Item 1. Financial Statements
Item 1: Financial Statements
Versus Systems Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2024 2023
($) ($)
ASSETS
Current assets
Cash 471,248 4,689,007
Receivables, net of allowance 754 18,222
Prepaids 770,935 160,474
Total current assets 1,242,937 4,867,703
Restricted deposit -
8,679
Property and equipment, net -
1,935
Total assets 1,242,937 4,878,317
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities 25,783 286,427
Deferred revenue 1,164 35,049
Total liabilities 26,947 321,476
Commitments and contingencies (Note 12)
Stockholders’ equity
Share capital
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 September 30, 2024 and December 31, 2023, respectively 147,290,988 147,130,123
Accumulated other comprehensive income 276,947 248,287
Accumulated deficit ( 138,666,829 ) ( 135,434,022 )
8,901,106 11,944,388
Non-controlling interest ( 7,685,116 ) ( 7,387,547 )
Total stockholders’ equity 1,215,990 4,556,841
Total liabilities and stockholders’ equity 1,242,937 4,878,317
The accompanying notes are an integral part of
these condensed interim consolidated financial statements.
1
Versus Systems Inc.
Condensed Consolidated Statements of
Operations and Comprehensive Loss (Unaudited)
Three Months
Ended
Three Months
Ended
Nine months
Ended
Nine months
Ended
September 30,
2024
September 30,
2023
September 30,
2024
September 30,
2023
($)
($)
($)
($)
REVENUES
Revenues
3,848
22,950
57,288
236,953
Cost of revenues
-
23,570
40,277
79,497
Gross margin
3,848
( 620
)
17,011
157,456
EXPENSES
Research and development
11,462
272,111
118,077
1,056,918
Selling, general and administrative
521,410
1,617,161
3,429,062
4,473,710
Total operating expenses
532,872
1,889,272
3,547,139
5,530,628
Operating loss
( 529,024
)
( 1,889,892
)
( 3,530,128
)
( 5,373,172
)
Other income (expense):
Employee retention credit refund
-
354,105
-
354,105
Other income (expense)
73
-
( 248
)
-
Other income/(expense), net
73
354,105
( 248
)
354,105
Loss before provision
( 528,951
)
( 1,535,787
)
( 3,530,376
)
( 5,019,067
)
Provision for income taxes
-
-
-
-
Net loss
( 528,951
)
( 1,535,787
)
( 3,530,376
)
( 5,019,067
)
Other total comprehensive income (loss):
Change in foreign currency translation, net of tax
( 52,823
)
( 4,814
)
28,660
23,383
Total other comprehensive income (loss)
( 52,823
)
( 4,814
)
28,660
23,383
Total comprehensive loss
( 581,774
)
( 1,540,601
)
( 3,501,716
)
( 4,995,684
)
Less: comprehensive income (loss) attributable to non-controlling interest
( 31,920
)
215,958
297,569
603,271
Comprehensive loss attributable to shareholders
( 613,694
)
( 1,324,643
)
( 3,204,147
)
( 4,392,413
)
Basic and diluted earnings per share to shareholders
( 0.22
)
( 1.99
)
( 1.29
)
( 7.06
)
Weighted average shares - basic and diluted
2,506,015
669,636
2,506,015
618,757
The accompanying notes are an integral part of
these condensed interim consolidated financial statements.
2
Versus Systems Inc.
