UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2024

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission File No. 001-39885

 

VERSUS SYSTEMS INC.

(Exact name of registrant as specified in its charter)

 

British Columbia

  Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1558 West Hastings St.

Vancouver, BC

  V6G 3J4 Canada
(Address of principal executive office)   (Zip Code)

 

(424) 226-8588

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Shares, no par value per share   VS   The Nasdaq Capital Market
Unit A Warrants   VSSYW   The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

As of May 15, 2024, there were 2,506,015 of the registrant’s common shares outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

        PAGE
PART I   FINANCIAL INFORMATION   1
Item 1.   Financial Statements (Unaudited)   1
    Condensed Interim Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023   1
    Condensed Interim Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2024 and 2023.   2
    Condensed Interim Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2024 and 2023.   3
    Condensed Interim Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023.   4
    Notes to the Condensed Interim Unaudited Consolidated Financial Statements   5
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   33
Item 4.   Controls and Procedures   33
         
PART II   OTHER INFORMATION   34
Item 1.   Legal Proceedings   34
Item 1A.   Risk Factors   34
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   34
Item 3.   Default Upon Senior Securities   34
Item 4.   Mine Safety Disclosures   34
Item 5.   Other Information   34
Item 6.   Exhibits   35
    Signatures   36

 

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1:Financial Statements

 

Versus Systems Inc.

Condensed Interim Consolidated Balance Sheets (Unaudited)

(Expressed in US Dollars)

 

 

   March 31   December 31, 
   2024   2023 
   ($)   ($) 
ASSETS        
Current assets        
Cash   2,892,356    4,689,007 
Receivables, net of allowance (Note 4)   12,654    18,222 
Prepaids   440,688    160,474 
Total current assets   3,345,698    4,867,703 
           
Restricted deposit (Note 5)   8,491    8,679 
Property and equipment, net (Note 6)   1,169    1,935 
Total assets   3,355,358    4,878,317 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued liabilities (Note 9, Note 10 and Note 12)   163,527    286,427 
Deferred revenue   15,499    35,049 
Total liabilities   179,026    321,476 
           
Stockholders’ equity          
Share capital (Note 11)          
Common stock and additional paid in capital, no par value. Unlimited authorized shares; 2,506,015 and 260,761 shares issued and outstanding, respectively   147,290,988    147,130,123 
Accumulated other comprehensive income   208,596    248,287 
Accumulated deficit   (136,762,413)   (135,434,022)
    10,737,171    11,944,388 
Non-controlling interest (Note 7)   (7,560,839)   (7,387,547)
Total stockholders’ equity   3,176,332    4,556,841 
Total liabilities and stockholders’ equity   3,355,358    4,878,317 

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements. 

 

1

 

 

Versus Systems Inc.

Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

(Expressed in US Dollars)

 

 

   Three Months Ended   Three Months Ended 
   March 31,
2024
   March 31,
2023
 
   ($)   ($) 
REVENUES        
Revenues   26,503    157,950 
Cost of revenues   24,046    32,357 
Gross margin   2,457    125,593 
           
EXPENSES          
Research and development   39,412    67,140 
Selling, general and administrative   1,464,481    1,385,342 
Total operating expenses   1,503,893    1,452,482 
           
Operating loss   (1,501,436)   (1,326,889)
Other income/(expense), net   247    
-
 
Loss before provision   (1,501,683)   (1,326,889)
Provision for income taxes   
-
    
-
 
Net loss   (1,501,683)   (1,326,889)
           
Other total comprehensive loss:          
Change in foreign currency translation, net of tax   39,691    (9,348)
Total other comprehensive loss   39,691    (9,348)
Total comprehensive loss   (1,461,992)   (1,317,541)
           
Less: comprehensive income attributable to non-controlling interest   173,292    132,694 
Comprehensive loss attributable to shareholders   (1,288,700)   (1,184,847)
           
Basic and diluted earnings per share to shareholders
   (0.53)   (2.28)
           
Weighted average shares - basic and diluted
   2,506,015    515,304 

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements. 

 

2

 

 

Versus Systems Inc.

Condensed Interim Consolidated Statements of Changes in Equity (Deficit) (Unaudited)

(Expressed in US Dollars)

 

 

   Number of
Common
Shares
   Number of
Class “A”
Shares
   Common
Shares
   Class “A”
Shares
   Additional
paid in
Capital
   Currency
translation
adjustment
   Accumulated
deficit
   Stockholders’
equity
   Non-controlling
Interest
   Total
stockholders’
equity
 
           ($)   ($)   ($)   ($)   ($)   ($)   ($)   ($) 
                       -                 
Balance at December 31, 2022   260,761    21    122,353,525    28,247    14,506,758    154,970    (125,907,025)   11,136,475    (6,402,387)   4,734,088 
                                                   
Exercise of warrants   252,625    -    4,446,200    -    -    -    
-
    4,446,200    -    4,446,200 
Shares issued in public offering   156,250    -    2,250,000    
-
    
-
    
-
    
-
    2,250,000    -    2,250,000 
Share issuance costs   -    -    (226,544)   
-
    
-
    
-
    
-
    (226,544)   -    (226,544)
Stock-based compensation   -    -    
-
    
-
    (1,247,113)   -    
-
    (1,247,113)   -    (1,247,113)
Cumulative translation adjustment   -    -    
-
    
-
    
-
    9,348    
-
    9,348    -    9,348 
Loss and comprehensive loss   -    -    
-
    
-
    
-
    
-
    (1,194,195)   (1,194,195)   (132,694)   (1,326,889)
                                                   
Balance at March 31, 2023   669,636    21    128,823,181    28,247    13,259,645    164,318    (127,101,220)   15,174,171    (6,535,081)   8,639,090 
                                                   
Balance at December 31, 2023   2,506,015    -    134,075,745    -    13,054,378    248,287    (135,434,022)   11,944,388    (7,387,547)   4,556,841 
Stock-based compensation   -    -    
-
    
-
    160,865    -    
-
    160,865    -    160,865 
Cumulative translation adjustment   -    -    
-
    
-
    
-
    (39,691)   
-
    (39,691)   -    (39,691)
Loss and comprehensive loss   -    -    
-
    
-
    
-
    
-
    (1,328,391)   (1,328,391)   (173,292)   (1,501,683)
                                                   
Balance at March 31, 2024   2,506,015    -    134,075,745    
-
    13,215,243    208,596    (136,762,413)   10,737,171    (7,560,839)   3,176,332 

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements. 

 

3

 

 

Versus Systems Inc.

Condensed Interim Consolidated Statements of Cash Flows (unaudited)

(Expressed in US Dollars)

 

 

   Three Months Ended   Three Months Ended 
   March 31,
2024
   March 31,
2023
 
   ($)   ($) 
Cash flows from operating activities        
         
OPERATING ACTIVITIES        
Net Loss   (1,501,683)   (1,326,889)
Adjustments to reconcile net loss to net cash:          
Amortization (Note 6)   
-
    73,601 
Amortization of intangible assets (Note 8)   
-
    686,353 
Loss on sale of equipment   
-
    2,659 
Effect of foreign exchange   (38,740)   (10,012)
Share-based compensation   160,865    (1,247,113)
Receivables   5,568    26,182 
Prepaids   (280,214)   (179,126)
Deferred revenue   (19,550)   (23,867)
Accounts payable and accrued liabilities   (122,897)   (259,747)
Cash flows from operating activities   (1,796,651)   (2,257,959)
           
FINANCING ACTIVITIES          
Repayment of notes payable - related party   
-
    (36,795)
Proceeds from warrant exercises   
-
    4,446,200 
Proceeds from share issuances   
-
    2,250,000 
Payments for lease liabilities   
-
    (65,788)
Payments of share issuance costs   
-
    (226,544)
Cash flows from financing activities   
-
    6,367,073 
           
INVESTING ACTIVITIES          
Proceeds from sale of equipment   
-
    1,000 
Purchase of intangible assets   
-
    (9,550)
Cash flows from investing activities   
-
    (8,550)
           
Change in cash during the period   (1,796,651)   4,100,564 
Cash - Beginning of period   4,689,007    1,178,846 
Cash - End of period   2,892,356    5,279,410 

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 

4

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

 

1.NATURE OF OPERATIONS

 

Versus Systems Inc. (the Company) was continued under the Business Corporations Act (British Columbia) effective January 2, 2007. The Company’s head office and registered and records office is 1558 West Hastings Street, Vancouver, BC, V6C 3J4, Canada. The Company’s common stock is traded on the NASDAQ under the symbol “VS”. The Company’s Unit A warrants are traded on NASDAQ under “VSSYW”. On November 9, 2022, the Company completed a one-for-15 reverse stock split of the Company’s common shares. On December 28, 2023, the Company completed a one-for-16 reverse stock split of the Company’s common shares. All share and per share data are presented to reflect the reverse share splits on a retroactive basis.

