Versus
Systems Inc.
Condensed
Interim Consolidated Statements of Cash Flows
(Expressed
in US Dollars)
| |
Year Ended | | |
Year Ended | | |
Year Ended | |
| |
December 31, | | |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
| |
($) | | |
($) | | |
($) | |
CASH PROVIDED BY (USED IN) | |
| | |
| | |
| |
| |
| | |
| | |
| |
OPERATING ACTIVITIES | |
| | |
| | |
| |
Loss for the year | |
| (17,847,892 | ) | |
| (6,911,040 | ) | |
| (7,256,326 | ) |
Items not affecting cash: | |
| | | |
| | | |
| | |
Amortization (Note 6) | |
| 30,793 | | |
| 17,937 | | |
| 21,453 | |
Amortization of intangible assets (Note 9) | |
| 2,009,714 | | |
| 1,272,435 | | |
| 1,907,306 | |
Amortization of right-of-use assets (Note 7) | |
| 304,904 | | |
| 240,820 | | |
| 246,626 | |
Shares issued for services | |
| 206,614 | | |
| 242,023 | | |
| - | |
Finance expense | |
| 225,197 | | |
| 276,602 | | |
| 194,039 | |
Loss on sale of investment | |
| - | | |
| 378,718 | | |
| - | |
Interest expense | |
| 39,836 | | |
| 62,076 | | |
| 206,193 | |
Factoring fees | |
| - | | |
| 38,727 | | |
| - | |
Effect of foreign exchange | |
| 516,877 | | |
| (410,189 | ) | |
| (68,676 | ) |
Change in fair value of warrant liability | |
| 361,055 | | |
| - | | |
| - | |
Forgiveness on government loan (Note 12) | |
| - | | |
| (448,504 | ) | |
| - | |
Share-based compensation | |
| 2,145,928 | | |
| 1,049,135 | | |
| 632,542 | |
| |
| | | |
| | | |
| | |
Changes in non-cash working capital items: | |
| | | |
| | | |
| | |
Receivables | |
| 378,976 | | |
| (430,693 | ) | |
| (30,679 | ) |
Prepaids and deposits | |
| (183,390 | ) | |
| 3,332 | | |
| 24,161 | |
Deferred revenue | |
| 70,333 | | |
| - | | |
| - | |
Accounts payable and accrued liabilities | |
| (1,152,162 | ) | |
| 381,854 | | |
| (8,311 | ) |
| |
| | | |
| | | |
| | |
Cash used in operating activities | |
| (12,893,217 | ) | |
| (4,236,767 | ) | |
| (4,131,672 | ) |
| |
| | | |
| | | |
| | |
FINANCING ACTIVITIES | |
| | | |
| | | |
| | |
Proceeds from notes payable | |
| - | | |
| 968,674 | | |
| 2,027,457 | |
Proceeds from Government PPP loan | |
| - | | |
| 638,905 | | |
| - | |
Repayment of notes payable | |
| (462,229 | ) | |
| (258,661 | ) | |
| (968,587 | ) |
Proceeds from warrant exercises | |
| 5,446,769 | | |
| - | | |
| - | |
Proceeds from share issuances | |
| 11,040,000 | | |
| 6,465,288 | | |
| 5,118,196 | |
Proceeds from option exercises | |
| 392,299 | | |
| - | | |
| - | |
Payments for lease liabilities | |
| (282,087 | ) | |
| (305,493 | ) | |
| (270,668 | ) |
Receivable factoring costs | |
| - | | |
| (38,727 | ) | |
| - | |
Proceeds from issuance of common shares | |
| - | | |
| - | | |
| - | |
Proceeds from subscriptions received in advance | |
| - | | |
| - | | |
| 230,947 | |
Payments of share issuance costs | |
| (1,334,814 | ) | |
| (81,424 | ) | |
| (492,151 | ) |
| |
| | | |
| | | |
| | |
Cash provided by financing activities | |
| 14,799,938 | | |
| 7,388,562 | | |
| 5,645,194 | |
| |
| | | |
| | | |
| | |
INVESTING ACTIVITIES | |
| | | |
| | | |
| | |
Acquisition of a business | |
| (85,101 | ) | |
| - | | |
| - | |
Purchase of equipment | |
| (74,478 | ) | |
| - | | |
| - | |
Proceeds from the sale of investments | |
| - | | |
| 141,928 | | |
| - | |
Development of intangible assets | |
| (2,352,248 | ) | |
| (1,086,834 | ) | |
| (1,462,071 | ) |
| |
| | | |
| | | |
| | |
Cash used in investing activities | |
| (2,511,827 | ) | |
| (944,906 | ) | |
| (1,462,071 | ) |
| |
| | | |
| | | |
| | |
Change in cash during the period | |
| (605,106 | ) | |
| 2,206,889 | | |
| 51,451 | |
Cash - Beginning of period | |
| 2,283,262 | | |
| 76,373 | | |
| 24,922 | |
| |
| | | |
| | | |
| | |
Cash - End of period | |
| 1,678,156 | | |
| 2,283,262 | | |
| 76,373 | |
Supplemental Cash
Flow Information (Note 18)
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
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’s
common stock 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 has developed a proprietary prizing and promotions tool allowing game developers and
creators of streaming media, live events, broadcast TV, games, apps, and other content to offer real world prizes inside their content.
The ability to win prizes drives increased levels of consumer engagement creating an attractive platform for advertisers.