Condensed Consolidated Statements of Changes
in Equity (Deficit) (Unaudited)
Number of
Common
Shares
Number of
Class “A”
Shares
Common
Shares
Class “A”
Shares
Additional
paid in
Capital
Accumulated
other
comprehensive
income
(loss)
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
)
Net
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
Cumulative
translation adjustment
-
-
-
-
-
121,174
-
121,174
-
121,174
Net
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
Cumulative
translation adjustment
-
-
-
-
-
( 52,823
)
-
( 52,823
)
-
( 52,823
)
Net
loss
-
-
-
-
-
-
( 560,871
)
( 560,871
)
31,920
( 528,951
)
Balance
at September 30, 2024
2,506,015
-
134,075,745
-
13,215,243
276,947
( 138,666,829
)
8,901,106
( 7,685,116
)
1,215,990
Number of
Common
Shares
Number of
Class “A”
Shares
Common
Shares
Class “A”
Shares
Additional
paid in
Capital
Accumulated
other
comprehensive
income (loss)
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
Net
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
Net
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
Stock-based
compensation
-
-
-
-
1,909
-
-
1,909
-
1,909
Cumulative
translation adjustment
-
-
-
-
-
( 4,814
)
-
( 4,814
)
-
( 4,814
)
Net
loss
-
-
-
-
-
-
( 1,179,840
)
( 1,179,840
)
( 201,683
)
( 1,381,523
)
Balance
at September 30, 2023
669,636
21
128,823,181
28,247
13,352,450
178,353
( 130,322,821
)
12,059,410
( 7,005,658
)
5,053,752
The accompanying notes are an integral part of
these condensed interim consolidated financial statements.
3
Versus Systems Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months
Ended
Nine months
Ended
September 30,
2024
September 30,
2023
($)
($)
Cash flows from operating activities
OPERATING ACTIVITIES
Net loss
( 3,530,376
)
( 5,019,067
)
Adjustments to reconcile net loss to cash used in operating activities:
Amortization
1,688
57,013
Amortization of intangible assets
-
1,870,045
Loss on sale of equipment
-
51,770
Accrued interest
-
2,582
Share-based compensation
160,865
( 1,154,308
)
Changes in operating assets and liabilities:
Receivables
17,468
31,463
Proceeds from office security deposit
-
100,000
Prepaids
( 610,461
)
( 972
)
Deferred revenue
( 33,885
)
( 35,798
)
Accounts payable and accrued liabilities
( 260,644
)
( 258,451
)
Cash flows used in operating activities
( 4,255,345
)
( 4,355,723
)
INVESTING ACTIVITIES
Proceeds from sale of equipment
-
4,899
Purchase of intangible assets
-
( 19,005
)
Cash flows used in investing activities
-
( 14,106
)
FINANCING ACTIVITIES
Repayment of notes payable - related party
-
( 821,292
)
Proceeds from warrant exercises
-
4,446,200
Proceeds from share issuances
-
2,250,000
Payments for finance lease liabilities
-
( 131,142
)
Payments of share issuance costs
-
( 380,788
)
Cash flows provided by financing activities
-
5,362,978
Effect of exchange rates on cash and cash equivalents
37,586
( 3,198
)
Change in cash during the period
( 4,217,759
)
989,951
Cash - Beginning of period
4,689,007
1,178,847
Cash - End of period
471,248
2,168,798
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
VERSUS SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(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.
In September 2024 the Company closed
down its operations within the United Kingdom, Versus Systems UK, Ltd. The United Kingdom had limited activity for the nine months ended
September 30, 2024 and 2023, respectively.
On August 22, 2024, the Company received
a letter from The Nasdaq Capital Market (“Nasdaq”), notifying the Company that it is no longer in compliance with the minimum
stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires listed
companies to maintain stockholders’ equity of at least $ 2.5 million. In addition, as of August 22, 2024, the Company did not meet
the alternative compliance standards relating to the market value of listed securities or net income from continuing operations.
In October 2024, the Company entered into a $ 2,500,000
funding agreement with ASPIS Cyber Technologies (“ASPIS”). At that time, ASPIS delivered to the Company $ 500,000 and agreed
to, on or before November 15, 2024, deliver to the Company an additional $ 2,000,000 . However, the Company has informally agreed to defer
the $ 2,000,000 until Nasdaq has progressed further with its review of the Company’s plan. Pursuant to that agreement, the Company
issued to ASPIS a senior convertible promissory note in the principal amount of the total amount funded. The note provides that upon approval
by the Company’s shareholders and the Company’s redomiciling to Delaware the amount funded to date plus, at ASPIS’s
option, any accrued and unpaid interest thereon, will be converted into units of the Company, each equal to (a) one common share of the
Company and (b) a warrant to purchase one-half of one Common Share at a purchase price of $ 4.00 per one whole share, exercisable for five
years.
