Versus Systems (VS) - 2022 Q1 - Quarterly Report

Report of Independent Registered Public Accounting Firm Independent auditors issued an unqualified opinion on Versus Systems Inc.'s consolidated financial statements, noting significant going concern doubts Opinion on the Consolidated Financial Statements Auditors issued an unqualified opinion on the consolidated financial statements but highlighted significant going concern doubts due to recurring losses - The auditors issued an unqualified opinion on Versus Systems Inc. and its subsidiaries' consolidated financial statements as of December 31, 2021, stating they are fairly presented in all material respects in accordance with International Financial Reporting Standards[3] - Significant doubt exists about the company's ability to continue as a going concern due to recurring operating losses and a net capital deficiency, despite management's plans described in Note 1, with no adjustments included in the financial statements for potential uncertainties[4] Critical Audit Matters Capitalized software costs were a critical audit matter requiring subjective judgment for proper capitalization, amortization, and impairment testing - Capitalized software costs were identified as a critical audit matter due to the subjective judgment required for assessing proper capitalization and potential impairment[10][11] - Audit procedures included evaluating management's analysis of capitalized software costs, testing selected additions, recalculating capitalized labor costs, discussing the application of development percentages, testing amortization, and performing substantive tests for impairment, with no impairment found[12] Consolidated Financial Statements This section presents the company's consolidated financial position, loss, equity changes, and cash flows for the reported periods Consolidated Statements of Financial Position Total assets significantly increased to $18.54 million by December 31, 2021, driven by goodwill and intangible assets, while equity turned positive Consolidated Statements of Financial Position Key Data | Indicator | December 31, 2021 ($) | December 31, 2020 ($) | December 31, 2019 ($) | | :----------------------- | :------------------- | :------------------- | :------------------- | | Assets | | | | | Current Assets | 2,354,512 | 3,164,636 | 132,111 | | Restricted Deposits | 9,068 | 8,851 | 8,853 | | Deposits | 100,000 | 98,393 | 99,998 | | Property and Equipment | 326,945 | 481,861 | 730,560 | | Goodwill | 6,580,660 | - | - | | Intangible Assets | 9,172,507 | 1,737,416 | 2,140,375 | | Total Assets | 18,543,692 | 5,491,157 | 3,111,897 | | Liabilities and Equity | | | | | Current Liabilities | 3,372,894 | 3,959,642 | 1,003,678 | | Non-Current Liabilities | 1,168,050 | 2,669,865 | 4,318,805 | | Total Liabilities | 4,541,024 | 6,629,507 | 5,322,483 | | Equity (Deficit) | 14,002,668 | (1,138,350) | (2,210,586) | | Total Liabilities and Equity | 18,543,692 | 5,491,157 | 3,111,897 | Consolidated Statements of Loss and Comprehensive Loss The company reported a net loss of $17.85 million in 2021, a substantial increase from 2020, with revenue declining and expenses rising Consolidated Statements of Loss and Comprehensive Loss Key Data | Indicator | December 31, 2021 ($) | December 31, 2020 ($) | December 31, 2019 ($) | | :------------------------------------------------ | :------------------- | :------------------- | :------------------- | | Revenue | 768,650 | 1,390,018 | 501,152 | | Amortization | 304,904 | 240,820 | 246,626 | | Amortization of Intangible Assets | 2,009,714 | 1,272,435 | 1,907,306 | | Consulting Fees | 582,998 | 465,252 | 613,608 | | Foreign Exchange (Gain) Loss | 1,087,110 | 24,719 | 29,241 | | Office and Miscellaneous Expenses | 557,606 | 255,863 | 320,316 | | Interest Expense | 153,425 | 234,087 | 248,508 | | Professional Fees | 2,711,916 | 780,534 | 335,851 | | Salaries and Wages | 5,202,213 | 2,564,830 | 2,451,627 | | Sales and Marketing | 879,683 | 486,249 | 593,462 | | Software Delivery Costs | 615,117 | 257,924 | 184,350 | | Share-Based Payment Expense | 2,145,928 | 1,049,135 | 632,542 | | Total Operating Loss | (15,481,964) | (6,241,830) | (7,062,287) | | Finance Costs | (225,196) | (276,602) | (194,039) | | Fair Value Change in Warrant Liability | (2,024,580) | - | - | | Loss