Exhibit 99.1

 

 

 

RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

(Expressed in United States dollars)

 

THREE MONTH PERIOD ENDED

 

MARCH 31, 2021

 

 

 

 

Notice to Reader

 

Versus Systems Inc. (the “Company”) has restated its unaudited condensed interim consolidated financial statements for the three months ended March 31, 2021 which were previously filed on SEDAR (the “interim financial statements”). Subsequent to the original issuance of the interim financial statements, the Company decided to change its functional and presentation currency to the United States dollar, as a result of the January 2021 initial public offering. These adjustments have been made in the restated unaudited condensed interim consolidated financial statements for the three months ended March 31, 2021. See notes 2 and 4 of the restated unaudited condensed interim consolidated statements for more detail.

 

 

 

 

Versus Systems Inc.

Restated Condensed Interim Consolidated Statements of Financial Position

(Expressed in United States Dollars)

(Unaudited - prepared by management)

 

   March 31,
2021
     
   (Restated-
Note 2)
   December 31,
2020
 
   ($)   ($) 
ASSETS          
Current assets          
Cash   11,076,338    2,283,262 
Receivables (Note 5)   84,699    464,873 
Deferred financing costs (Note 3)   -    398,276 
Prepaids   394,348    18,226 
    11,555,385    3,164,637 
Restricted deposit (Note 6)   9,081    8,851 
Deposits   100,000    98,393 
Property and equipment (Note 7)   428,101    481,861 
Intangible assets (Note 9)   1,748,460    1,737,416 
Total Assets   13,841,027    5,491,158 
           
LIABILITIES AND EQUITY          
Current liabilities          
Accounts payable and accrued liabilities (Note 10 and 13)   1,213,156    1,458,681 
Notes payable (Note 11)   1,169,608    2,290,798 
Lease liability (Note 18)   196,904    209,137 
Current liabilities   2,579,668    3,958,616 
           
Non-current liabilities          
Lease liability (Note 18)   389,425    432,114 
Warrant liability (Note 12)   7,630,647    - 
Notes payable (Note 11)   1,658,718    2,237,751 
Total liabilities   12,258,459    6,628,481 
           
Equity (Deficit)          
Share capital (Note 12)          
Common shares   95,889,272    82,046,674 
Class “A” shares   28,247    28,247 
Reserves (Note 12)   8,814,943    8,663,301 
Cumulative translation adjustment   -    (107,549)
Deficit   (97,777,295)   (86,596,262)
    6,955,167    4,034,411 
Non-controlling interest (Note 8)   (5,372,599)   (5,171,734)
    1,582,568    (1,137,323)
Total Liabilities and Equity   13,841,027    5,491,158 
Nature of operations (Note 1)          
Commitments (Note 18)          
Subsequent events (Note 19)          

  

These restated condensed interim consolidated financial statements were authorized for issue by the Board of Directors on November 15, 2021. They are signed on behalf of the Board of Directors by:

 

“Matthew Pierce”   “Brian Tingle”
Director   Director

 

 The accompanying notes are an integral part of these restated condensed interim consolidated financial statements.

 

1

 

  

Versus Systems Inc.

Restated Condensed Interim Consolidated Statements of Loss and Comprehensive Loss

(Expressed in United States Dollars)

(Unaudited - prepared by management)

 

   Three Months
Ended
     
   March 31,
2021
   Three Months
Ended
 
   (Restated - Note 2)   March 31,
2020
 
   ($)   ($) 
REVENUES          
Revenues   335    194 
           
EXPENSES          
Amortization (Note 7)   66,753    62,367 
Amortization of intangible assets (Note 9)   331,715    402,855 
Consulting fees (Note 13)   86,119    141,261 
Foreign exchange loss   (140,890)   159,802 
Office and miscellaneous expenses   201,336    212,560 
Interest expense   64,376    44,343 
Interest expense on lease obligations (Note 18)   11,800    7,057 
Professional fees (Note 12)   536,737    67,518 
Salaries and wages (Note 11 and 13)   963,976    453,105 
Sales and marketing   205,242    8,870 
Software delivery costs   58,728    73,580 
Share-based compensation (Note 12)   202,220    217,489 
    (2,587,778)   (1,850,611)
           
Finance expense (Note 11)   (85,161)   (64,204)
Change in fair value of warrant liability (Note 12)   (8,593,177)   - 
Loss on note conversion (Note 11)   (115,782)   - 
Net loss   (11,381,898)   (1,914,815)
           
Other comprehensive loss:          
Foreign currency transaction loss   (355,627)   (159,326)
Comprehensive loss   (11,737,525)   (2,074,141)
           
Net loss attributable to:          
Shareholders   (11,181,033)   (1,279,469)
Non-controlling interest   (200,865)   (635,346)
    (11,381,898)   (1,914,815)
           
Basic and diluted loss per common share attributable to Versus Systems Inc.   (1.04)   (0.15)
           
Weighted average common shares outstanding   10,733,586    8,775,671 

 

The accompanying notes are an integral part of these restated condensed interim consolidated financial statements.

 

2

 

 

Versus Systems Inc.

Restated Condensed Interim Consolidated Statement of Changes in Equity (Deficit)

(Expressed in United States Dollars)

(Unaudited - prepared by management)

  

           Share Capital                             
   Number of
Common
Shares
   Number of
Class “A”
Shares
   Common
Shares
   Class “A”
Shares
   Reserves   Currency
Translation
adjustment
   Deficit   Share
subscriptions
received
   Equity   Non-controlling Interest   Total Equity
(Deficit)
 
           ($)   ($)   ($)   ($)   ($)   ($)   ($)   ($)   ($) 
                                             
Balance at December  31, 2019   8,455,525    5,057    74,639,358    28,247    7,409,092    339,753    (80,820,209)   230,947    1,827,187    (4,036,747)   (2,209,560)
                                                        
Shares issued in private placement   150,000    -    230,947    -    -    -    -    -    230,947    -    230,947 
Share subscriptions received   -    -    230,947    -    -    -    -    (230,947)   -    -    - 
Contribution benefit   -    -    -    -    65,691    -    -    -    65,691    -    65,691 
Exercise of warrants   326,460    -    591,477    -    -    -    -    -    591,477    -    591,477 
Stock-based compensation   -    -    -    -    217,489    -    -    -    217,489    -    217,489 
Cumulative translation adjustment   -    -    -    -    -    (159,326)   -    -    (159,326)        (159,326)
Loss and comprehensive loss   -    -    -    -    -    -    (1,279,469)   -    (1,279,469)   (635,346)   (1,914,815)
Balance at March 31, 2020   8,931,985    5,057    75,692,729    28,247    7,692,272    180,427    (82,099,678)   -    1,493,996    (4,672,093)   (3,178,097)
                                                        