In
June 2021, the Company completed its acquisition of multimedia, production, and interactive gaming company Xcite Interactive, a provider
of online audience engagement through its owned and operated XEO technology platform. The company partners with multiple professional
sports franchises across Major League Baseball (MLB), National Hockey League (NHL), National Basketball Association (NBA) and the National
Football League (NFL) as well as the Olympics, World Cup, and other global sporting events to drive in-stadium audience engagement as
well as a software licensing business to drive audience engagement.
These
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 December 31, 2021, the Company has not achieved positive cash flow from operations and is not able to finance day to day
activities through operations and as such, there is substantial doubt as to the Company’s ability to continue as a going concern.
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 consolidated financial statements, these conditions could have a significant adverse impact on the Company’s financial
position and results of operations for future periods.
Statement
of compliance
These
consolidated financial statements, including comparatives, have been prepared in accordance with International Financial Reporting Standards
(collectively, “IFRS”) as issued by the International Accounting Standards Board (“IASB”) and Interpretations
issued by the International Financial Reporting Interpretations Committee (“IFRIC”).
These
consolidated financial statements were authorized for issue by the Board of Directors on March 31, 2022.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
2. | BASIS
OF PRESENTATION (continued) |
Basis
of measurement
These
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 financial statements have been prepared using the accrual basis of accounting except for
cash flow information.
Functional
and presentation currency
These
consolidated financial statements are presented in United States dollars, unless otherwise noted, which is the functional currency of
the Company and its subsidiaries.
Basis
of consolidation
These
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 |
Xcite Interactive, Inc.
|
|
United States of America |
|
|
100 |
% |
|
Technology Company |
Significant
Accounting Judgments, Estimates and Assumptions
The
preparation of these 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.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(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:
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.
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.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
2. | BASIS
OF PRESENTATION (continued) |
| vii) | Business
combinations |
Judgement
was used in determining whether the acquisition of Xcite Interactive, Inc. was a business combination or an asset acquisition. Estimates
were made as to the fair value of assets and liabilities acquired. In certain circumstances, such as the valuation of equipment, intangible
assets and goodwill acquired, the Company may rely on independent third-party valuators. The Company measured all the assets acquired
and liabilities assumed at their acquisition-date fair values. The excess of the consideration paid over the acquisition-date fair values
of the net assets acquired, was recognized as goodwill as of the acquisition date in business combination.
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 6,427,899 (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.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
3. | SIGNIFICANT
ACCOUNTING POLICIES (continued) |
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 |
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.
Intangible
assets excluding goodwill
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 December 31, 2021, the Company does not have any derivative financial assets and liabilities.
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.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
3. | SIGNIFICANT
ACCOUNTING POLICIES (continued) |
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.
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.
Goodwill
The
Company allocates goodwill arising from business combinations to each cash generating unit (“CGU”) or group of CGUs that
are expected to receive the benefits from the business combination. The carrying amount of the CGU or group of CGUs to which goodwill
has been allocated is tested annually for impairment or when there is an indication that the goodwill may be impaired. Any impairment
is recognized as an expense immediately. Should there be a recovery in the value of a CGU, any impairment of goodwill previously recorded
is not subsequently reversed.
Deferred
financing costs
Deferred
financing costs consist primarily of direct incremental costs related to the Company’s public offering of its common stock completed
in January 2021 and a subsequent public offering completed in February 2022. Upon completion of the Company’s public offering and
financing any deferred costs were offset against the proceeds. The Company incurred $174,813 during the year ended December 31, 2021.
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 |
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
3. | SIGNIFICANT
ACCOUNTING POLICIES (continued) |
|
(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.
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.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
3. | SIGNIFICANT
ACCOUNTING POLICIES (continued) |
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;
-
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.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
3. | SIGNIFICANT
ACCOUNTING POLICIES (continued) |
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.
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 at fair value at issue with subsequent changes recognized in the consolidated
statement of loss and comprehensive loss. A $9,743,659 warrant derivative loss was recorded in the consolidated statement of loss and
comprehensive loss beginning February 1, 2021 when the Company changed its functional currency.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
3. | SIGNIFICANT
ACCOUNTING POLICIES (continued) |
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.
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 three primary ways: 1) the sales of software-as-a-service (SAAS) from its interactive production software platform,
2) development and maintenance of custom-built software or other professional services, or 3) the sale of advertising.
The
Company recognizes SAAS revenues from its interactive production sales over the life of the contract as its performance obligations are
satisfied. Payment terms vary by contract and can be periodic or one-time payments.
The
Company 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.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
3. | SIGNIFICANT
ACCOUNTING POLICIES (continued) |
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.
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 year ended December 31, 2021. Net loss differs from comprehensive loss for the years ending December 31,
2020 and 2019, as a result of the change in presentation and functional currency.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
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 monetary 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 non-monetary assets
and liabilities and comparative shareholders’ equity (deficit) balances were translated at historical rates. 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.
