The following discussion and analysis should be read in conjunction with our
audited consolidated financial statements and the accompanying notes thereto
included in "Item 8. Financial Statements and Supplementary Data." In addition
to historical financial information, the following discussion and analysis may
contain forward-looking statements that involve risks, uncertainties and
assumptions. See "Forward-Looking Statements." Our results and the timing of
selected events may differ materially from those anticipated in these
forward-looking statements as a result of many factors.
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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 HK") 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. China VTV HK 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 HK in exchange for all of the issued and outstanding
equity interests of China VTV HK and five individuals who provided prior
services to China VTV HK. As a result, China VTV HK has become our wholly-owned
subsidiary. The acquisition of China VTV HK is treated as a reverse acquisition,
and the business of China VTV became our business.
On December 18, 2019, the Company, VTV Global Culture Media (Beijing) Co., Ltd.,
a Chinese wholly foreign owned entity and a wholly-owned subsidiary of the
Company ("WFOE"), Butterfly Effect Culture Media (Beijing) Co., Ltd., a
corporation formed under the laws of China (the "Target") and each and all of
the shareholders of the Target (each, a "Target Shareholder", and collectively,
"Target Shareholders") entered into a business acquisition agreement (the
"Acquisition Agreement"), pursuant to which the Company through its WFOE agreed
to acquire the Target through a series of management agreements (the "VIE
Agreements") to effectively control and own the Target (the "Acquisition"). In
accordance with the Acquisition Agreement, in consideration for the effective
control over the Target, the Company issued an aggregate of 24,000,000 shares of
its common stock (the "Common Stock") to the Target Shareholders in accordance
with the percentage (the "Target Shareholder Equity Percentage") as set forth in
the Acquisition Agreement. In addition, subject to the terms and conditions in
the Acquisition Agreement, the Company and its subsidiaries agreed to pay a
total of RMB 288,000,000 (the "Cash Consideration") to the Target Shareholders
pro rata with the Target Shareholder Equity Percentage over a period of time as
set forth therein.
Pursuant to the terms and conditions of the Acquisition Agreement, the Company
also agreed to dedicate forty percent (40%) of the net proceeds actually
received in any public or private equity offering (the "Qualified Offering"), in
which the Company raises at least $20,000,000 USD in gross proceeds before
deducting any underwriter or placement agent's discount and commissions and any
offering expenses, to be used to pay the Target Shareholders pro rata with the
Target Shareholder Equity Percentage until the total amount of the Cash
Consideration is paid in full, without the obligation to pay any interest
thereon.
In addition, the Acquisition Agreement provides that in the event that the
Target fails to meet the net profit milestones as set forth in the Acquisition
Agreement, each Target Shareholder shall return the Common Stock or equivalent
amount of cash (the "Claw-back") according to the formula specified in the
Acquisition Agreement. However, subject to the Claw-back provision, the
Acquisition Agreement prescribes that if the Company does not make payments of
at least half of the Cash Consideration to the Target Shareholders within one
(1) year commencing on the first trading day (excluding the first trading day)
of the Common Stock on a national stock exchange, i) the Target shall have the
right to appoint the majority of the Company's Board and manage and operate the
Company and its subsidiaries and ii) each of the Target Shareholders shall have
the right to receive the number of shares of the Common Stock equal to the
result of (the total amount of Cash Consideration - the sum of cash received by
the Target Shareholders)/ $2.00 per share* Target Shareholder Equity Percentage.
The Company completed this acquisition transaction on February 24, 2020 (the
"Closing Date") and acquired Butterfly Effect Media's business.
Butterfly Effect Culture Media is primarily engaging in literary adaptation
business. The Company centers its business on internet Chinese literary and
literary adaptation for television shows, movies, audible books and mobile phone
video games that are primarily distributed through online platforms to provide
marketing and media services to the entertainment industry in China, including
production of media promotion and advertising services to movies, television
shows, actors and commercial products in China. For the year ended February 29,
2020, the focus and revenue stream for the Company was the purchase and sale of
literature copyrights, and licensing of the copyrights to video game software
development companies.