Shares issued in private placement   797,532    -    2,639,366    -    42,164    -    -    -    2,681,530    -    2,681,530 
Share subscriptions received   -    -    -    -    -    -    -    -    -    -    - 
Contribution benefit   -    -    -    -    170,329    -    -    -    170,329    -    170,329 
Exercise of warrants   729,683    -    2,950,997    -    -    -    -    -    2,950,997    -    2,950,997 
Shares issued for services and investment   270,636    -    753,583    -    -    -    -    -    753,583    -    753,583 
Exercise of options   3,750    -    9,999    -    (7,419)   -    -    -    2,580    -    2,580 
Stock-based compensation   -    -    -    -    831,646    -    -    -    831,646    -    831,646 
Cumulative translation adjustment   -    -    -    -    -    (287,976)   -    -    (287,976)   -    (287,976)
Loss and comprehensive loss   -    -    -    -    -    -    (4,496,584)   -    (4,496,584)   (499,641)   (4,996,225)
                                                        
Balance at December 31, 2020   10,733,586    5,057    82,046,674    28,247    8,663,301    (107,549)   (86,596,262)   -    4,034,411    (5,171,734)   (1,137,323)
                                                        
Shares issued in public offering   1,472,000    -    11,040,000    -    -    -    -    -    11,040,000    -    11,040,000 
Share issuance costs   -    -    (1,524,439)   -    -    -    -    -    (1,524,439)   -    (1,524,439)
Shares issued in exchange for debt   215,341    -    1,615,058    -    -    -    -    -    1,615,058    -    1,615,058 
Exercise of warrants   96,280    -    374,649    -    -    -    -    -    374,649    -    374,649 
Stock-based compensation   -    -    -    -    66,616    -    -    -    66,616    -    66,616 
Cumulative translation adjustment   -    -    -    -    -    (355,627)   -    -    (355,627)        (355,627)
Loss and comprehensive loss   -    -    -    -    -    -    (9,573,290)   -    (9,573,290)   (995,875)   (10,569,165)
Change in accounting policy - functional currency   -    -    -    -    -    463,176    282,331     -    745,507    -    745,507 
Balance at February 1, 2021   12,517,207    5,057    93,551,942    28,247    8,729,917    -    (95,887,221)   -    6,422,885    (6,167,609)   255,276 
                                                        
Exercise of warrants   549,681    -    2,259,781    -    (27,903)   -    -    -    2,231,878    -    2,231,878 
Exercise of stock options   22,674    -    77,549         (22,676)   -    -    -    54,873    -    54,873 
Stock-based compensation   -    -    -    -    135,604    -    -    -    135,604    -    135,604 
Loss and comprehensive loss   -    -    -    -    -    -    (1,607,743)   -    (1,607,743)   795,010    (812,733)
Balance at March 31, 2021   13,089,562    5,057    95,889,272    28,247    8,814,943    -    (97,494,964)   -    7,237,498    (5,372,599)   1,864,899 

 

The accompanying notes are an integral part of these restated condensed interim consolidated financial statements.

 

3

 

 

Versus Systems Inc.

Restated Condensed Interim Consolidated Statements of Cash Flows

(Expressed in United States Dollars)

(Unaudited - prepared by management)

 

   Three Months
Ended
     
   March 31,
2021
(Restated - Note 2)
   Three Months
Ended
March 31,
2020
 
   ($)   ($) 
CASH PROVIDED BY (USED IN)          
           
OPERATING ACTIVITIES          
Loss for the year   (11,381,898)   (1,914,815)
Items not affecting cash:          
Amortization (Note 6)   2,748    4,613 
Amortization of intangible assets (Note 8)   331,715    402,855 
Amortization of right-of-use assets (Note 6)   66,753    62,367 
Finance expense   -    64,204 
Interest expense   96,961    7,057 
Effect of foreign exchange   (791,532)   (102,883)
Forgiveness on government loan (Note 10)   -    - 
Change in fair value of warrant liability (Note 11)   8,593,177    - 
Share-based compensation   202,220    217,489 
           
Changes in working capital items:          
Receivables   380,174    21,810 
Prepaids and deposits   (376,353)   9,687 
Accounts payable and accrued liabilities   (245,525)   430,306 
           
Cash used in operating activities   (3,121,559)   (797,310)
           
FINANCING ACTIVITIES          
Proceeds from notes payable   -    341,122 
Repayment of notes payable   (287,616)   - 
Proceeds from share issuances   11,040,000    230,947 
Payments for lease liabilities   (77,689)   (68,338)
Proceeds from exercise of options   54,873    - 
Proceeds from exercise of warrants   2,606,527    591,477 
Payments of share issuance costs   (1,126,163)   - 
           
Cash provided by financing activities   12,209,933    1,095,208 
           
INVESTING ACTIVITIES          
Development of intangible assets   (295,298)   (363,011)
           
Cash used in investing activities   (295,298)   (363,011)
           
Change in cash during the period   8,793,076    (65,113)
Cash - Beginning of period   2,283,262    76,373 
           
Cash - End of period   11,076,337    11,260 

 

The accompanying notes are an integral part of these restated condensed interim consolidated financial statements.

 

4

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

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 is traded on the NASDAQ under the symbol “VS”. The Company’s Unit A warrants are traded on NASDAQ under “VSSYW”.

 

The Company is engaged in the technology sector and 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.

 

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 March 31, 2021, the Company has not achieved positive cash flow from operations and is not able to finance day to day activities through operations. During the three months ended March 31, 2021, the Company completed a public offering with total proceeds of approximately $11 million. The Company estimates that it has adequate financial resources for the next twelve months. 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 consolidated financial statements do not include any adjustments 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.

 

COVID-19 Pandemic

 

In March 2020 the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn.

 

Although it is not possible to reliably estimate the length or severity of these developments and their financial impact to the date of approval of these financial statements, these conditions could have a significant adverse impact on the Company’s financial position and results of operations for future periods.

 

2.BASIS OF PRESENTATION

 

Statement of compliance

 

These condensed interim consolidated financial statements, including comparatives, have been prepared in accordance with IAS 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”) and the interpretations of the IFRS Interpretations committee. They do not include all disclosures required by International Financial Reporting Standards (“IFRS”) for annual financial statements, and therefore should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2020, prepared in accordance with IFRS as issued by the IASB.

 

These condensed interim consolidated financial statements were authorized for issue by the Board of Directors on November 15, 2021.

 

Basis of measurement

 

These condensed interim consolidated financial statements have been prepared on a historical cost basis, except for financial instruments classified as financial instruments at fair value. In addition, these condensed financial statements have been prepared using the accrual basis of accounting except for cash flow information.

 

5

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

2.BASIS OF PRESENTATION (continued)

 

Functional and presentation currency

 

These condensed interim consolidated financial statements are presented in United States dollars, unless otherwise noted, which is the functional currency of the Company and its subsidiaries.