As of December 31, 2021, accounts
receivable consists of customer receivables, net a $11,500 allowance for doubtful accounts ($102,308) and GST receivable ($32,809). 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). 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 $38,727 during the twelve-month
period ended December 31, 2020.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
As at December 31, 2021, restricted
deposits consisted of $9,068 (2020 - $8,851) held in a guaranteed investment certificate as collateral for a corporate credit card.
| |
Computers | | |
Right of Use Asset | | |
Total | |
| |
($) | | |
($) | | |
($) | |
Cost | |
| | |
| | |
| |
At December 31, 2018 | |
| 84,104 | | |
| - | | |
| 84,104 | |
Additions | |
| 4,225 | | |
| 936,958 | | |
| 941,183 | |
At December 31, 2019 | |
| 88,329 | | |
| 936,958 | | |
| 1,025,287 | |
Additions | |
| - | | |
| - | | |
| - | |
At December 31, 2020 | |
| 88,329 | | |
| 936,958 | | |
| 1,025,287 | |
Additions | |
| 108,974 | | |
| - | | |
| 108,974 | |
Foreign currency adjustment | |
| (15,913 | ) | |
| (23,553 | ) | |
| (39,466 | ) |
At December 31, 2021 | |
| 181,390 | | |
| 913,405 | | |
| 1,094,795 | |
| |
| | | |
| | | |
| | |
Accumulated amortization | |
| | | |
| | | |
| | |
At December 31, 2018 | |
| 42,879 | | |
| - | | |
| 42,879 | |
Amortization for the year | |
| 22,184 | | |
| 225,594 | | |
| 246,626 | |
At December 31, 2019 | |
| 65,063 | | |
| 225,594 | | |
| 290,657 | |
Amortization for the year | |
| 17,223 | | |
| 223,597 | | |
| 240,820 | |
At December 31, 2020 | |
| 82,286 | | |
| 449,191 | | |
| 531,477 | |
Amortization for the year | |
| 30,793 | | |
| 205,580 | | |
| 236,373 | |
At December 31, 2021 | |
| 113,079 | | |
| 654,771 | | |
| 767,850 | |
Carrying amounts | |
| | | |
| | | |
| | |
At December 31, 2019 | |
| 21,875 | | |
| 708,763 | | |
| 730,560 | |
At December 31, 2020 | |
| 6,044 | | |
| 475,817 | | |
| 481,861 | |
At December 31, 2021 | |
| 68,311 | | |
| 258,634 | | |
| 326,945 | |
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
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 $3,575,884 against reserves. The effect on non-controlling interest was
a reduction of $2,053,199.
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 $6,906 and $2,527, respectively. As a result, the Company increased its ownership interest to 66.8% and recorded the excess
purchase price over net identifiable assets of $26,448 against reserves. The effect on non-controlling interest was a reduction of $19,433.
The following table presents summarized
financial information before intragroup eliminations for the non-wholly owned subsidiary as of December 31, 2021, 2020, and 2019:
| |
2021 | | |
2020 | | |
2019 | |
Non-controlling interest percentage | |
33.2% | | |
33.2% | | |
58.7% | |
| |
($) | | |
($) | | |
($) | |
Assets | |
| | |
| | |
| |
Current | |
| 1,488,892 | | |
| 779,123 | | |
| 79,598 | |
Non-current | |
| 2,300,268 | | |
| 2,289,645 | | |
| 2,878,711 | |
| |
| 3,789,160 | | |
| 3,068,768 | | |
| 2,958,309 | |
| |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | |
Current | |
| 763,970 | | |
| 1,020,192 | | |
| 633,784 | |
Non-current | |
| 30,661,143 | | |
| 17,329,272 | | |
| 13,742,518 | |
| |
| 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 | |
| (17,847,890 | ) | |
| (6,911,040 | ) | |
| (7,256,326 | ) |
Net loss attributed to non-controlling interest | |
| (3,448,820 | ) | |
| (1,464,660 | ) | |
| (2,000,962 | ) |
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
9. | ACQUISITION OF XCITE INTERACTIVE, INC. |
A) Summary of the Acquisition
On June 3, 2021, the Company closed
its acquisition of all the issued and outstanding common shares of Xcite Interactive Inc. (“Xcite”) in exchange for common
shares of the Company. Pursuant to the terms of the acquisition, the Company acquired all the issued and outstanding Xcite common shares
in consideration for the issuance of 0.3510 of a common shares of the Company for each Xcite common share. The Company issued a total
of 1,506,903 common shares with a fair value of $10.7 million, based on the June 3, 2021 closing share price of $6.76. The Company issued
an additional 43,746 shares on July 26, 2021, related to the Payment Protection Program (PPP) loan escrow account that was included in
the Xcite debt at the time of the acquisition. The Company is also committed to issue an additional 443,646 shares of common stock to
Xcite 15 months after the close date if certain achievements are met. In addition, $109,360 of cash was awarded to non-accredited investors
of Xcite on June 3, 2021, and additional $2,865 on July 26, 2021.
The acquisition was accounted for
using the acquisition method pursuant to IFRS 3, “Business Combinations”. Under the acquisition method, assets and liabilities
are measured at their estimated fair value on the date of acquisition with the exception of income tax, stock-based compensation, lease
liabilities and ROU assets. The total consideration was allocated to the tangible and intangible assets acquired and liabilities assumed.
The preliminary purchase price allocation
is based on management’s best estimate of the assets acquired and liabilities
assumed. Upon finalizing the value
of net assets acquired and liabilities assumed, adjustments to initial estimates, including goodwill and intangibles, may be required.
The following table summarizes the details of the consideration and the recognized amounts of assets acquired and liabilities assumed
at the date of the acquisition.
B) Consideration
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 | |
Goodwill recognized is attributable
to the synergies expected to be achieved. Goodwill is not deductible for tax purposes.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
9. | ACQUISITION OF XCITE INTERACTIVE, INC.