on Disposal of Marketable Securities and Notes Payable | (116,152) | (378,718) | - | | Other Expenses | - | (13,890) | - | | Net Loss | (17,847,892) | (6,911,040) | (7,256,326) | | Other Comprehensive Loss: Foreign Currency Translation Loss | - | (447,302) | (266,048) | | Loss and Comprehensive Loss | (17,847,892) | (7,358,342) | (7,522,374) | | Basic and Diluted Loss Per Share Attributable to Versus Systems Inc. Common Shareholders | (1.01) | (0.59) | (0.74) | Consolidated Statements of Changes in Equity (Deficit) Equity shifted from a deficit to a positive $14.00 million by December 31, 2021, primarily due to significant common share issuances Consolidated Statements of Changes in Equity (Deficit) Key Data | Indicator | December 31, 2021 ($) | December 31, 2020 ($) | December 31, 2019 ($) | | :----------------------- | :------------------- | :------------------- | :------------------- | | Common Shares | 110,226,715 | 82,046,672 | 74,639,357 | | Shares to be Issued | 2,703,326 | - | - | | Class A Shares | 28,247 | 28,247 | 28,247 | | Subscribed Share Capital | - | - | 230,947 | | Reserves | 10,661,294 | 8,663,301 | 7,409,092 | | Accumulated Foreign Exchange Adjustment | - | (86,609) | 31,020 | | Deficit | (100,995,334) | (86,596,261) | (80,820,208) | | Non-Controlling Interest | (8,621,581) | (5,193,701) | (3,729,041) | | Total Equity (Deficit) | 14,002,668 | (1,138,350) | (2,210,586) | Condensed Interim Consolidated Statements of Cash Flows Operating cash outflows increased significantly in 2021, while financing activities provided substantial inflows from warrant exercises and share issuances Consolidated Statements of Cash Flows Key Data | Indicator | December 31, 2021 ($) | December 31, 2020 ($) | December 31, 2019 ($) | | :----------------------- | :------------------- | :------------------- | :------------------- | | Cash Outflow from Operating Activities | (12,893,217) | (4,236,767) | (4,131,672) | | Cash Inflow from Financing Activities | 14,799,938 | 7,388,562 | 5,645,194 | | Cash Outflow from Investing Activities | (2,511,827) | (944,906) | (1,462,071) | | Change in Cash During the Period | (605,106) | 2,206,889 | 51,451 | | Cash at End of Period | 1,678,156 | 2,283,262 | 76,373 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed explanations and disclosures for the figures presented in the consolidated financial statements 1. NATURE OF OPERATIONS Versus Systems Inc. develops proprietary reward and promotion tools, acquired Xcite Interactive in 2021, and faces significant going concern uncertainties - The company operates in the technology industry, developing proprietary reward and promotion tools that enable game developers and content creators to offer real-world prizes within their content to enhance consumer engagement[20] - In June 2021, the company completed the acquisition of Xcite Interactive, which provides online audience engagement services through its XEO technology platform, partnering with professional sports franchises like MLB, NHL, NBA, NFL, and global sporting events such as the Olympics and World Cup[21] - As of December 31, 2021, the company had not generated positive cash flows from operations and could not fund its daily activities through operations, raising significant doubt about its ability to continue as a going concern[22] - The COVID-19 pandemic has adversely affected the global workforce, economy, and financial markets, potentially having a significant negative impact on the company's financial position and operating results in future periods[23][24] 2. BASIS OF PRESENTATION Consolidated financial statements are prepared under IFRS using historical cost, with USD as the functional and presentation currency, involving significant management judgments - The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and were authorized for issue by the Board of Directors on March 31, 2022[25] - The financial statements are prepared on a historical cost basis, except for financial instruments measured at fair value through profit or loss, and utilize the accrual basis of accounting[27] - The company's functional and presentation currency is the US dollar[28] Major Subsidiaries and Ownership | Subsidiary Name | Place of Incorporation | Ownership Percentage | Principal Business | | :--------------------- | :----------------- | :--------- | :------------- | | Versus Systems (Holdco) Inc. | USA | 66.8% | Holding Company | | Versus Systems UK, Ltd. | UK | 66.8% | Sales Company | | Versus LLC | USA | 66.8% | Technology Company | | Xcite Interactive, Inc. | USA | 100.0% | Technology Company | - Management made significant judgments, estimates, and assumptions in preparing the financial statements regarding deferred income taxes, the economic recoverability and future economic benefits of intangible assets, share-based payment valuations, depreciation and amortization, functional currency determination, revenue recognition, and business combinations[31][33][41] 3. SIGNIFICANT ACCOUNTING POLICIES This section details accounting policies for EPS, property and equipment, financial instruments, intangible assets, goodwill, income taxes, leases, and share-based payments - Basic and diluted loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding, with potentially dilutive options and warrants excluded from the diluted loss per share calculation[42] Property and Equipment Amortization Rates | Asset | Rate | | :--------- | :--------------- | | Computers | Straight-line, 3 years | | Right-of-use assets | Shorter of useful life or lease term | Financial Instrument Classification | Financial Asset/Liability | IFRS 9 Classification | | :-------------------- | :------------- | | Cash | FVTPL | | Receivables | Amortized Cost | | Restricted Deposits | Amortized Cost | | Deposits | Amortized Cost | | Accounts Payable and Accrued Liabilities | Amortized Cost | | Notes Payable | Amortized Cost | - Intangible assets (excluding goodwill) are measured at cost, and finite-lived intangible assets are amortized on a straight-line basis over 3 years[53][55] - Goodwill is tested annually for impairment and is not subsequently reversed[56] - Effective February 1, 2021, warrants are treated as derivative liabilities, with changes in their fair value recognized in the consolidated statements of loss and comprehensive loss[83] - The company primarily recognizes revenue through three methods: Software-as-a-Service (SaaS) sales, custom software development and maintenance services, and advertising sales[89] 4. CHANGE IN FUNCTIONAL AND PRESENTATION CURRENCY Effective February 1, 2021, the company changed its functional and presentation currency from CAD to USD, aligning with its NASDAQ listing and USD-denominated activities - Effective February 1, 2021, the company changed its functional currency from Canadian Dollars (CAD) to US Dollars (USD), and its presentation currency also to USD[99] - This change aligns with the company's NASDAQ listing and its primary business activities and financing being denominated in USD[99] - All assets, liabilities, share capital, and other components of shareholders' equity were translated to USD at the exchange rate on the change date, with the statement of loss translated at quarterly average exchange rates, and resulting exchange differences recognized in the foreign currency translation reserve[99] 5. RECEIVABLES As of December 31, 2021, receivables totaled $102,308 (net of allowance) from customers and $32,809 from GST, with factoring activities in 2020 - As of December 31, 2021, receivables included customer receivables of $102,308 (net of a $11,500 allowance for doubtful accounts) and GST receivables of $32,809[100] - In 2020, the company entered into an accounts receivable purchase and guarantee agreement with a factor, incurring $38,727 in factoring fees and interest[100] 6. RESTRICTED DEPOSIT The restricted deposit of $9,068 as of December 31, 2021, serves as collateral for the company's corporate credit card - As of December 31, 2021, the restricted deposit was $9,068, held as a guaranteed investment certificate to collateralize the company's corporate credit card[101] 7. PROPERTY AND EQUIPMENT Property and equipment had a net book value of $326,945 as of December 31, 2021, primarily comprising computers and right-of-use assets Property and Equipment Net Book Value | Indicator | December 31, 2021 ($) | December 31, 2020 ($) | December 31, 2019 ($) | | :----------------- | :------------------- | :------------------- | :------------------- | | Computers Net Book Value | 68,311 | 6,044 | 21,875 | | Right-of-Use Assets Net Book Value | 258,634 | 475,817 | 708,763 | | Total Net Book Value | 326,945 | 481,861 | 730,560 | 8. NON-CONTROLLING INTEREST IN VERSUS LLC The company increased its ownership in Versus LLC to 66.8% in 2019, with non-controlling interest at negative $8.62 million and a net loss of $3.45 million in 2021 - The company increased its ownership interest in Versus LLC from 41.3% to 66.8% through two acquisitions in May and June 2019[103][104][105] Summarized Financial Information for Non-Controlling Interest in Versus LLC | Indicator | 2021 ($) | 2020 ($) | 2019 ($) | | :----------------------- | :--------- | :--------- | :--------- | | Non-Controlling Interest Percentage | 33.2% | 33.2% | 58.7% | | Assets | 3,789,160 | 3,068,768 | 2,958,309 | | Liabilities | 31,425,113 | 18,349,464 | 14,376,302 | | Net Liabilities | (27,635,953) | (15,280,696) | (11,417,993) | | Non-Controlling Interest | (8,621,581) | (5,193,701) | (3,729,041) | | Net Loss | (17,847,892) | (6,911,040) | (7,256,326) | | Net Loss Attributable to Non-Controlling Interest | (3,448,820) | (1,464,660) | (2,000,962) | 9. ACQUISITION OF XCITE INTERACTIVE, INC. The acquisition of Xcite Interactive Inc. on June 3, 2021, for $13.18 million, primarily via common shares, resulted in $6.58 million goodwill and $7.14 million intangible assets - The company completed the acquisition of Xcite Interactive Inc. on June 3, 2021, with a portion of the consideration paid by issuing 1,506,903 common shares with a fair value of $10.7 million[108] Acquisition Consideration and Allocation of Assets and Liabilities | Item | Amount ($) | | :----------------------- | :----------- | | Common Shares | 12,890,029 | | Cash | 112,225 | | Working Capital Adjustment | (163,902) | | PPP Shares | 346,031 | | Total Consideration | 13,184,383 | | Identifiable Assets Acquired and Liabilities Assumed | | | Cash | 27,124 | | Accounts Receivable | 37,719 | | Property, Plant, and Equipment | 34,496 | | Intangible Assets | 7,140,000 | | Other Assets | 12,409 | | Accounts Payable and Accrued Liabilities | (524,853) | | Other Liabilities | (123,171) | | Total Identifiable Assets | 6,603,724 | | Goodwill | 6,580,659 | - From June 3 to December 31, 2021, the acquired business contributed $760,813 in revenue, and management estimated an additional $600,000 in revenue and approximately $1,000,000 increase in net loss if the acquisition had occurred on January 1, 2021[113] 10. INTANGIBLE ASSETS Intangible assets significantly increased to $9.17 million by December 31, 2021, primarily due to customer relationships, trade names, and developed technology from the Xcite acquisition - Intangible assets include a business-to-business software platform that allows video game publishers and developers to offer prize-based contests to players[114] Intangible Assets Cost and Amortization | Item | December 31, 2021 ($) | December 31, 2020 ($) | December 31, 2019 ($) | | :------------------- | :------------------- | :------------------- | :------------------- | | Cost | | | | | Software | 12,218,908 | 9,914,104 | 9,016,764 | | Customer Relationships | 4,840,000 | - | - | | Trade Name | 750,000 | - | - | | Developed Technology | 1,550,000 | - | - | | Total Cost | 19,358,908 | 9,914,104 | 9,016,764 | | Accumulated Amortization | | | | | Software | 9,481,679 | 8,176,688 | 6,876,389 | | Customer Relationships | 403,333 | - | - | | Developed Technology | 301,389 | - | - | | Total Accumulated Amortization | 10,186,401 | 8,176,688 | 6,876,389 | | Net Book Value | | | | | Software | 2,636,555 | 2,256,903 | 2,140,375 | | Customer Relationships | 4,494,286 | - | - | | Trade Name | 750,000 | - | - | | Developed Technology | 1,291,667 | - | - | | Total Net Book Value | 9,172,507 | 1,737,416 | 2,140,375 | 11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Total accounts payable and accrued liabilities decreased to $832,399 as of December 31, 2021, from $1,459,707 in 2020 Accounts Payable and Accrued Liabilities Composition | Item | December 31, 2021 ($) | December 31, 2020 ($) | | :--------------- | :------------------- | :------------------- | | Accounts Payable | 386,030 | 552,357 | | Amounts Due to Related Parties | 302,883 | 551,815 | | Accrued Liabilities | 143,486 | 355,535 | | Total | 832,399 | 1,459,707 | 12. NOTES PAYABLE – RELATED PARTY Notes payable to related parties