 

The Company is engaged in the technology sector and has developed a proprietary prizing and promotions tool allowing game developers and creators of streaming media, live events, broadcast TV, games, apps, and other content to offer real world prizes inside their content. The ability to win prizes drives increased levels of consumer engagement creating an attractive platform for advertisers.

 

In June 2021, the Company completed its acquisition of multimedia, production, and interactive gaming company Xcite Interactive, a provider of online audience engagement through its owned and operated XEO technology platform. The Company partners with professional sports franchises across Major League Baseball (MLB), National Hockey League (NHL), National Basketball Association (NBA) and the National Football League (NFL) to drive audience engagement.

 

The Company is in the process of considering a number of strategic alternatives for the Company focused on maximizing shareholder value, including, but not limited to, an acquisition, merger, reverse merger, sale of assets, strategic partnership, capital raise or other transaction. The Company is hopeful that the change in governing jurisdiction from British Columbia to Delaware will more appropriately reflect its shift in strategy and will (i) improve our access to capital markets, increase funding and strategic flexibility and reduce the cost of capital, (ii) improve the Company’s ability to execute an acquisitive growth strategy using its capital stock as consideration, and (iii) better focus management efforts on each U.S. and international operation and better attract and retain key employees.

 

These condensed interim consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern, meaning it will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the ordinary course of operations. Different bases of measurement may be appropriate if the Company is not expected to continue operations for the foreseeable future. As of March 31, 2024, the Company has not achieved positive cash flow from operations and is not able to finance day to day activities through operations and as such, there is substantial doubt as to the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to attain profitable operations and generate funds therefrom and/or raise equity capital or borrowings sufficient to meet current and future obligations. These condensed interim consolidated financial statements do not include any adjustments as to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. These adjustments could be material.

 

2.BASIS OF PRESENTATION

 

Statement of compliance

 

These condensed interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP).

 

Basis of measurement

 

These condensed interim consolidated financial statements have been prepared on a historical cost basis, except for financial instruments classified as financial instruments at fair value. In addition, these condensed interim consolidated financial statements have been prepared using the accrual basis of accounting.

 

5

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

2.BASIS OF PRESENTATION (continued)

 

Functional and presentation currency

 

These condensed interim consolidated financial statements are presented in United States dollars, unless otherwise noted, which is the functional currency of the Company and its subsidiaries.

 

Basis of consolidation

 

These condensed interim consolidated financial statements include the accounts of Versus Systems Inc. and its subsidiaries, from the date control was acquired. Control exists when the Company possesses power over an investee, has exposure to variable returns from the investee and has the ability to use its power over the investee to affect its returns. All inter-company balances and transactions, and any unrealized income and expenses arising from inter-company transactions, are eliminated on consolidation. For partially owned subsidiaries, the interest attributable to non-controlling shareholders is reflected in non-controlling interest. Adjustments to non-controlling interest are accounted for as transactions with owners and adjustments that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary.

 

Name of Subsidiary   Place of Incorporation   Proportion of
Ownership Interest
    Principal Activity
               
Versus Systems (Holdco) Inc.   United States of America   81.9 %   Holding Company
Versus Systems UK, Ltd.   United Kingdom   81.9 %   Sales Company
Versus LLC   United States of America   81.9 %   Technology Company
Xcite Interactive, Inc.   United States of America   100.0 %   Technology Company

 

Use of estimates

 

The preparation of these condensed interim consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed interim consolidated financial statements. Estimates and assumptions are continually evaluated and are based on historical experience and management’s assessment of current events and other facts and circumstances that are considered to be relevant. Actual results could differ from these estimates.

 

Significant assumptions about the future and other sources of estimation uncertainty that management has made at the end of the reporting period, that could result in a material adjustment to the carrying amounts of assets and liabilities in the event that actual results differ from assumptions made, relate to, but are not limited to, the following:

 

i)Deferred income taxes

 

Deferred tax assets, including those arising from un-utilized tax losses, require management to assess the likelihood that the Company will generate sufficient taxable earnings in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be impacted.

 

6

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

2.BASIS OF PRESENTATION (continued)

 

  ii) Valuation of share-based compensation

 

The Company uses the Black-Scholes Option Pricing Model for valuation of share-based compensation. Option pricing models require the input of subjective assumptions including expected price volatility, interest rate, and forfeiture rate. Input assumptions changes can materially affect the fair value estimate and the Company’s earnings (losses).

 

  iii) Depreciation and Amortization

 

The Company’s intangible assets and equipment are depreciated and amortized on a straight-line basis, taking into account the estimated useful lives of the assets and residual values. Changes to these estimates may affect the carrying value of these assets, net loss, and comprehensive income (loss) in future periods.

 

  iv) Determination of functional currency

 

The functional currency of the Company and its subsidiaries is the currency of the primary economic environment in which each entity operates. Determination of the functional currency may involve certain judgments to determine the primary economic environment. The functional currency may change if there is a change in events and conditions which determines the primary economic environment.

 

  v) Revenue Recognition

 

The Company’s contracts with customers may include promises to transfer multiple products and services. For these contracts, the Company accounts for individual performance obligations separately if they are capable of being distinct and distinct within the context of the contract. Determining whether products and services are considered distinct performance obligations may require significant judgment. Judgment is also required to determine the stand-alone selling price, for each distinct performance obligation.

 

3. SIGNIFICANT ACCOUNTING POLICIES

 

Basic and diluted loss per share

 

Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares outstanding during the reporting periods. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share, except that the weighted average shares outstanding are increased to include additional shares for the assumed exercise of stock options and warrants, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options and warrants were exercised and that the proceeds from such exercises were used to acquire common stock at the average market price during the reporting periods. Potentially dilutive options and warrants excluded from diluted loss per share as of March 31, 2024 totaled 915,154 (March 31, 2023 – 123,684).

 

7

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Property and equipment

 

Property and equipment is recorded at cost less accumulated amortization and any impairments. Amortization is calculated based on the estimated residual value and estimated economic life of the specific assets using the straight-line method over the period indicated below:

 

Asset   Rate
Computers   Straight line, 3 years
Right of use assets   Shorter of useful life or lease term

 

Financial instruments

 

Classification

 

The Company classifies its financial instruments into the following categories: at fair value through profit and loss (FVTPL), at fair value through other comprehensive income (loss) (FVTOCI), or at amortized cost. The classification of financial assets and liabilities is determined at initial recognition. For equity instruments, the Company generally classifies them at FVTPL. However, certain equity investments that are not held for trading may be measured at cost minus impairment if they do not have readily determinable fair values. Debt instruments are classified based on the Company’s business model for managing the financial assets and their contractual cash flow characteristics. Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL, such as instruments held for trading or derivatives, or if the Company opts to measure them at FVTPL.

 

Measurement

 

The Company applies Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 requires disclosures to be provided for fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

  - Level 1-Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

  - Level 2-Includes other inputs that are directly or indirectly observable in the marketplace.

 

  - Level 3-Unobservable inputs which are supported by little or no market activity.

 

ASC 820 recommends three main approaches for measuring the fair value of assets and liabilities: the market approach, the income approach, and the cost approach. The Company uses the appropriate approach based on the nature of the asset or liability being measured. Financial instruments include cash, receivables, restricted deposit, accounts payable and accrued liabilities. The carrying values of the financial instruments included in current assets and liabilities approximate their fair values due to their short-term maturities.

 

8

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

 

For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company uses its valuation processes to decide its valuation policies and procedures and analyze changes in fair value measurements from period to period. For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting.

 

Financial assets and liabilities at amortized cost

 

Financial assets and liabilities at amortized cost are initially recognized at fair value plus or minus transaction costs, respectively, and subsequently carried at amortized cost less any impairment.

 

Financial assets and liabilities at FVTPL

 

Financial assets and liabilities carried at FVTPL are initially recorded at fair value and transaction costs are expensed in profit or loss. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets and liabilities held at FVTPL are included in profit or loss in the period in which they arise.

 

Impairment of financial assets at amortized cost

 

The Company applies the Current Expected Credit Loss (CECL) model under ASC 326 for impairment of financial assets. This model requires the recognition of an allowance for credit losses based on expected losses over the life of the asset. If the credit risk of a financial asset decreases in a subsequent period, any previously recognized impairment loss is reversed through profit or loss, limited to the extent that the carrying amount does not exceed what the amortized cost would have been had the impairment not been recognized.

