UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
Commission file Number: 0-32355
CYOP SYSTEMS INTERNATIONAL INCORPORATED
(Exact name of small business issuer as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
98-0222927
(I.R.S. Employer Identification Number)
Suite 406
1040 Hamilton Street
Vancouver, British Columbia
V6B 2R9
(Address of principal executive offices)
(604) 688-8859
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
28,439,975 common shares as at June 30, 2002
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
CYOP SYSTEMS INTERNATIONAL INCORORATED
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet as of December 31, 2001 and June 30, 2002
Statement of Income for the period ended
June 30, 2002
Consolidated Statements of Cash Flows for the period ended
June 30, 2002
Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
Item 2 Management Discussion and Analysis
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8K
SIGNATURES
CYOP SYSTEMS INTERNATIONAL
INCORPORATED & SUBSIDIARIES
Consolidated Financial Statements
(Expressed in U.S. Dollars)
June 30, 2002
(Unaudited)
Index
Consolidated Balance Sheets
Consolidated Statement of Stockholders' Deficiency
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(Expressed in U.S. Dollars)
- ---------------------------------------------------------------------------------------------------------------------------
June 30 December 31
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 4,996 $ 1,852
Accounts receivable 24,160 178,910
Demand loan, unsecured 38,629 -
Demand loan, interest at 12% per annum and unsecured - 14,472
Due from director, non interest bearing and unsecured - 105,738
Prepaid expenses and deposit - 49,191
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 67,785 350,163
Note receivable related party (Note 7) 1,565,452 1,565,452
Intellectual property (Note 8) 158,300
Fixed assets (Note 4) 68,900 222,646
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,860,437 $ 2,138,261
===========================================================================================================================
LIABILITIES
Current
Bank overdraft $ $ 18,604
Demand loans (Note 6) 9,261 452,676
Demand loans related party (Note 6) 50,000 50,000
Accounts payable and accrued liabilities 124,729 586,139
Payroll deductions payable - 362,115
Short-term loan (Note 6) 238,725 228,421
Investor deposit 35,000 10,000
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 457,715 1,707,955
Deferred revenue (Note 7) 2,270,394 2,270,394
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities 2,728,110 3,978,349
- ---------------------------------------------------------------------------------------------------------------------------
Nature and continuance of operations (Note 1)
Commitments (Note 10)
STOCKHOLDERS' (DEFICIENCY)
Share capital
Authorized:
100,000,000 shares of common stock with a par value
of $0.0001 per share Issued, allotted and outstanding:
28,439,975 shares of common stock 2,844 2,844
Additional paid-in capital 221,627 219,127
Accumulated other comprehensive income 135,450 133,194
Deficit accumulated (1,227,594) (2,195,253)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' (deficiency) (867,673) (1,840,088)
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' (deficiency) $ 1,860,437 $ 2,138,261
===========================================================================================================================
The accompanying notes are an integral part of these financial statements.
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Consolidated Statement of Stockholders' Deficiency
Six Months Ended June 30, 2002
(Unaudited)
(Expressed in U.S. Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Compre- other Total
Common stock Additional hensive compre- Stock-
--------------------- paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated income (deficiency)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 28,439,975 $ 2,844 $ 219,127 $(2,195,253) $ 133,194 $(1,840,088)
Imputed interest on loan
due to a related party -- -- 2,500 (1,250) -- 1,250
Other comprehensive income
- - foreign currency
translation adjustment -- -- -- 2,256 -- 2,256 2,256
Comprehensive income
- net income for the period -- -- -- 968,909 968,909 -- 968,909
- ------------------------------------------------------------------------------------------------------------------------------------
$ 968,909
Balance, June 30, 2002 28,439,975 2,844 221,627 ----------- (1,227,594) 135,450 (867,673)
The accompanying notes are an integral part of these financial statements.
