VS 10-Q
Versus Systems Inc. (VS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from ______________ to ______________
Commission
File No.
(Exact name of registrant as specified in its charter)
(State
or other jurisdiction of | (I.R.S.
Employer |
| ||
| (Address of principal executive office) | (Zip Code) |
(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 | ||
| The | ||||
| The |
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.
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).
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 | ☐ |
| ☒ | 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 August 12, 2024, there were
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Versus Systems Inc.
Condensed Interim Consolidated Balance Sheets
(Expressed in US Dollars)
| June 30 | December 31, | |||||||
| 2024 | 2023 | |||||||
| ($) | ($) | |||||||
| ASSETS | (Unaudited) | |||||||
| Current assets | ||||||||
| Cash | ||||||||
| Receivables, net of allowance (Note 4) | ||||||||
| Prepaids | ||||||||
| Total current assets | ||||||||
| Restricted deposit (Note 5) | - | |||||||
| Property and equipment, net (Note 6) | ||||||||
| Total assets | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities (Note 9, Note 10 and Note 12) | ||||||||
| Deferred revenue | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity | ||||||||
| Share capital (Note 11) | ||||||||
| Common stock and additional paid in capital, par value. | ||||||||
| Accumulated other comprehensive income | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Non-controlling interest (Note 7) | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | ||||||||
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, except share and per share amounts)
| Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | |||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||
| ($) | ($) | ($) | ($) | |||||||||||||
| REVENUES | ||||||||||||||||
| Revenues | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross margin | ||||||||||||||||
| EXPENSES | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income/(expense), net | ( | ) | ( | ) | ||||||||||||
| Loss before provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other total comprehensive income (loss): | ||||||||||||||||
| Change in foreign currency translation, net of tax | ||||||||||||||||
| Total other comprehensive income (loss) | ||||||||||||||||
| Total comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: comprehensive income attributable to non-controlling interest | ||||||||||||||||
| Comprehensive loss attributable to shareholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
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, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Loss and comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| March 31, 2024 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | ||||||||||||||||||||||||||||||||||||||
| Loss and comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| 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 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||||||
| Shares issued in public offering | ||||||||||||||||||||||||||||||||||||||||
| Share issuance costs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | ||||||||||||||||||||||||||||||||||||||
| Loss and comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | ||||||||||||||||||||||||||||||||||||||
| Loss and comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
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)
| Six months Ended | Six months Ended | |||||||
| June 30, 2024 | June 30, 2023 | |||||||
| ($) | ($) | |||||||
| Cash flows from operating activities | ||||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss to net cash: | ||||||||
| Amortization (Note 8) | ||||||||
| Amortization of intangible assets | ||||||||
| Loss on sale of equipment | ||||||||
| Accrued interest | ||||||||
| Effect of foreign exchange | ||||||||
| Share-based compensation | ( | ) | ||||||
| Receivables | ||||||||
| Prepaids | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
| Cash flows used in operating activities | ( | ) | ( | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Repayment of notes payable - related party | ( | ) | ||||||
| Proceeds from warrant exercises | ||||||||
| Proceeds from share issuances | ||||||||
| Payments for lease liabilities | ( | ) | ||||||
| Payments of share issuance costs | ( | ) | ||||||
| Cash flows provided by financing activities | ||||||||
| INVESTING ACTIVITIES | ||||||||
| Proceeds from sale of equipment | ||||||||
| Purchase of intangible assets | ( | ) | ||||||
| Cash flows used in investing activities | ( | ) | ||||||
| Change in cash during the period | ( | ) | ||||||
| Cash - Beginning of period | ||||||||
| Cash - End of period | ||||||||
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
4
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VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 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 actively pursuing a range of strategic alternatives aimed at maximizing shareholder value and strengthening its market position. We are in the process of evaluating and implementing commercial agreements to expand the distribution of applications that leverage our proprietary technology. These arrangements are intended to enhance market reach, drive user growth, and establish relationships with distribution partners. These collaborations may support technology and development, integrate complementary technologies, and improve our competitive edge.