Under the terms of the agreement, upon the Company’s shareholders’
approval and the Company’s redomiciling to Delaware, assuming only $ 2,500,000 is funded, ASPIS will receive upon the Conversion
2,155,172 Common Shares and warrants to purchase an additional 1,077,586 shares.
5
VERSUS SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
1.
NATURE OF OPERATIONS (CONTINUED)
Additionally,
the Company entered into a Technology License and Software Development Agreement (the “License Agreement”) in October 2024
which provides for the Company to license its gamification, engagement and QR code technology to ASPIS for use in ASPIS’s website
business and for development of additional functionality for Versus’ technology.
Pursuant
to the License Agreement, the Company granted ASPIS a license to use Versus’ technology in ASPIS’s website business that
provides cybersecurity technology. ASPIS will pay for any required technology modifications, improvements and developments to Versus’
technology in addition to a license fee of $ 165,000 per month beginning in January 2025. The Company will retain ownership of Versus’
technology and ASPIS will hold an exclusive license to use Versus’ technology in the cybersecurity industry so long as ASPIS continues
to pay the monthly license fee. The License Agreement has an initial term of one year with successive renewal terms of one year each
upon ASPIS’s written approval, subject to earlier termination by the Company or ASPIS.
In October 2024, the Company warrant holders exercised
240,490 warrants issued in December 2023 offering upon such exercise, the Company issued 240,490 common shares at a price of $ 3.68 per
share, for $ 885,003 proceeds.
Going Concern
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 September 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.
Management’s plans include attempting to
secure additional required funding through equity or debt financing, if available, seeking to enter into a partnership or other strategic
agreement regarding, or sales or out-licensing of, its technology. There can be no assurance that we will be able to obtain required funding
in the future. If the Company does not obtain required funding, the Company’s cash resources will be depleted in the near term
and the Company would be required to materially reduce or suspend operations, which would likely have a material adverse effect on the
Company’s business, stock price and our relationships with third parties with whom the Company have business relationships. If the
Company does not have sufficient funds to continue operations, the Company could be required to seek bankruptcy protection, dissolution
or liquidation, or other alternatives that could result in the Company’s stockholders losing some or all of their investment in
us. The Company has implemented expense reduction measures including, without limitation, employee headcount reductions and the reduction
or discontinuation of certain product development programs. Additionally, the Company is not in compliance with certain listing standards
of the Nasdaq National Market and there can be no assurance that the Company will be successful in curing the deficiencies and regaining
compliance by the applicable cure dates. (See Note 11 for additional information).
6
VERSUS SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 8 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”).
Accordingly, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted.
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (including
normal recurring adjustments and the elimination of intercompany accounts) considered necessary for a fair statement of all periods presented.
The results of operations of the Company for any interim periods are not necessarily indicative of the results of operations for any other
interim periods or for a full fiscal year. These unaudited interim condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2023.
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.
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.
7
VERSUS SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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:
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 September 30, 2024 totaled 911,775 (September 30, 2023 – 127,041 ).
8
VERSUS
SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment
Property and equipment is recorded at cost less
accumulated amortization and any impairments. Depreciation 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
Fair Value Measurements and Financial
instruments
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.
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 in the condensed consolidated statement changes in shareholders’ equity.
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.
9
VERSUS
SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
SUMMARY OF 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 September 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 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.
10
VERSUS
SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
SUMMARY OF 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.
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.
11
VERSUS
SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
12
VERSUS
SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
SUMMARY OF 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 September 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 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 consolidated financial statements and disclosures.