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(Expressed in U.S. Dollars)
- -------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months
June 30 Ended June 30
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------
Revenue
Interest income 44,947 -- 44,947 --
License fees -- -- 240,000 --
Service fees 60,000 -- 77,852 --
Ad sales 93,358 -- 108,569
- -------------------------------------------------------------------------------------------------------------
198,305 -- 471,368 --
Cost of sales 82,495 -- 221,399 --
- -------------------------------------------------------------------------------------------------------------
Gross profit 115,810 -- 249,969 --
Advertising and promotion expenses (3,694) (11,457) (15,427) (100,615)
Commissions (24,705) -- (24,705)
Software development costs -- (71,621) (94,368) (358,859)
Gain on disposal of a subsidiary (Note 13) 1,017,261 -- 1,017,261 --
General and administrative expenses
Accounting and audit (18,445) (10,938) (18,445) (25,084)
Automobile -- (15,735) (9,399) (29,656)
Bank charges and interest (8,293) (41,785) (21,652) (67,696)
Depreciation of fixed assets (11,004) (33,761) (11,627) (35,415)
Foreign exchange (gain) loss (863) 40,983 1,734 (9,216)
Hosting fees (44,947) -- (44,947) --
Legal and other professional fees 2,059 (43,287) (870) (73,852)
Loss on disposal of asset -- (328) -- (328)
Office and miscellaneous (659) (25,496) (823) (53,362)
Rent (9,846) (17,873) (14,123) (34,659)
Salaries and benefits -- (42,935) (34,599) (74,711)
Telephone and bandwidth (8,724) (4,159) (9,070) (6,544)
- -------------------------------------------------------------------------------------------------------------
Net Income for the period 1,003,950 (278,392) 968,909 (869,997)
=============================================================================================================
Loss per share
Basic 0.04 (0.01) 0.03 (0.03)
Diluted 0.04 (0.01) 0.03 (0.03)
=============================================================================================================
Weighted average number of
common shares outstanding
Basic 28,439,975 28,395,109 28,439,975 28,395,109
Diluted 28,621,318 28,395,109 28,621,318 28,395,109
=============================================================================================================
The accompanying notes are an integral part of these financial statements.
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in U.S. Dollars)
- -----------------------------------------------------------------------------------------------------------
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Cash flows from (used in) operating activities
Net (loss) income for the year 1,003,950 (278,392) 968,909 (869,997)
Non-cash adjustments
- depreciation of fixed assets 11,005 17,200 21,414 33,739
- fixed asset write off - 31,725 - 31,275
- loss on disposal of asset - 328 - 328
- imputed interest on related party loan 1,250 - 2,500 -
- exchange (gain) loss on fixed assets (8,149) 3,089
- -----------------------------------------------------------------------------------------------------------
1,016,205 (237,288) 992,822 (801,116)
Changes in assets and liabilities:
- deposits 15,000 (1,085) 25,000 (25,673)
- accounts receivable 237,695 (20,035) 154,750 (20,035)
- refundable tax credits - 10,579 - 5,023
- demand loans 25,586 (115,704) 25,586 (115,704)
- prepaid expenses 28,689 (6,565) 49,190 10,153
- accounts payable and accrued liabilities (484,061) 158,961 (456,720) 318,339
- payroll deductions payable (371,731) - (359,245) -
- -----------------------------------------------------------------------------------------------------------
467,383 (211,137) 431,383 (629,013)
- -----------------------------------------------------------------------------------------------------------
Cash flows used in investing activities
Increase in demand loan receivable (456,326) - (506,070) -
Purchase of fixed assets (158,300) - (158,300) (6,186)
Disposal of fixed assets 125,766 6,806 125,766 6,806
- -----------------------------------------------------------------------------------------------------------
(488,860) 6,806 (538,604) 620
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Shares issued for cash - 11,300 - 82,200
Cancellation of shares allotted - (20,000) - (20,000)
Proceeds from short term loans 10,318 226,388 128,968 226,388
Proceeds from demand loans - 68,880 296,412
- -----------------------------------------------------------------------------------------------------------
10,318 286,568 128,968 585,000
- -----------------------------------------------------------------------------------------------------------
Foreign exchange gain (loss) on cash held in
foreign currency 5,193 (85,487) 1,848
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (5,967) (3,250) 21,748 (41,545)
Cash, beginning of period 10,963 (8,815) (16,752) 29,480
- -----------------------------------------------------------------------------------------------------------
Cash (deficiency), end of period $ 4,996 $ (12,065) $ 4,996 $ (12,065)
===========================================================================================================
Cash represented by:
Cash $ 4,996 $ 4,751 $ 4,996 $ 4,751
Bank overdraft (16,816) (16,816)
- -----------------------------------------------------------------------------------------------------------
$ 4,996 $ (12,065) $ 4,996 $ (12,065)
===========================================================================================================
The accompanying notes are an integral part of these financial statements.
