Versus Systems Inc. 10-K

ITEM 7. 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, 2025 and 2024 in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Annual 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 Annual 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, venues (Arenas, Football Stadiums, Baseball Stadiums), fan engagement and sponsor activation platforms, digital out-of-home media companies, 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 December 31, 2025, we had four active customers. At December 31, 2024, we had two active customers. Our products and games are designed so that end users could 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 Filter Fan Cam (“FFC”) products for live events, our 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, as well as the “Winfinite” Games, which are customizable web-based casual games. 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 year ended December 31, 2025, the Company’s largest customer was ASPIS, a significant shareholder and we continue to do business with the Texas Rangers. We offer a suite of products centered on “Winfinite” and FFC. Our 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 software products to teams, ad agencies, and other content creators. 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 professional fees and share-based compensation. 29 Operating Results Comparison of Results of Operations for the Years Ended December 31, 2025 and 2024 The following table summarizes our results of operations for the years ended December 31, 2025 and 2024: For the Year Ended December 31, 2025 2024 Statement of Operations and Comprehensive Loss Data: Revenue $ 2,183,415 $ 57,288 Cost of revenues 16,446 40,277 Gross Margin 2,166,969 17,011 Expenses Research and development 48,065 246,019 Selling, general and administrative 4,280,214 4,310,218 Total Operating Expenses 4,328,279 4,556,237 Operating loss (2,161,310 ) (4,539,226 ) Other income/(expense) 18,173 (11,384 ) Loss before tax provision (2,143,137 ) (4,550,610 ) Provision for income taxes 1,596 24,226 Net loss $ (2,144,733 ) $ (4,574,836 ) Revenue Our revenues are derived from three primary sources: software licensing, professional services and advertising. Revenue was $2,183,415 for the year ended December 31, 2025, representing an increase of $2,126,127, or 3,711%, from $57,288 for the year ended December 31, 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 year ended December 31, 2025, representing a decrease of $23,831, or 59%, from $40,277 for the year ended December 31, 2024. The decrease was due to the decrease in infrastructure needed for the Xcite Interactive customers. Research and development Research and development was $48,065 for the year ended December 31, 2025, representing a decrease of $197,954, or 80%, from $246,019 for the year ended December 31, 2024. The decrease was primarily due to a reduction in staffing levels, including a large portion of our engineering staff, and a reduction in software costs. 30 Selling, general and administrative Selling, general and administrative was $4,280,214 for the year ended December 31, 2025, representing a decrease of $30,004, or 1%, from $4,310,218 for the year ended December 31, 2024. The decrease was primarily due to a reduction in professional fees. Selling, general and administrative for the year ended December 31, 2025, included Company funds which had been misappropriated. For more information about the fraudulent activity and a promissory note that was executed by the former Chief Financial Officer in connection therewith, please see Notes 11 and 12 to our consolidated financial statements for the year ended December 31, 2025. Loss from Operations Loss from operations was $2,161,310 for the year ended December 31, 2025, representing a decrease of $2,377,916, or 52%, from $4,539,226 for the year ended December 31, 2024. Increase in revenue resulted in the decrease in the loss. Other income (expense) Other income (expense) was an income of $18,173 for the year ended December 31, 2025, representing an increase of $29,557, or 260%, from expense of $(11,384) for the year ended December 31, 2024. The increase in income can be attributed to changes in foreign currency rates. Income tax expense Income tax expense was $1,596 for the year ended December 31, 2025, representing a decrease of $22,630 from income tax expense of $24,226 for the year ended December 31, 2024. The decrease in income tax can be attributed to taxes owed in our Canadian jurisdiction in 2024. Inflation The effect of inflation on our revenue and operating results was not significant. Liquidity and Capital Resources Since inception, the Company has incurred operating losses as it continues to invest in developing and commercializing its technology platform. For the years ended December 31, 2025 and 2024, we incurred net losses of approximately $2.1 million and $4.6 million, respectively. During these periods, operations were primarily financed through an initial public offering of common shares in January 2021 and subsequent equity and debt transactions, including warrant exercises and private placements. In October 2024, warrant holders exercised approximately $0.9 million of warrants, and in November and December 2024 the Company raised $2.5 million through convertible notes. Our cash and cash equivalents as of December 31, 2025 was $0.5 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 common to emerging growth businesses. Management believes that current resources and expected operating revenues may not be sufficient to fund planned activities for the next twelve months. The report of our independent registered public accounting firm on the Company’s consolidated financial statements for the year ended December 31, 2025 and 2024 