Following the acquisition, the Company plans to operate as a single entity with
two relatively separate but integrated business units, which are 1) the e-media
online streaming platform operated by the Company's Hong Kong subsidiary and 2)
the literary adaptation business whereby the Target adapts original stories or
books into TV shows, movies and mobile video games to be distributed in and
outside the People's Republic of China (the "PRC") through the internet. The
Company is currently exploring the model to distribute contents, such as TV show
episodes, produced by Butterfly Effect Culture Media on our online streaming
platform. While each of the two business units is operating independently of
each other, they are supervised by the board of directors (the "Board") of the
Company and share certain common resources and functions, including, but not
limited to, accounting, business development, an marketing functions. The new
Board after January 10, 2020 has representatives from both the Company and
Butterfly Effect Media.
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Strategic Development with CybEye and Chief Technology Officer
On September 30, 2019, we entered into a strategic development agreement (the
"Strategic Development Agreement") with CybEye Image, Inc. ("CybEye"), pursuant
to which CybEye is developing and providing technical support and maintenance to
the Company's online streaming media OTT Platform and incorporating 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. On December 13, 2019, the Company and CybEye entered into
an amendment to the Licensing Agreement dated September 30, 2019, pursuant to
which the term of the Licensing Agreement was amended to twenty (20) years (from
September 30, 2019 to September 29, 2039) and the Company agreed to issue
2,500,000 shares of its common stock to CybEye as set forth in the Strategic
Development Agreement dated September 30, 2019. A copy of such amendment was
filed in a current report on Form 8-K on December 17, 2019.
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.
Since November 2019, our blockchain-operated App have been available for both
iPhone and Android mobile phone users, and we have been trying to recruit more
mobile phone users to use our App to watch our online media programs.
Change of Directors
On November 29, 2019, the board of directors (the "Board") of the Company
appointed Mr. Bing Liu as a member of the Board and the Company's Chief
Technology Officer ("CTO"), Ms. Gehui Xu and Mr. Chi-Chung Cheng as members of
the Board, effective immediately. Each of Mr. Bing Liu, Ms. Gehui Xu and Mr.
Chi-Chung Cheng serves as a member of the Board until the next annual
shareholder meeting and until his or her successor shall be duly elected and
qualified or his or her early resignation.
Mr. Bing Liu, 60 years old, is the founder and Chief Executive Officer of
CybEye, Inc., which was incorporated in October 2011. He owns fourteen U.S.
patents and has the expertise in social networking platform, internet security,
cloud computing and multi-lingual processing. Mr. Bing Liu received a Bachelor
and a Masters of Computer Science from Tsinghua University in China. The Company
has thus determined that it is in its best interest of the shareholders to
appoint Mr. Liu the CTO and a member of its Board to fill a vacancy on the
Board.
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Ms. Gehui Xu, 51 years old, was a well-known television hostess at China Central
Television Station from 1991 until 1995 and started her career as a television
hostess at Hong Kong Phoenix Television Station in 1996. Ms. Gehui Xu received
the award as one of the Top Ten Television Hostesses in China in 1994. Ms. Gehui
Xu currently hosts three TV programs at Hong Kong Phoenix Television Station.
Ms. Xu received a Bachelor's Degree in English from Beijing Foreign Language
College. Therefore, the Company has determined that it is in its best interest
of the shareholders to elect Ms. Gehui Xu to the Board to fill a vacancy on the
Board.
Mr. Chi-Chung Cheng, 53 years old, has been a director of ETtoday Dongsen News
Cloud Co., Ltd. since 2018. From 2011 to 2018, Mr. Chi-Chung Cheng was the
Chairman, Chief Executive Officer and a director of SMI Holdings Group Limited
(a company previously listed on the Hong Kong Stock Exchange). Mr. Chi-Chung
Cheng received a Bachelor's Degree from Taiwan University and an MBA Degree from
Tsinghua University. Therefore, the Company has determined that it is in its
best interest of the shareholders to appoint Mr. Chi-Chung Cheng to the Board to
fill a vacancy on the Board.
On January 10, 2020, the Board reviewed and accepted Mr. Hongbin Dong's
resignation letter as a member of the Board, effective January 6, 2020. In
addition, on January 10, 2020, the Board appointed Mr. Hongbin Dong as the
Chairman of the supervisory board of the Company effective immediately, where
Mr. Hongbin Dong oversees the general operations of the Company and advises on
the executive compensation.