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2002
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
1. Nature and Continuance of Operations
The Company was incorporated on October 29, 1999 in the name of Triple
8 Development Corporation under the laws of the State of Nevada to
engage in any lawful business or activity for which corporations may be
organized under the laws of the State of Nevada. The Company changed
its name to CYOP Systems International Incorporated ("CYOP") on October
30, 2000. On November 3, 2000, the Company acquired 100% of the issued
and outstanding shares of CYOP Systems Inc., Barbados ("CYOP
Barbados"). This transaction was accounted for as a reverse acquisition
recapitalization (see Note 3).
CYOP Barbados was incorporated under the laws of Barbados on June 20,
2000. On August 31, 2000, CYOP Barbados acquired 100% of the issued and
outstanding shares of Moshpit Entertainment Inc., Canada ("Moshpit"), a
company incorporated under the laws British Columbia, Canada. CYOP
Barbados sold 100% of the issued and outstanding shares of Moshpit by
agreement dated April 1, 2002 to a former shareholder and the sole
director. The agreement provide for Moshpit to provide hosting to CYOP
as well as any further software development on a contract basis as CYOP
focuses on sales and marketing of the financial transaction platform
for on-line video games.
The Company, and its subsidiary, is a provider of multimedia
transactional technology solutions and services for the entertainment
industry. The Company's range of products and services include
financial transaction platforms for on-line video games and integrated
e-commerce transaction technology for on-line merchants. These services
are considered as one segment only based on internal organizational
structure.
These consolidated financial statements have been prepared using the
generally accepted accounting principles applicable to a going concern
which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The
Company has suffered recurring losses from operations and has a net
capital deficiency. The ability of the Company to continue as a going
concern is dependent upon many factors, including the ability of the
Company to obtain financing to fund working capital requirements, the
degree of competition encountered by the Company, technology risks,
government regulation and general economic conditions. The Management's
plan in this regard is to raise equity financing as required and keep
abreast with the multimedia technology. These consolidated financial
statements do not include any adjustments that might result from this
uncertainty.
2. Significant Accounting Policies
(a) Basis of Consolidation
These consolidated financial statements, prepared in accordance with
accounting principles generally accepted in the United States of
America, include the accounts of the Company and its subsidiary CYOP
Barbados. Significant inter-company accounts and transactions have been
eliminated.
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2002
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
(b) Basis of Presentation
These interim consolidated financial statements have been prepared
using the same accounting policies and methods of their application as
the most recent annual consolidated financial statements of the
Company. These interim consolidated financial statements do not include
all disclosures normally provided in the annual consolidated financial
statements and should be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31, 2001.
In management's opinion, all adjustments necessary for fair
presentation have been included in these interim consolidated financial
statements. Interim results are not necessary indicative of the results
expected for the fiscal year. Certain comparative figures have been
reclassified to conform to the current period's presentation.
(c) Accounting Estimates
The preparation of financial statements in conformity with US generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the period. Actual results may differ from those
estimates.
(d) Cash Equivalents
Cash equivalents usually consist of highly liquid investments which are
readily convertible into cash with maturity of three months or less
when purchased.
(e) Fixed Assets
Fixed assets are recorded at historical cost. Depreciation is charged
to earnings in amounts sufficient to allocate the costs over their
estimated useful lives, as follows:
Audio and visual equipment 20% declining-balance basis
Computer hardware 30% declining-balance basis
Computer software 100% declining-balance basis
Office furniture and equipment 20% declining-balance basis
(f) Revenue recognition
The Company derives revenue from providing services on software
development and online internet transaction platform maintenance.
Service revenues are recognized when services have been performed and
delivered in accordance with service agreements, the Company has no
significant remaining performance requirements, there are no material
uncertainties regarding customer acceptance and collection of the
resulting receivable is deemed probable.
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2002
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
(g) Software Development Costs
Software development costs incurred prior to the establishment of
technological feasibility are charged to expenses as incurred.
(h) Advertising and Promotion
The Company expenses advertising and promotion costs as incurred. Total
advertising and promotion costs charged to expenses for the six months
ended June 30, 2002 amounted to $15,427 (June 30, 2001 - $100,615).
(i) Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. The Company is
disclosing this information on its consolidated Statement of
Stockholders' Equity. Comprehensive income comprises equity except
those resulting from investments by owners and distributions to owners.
