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 SEPTEMBER 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 September 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 September 30, 2002 Statement of Income for the period ended September 30, 2002 Consolidated Statements of Cash Flows for the period ended September 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) September 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) ============================================================================= September 30 December 31 2002 2001 - ----------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents $ 1,287 $ 1,852 Cash with processors 4,450 - Accounts receivable 27,987 178,910 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 72,353 350,163 Note receivable related party (Note 7) 1,565,452 1,565,452 Intellectual property (Note 8) 158,300 Fixed assets (Note 4) 63,733 222,646 - ------------------------------------------------------------------------------ Total assets $ 1,859,838 $ 2,138,261 ============================================================================== LIABILITIES Current Bank overdraft $ $ 18,604 Demand loans (Note 6) 145,370 452,676 Demand loans related party (Note 6) 44,625 50,000 Accounts payable and accrued liabilities 155,937 586,139 Payroll deductions payable - 362,115 Short-term loan (Note 6) 212,725 228,421 Investor deposit - 10,000 Funds held on deposit (Note 14) 32,017 - - ------------------------------------------------------------------------------ Total current liabilities 590,674 1,707,955 Deferred revenue (Note 7) 2,270,394 2,270,394 - ------------------------------------------------------------------------------ Total Liabilities 2,861,068 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 (1,361,151) (2,195,253) - ------------------------------------------------------------------------------ Total stockholders' (deficiency) (1,001,230) (1,840,088) - ------------------------------------------------------------------------------ Total liabilities and stockholders' (deficiency) $ 1,859,838 $ 2,138,261 ============================================================================== CYOP SYSTEMS INTERNATIONAL INCORPORATED & SUBSIDIARIES Consolidated Statement of Stockholders' Deficiency Nine Months Ended September 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 - 2,500 Other comprehensive income - - foreign currency translation adjustment - - - - 2,256 2,256 Comprehensive income - net income for the period - - - 834,102 834,102 - 834,102 - --------------------------------------------------------------------------------------------------------------------------------- $ 834,102 ------------- Balance, September 30, 2002 28,439,975 2,844 221,627 (1,361,151) 135,450 (1,001,230) - --------------------------------------------------------------------------------------------------------------------------------- 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 Nine Months September 30 Ended September 30 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------- Revenue Interest income 44,947 - 89,894 - License fees - - 240,000 - Service fees 4,693 - 82,544 - Ad sales 29,666 - 138,234 - -------------------------------------------------------------------------------------------------------------------------- 79,306 - 550,672 - Cost of sales 48,157 - 269,556 - - -------------------------------------------------------------------------------------------------------------------------- Gross profit 31,149 - 281,116 - Advertising and promotion expenses (24,772) (61) (40,199) (100,676) Commissions (11,464) - (36,169) - Software development costs - 73,057 (94,368) (285,802) Gain on disposal of a subsidiary (Note 13) - - 1,017,262 - General and administrative expenses Accounting and audit (5,073) (5,804) (23,518) (30,888) Automobile (11,000) (13,645) (20,398) (43,301) Bank charges and interest (8,973) (28,895) (30,625) (96,591) Depreciation of fixed assets (5,167) (1,904) (16,794) (5,594) Foreign exchange (gain) loss (12,007) (45,120) (10,274) (54,336) Hosting fees (44,947) - (89,894) - Legal and other professional fees (1,929) (45,372) (2,799) (119,224) Loss on disposal of asset - 127 - (31,926) Office and miscellaneous (13,053) (17,894) (13,876) (64,353) Rent (14,678) (8,814) (28,801) (43,473) Salaries and benefits - (42,460) (34,599) (117,171) Telephone and bandwidth (12,547) (8,791) (21,617) (15,335) Travel (345) (121) (345) (7,024) - -------------------------------------------------------------------------------------------------------------------------- Net Income for the period (134,806) (145,697) 834,102 (1,015,694) ========================================================================================================================== Loss per share Basic (0.01) (0.01) 0.03 (0.02) Diluted (0.01) (0.01) 0.03 (0.02) ========================================================================================================================== Weighted average number of common shares outstanding Basic 28,439,975 28,439,975 28,439,975 28,439,975 Diluted 28,439,975 28,439,975 28,439,975 28,439,975 ========================================================================================================================== 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 Nine Months Ended September 30, Ended September 30, 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from (used in) operating activities Net (loss) income for the year (134,807) (145,697) 834,102 (1,015,694) Non-cash adjustments - depreciation of fixed assets 5,167 15,761 26,581 49,500 - fixed asset write off - (183) - 31,542 - loss on disposal of asset - 56 - 384 - imputed interest on related party loan - - 2,500 - - exchange (gain) loss on fixed assets - 7,729 - 10,819 - -------------------------------------------------------------------------------------------------------------------------- (129,640) (122,334) 863,183 (923,449) Changes in assets and liabilities: - deposits - 1,250 - (24,423) - accounts receivable (3,828) (100,473) 150,923 (120,508) - refundable tax credits - 11,785 - 