 

Intangible assets excluding goodwill

 

Derecognition of financial assets

 

The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity. Gains and losses on derecognition are generally recognized in profit or loss.

 

As at March 31, 2024, the Company does not have any derivative financial assets and liabilities.

 

Intangible assets acquired separately were carried at cost at the time of initial recognition. Intangible assets acquired in a business combination and recognized separately from goodwill were initially recognized at their fair value at the acquisition date. Expenditure on research activities is recognized as an expense in the period in which it is incurred.

 

Intangibles with a finite useful life were amortized and those with an indefinite useful life are not amortized. The useful life is the best estimate of the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. The useful life is based on the duration of the expected use of the asset by the Company and the legal, regulatory or contractual provisions that constrain the useful life and future cash flows of the asset, including regulatory acceptance and approval, obsolescence, demand, competition and other economic factors. If an income approach is used to measure the fair value of an intangible asset, the Company considers the period of expected cash flows used to measure the fair value of the intangible asset, adjusted as appropriate for Company-specific factors discussed above, to determine the useful life for amortization purposes. If no regulatory, contractual, competitive, economic or other factors limit the useful life of the intangible to the Company, the useful life is considered indefinite.

 

9

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

  

Intangibles with a finite useful life were amortized on the straight-line method unless the pattern in which the economic benefits of the intangible asset are consumed or used up are reliably determinable. The Company evaluates the remaining useful life of intangible assets each reporting period to determine whether any revision to the remaining useful life is required. If the remaining useful life is changed, the remaining carrying amount of the intangible asset will be amortized prospectively over the revised remaining useful life. The Company’s intangible assets are amortized on a straight-line basis over 3 years. In the year development costs are incurred, amortization is based on a half year.

 

Goodwill

 

The Company allocates goodwill arising from business combinations to reporting units that are expected to receive the benefits from the synergies of the business combination. The carrying amount reporting units to which goodwill has been allocated was tested annually for impairment or when there is an indication that the goodwill may be impaired. Any impairment is recognized as an expense immediately.

 

Deferred financing costs

 

Deferred financing costs consist primarily of direct incremental costs related to the Company’s public offering of its common stock. Upon completion of the Company’s financings any deferred costs were offset against the proceeds.

 

Impairment of intangible assets excluding goodwill

 

There are special requirements for the development of software to be sold. The costs incurred to establish the technological feasibility of the software that will be sold are expensed as research and development when incurred. Once technological feasibility has been achieved, the Company capitalizes the remaining costs incurred to develop the software for sale. Costs were capitalized until the product is ready to be sold or marketed to customers, at which time, amortization of the capitalized costs begins.

 

At the end of each reporting period, the Company reviews the carrying amounts of its intangible assets to determine whether there is any indication that those assets have suffered impairment losses. If any such indication exists, fair value of the reporting unit or an asset group to which the asset belongs is estimated in order to determine the extent of the impairment losses (if any).

 

If the fair value of an asset (or an asset group/reporting unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or an asset group/reporting unit ) is reduced to fair value.

 

Income taxes

 

The Company accounts for income taxes utilizing the assets and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and net operating loss and tax credit carry forwards, using enacted tax rates and laws that are expected to be in effect when the differences reverse.

 

10

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

 

A valuation allowance is recorded against deferred tax assets in these cases then management does not believe that the realization is more likely than not. While management believes that its judgements and estimates regarding deferred tax assets and liabilities are appropriate, significant differences in actual results may materially affect the Company’s future financial results.

 

The Company recognizes any uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon audit by relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. As of March 31, 2024 and December 31, 2023, the Company did not record any accruals for interest and penalties. The Company does not foresee material changes to its uncertain tax positions within its next twelve months. The Company’s tax years are subject to examination for 2020 and forward for U.S. Federal tax purposes and for 2019 and forward for state tax purposes.

 

Leases

 

The Company early adopted ASC 842, Leases, as of January 1, 2019 using the modified retrospective application.

 

The Company assesses at contract inception whether a contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lease term corresponds to the non-cancellable period of each contract.

 

All leases are accounted for as operating leases wherein rental payments are expensed on a straight-line basis over the periods of their respective leases. Operating leases (with an initial term of more than 12 months) are included in operating lease right-of-use (ROU) assets, operating lease liabilities (current), and operating lease liabilities (non-current) in the condensed interim consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company utilizes a market-based approach to estimate the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease prepayments, reduced by lease incentives and accrued rent. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

 

Loss contingencies

 

A loss contingency is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. Loss contingencies are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

 

Non-controlling interest

 

Non-controlling interest in the Company’s less than wholly owned subsidiaries are classified as a separate component of equity. On initial recognition, non-controlling interest is measured at the fair value of the non-controlling entity’s contribution into the related subsidiary. Subsequent to the original transaction date, adjustments are made to the carrying amount of non-controlling interest for the non-controlling interest’s share of changes to the subsidiary’s equity.

 

Changes in the Company’s ownership interest in a subsidiary that do not result in a loss of control are recorded as equity transactions. The carrying amount of non-controlling interest is adjusted to reflect the change in the non-controlling interest’s relative interest in the subsidiary, and the difference between the adjustment to the carrying amount of non-controlling interests and the Company’s share of proceeds received and/or consideration paid is recognized directly in equity and attributed to owners of the Company.

 

11

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Valuation of Equity Units Issued in Private Placements

 

In accordance with U.S. GAAP, particularly ASC 505-10 and ASC 815, the Company has adopted the fair value method for the valuation of equity units issued in private placements, which typically comprise common shares and warrants. For each private placement, the Company separately estimates the fair value of both the common shares and the warrants at the date of issuance. The determination of fair value is based on market conditions, volatility, and other relevant factors at the time of issuance.

 

  1. Common Shares: The fair value of the common shares issued is measured based on observable market prices, if available, or estimated using appropriate valuation techniques considering the terms of the shares and market conditions.

 

  2. Warrants: Warrants are valued using an appropriate option-pricing model, such as the Black-Scholes or a binomial model. The model incorporates various inputs, including the share price, expected volatility, expected term, risk-free interest rate, and any dividends.

 

The total proceeds from the issuance of equity units are allocated between the common shares and the warrants based on their relative fair values at the date of issuance. This allocation is reflected in the equity section of the condensed interim consolidated balance sheet, with the fair value of the warrants recorded as a component of additional paid-in capital in the equity section. If the warrants expire unexercised, the amount remains in additional paid-in capital.

 

This method of valuation and allocation ensures compliance with the fair value measurement and equity classification requirements of U.S. GAAP.

 

Warrants issued in equity financing transactions

 

The Company engages in equity financing transactions to obtain funds necessary to continue operations. These equity financing transactions may involve issuance of common shares or units. Each unit comprises a certain number of shares and a certain number of warrants. Depending on the terms and conditions of each equity financing transaction, the warrants are exercisable into additional common shares at a price prior to expiry as stipulated by the transaction.

 

Warrants that are part of units are assigned a value based on the residual value, if any.

 

As of February 1, 2021, the warrants were considered a derivative liability since the obligation to issue shares was not fixed in the Company’s functional currency. The derivative warrant liability was measured as fair value at issue with subsequent changes recognized in the consolidated statement of loss and comprehensive loss. A $9,743,659 warrant derivative loss was recorded in the consolidated statement of loss and comprehensive loss beginning February 1, 2021 when the Company changed its functional currency. As of March 31, 2024 and the associated warrants have expired and the remaining balance of the warrant liability is $0.

 

The Company uses the Black-Scholes Option Pricing Model for valuation of share-based payments and derivative financial assets (e.g. investments in warrants). Option pricing models require the input of subjective assumptions including expected price volatility, interest rates, and forfeiture rates. Changes in the input assumptions can materially affect the fair value estimate and the Company’s earnings.

 

12

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Share-based compensation

 

The Company grants stock options to acquire common shares of the Company to directors, officers, employees and consultants. An individual is classified as an employee when the individual is an employee for legal or tax purposes, or provides services similar to those performed by an employee.

 

The fair value of stock options is measured on the date of grant, using the Black-Scholes option pricing model, and is recognized over the vesting period. Consideration paid for the shares on the exercise of stock options is credited to capital stock.

 

In situations where equity instruments are issued to non-employees and some or all of the goods or services received by the Company as consideration cannot be specifically identified, they are measured at fair value of the share-based payment. Otherwise, share-based payments are measured at the fair value of goods or services received.