 

Restatement

 

Subsequent to the original issuance of the Company’s interim financial statements, the Company’s external auditors performed an interim review over the interim financial statements and as a result of the review, it was concluded that there were accounting errors in the previously filed interim financial statements which have been corrected retrospectively in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”.

 

The effect of the changes are as follows:

 

- Warrant liability increased by $7,630,647

- Change in fair value of warrant liability decreased by $8,593,177

- Loss on note conversion increased by $115,782

- Deficit increased by $8,708,959

 

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. For partially owned subsidiaries, the interest attributable to non-controlling shareholders is reflected in non-controlling interest. Adjustments to non-controlling interest are accounted for as transactions with owners and adjustments that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary.

 

Name of Subsidiary  Place of Incorporation  Proportion of
Ownership Interest
   Principal Activity
           
Versus Systems (Holdco) Inc.  United States of America   66.8%  Holding Company
Versus Systems UK, Ltd.  United Kingdom   66.8%  Sales Company
Versus LLC  United States of America   66.8%  Technology Company

 

Significant Accounting Judgments, Estimates and Assumptions

 

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 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.

  

6

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

2.BASIS OF PRESENTATION (continued)

 

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:

 

i)Deferred income taxes

 

Deferred tax assets, including those arising from un-utilized tax losses, require management to assess the likelihood that the Company will generate sufficient taxable earnings in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be impacted.

 

ii)Economic recoverability and probability of future economic benefits of intangible assets

 

Management has determined that intangible asset costs which were capitalized may have future economic benefits and may be economically recoverable. Management uses several criteria in its assessments of economic recoverability and probability of future economic benefits including anticipated cash flows and estimated economic life.

 

iii)Valuation of share-based compensation

 

The Company uses the Black-Scholes Option Pricing Model for valuation of share-based compensation. Option pricing models require the input of subjective assumptions including expected price volatility, interest rate, and forfeiture rate. Changes in the input assumptions can materially affect the fair value estimate and the Company’s earnings and equity reserves.

 

iv)Depreciation and Amortization

 

The Company’s intangible assets and equipment are depreciated and amortized on a straight-line basis, taking into account the estimated useful lives of the assets and residual values. Changes to these estimates may affect the carrying value of these assets, net loss, and comprehensive income (loss) in future periods.

 

v)Determination of functional currency

 

The functional currency of the Company and its subsidiaries is the currency of the primary economic environment in which each entity operates. Determination of the functional currency may involve certain judgments to determine the primary economic environment. The functional currency may change if there is a change in events and conditions which determines the primary economic environment.

 

Significant Accounting Judgments, Estimates and Assumptions

 

vi)Revenue Recognition

 

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.

 

7

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

3.SIGNIFICANT ACCOUNTING POLICIES

 

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 totalled 6,964,198 (2020 – 4,671,713).

 

Property and Equipment

 

Property and equipment is recorded at cost less accumulated amortization and any impairments. Amortization 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

 

Financial instruments

 

Classification

 

The Company classifies its financial instruments in the following categories: at fair value through profit and loss (“FVTPL”), at fair value through other comprehensive income (loss) (“FVTOCI”), or at amortized cost. The Company determines the classification of financial assets at initial recognition. The classification of debt instruments is driven by the Company’s business model for managing the financial assets and their contractual cash flow characteristics. Equity instruments that are held for trading are classified as FVTPL. For other equity instruments, on the day of acquisition the Company can make an irrevocable election (on an instrument-by-instrument basis) to designate them as FVTOCI. Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL (such as instruments held for trading or derivatives) or the Company has opted to measure them at FVTPL.

 

Financial Instrument

 

The following table shows the classification of financial instruments:

 

Financial assets/liabilities   Classification IFRS 9
Cash   FVTPL
Receivables   Amortized cost
Restricted deposit   Amortized cost
Deposit   Amortized cost
Accounts payable and accrued liabilities   Amortized cost
Notes payable   Amortized cost

 

8

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Measurement

 

Financial assets and liabilities at amortized cost

 

Financial assets and liabilities at amortized cost are initially recognized at fair value plus or minus transaction costs, respectively, and subsequently carried at amortized cost less any impairment.

 

Financial assets and liabilities at FVTPL

 

Financial assets and liabilities carried at FVTPL are initially recorded at fair value and transaction costs are expensed in profit or loss. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets and liabilities held at FVTPL are included in profit or loss in the period in which they arise.

 

Impairment of financial assets at amortized cost

 

An ‘expected credit loss’ impairment model applies which requires a loss allowance to be recognized based on expected credit losses. The estimated present value of future cash flows associated with the asset is determined and an impairment loss is recognized for the difference between this amount and the carrying amount as follows: the carrying amount of the asset is reduced to estimated present value of the future cash flows associated with the asset, discounted at the financial asset’s original effective interest rate, either directly or through the use of an allowance account and the resulting loss is recognized in profit or loss for the period.

 

In a subsequent period, if the amount of the impairment loss related to financial assets measured at amortized cost decreases, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

 

Derecognition

 

Financial assets

 

The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity. Gains and losses on derecognition are generally recognized in profit or loss.

 

As at March 31, 2021, the Company does not have any derivative financial assets and liabilities.

 

Intangible assets excluding goodwill

 

Intangible assets acquired separately are carried at cost at the time of initial recognition. Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date. Expenditure on research activities is recognized as an expense in the period in which it is incurred.

 

Intangibles with a finite useful life are amortized and those with an indefinite useful life are not amortized. The useful life is the best estimate of the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. The useful life is based on the duration of the expected use of the asset by the Company and the legal, regulatory or contractual provisions that constrain the useful life and future cash flows of the asset, including regulatory acceptance and approval, obsolescence, demand, competition and other economic factors. If an income approach is used to measure the fair value of an intangible asset, the Company considers the period of expected cash flows used to measure the fair value of the intangible asset, adjusted as appropriate for Company-specific factors discussed above, to determine the useful life for amortization purposes. If no regulatory, contractual, competitive, economic or other factors limit the useful life of the intangible to the Company, the useful life is considered indefinite.

 

9

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Intangibles with a finite useful life are amortized on the straight-line method unless the pattern in which the economic

 

benefits of the intangible asset are consumed or used up are reliably determinable. The Company evaluates the remaining useful life of intangible assets each reporting period to determine whether any revision to the remaining useful life is required. If the remaining useful life is changed, the remaining carrying amount of the intangible asset will be amortized prospectively over the revised remaining useful life. The Company’s intangible asset is amortized on a straight-line basis over 3 years. In the year development costs are incurred, amortization is based on a half year.

 

Deferred Financing Costs

 

Deferred financing costs consist primarily of direct incremental costs related to the Company’s public offering of its common stock, which was completed in January 2021. Upon completion of the Company’s public offering any deferred cost was offset against the proceeds of the offering. The Company incurred $398,276 of deferred financing cost during the year ended December 31, 2020.