(continued) |
C) Revenue and Profit Contribution
The acquired business contributed
revenues of $760,813 for the period from June 3, 2021 through December 31, 2021. If the acquisition occurred on January 1, 2021, management
estimates that revenue would have increased by $600,000 and net loss would have been increased by approximately $1,000,000, respectively.
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, 2021.
| |
Software | | |
Customer Relationships | | |
Tradename | | |
Developed Technology | | |
Total | |
Cost | |
| | |
| | |
| | |
| | |
| |
At December 31, 2019 | |
| 9,016,764 | | |
| - | | |
| - | | |
| - | | |
| 9,016,764 | |
Foreign currency adjustment | |
| 15,065 | | |
| | | |
| | | |
| | | |
| 15,065 | |
Additions | |
| 882,275 | | |
| - | | |
| - | | |
| - | | |
| 882,275 | |
At December 31, 2020 | |
| 9,914,104 | | |
| - | | |
| - | | |
| - | | |
| 9,914,104 | |
Foreign currency adjustment | |
| (47,444 | ) | |
| | | |
| | | |
| | | |
| (47,444 | ) |
Additions | |
| 2,352,248 | | |
| 4,840,000 | | |
| 750,000 | | |
| 1,550,000 | | |
| 9,492,248 | |
At December 31, 2021 | |
| 12,218,908 | | |
| 4,840,000 | | |
| 750,000 | | |
| 1,550,000 | | |
| 19,358,908 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Accumulated amortization | |
| | | |
| | | |
| | | |
| | | |
| | |
At December 31, 2019 | |
| 6,876,389 | | |
| - | | |
| - | | |
| - | | |
| 6,876,389 | |
Amortization | |
| 1,300,299 | | |
| - | | |
| - | | |
| - | | |
| 1,300,299 | |
At December 31, 2020 | |
| 8,176,688 | | |
| - | | |
| - | | |
| - | | |
| 8,176,688 | |
Amortization | |
| 1,304,991 | | |
| 403,333 | | |
| - | | |
| 301,389 | | |
| 2,009,713 | |
At December 31, 2021 | |
| 9,481,679 | | |
| 403,333 | | |
| - | | |
| 301,389 | | |
| 10,186,401 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Carrying amounts | |
| | | |
| | | |
| | | |
| | | |
| | |
At December 31, 2019 | |
| 2,140,375 | | |
| - | | |
| - | | |
| - | | |
| 2,140,375 | |
At December 31, 2020 | |
| 2,256,903 | | |
| - | | |
| - | | |
| - | | |
| 1,737,416 | |
At December 31, 2021 | |
| 2,636,555 | | |
| 4,494,286 | | |
| 750,000 | | |
| 1,291,667 | | |
| 9,172,507 | |
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
11. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
The Company’s accounts payable
and accrued liabilities are comprised of the following:
| |
December 31, 2021 | | |
December 31, 2020 | |
| |
($) | | |
($) | |
Accounts payable | |
$ | 386,030 | | |
| 552,357 | |
Due to related parties | |
| 302,883 | | |
| 551,815 | |
Accrued liabilities | |
| 143,486 | | |
| 355,535 | |
| |
$ | 832,399 | | |
| 1,459,707 | |
12. | NOTES PAYABLE – RELATED PARTY |
During the year ended December 31,
2021, the Company exchanged 215,341 shares of common stock in exchange for a principal reduction of debt in the amount of $1,483,738
and $131,320 of accrued interest. The Company recorded a loss on the conversion of $116,152. In addition, the Company repaid $462,228
of principal. As at December 31, 2021, the Company had recorded $38,301 in accrued interest which was included in accounts payable and
accrued liabilities.
During the year ended December 31,
2020, the Company issued unsecured notes payable for total proceeds of $968,674 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 $170,329 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 year ended December 31,
2021, the Company recorded finance expense of $225,196 (2020 - $276,602), related to bringing the notes to their present value.
| |
Amount | |
| |
($) | |
Balance at December 31, 2018 | |
| 2,550,075 | |
Proceeds | |
| 2,027,457 | |
Repayments | |
| (968,587 | ) |
Contribution Benefit | |
| (223,913 | ) |
Financing Expense | |
| 194,039 | |
Foreign exchange adjustment | |
| 127,547 | |
Balance at December 31, 2019 | |
| 3,706,618 | |
Proceeds | |
| 968,674 | |
Repayments | |
| (258,661 | ) |
Contribution benefit | |
| (170,329 | ) |
Finance expense | |
| 276,602 | |
Foreign exchange adjustment | |
| 5,745 | |
Balance, December 31, 2020 | |
| 4,528,549 | |
Proceeds | |
| - | |
Repayments | |
| (2,058,720 | ) |
Contribution benefit | |
| - | |
Finance expense | |
| 225,196 | |
Foreign exchange adjustment | |
| 91,158 | |
Balance, December 31, 2021 | |
| 2,786,283 | |
Current | |
| 2,107,668 | |
Non-current | |
| 678,515 | |
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
12. | NOTES PAYABLE (continued) |
In May 2020, the Company received
loan proceeds in the aggregate amount of $610,247 under the Paycheck Protection Program. 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 PPP loan was forgiven in July
2021. 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, $170,168 was applied towards
payroll cost capitalized as intangible assets during the year ended December 31, 2020.
