Versus Systems Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations for the years ended December 31, 2024 and 2023 in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Quarterly Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Quarterly Report. Overview We offer a suite of proprietary business-to-business software tools that are meant to drive user engagement through gamification and rewards. These tools allow our partners to offer in-game prizing and rewards, including merchandise, coupons, digital goods, and sweepstakes entries — inside their websites, their venues, or their streaming media content. Our customers mostly sports teams (Professional and Collegiate), venues (Arenas, Football Stadiums, Baseball Stadiums), and advertising agencies, which typically use our products as part of their live events or as part of an advertising campaign with the goal of engaging fans, increasing consented first-party data, and increasing sales. At June 30, 2025 and December 31, 2024, we had three active customers. Our products and games are designed so that end users of our products can earn prizes by registering on our system and completing in-content challenges like trivia, polls, or casual mobile games. Players could use our system to play a variety of games and earn a wide range of prize types, provided by advertisers and sponsors. Our products, include our in-venue XEO and Filter Fan Cam products for live events, and our new stand-alone “Winfinite” product line that can be used by brands, advertising agencies, and content partners to reach potential customers outside of sports venues, on mobile devices. We also have an IP portfolio that could create future licensing and product development opportunities including our recently allowed Artificial Intelligence (“AI”) and Machine Learning (“ML”) series of patent claims. With the acquisition of Xcite Interactive in June 2021, we acquired a number of key pieces of technology and relationships that have helped to drive our engagement and rewards business, including a live events fan engagement business that has partnered with professional sports franchises in the National Football League (“NFL”), the National Basketball Association (“NBA”), the National Hockey League (“NHL”) and others to increase audience engagement using interactive gaming functions like trivia, polling, and casual games that can be played alongside live experiences whether a player is at-home, in a restaurant, or in-venue at the event itself. Our largest customers in 2024 were the Texas Rangers and San Jose Sharks. For the six months ended June 30, 3025 our largest customer is ASPIS, a significant shareholder of the Company. We now have three principal software products. Our eXtreme Engagement Online or “XEO” platform is designed primarily for in-venue main-board work in stadiums and arenas. Our Filter Fan Cam (FFC) platform is an Augmented Reality filtering tool that can be used for mobile and in-venue applications. In addition, we have a stand-alone gaming and prizing product that we call “Winfinite,” which allows brands, media companies, and advertising agencies to reach out to customers directly on their mobile devices. We license these three software products to teams, ad agencies, and other content creators. During the period, we have now made some major headway in our new market of Brazil, which we expect to come online and be revenue generating within Q3. Including and not limited to discussions with major soccer franchises, leagues, festival promoters and tennis tournaments. Additionally, we now are using Aspis Cyber Technologies, Inc products to secure the company’s websites and all technology offerings. We have now also embarked upon a project of creating new and more current IP, which will be an ongoing project and bolster our company’s position. 14 Significant Components of Our Results of Operations Revenue. In general, we recognize revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to us, where there is evidence of an arrangement, when the selling price is fixed or determinable, and when specific criteria have been met or there are no significant remaining performance obligations for each of our activities as described below. Foreseeable losses, if any, are recognized in the year or period in which the loss is determined. We earn revenue through the development and maintenance of custom-built software. We recognize revenues received from the development and maintenance of custom-built software and other professional services provided upon the satisfaction of our performance obligation in an amount that reflects the consideration to which we expect to be entitled in exchange for those services. Performance obligations can be satisfied either at a single point in time or over time. For those performance obligations that are satisfied at a single point in time, the revenue is recognized at that time. For each performance obligation satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of that performance obligation. Our contracts with customers may include multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are capable of being distinct within the context of the contract. Determining which performance obligations are considered distinct may require significant judgment. Judgment is also required to determine the amount of revenue associated with each distinct performance obligation. Operating Expenses. We classify our operating expense as research and development, and selling, general and administrative. Personnel costs are the primary component of each of these operating expense categories, which consist of cash-based personnel costs, such as salaries, benefits and bonuses. Additionally, these categories include intangible amortization, amortization expense, interest expense, software costs, professional fees and share-based compensation. Operating Results Comparison of Results of Operations for the three months ended June 30, 2025 and June 30, 2024 The following table summarizes our results of operations for the three months ended June 30, 2025 and 2024: For the Three Months Ended June 30, 2025 2024 Consolidated Statement of Operations and Comprehensive Income (Loss) Data: Revenue $ - $ 26,937 Revenues – related party 1,980,000 - Cost of revenues 8,222 16,231 Gross margin 1,971,778 10,706 Expenses Research and development 6,219 67,203 Selling, general and administrative 1,026,758 1,443,171 Total operating expenses 1,032,977 1,510,374 Operating income (loss) 938,801 (1,499,668 ) Other income (expense), net 3,660 (74 ) Net income (loss) 942,461 (1,499,742 ) Other comprehensive income (loss), net of tax: Change in foreign currency translation, net of tax (117,564 ) 121,174 Total comprehensive income (loss) $ 824,897 (1,378,568 ) Basic and diluted earnings (loss) per share to shareholders $ 0.14 $ (0.54 ) 15 Revenue Our revenues are derived primarily from our license with ASPIS and related professional services. Revenue was $1,980,000 for the three month period ended June 30, 2025, representing a increase of $1,953,063, or 7,250%, from $26,937 for the three month period ended June 30, 2024. The increase can be attributed to the recognition of the ASPIS license revenue of $1,980,000. Cost of revenues Cost of revenues was $8,222 for the three month period ended June 30, 2025, representing a decrease of $8,222, or 49%, from $16,231 for the three month period ended June 30, 2024. The decrease was due to the decrease in infrastructure needed for the Xcite Interactive. Research and development Research and development was $6,219 for the three month period ended June 30, 2025, representing a decrease of $60,984, or 91%, from $67,203 for the three month period ended June 30, 2024. The decrease was primarily due to significant reductions in staff related to our company restructuring in the prior year. Selling, general and administrative Selling, general and administrative was $1,026,758 for the three month period ended June 30, 2025, representing a decrease of $416,413, or 29%, from $1,443,171 for the three month period ended June 30, 2024. The decrease was primarily due to a decrease in payroll as the Company reduced head count and a decrease in professional fees. In addition, there was a reduction in expense due to a one-time severance payment of $305,000 during the three months ended June 30, 2024. Operating Results Comparison of Results of Operations for the six month period ended June 30, 2025 and June 30, 2024 The following table summarizes our results of operations for the six months ended June 30, 2025 and 2024: For the Six Months Ended June 30, 2025 2024 Consolidated Statement of Operations and Comprehensive Income (Loss) Data: Revenues $ 23,348 $ 53,440 Revenues – related party 2,156,000 - Cost of revenues 16,446 40,277 Gross margin 2,162,902 13,163 Expenses Research and development 12,368 106,615 Selling, general and administrative 2,384,494 2,907,652 Total operating expenses 2,396,862 3,014,267 Operating loss (233,960 ) (3,001,104 ) Other income (expense), net 19,944 (321 ) Net loss (214,016 ) (3,001,425 ) Other comprehensive income (loss), net of tax: Change in foreign currency translation, net of tax (125,314 ) 160,865 Total comprehensive loss $ (339,330 ) (2,840,560 ) Basic and diluted loss per share to shareholders $ (0.06 ) $ (1.07 ) 16 Revenue Our revenues are derived primarily from our license with ASPIS and related professional services. Revenue was $2,179,348 for the six month period ended June 30, 2025, representing an increase of $2,125,908, or 3,978%, from $53,440 for the six month period ended June 30, 2024. The increase can be attributed to the recognition of the ASPIS license revenue and professional services. Cost of revenues Cost of revenues was $16,446 for the six month period ended June 30, 2025, representing a decrease of $23,831, or 59%, from $40,277 for the six month period ended June 30, 2024. The decrease was due to the decrease in infrastructure needed for the Xcite Interactive. Research and development Research and development was $12,368 for the six month period ended June 30, 2025, representing a decrease of $94,247, or 88%, from $106,615 for the six month period ended June 30, 2024. The decrease was primarily due to significant reductions in staff related to our company restructuring in the prior year. Selling, general and administrative Selling, general and administrative was $2,384,494 for the six month period ended June 30, 2025, representing a decrease of $523,158, or 18%, from $2,907,652 for the six month period ended June 30, 2024. The decrease was primarily due to a decrease in payroll as the Company reduced head count and a decrease in professional fees, offset by a one-time severance payment of $305,000 during the six months ended June 30, 2024. Inflation The effect of inflation on our revenue and operating results was not significant. Liquidity and Capital Resources We have cash of $1,682,256 and a working capital balance of $3,808,046 as at June 30, 2025, compared to a cash position of $3,065,914 and working capital balance of $3,509,272 as at December 31, 2024. The decrease in our cash related to using cash to fund operations and ongoing losses for the six months ended June 30, 2025 and an increase in working capital balance was due to the account receivable’s owed from ASPIS. Our financial condition and liquidity is and will continue to be influenced by a variety of factors, including: ● our ability to generate cash flows from our operations; ● future indebtedness and the interest we are obligated to pay on this indebtedness; ● the availability of public and private debt and equity financing; ● our capital expenditure requirements. 