On January 10, 2020, the Board elected Ms. Qiongfang Shi as a member of the
Board in connection with the Acquisition Agreement with Butterfly Effect,
effective immediately. Ms. Qiongfang Shi serves as a member of the Board until
the next annual shareholder meeting and until her successor shall be duly
elected and qualified or her early resignation.
Ms. Qiongfang Shi, 39 years old, has been a member of the board of directors of
Butterfly Effect since July 2015. Previously Ms. Shi served as the Vice
President of Jiubang Digital Technology (Guangzhou) Co., Ltd. from November 2010
to June 2015. In addition, Ms. Shi has had various roles in the areas of Chinese
literature, sales and marketing and project management. Ms. Qiongfang Shi
received an associate's degree in international accounting from Guangdong
Industry Technical College in 2000, an associate's degree in property management
from Guangzhou Caimao Guanli Ganbu College in 2004, and has been pursuing an MBA
at Communication University of China since September 2019.
Impact of Covid-19
A novel strain of coronavirus, or COVID-19, was first identified in China in
December 2019 and subsequently declared a pandemic in March 11, 2020, by the
World Health Organization. As a result of the COVID-19 pandemic, all travel has
been severely curtailed to protect the health of our employees and comply with
local guidelines, and we temporarily closed our china offices from February to
early March 2020. To date, COVID-19 has surfaced in nearly all regions around
the world and resulted in travel restrictions and business slowdowns in affected
areas. The full impact of the pandemic on our business, operations and financial
results will depend on various factors that continue to evolve which we may not
accurately predict.
Results of Operations
Fiscal Year Ended February 29, 2020 compared to the Fiscal Year Ended February
28, 2019
The following table sets forth our consolidated statements of operations for the
years indicated:
For the Years Ended
February 29, February 28, Dollar
2020 2019 Change
Net Revenue $ 3,834 $ - $ 3,834
Cost of Revenue 1,278 - 1,278
Gross Profit 2,556 - 2,556
Sales and marketing expenses 6,390 - 6,390
Research and Development Expenses 231,791 861,581 (629,790 )
General and Administrative Expenses 1,271,630 13,426 1,258,204
Total Operating Expenses 1,509,811 875,007 634,804
Interest expense 316 - 316
Loss before income tax (1,507,571 ) (875,007 ) (632,564 )
Provision for Income Tax - - -
Net Loss (1,507,571 ) (875,007 ) (632,564 )
Comprehensive Loss $ (1,508,905 ) $ (875,770 ) $ (633,135 )
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Revenue:
During the year ended February 29, 2020, we realized $3,834 in revenue,
representing an increase of $3,834 as compared to $0 for the year ended February
28, 2019, as a result of one-time advertising revenue that was generated by the
Company's subsidiary, China VTV Ltd. The Company acquired China VTV Ltd.,
through a reverse merger transaction, in May 2019.
Cost of Revenue:
Our cost of sales consisted of the fees that we paid to telecommunication
carriers and other service providers for telecommunications and other content
delivery-related services. During the year ended February 29, 2020, we had cost
of revenue of $1,278, compared to $0 during the year ended February 28, 2019, as
a result of the increase in advertising revenue.
Sales and marketing expenses:
Sales and marketing expenses during the year ended February 29, 2020 was $6,390,
an increase of $6,390 from $0 during the year ended February 28, 2019. The
Company did not have any business operations during the year ended February 28,
2019.
Research and Development Expenses:
Research and development expenses mainly consisted of the costs incurred in the
development and improvement of the Company's OTT service platform. Research and
development expenses decreased by $629,790 to $231,791 for the year ended
February 29, 2020, as compared to $861,581 for the year ended February 28, 2019.
The decrease in the research and development expenses was primarily due to the
decrease in the development and technical support cost for our OTT Platform.
During the year ended February 29, 2020, we engaged our business strategic
partner, CybEye Image, Inc. ("CybEye"), in developing and providing technical
support and maintenance to the Company's online streaming media OTT Platform and
incorporating blockchain technologies to the Company's OTT Platform to enhance
security. Pursuant to the "Strategic Development Agreement", entered by the
Company and CybEye, the Company shall issue 2,500,000 shares of its common stock
at one time and forty thousand (40,000) shares its common stock per month to
CybEye during the term of the contract term. In addition, the Company granted
the CybEye's developers stock options to purchase 500,000 shares of the
Company's common stock each year during the term of the employment pursuant to
the stock option agreement. The total share-based compensation of $231,791 was
recognized as research and development expenses for the year ended February 29,
2020.