In parallel, we are exploring various strategic options, including potential acquisitions, mergers, reverse mergers, and the sale of non-core assets. These alternatives would be designed to create synergies, streamline operations, and generate revenue. We are also seeking strategic partnerships and evaluating opportunities for capital raises to support our growth initiatives. Furthermore, the Company is focused on enhancing operational efficiency by optimizing processes and upgrading technology systems to reduce costs and improve profitability. Strengthening our financial health through better cash flow management and prudent financial practices is also a key priority. These comprehensive efforts are aimed at positioning the Company for long-term success and delivering sustainable value to our shareholders.
The Company is undertaking a strategic transition by shifting its governing jurisdiction from British Columbia to Delaware. This change is expected to better align with our evolving business strategy and deliver several key benefits. Firstly, the transition to Delaware is anticipated to enhance our access to investors and financial institutions within the United States. Delaware’s renowned business-friendly legal environment and proximity to the U.S. Northeast’s economic and financial centers is expected to facilitate easier access to funding, increase our strategic flexibility, and reduce the overall cost of capital. This improved access to funding would be crucial in supporting our future growth initiatives and financing our strategic plans.
Secondly, the move is expected to bolster our ability to execute an acquisitive growth strategy. By operating under Delaware’s well-established corporate laws, we believe that we will be better positioned to use our capital stock as consideration for acquisitions and be able to structure transactions with more legal certainty. This capability will allow us to pursue strategic opportunities more effectively, expand our business portfolio, and achieve our growth objectives through well-structured transactions.
Additionally, the change in jurisdiction will enable us to more effectively focus management efforts on our U.S. and international operations. This realignment would help streamline our governance and operational strategies across different regions, thereby enhancing our ability to manage and optimize each market effectively. Furthermore, the enhanced profile of companies incorporated in Delaware with operations in the U.S. is likely to make the Company more attractive to key employees and executives, aiding in the recruitment and retention of top talent critical for driving innovation and growth.
In conjunction with these changes, the Company is also exploring opportunities to raise capital through its shareholders. Engaging with our shareholder base could provide an additional source of funding that aligns with our strategic goals. Accretive capital raises would support our expansion plans, enable us to capitalize on growth opportunities, and strengthen our financial position.
Overall, the shift to Delaware, combined with the exploration of acquisition opportunities and investor engagement, is part of our broader strategy to enhance operational effectiveness, execute our growth strategy, and maximize shareholder value.
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 June 30, 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.
5
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VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2024 (Expressed in United States dollars) (Unaudited) |
| 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.
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.
| Name of Subsidiary | Place of Incorporation | Proportion of Ownership Interest | Principal Activity | |||||
| Versus Systems (Holdco) Inc. | % | |||||||
| Versus Systems UK, Ltd. | % | |||||||
| Versus LLC | % | |||||||
| Xcite Interactive, Inc. | % | |||||||
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 AND SIX MONTH PERIODS ENDED JUNE 30, 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 June 30, 2024 totaled
7
| VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2024 (Expressed in United States dollars) (Unaudited) |
| 3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
Property and equipment
| Asset | Rate | |
| Computers | ||
| Right of use assets |
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 AND SIX MONTH PERIODS ENDED JUNE 30, 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 June 30, 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 AND SIX MONTH PERIODS ENDED JUNE 30, 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 were amortized on a straight-line basis over
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 AND SIX MONTH PERIODS ENDED JUNE 30, 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
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 AND SIX MONTH PERIODS ENDED JUNE 30, 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.
12
| VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 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 AND SIX MONTH PERIODS ENDED JUNE 30, 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 statements 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 June 30, 2024 and 2023, due to the effects of foreign translation gains and losses.
Recent accounting pronouncements not yet adopted
New accounting pronouncements
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. 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.