 

Impairment of intangible assets excluding goodwill

 

An internally-generated intangible asset arising from development (or from the development phase of an internal project) is recognized if, and only if, all of the following have been demonstrated:

 

(a)the technical feasibility of completing the intangible asset so that it will be available for use or sale;

 

(b)the intention to complete the intangible asset and use or sell it;

 

(c)the ability to use or sell the intangible asset;

 

(d)how the intangible asset will generate probable future economic benefits;

 

(e)the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

 

(f)the ability to measure reliably the expenditure attributable to the intangible asset during its development.

 

The amount initially recognized for internally-generated intangible assets is the sum of the costs incurred from the date when the intangible assets first meet the recognition criteria listed above. If no future economic benefit is expected before the end of the life of assets, the residual book value is expensed. Subsequent to initial recognition, internally-generated intangible assets are reported at cost. Where no internally-generated intangible asset can be recognized, development costs are recognized as an expense in the period in which it is incurred.

 

At the end of each reporting period, the Company reviews the carrying amounts of its intangible assets to determine whether there is any indication that those assets have suffered impairment losses. If any such indication exists, the recoverable amount of the cash-generating unit (“CGU”) to which the asset belongs is estimated in order to determine the extent of the impairment losses (if any).

 

Where a reasonable and consistent basis of allocation can be identified, corporate assets (assets other than goodwill that contribute to the future cash flows of both the CGU under review and other CGUs) are also allocated to individual CGUs, or otherwise they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identified.

 

10

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

 

If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount.

 

Where impairment losses subsequently reverse, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment losses been recognized for the asset (or CGU) in prior years. A reversal of impairment losses is recognized immediately in profit or loss.

 

Income taxes

 

Tax expense recognized in profit or loss comprises the sum of current tax and deferred tax not recognized in other comprehensive income or directly in equity.

 

Current Income Tax

 

Current income tax assets and/or liabilities comprise those claims from, or obligations to, fiscal authorities relating to the current or prior reporting periods that are unpaid at the reporting date. Current tax is payable on taxable profit, which differs from profit or loss in the financial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period.

 

Deferred income tax

 

Deferred income taxes are calculated based on temporary differences between the carrying amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realization, provided they are enacted or substantively enacted by the end of the reporting period.

 

Deferred tax assets are recognized to the extent that it is probable that they will be able to be utilized against future taxable income. Deferred tax assets and liabilities are offset only when the Company has a right and intention to offset current tax assets and liabilities from the same taxation authority.

 

Changes in deferred tax assets or liabilities are recognized as a component of tax income or expense in profit or loss, except where they relate to items that are recognized in other comprehensive income or directly in equity, in which case the related deferred tax is also recognized in other comprehensive income or equity, respectively.

 

Leases

 

Leases are recognized as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Company. Assets and liabilities arising from a lease are initially measured on a present value basis.  Right-of-use assets are measured at cost comprising the following:

 

- the amount of the initial measurement of lease liability;

 

11

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

  

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

-any lease payments made at or before the commencement date less any lease incentives received; \

 

-any initial direct costs; and

 

-restoration costs.

 

The Company assesses whether a contract is or contains a lease, at inception of a contract. The Company recognizes a right-of-use asset and a corresponding lease liability with respect to all lease agreements in which it is the lessee. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company uses its incremental borrowing rate.

 

Leases

 

The lease liability is subsequently measure by increasing its carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect lease payments made. The right-of-use asset is depreciated over the shorter of the lease term and the useful life of the underlying asset. The company applies IAS 36, Impairment of Assets, to determine whether the asset is impaired and account for any identified impairment loss.

 

As a practical expedient, IFRS 16 permits a lease not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement. The Company has not used this practical expedient, and accordingly allocates the consideration in the contract to lease and non-lease components based on the stand-alone price of the lease component and aggregate stand-alone price of the non-lease components.

 

Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognized as an expense in the period in which the event or condition that triggers those payments occurs and are presented as such in the statements of income and comprehensive income.

 

Provisions

 

A provision 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. Provisions 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.

 

Government grant

 

Government grant is recognized when there is reasonable assurance that the Company will comply with any conditions attached to the grant and the grant will be received. Government grant is recognized in profit or loss to offset the corresponding expenses on a systematic basis over the periods in which the Company recognizes expenses for the related costs for which the grants are intended to compensate, which in the case of grants related to assets requires setting up the grant as deferred income or deducting it from the carrying amount of the asset.

 

Non-controlling interest

 

Non-controlling interest in the Company’s less than wholly owned subsidiary is 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.

 

12

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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.

 

Valuation of equity units issued in private placements

 

The Company has adopted a residual value method with respect to the measurement of shares and warrants issued as private placement units. The residual value method first allocates value to the most easily measurable component based on fair value and then the residual value, if any, to the less easily measurable component.

 

The fair value of the common shares issued in private placements is determined to be the more easily measurable component and are valued at their fair value. The balance, if any, is allocated to the attached warrants. Any fair value attributed to the warrants is recorded as warrant reserve. If the warrants are exercised, the related amount is reclassified as share capital. If the warrants expire unexercised, the related amount remains in the warrant reserve.

 

Warrants issued in equity financing transactions

 

The Company engages in equity financing transactions to obtain funds necessary to continue operations. These equity financing transactions may involve issuance of common shares or units. Each unit comprises a certain number of shares and a certain number of warrants. Depending on the terms and conditions of each equity financing transaction, the warrants are exercisable into additional common shares at a price prior to expiry as stipulated by the transaction. Warrants that are part of units are assigned a value based on the residual value, if any, and included in reserves.

 

As of February 1, 2021, the warrants were considered a derivative liability since the obligation to issue shares was not fixed in the Company’s functional currency. The derivative warrant liability was measured as fair value at issue with subsequent changes recognized in the statement of loss and comprehensive loss. A $9,743,659 warrant derivative loss was recorded in the statement of loss and comprehensive loss beginning February 1, 2021 when the Company changed its functional currency.

 

The Company uses the Black-Scholes Option Pricing Model for valuation of share-based payments and derivative financial assets (e.g. investments in warrants). Option pricing models require the input of subjective assumptions including expected price volatility, interest rates, and forfeiture rates. Changes in the input assumptions can materially affect the fair value estimate and the Company’s earnings and equity reserves.

 

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 entity as consideration cannot be specifically identified, they are measured at fair value of the share-based payment.

 

13

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Otherwise, share-based payments are measured at the fair value of goods or services received.

 

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) development and maintenance of custom-built software or other professional services, or 2) the sale of advertising.

 

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.

 

Revenue recognition

 

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.