13
VERSUS
SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
SUMMARY OF 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 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
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
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 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.
14
VERSUS
SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.
PROPERTY AND EQUIPMENT
Computers
($)
Cost
At December 31, 2023
24,251
Disposals
( 247 )
At September 30, 2024
24,004
Accumulated amortization
At December 31, 2023
22,316
Amortization for the period
1,688
Disposals
-
At September 30, 2024
24,004
Carrying amounts
At December 31, 2023
1,935
At September 30, 2024
-
The Company recorded depreciation expense of $ 878 and $ 8,444 for the
three months ended September 30, 2024 and 2023, respectively. The Company recorded depreciation expense of $ 1,688 and $ 22,344 for the
nine months ended September 30, 2024 and 2023, respectively.
4.
NON-CONTROLLING INTEREST IN VERSUS LLC
The Company holds a 81.9 % 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.
The net loss for Versus, LLC for the three month and nine month periods
ended September 30, 2024 was $ 543,107 and $ 3,448,893 , respectively. The net loss for Versus, LLC for the three month and nine month periods
ended September 30, 2023 was $ 2,363,489 and $ 4,995,685 , respectively. The net income (loss) attributable to the non-controlling interest
for the three month and nine month periods ended September 30, 2024 was $( 31,920 ) and $ 297,569 , respectively The net income (loss) attributable
to the non-controlling interest for the three month and nine month periods ended September 30, 2023 was $ 215,958 and $ 603,271 , respectively
The following table presents summarized financial information before intragroup eliminations for the non-wholly owned subsidiary as of
September 30, 2024 and 2023.
September 30,
2024
December 31,
2023
Non-controlling interest percentage
18.1 %
18.1 %
($)
($)
Assets
Current
676,300
2,996,250
Non-current
-
1,935
676,300
2,998,185
Liabilities
Current
19,853
175,051
Non-current
45,997,362
45,960,372
46,017,215
46,135,423
Net liabilities
( 45,340,915 )
( 43,137,328 )
Non-controlling interest
( 7,685,116 )
( 7,387,547 )
15
VERSUS
SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.
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, the Company impaired the remaining carrying value of the intangible assets.
6.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The Company’s accounts payable
and accrued liabilities are comprised of the following:
September 30,
2024
December 31,
2023
($)
($)
Accounts payable
-
82,579
Due to related parties (Note 10 and Note12)
-
177,500
Accrued liabilities
25,783
26,348
25,783
286,427
16
VERSUS
SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.
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 nine months ended September 30, 2024 and 2023 the Company recorded interest expense of $0 .
8.
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.
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 .
During
the nine months ended September 30, 2024, the Company:
i)
Did not enter into any
capital transactions.
17
VERSUS
SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8.
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
($)
Outstanding
– December 31, 2023
28,990
165.38
Granted
-
-
Exercised
-
-
Forfeited
( 13,860 )
186.49
Outstanding –
September 30, 2024
15,130
146.03
During
the three months ended September 30, 2024 and 2023 the Company recorded share-based compensation of none and $ 1,909 , respectively, relating
to options vested during the period. During the nine months ended September 30, 2024 and 2023 the Company recorded share-based compensation
of $ 160,865 and $( 1,154,308 ), respectively.
There
were no grants in the three-month and nine-month period ended September 30, 2024. There were no grants in the three-month period ended
September 30, 2023. The Company used the following assumptions in calculating the grant date fair value of stock options granted for
the nine-month period ended September 30, 2023:
September 30,
2023
Risk-free interest rate 3.93 %
Expected life of options 5.0 years
Expected dividend yield Nil
Volatility 132.65 %
18
VERSUS
SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8.
SHARE CAPITAL (continued)
d)
Share purchase warrants
A
continuity schedule of outstanding share purchase warrants is as follows:
Number
Outstanding
Weighted
Average
Exercise
Price
($)
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 – September
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.
