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 ("China VTV"), formerly known as T-Bamm., was incorporated in
the State of Nevada on February 19, 2015 and is a holding company which has not
carried out substantive business operations of its own.
China VTV Ltd. ("China VTV HK") was incorporated on January 9, 2015 under the
laws of Hong Kong. China VTV HK provided a 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 "Butterfly Effect") and each and
all of the shareholders of the Butterfly Effect (each, a "Butterfly Effect
Shareholder", and collectively, "Butterfly Effect Shareholders") entered into a
business acquisition agreement (the "Acquisition Agreement"), pursuant to which
the Company through its WFOE agreed to acquire the Butterfly Effect through a
series of management agreements (the "VIE Agreements") to effectively control
and own the Butterfly Effect (the "Acquisition"). In accordance with the
Acquisition Agreement, in consideration for the effective control over the
Butterfly Effect, the Company issued an aggregate of 24,000,000 shares of its
common stock (the "Common Stock") to the Butterfly Effect Shareholders in
accordance with the percentage (the "Butterfly Effect 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 Butterfly Effect Shareholders pro rata with the Butterfly Effect
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 Butterfly Effect Shareholders pro rata
with the Butterfly Effect 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
Butterfly Effect fails to meet the net profit milestones as set forth in the
Acquisition Agreement, each Butterfly Effect 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 Butterfly Effect
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
Butterfly Effect 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 Butterfly Effect 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 Butterfly Effect Shareholders)/
$2.00 per share* Butterfly Effect Shareholder Equity Percentage.
The Company completed this acquisition transaction on February 24, 2020 (the
"Closing Date") and acquired Butterfly Effect Media's business.
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Butterfly Effect 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, China VTV Limited and its consolidated subsidiaries
and variable interest entities ("VIE") are referred collectively herein as the
"Company". The Company plans to focus on the businesses of outdoor LED billboard
advertisement in South Asia, Australia, the U.S., Taiwan and the People's
Republic of China (the "PRC"); the e-media online streaming platform; and the
literary adaptation whereby the Company adapts original stories or books into TV
shows, movies and mobile video games that will be distributed outside PRC
through the internet. The Company is currently exploring the model to distribute
contents, such as TV show episodes, produced by the Company on its online
streaming platform.
Consumer
As of August 31, 2020, the Company had approximately 3.82 million viewers and
subscribers, and most of them reside in Malaysia, Singapore, Australia, Canada,
Hong Kong, Taiwan, Indonesia, India, Thailand, the U.S. and other countries and
regions, including mainland China.
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.
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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 platform has 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 programs.
Impact of Covid-19
A novel strain of coronavirus, COVID-19, was first identified in China in
December 2019 and subsequently declared a pandemic on 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 and
resumed the office operations in 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
Three and Six Months Ended August 31, 2020 compared to Three and Six Months
Ended August 31, 2019
The following table sets forth selected financial information from our
statements of comprehensive income for the three months ended August 31, 2020
and 2019:
For the Three Months Ended
August 31, August 31, Dollar
2020 2019 Change
Net Revenue $ 3,024,268 $ 3,828 $ 3,020,440
Cost of Revenue 1,261,904 1,276 1,260,628
Gross Profit 1,762,364 2,552 1,759,812
General and Administrative Expenses 1,558,470 117,030 1,441,440
Income (Loss) from Operations
203,894 (114,478 ) 318,372
Interest Expense (11,530 ) - (11,530 )
Other Loss (308 ) - (308 )
Income (Loss) Before Income Tax 192,056 (114,478 ) 306,534
Provision for Income Tax - - -
Net Income (Loss) 192,056 (114,478 ) 306,534
Comprehensive Income (Loss) $ 742,766 $ (114,366 ) $ 857,132
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The following table sets forth selected financial information from our
statements of comprehensive income for the six months ended August 31, 2020 and
2019:
For the Six Months Ended
August 31, August 31, Dollar
2020 2019 Change
Net Revenue $ 6,745,886 $ 3,828 $ 6,742,058
Cost of Revenue 2,843,471 1,276 2,842,195
Gross Profit 3,902,415 2,552 3,899,863
General and Administrative Expenses 2,884,987 220,069 2,664,918
Income (Loss) from Operations
1,017,428 (217,517 ) 1,234,945
Interest Expense (27,072 ) - (27,072 )
Other Loss (19,082 ) - (19,082 )
Income (Loss) Before Income Tax 971,274 (217,517 ) 1,188,791
Provision for Income Tax - - -
Net Income (Loss) 971,274 (217,517 ) 1,188,791
Comprehensive Income (Loss) $ 1,428,496 $ (217,632 ) $ 1,646,128
Revenue:
During the three and six months ended August 31, 2020, we realized $3,024,268
and $6,745,886 in revenue, representing an increase of $3,020,440 and
$6,742,058, respectively, as compared to $3,828 in revenue for the three and six
months ended August 31, 2019. The revenues were generated from sales of
literature copyrights and licensing of copyrights to video game software
development companies. Prior to the acquisition of Butterfly Effect in February
2020, we did not conduct any significant revenue generating activities. During
the three and six months ended August 31, 2019, we only generated revenue of
$3,828 as a result of one-time advertising income.
