Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended
June
30, 2022
Note
1. Basis of Presentation
While
the information presented in the accompanying June 30, 2022 financial statements is unaudited, it includes all adjustments which are,
in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the periods
presented in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). In
the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position
have been included and all such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with US GAAP have been condensed or omitted. These financial statements should be read
in conjunction with the Company’s September 30, 2021 audited financial statements (and notes thereto). Operating results for the
three and nine months ended June 30, 2022 are not necessarily indicative of the results that can be expected for the year ending September
30, 2022.
The
accompanying unaudited condensed consolidated financial statements herein contain the operations of Virtual Interactive Technologies
Corp (“VRVR”), and its wholly-owned subsidiaries Advanced Interactive Gaming Inc. (“AIG Inc.”) and Advanced Interactive
Gaming Ltd. (“AIG Ltd”) (collectively, the “Company”). All significant intercompany amounts have been eliminated.
Note
2. Business
Nature
of Operations
Advanced
Interactive Gaming, Ltd. (“AIG Ltd”) was incorporated in Bermuda on September 19, 2016, and is in the business of assisting
in the development of video games through investments and royalty contracts. AIG Ltd had several royalty contracts with video game development
companies during the past three years.
On
September 24, 2019, AIG Ltd was acquired by Advanced Interactive Gaming, Inc. (“AIG Inc”), a Colorado Corporation, through
a reverse recapitalization and share exchange agreement. After the transaction, AIG Ltd became a wholly owned subsidiary of AIG Inc.
Virtual
Interactive Technologies Corp. (f/k/a Mascota Resources, Corp.) was incorporated in the State of Nevada on November 3, 2011. On September
25, 2019, Mascota Resources, Corp. effected a name change to Virtual Interactive Technologies Corp. (“VRVR”), and a 20:1
reverse stock split applicable to all existing VRVR shareholders of record. The effects of the split have been retroactively applied
to all periods presented.
On
September 27, 2019, AIG Inc effected a reverse recapitalization via a share exchange agreement with VRVR, resulting in AIG Inc becoming
a wholly-owned subsidiary of VRVR.
VRVR
finances the development of video game projects to be released on various popular gaming platforms in exchange for a royalty stream on
the games. To date the Company has financed several gaming titles including Carmageddon Max Damage, Carmageddon Crashers, Interplanetary:
Enhanced Edition, Catch & Release and Worbital. Collectively these games are distributed world-wide on various gaming platforms including
Sony PlayStation, Xbox, Steam and Oculus among others. In addition to financing solutions, VRVR offers expertise in development solutions,
publishing and marketing video game products and is actively involved in the early stages of VR/AR game development. VRVR continues to
reinvest its royalty income into growing its royalty contracts and intellectual property in the video game development industry.
The
Company’s strategy moving forward is to continue to invest in new game development through partnerships and royalty contracts.
Management believes that there is significant opportunity in VR games given the relatively early stage in the product cycle and the growing
need for content to support VR hardware sales. While the Company has historically participated mostly in the PC and console market, it
will continue to explore addition opportunities in the gaming space as they present themselves. In addition, VRVR may explore strategic
alliances and acquisitions in order to expand its business.
Use
of Estimates
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain
reported amounts and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could differ from those estimated.
Cash
Equivalents
The
Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents. The
Company had no cash equivalents at June 30, 2022 or September 30, 2021.
Fair
Value of Financial Instruments
The
Company accounts for fair value measurements in accordance with accounting standard ASC 820-10-50, “Fair Value Measurements.”
ASC 820 defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures. The three levels are defined as follows:
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1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
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Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
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Level
3 inputs to valuation methodology are unobservable and significant to the fair measurement. |
The
Company’s financial instruments consist of cash, royalties receivable, notes receivable and related accrued interest receivable,
accounts payable and accrued expenses, and notes payable and related accrued interest payable. The carrying value of these financial
instruments approximates fair value due to the short-term nature of the instruments.
