Versus Systems Inc. 10-Q

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 905,915 4,689,007 Receivables, net of allowance (Note 4) 10,250 18,222 Prepaids 913,658 160,474 Total current assets 1,829,823 4,867,703 Restricted deposit (Note 5) - 8,679 Property and equipment, net (Note 6) 878 1,935 Total assets 1,830,701 4,878,317 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued liabilities (Note 9, Note 10 and Note 12) 23,606 286,427 Deferred revenue 9,331 35,049 Total liabilities 32,937 321,476 Stockholders’ equity Share capital (Note 11) Common stock and additional paid in capital, no par value. Unlimited authorized shares; 2,506,015 common shares and no Class A shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively 147,290,988 147,130,123 Accumulated other comprehensive income 329,770 248,287 Accumulated deficit ( 138,105,958 ) ( 135,434,022 ) 9,514,800 11,944,388 Non-controlling interest (Note 7) ( 7,717,036 ) ( 7,387,547 ) Total stockholders’ equity 1,797,764 4,556,841 Total liabilities and stockholders’ equity 1,830,701 4,878,317 The accompanying notes are an integral part of these condensed interim consolidated financial statements. 1 Versus Systems Inc. Consolidated Statements of Operations and Comprehensive Loss (Unaudited) (Expressed in US Dollars, 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 26,937 56,053 53,440 214,003 Cost of revenues 16,231 23,570 40,277 55,927 Gross margin 10,706 32,483 13,163 158,076 EXPENSES Research and development 67,203 717,667 106,615 784,807 Selling, general and administrative 1,443,171 1,625,471 2,907,652 3,010,813 Total operating expenses 1,510,374 2,343,138 3,014,267 3,795,620 Operating loss ( 1,499,668 ) ( 2,310,655 ) ( 3,001,104 ) ( 3,637,544 ) Other income/(expense), net ( 74 ) - ( 321 ) - Loss before provision ( 1,499,742 ) ( 2,310,655 ) ( 3,001,425 ) ( 3,637,544 ) Provision for income taxes - - - - Net loss ( 1,499,742 ) ( 2,310,655 ) ( 3,001,425 ) ( 3,637,544 ) Other total comprehensive income (loss): Change in foreign currency translation, net of tax 121,174 18,849 160,865 28,197 Total other comprehensive income (loss) 121,174 18,849 160,865 28,197 Total comprehensive loss ( 1,378,568 ) ( 2,291,806 ) ( 2,840,560 ) ( 3,609,347 ) Less: comprehensive income attributable to non-controlling interest 156,197 268,894 329,489 401,588 Comprehensive loss attributable to shareholders ( 1,222,371 ) ( 2,022,912 ) ( 2,511,071 ) ( 3,207,759 ) Basic and diluted earnings per share to shareholders ( 0.54 ) ( 3.05 ) ( 1.07 ) ( 5.46 ) Weighted average shares - basic and diluted 2,506,015 669,636 2,506,015 592,896 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 2,506,015 - 134,075,745 - 13,054,378 248,287 ( 135,434,022 ) 11,944,388 ( 7,387,547 ) 4,556,841 Stock-based compensation - - - - 160,865 - - 160,865 - 160,865 Cumulative translation adjustment - - - - - ( 39,691 ) - ( 39,691 ) - ( 39,691 ) Loss and comprehensive loss - - - - - - ( 1,328,391 ) ( 1,328,391 ) ( 173,292 ) ( 1,501,683 ) March 31, 2024 2,506,015 - 134,075,745 - 13,215,243 208,596 ( 136,762,413 ) 10,737,171 ( 7,560,839 ) 3,176,332 Stock-based compensation - - - - - - - - - - Cumulative translation adjustment - - - - - 121,174 - 121,174 - 121,174 Loss and comprehensive loss - - - - - - ( 1,343,545 ) ( 1,343,545 ) ( 156,197 ) ( 1,499,742 ) Balance at June 30, 2024 2,506,015 - 134,075,745 - 13,215,243 329,770 ( 138,105,958 ) 9,514,800 ( 7,717,036 ) 1,797,764 Number of Common Shares Number of Class “A” Shares Common Shares Class “A” Shares Additional paid in Capital Currency translation adjustment Accumulated deficit Stockholders’ equity Non- controlling Interest Total stockholders’ equity ($) ($) ($) ($) ($) ($) ($) ($) Balance at December 31, 2022 260,761 21 122,353,525 28,247 14,506,758 154,970 ( 125,907,025 ) 11,136,475 ( 6,402,387 ) 4,734,088 Exercise of warrants 252,625 - 4,446,200 - - - - 4,446,200 - 4,446,200 Shares issued in public offering 156,250 - 2,250,000 - - - - 2,250,000 - 2,250,000 Share issuance costs - - ( 226,544 ) - - - - ( 226,544 ) - ( 226,544 ) Stock-based compensation - - - - ( 1,247,113 ) - - ( 1,247,113 ) - ( 1,247,113 ) Cumulative translation adjustment - - - - - 9,348 - 9,348 - 9,348 Loss and comprehensive loss - - - - - - ( 1,194,195 ) ( 1,194,195 ) ( 132,694 ) ( 1,326,889 ) March 31, 2023 669,636 21 128,823,181 28,247 13,259,645 164,318 ( 127,101,220 ) 15,174,171 ( 6,535,081 ) 8,639,090 Stock-based compensation - - - - 90,893 - - 90,896 - 90,896 Cumulative translation adjustment - - - - - 18,849 - 18,849 - 18,849 Loss and comprehensive loss - - - - - - ( 