13. | 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 December 31, 2021 and 2020,
there were 5,057 Class A Shares issued and outstanding.
During the year ended December 31, 2021, the Company:
| i) | issued, 1,506,903
units at a price of $6.76 per unit in connection with the acquisition of Xcite. |
| ii) | 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. |
| iii) | issued, 1,553,372
common shares pursuant to exercise of 1,435,333 warrants and 118,039 stock options for total
proceeds of $6,735,254. |
| iv) | 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. |
| v) | issued 29,307 shares
of the Company’s common stock with a value of $206,614 to a third party in exchange
for services (included in professional fees). |
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
13. | SHARE CAPITAL AND RESERVES (continued) |
| vi) | issued 43,746 shares related to the
PPP loan escrow account that was included in the Xcite debt at the time of the acquisition. |
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 $453,000. 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 $4.71 until February 17, 2021. |
| | |
| ii) | issued, 172,532 units at a price of $2.95 per unit for total proceeds of $508,969. 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 $1,906,250. 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, 1,059,893 common shares pursuant to exercise of 1,056,143 warrants and 3,750 stock options for total proceeds of $3,552,473. |
During the
year ended December 31, 2019, the Company:
| i) | issued, 624,228 units at a price of $2.17 per unit for total proceeds of $1,351,916. Each unit consisted of one common share and a one common stock warrant for each share purchased. Each warrant entitles the holder to purchase one additional common share at a price of $3.61 until February 14, 2021. |
| ii) | issued, 1,094,844 units pursuant to a private placement at a price of $2.43 per unit for total proceeds of $2,657,791. Each unit consisted of one common share and a one common stock warrant for each share purchased. Each warrant entitles the holder to purchase one additional common share at a price of $4.25 until July 26, 2021. |
| iii) | issued, 284,092 units at a price of $2.66 per unit for total proceeds of $756,372. Each unit consisted of one common share and one common stock warrant for each share purchased. Each warrant entitles the holder to purchase one additional common share at a price of $4.24 until August 9, 2021. |
| v) | issued 576,834 common shares at a value of $1,410,581 on acquisition of Versus LLC shares (Note 8). |
| vi) | issued 158,115 common shares pursuant to the exercise of share purchase warrants and stock options for total proceeds of $352,116. |
Escrow
At December 31, 2021, 313 common
shares (December 31, 2020 – 313) of the Company are held in escrow due to misplaced share certificates originally issued to three
individual shareholders.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
13. | SHARE CAPITAL AND RESERVES (continued) |
The Company may grant incentive
stock options to its officers, directors, employees, and consultants. The Company has implemented a rolling Stock Option Plan (the “Plan”)
whereby the Company can issue up to 10% of the issued and outstanding common shares of the Company. Options have a maximum term of ten
years and vesting is determined by the Board of Directors.
A continuity schedule of outstanding
stock options is as follows:
| |
Number Outstanding | | |
Weighted Average Exercise Price | |
| |
| | |
($) | |
Balance – December 31, 2018 | |
| 549,524 | | |
| 3.82 | |
Granted | |
| 482,500 | | |
| 4.06 | |
Exercised | |
| (3,125 | ) | |
| 2.71 | |
Forfeited | |
| (15,500 | ) | |
| 5.17 | |
Balance – December 31, 2019 | |
| 1,013,399 | | |
| 3.94 | |
Granted | |
| 470,083 | | |
| 3.16 | |
Exercised | |
| (3,750 | ) | |
| 2.69 | |
Forfeited | |
| (125,907 | ) | |
| 4.65 | |
Balance –December 31, 2020 | |
| 1,353,825 | | |
| 3.70 | |
Granted | |
| 960,224 | | |
| 4.87 | |
Exercised | |
| (118,039 | ) | |
| 3.32 | |
Forfeited | |
| (254,247 | ) | |
| 3.39 | |
Balance – December 31, 2021 | |
| 1,941,769 | | |
| 4.24 | |
During the year ended December 31,
2021, 960,224 stock options were granted by the Company. During the year ended December 31, 2021, the Company recorded share-based compensation
of $2,145,928 (December 31, 2020 - $1,049,135) relating to options vested during the period.
During the year ended December 31,
2020, 470,083 stock options were granted by the Company with a fair value of $906,618 (or $1.93 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.
