Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This section of this Form 10-Q includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.
Organization and Business Operations
China VTV Limited (the “Company,” “we,” “us,” or “our”) was incorporated under the laws of the State of Nevada on February 19, 2015. On February 9, 2018, we filed with the Nevada Secretary of State to change the name of our corporation from “T-Bamm” to “China VTV Limited”.
China VTV Ltd. (“China VTV”) was incorporated on January 9, 2015 under the laws of Hong Kong. The business of China VTV is developing an Over-The-Top (the “OTT”) streaming media platform that distributes streaming media as a standalone product directly to viewers over the Internet, bypassing telecommunications, multichannel television, and broadcast television platforms that traditionally act as a controller or distributor of such content. The Company provides news, entertainment shows, TV episodes and other programs on its website and social media accounts.
Pursuant to the Share Exchange Agreement dated March 15, 2019, on May 6, 2019, we issued an aggregate of 115,550,000 shares of our common stock to the shareholders of China VTV in exchange for all of the issued and outstanding equity interests of China VTV and five individuals who provided prior services to China VTV. As a result, China VTV has become our wholly-owned subsidiary. The acquisition of China VTV is treated as a reverse acquisition, and the business of China VTV became our business.
We have generated limited revenue to date and consequently our operations are subject to all risks inherent in the establishment of a new business enterprise. During the period from inception, February 19, 2015, through August 31, 2019, we had an accumulated deficit of $3,132,436.
Going Concern
Our auditor has indicated in their report on our financial statements for the fiscal year ended February 28, 2019, that conditions exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses from operations, deficit in equity, and the need to raise additional capital to fund operations. A “going concern” opinion could impair our ability to finance our operations through the sale of debt or equity securities.
Strategic Development with CybEye
On September 30, 2019, we entered into a strategic development agreement (the “Strategic Development Agreement”) with CybEye Image, Inc. (“CybEye”), pursuant to which CybEye will develop and provide technical support and maintenance to the Company’s online streaming media OTT Platform and incorporate blockchain technologies to the Company’s OTT Platform to enhance security. CybEye is a mobile video-messaging APP platform company that builds customized applications for various industries. The Strategic Development Agreement shall continue in full force and effect until September 29, 2022. During the term of the Strategic Development Agreement, CybEye will develop the OTT Platform only for the Company, and will not engage in providing any services to other media companies. Subject to the terms and conditions of the Strategic Development Agreement, the Company shall issue to CybEye two million and five hundred thousand (2,500,000) shares of its unissued and registered common stock at one time and forty thousand (40,000) shares its unissued and registered common stock per month during the term of the Strategic Development Agreement upon the effectiveness of a registration statement to register those shares. Pursuant to the terms of the Strategic Development Agreement, upon listing of the Company’s common stock on a national stock exchange market, the Company shall make a cash payment of $150,000 to CybEye instead of the stock payment at the end of each whole month for CybEye’s services pursuant to this Agreement.
In connection with the Strategic Development Agreement, on September 30, 2019, the Company and CybEye entered into a non-exclusive licensing agreement (the “Licensing Agreement”), pursuant to which the Company and its affiliates were granted a fully-paid perpetual non-exclusive right and license to use and develop any intellectual property and proprietary information, including, without limitation, any patents and trademarks as set forth in Schedule A thereto, which CybEye owns, to carry out the purposes and goals of the Strategic Development Agreement.
In addition, on September 30, 2019, the Company and Mr. Bing Liu (the “Executive”) entered into an executive employment agreement (the “Executive Employment Agreement”), in accordance with which, subject to the approval of the board of directors of the Company (the “Board”), the Executive shall be elected as a member of the Board and the Chief Technology Officer (“CTO”) of the Company. The Executive Employment Agreement has a term (the “Term”) of three (3) years, unless terminated earlier pursuant to the termination provisions therein. In accordance with the Employment Agreement, the Executive shall receive incentive stock options to purchase five hundred thousand (500,000) shares of the Company’s common stock each year during the Term of the employment pursuant to the stock option agreement (the “Stock Option Agreement”). Upon termination of the Strategic Development Agreement, the Executive Employment Agreement shall also be terminated, unless otherwise mutually agreed in writing. In connection with the Executive Employment Agreement, on September 30, 2019 (the “Grant Date”), the Company and the Executive entered into the Stock Option Agreement under the Company’s 2019 stock plan (the “Plan”), whereby the Company issued the Executive options (the “Options”) to purchase an aggregate of five hundred thousand (500,000) shares of the Company’s common stock, at an exercise price of $12.00 per share. The Stock Option Agreement provides that the Options shall become exercisable on September 29, 2020, one year from the Grant Date, and shall expire on September 29, 2026. Subject to the terms of the Stock Option Agreement and Plan, the Options shall vest in equal amounts each quarter from the Grant Date.