decreased to $2.79 million by December 31, 2021, due to debt reduction through share issuance and principal repayments, and PPP loan forgiveness - In 2021, the company reduced $1,483,738 in debt principal and $131,320 in accrued interest by issuing 215,341 common shares, recording a conversion loss of $116,152[117] - The company repaid $462,228 in note principal during 2021[117] - In July 2021, the company received forgiveness for a Paycheck Protection Program (PPP) loan totaling $610,247, originally obtained in May 2020[121][122] Notes Payable Balances | Item | Amount ($) | | :--------------- | :----------- | | Balance December 31, 2019 | 3,706,518 | | Balance December 31, 2020 | 4,528,549 | | Balance December 31, 2021 | 2,786,183 | | Of which: Current Portion | 2,107,668 | | Of which: Non-Current Portion | 678,515 | 13. SHARE CAPITAL AND RESERVES Share capital significantly increased in 2021 through common share issuances for acquisitions, public offerings, warrant/option exercises, and debt conversions - In 2021, the company issued 1,506,903 common shares for the Xcite acquisition, 1,472,000 units (common shares and warrants) in a public offering, exercised 1,553,372 warrants and stock options, issued 215,341 units for debt settlement, and 29,307 shares for services[124] Stock Option Activity | Item | December 31, 2021 | December 31, 2020 | December 31, 2019 | | :--------------- | :------------- | :------------- | :------------- | | Beginning Balance | 1,353,825 | 1,013,399 | 549,524 | | Granted | 960,224 | 470,083 | 482,500 | | Exercised | (118,039) | (3,750) | (3,125) | | Forfeited | (254,247) | (125,907) | (15,500) | | Ending Balance | 1,941,769 | 1,353,825 | 1,013,399 | - The company recorded $2,145,928 in share-based payment expense in 2021[128] Warrant Activity | Item | December 31, 2021 | December 31, 2020 | December 31, 2019 | | :--------------- | :------------- | :------------- | :------------- | | Beginning Balance | 2,692,622 | 3,315,581 | 1,468,538 | | Exercised | (1,088,713) | (1,056,143) | (154,990) | | Expired | (492,461) | (438,948) | (347,732) | | Issued | 3,374,682 | 872,532 | 2,349,365 | | Ending Balance | 4,486,130 | 2,692,622 | 3,315,581 | 14. RELATED PARTY TRANSACTIONS Short-term employee benefits for key management increased to $1.95 million in 2021, with related party payables including $302,883 in accounts payable and $2.79 million in notes payable Key Management Personnel Short-Term Employee Benefits | Key Management Personnel | 2021 ($) | 2020 ($) | | :----------- | :--------- | :--------- | | CEO | 335,430 | 280,177 | | CFO | 447,710 | 273,439 | | Advisory Board Members | 215,706 | 216,410 | | VP Engineering | 289,290 | 300,877 | | Other Directors and Officers | 666,586 | 327,991 | | Total | 1,954,722 | 1,398,894 | - As of December 31, 2021, amounts due to related parties included $302,883 in accounts payable and accrued liabilities (unsecured, non-interest bearing) and $2,786,183 in long-term notes payable[147] 15. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The company manages credit, liquidity, interest rate, and foreign exchange risks, relying on external financing, with minimal interest rate impact and reduced foreign exchange risk in 2021 - The company manages credit risk by holding cash with financial institutions that have high investment-grade ratings[144] - The company relies on external financing to meet its liquidity requirements[146] - Changes in interest rates did not have a significant impact on the company's profit or loss in 2021[148] Foreign Exchange Exposure | Item | December 31, 2021 ($) | December 31, 2020 ($) | | :----------------------- | :------------------- | :------------------- | | Cash | 162,135 | 86,800 | | Lease Liabilities | - | (741,868) | | Accounts Payable and Accrued Liabilities | (142,726) | (1,092,402) | | Net Exposure | 19,409 | (1,747,470) | - A +/-10% change in the USD to CAD exchange rate as of December 31, 2021, would impact the company's net loss by $1,900, significantly lower than $220,000 in 2020[150] 16. MANAGEMENT OF CAPITAL The company manages its capital structure based on available funds and management expertise, relies on external financing, and does not pay dividends - The company manages its capital structure based on available funds and relies on management's