During the year ended December 31,
2019, the Company granted a total of 482,500 stock options with a fair value of $1,299,816 (or $2.69 per option). During
the year ended December 31, 2019, the Company recorded share-based compensation of $632,542 relating to options vested during the year.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
13. | SHARE CAPITAL AND RESERVES (continued) |
The Company used the following assumptions
in calculating the fair value of stock options for the years ended:
| |
December 31, 2021 | |
December 31, 2020 | |
December 31,
2019 | |
Risk-free interest rate | |
0.04% - 0.47 | % |
0.26-0.37 | % |
| 1.59 | % |
Expected life of options | |
5.0 years | |
2.0 – 5.0 years | |
| 5.0 years | |
Expected dividend yield | |
Nil | |
Nil | |
| Nil | |
Volatility | |
102% - 128 | % |
79.44% - 87.79 | % |
| 95.8 | % |
At December 31, 2021, the Company had incentive stock
options outstanding as follows:
Expiry Date | |
Options Outstanding | | |
Options
Exercisable | | |
Exercise
Price | | |
Weighted Average Remaining
Life | |
| |
| | |
| | |
($) | | |
(years) | |
| |
| | |
| | |
| | |
| |
March 17, 2022 | |
| 13,063 | | |
| 13,063 | | |
| 5.22 | | |
| 0.46 | |
May 18, 2022 | |
| 5,750 | | |
| 5,750 | | |
| 5.72 | | |
| 0.63 | |
September 14, 2022 | |
| 74,156 | | |
| 74,156 | | |
| 4.46 | | |
| 0.95 | |
June 6, 2023 | |
| 14,063 | | |
| 10,889 | | |
| 5.70 | | |
| 1.68 | |
September 4, 2023 | |
| 12,813 | | |
| 7,455 | | |
| 2.97 | | |
| 1.93 | |
April 2, 2024 | |
| 106,875 | | |
| 106,875 | | |
| 2.52 | | |
| 2.51 | |
June 27, 2024 | |
| 6,250 | | |
| 6,250 | | |
| 2.56 | | |
| 2.74 | |
September 27, 2024 | |
| 300,000 | | |
| 131,250 | | |
| 4.53 | | |
| 2.99 | |
October 22, 2024 | |
| 12,500 | | |
| 7,345 | | |
| 4.03 | | |
| 3.06 | |
July 24, 2025 | |
| 242,095 | | |
| 31,178 | | |
| 2.98 | | |
| 3.82 | |
July 31, 2025 | |
| 166,116 | | |
| 166,116 | | |
| 2.98 | | |
| 3.82 | |
August 10, 2025 | |
| 12,500 | | |
| 4,840 | | |
| 3.00 | | |
| 3.86 | |
November 19, 2025 | |
| 15,364 | | |
| 4,186 | | |
| 4.59 | | |
| 3.14 | |
June 1, 2026 | |
| 56,816 | | |
| - | | |
| 7.04 | | |
| 4.72 | |
June 29, 2026 | |
| 329,500 | | |
| - | | |
| 5.65 | | |
| 4.72 | |
August 19, 2026 | |
| 573,908 | | |
| - | | |
| 4.20 | | |
| 3.95 | |
| |
| 1,941,769 | | |
| 569,353 | | |
| 4.24 | | |
| 3.65 | |
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
13. | SHARE CAPITAL AND RESERVES (continued) |
| d) | Share
purchase warrants |
A continuity schedule of outstanding share purchase warrants
is as follows:
| |
Number
Outstanding | | |
Weighted
Average
Exercise Price | |
| |
| | |
($) | |
Balance – December 31, 2018 | |
| 1,468,538 | | |
| 3.64 | |
Exercised | |
| (154,990 | ) | |
| 2.09 | |
Expired | |
| (347,732 | ) | |
| 2.46 | |
Issued | |
| 2,349,365 | | |
| 3.94 | |
Balance – December 31, 2019 | |
| 3,315,581 | | |
| 4.06 | |
Exercised | |
| (1,056,143 | ) | |
| 1.85 | |
Expired | |
| (438,948 | ) | |
| 3.33 | |
Issued | |
| 872,532 | | |
| 4.85 | |
Balance – December 31, 2020 | |
| 2,692,622 | | |
| 3.61 | |
Exercised | |
| (1,088,713 | ) | |
| 4.21 | |
Expired | |
| (492,461 | ) | |
| 4.21 | |
Issued | |
| 3,374,682 | | |
| 7.50 | |
Balance – December 31, 2021 | |
| 4,486,130 | | |
| 6.83 | |
During the year ended December 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 150,000 share purchase warrants exercisable at $4.83 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 $4.71 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. |
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
13. | SHARE
CAPITAL AND RESERVES (continued) |
| v) | On November 17, 2020, the Company, completed a unit private placement which included 625,000 share purchase warrants exercisable at $4.89 per share for a period of two years. |
During the year ended December 31, 2019, the
Company:
| i) | On February 14, 2019, the Company completed a unit private placement which included 624,228 share purchase warrants exercisable at $3.61 per share for a period of two years. The share purchase warrants were determined to have a fair value of $150,213 using the residual value method. |
| ii) | On February 14, 2019, the Company completed a unit private placement which included 43,696 broker warrants exercisable at $2.17 per share for a period of two years. The share purchase warrants were determined to have a fair value of $46,505 using the Black Scholes option pricing model. |
| iii) | On July 26, 2019, the Company completed a unit private placement which included 1,094,844 share purchase warrants exercisable at $4.25 per share for a period of two years. The share purchase warrants were determined to have a fair value of $Nil using the residual method. |
| iv) | On July 26, 2019, the Company issued 14,088 agent warrants exercisable to purchase additional shares at a price of $4.25 per share for a period of 24 months from closing. The agent warrants were determined to have a fair value of $15,919. |
| v) | On August 9, 2019, the Company completed a unit private placement which included 284,093 share purchase warrants exercisable at $4.24 per share for a period of two years. The share purchase warrants were determined to have a fair value of $Nil using the residual method. |
| vi) | The Company issued 288,416 warrants at a value of $119,122 for the acquisition of Newco shares (Note 8). |
The Company
used the following assumptions in calculating the fair value of the warrants for the period ended:
| |
December 31,
2021 | | |
December 31,
2020 | |
Risk-free interest rate | |
| 0.25 | % | |
| 1.77 | % |
Expected life of options | |
| 0.7 – 1.76 years | | |
| 2.0 years | |
Expected dividend yield | |
| Nil | | |
| Nil | |
Volatility | |
| 75 | % | |
| 107.14 | % |
Weighted average fair value per warrant | |
$ | 3.38 | | |
$ | 0.64 | |
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
13. | SHARE CAPITAL AND RESERVES (continued) |
d) Share purchase warrants
(continued)
At December 31, 2021, the Company
had share purchase warrants outstanding as follows:
Expiry Date | |
Warrants
Outstanding | | |
Exercise
Price | | |
Weighted
Average
Remaining
Life | |
| |
| | |
($) | | |
(years) | |
January 20, 2022 | |
| 1,665,008 | | |
| 7.50 | | |
| 0.05 | |
March 17, 2022 | |
| 350,000 | | |
| 4.80 | | |
| 0.21 | |
July 17, 2022 | |
| 172,531 | | |
| 4.71 | | |
| 0.55 | |
November 17, 2022 | |
| 611,250 | | |
| 4.89 | | |
| 0.78 | |
January 20, 2026 | |
| 1,687,341 | | |
| 7.50 | | |
| 4.06 | |
| |
| 4,486,130 | | |
| 6.83 | | |
| 1.69 | |
14. | RELATED PARTY TRANSACTIONS |
The following summarizes the Company’s
related party transactions, not disclosed elsewhere in these consolidated financial statements, during the twelve months ended December
31, 2021 and 2020. Key management personnel includes the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”)
and certain directors and officers and companies controlled or significantly influenced by them.