Research
and Development
The
costs incurred for the development of computer software to be sold, leased, or otherwise marketed are accounted for in accordance
with ASC 985-20, Costs of Software to be Sold, Leased or Marketed. The Company expenses all research and development
costs incurred prior to technological feasibility. Capitalization is required when technological feasibility has been established, which
generally occurs when all planning, design, coding and testing activities are completed that are necessary to establish that the product
can be produced to meet its design specifications, including functions, features and technical performance requirements. The establishment
of technological feasibility is an ongoing assessment of judgment by management with respect to certain external factors, including,
but not limited to, anticipated future revenues, estimated economic life and changes in technology. Capitalized software includes
direct labor and related expenses for software development for new products and enhancements to existing products and acquired software.
Amortization
of capitalized software development costs begins when the product is available for general release. Amortization is provided on
a product-by-product basis using the straight-line method over periods between 3 to 5 years. Unamortized capitalized software development
costs determined to be in excess of the net realizable value of the product are expensed immediately.
Capitalized
software costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies
at least annually at September 30, and whenever events or circumstances make it more likely than not that impairment may have occurred.
In the event of impairment, unamortized capitalized software costs are compared to the net realizable value of the related product
and the carrying value of the related assets are written down to the net realizable value to the extent the unamortized capitalized costs
exceed such value. The net realizable value is the estimated future gross revenues from the related product reduced by the estimated
future costs of completing and disposing of such product, including the costs of providing related maintenance and customer support,
which costs are expensed as incurred.
On
May 20, 2022, the Company entered into a letter of intent with Hammer Slammer Games GmbH of Berlin Germany to develop a mobile game called
Micro Card Battler. As part of the agreement, the Company made an initial payment of $16,539 which was expensed as research and development
expense that is considered a work in progress product as of June 30, 2022. The Company had no capitalizable research and development
costs during the nine months ended June 30, 2022 or 2021.
Net
Income (Loss) Per Share
In
accordance with ASC 260 “Earnings per Share,” the basic net income (loss) per share (“EPS”) is computed
by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding during the period,
excluding the effects of any potentially dilutive securities. Diluted EPS is computed by dividing the net loss available to common stockholders
by the weighted average number of common shares outstanding adjusted on an “if-converted” basis (for convertible preferred
stock). During the period ended June 30, 2022, 325,000 shares of the Series B Convertible Preferred stock were converted into 325,000
shares of common stock. During the periods ended June 30, 2022 and 2021, the Company had 270,612 and 595,612 shares, respectively, of
Series B Convertible Preferred stock issued and outstanding that are convertible into shares of common stock. These potentially dilutive
securities were excluded from the EPS computation due to their anti-dilutive effect resulting from the Company’s net losses during
the three and nine months ended June 30, 2022.
Foreign
Currency
The
Company’s functional currency is the US dollar. With the exception of stockholders’ equity (deficit), all transactions that
are originally denominated in foreign currency are translated to US dollars by our international customers, on a monthly basis, when
recognized by them and prior to paying royalties to the Company. All royalty revenues that are received and recognized by the Company
are recorded in US dollars.
The
Company has a Euro currency bank account located in Bermuda. This account is used for payments to vendors that bill the Company in a
currency other than US dollars and for funds received from shareholders located outside the United States. As of June 30, 2022 and September
30, 2021, the Euro account had a balance of $0 and $0 Euros, respectively.
Foreign
currency translation gains/losses are recorded in other accumulated comprehensive income (“AOCI”) based on exchange rates
prevalent on reporting dates for balance sheet items, and at weighted average exchange rates during the reporting period for the statement
of operations. Foreign currency transaction gains/losses are recorded as other income (expense) in the period of settlement. No AOCI
items were present during the nine months ended June 30, 2022 and 2021, as all financial statement items were denominated in the US dollar.
(Losses) gains from foreign currency transactions during the nine months ended June 30, 2022 and 2021 totaled ($650) and $620, respectively.