expertise to sustain future business development[151] - The company continues to rely on external financing to fund its activities[152] - The company does not pay dividends and invests its cash reserves in term deposits with major financial institutions[153] 17. GEOGRAPHICAL SEGMENTED INFORMATION The company focuses on a single business activity: developing a B2B software platform for prize-based contests, with identifiable assets in Canada and the US - The company focuses on a single business activity, which is the development of a business-to-business software platform that allows video game publishers and developers to offer prize-based contests to their players[155] - In 2020, revenue was concentrated from one US customer, but no revenue was generated from this customer in 2021[155] Identifiable Assets by Geographical Segment | Geographical Segment | December 31, 2021 ($) | December 31, 2020 ($) | | :------- | :------------------- | :------------------- | | Canada | 9,068 | 42,966 | | United States | 16,177,612 | 2,283,559 | 18. SUPPLEMENTAL CASH FLOW INFORMATION This section details non-cash investing and financing activities, including share issuances for acquisitions and debt settlement, and deferred financing costs Non-Cash Investing and Financing Activities | Item | 2021 ($) | 2020 ($) | 2019 ($) | | :--------------------------- | :--------- | :--------- | :--------- | | Contribution in Kind of Low-Interest Notes | - | 170,329 | 223,913 | | Shares Issued for Acquisition of New Company | - | - | 1,410,581 | | Deferred Financing Costs Included in Accrued Expenses | 174,813 | 398,276 | - | | Residual Value of Units | - | 42,502 | - | | Common Shares Issued to Settle Debt | 1,615,058 | - | - | | Fair Value of Common Shares Issued in Acquisition | 13,184,384 | - | - | | Interest Paid During the Year | - | - | 42,316 | | Income Taxes Paid During the Year | - | - | - | 19. LEASE OBLIGATIONS AND COMMITMENTS Lease liabilities totaled $367,884 as of December 31, 2021, with office leases in Canada and Los Angeles extending to June 2023, and future commitments of $260,185 in 2022 Lease Liability Movement | Item | Amount ($) | | :----------------------- | :----------- | | Lease Liabilities Recognized January 1, 2020 | 865,076 | | Lease Liabilities Recognized January 1, 2021 | 641,251 | | Lease Liabilities December 31, 2021 | 367,884 | | Less: Current Portion | (239,323) | | Non-Current Portion December 31, 2021 | 128,560 | - The company has office lease agreements in Canada and Los Angeles, with the Los Angeles lease extending until June 30, 2023[159][160] Future Lease Payment Commitments | Year | Amount ($) | | :--- | :------- | | 2022 | 260,185 | | 2023 | 131,576 | 20. INCOME TAXES The company recognized no income tax expense in 2021, 2020, or 2019, possessing significant unrecognized deferred tax assets from loss carryforwards - The company did not recognize income tax expense in 2021, 2020, or 2019[162] Major Components of Unrecognized Deferred Tax Assets | Item | 2021 ($) | 2020 ($) | | :----------------------- | :--------- | :--------- | | Non-Capital Loss Carryforwards - US | 29,390,000 | 14,880,000 | | Non-Capital Loss Carryforwards - Canada | 20,664,000 | 17,215,000 | | Allowable Capital Losses | 14,077,000 | 13,304,000 | | Property and Equipment | 128,000 | 273,000 | | Intangible Assets | 853,000 | 6,364,000 | | Exploration and Evaluation Assets | 5,446,000 | 5,446,000 | | Share Issuance Costs | 2,724,000 | 401,000 | 21. SUBSEQUENT EVENTS Subsequent events include a February 2022 public offering raising $7.0 million, March 2022 share conversions, underwriters' over-allotment exercise, and extensions of related party notes payable - On February 28, 2022, the company completed a public offering of 4,375,000 units, raising $7,000,000 in gross proceeds, with each unit comprising one common share and one warrant[165] - On March 1, 2022, the company converted 171,608 Versus Holdco shares into Versus Systems Inc. shares[165] - On March 24, 2022, the company issued 590,625 shares, generating $874,125 in gross proceeds from the underwriters' exercise of their over-allotment option[165] - Subsequent to December 31, 2021, the company extended notes payable to directors Brian Tingle and CEO Matthew Pierce for CAD 520,000 and CAD 17,000, respectively[165]