10QSB 1 cyop10qsb.htm Filed By Filing Services Canada Inc. 403-717-3898

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-QSB



[xx]

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003


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 390

1090 Homer Street

Vancouver, British Columbia

V6B 2W9

(Address of principal executive offices)


(604) 685-0696

(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:

28,594,682 common shares as at September 30, 2003


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, 2002 and September 30, 2003


Statement of Income for the period ended

September 30, 2003


Consolidated Statements of Cash Flows for the period ended

September 30, 2003


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, 2003

(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

   

2003

 

2002

      

ASSETS

     

Current

     

  Cash and cash equivalents

$

4,355

$

4,253

  Interest receivable related party (Note 6)

 

157,500

 

90,000

  Prepaid expenses and deposit

 

1,538

 

-

Total current assets

 

163,394

 

94.253

Note receivable related party (Note 6)

 

1,590,272

 

1,585,034

Intellectual property (Note 4)

 

93,978

 

115,665

Fixed assets (Note 3)

 

     83,893

 

58,953

      

Total assets

 

$

1,931,537

$

1,853,905

      

LIABILITIES

     

Current

     

  Demand loans related party (Note 5a)

$

786,561

$

562,238

  Accounts payable and accrued liabilities

 

208,077

 

147,480

  Player funds on deposit

 

26,900

 

36,783

  Short-term loan (Note 5b)

 

212,725

 

212,725

Total current liabilities

 

1,234,263

 

959,226

Deferred revenue (Note 6)

 

2,196,311

 

2,198,552

      

Total Liabilities

 

3,430,574

 

3,157,778

      

Nature and continuance of operations  (Note 1)

    
      

STOCKHOLDERS' (DEFICIENCY)

    

Share capital 

    

  Authorized:

     

500,000,000

shares of common stock with a par value

    
 

  of $0.00002 per share

    

  Issued, allotted and outstanding:  

    

142,973,410

shares of common stock

 

2,860

 

2,848

Additional paid-in capital

 

370,889

 

284,551

Accumulated other comprehensive income

 

-

 

-

Deficit accumulated

 

(1,872,786)

 

(1,591,272)

Total stockholders' (deficiency)

 

(1,499,037)

 

(1,303,873)

Total liabilities and stockholders' (deficiency)

$

1,931,537

$

1,853,905

 

The accompanying notes are an integral part of these financial statements.

  		 



 

CYOP SYSTEMS INTERNATIONAL INCORPORATED

    

& SUBSIDIARIES

           
            

Consolidated Statement of Stockholders' Deficiency

          

Nine Months Ended September 30, 2003

           

(Unaudited)

           

(Expressed in U.S. Dollars)

           
            
       

Compre-

   

Total

    

Additional

 

hensive

   

Stock-

 

Common stock

 

paid-in

 

income

 

Deficit

 

holders'

 

Shares

Amount

 

capital

 

(loss)

accumulated

 

(deficiency)

            

Balance, December 31, 2002

142,373,410

$

2,848

$

284,551

  

$

(1,591,271)

$

(1,303,872)

            

Imputed interest on loan due to a related party

-

 

-

 

50,350

     

50,350

            

Shares issued for capital equipment at $0.06

           

   Per share on September 30, 2003

600,000

 

12

 

35,988

     

36,000

            

Comprehensive income

           

  - net income for the period

-

 

-

 

-

 

(281,515)

 

(281,515)

 

(281,515)

            
      

$

(281,515)

    

Balance, September 30, 2003

142,973,410

 

14,297

 

370,889

   

( 1,872,786))

 

(1,499,037)

     

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 September 30


For the Nine Months

Ended September 30

 
 
 

2003

2002

2003

2002

Revenue

    

  License fees

-

-

-

240,000

  Service fees

4,030

4,693

23,656

82,544

  Sale – Crediplay – related party (Note 6)

350

-

2,241

-

  Ad sales

-

29,666

-

138,234

  Banking fees

86

-

951

-

 

4,466

34,359

26,848

460,778

  Cost of sales

36,860

48,157

120,844

269,556

  Charge-backs

842

 

842

 

