INITIATION REPORT | September 26, 2019 Versus Systems Inc. STOCK PRICE $0.35 CSE: VS RATING BUY TARGET PRICE $0.55 SECTOR: Gaming & Esports INITIATING COVERAGE PROJECTED RETURN 59% Winfinite Possibilities RISK FACTOR Very High INVESTMENT BRIEF: We are initiating coverage on Versus Systems Inc. (VS-CSE) with a Buy Rating and a 12-month target price of $0.55 per share. Versus Systems is currently developing B2B software SCENARIO ANALYSIS platforms that allow content creators to offer prize-based rewards. The Company’s proprietary Downside Current Price Winfinite platform allows video game developers and publishers to offer users real-world prizes in- Scenario Price TargetPrice game. There are opportunities for the platform across multiple new verticals, where advertising Target brands and content providers aspire to increase engagement. $0.20 $0.35 $0.55 KEY HIGHLIGHTS 42% $3.2559% People Hate Ads, Versus has a Solution. In partnership with the MEMES Center at UCLA, Versus conducted a comprehensive study of over 88k respondents that highlighted the need for new methods of advertising. It’s no surprise that 45% of people surveyed frequently or always actively KEY STATISTICS AND METRICS (Q3/19E) avoid ads, with only 3.6% watching the full ad. While gamers might not self-identify as such, they are approaching the majority with 41% having played a game in the past 24 hours. With traditional 52-Week High/Low $0.50 / $0.18 programming lacking engagement from younger audiences, advertisers need to leverage digital YTD Performance 43.8% and interactive media in new ways. The Winfinite platform empowers the audience with the opportunity, not the requirement, to engage with the advertising brand and win real prizes. Dividend Yield - Shares O/S 132.8M HP Partnership Drives Growth. The Company’s Winfinite platform now powers HP’s OMEN Market Capitalization $45.8M Rewards, a prize platform that is built into the OMEN Command Center. We view the recently announced HP partnership as a transformative announcement from Versus that has the potential Cash $2.8M to significantly augment the current user base and drive revenue growth. We expect HP to expand Debt $5.9M the OMEN Command Center into Europe later this year and into Asia in the second half of 2020. Enterprise Value $40.1M For fiscal 2020, we assume that Versus’ user base increases from 2 million to 4.5 million users for Daily Volume (3 mos.) 277,990 an average of 3.9 million users, driving revenue of $14.6M. Currency C$ unless noted Platform Validation Propels Inbound Sales. We believe that the HP partnership validates the Winfinite platform for other content companies and as such should lead to additional partnership announcements in the coming year. As the Company partners with more platforms, the user base and number of sessions will grow, attracting more advertisers and brands to the Winfinite HAYWOOD ESTIMATES (CAD) platform, driving inbound requests to advertise. The Company announcing additional platform 2018A 2019E 2020E partners also further validates Winfinite to the industry, which should influence more content Sales, $M 1.4 14.6 25.3 providers to onboard Winfinite. We expect the Company to continuously announce new Adjusted EBITDA, $M (3.5) 8.3 17.8 partnerships both on the platform side, and with advertisers and brands, as Winfinite expands. As we currently only model announced partnerships, this would represent upside to our estimates. EPS, $ (0.04) 0.01 0.03 EV / Revenue 29.6 2.7 1.6 RECOMMENDED ACTION EV / Adj. EBITDA - 4.8 2.2 We recommend buying shares in this catalyst-rich software platform We are initiating coverage on Versus Systems Inc. with a Buy Rating and a 12-month target price of $0.55/share. With the development cost of Winfinite behind the Company and HP’s validation of the platform, we believe now is an attractive entry point ahead of our estimated increase in current user base and significant revenue growth. Furthermore, we expect the Company to announce new brands, partnerships and verticals that could represent additional positive re- ratings. VALUATION CATALYSTS Versus currently trades at a 4.8x multiple on our F2020 Adjusted EBITDA estimate compared to the blended average of large 1. Geographic Expansion HP Europe – Q4/19 capitalized advertising, marketing and 2. Geographic Expansion HP Asia – H2/20 application software companies which 3. New Partnerships – Ongoing currently trade at an average of 25.7x 2020 4. New Verticals – OTT & Health and Wellness – Ongoing consensus EBITDA estimates. 