SFAS No. 130 did not change the current accounting treatments for
components of comprehensive income.
(j) Financial Instruments and Concentration of Risks
Fair value of financial instruments are made at a specific point in
time, based on relevant information about financial markets and
specific financial instruments. As these estimates are subjective in
nature, involving uncertainties and matters of significant judgement,
they cannot be determined with precision. Changes in assumptions can
significantly affect estimated fair values.
The carrying value of cash and cash equivalents, accounts receivable,
demand loan receivable, demand loans payable, accounts payable and
accrued liabilities, and short-term loans approximate their fair values
because of the short-term maturity of these instruments.
Financial instruments that potentially subject the Company to
concentration of credit risk consist of accounts receivable, demand
loan receivable, the balances of which are stated on the balance sheet.
The Company performs ongoing credit evaluations of its customers and
debtors and maintains allowances for possible losses with, when
realized, have been within the range of management's expectations. The
Company places its cash in high credit quality financial institutions.
The Company does not require collateral or other security to support
financial instruments subject to credit risk.
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2002
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
(k) Net Income (Loss) Per Share
Basic net income (loss) per share are computed using the
weighted-average number of shares of common stock outstanding during
the period. Diluted net income (loss) per share incorporates the
incremental shares issuable upon the assumed exercise of stock options
and other dilutive securities.
(l) Stock-based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-based Compensation". SFAS 123 encourages, but
does not require, companies to adopt a fair value based method for
determining expense related to stock-based compensation. The Company
accounts for stock-based compensation issued to employees and directors
using the intrinsic value method as prescribed under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations.
3. Acquisition of CYOP Systems Inc., Barbados
On November 3, 2000, the Company acquired 100% of the issued and
outstanding common shares of CYOP Barbados by issuing 9,000,000 shares,
which are presented as outstanding for all periods presented. As the
Company was a non-operating shell company, the transaction resulted in
the management of CYOP Barbados having effective operating control of
the combined company, with the shareholders of the Company continuing
only as passive investors. Accounting principles applicable to reverse
acquisition recapitalization have been applied to record this
transaction. Under this basis of accounting, CYOP Barbados has been
identified as the acquirer and, accordingly, the combined company is
considered to be a continuation of the operations of CYOP Barbados with
the net liabilities of the Company deemed to have been assumed by CYOP
Barbados. Statements of operations present primarily the operations of
Barbados. Pro-forma information is not presented, as the transaction is
not considered a business combination.
The net liabilities of the Company assumed by CYOP Barbados are
summarized as follows:
------------------------------- -------------------
Current assets $ 2,399
Current liabilities (12,100)
------------------------------- -------------------
Net liabilities assumed $ (9,701)
=============================== ===================
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2002
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
4. Fixed assets
- -----------------------------------------------------------------------------------------------------------------
June 30, 2002
- -----------------------------------------------------------------------------------------------------------------
Cost Accumulated Net book
depreciation Value
- -----------------------------------------------------------------------------------------------------------------
Audio and visual equipment $ 21,558 $ 7,063 $ 14,495
Computer hardware 60,864 11,491 49,373
Computer software 3,088 3,088 -
Office furniture and equipment 9,227 4,195 5,032
- -----------------------------------------------------------------------------------------------------------------
Total $ 94,737 $25,837 $ 68,900
=================================================================================================================
- -----------------------------------------------------------------------------------------------------------------
December 31, 2001
- -----------------------------------------------------------------------------------------------------------------
Cost Accumulated Net book
depreciation Value
- -----------------------------------------------------------------------------------------------------------------
Audio and visual equipment $ 21,578 $ 5,957 $ 15,621
Computer hardware 284,526 84,237 200,289
Computer software 3,090 3,090 -
Office furniture and equipment 9,402 2,666 6,736
- ---------------------------------------------------- ------------------- -------------------- -------------------
Total $ 318,596 $ 95,950 $ 222,646
=================================================================================================================
For the six months ended June 30, 2002, depreciation expenses charged
to software development costs and general and administrative expenses
were $9,787 (2001 - $30,049).