included an explanatory paragraph noting that recurring operating losses, accumulated deficit, and negative operating cash flows raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance of those financial statements. We are pursuing initiatives intended to improve cash flows from operations and continue to evaluate strategic and financing alternatives to strengthen liquidity. To execute the business plan and support growth initiatives, the Company may seek additional financing through equity or debt offerings, credit facilities, or other arrangements. There can be no assurance that such financing will be available on terms acceptable to the Company, or at all. Any future equity or equity-linked financing could dilute existing stockholders and may affect the market price of the Company’s common shares, while debt financing, if obtained, could impose covenants or interest obligations. If sufficient funding is not secured when required, the Company may need to further align its operating expenditures with available resources, which could impact certain development programs or staffing levels. Management believes that disciplined cost control, continued customer engagement, and expansion into new markets may provide a foundation for improved liquidity over time; however, material uncertainties remain until additional financing or sustained positive cash flows are achieved. In addition, as previously disclosed in the Company’s Form 12b-25 filed on April 1, 2026, in the first quarter of 2026, the Audit Committee of the Company’s Board of Directors conducted an internal investigation and determined that fraudulent activity involving the Company’s former Chief Financial Officer had occurred. A promissory note was executed in connection therewith; however, there can be no assurance that such note will be collected in part or full or at all. For more information about the fraudulent activity and promissory note, please see Notes 11 and 12 to our consolidated financial statements for the year ended December 31, 2025, which disclosure is incorporated herein by reference. 31 Our financial condition and liquidity is and will continue to be influenced by a variety of factors, including: ● our ability to generate cash flows from our operations; ● future indebtedness and the interest we are obligated to pay on this indebtedness; ● the availability of public and private debt and equity financing; ● changes in exchange rates which will impact our generation of cash flows from operations when measured in CAD; and ● our capital expenditure requirements. Cash Flows The following summarizes the key components of our cash flows for the years ended December 31, 2025 and 2024: Year Ended December 31, 2025 Year Ended December 31, 2024 Net cash used in operating activities $ (2,052,862 ) $ (4,971,948 ) Net cash used in investing activities (609,000 ) - Net cash provided by financing activities - 3,278,235 Effect of foreign exchange 123,336 70,620 Net (decrease) increase in cash and cash equivalents $ (2,538,526 ) $ (1,623,093 ) Operating Activities Net cash used in operating activities for the year ended December 31, 2025 was $2,052,862 as compared to $4,971,948 for the year ended December 31, 2024. The decrease in cash used in operating activities was primarily attributable to a decrease in the net loss of $2,144,733 and prepaids of $380,972 offset by an increase of stock-based compensation of $430,428, an increase in accounts receivable of $836,000 and increase in accounts payable of $116,471. Investing Activities Net cash used in investing activities for the year ended December 31, 2025 was $609,000 as compared to $0 for the year ended December 31, 2024. The change in cash flow used in investing activities was primarily attributable to attributed to monies spent on developed technology attributed to the Company’s new product offerings. Financing Activities Net cash provided by financing activities was none for the year ended December 31, 2025 as compared to $3,278,235 for the year ended December 31, 2024. The change in cash flow provided by financing activities was mainly attributable to the decrease in proceeds we received from the issuance of common shares and warrants. The Company raised $3,278,235 for the year ended December 31, 2024 from debt issuances and warrant exercises. Critical Accounting Policies and Estimates The preparation of consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements. Estimates and assumptions are continually evaluated and are based on historical experience and management’s assessment of current events and other facts and circumstances that are considered to be relevant. Actual results could differ from these estimates. 32 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 year ended December 31, 2025, the Company recognized $176,000 attributed to professional services. 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 year ended December 31, 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 year. The Company invoices ASPIS on a monthly basis with 30 day payment terms. For the year ended December 31, 2025 the Company has collected $1,320,000, respectively, from ASPIS. Intangible assets Intangible assets consist of internally developed software. The Company amortizes such assets using the straight-line method over the expected useful life of the asset once. The Company evaluates the useful lives of these assets on an annual basis. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. Intangible assets capitalized during the year ended December 31, 2025 was $609,000. 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. 33 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements beginning on Page F-1 of this Annual Report on Form 10-K are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.