Versus Systems Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read together with and is qualified in its entirety by reference to the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed under “Risk Factors,” set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2025, and any updates thereto set forth in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission (“SEC”), including future SEC filings. 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 March 31, 2026 and December 31, 2025, we had four 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. 15 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. Operating Results Comparison of Results of Operations for the Three-Month periods ended March 31, 2026 and March 31, 2025 The following table summarizes our results of operations for the three-month periods ended March 31, 2026 and 2025: For the Three Months Ended March 31, 2026 2025 Statement of Operations and Comprehensive Loss Data: Revenue $ 17,300 $ 199,347 Cost of revenues - 8,223 Gross Margin 17,300 191,124 Expenses Research and development - 6,149 Selling, general and administrative 835,995 1,357,736 Total Operating Expenses 835,995 1,363,885 Operating loss (818,695 ) (1,172,761 ) Other income/(expense) - 16,284 Net loss (818,695 ) (1,156,477 ) 16 Revenue Revenue was $17,300 for the three-month period ended March 31, 2026, representing a decrease of $182,047, or 91%, from $199,347 for the three-month period ended March 31, 2025. The decrease was primarily due to one-time consulting services attributed to the ASPIS arrangement which accounted for approximately $176,000 during the three months ended March 31, 2025. Cost of revenues Cost of revenues was $0 for the three-month period ended March 31, 2026, representing a decrease of $8,223 or 100%, from $8,223 for the three month period ended March 31, 2025. The decrease was primarily due to a change in revenue mix as the $17,300 of revenue was attributable to the Company’s legacy Xcite business, which did not incur associated cost of revenues during the period. Research and development Research and development was $0 for the three month period ended March 31, 2026, representing a decrease of $6,149, or 100%, from $6,149 for the three month period ended March 31, 2025. The decrease was primarily due to a reduction in software costs. Selling, general and administrative Selling, general and administrative was $835,995 for the three-month period ended March 31, 2026, representing a decrease of $521,741, or 38%, from $1,357,736 for the three month period ended March 31, 2025. The decrease was primarily due to a decrease in administrative employees and stock compensation. Loss from Operations Loss from operations was $818,695 for the three month period ended March 31, 2026, representing a decrease of $354,066, or 30%, from $1,172,761 for the three month period ended March 31, 2025. The decrease was primarily the result of decreased expenses and headcount offset by the decrease in revenue. 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. The company incurred a net loss of $0.8 million for the three months ended March 31, 2026. 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 residual proceeds from the Company’s 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 March 31, 2026 was $0.4 million. Our primary cash needs are for working capital requirements, headcount, 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. 17 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. The Company and ASPIS entered into a Stock Purchase Agreement (the “SPA”). Pursuant to the SPA, the Company will sell to ASPIS, and Aspis will purchase for cash, a number of shares of Company common stock, at a price, equal to $1,700,000 divided by 105% of the closing price of a share of Company common stock on the day preceding consummation. The purchase price per share shall be 105% of such closing price. On May 15, 2026, the Company received notification from ASPSIS that they wired $1,200,000 pursuant to the Stock Purchase Agreement; however, no shares had been issued under the SPA as of such date. The Company expects to receive the remaining balance of the purchase price in the near future and all shares will be issued at that time. Based on the Company’s historic and projected expenses and revenues, the Company expects the proceeds from the SPA to result in the Company maintaining at least $2,500,000 in stockholders’ equity through at least December 31, 2026. In addition, as disclosed in Note 9, 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. As of May 15, 2026, no monies have been repaid on the promissory note. 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 three month periods ended March 31, 2026 and 2025: Three Months Ended March 31, 2026 Three Months Ended March 31, 2025 Net cash provided by (used in) operating activities $ 143,986 $ (641,445 ) Net cash used in investing activities (327,000 ) - Net cash provided by financing activities - - Effect of foreign exchange 78,529 7,750 Net decrease in cash and cash equivalents $ (104,485 ) $ (633,695 ) 18 Operating Activities Net cash provided by operating activities for the three month period ended March 31, 2026 was $143,986 as compared to cash used in operations of $641,445 for the three month period ended March 31, 2025. The decrease in cash used in operating activities was primarily attributable to a decrease in the net loss of $337,782, increase in collections of accounts receivable of $642,700 and an increase in accounts payable and accrued liabilities of $340,807. These increases were offset by decreases in stock-based compensation of $344,524 and prepaid expenses of $191,334. Investing Activities Net cash used in investing activities for the three months ended March 31, 2026 was $327,000 as compared to $0 for the three months ended March 31, 2025. The change in cash flow used in investing activities was primarily attributable to monies spent on capitalized software development for technology attributed to the Company’s new product offerings. Financing Activities No cash was used in or provided by financing activities for the three months ended March 31, 2026 and 2025, respectively. 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. Our critical accounting estimates reflecting management’s estimates and judgments are described in our Annual Report on Form 10-K for the year ended December 31, 2025. We have reviewed recently issued accounting pronouncements and are evaluating the potential impact, if any, on our condensed consolidated financial statements. Accordingly, there have been no material changes to critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2025. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not required under Regulation S-K for smaller reporting companies. 19