Gross profit (loss)

(33,236)

(13,798)

(94,838)

191,222

     

Advertising and promotion expenses

(1,522)

(24,772)

(78,330)

(40,199)

Commissions

-

(11,464)

-

(36,169)

Software development costs

-

-

-

(94,368)

Gain on disposal of a subsidiary

-

-

-

1,017,262

General and administrative expenses

    

  Accounting and audit

(4,990)

(5,073)

(635)

(23,518)

  Amortization of intangible assets

(7,229)

-

(21,687)

 

  Automobile

-

(11,000)

-

(20,398)

  Bad debt

-

-

(12,189)

-

  Bank charges and interest

(348)

(8,973)

(1,649)

(30,625)

  Contractors and consultants fees

-

-

(32,700)

-

  Depreciation of fixed assets

(3,480)

(5,167)

(11,060)

(16,794)

  Filing fees

(300)

-

(4,354)

 

  Foreign exchange (gain) loss

-

(12,007)

(66)

(10,274)

  Hosting fees

-

(44,947)

 

(89,894)

  Imputed interest expense – related party

(18,262)

 

(50,351)

 

  Legal and other professional fees

(817)

(1,929)

(11,700)

(2,799)

  Office and miscellaneous

(41)

(13,053)

(3,164)

(13,876)

  Press Release expense

(274)

-

(274)

-

  Rent

(487)

(14,678)

(8,599)

(28,801)

  Salaries and benefits

-

-

 

(34,599)

  Telephone and bandwidth

(7,048)

(12,547)

(20,383)

(21,617)

  Travel

(90)

(345)

(2,274)

(345)

 

(44,888)

(165,955)

(259,415)

552,986

Operating income (loss)

(78,124)

 $   (179,753)

(354,253)

$    744,208

Other income (loss)

    

   Interest income related party

22,500

44,947

72,738

89,894

Net income (loss) for the period

(55,624)

(134,806)

(281,515)

834,102

Earnings (loss) per share – basic and diluted

(0.00)

(0.00)

(0.00)

0.01

Weighted average number of

    
 

142,973,410

142,199,875

142,973,410

142,199,875

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

Ended September 30,

For the Nine Months

Ended September 30,

 
 

2003

2002

2003

2002

Cash flows from (used in) operating activities

    

  Net (loss) income for the year

(55,624)

(134,806)

(281,515)

834,102

  Adjustments to reconcile net loss to net cash

    

     Used in operating activities:

    

    - amortization of intangible assets

7.229

-

21,687

-

    - depreciation of fixed assets

3,480

5,167

11,060

26,581

    - imputed interest on related party loan

18,262

-

50,351

2,500

  Changes in assets and liabilities:

    

    - accounts receivable

-

(3,829)

-

150,923

    - accounts payable and accrued liabilities

30,320

31,207

60,598

(425,513)

    - deferred revenue

(350)

-

(2,241)

-

    - interest receivable

(22,500)

-

(67,500)

-

    - loan receivable

-

(5,375)

-

(458,051)

    - note receivable related party

-

-

(5,238)

-

    - prepaid expenses

(1,538)

-

(1,538)

49,191

    - player funds on deposit

(1,673)

32,017

(9,883)

32,017

    - payroll deductions payable

-

-

 

(359,245)

 

(22,394)

(75,619)

(224,219)

(147,495)

Cash flows used in investing activities

    

  Increase in demand loan receivable

-

101,108

-

98,301

  Disposal of fixed assets

-

-

 

125,766

 

-

101,108

-

65,767

Cash flows from financing activities

    

  Proceeds of investor deposit

-

-

-

-

  Increase in due from a director

20,809

(26,000)

224,322

102,967

  Proceeds from demand loans

 

-

-

 
 

20,809

(26,000)

224,322

102,967

Foreign exchange gain (loss) on cash held in

    

  foreign currency

-

1,250

-

1,250

     

Increase (decrease) in cash and cash equivalents

(1,584)

(509)

102

21,239

     

Cash, beginning of period

5,939

4,997

4,253

(16,752)

    

Cash (deficiency), end of period

$

4,355

$

5,737

$

4,355

$

5,737

Cash represented by:

        

  Cash

$

1,422

$

1,287

$

1,422

$

1,287

  Cash with processors

 

2,933

 

4,450

 

2,933

 

4,450

 

$

4,355

$

5,737

$

4,355

$

5,737

The accompanying notes are an integral part of these financial statements.

