|
(14.8
|
)
|
|
|
10.8
|
|
|
|
4.3
|
|
|
|
10.8
|
|
Net operating losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(10.7
|
)
|
|
|
-
|
|
Tax impact of foreign operations
|
|
|
(32.6
|
)
|
|
|
-
|
|
|
|
(8.5
|
)
|
|
|
-
|
|
Reversal valuation allowance
|
|
|
-
|
|
|
|
-
|
|
|
|
5.5
|
|
|
|
-
|
|
Over accrual
|
|
|
30.5
|
|
|
|
-
|
|
|
|
0.7
|
|
|
|
-
|
|
Tax adjustment
|
|
|
79.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-deductible/non-taxable items
|
|
|
-
|
|
|
|
14.6
|
|
|
|
-
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
96.3
|
%
|
|
|
59.4
|
%
|
|
|
25.3
|
%
|
|
|
52.5
|
%
|
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARies
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED September 30, 2017 AND 2016
The Company didn't grant any
options during the three and nine months ended September 30, 2017.
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, 2016
|
|
|
3,200,000
|
|
|
$
|
2.45
|
|
|
|
6.87 years
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled and expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
3,200,000
|
|
|
$
|
2.45
|
|
|
|
6.12 years
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2017
|
|
|
870,000
|
|
|
$
|
1.42
|
|
|
|
4.65
years
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
870,000
|
|
|
$
|
1.42
|
|
|
|
4.65 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 and nine months ended September 30, 2017 and 2016.
There was no compensation expense
related to all the above options because the value ascribed to these options was not material.
AMERICAN
EDUCATION CENTER, Inc. AND SUBSIDIARies
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED September 30, 2017 AND 2016
The Company’s management has performed subsequent events
procedures through November 14, 2017, which is the date the consolidated financial statements were available to be issued. There
were no subsequent events requiring adjustment to or disclosure in the consolidated financial statements except for the following.
Appointment of Certain Officers
On August 29, 2017, Mr. Jonathan F. McKeage
left his position as the Chief Executive Officer (“CEO”) of the Company because Mr. McKeage’s employment agreement
with the Company ended on August 28, 2017. Mr. McKeage will remain as a senior advisor of the Company, assisting Mr. Max P. Chen,
Chairman and Sole Director of the Company in the implementation of the its strategic and business plan. On August 28, 2017, Mr.
Max P. Chen was appointed by the Board of Directors of the Company (the “Board”) to serve as the Company’s CEO,
effective on August 29, 2017. The Company entered into an Employment Agreement with Mr. Chen on August 29, 2017 for a term of three-year
period that renews annually unless terminated by either party.
On September 28, 2017, Mr. Anthony S. Chan,
CPA was appointed by the Board to replace Mr. Max P. Chen as the Company’s CFO, effective on October 1, 2017. The Company
entered into an Employment Agreement with Mr. Chan on September 28, 2017 (the “Employment Agreement”) for a term of
three-year period unless terminated according to the Employment Agreement.
Series A Convertible Preferred Stock Issuance
On October 30, 2017, the Company entered
into a Share Purchase Agreement (the “Share Purchase Agreement”) with China Cultural Finance Holdings Company Limited,
a British Virgin Islands corporation (the “Purchaser”) pursuant to which the Company will issue 500,000 shares (the
“Shares”) of the Company’s Series A Convertible Preferred Stock, par value $0.001 per share (the “Series
A Preferred Stock”), at price of $4 per Share (the “Purchase Price Per Share”) to the Purchaser, with the rights,
privileges and preferences set forth in the Certificate of Designation of Series A Convertible Preferred Stock (the “Certificate
of Designation”), for the aggregate price of Two Million Dollars ($2,000,000) (the “Purchase Price”).
On November 3, 2017, the Company designated
and issued to the Purchaser, 500,000 shares as Series A Convertible Preferred Stock (the “Preferred Stock”) out of
the 20,000,000 authorized number of preferred shares of the Company, par value $0.001 per share.
Pursuant to the Share Purchase Agreement,
the Company will use its commercially reasonable efforts to apply to be listed on the NASDAQ Capital Market or such other national
securities exchange as is reasonably acceptable to the Purchaser (the “National Exchanges”), so that the Company’s
common stock (the “Common Stock”) will commence trading on one of the National Exchanges (the “Uplisting”)
within 365 days after the Closing Date (the “Uplisting Deadline”). Each and every outstanding shares of Preferred Stock
will automatically convert, without the payment of additional consideration by the holder thereof (the “Mandatory Conversion”)
if and when Uplisting occurs (the “Mandatory Conversion Commencement”), into fully paid and non-assessable shares of
Common Stock, at a conversion price which shall be the lesser of (i) $4.00 or (ii) 90% of the offering price in the occurrence
of a secondary public offering of the Company’s Common Stock pursuant to a registration statement on Form S-1 (the “Conversion
Price”). The Conversion Price will be subject to adjustment in the event of reorganization, reclassification, consolidation
or merger.