Key Management Personnel | |
2021 | | |
2020 | |
| |
($) | | |
($) | |
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. | |
| 335,430 | | |
| 280,177 | |
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. | |
| 447,710 | | |
| 273,439 | |
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. | |
| 215,706 | | |
| 216,410 | |
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. | |
| 289,290 | | |
| 300,877 | |
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. | |
| 666,586 | | |
| 327,991 | |
| |
| | | |
| | |
Total | |
| 1,954,722 | | |
| 1,398,894 | |
Other Related Party Payments
Office sharing and occupancy costs
of $67,012 (2020 - $62,616) were paid or accrued to a corporation that shares management in common with the Company.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
14. | RELATED PARTY TRANSACTIONS (continued) |
Amounts Outstanding
| a) | At December 31, 2021, a total of $302,883 (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 (Note 10). |
| b) | At December 31, 2021, a total of $2,786,183 (December 31, 2020 - $4,528,549) of long term notes was payable to a director and the CEO of the Company (Note 12). |
15. | 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 twelve months ended December
31, 2021.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
15. | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
(continued) |
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 year ended December 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.
The Company was exposed to the following
foreign currency risk as at December 31, 2021 and December 31, 2020:
| |
December 31, 2021 | | |
December 31, 2020 | |
| |
($) | | |
($) | |
Cash | |
| 162,135 | | |
| 86,800 | |
Lease Obligations | |
| - | | |
| (741,868 | ) |
Accounts payable and accrued liabilities | |
| (142,726 | ) | |
| (1,092,402 | ) |
| |
| 19,409 | | |
| (1,747,470 | ) |
As at December 31, 2021, with other
variables unchanged, a +/- 10% change in the United States dollar to Canadian dollar exchange rate would impact the Company’s net
loss by $1,900 (December 31, 2020 - $220,000).
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 year ended December 31, 2021.
17. | 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 were due from that customer. No revenue was earned from the same customer for the year
ended December 31, 2021.
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
17. | GEOGRAPHICAL
SEGMENTED INFORMATION (continued) |
Details of identifiable assets by
geographic segments are as follows:
| |
Restricted deposits | | |
Deposits | | |
Goodwill | | |
Property and equipment | | |
Intangible assets | |
| |
| | |
| | |
| | |
| | |
| |
December 31, 2021 | |
| | |
| | |
| | |
| | |
| |
Canada | |
$ | 9,068 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
USA | |
| - | | |
| 100,000 | | |
| 6,580,660 | | |
| 326,945 | | |
| 9,172,507 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
| |
$ | 9,068 | | |
$ | 100,000 | | |
| 6,580,660 | | |
$ | 326,945 | | |
$ | 9,172,507 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
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 | |
18. | SUPPLEMENTAL
CASH FLOW INFORMATION |
| |
2021 | | |
2020 | | |
2019 | |
| |
($) | | |
($) | | |
($) | |
Non-cash investing and financing activities: | |
| | |
| | |
| |
Contribution benefit on low interest rate
notes (Note 12) | |
| - | | |
| 170,329 | | |
| 223,913 | |
Shares issued to acquire Newco shares 1 | |
| - | | |
| - | | |
| 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 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
| |
$ | |
Lease liabilities recognized as of January 1, 2020 | |
| 865,076 | |
Lease payments made | |
| (305,023 | ) |
Interest expense on lease liabilities | |
| 60,112 | |
Foreign exchange adjustment | |
| 21,086 | |
Lease liabilities recognized as of January 1, 2021 | |
| 641,251 | |
Lease payments made | |
| (251,383 | ) |
Interest expense on lease liabilities | |
| 39,836 | |
Foreign exchange adjustment | |
| (61,820 | ) |
| |
| 367,884 | |
Less: current portion | |
| (239,323 | ) |
At December 31, 2021 | |
| 128,560 | |
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
19. | 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.
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 $17,324 per
month commencing on October 1, 2017 until June 30, 2023.