Copies of the Strategic Development Agreement, Licensing Agreement, Executive Employment Agreement and Stock Option Agreement were filed in a current report on Form 8-K on October 3, 2019.
As of the date of this quarterly report, our blockchain-operated App is available for iPhone users and CybEye and we are testing the Android version of the mobile App. We expect that Android phone users will have access to our programs though our new mobile App in the near future.
Results of Operations
Three Months Ended August 31, 2019, Compared to Three Months Ended August 31, 2018
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For The Three Months Ended
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August 31,
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2019
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|
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2018
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|
|
|
|
|
|
|
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Net revenue
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$
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3,828
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|
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$
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-
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Cost of revenue
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1,276
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|
|
|
-
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Gross profit
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2,552
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|
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-
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Research and development expenses
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|
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-
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|
|
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-
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General and administrative expenses
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117,030
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17,520
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Total operating expense
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117,030
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17,520
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Loss from operations before income taxes
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(114,478
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)
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(17,520
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)
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Provision for income tax
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-
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|
|
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-
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Net loss
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$
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(114,478
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)
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$
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(17,520
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)
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Revenue
During the three months ended August 31, 2019, we generated revenue of $3,828, 100% increase compared to $0 during the three months ended August 31, 2018, as a result of one-time advertising income.
Cost of Revenue
Cost of Revenue mainly consisted of the fees we pay to telecommunications carriers and other service providers for telecommunications and other content delivery-related services. During the three months ended August 31, 2019, we had cost of revenue of $1,276, 100% increase compared to $0 during the three months ended August 31, 2018, as a result of the increase in advertising revenue.
Research and Development Expenses
We did not engage in any research and development activities during the three months ended August 31, 2019 and 2018.
General and Administrative Expenses
General and administrative expenses increased by $99,510, or 568%, to $117,030 for the three months ended August 31, 2019, as compared to $17,520 for the three months ended August 31, 2018. The increase in general and administrative expenses was primarily due to the increase in professional legal fees of $60,722, the increase in executive compensation of $15,885, and the increase in travel expenses of $12,147 during the three months ended August 31, 2019, compared to the same period ended in August 31, 2018.
Net Loss
Our net loss increased by $96,958, or 553%, to $114,478 for the three months ended August 31, 2019, as compared to $17,520 for the three months ended August 31, 2018. The increase in net loss was a result of the increase in general and administrative expenses.
Six Months Ended August 31, 2019, Compared to Six Months Ended August 31, 2018
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For The Six Months Ended
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August 31,
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2019
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|
|
2018
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|
|
|
|
|
|
|
|
Net revenue
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$
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3,828
|
|
|
$
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-
|
|
Cost of revenue
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|
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1,276
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|
|
|
-
|
|
Gross profit
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|
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2,552
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-
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Research and development expenses
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-
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862,142
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General and administrative expenses
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220,069
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34,134
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Total operating expense
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220,069
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896,276
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Loss from operations before income taxes
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(217,517
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)
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(896,276
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)
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Provision for income tax
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-
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|
|
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-
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Net loss
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$
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(217,517
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)
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$
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(896,276
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)
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Revenue
During the six months ended August 31, 2019, we generated revenue of $3,828, 100% increase compared to $0 during the six months ended August 31, 2018, as a result of one-time advertising revenue.
Cost of Revenue
Cost of Revenue mainly consisted of the fees we pay to telecommunications carriers and other service providers for telecommunications and other content delivery-related services. During the six months ended August 31, 2019, we had cost of revenue of $1,276, 100% increase compared to $0 during the six months ended August 31, 2018, as a result of the increase in advertising revenue.
Research and Development Expenses
Research and development expenses mainly consist of the costs incurred in the development and improvement of the Company’s OTT service platform. Research and development expenses decreased by $862,142, or 100%, to $0 for the six months ended August 31, 2019, as compared to $862,142 for the six months ended August 31, 2018. The decrease in those expenses was primarily because we did not engage in any research and development activities for the six months ended August 31, 2019.