2,041,761 ) ( 2,041,761 ) ( 268,894 ) ( 2,310,655 ) Balance at June 30, 2023 669,636 21 128,823,181 28,247 13,350,541 183,167 ( 129,142,981 ) 13,242,155 ( 6,803,975 ) 6,438,180 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 ( 3,001,425 ) ( 3,637,544 ) Adjustments to reconcile net loss to net cash: Amortization (Note 8) - 113,391 Amortization of intangible assets - 1,371,951 Loss on sale of equipment - 51,771 Accrued interest - 2,582 Effect of foreign exchange 91,219 56,500 Share-based compensation 160,865 ( 1,156,217 ) Receivables 7,972 39,363 Prepaids ( 753,184 ) ( 67,338 ) Deferred revenue ( 25,718 ) ( 58,720 ) Accounts payable and accrued liabilities ( 262,821 ) ( 229,742 ) Cash flows used in operating activities ( 3,783,092 ) ( 3,514,003 ) FINANCING ACTIVITIES Repayment of notes payable - related party - ( 664,697 ) Proceeds from warrant exercises - 4,446,200 Proceeds from share issuances - 2,250,000 Payments for lease liabilities - ( 131,142 ) Payments of share issuance costs - ( 361,706 ) Cash flows provided by financing activities - 5,538,655 INVESTING ACTIVITIES Proceeds from sale of equipment - 4,899 Purchase of intangible assets - ( 14,569 ) Cash flows used in investing activities - ( 9,670 ) Change in cash during the period ( 3,783,092 ) 2,014,981 Cash - Beginning of period 4,689,007 1,178,846 Cash - End of period 905,915 3,193,827 The accompanying notes are an integral part of these condensed interim consolidated financial statements. 4 VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE 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 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. Adjustments to non-controlling interest are accounted for as transactions with owners and adjustments that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary. Name of Subsidiary Place of Incorporation Proportion of Ownership Interest Principal Activity Versus Systems (Holdco) Inc. United States of America 81.9 % Holding Company Versus Systems UK, Ltd. United Kingdom 81.9 % Sales Company Versus LLC United States of America 81.9 % Technology Company Xcite Interactive, Inc. United States of America 100.0 % Technology Company Use of estimates The preparation of these condensed interim consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed interim consolidated financial statements. Estimates and assumptions are continually evaluated and are based on historical experience and management’s assessment of current events and other facts and circumstances that are considered to be relevant. Actual results could differ from these estimates. Significant assumptions about the future and other sources of estimation uncertainty that management has made at the end of the reporting period, that could result in a material adjustment to the carrying amounts of assets and liabilities in the event that actual results differ from assumptions made, relate to, but are not limited to, the following: i) Deferred income taxes Deferred tax assets, including those arising from un-utilized tax losses, require management to assess the likelihood that the Company will generate sufficient taxable earnings in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be impacted. 6 VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE 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 911,775 (June 30, 2023 – 127,041 ). 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 Property and equipment is recorded at cost less accumulated amortization and any impairments. Amortization is calculated based on the estimated residual value and estimated economic life of the specific assets using the straight-line method over the period indicated below: Asset Rate Computers Straight line, 3 years Right of use assets Shorter of useful life or lease term Financial instruments Classification The Company classifies its financial instruments into the following categories: at fair value through profit and loss (FVTPL), at fair value through other comprehensive income (loss) (FVTOCI), or at amortized cost. The classification of financial assets and liabilities is determined at initial recognition. For equity instruments, the Company generally classifies them at FVTPL. However, certain equity investments that are not held for trading may be measured at cost minus impairment if they do not have readily determinable fair values. Debt instruments are classified based on the Company’s business model for managing the financial assets and their contractual cash flow characteristics. Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL, such as instruments held for trading or derivatives, or if the Company opts to measure them at FVTPL. Measurement The Company applies Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 requires disclosures to be provided for fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: - Level 1-Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. - Level 2-Includes other inputs that are directly or indirectly observable in the marketplace. - Level 3-Unobservable inputs which are supported by little or no market activity. ASC 820 recommends three main approaches for measuring the fair value of assets and liabilities: the market approach, the income approach, and the cost approach. The Company uses the appropriate approach based on the nature of the asset or liability being measured. Financial instruments include cash, receivables, restricted deposit, accounts payable and accrued liabilities. The carrying values of the financial instruments included in current assets and liabilities approximate their fair values due to their short-term maturities. 8 VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE 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 3 years. In the year development costs are incurred, amortization is based on a half year. Goodwill The Company allocates goodwill arising from business combinations to reporting units that are expected to receive the benefits from the synergies of the business combination. The carrying amount reporting units to which goodwill has been allocated was tested annually for impairment or when there is an indication that the goodwill may be impaired. Any impairment is recognized as an expense immediately. Deferred financing costs Deferred financing costs consist primarily of direct incremental costs related to the Company’s public offering of its common stock. Upon completion of the Company’s financings any deferred costs were offset against the proceeds. Impairment of intangible assets excluding goodwill There are special requirements for the development of software to be sold. The costs incurred to establish the technological feasibility of the software that will be sold are expensed as research and development when incurred. Once technological feasibility has been achieved, the Company capitalizes the remaining costs incurred to develop the software for sale. Costs were capitalized until the product is ready to be sold or marketed to customers, at which time, amortization of the capitalized costs begins. At the end of each reporting period, the Company reviews the carrying amounts of its intangible assets to determine whether there is any indication that those assets have suffered impairment losses. If any such indication exists, fair value of the reporting unit or an asset group to which the asset belongs is estimated in order to determine the extent of the impairment losses (if any). If the fair value of an asset (or an asset group/reporting unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or an asset group/reporting unit ) is reduced to fair value. Income taxes The Company accounts for income taxes utilizing the assets and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and net operating loss and tax credit carry forwards, using enacted tax rates and laws that are expected to be in effect when the differences reverse. 10 VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE 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 50 % likelihood of being sustained. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2024 and December 31, 2023, the Company did not record any accruals for interest and penalties. The Company does not foresee material changes to its uncertain tax positions within its next twelve months. The Company’s tax years are subject to examination for 2020 and forward for U.S. Federal tax purposes and for 2019 and forward for state tax purposes. Leases The Company early adopted ASC 842, Leases, as of January 1, 2019 using the modified retrospective application. The Company assesses at contract inception whether a contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lease term corresponds to the non-cancellable period of each contract. All leases are accounted for as operating leases wherein rental payments are expensed on a straight-line basis over the periods of their respective leases. Operating leases (with an initial term of more than 12 months) are included in operating lease right-of-use (ROU) assets, operating lease liabilities (current), and operating lease liabilities (non-current) in the condensed interim consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company utilizes a market-based approach to estimate the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease prepayments, reduced by lease incentives and accrued rent. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Loss contingencies A loss contingency is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. Loss contingencies are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Non-controlling interest Non-controlling interest in the Company’s less than wholly owned subsidiaries are classified as a separate component of equity. On initial recognition, non-controlling interest is measured at the fair value of the non-controlling entity’s contribution into the related subsidiary. Subsequent to the original transaction date, adjustments are made to the carrying amount of non-controlling interest for the non-controlling interest’s share of changes to the subsidiary’s equity. Changes in the Company’s ownership interest in a subsidiary that do not result in a loss of control are recorded as equity transactions. The carrying amount of non-controlling interest is adjusted to reflect the change in the non-controlling interest’s relative interest in the subsidiary, and the difference between the adjustment to the carrying amount of non-controlling interests and the Company’s share of proceeds received and/or consideration paid is recognized directly in equity and attributed to owners of the Company. 11 VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE 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 none and Goods and Services Tax (GST) receivable of $ 10,250 As of December 31, 2023, accounts receivable consists of customer receivables of $ 8,680 (net an allowance for credit losses of $ 2,700 ) and GST receivable of $ 9,542 . 5. RESTRICTED DEPOSIT As at June 30, 2024, restricted deposits consisted of none (December 31, 2023 - $ 8,679 ) held in a guaranteed investment certificate as collateral for a corporate credit card. 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 246,719 749,202 995,921 Additions - - - Disposals ( 222,468 ) - ( 222,468 ) At December 31, 2023 24,251 749,202 773,453 Disposals ( 247 ) ( 247 ) At June 30, 2024 24,004 749,202 773,206 Accumulated amortization At December 31, 2022 152,746 749,202 901,948 Amortization for the period 23,754 - 23,754 Disposals ( 154,184 ) - ( 154,184 ) At December 31, 2023 22,316 749,202 771,518 Amortization for the period 892 892 Disposals ( 82 ) ( 82 ) At June 30, 2024 23,126 749,902 772,328 Carrying amounts At December 31, 2022 93,973 - 93,973 At December 31, 2023 1,935 - 1,935 At June 30, 2024 878 - 878 7. NON-CONTROLLING INTEREST IN VERSUS LLC As of December 31, 2018, the Company held a 41.3 % ownership interest in Versus LLC, a privately held limited liability company organized under the laws of the state of Nevada. The Company consolidates Versus LLC as a result of having full control over the voting shares. Versus LLC is a technology company that is developing a business-to-business software platform that allows video game publishers and developers to offer prize-based matches of their games to their players. During 2019, the Company increased its ownership by 25.2 % in a series of transactions through the issuance of common shares and warrants. On March 1, 2022, the Company acquired an additional 15.1 % interest in Versus LLC in exchange for 715 common shares of the Company. The common shares were determined to have a fair value of $ 186,294 . As a result, the Company increased its ownership interest to 81.9 % and recorded the excess purchase price over net identifiable assets of $ 4,562,631 against additional-paid-in-capital. The effect on non-controlling interest was a reduction of $ 4,376,337 . The following table presents summarized financial information before intragroup eliminations for the non-wholly owned subsidiary as of and for the six months ended June 30, 2024 and 2023. June 30, 2024 June 30, 2023 Non-controlling interest percentage 18.1 % 18.1 % ($) ($) Assets Current 1,139,890 1,010,211 Non-current 878 2,046,995 1,140,768 3,057,206 Liabilities Current 10,955 140,523 Non-current 45,927,621 42,485,061 45,938,576 42,625,584 Net liabilities ( 44,797,808 ) ( 39,568,378 ) Non-controlling interest ( 7,717,036 ) ( 6,784,717 ) Net loss ( 3,001,425 ) ( 2,218,719 ) Net loss attributed to non-controlling interest ( 329,489 ) ( 401,588 ) 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. As a result, they recorded an impairment change in the amount of $ 3,968,332 