 

As the Company’s performance obligations are satisfied within 12 months, the Company has elected the practical expedients under IFRS 15, which allows the Company not to record any significant financing component as a result of financing any of its arrangements and not to capitalize cost incurred to obtain a contract.

 

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 entity 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 IAS 21, The Effects of Changes in Foreign Exchange Rates.

 

14

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

3.SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Transactions in currencies other than the United States dollar are recorded at exchange rates prevailing on the dates of the transactions. 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 statement of financial position while non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at the exchange rates approximating those in effect on the date of the transactions. Exchange gains and losses arising on translation are included in the statement of profit or loss.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss) and represents the change in shareholders’ equity (deficiency) which results from transactions and events from sources other than the Company’s shareholders. Net loss is the same as comprehensive loss for the years presented.

 

4. CHANGE IN FUNCTIONAL AND PRESENTATION CURRENCY

 

The Company changed its functional currency from the Canadian dollar (“CAD”) to the United States dollar (“USD”) as of February 1, 2021. The change in functional currency coincides with the January 2021 initial public offering and listing on the Nasdaq. Considering Versus’ business activities, comprised primarily of United States dollar revenue and expenditures as well as United States dollar denominated financings, management determined that the functional currency of the Company is the United States dollar. All assets, liabilities, share capital, and other components of shareholders’ equity (deficit) were translated into United States dollars at the exchange rate at the date of change. These changes have been accounted for prospectively. Concurrent with the change in functional currency, on February 1, 2021, the Company changed its presentation currency from the Canadian dollar to the United States dollar. This change in presentation currency is to better reflect the Company’s business activities, comprised primarily of United States dollar transactions. The consolidated financial statements for all periods presented have been translated into the new presentation currency in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates. The consolidated statements of loss and comprehensive loss have been translated into the presentation currency using the average exchange rates prevailing during each quarterly reporting period. All assets and liabilities previously reported in Canadian dollars have been translated into United States dollars as at February 1, 2021 and December 31, 2020 using the period-end noon exchange rates of 0.782 CAD/USD and 0.770 CAD/USD, respectively. As a practical measure, the comparative shareholders’ equity (deficit) balances were translated at the February 1, 2021 exchange rate of 1.2824 CAD/USD. The comparative statements of net loss and cash flows were translated at a quarterly average of 0.745 CAD/USD for the year ending December 31, 2020. All resulting exchange differences have been recognized in the foreign currency translation reserve. The effect of applying different exchange rates for the change in functional currency and presentation currency have been included as a reconciling item within the statement of changes in shareholders’ equity (deficit) as at February 1, 2021.

 

5. ACCOUNTS RECEIVABLE

 

As of March 31, 2021 accounts receivable consist of share subscription receivable ($53,132) and GST receivable ($31,568). As of December 31, 2020 accounts receivable consists of amounts due from one customer ($373,202), GST receivable ($22,386) and share subscription receivable ($69,284). There has been no provision for doubtful accounts for the years presented. During 2020, the Company entered into an Accounts Receivable Purchase and Security Agreement (the “Factor Agreement”) with full recourse. Pursuant to the Factor Agreement, the factor advances funds to the Company for the right to collect cash flows from factored accounts receivable and charges fees for its services. The factor advances funds to the Company at 90% of accounts receivable factored. The outstanding balance bears a daily interest rate of 0.05%. As of December 31, 2020, 100% of the monies owed were collected by the Company and the factoring agent under the terms of the Factor Agreement. The Company expensed the fees and interest charged by the factoring agent as a loss on factoring within its financial statements, which totaled $37,500 during the twelve month period ended December 31, 2020.

 

15

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

6.RESTRICTED DEPOSIT

 

As at March 31, 2021, restricted deposits consisted of $11,497 (2020 - $8,851) held in a guaranteed investment certificate as collateral for a corporate credit card.

 

7.PROPERTY AND EQUIPMENT

 

   Computers   Right of Use
Asset
  

 

Total

 
   ($)   ($)   ($) 
Cost            
At December 31, 2019  88,329   930,785   1,019,114 
Foreign currency adjustment   -    (47.501)   (47,501)
At December 31, 2020   88,329    883,284    971,613 
Additions   75,505    38,556    114,061 
Foreign currency adjustment   -    (98,320)   (98,320)
At March 31, 2021   163,834    823,520    987,354 
                
Accumulated amortization               
At December 31, 2019   65,062    223,492    288,554 
Amortization for the year   17,223    183,975    201,198 
At December 31, 2020   82,285    407,467    489,752 
Amortization for the period   6,044    66,753    69,501 
At March 31, 2021   93,589    474,220    559,253 
                
Carrying amounts               
At December 31, 2020   6.044    475,817    481,861 
At March 31, 2021   78,801    349,300    428,101 

 

8. NON-CONTROLLING INTEREST IN VERSUS LLC

 

As of December 31, 2018, the Company held a 41.3% 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.

 

On May 21, 2019, the Company acquired an additional 25.2% interest in Versus LLC in exchange for 574,009 common shares of the Company and 287,005 share purchase warrants that are exercisable at C$3.20 per share until June 30, 2019. The common shares and the share purchase warrants were determined to have a fair value of $1,403,675 and $116,595, respectively. As a result, the Company increased its ownership interest to 66.5% and recorded the excess purchase price over net identifiable liabilities of $3,462,849 against reserves. The effect on non-controlling interest was a reduction of $1,942,580.

 

16

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

8. NON-CONTROLLING INTEREST IN VERSUS LLC (continued)

 

On June 21, 2019, the Company acquired an additional 0.3% interest in Versus LLC in exchange for 2,825 common shares of the Company and 1,412 share purchase warrants that are exercisable at C$3.20 per share until June 30, 2019. The common shares and the share purchase warrants were determined to have a fair value of $7,011 and $2,565, respectively. As a result, the Company increased its ownership interest to 66.8% and recorded the excess purchase price over net identifiable assets of $26,275 against reserves. The effect on non-controlling interest was a reduction of $16,698.

 

The following table presents summarized financial information before intragroup eliminations for the non-wholly owned subsidiary as of March 31, 2021 and December 31, 2020:

 

   2021   2020 
Non-controlling interest percentage  33.2%   33.2% 
    ($)    ($) 
Assets          
Current   8,682,359    779,123 
Non-current   2,256,640    2,289,645 
    10,938,998    3,068,768 
Liabilities          
Current   769,080    1,020,192 
Non-current   31,337,099    17,329,272 
    32,106,179    18,349,464 
Net liabilities   (21,167,181)   (15,280,696)
Non-controlling interest   (5,372,599)   (5,171,734)
Loss and comprehensive loss   (11,381,898)   (3,418,635)
Loss and comprehensive loss attributed to non-controlling interest   (200,865)   (1,134,987)

 

17

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

9.INTANGIBLE ASSETS

 

Intangible assets are 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 continues to develop new apps, therefore additional costs were capitalized during the year ended December 31, 2020.