 

Revenue recognition

 

In general, the Company recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Company, where there is evidence of an arrangement, when the selling price is fixed or determinable, and when specific criteria have been met or there are no significant remaining performance obligations for each of the Company’s activities as described below. Foreseeable losses, if any, are recognized in the year or period in which the loss is determined.

 

The Company earns revenue in two primary ways: 1) the sales of software-as-a-service (SAAS) from its interactive production software platform or 2) development and maintenance of custom-built software or other professional services.

 

The Company recognizes SAAS revenues from its interactive production sales over the life of the contract as its performance obligations are satisfied. Payment terms vary by contract and can be periodic or one-time payments.

 

The Company recognizes revenues received from the development and maintenance of custom-built software and other professional services provided upon the satisfaction of its performance obligation in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. Performance obligations can be satisfied either at a single point in time or over time. For those performance obligations that are satisfied at a single point in time, the revenue is recognized at that time. For each performance obligation satisfied over time, the Company recognizes revenue by measuring the progress toward complete satisfaction of that performance obligation. 

 

For revenues received from the sales of advertising, the Company is deemed the agent in its revenue agreements. The Company does not own or obtain control of the digital advertising inventory. The Company recognizes revenues upon the achievement of agreed-upon performance criteria for the advertising inventory, such as a number of views, or clicks. As the Company is acting as an agent in the transaction, the Company recognizes revenue from sales of advertising on a net basis, which excludes amounts payable to partners under the Company’s revenue sharing agreements.

 

The Company’s contracts with customers may include promises to transfer multiple products and services. For these contracts, the Company accounts for individual performance obligations separately if they are capable of being distinct and distinct within the context of the contract. Determining whether products and services are considered distinct performance obligations may require significant judgment. Judgment is also required to determine the stand-alone selling price, for each distinct performance obligation.

 

13

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Deferred revenue

 

Revenue recognition of sales is recorded on a monthly basis upon delivery or as the services are provided. Cash received in advance for services are recorded as deferred revenue based on the proportion of time remaining under the service arrangement as of the reporting date.

 

Foreign exchange

 

The functional currency is the currency of the primary economic environment in which the Company operates and has been determined for each entity within the Company. The functional currency for the Company and its subsidiaries is the United States dollar. The functional currency determinations were conducted through an analysis of the consideration factors identified in ASC 830, Foreign Currency Matters.

 

Foreign currency transactions in currencies other than the United States dollar are recorded at exchange rates prevailing on the dates of the transactions. Foreign currency transaction gains and losses are generally recognized in profit or loss and presented within gain (loss) on foreign exchange.

 

At the end of each reporting period, the monetary assets and liabilities of the Company and its subsidiaries that are denominated in foreign currencies are translated at the rate of exchange at the date of the condensed interim consolidated balance sheets. Non-monetary assets and liabilities that are denominated in foreign currencies are translated at historical rates. Revenues and expenses that are denominated in foreign currencies are translated at the exchange rates approximating those in effect on the date of the transactions. Foreign currency translation gains and losses are recognized in other comprehensive income and accumulated in equity on the condensed interim consolidated statement of stockholders’ equity.

 

Comprehensive income (loss)

 

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss) and represents the change in shareholders’ equity (deficit) which results from transactions and events from sources other than the Company’s shareholders. Comprehensive loss differs from net loss for the periods ended March 31, 2024 and 2023, due to the effects of foreign translation gains and losses.

 

Recent accounting pronouncements not yet adopted

 

New accounting pronouncements

 

In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements. This ASU clarifies leasing transactions among entities under common control, emphasizing the use of written terms for lease existence and classification. It is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating how this will impact its condensed interim consolidated financial statements and disclosures.

 

In March 2023, the FASB issued ASU 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This ASU expands the proportional amortization method to additional types of tax equity investments. It allows entities to apply this method to a broader range of investments that generate tax credits, providing greater flexibility in accounting for these investments. ASU 2023-02 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating how this ASU will impact its condensed interim consolidated financial statements and disclosures.

 

In March 2023, the FASB issued ASU 2023-03, which amends various SEC paragraphs in the Accounting Standards Codification. This includes amendments to Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718). The amendments are in response to SEC Staff Accounting Bulletin No. 120 and other SEC staff announcements and guidance. This ASU does not introduce new guidance and therefore does not have a specified transition or effective date. However, for smaller reporting companies, the ASU is effective for fiscal years beginning after December 15, 2023. The Company is currently evaluating how this ASU will impact its condensed interim consolidated financial statements and disclosures.

 

14

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

 

In August 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. This ASU addresses accounting for assets and liabilities contributed to a joint venture. It requires entities to recognize and measure these contributions at fair value as of the joint venture formation date. This ASU is applicable to all entities involved in forming joint ventures and is effective for joint ventures formed on or after January 1, 2025.

 

Entities may choose to apply these amendments retrospectively if sufficient information is available. The Company is currently evaluating how this ASU will impact its condensed interim consolidated financial statements and disclosures.

 

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU introduces changes to the disclosure requirements, aligning them more closely with the SEC’s initiatives for simplification and update. It specifically addresses various amendments in the FASB Accounting Standards Codification in response to the SEC’s drive for clearer and more streamlined disclosures. This ASU is effective for public business entities classified as smaller reporting companies for fiscal years beginning after December 15, 2023. The Company is currently evaluating how this ASU will impact its condensed interim consolidated financial statements and disclosures.

 

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU enhances the disclosures related to segment reporting for public entities. It requires entities to disclose significant segment expenses for each reportable segment, providing greater transparency in segment performance. The ASU is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating how this ASU will impact its condensed interim consolidated financial statements and disclosures.

 

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU enhances the transparency and decision usefulness of income tax disclosures. It is designed to provide more detailed information about an entity’s income tax expenses, liabilities, and deferred tax items, potentially affecting how companies report and disclose their income tax-related information. The ASU is effective for public business entities for annual periods beginning after December 15, 2024, including interim periods within those fiscal years. The Company is currently evaluating how this ASU will impact its condensed interim consolidated financial statements and disclosures.

 

Recent adopted accounting pronouncements

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. It is effective for public business entities for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted the amendments in this update during the current year and the adoption did not have a material impact on its condensed interim consolidated financial statements and disclosures.

 

15

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

 

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which provides an exception to fair value measurement for contract assets and contract liabilities related to revenue contracts acquired in a business combination. ASU 2021-08 requires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contract. It is effective for public business entities for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted the amendments in this update during the current year and the adoption did not have a material impact on its condensed interim consolidated financial statements and disclosures.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which significantly changes how entities measure credit losses for most financial assets and certain other instruments. ASU 2016-13 introduces a new model for recognizing credit losses, known as the current expected credit loss (CECL) model, which is based on expected losses rather than incurred losses. Under the CECL model, entities will be required to estimate all expected credit losses over the life of the asset. This update applies to all entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. This ASU is effective for public business entities classified as smaller reporting companies for fiscal years beginning after December 15, 2022. The Company adopted the amendments in this update during the current year and the adoption did not have a material impact on its condensed interim consolidated financial statements and disclosures.

 

Management does not believe any other recently issued but not yet effective accounting pronouncement, if adopted, would have a material effect on the Company’s present or future consolidated financial statements.

 

4. RECEIVABLES

 

As of March 31, 2024, accounts receivable consists of customer receivables of $3,874 (net an allowance for credit losses of $754) and Goods and Services Tax (GST) receivable of $8,780. As of December 31, 2023, accounts receivable consists of customer receivables of $8,680 (net an allowance for credit losses of $2,700) and GST receivable of $9,542.

 

5. RESTRICTED DEPOSIT

 

As at March 31, 2024, restricted deposits consisted of $8,491 (December 31, 2023 - $8,679) held in a guaranteed investment certificate as collateral for a corporate credit card.

 

16

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

6. PROPERTY AND EQUIPMENT

 

   Computers   Right of Use
Asset
   Total 
   ($)   ($)   ($) 
Cost            
At December 31, 2022   246,719    749,202    995,921 
Additions   
-
    
-
    
-
 
Disposals   (222,468)   
-
    (222,468)
At December 31, 2023   24,251    749,202    773,453 
Disposals   (247)        (247)
At March 31, 2024   24,004    749,202    773,206 
Accumulated amortization               
At December 31, 2022   152,746    749,202    901,948 
Amortization for the period   23,754    
-
    23,754 
Disposals   (154,184)   
-
    (154,184)
At December 31, 2023   22,316    749,202    771,518 
Amortization for the period   601         601 
Disposals   (82)        (82)
At March 31, 2024   22,835    749,902    772,737 
                
Carrying amounts               
At December 31, 2022   93,973    
-
    93,973 
At December 31, 2023   1,935    
-
    1,935 
At March 31, 2024   1,169    
-
    1,169 

 

7. NON-CONTROLLING INTEREST IN VERSUS LLC

 

As of December 31, 2018, the Company held a 41.3% ownership interest in Versus LLC, a privately held limited liability company organized under the laws of the state of Nevada. The Company consolidates Versus LLC as a result of having full control over the voting shares. Versus LLC is a technology company that is developing a business-to-business software platform that allows video game publishers and developers to offer prize-based matches of their games to their players.