5. IP – Patent Filing Announcements – Ongoing Douglas Ibbitson, CFA, 416-507-2790, [email protected] For Important Disclosures and Analyst Certification See Page 27 Neal Gilmer, MBA, 416-507-2759, [email protected] 1 Versus Systems Inc. (CSE:VS) SCENARIO ANALYSIS INVESTMENT THESIS Our investment drivers are as follows: Versus Systems Inc. (VS-V) Price History (C$) Volume (M) 0.5 1.6 50-Day MA 200-Day MA HP Partnership Validates Winfinite: We view the HP 0.45 1.4 partnership as a transformative announcement from Versus 0.4 1.2 that has the potential to significantly increase the current user 0.35 base and drive revenue growth. The Company’s Winfinite 0.3 1 platform now powers HP’s OMEN Rewards, a prize platform 0.25 0.8 that is built into the OMEN Command Center. The platform is 0.2 0.6 expected to expand its user base into Europe later this year 0.15 0.4 and into Asia in the second half of 2020, which could 0.1 significantly increase sessions for the Company. We believe 0.05 0.2 that the HP partnership validates the Winfinite platform for 0 0 other content companies and as such should lead to additional Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 18 18 18 18 19 19 19 19 19 19 19 19 partnership announcements in the coming year. New Vertical Opportunities: While management’s priority for Source: Capital IQ, and Haywood Securities Inc. the Winfinite platform remains the high growth gaming sector, there are opportunities for the platform across TARGET PRICE multiple new verticals. OTT services have largely moved to a Our target price of $0.55/sh is derived from a 12.0x multiple on our subscription-based model, leaving advertisers and brands F2020 Adjusted EBITDA estimate. In our view, this valuation could looking for new ways to reach this audience. Versus plans to prove conservative given that the blended average of large capitalized work with multiple distribution channels, including YouTube, advertising, marketing and application software companies are Twitch, and traditional television. Another interesting vertical currently trading at an average of 25.7x EV/EBITDA on 2020 consensus for Winfinite is health and wellness applications where users estimates. are physically competing against their community, friends and personal bests. This is a highly engaging opportunity for health DOWNSIDE CASE and wellness brands to specifically target users. Our downside scenario on Versus Systems is predicated on HP gradually IP Portfolio of Prizing, Promotion & FinTech: The Company ramping up marketing of OMEN Rewards, resulting in half of the paid currently has patents protecting numerous proprietary sessions in 2020 than we are currently modeling from the partnership. systems and methods for awarding real money, physical As such, we conservatively assume that the Company can generate goods, digital currencies, and downloadable content to $4M in Adjusted EBITDA in 2020, to which we apply a 6.0x multiple to players inside video games and interactive media. With over arrive at our $0.20 per share downside valuation. 40 patents filed, we expect ongoing announcements with regard to the Company’s portfolio of patent and trademark Our downside scenario price is a theoretical case based on notional valuation filings. metrics and market assumptions. The downside price is solely intended for demonstrative purposes and is not to be regarded as a reflection of all market possibilities. It is not a guarantee that this company’s share price will not drop below this price level and hence should not be taken as such. Company Profile KEY RISKS Versus Systems is a development stage company focused on the • Limited Operating History: As a new business, risks involving technology sector and is currently developing business-to-business under-capitalization, cash shortages, or lack of revenue may software platforms that allow content creators to offer prize-based prevent the Company from achieving their growth objectives. rewards. Its Winfinite platform is a proprietary platform for winning real-world prizes in-game for video game publishers and developers. • Changes in Laws, Regulations and Guidelines: Operations are subject to a variety of laws, regulations and guidelines relating to The Company has an office in Vancouver, Canada and operations in Los the Company offering prizes based tournaments including esports, Angeles, California. online gaming and gambling laws and regulations. Company Website • Regulatory Risk: The Company’s operations are contingent upon www.versussystems.com compliance with regulatory requirements and as such require obtaining all regulatory approvals for the sale and use of its Key Management products and services. Matthew Pierce (Chief Executive Officer and Director) Craig Finster (President and Chief Financial Officer) • Competition: The Company could face intense competition from Companies that have longer operating histories, that have more Alex Peachey (Chief Technology Officer) financial resources and more marketing experience than Versus. Keyvan Peymani (Executive Chairman) Douglas Ibbitson, CFA, 416-507-2790, [email protected] Neal Gilmer, MBA, 416-507-2759, [email protected] 2 Versus Systems Inc. (CSE:VS) Target Price, C$ $ 0.55 Shares O/S, million 132.8 Versus Systems Inc. (VS-CSE) Current Price, C$ $ 0.35 Shares F/D, million 242.1 Rating: BUY Risk: Very High Return, % 59% Market Capitalization, C$M $ 45.8 Target Price: C$0.55 52-Week High / Low, C$ $0.50 / $0.18 Company CEO Pierce, Matthew Metric: 12.0x EV/2020E Adjusted EBITDA Daily Volume (100-day avg) 277,990 Company Web Site www.versussystems.com Balance Sheet and Capitalization As of: Q3/19E Share Capital Dilution US$M US$ / Share C$M C$ / Share As of Number Avg.