 

   Software 
   ($) 
Cost    
At December 31, 2019   9,016,764 
Foreign currency adjustment   15,065 
Additions   882,275 
At December 31, 2020   9,914,104 
Foreign currency adjustment   47,461 
Additions   295,298 
At March 31, 2021   10,256,863 
      
Accumulated amortization     
At December 31, 2019   6,876,389 
Amortization   1,300,299 
At December 31, 2020   8,176,688 
Amortization   331,715 
At March 31, 2021   8,508,403 
      
Carrying amounts     
At December 31, 2019   2,140,375 
At December 31, 2020   1,737,416 
At March 31, 2021   1,748,460 

 

10.ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

The Company’s accounts payable and accrued liabilities are comprised of the following:

 

   March 31,
2021
   December 31,
2020
 
   ($)   ($) 
Accounts payable   631,850    551,329 
Due to related parties   150,583    551,815 
Accrued liabilities   430,723    355,535 
    1,213,156    1,458,680 

 

11.NOTES PAYABLE

 

During the three month period ended March 31, 2021, the Company exchanged 215,341 shares of common stock in exchange for a principal reduction of debt in the amount of $1,484,602 and $130,456 of accrued interest. In addition, the Company repaid $287,616 of principal. As at March 31, 2021, the Company had recorded $87,657 in accrued interest which was included in accounts payable and accrued liabilities.

 

18

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

11.NOTES PAYABLE (continued)

 

During the year ended December 31, 2020, the Company issued unsecured notes payable for total proceeds of $970,942 from director and officers of the Company who are also shareholders. The loans bear interest at the prime rate which was 2.45% to 3.95% per annum at December 31, 2020, compounded annually and payable quarterly, and had a maturity date of three years from the date of issuance. The notes were considered below the Company’s estimated market borrowing rate of 10% and as such, a contribution benefit of $175,902 was recorded in reserves. As of December 31, 2020, the Company had recorded $363,439 in accrued interest which was included in accounts payable and accrued liabilities.

 

During the three months ended March 31, 2021, the Company recorded finance expense of $85,161 (2020 - $64,205), related to bringing the notes to their present value.

 

   Amount 
   (C$) 
Balance at January 1, 2020   3,760,518 
Proceeds   1,097,650 
Repayments   (386,344)
Contribution benefit   (175,136)
Finance expense   285,651 
Balance, December 31, 2020   4,528,549 
Foreign currency adjustment   (170,322)
Repayments   (1,615,062)
Contribution benefit   - 
Finance expense   85,161 
Balance, March 31, 2021   2,828,326 
Current   1,169,608 
Non-current   1,658,718 

 

In May 2020, the Company received loan proceeds in the aggregate amount of $610,247 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the CARES Act within the United States of America in response to the COVID-19 pandemic, provides for loans to qualifying businesses. A portion of the loans and accrued interest are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries. No collateral or guarantees were provided in connection with the PPP loans.

 

The unforgiven portion of the PPP loans is payable over two years at an interest rate of 1%, with a deferral of payments for the first nine months. The Company used the proceeds for purposes consistent with the PPP. For the year ended December 31, 2020 the Company had incurred eligible payroll cost of $610,247 which were fully offset against the loan balance. Of the total loan balance, $210,248 was applied towards payroll cost capitalized as intangible assets during the year ended December 31, 2020.

 

12.SHARE CAPITAL AND RESERVES

 

a)Authorized share capital

 

We are authorized to issue an unlimited number of Class A Shares. The Class A Shares do not have any special rights or restrictions attached. As of March 31, 2021, there were 5,057 Class A Shares issued and outstanding.

 

19

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

12.SHARE CAPITAL AND RESERVES (continued)

 

b)Issued share capital

 

During the three month period ended March 31, 2021, the Company:

 

i)issued, 1,472,000 units at a price of $7.50 per unit per unit for total proceeds of $11,040,000. Each unit consisted of one common share, one Unit A warrant and one Unit B warrant, Unit A warrants allow the purchaser to purchase one common share at $7.50 per share until January 20, 2026. Unit B warrants allow the purchaser to purchase one common share at $7.50 per share until January 20, 2026. In connection with the offering, the Company incurred $1,524,439 in issuance costs as part of the transaction.

 

ii)issued, 668,635 common shares pursuant to exercise of 645,961 warrants and 22,674 stock options for total proceeds of $2,711,979.

 

iii)Issued, 215,341 units consisting of one share of common share and one Unit A warrant and one Unit B warrant in exchange for the forgiveness of $1,615,058 of debt and accrued interest.

 

During the year ended December 31, 2020, the Company:

 

  i) issued, 150,000 units at a price of $3.02 per unit for total proceeds of $452,625. Each unit consisted of one common share and a one half share purchase warrant for each share purchased. Each whole warrant entitles the holder to purchase one additional common share at a price of $4.80 until February 17, 2021.

 

  ii) issued, 172,532 units at a price of $2.95 per unit for total proceeds of $508,417. Each unit consisted of one common share and one share purchase warrant for each share purchased. Each warrant entitles the holder to purchase one additional common share at a price of $4.71 until July 17, 2022.
     
  iii) issued, 625,000 units at a price of $3.05 per unit for total proceeds of $1,909,271. Each unit consisted of one common share and a one half share purchase warrant for each share purchased. Each whole warrant entitles the holder to purchase one additional common share at a price of $4.89 until November 17, 2022

 

  iv) entered into a Mutual Investment Agreement with Animoca Brands Inc. (Animoca) in which the Company issued 181,547 shares of the Company’s common stock with a value of $502,414 in exchange for 4,327,431 shares of Animoca common stock. On the same date, the Company issued an additional 89,088 shares of the Company’s common stock with a value of $251,169 to Animoca in exchange for services (included in professional fees). The Company subsequently sold all of its shares of Animoca and recognized a loss of $378,718.

 

  v) issued, 1,058,987 common shares pursuant to exercise of 1,055,237 warrants and 3,750 stock options for total proceeds of $2,834,349.

 

Escrow

 

At March 31, 2021, 313 common shares (December 31, 2020 – 313) of the Company are held in escrow due to misplaced share certificates originally issued to three individual shareholders.

 

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.

 

20

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

12.SHARE CAPITAL AND RESERVES (continued)

 

c)Stock options (continued)

 

A continuity schedule of outstanding stock options is as follows:

 

   Number Outstanding   Weighted Average
Exercise Price
 
       ($) 
Balance – December 31, 2019   1,013,399    4.07 
Granted   470,083    3.27 
Exercised   (3,750)   2.78 
Forfeited   (125,907)   4.80 
Balance –December 31, 2020   1,353,825    3.74 
Granted   -    - 
Exercised   (60,000)   3.32 
 Forfeited   -    - 
Balance – March 31, 2021   1,293,825    3.57 

 

During the three months ended March 31, 2021, no stock options were granted by the Company. During the three months ended March 31, 2021, the Company recorded share-based compensation of $202,220 (March 31, 2020 - $205,654) relating to options vested during the year.