during the year ended December 31,2023. Software Customer Relationships Trade name Developed Technology Total Cost At December 31, 2022 14,715,529 3,170,966 420,833 1,209,861 19,517,189 Additions 19,413 - - - 19,413 Impairment ( 1,656,691 ) ( 1,745,854 ) ( 420,833 ) ( 144,954 ) ( 3,968,332 ) At December 31, 2023 13,078,251 1,425,112 - 1,064,907 15,568,270 Additions - - - - - At June 30, 2024 - - - - - Accumulated amortization At December 31, 2022 11,311,681 1,037,144 - 775,000 13,123,825 Amortization 1,766,570 387,968 - 289,907 2,444,445 At December 31, 2023 13,078,251 1,425,112 - 1,064,907 15,568,270 Amortization - - - - - At June 30, 2024 13,078,251 1,425,112 - 1,064,907 15,568,270 Carrying amounts At December 31, 2022 3,403,848 2,133,822 420,833 434,861 6,393,364 At December 31, 2023 - - - - - At June 30, 2024 - - - - - 9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The Company’s accounts payable and accrued liabilities are comprised of the following: June 30, 2024 December 31, 2023 ($) ($) Accounts payable 12,655 82,579 Due to related parties (Note 10 and Note12) - 177,500 Accrued liabilities 10,951 26,348 23,606 286,427 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 $ 2,519,835 of principal on its outstanding note payable – related party balances. As at December 31, 2023, the Company had recorded $0 in accrued interest. During the three and six months ended June 30, 2023 the Company recorded finance expense of $ 0 (December 31, 2023 - $ 60,770 ), related to bringing the notes to their present value. Amount ($) Balance, December 31, 2022 2,604,713 Foreign currency adjustment ( 35,380 ) Repayments ( 2,519,835 ) Cancellation of remaining debt ( 49,498 ) Balance, December 31, 2023 - 11. SHARE CAPITAL a) Authorized share capital The Company is authorized to issue an unlimited number of Class A Shares 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 156,250 shares at a price of $ 14.40 per share for total proceeds of $ 2,250,000 in a registered direct offering. In connection with the offering, the Company incurred $ 226,544 in issuance costs as part of the transaction. ii) Issued 283,875 common shares pursuant to exercise of 283,875 warrants at a price of $ 17.37 per share for total proceeds of $ 4,561,200 . iii) Issued 815,217 shares at a price of $ 3.68 per share for total proceeds of $ 3,000,000 in a registered direct offering. In connection with the offering, the Company incurred $ 453,345 in issuance costs as part of the transaction. iv) Issued 989,903 shares at a price of $ 2.59 per share for total proceeds of $ 2,562,660 in a private placement. v) Issued 21 shares upon the conversion of Class A shares. 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 10 % of the issued and outstanding common shares of the Company. Options have a maximum term of ten years and vesting is determined by the Board of Directors. A continuity schedule of outstanding stock options is as follows: Number Outstanding Weighted Average Exercise Price ($) Balance – December 31, 2022 14,238 594.08 Granted 25,000 14.40 Exercised - - Forfeited ( 10,247 ) 392.60 Balance – December 31, 2023 28,990 165.38 Granted - - Exercised - - Forfeited ( 13,860 ) 186.49 Balance – June 30, 2024 15,130 146.03 During the three months ended June 30, 2024 and 2023 the Company recorded share-based compensation of none and $ 90,896 , respectively, relating to options vested during the period. During the six months ended June 30, 2024 and 2023 the Company recorded share-based compensation of $ 160,865 and $( 1,156,217 ), respectively, relating to options vested during the period. The Company used the following assumptions in calculating the fair value of stock options for the period ended: June 30, 2024 June 30, 2023 Risk-free interest rate 3.93 % 3.93 % Expected life of options 3.38 years 5.0 years Expected dividend yield Nil Nil Volatility 132.65 % 132.65 % 19 VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2024 (Expressed in United States dollars) (Unaudited) 11. SHARE CAPITAL (continued) At June 30, 2024, the Company had incentive stock options outstanding as follows: Expiry Date Options Outstanding Exercise Price Weighted Average Remaining Life ($) (years) September 27, 2024 572 1,087.20 0.24 July 24, 2025 287 715.20 1.07 July 31, 2025 276 715.20 1.08 June 1, 2026 59 1,689.60 1.92 August 19, 2026 761 1,008.00 2.14 August 17, 2027 1,504 96.00 3.13 September 20, 2027 140 55.20 3.22 February 13, 2028 11,531 14.40 3.62 15,130 146.03 3.27 d) Share purchase warrants A continuity schedule of outstanding share purchase warrants is as follows: Number Outstanding Weighted Average Exercise Price ($) Balance –December 31, 2022 329,908 91.84 Exercised ( 283,875 ) 16.19 Expired - - Issued 850,612 3.83 Balance – December 31, 2023 896,645 32.36 Exercised - - Expired - - Issued - - Balance – June 30, 2024 896,645 32.36 During the year ended December 31, 2023, the Company: i) Issued 10,938 placement agent warrants in conjunction with a registered direct offering on February 2, 2023, with an exercise price of $ 14.40 per share. 