14
| VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2024 (Expressed in United States dollars) (Unaudited) |
| 3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
Recent adopted 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 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 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 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 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 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 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 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 June 30, 2024, accounts receivable
consists of customer receivables of
| 5. | RESTRICTED DEPOSIT |
As at June 30, 2024, restricted deposits
consisted of
15
| VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2024 (Expressed in United States dollars) (Unaudited) |
| 6. | PROPERTY AND EQUIPMENT |
| Computers | Right of Use Asset | Total | ||||||||||
| ($) | ($) | ($) | ||||||||||
| Cost | ||||||||||||
| At December 31, 2022 | ||||||||||||
| Additions | ||||||||||||
| Disposals | ( | ) | ( | ) | ||||||||
| At December 31, 2023 | ||||||||||||
| Disposals | ( | ) | ( | ) | ||||||||
| At June 30, 2024 | ||||||||||||
| Accumulated amortization | ||||||||||||
| At December 31, 2022 | ||||||||||||
| Amortization for the period | ||||||||||||
| Disposals | ( | ) | ( | ) | ||||||||
| At December 31, 2023 | ||||||||||||
| Amortization for the period | ||||||||||||
| Disposals | ( | ) | ( | ) | ||||||||
| At June 30, 2024 | ||||||||||||
| Carrying amounts | ||||||||||||
| At December 31, 2022 | ||||||||||||
| At December 31, 2023 | ||||||||||||
| At June 30, 2024 | ||||||||||||
| 7. | NON-CONTROLLING INTEREST IN VERSUS LLC |
As of December 31, 2018, the Company
held a
During 2019, the Company increased its ownership by
On March 1, 2022, the Company acquired
an additional
| June 30, 2024 | June 30, 2023 | |||||||
| Non-controlling interest percentage | ||||||||
| ($) | ($) | |||||||
| Assets | ||||||||
| Current | ||||||||
| Non-current | ||||||||
| Liabilities | ||||||||
| Current | ||||||||
| Non-current | ||||||||
| Net liabilities | ( | ) | ( | ) | ||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Net loss | ( | ) | ( | ) | ||||
| Net loss attributed to non-controlling interest | ( | ) | ( | ) | ||||
16
| VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2024 (Expressed in United States dollars) (Unaudited) |
| 8. | INTANGIBLE ASSETS |
Intangible assets were comprised of
a business-to-business software platform that allows video game publishers and developers to offer prize-based matches of their games
to their players. The Company continued to develop new apps, therefore additional costs were capitalized during the years ended December
31, 2023 and 2022. During the year ended December 31, 2023, the Company completed an impairment analysis of its intangible assets and
concluded the assets were impaired.
| Software | Customer Relationships | Trade name | Developed Technology | Total | ||||||||||||||||
| Cost | ||||||||||||||||||||
| At December 31, 2022 | ||||||||||||||||||||
| Additions | ||||||||||||||||||||
| Impairment | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| At December 31, 2023 | ||||||||||||||||||||
| Additions | ||||||||||||||||||||
| At June 30, 2024 | ||||||||||||||||||||
| Accumulated amortization | ||||||||||||||||||||
| At December 31, 2022 | ||||||||||||||||||||
| Amortization | ||||||||||||||||||||
| At December 31, 2023 | ||||||||||||||||||||
| Amortization | ||||||||||||||||||||
| At June 30, 2024 | ||||||||||||||||||||
| Carrying amounts | ||||||||||||||||||||
| At December 31, 2022 | ||||||||||||||||||||
| At December 31, 2023 | ||||||||||||||||||||
| At June 30, 2024 | ||||||||||||||||||||
| 9. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
| June 30, 2024 | December 31, 2023 | |||||||
| ($) | ($) | |||||||
| Accounts payable | ||||||||
| Due to related parties (Note 10 and Note12) | ||||||||
| Accrued liabilities | ||||||||
17
| VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2024 (Expressed in United States dollars) (Unaudited) |
| 10. | NOTES PAYABLE – RELATED PARTY |
During the year ended December 31, 2023,
the Company repaid $
| Amount | ||||
| ($) | ||||
| Balance, December 31, 2022 | ||||
| Foreign currency adjustment | ( | ) | ||
| Repayments | ( | ) | ||
| Cancellation of remaining debt | ( | ) | ||
| Balance, December 31, 2023 | ||||
| 11. | SHARE CAPITAL |
| a) | Authorized share capital |
The Company is authorized to issue an unlimited number of Class A Shares and an unlimited number of common shares. The Class A Shares and common shares do not have any special rights or restrictions attached, respectively. The Class A shares were converted to common shares on December 22, 2023, and as of December 31, 2023, there were no Class A Shares issued and outstanding and only common shares outstanding.