 

During 2019, the Company increased its ownership by 25.2% in a series of transactions through the issuance of common shares and warrants.

 

On March 1, 2022, the Company acquired an additional 15.1% interest in Versus LLC in exchange for 715 common shares of the Company. The common shares were determined to have a fair value of $186,294. As a result, the Company increased its ownership interest to 81.9% and recorded the excess purchase price over net identifiable assets of $4,562,631 against additional-paid-in-capital. The effect on non-controlling interest was a reduction of $4,376,337.

 

17

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

7. NON-CONTROLLING INTEREST IN VERSUS LLC (continued)

 

The following table presents summarized financial information before intragroup eliminations for the non-wholly owned subsidiary as of and for the three months ended March 31, 2024 and 2023.

 

   March 31,
2024
   March 31,
2023
 
Non-controlling interest percentage  18.1%   18.1% 
   ($)   ($) 
Assets        
Current   2,026,403    296,337 
Non-current   1,169    2,491,634 
    2,207,572    2,787,971 
           
Liabilities          
Current   26,087    151,311 
Non-current   45,936,326    40,803,631 
    45,962,413    40,954,942 
Net liabilities   (43,754,841)   (38,166,971)
Non-controlling interest   (7,560,839)   (6,515,823)
Net loss   (1,501,683)   (733,116)
Net loss attributed to non-controlling interest   (173,292)   (132,694)

 

18

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

8. INTANGIBLE ASSETS

 

Intangible assets were comprised of a business-to-business software platform that allows video game publishers and developers to offer prize-based matches of their games to their players. The Company continued to develop new apps, therefore additional costs were capitalized during the years ended December 31, 2023 and 2022. During the year ended December 31, 2023, the Company completed an impairment analysis of its intangible assets and concluded the assets were impaired. As a result, they recorded an impairment change in the amount of $3,968,332 during the year ended December 31,2023.

 

   Software   Customer
Relationships
   Trade name   Developed
Technology
   Total 
Cost                    
At December 31, 2022   14,715,529    3,170,966    420,833    1,209,861    19,517,189 
Additions   19,413    
-
    
-
    
-
    19,413 
Impairment   (1,656,691)   (1,745,854)   (420,833)   (144,954)   (3,968,332)
At December 31, 2023   13,078,251    1,425,112    
-
    1,064,907    15,568,270 
Additions   
-
    
-
    
-
    
-
    
-
 
At March 31, 2024   
-
    
-
    
-
    
-
    
-
 
Accumulated amortization                         
At December 31, 2022   11,311,681    1,037,144    
-
    775,000    13,123,825 
Amortization   1,766,570    387,968    
-
    289,907    2,444,445 
At December 31, 2023   13,078,251    1,425,112    
-
    1,064,907    15,568,270 
Amortization   
-
    
-
    
-
    
-
    
-
 
At March 31, 2024   13,078,251    1,425,112    
-
    1,064,907    15,568,270 
Carrying amounts                         
At December 31, 2022   3,403,848    2,133,822    420,833    434,861    6,393,364 
At December 31, 2023   
-
    
-
    
-
    
-
    0 
At March 31, 2024   
-
    
-
    
-
    
-
    0 

 

9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

The Company’s accounts payable and accrued liabilities are comprised of the following:

    March 31,
2024
    December 31,
2023
 
    ($)     ($)  
Accounts payable     92,056       82,579  
Due to related parties (Note 10 and Note12)     71,471       177,500  
Accrued liabilities    
-
      26,348  
      163,527       286,427  

 

19

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

10. NOTES PAYABLE – RELATED PARTY

 

During the year ended December 31, 2023, the Company repaid $2,519,835 of principal on its outstanding note payable – related party balances. As at December 31, 2023, the Company had recorded $0 in accrued interest.

 

During the three months ended March 31, 2023 the Company recorded finance expense of $24,625 (December 31, 2023 - $60,770), related to bringing the notes to their present value.

 

   Amount 
   ($) 
Balance, December 31, 2022   2,604,713 
Foreign currency adjustment   (35,380)
Repayments   (2,519,835)
Cancellation of remaining debt   (49,498)
Balance, December 31, 2023   
-
 

 

11. SHARE CAPITAL

 

  a) Authorized share capital

 

The Company is authorized to issue an unlimited number of Class A Shares. The Class A Shares do not have any special rights or restrictions attached., respectively. The Class A shares were converted to common shares on December 22, 2023, and as of December 31, 2023, there were 0 Class A Shares issued and outstanding.

 

  b) Issued share capital

 

During the year ended December 31, 2023, the Company:

 

  i) Issued 156,250 shares at a price of $14.40 per share for total proceeds of $2,250,000 in a registered direct offering. In connection with the offering, the Company incurred $226,544 in issuance costs as part of the transaction.

 

  ii) Issued 283,875 common shares pursuant to exercise of 283,875 warrants at a price of $17.37 per share for total proceeds of $4,561,200.

 

  iii) Issued 815,217 shares at a price of $3.68 per share for total proceeds of $3,000,000 in a registered direct offering. In connection with the offering, the Company incurred $453,345 in issuance costs as part of the transaction.

 

  iv) Issued 989,903 shares at a price of $2.59 per share for total proceeds of $2,562,660 in a private placement.

 

  v) Issued 21 shares upon the conversion of Class A shares.

 

20

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

11.SHARE CAPITAL (continued)

 

  c) Stock options

 

The Company may grant incentive stock options to its officers, directors, employees, and consultants. The Company has implemented a rolling Stock Option Plan (the “Plan”) whereby the Company can issue up to 10% of the issued and outstanding common shares of the Company. Options have a maximum term of ten years and vesting is determined by the Board of Directors.

 

A continuity schedule of outstanding stock options is as follows:

 

   Number
Outstanding
   Weighted Average
Exercise Price
 
       ($) 
Balance – December 31, 2022   14,238    594.08 
Granted   25,000    14.40 
Exercised   
-
    
-
 
Forfeited   (10,247)   392.60 
Balance – December 31, 2023   28,990    165.38 
Granted   
-
    
-
 
Exercised   
-
    
-
 
Forfeited   (10,481)   150.48 
Balance – March 31, 2024   18,509    173.81 

 

During the periods ended March 31, 2024 and 2023 the Company recorded share-based compensation of $160,865 and $1,247,113, respectively, relating to options vested during the period.

 

The Company used the following assumptions in calculating the fair value of stock options for the period ended:

 

   March 31,
2024
   March 31,
2023
 
Risk-free interest rate   3.93%   3.93%
Expected life of options   3.38 years    5.0 years 
Expected dividend yield   Nil    Nil 
Volatility   132.65%   132.65%

 

21

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

11. SHARE CAPITAL (continued)

 

At March 31, 2024, the Company had incentive stock options outstanding as follows:

 

Expiry Date 

Options

Outstanding

  

Exercise

Price 

   Weighted Average
Remaining Life
 
       ($)   (years) 
April 2, 2024   423    604.80    0.01 
June 27, 2024   26    614.40    0.24 
September 27, 2024   780    1,087.20    0.49 
October 22, 2024   26    967.20    0.56 
July 24, 2025   382    715.20    1.32 
July 31, 2025   384    715.20    1.33 
August 10, 2025   52    715.20    1.36 
June 1, 2026   59    1,689.60    2.17 
June 29, 2026   25    1,356.00    2.25 
August 19, 2026   949    1,008.00    2.39 
August 17, 2027   2,076    96.00    3.38 
September 20, 2027   140    55.20    3.47 
February 13, 2028   13,187    14.40    3.87 
    18,509    173.81    3.38 

 

  d) Share purchase warrants

 

A continuity schedule of outstanding share purchase warrants is as follows:

 

   Number Outstanding   Weighted Average Exercise Price 
       ($) 
Balance –  December 31, 2022   329,908    91.84 
Exercised   (283,875)   16.19 
Expired   
-
    
-
 
Issued   850,612    3.83 
Balance – December 31, 2023   896,645    32.36 
Exercised   
-
    
-
 
Expired   
-
    
-
 
Issued   
-
    
-
 
Balance – March 31, 2024(1)   896,645    32.36 

 

(1)Unit A warrant balance is 7,030 as of March 31, 2024.