Cost of Revenue
Our cost of sales primarily consisted of direct production cost of audiobooks
and related production overhead. During the three and six months ended August
31, 2020, we had cost of revenue of $1,261,904 and $2,843,471, respectively,
compared to $1,276 during the three and six months ended August 31, 2019, as a
result of the increase in revenue.
Cost of Revenue during the three and six months ended August 31, 2019 mainly
consisted of the fees we pay to telecommunications carriers and other service
providers for telecommunications and other content delivery-related services.
General and Administrative Expenses
General and administrative expenses primarily consisted of accrued salaries and
benefits for the Company's executives, directors and administrative staff,
depreciation and amortization expenses, legal and other professional service
fees, and rental expenses. General and administrative expenses were $1,558,470
and $2,884,987 for the three and six months ended August 31, 2020, as compared
to $117,030 and $220,069 for the three and six months ended August 31, 2019,
representing an increase of $1,441,440 and $2,664,918, respectively.
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The increase in general and administrative expenses for the three and six months
ended August 31, 2020 were primarily attributable to the increase in
depreciation and amortization expenses of $631,440 and $1,229,589, salaries and
benefits accruals for the Company's executives, directors and administrative
staff of $565,535 and $1,099,442, legal and other professional service fees of
$130,427 and $147,447, rental expenses of $47,772 and $117,599, and other office
and miscellaneous expenses of $50,688 and $55,263.
Net Income (Loss):
Our net income were $192,056 and $971,274 for the three and six months ended
August 31, 2020, as compared to a losses of $114,478 and $217,517 for the three
and six months ended August 31, 2019, representing an increase of $306,534 and
$1,188,791, respectively. Prior to the acquisitions of China VTV HK and
Butterfly Effect, the Company had only nominal operations and did not conduct
any revenue generating activities. The Company substantially expanded its
business operations in the beginning of its first fiscal quarter in 2020 through
business combination transactions.
Comprehensive Income (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 three and six months ended August 31, 2020, the effect of converting
our financial results to USD were gains of $607,812 and $373,737 to our other
comprehensive income, as compared to a gain of $112 and a loss of $115 during
the three and six months ended August 31, 2019, respectively, as a result of the
currency exchange rate fluctuations.
Liquidity and Capital Resources
Overview
The Company substantially expanded its business operations in the beginning of
its first fiscal quarter in 2020 through mergers and acquisitions. For the six
months ended August 31, 2020, we had net cash inflow of $686,896 from
operations, compared to the same quarter of the prior year's net cash outflow of
$87,019.We expect to expand our business and grow our revenue with consistent
operating profitability. We believe that cash flow from operations, financing
arrangements, and cash on hand will adequately fund our operations for, at
least, the next twelve months.
The following table sets forth a summary of our cash flows for periods
indicated:
For the Six Months Ended
August 31, August 31,
2020 2019
Net Cash Provided by (Used in) Operating Activities $ (1,932,996 ) $ (133,408 )
Net Cash Provided by Investing Activities
2,963,314 (111,166 )
Net Cash Provided by (Used in) Financing Activities (925,919 ) 233,727
Effect of Exchange Rate Changes on Cash and Cash
Equivalents 2,725 -
Net Increase (Decrease) in Cash and Cash Equivalents 107,124 (10,847 )
Cash and Cash Equivalents
Beginning 51,551 17,548
Ending $ 158,675 $ 6,701
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Net Cash Provided by (Used in) Operating Activities
Net cash used in operating activities was $1,932,996 during the six months ended
August 31, 2020, compared to net cash provided by operating activities of
$133,408 for the six months ended August 31, 2019, reflecting an increase in the
amount of $1,799,588. The increase in the cash provided by operating activities
was primarily due to the increase in net income from the business operations,
the increase in deferred revenue, and the decrease in advances to suppliers,
other receivables and tax payable, partly offset by the increase in accrued
expenses and inventories, compared to the six months ended August 31, 2019.