| b) | Issued share capital |
During the year ended December 31, 2023, the Company:
| i) | Issued |
| ii) | Issued |
| iii) | Issued |
| iv) | Issued |
| v) | Issued |
During the six months ended June 30, 2024, the Company:
| i) | Did not enter into any capital transactions. |
18
| VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2024 (Expressed in United States dollars) (Unaudited) |
| 11. | SHARE CAPITAL (continued) |
| c) | Stock options |
The Company may grant incentive stock
options to its officers, directors, employees, and consultants. The Company has implemented a rolling Stock Option Plan (the “Plan”)
whereby the Company can issue up to
| Number Outstanding | Weighted Average Exercise Price | |||||||
| ($) | ||||||||
| Balance – December 31, 2022 | ||||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ( | ) | ||||||
| Balance – December 31, 2023 | ||||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ( | ) | ||||||
| Balance – June 30, 2024 | ||||||||
During the three months ended June 30, 2024 and 2023 the Company recorded
share-based compensation of
| June 30, 2024 | June 30, 2023 | |||||||
| Risk-free interest rate | % | % | ||||||
| Expected life of options | ||||||||
| Expected dividend yield | ||||||||
| Volatility | % | % | ||||||
19
| VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2024 (Expressed in United States dollars) (Unaudited) |
| 11. | SHARE CAPITAL (continued) |
| Expiry Date | Options Outstanding | Exercise Price | Weighted Average Remaining Life | |||||||||
| ($) | (years) | |||||||||||
| September 27, 2024 | ||||||||||||
| July 24, 2025 | ||||||||||||
| July 31, 2025 | ||||||||||||
| June 1, 2026 | ||||||||||||
| August 19, 2026 | ||||||||||||
| August 17, 2027 | ||||||||||||
| September 20, 2027 | ||||||||||||
| February 13, 2028 | ||||||||||||
| d) | Share purchase warrants |
| Number Outstanding | Weighted Average Exercise Price | |||||||
| ($) | ||||||||
| Balance –December 31, 2022 | ||||||||
| Exercised | ( | ) | ||||||
| Expired | ||||||||
| Issued | ||||||||
| Balance – December 31, 2023 | ||||||||
| Exercised | ||||||||
| Expired | ||||||||
| Issued | ||||||||
| Balance – June 30, 2024 | ||||||||
During the year ended December 31, 2023, the Company:
| i) | Issued |
20
| VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2024 (Expressed in United States dollars) (Unaudited) |
| 11. | SHARE CAPITAL (continued) |
| ii) | Issued |
| iii) | Issued |
| June 30, 2024 | December 31, 2023 | |||||
| Risk-free interest rate | ||||||
| Expected life of warrants | ||||||
| Expected dividend yield | ||||||
| Volatility | ||||||
| Weighted average fair value per warrant | $ | $ |
| Expiration Date | Warrants Outstanding | Exercise Price | Weighted Average Remaining Life | |||||||||
| ($) | (years) | |||||||||||
| January 20, 2026 | ||||||||||||
| February 28, 2027 | ||||||||||||
| December 6, 2027 | ||||||||||||
| December 9, 2027 | ||||||||||||
| January 18, 2028 | ||||||||||||
| February 2, 2028 | ||||||||||||
| October 17, 2028 | ||||||||||||
| October 17, 2028 | ||||||||||||
21
| VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2024 (Expressed in United States dollars) (Unaudited) |
| 12. | RELATED PARTY TRANSACTIONS |
The following summarizes the Company’s related party transactions, not disclosed elsewhere in these condensed interim consolidated financial statements, during the six months ended June 30, 2024 and 2023. Key management personnel includes the Chief Executive Officer (CEO), Chief Financial Officer (CFO) and certain directors and officers and companies controlled or significantly influenced by them.
| 2024 | 2023 | |||||||
| ($) | ($) | |||||||
| 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. | ||||||||
| 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. | ||||||||
| 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. | ||||||||
| 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. | ||||||||
| 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. | ||||||||
| 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. | ||||||||
| 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. | ||||||||
| Total | ||||||||
Other Related Party Payments
Office sharing and occupancy costs of
$
Amounts Outstanding
| a) | At June 30, 2024, a total of $ |
22
| VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 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 and six months ended June 30, 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 six months ended June 30, 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.