 

During the year ended December 31, 2020, 470,083 stock options were granted by the Company with a fair value of $906,618 (or $2.01 per option). During the year ended December 31, 2020, the Company recorded share-based compensation of $1,049,135 (December 31, 2019 - $632,542) relating to options vested during the year.

 

The Company used the following assumptions in calculating the fair value of stock options for the year ended December 31, 2020:

 

   December 31,
2020
Risk-free interest rate  0.26% - 0.37%  
Expected life of options  2.0 – 5.0 years 
Expected dividend yield  Nil 
Volatility  79.44% - 87.79%  

 

21

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

12.SHARE CAPITAL AND RESERVES (continued)

 

c)Stock options (continued)

 

At March 31, 2021, the Company had incentive stock options outstanding as follows:

 

Expiry Date 

Options

Outstanding

  

Options

Exercisable

  

Exercise

Price

   Weighted Average
Remaining
Life
 
              ($)    (years) 
July 13, 2021   265,150    260,576    3.32    0.28 
March 17, 2022   13,063    13,063    5.22    0.96 
May 18, 2022   5,750    5,750    5.72    1.13 
September 14, 2022   74,156    74,156    4.46    1.45 
June 6, 2023   14,063    9,668    5.70    2.18 
September 4, 2023   12,813    6,807    2.97    2.43 
April 2, 2024   107,500    58,750    2.52    3.01 
June 27, 2024   6,250    6,250    2.56    3.24 
September 27, 2024   312,500    117,969    4.53    3.49 
October 22, 2024   12,500    6,094    4.03    3.56 
July 24, 2025   261,470    27,084    2.98    4.32 
July 31, 2025   171,116    114,077    2.98    4.32 
August 10, 2025   12,500    3,646    3.00    4.36 
November 19, 2025   25,000    2,083    4.59    3.64 
    1,293,825    705,973    3.57    2.28 

 

d)Share purchase warrants

 

A continuity schedule of outstanding share purchase warrants is as follows:

 

   Number    Weighted Average
Exercise Price
 
   Outstanding   ($) 
Balance – December 31, 2019   3,690,431    4.20 
Exercised   (1,056,143)   1.90 
Expired   (513,947)   3.43 
Issued   947,531    4.87 
Balance – December 31, 2020   3,067,872    4.67 
Exercised   (645,961)   4.38 
Expired   (249,912)   3.38 
Issued   3,374,682    7.50 
Balance – March 31, 2021   5,546,681    6.33 

 

22

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

12.SHARE CAPITAL AND RESERVES (continued)

 

d)Share purchase warrants (continued)

 

During the three month period ended March 31, 2021, the Company:

 

i)On January 21, 2021 Company completed a public offering and issued 1,472,000 units at a price of $7.50 per unit per unit for total proceeds of $11,040,000. Each unit consisted of one common share, one Unit A warrant and one Unit B warrant, each to purchase one common share for a total of 2,944,000 warrants issued at $7.50 per share until January 21, 2023.

 

ii)On January 21, 2021 the Company entered into a debt exchange agreement and exchanged 215,341 shares of common stock for the reduction of $1,615,058 of debt and accrued interest. As part of the agreement the Company also issued 215,341 Unit A warrants and 215,341 Unit B warrants issued at $7.50 per share until January 21, 2023.

 

During the year ended December 31, 2020, the Company:

 

iii)On February 17, 2020, the Company, completed a unit private placement which included 75,000 share purchase warrants exercisable at $4.80 per share for a period of two years. The share purchase warrants were determined to have a fair value of $Nil using the residual value method.

 

iv)On July 17, 2020, the Company, completed a unit private placement which included 172,532 share purchase warrants exercisable at $2.95 per share for a period of two years. The share purchase warrants were determined to have a fair value of $41,155 using the residual value method.

 

v)On November 17, 2020, the Company, completed a unit private placement which included. 625,000 share purchase warrants exercisable at $3.05 per share for a period of two years.

 

The Company used the following assumptions in calculating the fair value of the warrants for the period ended:

 

   December 31,
2020
Risk-free interest rate  1.77%
Expected life of options  2.0 years
Expected dividend yield  Nil
Volatility  107.14%
Weighted average fair value per warrant  $0.04

 

23

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

12.SHARE CAPITAL AND RESERVES (continued)

 

d)Share purchase warrants (continued)

 

At March 31, 2021, the Company had share purchase warrants outstanding as follows:

 

Expiry Date 

Warrants

Outstanding

  

Exercise

Price

   Weighted Average
Remaining
Life
 
         ($)    (years) 
July 26, 2021   826,710    4.25    0.32 
August 9, 2021   225,341    4.24    0.36 
January 20, 2022   1,666,008    7.50    0.80 
March 17, 2022   356,250    4.80    0.96 
July 17, 2022   172,531    4.71    1.30 
November 17, 2022   612,500    4.89    1.63 
January 20, 2026   1,687,341    7.50    4.81 
    5,546,681    6.33    2.07 

 

e)Performance warrants

 

On September 30, 2016, the Company issued 625,250 performance warrants with a fair value of $1,371,769. These performance warrants vested during the year ended December 31, 2019.

 

At March 31, 2021, the Company had performance warrants outstanding as follows:

 

Expiry Date 

Performance Warrants

Outstanding

  

Performance Warrants

Exercisable

  

Exercise

Price

   Remaining
Life
 
           ($)   (years) 
June 30, 2021   375,250    375,250    3.09    0.25 

 

24

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

13.RELATED PARTY TRANSACTIONS

 

The following summarizes the Company’s related party transactions, not disclosed elsewhere in these consolidated financial statements, during the three months ended March 31, 2021 and 2020. Key management personnel includes the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and certain directors and officers and companies controlled or significantly influenced by them.

 

Key Management Personnel  2021   2020 
   ($)   ($) 
Short-term employee benefits paid or accrued to the CEO of the Company, including share-based compensation vested for incentive stock options and performance warrants.   61,454    94,919 
Short-term employee benefits paid or accrued to the CFO of the Company, including share-based compensation vested for incentive stock options and performance warrants.   67,932    65,208 
Short-term employee benefits paid or accrued to a member of the advisory board of the Company, including share-based compensation vested for incentive stock options and performance warrants.   52,774    15,457 
Short-term employee benefits paid or accrued to the Vice President of Engineering of the Company, including share-based compensation vested for incentive stock options and performance warrants.   74,573    73,832 
Short-term employee benefits paid or accrued to certain directors and officers of the company, including share-based compensation vested for incentive stock options and performance warrants.   84,169    55,008 
Total   340,901    304,425 

 

Other Related Party Payments

 

Office sharing and occupancy costs of $16,700 (2020 - $15,654) were paid or accrued to a corporation that shares management in common with the Company.