16,808 - demand loans (5,375) (37,666) (458,051) (153,370) - prepaid expenses - 12,023 49,191 22,176 - accounts payable and accrued liabilities 31,207 19,966 (425,513) 338,305 - payroll deductions payable - - (359,245) - - player funds on deposit 32,017 - 32,017 - - -------------------------------------------------------------------------------------------------------------------------- (75,619) (215,449) (147,495) (844,461) - -------------------------------------------------------------------------------------------------------------------------- Cash flows used in investing activities Increase in demand loan receivable 101,108 - 98,301 - Purchase of fixed assets - - (158,300) (6,186) Disposal of fixed assets - - 125,766 6,806 - -------------------------------------------------------------------------------------------------------------------------- 101,108 - 65,767 620 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Shares issued for cash - - - 62,200 Cancellation of shares allotted - - - - Proceeds from short term loans (26,000) 152,113 102,967 378,501 Proceeds from demand loans - (42,393) 254,018 - -------------------------------------------------------------------------------------------------------------------------- (26,000) 109,720 102,967 694,719 - -------------------------------------------------------------------------------------------------------------------------- Foreign exchange gain (loss) on cash held in foreign currency 1,250 102,687 1,250 104,535 - -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (509) (3,042) 21,239 (44,587) Cash, beginning of period 4,997 (12,065) (16,752) 29,480 - -------------------------------------------------------------------------------------------------------------------------- Cash (deficiency), end of period $ 5,737 $ (15,107) $ 5,737 $ (15,107) ========================================================================================================================== Cash represented by: Cash $ 1,287 $ 6,336 $ 1,287 $ 6,336 Cash with processors 4,450 (21,443) 4,450 (21,443) - -------------------------------------------------------------------------------------------------------------------------- $ 5,737 $ (15,107) $ 5,737 $ (15,107) ========================================================================================================================== The accompanying notes are an integral part of these financial statements. CYOP SYSTEMS INTERNATIONAL INCORPORATED & SUBSIDIARIES Notes to Consolidated Financial Statements Nine Months Ended September 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 an 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 Nine Months Ended September 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 Nine Months Ended September 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 nine months ended September 30, 2002 amounted to $40,199 (September 30, 2001 - $100,676). (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 Nine Months Ended September 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 Nine Months Ended September 30, 2002 (Unaudited) (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 4. Fixed assets ----------------------------------------------------------------------------------------------------------------- September 30, 2002 ----------------------------------------------------------------------------------------------------------------- Cost Accumulated Net book depreciation Value ----------------------------------------------------------------------------------------------------------------- Audio and visual equipment $ 21,558 $ 7,063 $ 14,495 Computer hardware 60,864 16,658 44,206 Computer software 3,088 3,088 - Office furniture and equipment 9,227 4,195 5,032 ----------------------------------------------------------------------------------------------------------------- Total $ 94,737 $31,004 $ 63,733 ================================================================================================================= ----------------------------------------------------------------------------------------------------------------- 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 nine months ended September 30, 2002, depreciation expenses charged to software development costs and general and administrative expenses were $26,581 (2001 - $49,500). 5. Software Development Costs ----------------------------------------------------------------------------------------------------------------- September 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 Nine Months Ended September 30, 2002 (Unaudited) (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 6. Loans (a) Demand Loans --------------------------------------------------------------------------------------------------------- September 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 --------------------------------------------------------------------------------------------------------- - 277,676 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 145,370 --------------------------------------------------------------------------------------------------------- Total 145,370 $ 452,676 ========================================================================================================= (b) Demand Loans Related Party --------------------------------------------------------------------------------------------------------- September 30 December 31 2002 2001 --------------------------------------------------------------------------------------------------------- ii. Non-interest bearing and unsecured: - Jack Carley - related to a director 44,625 50,000 --------------------------------------------------------------------------------------------------------- Total $ 44,625 $ 50,000 ========================================================================================================= (c) Short-term Loan --------------------------------------------------------------------------------------------------------- September 30 December 31 2001 2002 --------------------------------------------------------------------------------------------------------- 