Year | |
Amount | |
| |
($) | |
2022 | |
| 260,185 | |
2023 | |
| 131,576 | |
| a) | Provision
for Income Taxes |
A reconciliation of income taxes
at statutory rates with the reported taxes is as follows:
| |
2021 | | |
2020 | | |
2019 | |
| |
($) | | |
($) | | |
($) | |
Loss for the year | |
| (17,847,892 | ) | |
| (6,911,040 | ) | |
| (7,256,326 | ) |
| |
| | | |
| | | |
| | |
Expected income tax (recovery) | |
| (4,819,000 | ) | |
| (1,866,000 | ) | |
| (1,959,000 | ) |
Change in statutory, foreign tax, foreign exchange rates and other | |
| 294,000 | | |
| 275,000 | | |
| 398,000 | |
Permanent differences | |
| 1,107,000 | | |
| 403,000 | | |
| 260,000 | |
Share issue costs | |
| 432,000 | | |
| - | | |
| (116,000 | ) |
Adjustment to prior years provision versus statutory tax returns | |
| - | | |
| (35,000 | ) | |
| 3,133,000 | |
Change in unrecognized deductible temporary differences | |
| 2,986,000 | | |
| 1,223,000 | | |
| (1,716,000 | ) |
Income tax expense | |
| - | | |
| - | | |
| - | |
The significant components of the
Company’s deferred tax assets that have not been included on the consolidated statement of financial position are as follows:
| |
2021 | | |
2020 | | |
2019 | |
| |
($) | | |
($) | | |
($) | |
Non-capital losses carry-forward | |
| 11,751,000 | | |
| 7,841,000 | | |
| 6,824,000 | |
Exploration and evaluation assets | |
| 1,470,000 | | |
| 1,470,000 | | |
| 1,477,000 | |
Share issuance costs | |
| 735,000 | | |
| 109,000 | | |
| 154,000 | |
Debt with accretion | |
| (70,000 | ) | |
| (70,000 | ) | |
| (98,000 | ) |
Intangible assets | |
| 179,000 | | |
| 1,336,000 | | |
| 1,236,000 | |
Other deferreds | |
| 37,000 | | |
| - | | |
| - | |
Allowable capital losses | |
| 3,801,000 | | |
| 3,592,000 | | |
| 3,579,000 | |
Property and equipment | |
| 35,000 | | |
| 64,000 | | |
| 59,000 | |
| |
| 17,938,000 | | |
| 14,342,000 | | |
| 13,231,000 | |
Unrecognized deferred tax assets | |
| (17,938,000 | ) | |
| (14,342,000 | ) | |
| (13,231,000 | ) |
VERSUS
SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021,
2020, AND 2019
(Expressed in United States dollars) |
|
20. | INCOME TAXES (continued) |
The significant components of the
Company’s temporary differences, unused tax credits and unused tax losses that have not been included on the consolidated statement
of financial position are as follows:
Temporary Differences |
|
2021 |
|
|
Expiry Date Range |
|
2020 |
|
|
Expiry Date Range |
|
|
($) |
|
|
|
|
($) |
|
|
|
Non-capital losses available for future
periods - US |
|
|
29,390,000 |
|
|
2036 to indefinite |
|
|
14,880,000 |
|
|
2036 to indefinite |
Non-capital losses available for future periods
- Canada |
|
|
20,664,000 |
|
|
2026 to 2040 |
|
|
17,215,000 |
|
|
2026 to 2039 |
Allowable capital losses |
|
|
14,077,000 |
|
|
No expiry date |
|
|
13,304,000 |
|
|
No expiry date |
Property and equipment |
|
|
128,000 |
|
|
No expiry date |
|
|
273,000 |
|
|
No expiry date |
Intangible asset |
|
|
853,000 |
|
|
No expiry date |
|
|
6,364,000 |
|
|
No expiry date |
Exploration and evaluation assets |
|
|
5,446,000 |
|
|
No expiry date |
|
|
5,446,000 |
|
|
No expiry date |
Share issuance costs |
|
|
2,724,000 |
|
|
2040 to 2044 |
|
|
401,000 |
|
|
2040 to 2043 |
Tax attributes are subject to review,
and potential adjustment, by tax authorities.
The Company has evaluated subsequent events
after the balance sheet date of December 31, 2021 through March 31, 2022, the date the consolidated financial statements were issued.
Based upon its evaluation, management has determined that no subsequent events have occurred that would require recognition in the accompanying
consolidated financial statements or disclosure in the notes thereto, except as follows:
| i. | On February 28, 2022, the Company completed a public offering and issued 4,375,000 units at a price of $1.60 per unit per unit for total proceeds of $7,000,000. Each unit consisted of one common share and one warrant, to purchase one common share at $1.92 per share until February 28, 2027. In connection with the offering, the Company incurred $221,628 in deferred financing costs as of December 31, 2021. |
| ii. | On March 1, 2022, the Company converted 171,608 Versus Holdco shares into Versus Systems Inc. shares. |
| iii. | On March 24, 2022, the Company issued 590,625 shares at a price of $1.48 per unit for total proceeds of $874,125 as a result of the underwriter exercising the overallotment. |
| iv. | Subsequent to December 31, 2021, the Company extended CAD$520,000 in notes payable to director Brian Tingle and $17,000 in notes payable to CEO Matthew Pierce. |
F-38
International Financial Reporting Standards
0.59
0.74
1.01
46
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