Concentration
of Credit Risk
Some
of our US dollar balances are held in a Bermuda bank that is not insured. As of June 30, 2022 and September 30, 2021, uninsured deposits
in the Bermuda bank totaled $20,495 and $20,616, respectively. Our management believes that the financial institution is financially
sound, and the risk of loss is low. The Company is in the process of migrating its banking to the institutions in the United States,
which are insured by the FDIC up to $250,000.
Revenue
Recognition
The
Company follows the guidance contained in ASC 606, “Revenue Recognition.” The core principle of ASC 606 is that an
entity should recognize revenue to depict the transfer of goods of services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. ASC 606 outlines the following five-step revenue
recognition model (along with other guidance impacted by this standard): (1) identify the contract with the customer; (2) identify the
performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations;
(5) recognize revenue when or as the entity satisfies a performance obligation.
Revenue
- Royalties
The
Company enters into agreements with third-party developers that require us to make payments for game development and production
services. In exchange for our payments, we receive the exclusive publishing and distribution rights to the finished game titles as
well as, in some cases, the underlying intellectual property rights. The Company has several contracts with video game
developers that entitle us to royalty streams as a percentage of revenues generated by the game sales, which vary from contract to
contract. As of June 30, 2022, the Company has four royalty contracts with three developers that are generating royalty revenue.
Once
a game has been developed and has met the terms of the underlying royalty agreement, the game is released for commercial sales. Per each
contract, the Company will receive reports on a regular basis from the game developers’ sales platforms that identify the amount
of game sales, from which consideration expected to be collected from the commercial customers is computed based on the applicable royalty
percentages. Royalty revenue is based on a percentage of net receipts as defined in each customer agreement, and is recognized in accordance
with the sale-based royalty provisions of ASC 606, which requires revenue recognition after the subsequent sales occur. The Company’s
performance obligation under each royalty contract as an investor in the game is complete once funds are advanced to the gaming developer.
Subsequent consideration is then received by the Company from the developers in the amount of the Company’s percentage fee of royalty
income (net receipts) received by the customer. Net receipts include all gross revenues received by the customer as a result of sales
of the games or related exploitation less certain taxes, refunds, manufacturing costs, freight, and other items specified in the underlying
contract.
During
the nine months ended June 30, 2022 and 2021, the Company recognized revenue from royalties of $80,719 and $130,898, respectively.
Royalties
Receivable
The
Company provides an allowance for doubtful accounts equal to the estimated uncollectible royalties. The Company’s estimate is based
on historical collection experience and a review of the current status of royalties receivable. It is reasonably possible that the Company’s
estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts
estimated in determining the allowance. The Company had royalties receivable of $89,628 and $115,830 at June 30, 2022 and September 30,
2021, respectively, and has determined that no allowance is necessary.
New
Accounting Pronouncements
The
Company has evaluated all recently issued or enacted accounting pronouncements, and has determined that all such pronouncements either
do not apply or their impact is insignificant to the financial statements.
COVID-19
Uncertainties
The
COVID-19 pandemic could have an impact on our ability to obtain financing to fund the operations. The Company is unable to predict the
ultimate impact at this time.
Going
Concern
The
accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the
United States of America (“GAAP”), which contemplates the Company’s continuation as a going concern. The Company has
not established profitable operations and has incurred significant losses since its inception. The Company’s plan is to grow significantly
over the next few years through strategic game development partnerships, through internal game development and through the acquisition
of independent game development companies globally.
The
Company has taken much of the cash flow from its first royalty agreement and has invested in royalty agreements for the development of
several other video games. By continuing to reinvest these royalties into agreements to develop new games, along with actively managing
corporate overhead, management’s plan is to substantially increase its video game royalty portfolio and cash flow over the next
several years. The Company intends to continue to grow its game portfolio over the next several years, focusing on console games, virtual
reality games and mobile games.