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 - - --------------------------------------------------------------------------------------------------------- Total $ 212,725 $ 228,421 ========================================================================================================= CYOP SYSTEMS INTERNATIONAL INCORPORATED & SUBSIDIARIES Notes to Consolidated Financial Statements Nine Months Ended September 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 Nine Months Ended September 30, 2002 (Unaudited) (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 8. Intellectual Property 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 nine months ended September 30, 2002, total revenue of $260,644 was earned from the serviced company. In forgiveness of the outstanding receivable 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 (September 30, 2001 - $Nil) at an interest rate of 10% per annum was accrued on interest free loan of $44,625 from an individual related to a director of the Company. (b) Accounting fees of $Nil (September 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 (September 30, 2001 - $43,110) 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 September 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 Nine Months Ended September 30, 2002 (Unaudited) (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 11. Stock Option The following is a summary of the stock option outstanding as at September 30, 2002: ----------------------------------------------------------------------------- Weighted Average Shares Exercise Price ----------------------------------------------------------------------------- Options outstanding at December 31, 2001 25,000 $ 1.00 Granted - - ----------------------------------------------------------------------------- Options outstanding at September 30, 2002 25,000 $ 1.00 ============================================================================= Options Outstanding and Exercisable ------------------------------------------------------------------------------------------------ Number Outstanding and Weighted Average Range of Exercise Exercisable Remaining Weighted Average Prices 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. The loan of $1,757,554 to Moshpit has been fully charged as a loss and netted with the gain on disposal. A one-time gain of $1,017,261 was recognized by CYOP Systems Inc. with the disposal of the Canadian subsidiary, Moshpit. 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 -------------------------------------------------------- 14. The $32,017 Player funds on deposit, include $22,851.45 as promotional credits granted to members and expensed as advertising and promotion costs. CYOP SYSTEMS INTERNATIONAL INCORPORATED & SUBSIDIARIES Notes to Consolidated Financial Statements Nine Months Ended September 30, 2002 (Unaudited) (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 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 nine months ended September 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 October 30, 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. Management continues to fund the Company through shareholders' loans until such time as the Company is financially self-supporting. Management of the Company is seeking financing to launch an aggressive marketing campaign for our pay for play network and our flagship video game Urban Mercenary. We received SEC and NASD clearance on September 4, 2002 for quotation of our securities on the OTC BB under the symbol CYOI. In order for our Company to expand it's operations and realize profits from pay for play online video gaming we are actively signing up affiliate company's and pursuing strategic acquisitions that bring internet traffic and more games to be integrated into our existing suite of games. Until we increase our Company's exposure and attract players to our website and/or complete strategic acquisitions 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 are also continuing 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 September 30, 2002 the Company had a working capital deficit of $(518,321) compared to a working capital deficit of ($2,269,681) at September 30, 2001 to satisfy requirements for operations for the same period ending September 30, 2001. Although this is a material improvement for the same period ending September 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. Funding will continue from management for baseline operations. The Company plans to raise capital during the last 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 September 30, 2002, there were no material commitments for capital expenditures. Results of operations for the quarter ended September 30, 2002 as compared to the quarter ended September 30, 2001. For the quarter ended September 30, 2002 the Company generated revenue of $79,305. Although $4,693 is directly related to the Crediplay system and Network Maintenance Fees, $29,666 is directly related to ad-serving and $44,900 from interest income forgiven on a contra arrangement for web hosting services. The same period ending September 30, 2001 generated no revenues as the Crediplay system was still in development stages. The Company had general and administrative expenses of $129,719 in 2002 compared with $218,693 in 2001. Software development costs, advertising and promotion and commissions was, $13,385 and a ($73,057) recovery, respectively for the periods. For the nine month period ended September 30, 2002, the Company incurred a gain on operations of $834,102 in 2002 which included a gain of $1,017,262 after netting loan loss provisions on the sale of the Canadian subsidiary, compared to ($1,015,694) in 2001, or $0.03 per share and ($0.02) 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 99.1 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 Nil 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: November 4, 2002 Per: /s/ Mitch White - -------------------------------------------------------------------------------- Mitch White, CEO and Director