 

During the year ended December 31, 2023, the Company:

 

  i)

Issued 10,938 placement agent warrants in conjunction with a registered direct offering on February 2, 2023, with an exercise price of $14.40 per share.

 

22

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

11.SHARE CAPITAL (continued)

 

  ii) Issued 815,217 warrants in conjunction with a public offering on October 17, 2023, with an exercise price of $3.68 per share.

 

  iii) Issued 24,457 placement agent warrants in conjunction with a public offering on October 17, 2023, with an exercise price of $4.05 per share.

 

The Company used the following assumptions in calculating the fair value of the warrants for the period ended:

 

   March 31,
2024
   December 31,
2023
 
Risk-free interest rate   4.13% - 4.49%    4.13% - 4.49% 
Expected life of warrants   1.814.55 years    2.064.80 years 
Expected dividend yield   Nil    Nil 
Volatility   132.78%   132.78%
Weighted average fair value per warrant  $4.44   $4.69 

 

At March 31, 2024, the Company had share purchase warrants outstanding as follows:

 

Expiration Date 

Warrants

Outstanding

  

Exercise

Price

   Weighted Average
Remaining Life
 
       ($)   (years) 
January 20, 2026(1)   7,030    1,800.00    1.81 
February 28, 2027   20,689    460.80    2.92 
December 6, 2027   13,781    20.00    3.68 
December 9, 2027   9,876    17.60    3.69 
January 18, 2028   25,906    124.80    3.80 
February 2, 2028   10,938    14.40    3.85 
October 17, 2028   783,968    3.68    4.55 
October 17, 2028   24,457    4.05    4.55 
    896,645    32.36    4.44 

 

(1) Unit A warrant balance is 7,030 as of March 31, 2024.

 

23

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

12. RELATED PARTY TRANSACTIONS

 

The following summarizes the Company’s related party transactions, not disclosed elsewhere in these condensed interim consolidated financial statements, during the three months ended March 31, 2024 and 2023. Key management personnel includes the Chief Executive Officer (CEO), Chief Financial Officer (CFO) and certain directors and officers and companies controlled or significantly influenced by them.

 

Key Management Personnel

 

   2024   2023 
   ($)   ($) 
Short-term employee benefits paid or accrued to the CEO of the Company, including share-based compensation vested for incentive stock options and performance warrants.   105,879    88,179 
Short-term employee benefits paid or accrued to the CFO of the Company, including share-based compensation vested for incentive stock options and performance warrants.   109,599    91,899 
Short-term employee benefits paid or accrued to a member of the advisory board of the Company, including share-based compensation vested for incentive stock options and performance warrants.   
-
    54,518 
Short-term employee benefits paid or accrued to the Chief Technology Officer of the Company, including share-based compensation vested for incentive stock options and performance warrants.   95,387    77,686 
Short-term employee benefits paid or accrued to a Director of the Company, including share-based compensation vested for incentive stock options and performance warrants.   82,487    74,786 
Short-term employee benefits paid or accrued to the Chief People Officer of the Company, including share-based compensation vested for incentive stock options and performance warrants.   
-
    54,036 
Short-term employee benefits paid or accrued to other directors and officers of the Company, including share-based compensation vested for incentive stock options and performance warrants.   18,748    23,826 
Total   412,100    464,930 

 

Other Related Party Payments

 

Office sharing and occupancy costs of $0 (December 31, 2023 - $64,741) were paid or accrued to a corporation that shares management in common with the Company.

 

Amounts Outstanding

 

  a) At March 31, 2024, a total of $71,471 (December 31, 2023 - $177,500) was included in accounts payable and accrued liabilities owing to officers, directors, or companies controlled by them. These amounts are unsecured and non-interest bearing (Note 9).

 

24

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

13.CONCENTRATION OF RISK

 

Credit risk

 

Credit risk is the risk of financial loss to the Company if a counterparty to a financial instrument fails to meet its payment obligations. The Company has no material counterparties to its financial instruments with the exception of the financial institutions which hold its cash. The Company manages its credit risk by ensuring that its cash is placed with a major financial institution with strong investment grade ratings by a primary ratings agency. The Company’s receivables consist of goods and services due from customers and tax due from the Canadian government.

 

Financial instrument risk exposure

 

The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board approves and monitors the risk management processes.

 

Liquidity risk

 

The Company’s cash is invested in business accounts which are available on demand. The Company has not raised additional capital during the three months ended March 31, 2024.

 

Interest rate risk

 

The Company’s bank account earns interest income at variable rates. The fair value of its portfolio is relatively unaffected by changes in short-term interest rates. A 1% change in interest rates would have no significant impact on profit or loss for the year ended March 31, 2024.

 

Foreign exchange risk

 

Foreign currency exchange rate risk is the risk that the fair value of financial instruments or future cash flows will fluctuate because of changes in foreign exchange rates. The Company operates in Canada and the United States.

 

The Company was exposed to the following foreign currency risk as at March 31, 2024 and December 31, 2023:

 

   March 31,
2024
   December 31,
2023
 
   ($)   ($) 
Cash   775,479    1,630,841 
Accounts payable and accrued liabilities   (132,107)   (105,941)
    643,372    1,524,900 

 

As at March 31, 2024, with other variables unchanged, a +/- 10% change in the United States dollar to Canadian dollar exchange rate would impact the Company’s net loss by $64,300 (December 31, 2023 - $152,500).

 

25

 

 

VERSUS SYSTEMS INC.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2024

(Expressed in United States dollars)

(Unaudited)

 

14. Management of Capital

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company. Capital consists of items within equity (deficit). The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business. The Company is not subject to any externally imposed capital requirements.

 

The Company remains dependent on external financing to fund its activities. In order to sustain its operations, the Company will spend its existing cash on hand and raise additional amounts as needed until the business generates sufficient revenues to be self-sustaining. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.

 

In order to maximize ongoing corporate development efforts, the Company does not pay out dividends. The Company’s investment policy is to keep its cash treasury invested in certificates of deposit with major financial institutions.

 

There have been no changes to the Company’s approach to capital management during the year ended March 31, 2024.

 

15. GEOGRAPHICAL SEGMENTED INFORMATION

 

The Company is engaged in three business activities, the live events business, which includes partnering with multiple professional sports franchises to drive in-stadium audience engagement; a software licensing business creating a recurring revenue stream; and a business-to-business software platform that allows video game publishers and developers to offer prize-based matches of their games to their players.

 

Details of identifiable assets by geographic segments are as follows:

 

   Restricted
deposits
   Deposits   Property and
equipment
   Intangible
assets
 
                 
March 31, 2024                
Canada  $8,491   $
-
   $
-
   $
-
 
USA   
-
    
-
    1,169    
-
 
                     
   $8,491   $
-
   $1,169   $
-
 
                     
March 31, 2023                    
Canada  $8,490   $
-
   $
-
   $
-
 
USA   
-
    100,000    114,815    6,381,563 
                     
   $8,490   $100,000   $114,815   $6,381,563 

 

16. SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events after the balance sheet date of March 31, 2024 through May 15, 2024, the date the consolidated financial statements were issued. Based upon its evaluation, management has determined that no subsequent events have occurred that would require recognition in the accompanying condensed interim consolidated financial statements or disclosure in the notes thereto.

 

26

 

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis of our financial condition and results of operations for the years ended December 31, 2023 and 2022 in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Quarterly Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Quarterly Report.

 

Overview

 

We offer a suite of proprietary business-to-business software tools that are meant to drive user engagement through gamification and rewards. These tools allow our partners to offer in-game prizing and rewards, including merchandise, coupons, digital goods, and sweepstakes entries — inside their websites, their venues, or their streaming media content.

  

Our customers are mostly sports teams, venues, and advertising agencies, who typically use our products as part of their live events or as part of an advertising campaign with the goal of engaging fans, increasing consented first-party data, and increasing sales. At December 31, 2022, we had 16 active customers. At December 31, 2023 and at March 31, 2024, we had five active customers.

 

Our products and games are designed so that end users of our products can earn prizes by registering on our system and completing in-content challenges like trivia, polls, or casual mobile games. Players can use our system to play a variety of games and earn a wide range of prize types provided by advertisers and sponsors. Our products include our in-venue XEO and Filter Fan Cam products for live events, and our new stand-alone “Winfinite” product that can be used by brands, advertising agencies, and content partners to reach potential customers outside of sports venues, on mobile devices. We also have an IP portfolio that could create future licensing and product development opportunities including our recently allowed Artificial Intelligence (“AI”) and Machine Learning (“ML”) series of patent claims.