5. Software Development Costs
-------------------------------------------------------------------
June 30 December 31
2002 2001
-------------------------------------------------------------------
Balance, beginning of period $ - $ 100
Salaries and benefits 84,581 454,840
Depreciation on fixed assets 9,787 40,118
-------------------------------------------------------------------
94,368 495,058
Costs charged to expenses (94,368) -
Costs charged to sale of software - (495,058)
-------------------------------------------------------------------
Balance, end of period $ - $ -
===================================================================
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2002
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
6. Loans
(a) Demand Loans
-----------------------------------------------------------------------
June 30 December 31 2001
2002
-----------------------------------------------------------------------
i. Interest at the Bank of Montreal's prime
lending rate of 6.0% plus 1.5% per annum
and unsecured:
- Cyber Roads Inc. - $ 178,519
- Tapijkabouter BV - 99,157
-----------------------------------------------------------------------
-
ii. Interest at the Hongkong Bank of
Canada's prime lending rate of 6.0%
plus 1% per annum and unsecured:
- Ameera Group Inc. - 75,000
iii. Non-interest bearing and unsecured:
- Tapijkabouter BV - 100,000
iv. Non-interest bearing and unsecured 9,261
-----------------------------------------------------------------------
Total 9,261 $ 452,676
=======================================================================
(b) Demand Loans Related Party
-----------------------------------------------------------------------
June 30 December 31
2002 2001
-----------------------------------------------------------------------
ii. Non-interest bearing and unsecured:
- Jack Carley - related to a director 50,000 50,000
-----------------------------------------------------------------------
Total $ 50,000 $ 50,000
=======================================================================
(c) Short-term Loan
----------------------------------------------------------------------
June 30 December 31
2002 2001
----------------------------------------------------------------------
i. Interest at 40% per annum, due on
January 25, 2002, convertible to
20,000 shares of common stock of
the Company at due date:
- Kornfeld MacOff (Cdn$25,000) - $ 15,696
ii. Interest at 10% per annum,
due on June 1, 2002:
- RedRuth Ventures extended
to June 1, 2003 212,725 212,725
iii. Non-interest bearing and
unsecured 26,000 -
----------------------------------------------------------------------
Total $ 238,725 $ 228,421
======================================================================
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2002
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
7. Sale and License-back of Computer Software
On December 14, 2001, the Company sold computer software identified as
Crediplay System to the sole director and a major shareholder and
creditor of the Company for $3,000,000. The purchase price was settled
by retiring $1,200,000 of debt owed to the purchaser and a promissory
note for $1,800,000. The promissory note bears interest at 5% per annum
with maturity on December 14, 2010. As at December 31, 2001, the
present value of the promissory note is $1,565,452, with discount rate
at 7% per annum.
Pursuant to a Marketing, Development and Distribution Agreement entered
into on the same date, the Crediplay System was licensed back to the
Company for a term of 15 years. A licensing fee payable will be
calculated on Gross Earnings derived from the Crediplay System as
follows:
2002 Gross Earnings x 20%
2003 Gross Earnings x 17%
2004 Gross Earnings x 15%
2005 to 2017 Gross Earnings x 10%
The development costs of the Crediplay System expended by the Company
amounted to approximately $1,273,406 of which $778,348 was expensed
previously. Management of the Company has estimated the $3,000,000
value based on the discounted future cash flow projection and the
estimate provided by knowledgeable parties of the software.
The gain on the sale of the Crediplay System is calculated as follows:
----------------------------------------------------------------
Sales price
Retirement of loan due to the purchaser $ 1,200,000
Present value of $1,800,000
promissory note discounted at
7% per annum 1,565,452
---------------------------------------------------------------
2,765,452
Software development costs incurred in 2001 (495,058)
---------------------------------------------------------------
Deferred gain $ 2,270,394
================================================================
The deferred gain of $2,270,394 will be amortized in proportion to the
licensing fees payable over the term of the agreement.
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2002
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
8. Economic Dependence
In fiscal year 2001, the Company entered into a software development
agreement and a software licensing, technical support and operation of
customer service and data centre agreement with a company with a common
director.
During the six months ended June 30, 2002, total revenue of $260,644
was earned from the serviced company.
In forgiveness of the outstanding recievable amount of $200,000 and a
deferred revenue amount of $41,700, by agreement dated May 24, 2002,
the Company acquired all the rights to the BiG'r Bingo game including
the software, the web site located at www.bigrbingo.com, the trademark
"BiG'r Bingo", and rights and responsibilities to the BiG'r Bingo
customer database.