There
are no assurances that the Company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from
operations; or (2) obtain additional financing through either private placement, public offerings and/or debt financing necessary to
support its working capital requirements. To the extent that funds generated from operations and any private placements, public offerings
and/or debt financing are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional
financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available
to the Company, it may be required to curtail or cease its operations.
Due
to uncertainties related to these matters, there exists a substantial doubt about the ability of the Company to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments related to the recoverability or classification of
asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a
going concern.
The
COVID-19 pandemic could have an impact on our ability to obtain financing to fund the operations. The Company is unable to predict the
ultimate impact at this time.
Note
3. Stockholders’ Equity (Deficit)
The
Company’s common stock is quoted under the symbol “VRVR” on the OTC Pink tier operated by OTC Markets Group, Inc. To
date, an active trading market for the Company’s common stock has not developed.
Treasury
Stock
The
Company accounts for treasury stock using the cost method. During the nine months ended June 30, 2022, the Company acquired 41,250 shares
at $0 cost of its then-issued and outstanding common stock pursuant to a claw-back provision in one of its notes payable (Note 4). At
June 30, 2022 and September 30, 2021, the Company held in treasury 41,250 and 0 shares, respectively, at total cumulative cost of $0.
Common
Stock
The
Company is authorized to issue 90,000,000 shares of common stock at par value of $0.001. At June 30, 2022, the Company had 7,640,284
shares issued and 7,599,034 shares outstanding, with 41,250 shares held as treasury stock. At September 30, 2021, the Company had 6,900,284
shares of common stock issued and outstanding.
On
September 23, 2021, the Company issued 82,500
shares of common stock valued at $165,000
as a commitment fee related to a note payable (Note 4). The commitment fee was recorded as an additional discount to the note and
was amortized over the life of the note. On March 24, 2022, the note payable and remaining accrued interest was paid off in full in
the amount of $235,000 and $1,958.
As per the terms of the contract, the Company recorded a claw back of half of the common shares associated with the commitment fee
in the amount of 41,250
shares that are being held in treasury at $0
cost.
On
December 3, 2021, the Company issued shares to two of our directors for director compensation. Jerry Lewis received 35,000 shares and
Janelle Gladstone received 25,000 shares. The closing price of our common stock on the grant date was $1.55 per share, and an expense
of $93,000 was recorded for the issuance of these shares.
On
March 15, 2022, the Company issued 82,500 shares of common stock valued at $206,250 as a commitment fee related to a note payable (Note
4). The commitment fee was recorded as an additional discount to the note and is being amortized over the life of the note.
On
April 4, 2022, the Company issued 82,500 shares of common stock valued at $206,250 as a commitment fee related to a note payable (Note
4). The commitment fee was recorded as an additional discount to the note and is being amortized over the life of the note.
On
April 21, 2022, the Company issued a total of 60,000 shares to two of our directors for director compensation. In addition, the Company
issued 100,000 shares for other services. The closing price of our common stock on the grant date was $1.80 per share, and an expense
of $288,000 was recorded for the issuance of these shares.
In
June 2022, the Company received $37,500 in cash, from two unrelated parties, and issued 30,000 shares of common stock at a price of $1.25
per share.
Preferred
Stock
The
Company is authorized to issue 10,000,000 each of Series A and B preferred shares at a par value of $0.01. Series A preferred shares
are not convertible, whereas Series B preferred shares are convertible into common stock on a one-for-one basis at the option of the
holder and there is no redemption feature.
As
of June 30, 2022 and September 30, 2021, the Company had 50,000 shares of Series A preferred stock issued and outstanding. At June 30,
2022, the Company converted 325,000 shares of Series B convertible preferred stock to 325,000 shares of common stock. At June 30, 2022
and September 30, 2021, the Company had 270,612 and 595,612 shares, respectively, of Series B convertible preferred stock issued and
outstanding.
Note
4. Notes Payable
On
March 20, 2019, an unrelated individual loaned VRVR $10,000.