17 Overview Since inception, we have incurred significant operating losses. For the six months ended June 30, 2025 and 2024, we incurred net losses of approximately $0.2 million and $3.0 million, respectively. During such periods, we have financed our operations primarily through an initial public offering of our common shares in January 2021 and subsequent public offerings, registered direct offerings, convertible debt, warrant exercises and private placements. In October 2024 warrant holders exercised $0.9 million of warrants into common stock. Also, in November and December 2024 the Company raised $2.5 million of convertible debt. Our cash and cash equivalents as of June 30, 2025 was $1.7 million. Our primary cash needs are for working capital requirements, capital expenditures and to fund our operations. We are subject to the risks and uncertainties associated with a new business. We believe that our current resources and the expected revenues from operations will be insufficient to fund our planned operations for the next twelve months. The report of our independent registered public accounting firm on our condensed consolidated financial statements for the year ended December 31, 2024 stated that our recurring losses from operations, accumulated deficit as of December 31, 2024, inability to achieve positive cash flows from operations and inability to fund day to day activities through operations indicates that a material uncertainty exists that may cast significant doubt on our ability to continue as a going concern. We plan to increase our cash flow from our operations to address some of our liquidity concerns and are evaluating other strategic alternatives. However, to execute our business plan and implement our business strategy, we anticipate that we will need to obtain additional financing from time to time and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute our current shareholders’ ownership in us and could also result in a decrease in the market price of our common shares. The terms of those securities issued by us in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. Furthermore, any debt financing, if available, may subject us to restrictive covenants and significant interest costs. There can be no assurance that we will be able to raise additional capital, when needed, to continue operations in their current form. If we cannot raise needed funds, we might be forced to make substantial reductions in our operating expenses, including reductions in our research and development expenses or headcount reductions, which could adversely affect our ability to implement our business plan and ultimately our viability as a company. Cash Flows The following summarizes the key components of our cash flows for the six month period ended June 30, 2025 and 2024: Six Month Period Ended June 30, 2025 Six Month Period Ended June 30, 2024 Net cash used in operating activities $ (1,508,972 ) $ (3,874,311 ) Net cash used in investing activities - - Net cash provided by financing activities - - Effect of foreign exchange 125,314 91,219 Net decrease in cash and cash equivalents $ (1,383,658 ) $ (3,783,092 ) Operating Activities Net cash used in operating activities for the six months ended June 30, 2025 was $1,508,972 as compared to $3,874,311 for the six months ended June 30, 2024. The decrease in cash used in operating activities was primarily attributable to a decrease in the net loss of $2,787,409 and prepaids of $1,042,853 off set by an increase of stock-based compensation of $226,611 and an increase in accounts receivable of $1,987,972. Investing Activities No cash was used in or provided by investing activities for the six months ended June 30, 2025 and 2024, respectively. Financing Activities No cash was used in or provided by financing activities for the six months ended June 30, 2025 and 2024, respectively. 18 Critical Accounting Policies and Estimates The preparation of condensed consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements. Estimates and assumptions are continually evaluated and are based on historical experience and management’s assessment of current events and other facts and circumstances that are considered to be relevant. Actual results could differ from these estimates. Significant assumptions about the future and other sources of estimation uncertainty that management has made at the end of the reporting year, that could result in a material adjustment to the carrying amounts of assets and liabilities in the event that actual results differ from assumptions made, relate to, but are not limited to, the following: Revenue recognition The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only recognizes revenue from contracts when it is probable that the entity will collect substantially all the consideration it is entitled to in exchange for the goods or services it transfers to the customer. 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 determines that the customer receives and consumes the benefits of the service simultaneously as the service is provided. The transaction price is allocated to the contractual performance obligations and recognized ratably over the contract term. 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. The Company generally measures progress comparing hours incurred to total estimated hours. 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. During the three and six months ended June 30, 2025, the Company recognized $176,000 attributed to professional services, respectively. 19 License Revenue We recognize revenue when or as the performance obligations in the contract are satisfied. For performance obligations that are fulfilled at a point in time, revenue is recognized at the fulfillment of the performance obligation. Since the IP is determined to be a functional license, the value of the grant of use is recognized in the first period of the contract term in which the license agreement is in force. For the three and six month periods ended June 30, 2025, $1,980,000 of revenue was recognized on our functional IP as the Technology Agreement with ASPIS as the license had been delivered to ASPIS during the quarter. Stock-based compensation The estimation of share-based payments (including warrants and stock options) requires the selection of an appropriate valuation model and consideration as to the inputs necessary for the valuation model chosen. We use the Black-Scholes valuation model at the date of the grant. We make estimates as to the volatility, the expected life, dividend yield and the time of exercise, as applicable. The expected volatility is based on the average volatility of share prices of similar companies over the period of the expected life of the applicable warrants and stock options. The expected life is based on historical data. These estimates may not necessarily be indicative of future actual patterns. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not required under Regulation S-K for smaller reporting companies.