General and Administrative Expenses:
General and administrative expenses primarily consist of legal, accounting,
other professional service fees, the compensations to the Company's employees,
executives, and directors, and depreciation expenses of the capital assets.
General and administrative expenses were $1,271,630 for the year ended February
29, 2020, as compared to $13,426 for the year ended February 28, 2019,
representing an increase of $1,258,204.
The increase in general and administrative expenses for the year ended February
29, 2020 was primarily attributable to the increase in stock-based compensations
to the Company's executives and directors of $713,415, legal fees of $107,651,
impairment of intangible assets and depreciation expenses of $183,088, accrued
salaries of $146,396, travel expenses of $28,649, and rental expenses of $6,953.
Net Loss:
Our net loss was $1,507,571 for the year ended February 29, 2020, as compared to
$875,007 for the year ended February 28, 2019, representing an increase of
$632,564. The increase in net loss for the year ended February 29, 2020 was
primarily attributable to the stock-based compensations to Cybeye developers and
the Company's executives and directors. The stock-based compensations, totaling
$872,914, were recognized as operating expenses for the year ended February 29,
2020.
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Comprehensive Loss:
Our business operates in Chinese RMB and Hong Kong Dollars, but we report our
results in our SEC filings in U.S. Dollars. The conversion of our accounts from
RMB and Hong Kong Dollars to U.S. Dollars results in translation adjustments,
which are reported as a middle step between net income and comprehensive income.
The net loss is added to the accumulated deficit while the translation
adjustment is added to a line item on our balance sheet labeled "other
comprehensive income," since it is more reflective of changes in the relative
values of U.S. and the foreign currencies than of the success of our business.
During the year ended February 29, 2020, the effect of converting our financial
results to USD was a loss of $1,335 to our other comprehensive income, as
compared to a loss of $763 during the year ended February 28, 2019 as a result
of the currency exchange rate fluctuation.
Liquidity and Capital Resources
Overview
Prior to the acquisitions of China VTV Ltd. ("China VTV HK") and Butterfly
Effect Media, the Company had only nominal operations and did not have any cash
generated from business operations. We funded our operating expenses by
borrowing loans from our related parties. We had cash and cash equivalents of
$51,551 at February 29, 2020, compared to $17,548 at February 28, 2019. As of
February 29, 2020, we have incurred accumulated operating losses of $3,844,738
since inception. As of February 29, 2020, and February 28, 2019, we had a
working capital deficit of $28,066,471 and $598,354, respectively.
During the year ended February 29, 2020, we issued 25.1M common stock shares to
four individual subscribers for gross proceeds of $732,963, in which $114,678
was received and the rest of $618,285 was to be received in the following year.
In May 2019, we acquired China VTV HK that generated 3,834 revenue during the
year ended February 29, 2020. In February 2020, we acquired Butterfly Effect
Culture Media through a series of management agreements (the "VIE Agreements").
In accordance with the Business Cooperation Agreement, in exchange for the
Company's exclusive technical, business and other related consulting services,
the VIE will pay a service fee to the Company, which constitutes 100% of the
VIE's after-tax income, resulting in a transfer of 100% of the net profits from
the VIE to the Company. The service fees shall be due and payable on a monthly
basis, within 30 days after the end of each month. Butterfly Effect Culture
Media has been profitable in the past three years, and its financing
arrangements consist of a revolving credit facility from the Bank of Beijing
that met our short-term liquidity requirements for the past year. During the
next twelve months, we will file a Form S-1, shortly after the filing of our
10-K, to raise approximately $120 million fund; we also plan to raise
approximately $3 million from private placements, and sign additional equity
credit lines of $1.5 million with other banks. We anticipate that the cash
generated from the VIE operations as well as these financing activities will be
sufficient to satisfy our liquidity requirements for the next 12 months.