 

Amounts Outstanding

 

a)At March 31, 2021, a total of $150,583 (December 31, 2020 - $551,815) was included in accounts payable and accrued liabilities owing to officers, directors, or companies controlled by them. These amounts are unsecured and non-interest bearing.

 

b)At March 31, 2021, a total of $2,828,326 (December 31, 2020 - $4,528,549) of long term notes was payable to a director and the CEO of the Company (Note 11).

 

25

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

14.FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

 

Financial risk management

 

Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are:

 

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;

 

Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and

 

Level 3 – Inputs that are not based on observable market data.

 

The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s financial instruments consist of cash, receivables, restricted deposit, accounts payable and accrued liabilities and notes payable.

 

The fair value of cash, receivables, accounts payable and accrued liabilities approximate their book values because of the short-term nature of these instruments. The fair value of notes payable approximates its book value as it was discounted using a market rate of interest.

 

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 tax due from the government.

 

Financial instrument risk exposure

 

The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board approves and monitors the risk management processes.

 

Liquidity risk

 

The Company’s cash is invested in business accounts which are available on demand. The Company has raised additional capital during the three months ended March 31, 2021.

 

Interest rate risk

 

The Company’s bank account earns interest income at variable rates and the notes payable bear interest at the prime lending rate. The fair value of its portfolio is relatively unaffected by changes in short-term interest rates. A 1% change in interest rates would have no significant impact on profit or loss for the three month period ended March 31, 2021.

 

Foreign exchange risk

 

Foreign currency exchange rate risk is the risk that the fair value of financial instruments or future cash flows will fluctuate because of changes in foreign exchange rates. The Company operates in Canada and the United States.

 

26

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

14.FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

 

The Company was exposed to the following foreign currency risk as at March 31, 2021 and December 31, 2020:

 

  

March 31,

2021

  

December 31,

2020

 
   ($)   ($) 
Cash  2,394,607   2,197,856 
Lease Obligations   (56,030)   (70,144)
Accounts payable and accrued liabilities   (80,304)   (617,722)
    2,258,273    1,509,990 

 

As at March 31, 2021, with other variables unchanged, a +/- 10% change in the Canadian dollar to the United States dollar exchange rate would impact the Company’s net loss by $226,000 (December 31, 2020 - $150,100).

 

15.Management of Capital

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company. Capital consists of items within equity (deficiency). The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business. The Company is not subject to any externally imposed capital requirements.

 

The Company remains dependent on external financing to fund its activities. In order to sustain its operations, the Company will spend its existing cash on hand and raise additional amounts as needed until the business generates sufficient revenues to be self-sustaining. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.

 

In order to maximize ongoing corporate development efforts, the Company does not pay out dividends. The Company’s investment policy is to keep its cash treasury invested in certificates of deposit with major financial institutions.

 

There have been no changes to the Company’s approach to capital management during the three month period ended March 31, 2021.

 

16.GEOGRAPHICAL SEGMENTED INFORMATION

 

The Company is engaged in one business activity, being the development 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. Revenue earned during the year ended December 31, 2020 is from one customer based in the United States and receivables of $373,202 are due from that customer. No revenue was earned from the same customer for the three months ended March 31, 2021.

 

27

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

16.GEOGRAPHICAL SEGMENTED INFORMATION (continued)

 

Details of identifiable assets by geographic segments are as follows:

 

   Restricted
deposits
   Deposits   Property and
equipment
   Intangible
assets
 
                 
March 31, 2021                
Canada  $9,081   $-   $19,921   $- 
USA   -    100,000    408,180    1,748,460 
                     
   $9,081   $100,000   $428,101   $1,748,460 
                     
December 31, 2020                    
Canada  $8,851   $-   $34,115   $- 
USA   -    98,393    447,746    1,737,416 
                     
   $8,851   $98,393   $481,861   $1,737,416 

 

17.SUPPLEMENTAL CASH FLOW INFORMATION

 

   2021   2020 
    ($)    ($) 
Non-cash investing and financing activities:          
Contribution benefit on low interest rate notes (Note 9)   -    67,400 
Common shares issued to settle debt   1.615,058    - 
Interest paid during the year   -      
Income taxes paid during the year   -    - 

 

18.LEASE OBLIGATIONS AND COMMITMENTS

 

Lease Liabilities    
   $ 
Lease liabilities recognized as of January 1, 2020   864,049 
Lease payments made   (305,493)
Interest expense on lease liabilities   60,112 
Foreign exchange adjustment   22,583 
Lease liabilities recognized as of January 1, 2021   641,251 
Lease payments made   (77,390)
Interest expense on lease liabilities   11,800 
Foreign exchange adjustment   (12,332)
    563,329 
Less: current portion   (196,904)
At March 31, 2021   389,425 

 

28

VERSUS SYSTEMS INC.

NOTES TO THE RESTATED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

(Expressed in United States dollars)

 

 

 

18.LEASE OBLIGATIONS AND COMMITMENTS (continued)

 

On August 1, 2015, the Company entered into a cost sharing arrangement agreement for the provision of office space and various administrative services. In May of 2018, the Company extended the cost sharing arrangement to July of 2022 at a monthly fee of CAD $7,000 plus GST per month.

 

Year  Amount 
   (C$) 
2021 (remaining)   28,000 

 

On September 6, 2017, the Company entered into a rental agreement for office space in Los Angeles, USA. Under the terms of the agreement the Company will pay $17,324 per month commencing on October 1, 2017 until June 30, 2023.

 

Year  Amount 
   ($) 
2021 (remaining)   189,970 
2022   260,185 
2023   131,576 

 

19.SUBSEQUENT EVENTS

 

A)From March 31, 2021 to November 15, 2021, the Company’s warrant and option holders had exercised 884,737 warrants and options at an average exercise price of $4.07 per share for total proceeds of $2,680,463.

 

B)On May 12, 2021, the Company entered into a definitive agreement with Xcite Interactive to acquire 100% of Xcite’s capital stock. The definitive agreement calls for the Company to purchase 100% of Xcite for $19 million in Versus stock less a net working capital adjustment and a $2.25M retention pool for Xcite employees. Xcite will be a wholly-owned subsidiary of Versus Systems.

 

C)On July 26, 2021, 43,746 shares were issued in accordance with the Xcite merger agreement and its $348,735 PPP loan being forgiven.

 

D)On July 29, 2021, the Company repaid Notes Payable in the amount of CAD$195,000.

 

E)The $610,247 PPP loan was forgiven in July 2021.

 

F)In October 2021, the Company extended CAD$640,000 in Notes Payable to director Brian Tingle.

 

 

29