Net Cash Provided by and Used in Investing Activities
Net cash provided by investing activities was $2,963,314 during the six months
ended August 31, 2020, compared to net cash used in investing activities of
$111,166 for the six months ended August 31, 2019. The increase in cash used in
investing activities in the amount of $3,074,480 was primarily due to
acquisition of new copyrights in amount of $1,336,005, offset by the receipt of
$4,300,336 net cash proceeds from the sale of 15% interest in a Company's 86.5%
owned subsidiary.
Net Cash Provided by (Used in) Financing Activities
Net cash used in financing activities was $925,919 during the six months ended
August 31, 2020, compared to the net cash provided by financing activities of
$233,727 for the six months ended August 31, 2019. The increase in the cash used
in financing activities in the amount of $1,159,646 was primarily due to the
decrease in the balance of due to related parties and short-term debt during the
six ended months ended August 31, 2020, offset by the proceeds of $102,060
received from shareholders, compared to the six months ended August 31, 2019.
Net increase in cash was $109,644 for the six months ended August 31, 2020,
compared to net decrease in cash and cash equivalents of $10,847 for the six
months ended August 31, 2019.
Sources of Liquidity
The principal sources of liquidity are derived from cash flows from operations,
available borrowings including the related parties' advances under our existing
financing arrangements, proceeds from private placements, and existing cash on
hand.
Uses of Liquidity
The Company's requirements for liquidity and capital resources are generally for
the purposes of operating activities and capital expenditures.
Critical Accounting Policies
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.
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Reclassification
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation. The reclassification had
no impact on previously reported net loss nor accumulated deficit.
Advances to Suppliers
The Company advances funds to certain authors or publishers for the purchase of
literature copyrights and productions. Based on management's assessment, no
allowance for advances to suppliers is required at the balance sheet date.
Inventories
Inventories comprises work-in-progress which are stated at the lower of cost or
net realizable value. Costs include direct production cost of audiobooks and
related production overhead. The cost of inventories is calculated on a
title-by-title basis. Any excess of the cost over the net realizable value of
each item of inventories is recognized as a loss in the statement of operations.
Net realizable value is the estimated selling price in the normal course of
business less any costs to complete and sell products.
Copyrights
Copyrights consist of payments made to holders for use of the copyrights during
the licensed term. Amortization of capitalized copyrights commences when the
copyrights is available for use by the Company and is recorded on a
title-by-title basis in statement of operations over the licensed term, ranging
from 3 to 10 years. Copyrights are stated at the lower of amortized cost or net
realizable value. The valuation of copyrights is reviewed on a title-by-title
basis when an event or change in circumstances indicated that the fair value of
a copyright is less than its unamortized cost.
Revenue Recognition
The Company adopted Topic 606 effective March 1, 2019 and recognizes revenue
based on the five criteria for revenue recognition that are 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 began to generate revenue during the year ended February 29, 2020.
The Company sells advertising services to third-party advertising agencies and
advertisers. Advertising contracts are signed to establish the price and specify
the advertising services to be provided. Pursuant to the advertising contracts,
the Company provides advertisement placements on its APP 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 customers
to assess the collectability of the revenue 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 occurred 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.
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The Company sells copyrights of scripts and original stories to third parties,
and sells the video and audio products to internet content platforms for broad
distribution, upon the finishing of the production of TV shows, movies, audible
books or video games. Revenue from the sales of copyrights, original stories,
and finished products are recognized when the Company delivers products and
passes its contractual rights or copyrights to the customers in accordance with
the sales contracts. Prepayments for sales of product is recorded as deferred
revenue and is generally recognized as revenue when the production is completed,
and the product is transferred, or copyrights have been passed to customers and
collectability is reasonably assured.
The Company also grants licenses to third parties for using its literary
copyrights. Revenue derived from licenses of the Company's literal copyrights
and original stories, which provide customers with a right to use the
intellectual properties as they exist and are available to customers, are
recognized at the point of time when the intellectual property is made available
to customers.
For revenue from licensing of literal copyrights where the Company continues to
develop the product or provide maintenance services, the Company recognizes the
fixed fee proportionately over the licensing term. For royalty derived from
licensing of literature copyrights, as revenue, it is recognized when sales or
usage occurs based upon the licensee's usage reports. When these reports are not
available, revenue is recognized based on historical data, industry information
and other relevant trends.
Deferred Revenue
Deferred revenue, primarily relating to licensing fees, is stated at the amount
of licensing fees received less the amount previously recognized as revenue over
the terms of the respective literary licensing contracts.