The following table sets forth a summary of our cash flows for periods
indicated:
For the Years Ended
February 29, February 28,
2020 2019
Net Cash Used in Operating Activities $ (471,808 ) $ (508,322 )
Net Cash Used in Investing Activities (78,466 ) -
Net Cash Provided by Financing Activities 506,476 60,918
Effect of Exchange Rate Changes on Cash and Cash
Equivalents 77,801 413,501
Net Increase (Decrease) in Cash and Cash
Equivalents 34,003 (33,903 )
Cash and Cash Equivalents
Beginning 17,548 51,451
Ending $ 51,551 $ 17,548
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Net Cash Used in Operating Activities
Net cash used in operating activities was $471,808 during the year ended
February 29, 2020, compared to net cash used in operating activities of $508,322
for the year ended February 28, 2019. The decrease in the cash used in operating
activities was primarily due to the increase in accounts payable and wages
payable for the year ended February 29, 2020, compared to the year ended
February 28, 2019.
Net Cash Used in Investing Activities
Net cash used in investing activities was $78,466 during the year ended February
29, 2020, compared to net cash used in investing activities of $0 for the year
ended February 28, 2019. The increase in cash used in investing activities was
primarily due to the purchase of office equipment and furniture, offset by
$33,313 cash proceeds we acquired from the acquisition of Butterfly Effect
Media.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $506,476 during the year ended
February 29, 2020, compared to $60,918 for the year ended February 28, 2019. The
increase in the cash provided by financing activities was primarily due to the
sale of newly issued common stock shares of $114,679 and the $391,797 increase
in the balance of due to related parties during the year ended February 29,
2020, compared to the year ended February 28, 2019.
Net increase in cash and cash equivalents was $34,002 for the year ended
February 29, 2020, compared to net decrease in cash and cash equivalents of
$33,903 for the year ended February 28, 2019.
Summary of Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with U.S.
GAAP requires estimates and assumptions that affect the reported amounts and
classifications of assets and liabilities, revenues and expenses, and the
related disclosures of contingent liabilities in the consolidated financial
statements and accompanying notes. The SEC has defined critical accounting
policies as those policies management believes are most important to the
portrayal of the Company's financial condition and results of operations and
which require the Company to make its most difficult and subjective judgments,
often as a result of the need to make estimates of matters that are inherently
uncertain. Based on this definition, the Company has identified the following
critical accounting policies and estimates addressed below. Our significant
accounting policies are summarized in Note 2, Summary of Significant Accounting
Policies to our Consolidated Financial Statements. The following describes our
critical accounting policies and estimates:
Use of Estimates
Our consolidated financial statements and notes thereto are prepared in
conformity with accounting principles generally accepted in the United States,
which require management to make estimates and assumptions that affect the
amounts reported and disclosed in the consolidated financial statements and the
accompanying notes. Actual results could differ materially from these estimates.
We base our estimates on historical experience, available market information,
appropriate valuation methodologies, and on various other assumptions that we
believe to be reasonable, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Estimates are
used for such items as depreciable lives for long-lived assets including
intangible assets, fair value of stock-based compensations, tax provisions, and
assets and liabilities assumed in business combinations, among others. In
addition, estimates are used to test long-lived assets and goodwill for
impairment.
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Business Combinations
We account for acquired businesses treated as a business combination using the
acquisition method of accounting, which requires that assets acquired and
liabilities assumed be recorded at the date of acquisition at their respective
fair values. Any excess of the purchase price over the estimated fair values of
the net assets acquired is recorded as goodwill. Acquisition-related costs are
expensed as incurred in the consolidated financial statements. Significant
judgments are used in determining the estimated fair values assigned to the
assets acquired and liabilities assumed and in determining estimates of useful
lives of long-lived assets acquired. Estimates of the fair values of assets
acquired and liabilities assumed are based upon assumptions believed to be
reasonable, and when appropriate, include assistance from independent
third-party appraisal firms.