 

With the acquisition of Xcite Interactive in June 2021, we acquired a number of key pieces of technology and relationships that have helped to drive our engagement and rewards business, including a live events fan engagement business that has partnered with professional sports franchises in the National Football League (“NFL”), the National Basketball Association (“NBA”), the National Hockey League (“NHL”) and others to increase audience engagement using interactive gaming functions like trivia, polling, and casual games that can be played alongside live experiences whether a player is at-home, in a restaurant, or in-venue at the event itself. Our three largest customers in 2023 were the San Jose Sharks, the Sacramento Kings, and ENT Marketing, a marketing agency that used our platform to promote Coca-Cola products.

 

We now have three principal software products. Our eXtreme Engagement Online or “XEO” platform is designed primarily for in-venue main-board work in stadiums and arenas. Our Filter Fan Cam (FFC) platform is an Augmented Reality filtering tool that can be used for mobile and in-venue applications. In addition, we have a stand-alone gaming and prizing product that we call “Winfinite,” which allows brands, media companies, and advertising agencies to reach out to customers directly on their mobile devices. We license these three software products to teams, ad agencies, and other content creators.

 

27

 

 

Significant Components of Our Results of Operations

 

Revenue. In general, we recognize revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to us, where there is evidence of an arrangement, when the selling price is fixed or determinable, and when specific criteria have been met or there are no significant remaining performance obligations for each of our activities as described below. Foreseeable losses, if any, are recognized in the year or period in which the loss is determined.

 

We earn revenue through the development and maintenance of custom-built software.

 

We recognize revenues received from the development and maintenance of custom-built software and other professional services provided upon the satisfaction of our performance obligation in an amount that reflects the consideration to which we expect to be entitled in exchange for those services. Performance obligations can be satisfied either at a single point in time or over time. For those performance obligations that are satisfied at a single point in time, the revenue is recognized at that time. For each performance obligation satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of that performance obligation.

 

Our contracts with customers may include multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are capable of being distinct within the context of the contract. Determining which performance obligations are considered distinct may require significant judgment. Judgment is also required to determine the amount of revenue associated with each distinct performance obligation.

 

Operating Expenses. We classify our operating expense as research and development, and selling, general and administrative. Personnel costs are the primary component of each of these operating expense categories, which consist of cash-based personnel costs, such as salaries, benefits and bonuses. Additionally, these categories include intangible amortization, amortization expense, interest expense, software costs, professional fees and share-based compensation.

 

Operating Results

 

Comparison of Results of Operations for the Three-Month periods ended March 31, 2024 and March 31, 2023

 

The following table summarizes our results of operations for the three month periods ended March 31, 2024 and 2023:

 

   For the Three Months Ended
March 31,
 
   2024   2023 
         
Statement of Operations and Comprehensive Loss Data:        
Revenue  $26,503   $157,950 
Cost of revenues   24,046    32,357 
Gross Margin   2,457    125,593 
           
Expenses          
Research and development   39,412    67,140 
Selling, general and administrative   1,464,481    1,385,341 
Total Operating Expenses   1,503,893    1,452,482 
Operating loss   (1,501,436)   (1,362,889)
Other income/(expense)   247    0 
Net loss   (1,501,683)   (1,326,889)
           
Other total comprehensive loss:          
Change in foreign currency translation, net of tax   39,691    (9,348)
Total comprehensive loss  $(1,461,992)   (1,317,541)
           
Basic and diluted loss per share to shareholders  $(0.53)  $(2.28)

 

28

 

 

Revenue

 

Our revenues are derived primarily from software licensing. Revenue was $26,503 for the three month period ended March 31, 2024, representing a decrease of $131,447, or 83%, from $157,950 for the three month period ended March 31, 2023. The decrease was primarily due to a significant reduction in the number of clients from 16 active clients at March 31, 2023 to five active clients at March 31, 2024.

 

Cost of revenues

 

Cost of revenues was $24,046 for the three month period ended March 31, 2024, representing a decrease of $8,311, or 26%, from $32,357 for the three month period ended March 31, 2023. The decrease was primarily due to significant reductions in staff related to our company restructuring.

 

Research and development

 

Research and development was $39,412 for the three month period ended March 31, 2024, representing a decrease of $27,728, or 41%, from $67,140 for the three month period ended March 31, 2023. The decrease was primarily due to a reduction in staffing levels, including a large portion of our engineering staff, and a reduction in software costs.

  

Selling, general and administrative

 

Selling, general and administrative was $1,464,481 for the three month period ended March 31, 2024, representing an increase of $79,139, or 6%, from $1,385,342 for the three month period ended March 31, 2023. The increase was primarily due to an increase in professional fees.

 

Loss from Operations

 

Loss from operations was $1,503,893 for the three month period ended March 31, 2024, representing an increase of $51,411, or 4%, from $1,452,482 for the three month period ended March 31, 2023. The increase was primarily the result of increased spend on professional fees. 

Inflation

 

The effect of inflation on our revenue and operating results was not significant.

 

Liquidity and Capital Resources

 

We had cash of $2,892,356 and a working capital surplus of $3,166,672 as at March 31, 2024, compared to a cash position of $4,689,007 and working capital surplus of $4,546,227 as at December 31, 2023. The decrease in our cash position and decrease in working capital surplus was related to using cash to fund operations and ongoing losses.

 

Our financial condition and liquidity is and will continue to be influenced by a variety of factors, including:

 

  our ability to generate cash flows from our operations;

 

  future indebtedness and the interest we are obligated to pay on this indebtedness;

 

  the availability of public and private debt and equity financing;

 

  changes in exchange rates which will impact our generation of cash flows from operations when measured in CAD; and

 

  our capital expenditure requirements.

 

29

 

 

Overview

 

Since inception, we have incurred significant operating losses. For the years ended December 31, 2023 and 2022, we incurred net losses of approximately $10.5 million and $22.4 million, respectively. During such periods, we have financed our operations primarily through an initial public offering of our common shares in January 2021 and subsequent public offerings, registered direct offerings, and private placements. In February 2023, we completed a registered direct offering of our common shares in which we received gross proceeds of $2.25 million and net proceeds of approximately $2 million. In October 2023, we completed a public direct offering of our common shares in which we received gross proceeds of approximately $3 million and net proceeds of approximately $2.5 million. In November 2023, we completed a private placement of our equity securities in which we received gross proceeds of $2.6 million. Throughout 2023, we received approximately $4.6 million in proceeds from warrant exercises. Our cash and cash equivalents as of December 31, 2023 was $4.7 million. Our primary cash needs are for working capital requirements, capital expenditures and to fund our operations.

  

We are subject to the risks and uncertainties associated with a new business. We believe that our current resources and the expected revenues from operations will be insufficient to fund our planned operations for the next twelve months. The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2023 stated that our recurring losses from operations, accumulated deficit as of December 31, 2023, inability to achieve positive cash flows from operations and inability to fund day to day activities through operations indicates that a material uncertainty exists that may cast significant doubt on our ability to continue as a going concern.

 

While, we plan to increase our cash flow from our operations to address some of our liquidity concerns, to date we have been unable to do so and are experiencing declining revenues. Accordingly, we are evaluating other strategic alternatives. However, to execute our business plan and implement our business strategy, we anticipate that we will need to obtain additional financing and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute our current shareholders’ ownership in us and could also result in a decrease in the market price of our common shares. The terms of those securities issued by us in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. Furthermore, any debt financing, if available, may subject us to restrictive covenants and significant interest costs. There can be no assurance that we will be able to raise additional capital, when needed, to continue operations in their current form. If we cannot raise needed funds, we might be forced to make substantial reductions in our operating expenses, including reductions in our research and development expenses or headcount reductions, which could adversely affect our ability to implement our business plan and ultimately our viability as a company, or we may be forced to liquidate the company.

 

Cash Flows

 

The following summarizes the key components of our cash flows for the three month periods ended March 31, 2024 and 2023:

 

   Three Month
Period Ended
March 31,
2024
   Three Month
Period Ended
March 31,
2023
 
Net cash used in operating activities  $(1,796,651)  $(2,257,959)
Net cash used in investing activities   -    (8,550)
Net cash provided by financing activities   -    6,367,073 
Net increase (decrease) in cash  $(1,796,651)  $4,100,564 

 

30

 

 

Operating Activities

 

Net cash used in operating activities for the three month period ended March 31, 2024 was $1,796,651 as compared to $2,257,959 for the three month period ended March 31, 2023. The decrease in cash used in operating activities was primarily attributable to a decrease in the net loss excluding share based compensation expense, which was negative $1,247,113 in the three month period ended March 31, 2023.