The note carries a 6%
interest rate and was initially payable March 20, 2020, and then amended on July 27, 2022 to mature on March
20, 2024. As of June 30, 2022 and September 30, 2021, the note balance was $10,000,
and accrued interest on the note totaled $1,969
and $1,520,
respectively.
On
September 23, 2021, an unrelated third party loaned VRVR $235,000 that
consisted of cash received by the Company in the amount of $217,375 and
an original issue discount of $17,625.
This discount was amortized over the life of the note commencing October 1, 2021. The note carried a 12.5%
annual interest rate and matured on March
23, 2022. Under the terms of the agreement,
the Company paid any accrued interest on a monthly basis. In addition, under the terms of the agreement, the Company issued
82,500 commitment shares to the holder at $2.00 per share and an expense of $165,000 was applied as an additional discount to the
note and amortized over the life of the note. The Company had the right to redeem 41,250 of the commitment shares if the note was
repaid on or before the maturity date. On September 30, 2021, principal and accrued interest totaled $235,000 and $571,
respectively. On March 23, 2022, the note payable balance of $235,000 and unpaid interest of $1,958 were repaid in full in the
amount of $236,958. During the period of October 1, 2021 through March 23, 2022, interest payments totaling $12,811 were made,
resulting in $14,769 total interest payments during the nine months ended June 30, 2022, and $0 principal and interest balances at
June 30, 2022. As a result of this repayment, 41,250 of the commitment shares were redeemed at $0 cost and are being held in
treasury.
On
March 15, 2022, an unrelated third party loaned VRVR $235,000 that consisted of cash received by the Company in the amount of $217,375
and an original issue discount of $17,625. This discount is being amortized over the life of the note commencing March 15, 2022. The
note carries a 15% annual interest rate and matures on March 15, 2023. As of June 30, 2022, the note balance was $235,000 and the accrued
interest was $10,334. The note is convertible at a price of $1.25 per share.
On
March 21, 2022, an unrelated third party, loaned VRVR $235,000 that consisted of cash received by the Company, on April 4, 2022, in the
amount of $217,375 and an original issue discount of $17,625. This discount is being amortized over the life of the note commencing March
15, 2022. The note carries a 12% annual interest rate and matures on March 21, 2023. As of June 30, 2022, the note balance was $235,000
and the accrued interest was $7,804. The note is convertible at a price of $1.25 per share.
Debt
discount amortization on the above notes totaled $310,203 and $0 during the nine months ended June 30, 2022 and 2021, respectively. Total
unamortized debt discount totaled $320,172 and $0 at June 30, 2022 and September 31, 2021, respectively.
Note
5. Related Party Transactions
Note
Payable, Related Party
On
March 29, 2018, the Company issued a $750,000, unsecured promissory note to the Company’s CEO for a potential acquisition and working
capital. The note carries an interest rate of 6% per annum, compounding annually, and matures on December 31, 2022. All principal and
interest are due at maturity and there is no prepayment penalty for early repayment of the note. As of June 30, 2022 and September 30,
2021, total balance on the debt was $741,030 and accrued interest totaled $209,969 and $167,597, respectively.
Note
6. Note Receivable
On
December 11, 2019, the Company issued a $25,000, unsecured promissory note receivable to a non-related entity. The note carries an interest
rate of 6% per annum and is due on demand. There is no prepayment penalty for early repayment of the note. As of June 30, 2022 and September
30, 2021, accrued interest was $4,209 and $3,086, respectively.
Note
7. Convertible Note Receivable
On
November 20, 2020, the Company invested $7,500 in a Convertible Note from and unrelated entity developing a freemium gaming concept that
combines online auctions and gift card purchasing. The note matures on November 20, 2022. The note carries an interest rate of 4% per
annum and is convertible into 1.25% of the entity’s stock at the Company’s option. As of June 30, 2022 and September 30,
2021, accrued interest was $478 and $254, respectively.
Note
8. Subsequent Events
The
Company has evaluated other events subsequent to the balance sheet date through the date these financial statements were issued and determined
that there are no events requiring disclosure.