| June 30, 2024 | December 31, 2023 | |||||||
| ($) | ($) | |||||||
| Cash | ||||||||
| Accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
As at June 30, 2024, with other variables
unchanged, a +/-
23
| VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 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 six months ended June 30, 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.
| Restricted deposits | Deposits | Property and equipment | Intangible assets | |||||||||||||
| June 30, 2024 | ||||||||||||||||
| Canada | $ | $ | $ | $ | ||||||||||||
| USA | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| June 30, 2023 | ||||||||||||||||
| Canada | $ | $ | $ | $ | ||||||||||||
| USA | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 16. | SUBSEQUENT EVENTS |
The Company has evaluated subsequent events after the balance sheet date of June 30, 2024 through August 14, 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.
24
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 addition to the Quarterly Report for the period ended March 31, 2024, in conjunction with our unaudited condensed consolidated interim 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 June 30, 2024, we had five active customers due to the decrease in our sales force.
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.
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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 months ended June 30, 2024 and June 30, 2023
The following table summarizes our results of operations for the three months ended June 30, 2024 and 2023:
| For the Three Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Statement of Operations and Comprehensive Loss Data: | ||||||||
| Revenue | $ | 26,937 | $ | 56,053 | ||||
| Cost of revenues | 16,231 | 23,570 | ||||||
| Gross Margin | 10,706 | 32,483 | ||||||
| Expenses | ||||||||
| Research and development | 67,203 | 717,667 | ||||||
| Selling, general and administrative | 1,443,171 | 1,625,471 | ||||||
| Total Operating Expenses | 1,510,374 | 2,343,138 | ||||||
| Operating loss | (1,499,668 | ) | (2,310,655 | ) | ||||
| Other income (expense) | (74 | ) | - | |||||
| Net loss | (1,499,742 | ) | (2,310,655 | ) | ||||
| Other total comprehensive loss: | ||||||||
| Change in foreign currency translation, net of tax | 121,174 | 18,849 | ||||||
| Total comprehensive loss | $ | (1,378,568 | ) | (2,291,806 | ) | |||
| Basic and diluted loss per share to shareholders | $ | (0.54 | ) | $ | (3.05 | ) | ||
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Revenue
Our revenues are derived primarily from software licensing. Revenue was $26,937 for the three month period ended June 30, 2024, representing a decrease of $29,116, or 52%, from $56,053 for the three month period ended June 30, 2023. The decrease was primarily due to a significant reduction in the number of clients from June 30, 2023 to June 30, 2024.
Cost of revenues
Cost of revenues was $16,231 for the three month period ended June 30, 2024, representing a decrease of $7,339, or 31%, from $23,570 for the three month period ended June 30, 2023. The decrease was in line with the decrease in revenue
Research and development
Research and development was $67,203 for the three month period ended June 30, 2024, representing a decrease of $650,464, or 91%, from $717,667 for the three month period ended June 30, 2023. The decrease was primarily due to significant reductions in staff related to our company restructuring.
Selling, general and administrative
Selling, general and administrative was $1,443,171 for the three month period ended June 30, 2024, representing a decrease of $182,300, or 11%, from $1,625,471 for the three month period ended June 30, 2023. The decrease was primarily due to a decrease in payroll as the Company reduced head count and a decrease in professional fees, offset by a one-time severance payment of $305,000 during the three months ended June 30, 2024.
Loss from Operations
Loss from operations was $1,499,742 for the three month period ended June 30, 2024, representing a decrease of $810,913, or 35%, from $2,310,655 for the three month period ended June 30, 2023. The decrease was primarily the result of decreased spend on professional fees and payroll.