 

Investing Activities

 

Net cash used in investing activities for the three month period ended March 31, 2024 was $0 as compared to $8,550 for the three month period ended March 31, 2023. The change in cash flow used in investing activities was primarily attributable to a significant reduction in payroll capitalized for the development of intangible assets, and a reduction in the amount of equipment purchased.

   

Financing Activities

 

Net cash provided by financing activities was $0 for the three month period ended March 31, 2024 as compared to $6,367,073 for the three month period ended March 31, 2023. The change in cash flow provided by financing activities was mainly attributable to proceeds we received from the issuance of common shares, exercise of warrants and options, and repayments on notes payable in 2023.

  

Indebtedness

 

Notes Payable

 

From 2017 to December 31, 2022, we issued $4,750,818 aggregate principal amount of promissory notes primarily to Brian Tingle, one of our directors. The notes bore interest at the prime rate of the Bank of Canada, which has ranged from 2.45% to 3.95% per annum, compounded annually, that was payable quarterly, and had a maturity date of three years from the date of issuance. As of December 31, 2023, all loans have been repaid and we had recorded $0 in accrued interest that was included in accounts payable and accrued liabilities.

 

Critical Accounting Policies and Estimates

 

The preparation of consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements. Estimates and assumptions are continually evaluated and are based on historical experience and management’s assessment of current events and other facts and circumstances that are considered to be relevant. Actual results could differ from these estimates.

 

Significant assumptions about the future and other sources of estimation uncertainty that management has made at the end of the reporting year, that could result in a material adjustment to the carrying amounts of assets and liabilities in the event that actual results differ from assumptions made, relate to, but are not limited to, the following:

 

Estimate for excess credit losses

 

We apply the Current Expected Credit Loss (CECL) model under ASC 326 for impairment of financial assets. This model requires the recognition of an allowance for credit losses based on expected losses over the life of the asset. If the credit risk of a financial asset decreases in a subsequent period, any previously recognized impairment loss is reversed through profit or loss, limited to the extent that the carrying amount does not exceed what the amortized cost would have been had the impairment not been recognized.

 

Deferred financing costs

 

Deferred financing costs consist primarily of direct incremental costs related to our public offerings of our common stock completed in February 2023. Upon completion of our public offering and financing any deferred costs were offset against the proceeds.

 

31

 

 

Property and equipment

 

Property and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing part of the property and equipment. All other repair and maintenance costs are recognized in the consolidated statements of operations and comprehensive loss. The initial cost of property and equipment comprises its purchase price or construction cost and any costs directly attributable to bringing it to a working condition for its intended use. The purchase price or construction cost is the aggregate amount of cash consideration paid and the fair value of any other consideration given to acquire the asset. Where an item of property and equipment is comprised of significant components with different useful lives, the components are accounted for as separate items of property and equipment. For all property and equipment, depreciation is calculated over the depreciable amount, which is the cost of an asset less its residual value. Depreciation is calculated starting on the date that property and equipment is available for its intended use.

  

Intangible assets

 

Intangible assets acquired separately were measured upon initial recognition at cost, which comprises the purchase price plus any costs directly attributable to the preparation of the asset for its intended use. Intangible assets acquired through business combinations (Xcite Interactive) or asset acquisitions were initially recognized at fair value as at the date of acquisition. After initial recognition, intangible assets were carried at cost less accumulated amortization and any accumulated impairment charges.

 

Income taxes

 

We account for income taxes utilizing the assets and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and net operating loss and tax credit carry forwards, using enacted tax rates and laws that are expected to be in effect when the differences reverse. 

 

A valuation allowance is recorded against deferred tax assets (DTA’s) when management does not believe that the realization of DTA’s is more likely than not. While management believes that its judgements and estimates regarding deferred tax assets and liabilities are appropriate, significant differences in actual results may materially affect our future financial results.

 

We recognize any uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon audit by relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. As of March 31, 2024 and 2023, we did not record any accruals for interest and penalties. We do not foresee material changes to our uncertain tax positions within the next twelve months.

 

Determination of share-based payments

 

The estimation of share-based payments (including warrants and stock options) requires the selection of an appropriate valuation model and consideration as to the inputs necessary for the valuation model chosen. We use the Black-Scholes valuation model at the date of the grant. We make estimates as to the volatility, the expected life, dividend yield and the time of exercise, as applicable. The expected volatility is based on the average volatility of share prices of similar companies over the period of the expected life of the applicable warrants and stock options. The expected life is based on historical data. These estimates may not necessarily be indicative of future actual patterns.

 

Deferred revenues and revenue recognition

 

Revenue recognition of sales is recorded on a monthly basis upon delivery or as the services are provided. Cash received in advance for services are recorded as deferred revenue based on the proportion of time remaining under the service arrangement as of the reporting date.

 

32

 

 

Functional currency

 

The functional currency for each of our subsidiaries is the currency of the primary economic environment in which the respective entity operates. Such determination involves certain judgements to identify the primary economic environment. We reconsider the functional currency of our subsidiaries if there is a change in events and/or conditions which determine the primary economic environment.

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

Not required under Regulation S-K for smaller reporting companies.

 

Item 4.Controls and Procedures.

 

Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our management, with the participation of our chief executive officer and chief financial officer, has concluded that, as of March 31, 2024, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

None.

 

33

 

 

PART II - OTHER INFORMATION

 

Item 1.Legal Proceedings

 

None

 

Item 1A.Risk Factors

 

Other than as set for below, there have been no material changes to the risk factors set forth in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 1, 2024 (our “Annual Report”). Our business involves significant risks. You should carefully consider the risks and uncertainties described in our Annual Report, together with all of the other information in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report. The risks and uncertainties described in our Annual Report are not the only ones we face, and additional risk and uncertainties that we are unaware of or that we deem immaterial may also become important factors that adversely affect our business. The realization of any of these risks and uncertainties could have a material adverse effect on our reputation, business, financial condition, results of operations, growth and future prospects as well as our ability to accomplish our strategic objectives. In that event, the market price of our common shares could decline and you could lose part or all of your investment.

 

If we do not successfully raise additional capital, improve our operating cash flow, or complete a strategic transaction, our board of directors may decide to pursue a dissolution and liquidation of our company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that must be reserved for commitments and contingent liabilities, as to which we can give you no assurance.

 

There can be no assurance that we will successfully raise additional capital, that we will improve our operating cash flow, or that we will be able to complete a strategic transaction. If none of those occur, our board of directors may decide to pursue a dissolution and liquidation of our company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution continues to decrease as we fund our operations while pursuing a financing, improved operations, or a strategic transaction. In addition, if our board of directors were to approve and recommend a dissolution and liquidation of our company, we would be required under British Columbia corporate law to pay our outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to stockholders. Our commitments and contingent liabilities may include obligations under our employment and related agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control of our company, litigation against us, and other various claims and legal actions arising in the ordinary course of business, and other unexpected and/or contingent liabilities. As a result of this requirement, a portion of our assets would need to be reserved pending the resolution of such obligations.

 

In addition, we may be subject to litigation or other claims related to a dissolution and liquidation of our company. If a dissolution and liquidation were to be pursued, our board of directors, in consultation with our advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of our common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of our company. A liquidation would be a lengthy and uncertain process with no assurance of any value ever being returned to our stockholders.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3.Default Upon Senior Securities

 

None

 

Item 4.Mine Safety Disclosures.

 

Not applicable.

 

Item 5.Other Information

 

None

 

34

 

 

Item 6.Exhibits

 

The following documents are filed as a part of this report or incorporated herein by reference:

 

Exhibit Number   Description
31.1   Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certifications of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certifications of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS   Inline XBRL Instance Document.
     
101.SCH   Inline XBRL Taxonomy Extension Schema Document.
     
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document.
     
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document.
     
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document.
     
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document.
     
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

35

 

 

SIGNATURES

 

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

VERSUS SYSTEMS INC.

   
Date: May 15, 2024 /s/ Matthew Pierce
  Matthew Pierce
  Chief Executive Officer
(Principal Executive Officer)
   
Date: May 15, 2024

/s/ Craig Finster

  Craig Finster
  Chief Financial Officer
  (Principal Financial and
Accounting Officer)

 

 

36

 

 

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