9. Related Party Transactions
Related party transactions not disclosed elsewhere in the consolidated
financial statements are as follows:
(a) Imputed interest of $2,500 (June 30, 2001 - $Nil) at an
interest rate of 10% per annum was accrued on interest free
loan of $50,000 from an individual related to a director of
the Company.
(b) Accounting fees of $Nil (June 30, 2001 - $10,338) were paid to
a company controlled by individuals related to a director of
the Company and were charged to expenses.
(c) Interest expenses of $Nil (June 30, 2001 - $33,059) were paid
to a director and a shareholder of the Company and were
charged to expenses.
10. Commitments
(a) The Company has entered into contracts with service providers
to pay for the services partly by cash and partly by issuance
of common stock of the Company when the common stock are
freely trading in the equity market. As at June 30, 2002,
156,343 shares of common stock of the Company are to be issued
for services received.
CYOP SYSTEMS INTERNATIONAL INCORPORATED
& SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2002
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
11. Stock Option
The following is a summary of the stock option outstanding as at June
30, 2002:
-----------------------------------------------------------------------
Weighted Average
Shares Exercise Price
-----------------------------------------------------------------------
Options outstanding at December 31, 2001 25,000 $ 1.00
Granted - -
-----------------------------------------------------------------------
Options outstanding at June 30, 2002 25,000 $ 1.00
=======================================================================
Options Outstanding and Exercisable
-----------------------------------------------------------------------
Range of Number Weighted Average Weighted
Exercise Outstanding and Remaining Average
Prices Exercisable Contractual Life Exercise Price
-----------------------------------------------------------------------
$1.00 25,000 2.12 $1.00
-----------------------------------------------------------------------
12. Comparative Figures
Certain 2001 comparative figures have been reclassified to conform with
the financial statement presentation adopted for 2002.
13. Sale of Canadian Subsidiary
Moshpit Entertainment Inc. ("Moshpit") was acquired by CYOP Systems
Inc. on August 31, 2000 as a development stage company in the business
of developing software for interactive online games. The April 1, 2002
Share Purchase Agreement provides for Moshpit to continue hosting the
Company's internet traffic in consideration of forgiving interest
payable amounts on loans advanced from the Company to Moshpit.
A one-time gain of $2,774,815 was recognized by CYOP Systems Inc. with
the disposal of the Canadian subsidiary, Moshpit. The loan of
$1,757,554 to Moshpit has been fully charged as a loss and netted with
the gain on disposal.
Liabilities of Moshpit:
Loan from parent and the Company $ 1,757,554
Other liabilities 1,265,567
----------------------------------------------------------------
Total Liabilities 3,023,121
Less: total assets of Moshpit (248,371)
----------------------------------------------------------------
Excess of liabilities over assets 2,774,750
Proceeds from sale of Moshpit 65
----------------------------------------------------------------
2,774,815
Less: provision of loss on loan to Moshpit (1,757,554)
----------------------------------------------------------------
Gain on disposal of Moshpit $ 1,017,261
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The following management's discussion and analysis of the Company should be read
in conjunction with the financial statements and the related notes thereto
included elsewhere in this quarterly report for the six months ended June 30,
2002. This quarterly report contains certain forward-looking statements and the
Company's future operation results could differ materially from those discussed
herein.
We were incorporated on October 29, 1999 under the laws of the State of Nevada
as Triple 8 Development Corporation to engage in any lawful corporate purpose.
We changed our name to CYOP Systems International Incorporated on November 2,
2000.
We have not been involved in any bankruptcy, receivership or similar
proceedings.
CYOP Systems International Incorporated ("CYOP") is the parent company in our
corporate structure. We own 100% of the common shares of CYOP Systems Inc., a
Barbados company. On April 1, 2002 we sold the Canadian subsidiary, Moshpit
Entertainment Inc., ("Moshpit") to a former shareholder and sole director. The
agreement provides for Moshpit to continue to provide hosting services and
further development on a contract basis. This transaction is in keeping with the
Company's strategy to move into sales and marketing activities bringing the
financial transaction platform for on-line video games to market. Approximately
$3 million in outstanding loans and other accounts payable amounts incurred by
the Canadian subsidiary remain with Moshpit.