Operating Results
Comparison of Results of Operations for the six month period ended June 30, 2024 and June 30, 2023
The following table summarizes our results of operations for the six months ended June 30, 2024 and 2023:
| For the Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Statement of Operations and Comprehensive Loss Data: | ||||||||
| Revenue | $ | 53,440 | $ | 214,003 | ||||
| Cost of revenues | 40,277 | 55,927 | ||||||
| Gross Margin | 13,163 | 158,076 | ||||||
| Expenses | ||||||||
| Research and development | 106,615 | 784,807 | ||||||
| Selling, general and administrative | 2,907,652 | 3,010,813 | ||||||
| Total Operating Expenses | 3,014,267 | 3,795,620 | ||||||
| Operating loss | (3,001,104 | ) | (3,637,544 | ) | ||||
| Other income/(expense) | (321 | ) | - | |||||
| Net loss | (3,001,425 | ) | (3,637,544 | ) | ||||
| Other total comprehensive income (loss): | ||||||||
| Change in foreign currency translation, net of tax | 160,865 | 28,197 | ||||||
| Total comprehensive loss | $ | (2,840,560 | ) | (3,609,347 | ) | |||
| Basic and diluted loss per share to shareholders | $ | (1.07 | ) | $ | (5.46 | ) | ||
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Revenue
Our revenues are derived primarily from software licensing. Revenue was $53,440 for the six month period ended June 30, 2024, representing a decrease of $160,563, or 75%, from $214,003 for the six month period ended June 30, 2023. The decrease was primarily due to a significant reduction in the number of clients from June 30, 2023 to June 30, 2024.
Cost of revenues
Cost of revenues was $40,277 for the six month period ended June 30, 2024, representing a decrease of $15,650, or 28%, from $55,927 for the six month period ended June 30, 2023. The decrease was in line with the decrease in revenue.
Research and development
Research and development was $106,615 for the six month period ended June 30, 2024, representing a decrease of $678,192, or 86%, from $784,807 for the six month period ended June 30, 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 $2,907,652 for the six month period ended June 30, 2024, representing a decrease of $103,161, or 3%, from $3,010,813 for the six month period ended June 30, 2023. The decrease was primarily due to a decrease in payroll as the Company reduced head count and a decrease in professional fees, offset by a one-time severance payment of $305,000 during the six months ended June 30, 2024.
Loss from Operations
Loss from operations was $3,001,104 for the six month period ended June 30, 2024, representing a decrease of $636,440, or 17%, from $3,637,544 for the six month period ended June 30, 2023. The decrease was primarily the result of decreased spend on professional fees and payroll.
Inflation
The effect of inflation on our revenue and operating results was not significant.
Liquidity and Capital Resources
We had cash of $905,915 and a working capital surplus of $1,796,886 as at June 30, 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. |
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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. For the six months ended June 30, 2024 the company incurred a net loss of $3.0 million. 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 six months period ended June 30, 2024 and 2023:
| Six Months Period Ended June 30, 2024 | Six Months Period Ended June 30, 2023 | |||||||
| Net cash used in operating activities | $ | (3,783,092 | ) | $ | (3,514,003 | ) | ||
| Net cash used in investing activities | - | (9,670 | ) | |||||
| Net cash provided by financing activities | - | 5,538,655 | ||||||
| Net increase (decrease) in cash | $ | (3,783,092 | ) | $ | 2,014,982 | |||
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Operating Activities
Net cash used in operating activities for the six month period ended June 30, 2024 was $3,783,092 as compared to $(3,637.544) for the six month period ended June 30, 2023. The increase in cash used in operating activities was primarily attributable to the increase in cash used for prepaid expenses as the Company is required to prepay for its directors and officers insurance.
Investing Activities
Net cash used in investing activities for the six month period ended June 30, 2024 was $0 as compared to $9,670 for the six month period ended June 30, 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.
Financing Activities
Net cash provided by financing activities was $0 for the six month period ended June 30, 2024 as compared to $5,538,655 for the six month period ended June 30, 2023. The change in cash flow provided by financing activities was mainly attributable to proceeds we received from the issuance of common shares, net of issuance costs, exercise of warrants and options, which was offset by repayments on notes payable and lease liabilities 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.
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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 June 30, 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.
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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 June 30, 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
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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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. As of June 30, 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.
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
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Item 6. Exhibits
The following documents are filed as a part of this report or incorporated herein by reference:
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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: August 14, 2024 | /s/ Curtis Wolfe |
| Curtis Wolfe | |
| Chief Executive Officer (Principal Executive Officer) | |
| Date: August 14, 2024 | /s/ Geoff Deller |
| Geoff Deller | |
| Interim Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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