Stock-Based Payments
The Company follows the provisions of ASC Topic 718, Compensation - Stock
Compensation ("ASC 718"), which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees,
non-employee directors, and consultants, including employee stock options. Stock
compensation expense, which is based on the grant date's fair value estimated in
accordance with the provisions of ASC 718, is recognized as an expense over the
requisite service period, and the Company made a policy election to recognize
forfeitures when they occur.
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model, which requires assumptions regarding the expected
volatility of the stock price, the expected lifetime of the options, an
expectation regarding future dividends on the Company's common stock, and
estimation of an appropriate risk-free interest rate. The Company's expected
common stock price volatility assumption is based upon the historical volatility
of the stock price of some similar companies due to limited history of our own
stock price. The expected lifetime assumption for stock options grants was based
upon the simplified method provided under ASC 718-10, which averages the
contractual term of the options with the vesting term. The dividend yield
assumption of zero is based upon the fact that the Company has never paid cash
dividends in the past and has presently no intention of paying cash dividends in
the future. The risk-free interest rate used for each grant was based upon the
prevailing short-term interest rates over the expected lifetime of the options.
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Translation Adjustment
The accounts of China VTV and Butterfly Effect were maintained, and their
financial statements were expressed, in Hong Kong Dollar ("HKD") and Chinese
Yuan (RMB), respectively. Such financial statements were translated into U.S.
Dollars ("$" or "USD") in accordance ASC 830, "Foreign Currency Matters", with
the HKD and RMB as the functional currencies. 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).
Impairment of Long-Lived Assets and Goodwill
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.
Goodwill represents the excess of the purchased consideration over the fair
value of the identifiable tangible and intangible assets acquired and
liabilities assumed of the acquired entity as a result of the Company's
acquisitions of interests in VIE and its subsidiaries. Goodwill is not amortized
but is tested for impairment on an annual basis, or more frequently if events or
changes in circumstances indicate that it might be impaired. The Company first
assesses the qualitative factors to determine whether it is necessary to perform
the two-step quantitative goodwill impairment test. In the qualitative
assessment, the Company considers primary factors such as industry and market
considerations, overall financial performance of the reporting unit, and other
specific information related to the operations. Based on the qualitative
assessment, if it is more likely than not that the fair value of each reporting
unit is less than the carrying amount, the quantitative impairment test will be
performed. Application of a goodwill impairment test requires significant
management judgment.
Fair Value Measurements
The Company has adopted FASB Accounting Standard Codification Topic on Fair
Value Measurements and Disclosures ("ASC 820"), which defines fair value,
establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. ASC 820 establishes a three-level
valuation hierarchy of valuation techniques based on observable and unobservable
input, which may be used to measure fair value and include the following:
Level 1 - quoted prices (unadjusted) in active markets that are accessible at
the measurement date for identical assets and liabilities. The fair value
hierarchy gives the highest priority to Level 1 inputs.
Level 2 - observable prices that are based on inputs not quoted on active
markets but corroborated by market data; and
Level 3 - unobservable inputs when there is little or no market data available,
thereby requiring an entity to develop its own assumptions. The fair value
hierarchy gives the lowest priority to Level 3 inputs.
The carrying values of certain assets and liabilities of the Company approximate
to fair value due to their relatively short maturities.
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Noncontrolling Interests
For the Company's non-wholly owned subsidiaries, a noncontrolling interest is
recognized to reflect the portion of equity that is not attributable, directly
or indirectly, to the Company. Consolidated net income in the consolidated
income statements includes net income (loss) attributable to noncontrolling
interests.
Basic and Diluted Earnings (Loss) Per Share
Pursuant to ASC 260-10-45, basic loss per common share is computed by dividing
net loss by the weighted average number of shares of common stock outstanding
for the periods presented. Diluted loss per share is computed by dividing net
loss by the weighted average number of shares of common stock, common stock
equivalents and potentially dilutive securities outstanding during the period.
Potentially dilutive common shares consist of common stock issuable for stock
warrants (using the treasury stock method) and common shares issuable upon the
conversion of convertible notes payable (using the as-if converted method).
These common stock equivalents may be dilutive in the future.
All potentially dilutive common shares were excluded from the computation of
diluted shares outstanding as they would have an anti-dilutive impact on the
Company's net losses and consisted of the following:
August 31, August 31,
2020 2019
Stock options 500,000 -
500,000 -
Income Taxes
The Company accounts for income taxes under ASC 740. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period including the enactment date. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
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.
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