General and Administrative Expenses
General and administrative expenses increased by $185,935, or 545%, to $220,069 for the six months ended August 31, 2019, as compared to $34,134 for the six months ended August 31, 2018. The increase in general and administrative expenses was primarily due to the increase in professional legal fees of $56,153, the increase in executive compensation of $87,169, and the increase in travel expenses of $19,995 during the six months ended August 31, 2019, compared to the same period ended in August 31, 2018.
Net Loss
Our net loss decreased by $678,759, or (76)%, to $217,517 for the six months ended August 31, 2019, as compared to $896,276 for the six months ended August 31, 2018. The decrease in net loss was a result of the decrease in research and development expenses, offset by the increase in general and administrative expenses.
Capital Resources and Liquidity
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For the Six Months
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Ended August 31,
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2019
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2018
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Net cash provided by (used in) operating activities
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100,319
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|
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(925,254
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)
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Net cash used in investing activities
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(111,166
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)
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-
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Net cash provided by financing activities
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-
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894,539
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Net decrease in cash and cash equivalents
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(10,847
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)
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(30,715
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)
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Cash and Cash Equivalents
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Beginning
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17,548
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51,451
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Ending
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$
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6,701
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$
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20,736
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As of August 31, 2019, we had cash and cash equivalent of $6,701 compared to $17,548 as of February 28, 2019. We will have to seek funding from outside sources to satisfy our liquidity requirements for the next three months. As of August 31, 2019, we had incurred operating losses of $3,132,436 since the inception. As of August 31, 2019, we had a working capital deficit of $922,087.
Net cash provided by operating activities was $100,319 during the six months ended August 31, 2019, compared to net cash used in operating activities of $925,254 for the six months ended August 31, 2018. The increase in the cash provided by operating activities was primarily due to the decrease in net loss and the increase in net proceeds provided by related parties for working capital purpose during the six months ended August 31, 2019.
Net cash used in investing activities was $111,166 during the six months ended August 31, 2019, compared to $0 for the six months ended August 31, 2018. The increase in net cash used in investing activities was due to the purchase of office equipment and furniture during the six months ended August 31, 2019.
Net cash provided by financing activities was $0 during the six months ended August 31, 2019, compared to $894,539 for the six months ended August 31, 2018. The decrease in net cash provided by financing activities was primarily because we did not have capital contribution from shareholder during the six months ended August 31, 2019.
Our net change in cash and cash equivalents was $(10,847) for the six months ended August 31, 2019 and $(30,715) for the six months ended August 31, 2018.
Going Concern
We require additional funding to meet its ongoing obligations and to fund anticipated operating losses. Our auditor has expressed substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on raising capital to fund its initial business plan and ultimately to attain profitable operations. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
We expect to incur marketing, professional and administrative expenses as well expenses associated with maintaining our filings with the Commission. We will require additional funds during this time and will seek to raise the necessary additional capital. If we are unable to obtain additional financing, we may be required to reduce the scope of our business development activities, which could harm our business plans, financial condition and operating results. Additional funding may not be available on favorable terms, if at all. We intend to continue to fund its business by way of equity or debt financing and advances from related parties. Any inability to raise capital as needed would have a material adverse effect on our business, financial condition and results of operations.
If we cannot raise additional funds, we will have to cease business operations. As a result, our common stock investors would lose all of their investment.
Off-balance sheet arrangements
As of August 31, 2019, other than the situation described in the section titled Capital Recourses and Liquidity, we had no off-balance sheet arrangements that had or were reasonably likely to have a current or future effect or change on the company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the company is a party, under which the company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Critical Accounting Policies and Estimates
Basis of Presentation
The interim financial information referred to above has been prepared and presented in conformity with accounting principles generally accepted in the United States of America applicable to interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. The interim financial information has been prepared on a basis consistent with prior interim periods and years and includes all disclosures that are necessary and required by applicable laws and regulations. This report on Form 10-Q should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended February 28, 2019.
Principal of Consolidation
The accompanying consolidated financial statements, including the accounts of the Company and its wholly-owned subsidiary, China VTV Ltd., a Hong Kong corporation. All material intercompany accounts, transactions, and profits have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with original maturities of three months or less, when purchased, to be cash and cash equivalents. As of August 31, 2019, and February 28, 2019, the Company had $6,701 and $17,548 in cash and cash equivalents, respectively.