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:
December 31,
2023
Risk-free interest rate
4.13 % – 4.49 %
Expected life of warrants
2.06 – 4.80 years
Expected dividend yield
Nil
Volatility
132.78 %
Weighted average fair value per warrant
$ 4.69
At
September 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 1.31
February 28, 2027 20,689 460.80 2.42
December 6, 2027 13,781 20.00 3.18
December 9, 2027 9,876 17.60 3.19
January 18, 2028 25,906 124.80 3.30
February 2, 2028 10,938 14.40 3.35
October 17, 2028 783,968 3.68 4.05
October 17, 2028 24,457 4.05 4.05
896,645 32.36 3.94
19
VERSUS
SYSTEMS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.
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.
10.
Commitments
and CONTINGENCIES
Legal
Proceedings
From
time to time, the Company is involved in legal proceedings and other matters arising in connection with the conduct of its business activities.
Many of these proceedings may be at the preliminary stages and/or seek an indeterminate amount of damages. In the opinion of management,
after consultation with legal counsel, such routine claims and lawsuits are not significant and we do not currently expect them to have
a material adverse effect on our business, financial condition, results of operations, or liquidity.
11.
SUBSEQUENT EVENTS
ASPIS Agreements
On October 7, 2024, the Company entered into two
agreements with ASPIS.ASPIS, an affiliate of the Company’s largest shareholder—Cronus Equity Capital Group, LLC (“CECG”)—is
a cloud-based mobile endpoint cyber security technology company for anti-tapping and anti-hacking within the government, finance, gaming
and social media sectors. CEGC holds approximately 39.5 % of the outstanding common shares of the Company.
The first agreement was a $ 2,500,000 funding agreement
with ASPIS. At that time, ASPIS delivered to the Company $ 500,000 and agreed to, on or before November 15, 2024, deliver to the Company
an additional $ 2,000,000 . However, the Company has informally agreed to defer the $ 2,000,000 until Nasdaq has progressed further with
its review of the Company’s plan. Pursuant to that agreement, the Company issued to ASPIS a senior convertible promissory note in
the principal amount of the total amount funded. The note provides that upon approval by the Company’s shareholders and the Company’s
redomiciling to Delaware the amount funded to date plus, at ASPIS’s option, any accrued and unpaid interest thereon, will be converted
into units of the Company, each equal to (a) one common share of the Company and (b) a warrant to purchase one-half of one Common Share
at a purchase price of $ 4.00 per one whole share, exercisable for five years.
Under the terms of the agreement, upon the Company’s
shareholders’ approval and the Company’s redomiciling to Delaware, assuming only $2,500,000 is funded, ASPIS will receive
upon the Conversion 2,155,172 Common Shares and warrants to purchase an additional 1,077,586 shares.
Additionally, the Company entered into a Technology
License and Software Development Agreement (the “License Agreement”) in October 2024 which provides for the Company to license
its gamification, engagement and QR code technology to ASPIS for use in ASPIS’s website business and for development of additional
functionality for Versus’ technology.
Pursuant to the License Agreement, the Company
granted ASPIS a license to use Versus’ technology in ASPIS’s website business that provides cybersecurity technology. ASPIS
will pay for any required technology modifications, improvements and developments to Versus’ technology in addition to a license
fee of $ 165,000 per month beginning in January 2025. The Company will retain ownership of Versus’ technology and ASPIS will hold
an exclusive license to use Versus’ technology in the cybersecurity industry so long as ASPIS continues to pay the monthly license
fee. The License Agreement has an initial term of one year with successive renewal terms of one year each upon ASPIS’s written approval,
subject to earlier termination by the Company or ASPIS.
In October 2024, the Company warrant holders
exercised 240,490 warrants issued in December 2023 offering upon such exercise, the Company issued 240,490 common shares at a price of
$ 3.68 per share, for $ 885,003 proceeds.
20
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.