Share-based compensation
We adopted the provision of ASC Topic 718 which requires us to measure and
recognize compensation expenses for an award of an equity instrument based on
the grant-date fair value. The cost is recognized over the vesting period (or
the requisition service period). ASC Topic 718 also requires us to measure the
cost of a liability classified award based on its current fair value. The fair
value of the award will be remeasured subsequently at each reporting date
through the settlement date. Changes in fair value during the requisite service
period are recognized as compensation cost over that period. Further, ASC Topic
718 requires us to estimate forfeitures in calculating the expense related to
stock-based compensation,
The fair value of each option award is estimated on the date of grant using the
Black-Sholes Valuation Model. The expect volatility was based on the historical
volatilities of our listed common stocks in the United States and other relevant
market information. We use historical data to estimate share option exercises
and employee departure behavior used in the valuation model. The expected terms
of share options granted is derived from the output of the option pricing model
and represents the period that share options granted are expected to be
outstanding. Since the share options once exercised will primarily traded in the
U.S. capital market, the risk-free rate for periods within the contractual term
of the share option is based on the U.S. Treasury yield curve in effect at the
time of grant.
Valuation of Goodwill, Intangible Assets and Investments:
As of February 29, 2020, the Company had goodwill of $21,552,596 as a result of
the acquisitions of Butterfly Effect Media. In addition, the Company recognized
intangible assets measured primarily based upon significant inputs that are not
observable in the market and represent Level 3 measurements as defined by ASC
820, Fair Value Measurements.
The Company applies ASC 805, Business Combinations and ASC 350, Intangibles -
Goodwill and Other to account for goodwill and intangible assets. The Company
amortizes all finite-lived intangible assets over their respective estimated
useful lives while goodwill has an indefinite life and is not amortized.
Goodwill is tested for impairment on an annual basis and, when specific
circumstances dictate, between annual tests. As of February 29, 2020, the
carrying amount of the Company's goodwill was considered as the fair value of
the goodwill.
We also perform a review of our purchased-intangible assets whenever events or
changes in circumstances indicate that the useful life is shorter than we had
originally estimated or that the carrying amount of assets may not be
recoverable. If such facts and circumstances exist, we assess the recoverability
of purchased-intangible assets by comparing the projected undiscounted net cash
flows associated with the related asset or group of assets over their remaining
lives against their respective carrying amounts. Impairments, if any, are based
on the excess of the carrying amount over the fair value of those assets. If the
useful life of the asset is shorter than originally estimated, we accelerate the
rate of amortization and amortize the remaining carrying value over the new
shorter useful life. There was no impairment of purchased-intangible assets
identified for the years ended February 29, 2020 and February 28, 2019.
The Company has investments in equity securities. For equity securities that do
not have a readily determinable fair value, we consider forecasted financial
performance of the investee companies, as well as volatility inherit in the
external markets for these investments. If these forecasts are not met,
impairment charges may be recorded.
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Valuation of Income Taxes
We recognize deferred tax assets and liabilities at enacted income tax rates for
the temporary differences between the financial reporting bases and the tax
bases of our assets and liabilities. Any effects of changes in income tax rates
or tax laws are included in the provision for income taxes in the period of
enactment. Our net deferred taxes primarily consist of net operating loss carry
forwards, or NOLs, intangibles and prepaids. We are required to record a
valuation allowance against our net deferred tax assets if we conclude that it
is more likely than not that taxable income generated in the future will be
insufficient to utilize the future income tax benefit from our net deferred tax
assets (namely, the NOLs) prior to expiration. We periodically review this
conclusion, which requires significant management judgment. If we are able to
conclude in a future period that a future income tax benefit from our net
deferred tax assets has a greater than 50% likelihood of being realized, we are
required in that period to reduce the related valuation allowance with a
corresponding decrease in income tax expense. This would result in a non-cash
benefit to our net income in the period of the determination. In subsequent
periods, we would expect to recognize income tax expense equal to our pre-tax
income multiplied by our effective income tax rate, an expense that was not
recognized prior to the reduction of the valuation allowance.
As of February 29, 2020, we had NOLs for United States federal and state tax
purposes, including those NOLs acquired as part of past business combinations,
of $3,068,446 and $506,960, respectively, expiring at various times through
2037. In addition, we had Non-US NOLs of $1,861,468 primarily related to China,
which has no expiration date.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements, "Summary of Significant
Accounting Policies and Practices - Recently Issued Accounting Standards," for
information regarding new accounting pronouncements.
Off-Balance Sheet Arrangements
As of February 29, 2020, there were no off-balance sheet arrangements currently
contemplated by management or in place that are reasonably likely to have a
current or future effect on the business, financial condition, changes in
financial condition, revenue or expenses, result of operations, liquidity,
capital expenditures and/or capital resources.
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CHINA VTV LTD. 