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 815,217 warrants in conjunction with a public offering on October 17, 2023, with an exercise price of $ 3.68 per share. iii) Issued 24,457 placement agent warrants in conjunction with a public offering on October 17, 2023, with an exercise price of $ 4.05 per share. The Company used the following assumptions in calculating the fair value of the warrants for the period ended: June 30, 2024 December 31, 2023 Risk-free interest rate 4.13 % – 4.49 % 4.13 % – 4.49 % Expected life of warrants 1.81 – 4.55 years 2.06 – 4.80 years Expected dividend yield Nil Nil Volatility 132.78 % 132.78 % Weighted average fair value per warrant $ 4.44 $ 4.69 At June 30, 2024, the Company had share purchase warrants outstanding as follows: Expiration Date Warrants Outstanding Exercise Price Weighted Average Remaining Life ($) (years) January 20, 2026 7,030 1,800.00 1.56 February 28, 2027 20,689 460.80 2.67 December 6, 2027 13,781 20.00 3.43 December 9, 2027 9,876 17.60 3.44 January 18, 2028 25,906 124.80 3.55 February 2, 2028 10,938 14.40 3.60 October 17, 2028 783,968 3.68 4.30 October 17, 2028 24,457 4.05 4.30 896,645 32.36 4.19 21 VERSUS SYSTEMS INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2024 (Expressed in United States dollars) (Unaudited) 12. RELATED PARTY TRANSACTIONS The following summarizes the Company’s related party transactions, not disclosed elsewhere in these condensed interim consolidated financial statements, during the six months ended June 30, 2024 and 2023. Key management personnel includes the Chief Executive Officer (CEO), Chief Financial Officer (CFO) and certain directors and officers and companies controlled or significantly influenced by them. Key Management Personnel 2024 2023 ($) ($) Short-term employee benefits paid or accrued to the CEO of the Company, including share-based compensation vested for incentive stock options and performance warrants. 272,177 177,178 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. 275,032 183,898 Short-term employee benefits paid or accrued to a member of the advisory board of the Company, including share-based compensation vested for incentive stock options and performance warrants. - 54,518 Short-term employee benefits paid or accrued to the Chief Technology Officer of the Company, including share-based compensation vested for incentive stock options and performance warrants. 213,028 156,193 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. 92,487 138,473 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. - 108,973 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. 28,748 48,777 Total 881,472 868,010 Other Related Party Payments Office sharing and occupancy costs of $ 0 (December 31, 2023 - $ 64,741 ) were paid or accrued to a corporation that shares management in common with the Company. Amounts Outstanding a) At June 30, 2024, a total of $ 0 (December 31, 2023 - $ 177,500 ) was included in accounts payable and accrued liabilities owing to officers, directors, or companies controlled by them. These amounts are unsecured and non-interest bearing (Note 9). 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. The Company was exposed to the following foreign currency risk as at June 30, 2024 and December 31, 2023: June 30, 2024 December 31, 2023 ($) ($) Cash 262,691 1,630,841 Accounts payable and accrued liabilities ( 12,652 ) ( 105,941 ) 250,039 1,524,900 As at June 30, 2024, with other variables unchanged, a +/- 10 % change in the United States dollar to Canadian dollar exchange rate would impact the Company’s net loss by $ 25,000 (December 31, 2023 - $ 152,500 ). 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. Details of identifiable assets by geographic segments are as follows: Restricted deposits Deposits Property and equipment Intangible assets June 30, 2024 Canada $ - $ - $ - $ - USA - - 878 - $ - $ - $ 878 $ - June 30, 2023 Canada $ 8,672 $ - $ - $ - USA - 100,000 18,504 5,700,984 $ 8,672 $ 100,000 $ 18,504 $ 5,700,984 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