Property, Plant, and Equipment
Property, plant, and equipment is carried at cost net of accumulated depreciation. Repairs and maintenance are expensed as incurred. Expenditures that improve the functionality of the related asset or extend the useful life are capitalized. When property and equipment is retired or otherwise disposed of, the related gain or loss is included in operating income. Leasehold improvements are depreciated on the straight-line method over the shorter of the remaining lease term or estimated useful life of the asset. Depreciation is calculated on the straight-line method, including property, plant, and equipment under capital leases, generally based on the following useful lives:
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Estimated Life
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Office Equipment and Furniture
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3 years
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Impairment of Long-Lived Assets:
The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates its long-lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed to be reported at the lower of the carrying amount or the fair value less costs to sell.
Reclassification
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. The reclassification had no impact on previously reported net loss nor accumulated deficit.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to a customer. Topic 606 requires the Company to recognize revenues when control of the promised goods or services and receipt of payment is probable. The Company recognizes revenue based on the five criteria for revenue recognition established under Topic 606: 1) identify the contract, 2) identify separate performance obligations, 3) determine the transaction price, 4) allocate the transaction price among the performance obligations, and 5) recognize revenue as the performance obligations are satisfied.
The Company adopted Topic 606 effective March 1, 2019 and began to generate revenue during the six months ended August 31, 2019. The Company sells advertising services to third-party advertising agencies and advertisers. Advertising contracts are signed to establish the price and advertising services to be provided. Pursuant to the advertising contracts, the Company provides advertisement placements on its OTT platform in different formats, including but not limited to video, banners, links, logos, brand placement and buttons. The Company performs a credit assessment of the customer to assess the collectability of the contract price prior to entering into contracts. For contracts where the Company provides customers with multiple performance obligations, primarily for advertisements to be displayed in different spots, placed under different forms and occur at different times, the Company would evaluate all the performance obligations in the arrangement to determine whether each performance obligation is distinct. Consideration is allocated to each performance obligation based on its standalone selling price and revenue is recognized as each performance obligation is satisfied by displaying the advertisements in accordance with the advertising contracts.
Research and Development Expenses
Research and development costs are generally expensed as incurred. Research and development expenses mainly consist of the costs incurred in the development and improvement of the Company’s OTT service platform. Research and development expenses were $0 and $862,142 for the six months ended August 31, 2019 and 2018, respectively.
Translation Adjustment
The accounts of China VTV were maintained, and its financial statements were expressed, in Hong Kong Dollar (“HKD”). Such financial statements were translated into U.S. Dollars (“$” or “USD”) in accordance ASC 830, “Foreign Currency Matters”, with the HKD as the functional currency. Pursuant to the ASC 830, all assets and liabilities are translated at the current exchange rate, stockholders’ equity (deficit) are translated at the historical rates, and income statement items are translated at an average exchange rate for the period.
The resulting translation adjustments are reported under accumulated other comprehensive income (loss) as a component of stockholders’ equity (deficit).
Comprehensive Income (Loss)
Comprehensive income (loss) includes accumulated foreign currency translation gains and losses. The Company has reported the components of comprehensive income (loss) on its consolidated statements of stockholders’ equity (deficit) and consolidated statements of operations and comprehensive income (loss).
Fair Value Measurements
FASB ASC 820, “Fair Value Measurements” defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It requires that an entity measure its financial instruments to base fair value on exit price, maximize the use of observable units and minimize the use of unobservable inputs to determine the exit price. It establishes a hierarchy which prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy increases the consistency and comparability of fair value measurements and related disclosures by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the assets or liabilities based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy prioritizes the inputs into three broad levels based on the reliability of the inputs as follows:
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·
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Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Valuation of these instruments does not require a high degree of judgment as the valuations are based on quoted prices in active markets that are readily and regularly available.
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·
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Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable as of the measurement date, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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·
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Level 3 – Valuations based on inputs that are unobservable and not corroborated by market data. The fair value for such assets and liabilities is generally determined using pricing models, discounted cash flow methodologies, or similar techniques that incorporate the assumptions a market participant would use in pricing the asset or liability.
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The carrying values of certain assets and liabilities of the Company, such as accounts payable and accrued expenses, approximate to fair value due to their relatively short maturities.
Recently Issued Accounting Pronouncements
Management has considered all recent accounting pronouncements issued and their potential effect on the consolidated financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on its consolidated financial statements.