The quarter has been a trying one for the Company. Commitments for funding that
went unfulfilled resulted in the need to reconfigure operations. Limited capital
availability due to the downturn in the Internet and technology sectors meant
that the Company was forced to reduce its operations to the basic minimum in
order to continue to operate
Management will continue to fund the Company through shareholders' loans until
such time as the Company is financially self-supporting. Management of the
Company will be aggressively seeking private financing to launch an aggressive
marketing campaign for our pay for play network and our flagship video game
Urban Mercenary.
In order for our Company to expand it's operations and realize profits from pay
for play online video gaming a number of additional steps must be taken. We must
continue to maintain and upgrade our software programs and our website. This is
an ongoing month-to-month responsibility with funds for this ongoing software
maintenance budgeted and loaned to our Company by management. In the future, the
funds required for ongoing software maintenance will come from revenue from
licensing fees or system maintenance fees from pay for play video gaming.
Secondly, to increase our Company's exposure and attract players to our website
we will be required to complete a full marketing launch. Until we complete a
marketing launch we cannot expect large volumes of players for our online pay
for play video game. Revenues will be derived from licensing fees from third
parties that already have an established community and significant traffic to
their web sites. We will also continue to pursue our pending patent applications
in the United States. Patent protection will improve our competitive position in
the online pay for play video gaming industry. We anticipate spending up to an
additional $25,000 for costs associated with our patent applications. We
anticipate it may take up to one year for our current patent applications to be
granted.
Liquidity and Capital Resources
At June 30, 2002 the Company had a working capital position of $(389,930)
compared to a working capital deficit of ($2,250,000) at June 30, 2001to satisfy
requirements for operations for the same period ending June 30, 2001. Although
this is a material improvement for the same period ending June 30, 2001 no
assurances can be given that the Company will successful in realizing sufficient
funding to continue operations. Based on the cost reduction plan and the sale of
the Canadian subsidiary, April 1, 2002, the Company has been successful in
significantly reducing operating costs period over period beginning with the
third quarter end in 2001. While development of the Crediplay system is complete
and operational very little cash is available to begin the process of marketing
and promoting the Crediplay system.
Deterioration of funding sources for internet based businesses has continued
into the calendar year 2002 creating financial stresses for the Company.
Operations have continued with funding from management. The Company plans to
raise capital during the second quarter of 2002.
The Company's consolidated financial statements have been prepared on a
continuing operation basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business.
Management recognizes that the Company must generate additional investment in a
timely manner to maintain operations. The Company plans to seek private
placements of equity capital to fund its operations but has no commitments at
date of this report for funding.
As of June 30, 2002, there were no material commitments for capital
expenditures.
Results of operations for the quarter ended June 30, 2002 as compared to the
quarter ended June 30, 2001.
During the quarter ended June 30, 2002 the Company generated revenue of $198,305
primarily from ad serving. Although $60,000 is directly related to the Crediplay
system and Network Maintenance Fees and $44, 900 from interest income forgiven
on a contra arrangement for web hosting services. A one-time gain of $1,017,261
was also recognized during the quarter with the sale of the Canadian subsidiary,
Moshpit. The same period ending June 30, 2001 generated no revenues as the
Crediplay system was still in development stages. The Company had general and
administrative expenses of $100,722 in 2002 compared with $195,314 in 2001.
Software development costs, advertising and promotion and commissions was,
$28,399 and $83,078 respectively for the periods.
The Company incurred a gain on operations of $1,003,950 in 2002 which included a
gain of $1,017,261 after netting loan loss provisions on the sale of the
Canadian subsidiary, compared to ($278,392) in 2001, or $0.04 per share and
($0.01 per share respectively. The improved income position is a result of the
sale of the Canadian subsidiary, a decrease of total expenses with no salary
costs and as a consequence of no revenue for the period in 2001.
"CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Except for historical matters,
the matters discussed in this Form 10-QSB are forward-looking statements based
on current expectations and involve risks and uncertainties. Forward-looking
statements include, but are not limited to, statements under the following
heading: "Managements Discussion And Analysis Or Plan Of Operations" the timing
and expected profitable results of sales and the need for no additional
financing.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Item 3 DEFAULTS UPON SENIOR SECURITIES
None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5 OTHER INFORMATION
None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
August 19, 2002 Form 8-k - Sale of Moshpit
Entertainment Inc. a wholly owned Canadian subsidiary
of CYOP Barbados Inc.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CYOP SYSTEMS INTERNATIONAL INCORPORATED
Dated: August 19, 2002 Per: /s/ Mitch White
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Mitch White, CEO and Director