 

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003

(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 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.

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 stockholder and the sole director.

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

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003

(Unaudited)

(Expressed in U.S. dollars)


2.

Significant Accounting Policies (continued)


(b)

Accounting Estimates

The preparation of financial statements in conformity with 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.

(c)

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.

(d)

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

Leasehold improvements

20% straight-line basis


(e)

Revenue recognition

The Company derives revenue from online internet transaction platform maintenance. Revenues are recognized when players complete an on-line game. The Company has no significant performance requirements, and, there are no material uncertainties regarding customer acceptance and collection of the network maintenance fee is deemed probable.

(f)

Software Development Costs

Software development costs incurred prior to the establishment of technological feasibility are charged to expenses as incurred.

(g)

Advertising and Promotion

The Company expenses advertising and promotion costs as incurred.  Total advertising and promotion costs charged to expenses for the period ended September 30, 2003 amounted to $78,330 (2002 - $40,199).

.


CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003

(Unaudited)

(Expressed in U.S. dollars)


2.

Significant Accounting Policies (continued)


(h)

Foreign Currency Transactions

The Company and CYOP Barbados maintain their accounting records in their functional currency.  Foreign currency transactions are translated into their functional currency in the following manner.

At the transaction date, each asset, liability, revenue and expense is translated into the functional currency by the use of the exchange rate in effect at that date.  At the period end, monetary assets and liabilities are translated into the functional currency by using the exchange rate in effect at that date.  The resulting foreign exchange gains and losses are included in operations.

(i)

Income Taxes

The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns using the liability method.  Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.  The effect on deferred income tax assets and liabilities of a change in income tax rates is included in the period that includes the enactment date.

(j)

Long-Lived Assets Impairment

Effective January 1, 2002, certain long-term assets of the Company are reviewed when changes in circumstances require consideration as to whether their carrying value has become impaired pursuant to guidance established in Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations.  If impairment is deemed to exist, the assets will be written down to fair value.  Prior to January 1, 2002, the Company evaluated long-term assets of the Company in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.  The adoption of SFAS No. 144 did not have a material effect on the consolidated financial statements.

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003

(Unaudited)

(Expressed in U.S. dollars)


2.

Significant Accounting Policies (continued)


(k)

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, interest receivable, note receivable, demand loans, accounts payable and accrued liabilities, player funds on deposit 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 interest receivable and note receivable, the balances of which are stated on the balance sheet. The Company performs ongoing credit evaluations of its 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.


(l)

Accounting for Derivative Instruments and Hedging Activities

The Financial Accounting Standards Board (“FASB”) issued SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the designated as a hedging instrument, the gain or loss is recognized in income in the period of change.

As at September 30, 2003, the Company has not entered into any derivative contracts either to hedge existing risks or for speculative purposes.

(m)

Net Income (Loss) Per Share

Basic net income (loss) per share is 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. Diluted income (loss) per share is equal to the basic income (loss) per share as the stock options to acquire 125,000 common shares that are outstanding at September 30, 2003 are not dilutive.

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003

(Unaudited)

(Expressed in U.S. dollars)


2.

Significant Accounting Policies (continued)

(o)

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.

(p)

New Accounting Pronouncements

In January 2003, the Financial Accounting Standard Board issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities – An Interpretation of Accounting Research Bulletin (ARB) No. 51.  This interpretation addressed the requirements for business enterprises to consolidate related entities in which they are determined to be the primary economic beneficiary as a result of their variable economic interest.  The interpretation is intended to provide guidance in judging multiple economic interests in an entity and in determining the primary beneficiary.  The interpretation outlines disclosure requirements for VIEs in existence prior to January 31, 2003, outlines consolidation requirements for VIEs created after January 31, 2003.  The company has reviewed its major commercial relationship and its overall economic interests with other companies consisting of related parties, vendors, loan creditors and other suppliers to determine the extent of its variable economic interest in these parties.  The review has not resulted in a determination that the Company would be judged to be the primary economic beneficiary in any material relationships, or that any material entities would be judged to be Variable Interest Entities of the Company.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement is effective for contracts entered into or modified after June 30, 2003. We do not expect the implementation of SFAS No. 149 to have a material impact on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 30, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We do not expect the implementation of SFAS No. 150 to have a material impact on our consolidated financial statements.


CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003

(Unaudited)

(Expressed in U.S. dollars)


3.

Fixed assets

 

September 30, 2003

 

Cost

Accumulated depreciation

Net book

Value

  


 

Audio and visual equipment

$

21,558

$

10,861

$

10,697

Computer hardware

96,864

27,144

69,720

Computer software

3,088

3,088

-

Office furniture and equipment

9,227

5,751

3,476

Total

 





 

December 31, 2002

 

Cost

Accumulated depreciation

Net book

Value

  


 

Audio and visual equipment

$

21,558

$    9,081

$    12,477

Computer hardware

60,864

18,259

42,605

Computer software

3,088

3,088

-

Office furniture and equipment

9,227

5,356

3,871

Total


$  35,784

$  58,953

 



 

For the period ended September 30, 2003, depreciation expenses charged to cost of service, software development costs and general and administrative expenses were $11,060.

4.

Intangible Assets


On May 21, 2002, the Company terminated the software development agreement and a software licensing, technical support and operation of customer service and data centre agreement with a related company (related by a common director) was terminated. As at that date $240,000 license fees were billed with $200,000 remaining unpaid at May 21, 2002.

In satisfaction of this unpaid amount and in consideration of terminating the agreement the related company assigned all right, title and interest in:

(a)

the Skill-Bingo Patents and the Skill-Bingo Inventions purchased from FYRC Inc.

(b)

the Skill-Bingo game software

(c)

the website located at http://www.bigrbingo.com

(d)

the trademark “BiG’rBingo”

(e)

the BiG’rBingo customer deposits

The above has been collectively recorded as intellectual property with an expected useful life of 5 years.

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003

(Unaudited)

(Expressed in U.S. dollars)



4.

Intangible Assets   (continued)

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”.  This statement requires that intangible assets with an indefinite life are not amortized.  Intangible assets with a definite life are amortized over its useful life or estimated of its useful life.  Indefinite life intangible assets will be tested for impairment annually, and will be tested for impairment between annual tests if any events occurs or circumstances change that would indicate that the carrying amount may be impaired.  Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that a carrying amount of an asset (asset group) may not be recoverable.  An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated non-discounted cash flows used in determining the fair value of the assets.  The amount of the impairment loss to be recorded is calculated by the excess of the assets carrying value over its fair value.

In accordance with SFAS No. 142, the Company wrote down the acquired intellectual property of $13,719 to its fair value in fiscal year 2002.  The changes in the carrying amount of intellectual property as follows:

  

September 30      2003

 

December 31 2002

  


  

Balance, beginning of period

$

115,665

$

-

  


  

Intangible assets acquired during the period

 


  

- intellectual property

 

-

 

158,300

  


  

Impairment of intangible assets during the period

 

-

 

(13,719)

  


  

Fair value

 

115,665

 

144,581

Amortization for the period

 

(21,687)

 

(28,916)

  


  

Balance, end of period

$

93,978

$

115,665














CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003

(Unaudited)

(Expressed in U.S. dollars)



5.

Loans


(a)

Demand Loans Related Party

 

September 30

2003

December 31 2002

   

i.

Non-interest bearing and unsecured:

    - Jack Carley – related to a director


$  44,625


$  44,625

       -  Mitch White – a director and stockholder

         739,822

    517,613

       -  Gordon Samson – a director

2,114

-

Total

$786,561

$

562,238


(b)

Short-term Loan

 

September 30

 2003

December 31 2002

i.

Interest at 40% per annum, due on January 25, 2002:

  

- Kornfeld MacOff (Cdn$25,000)

$

-

$            -

 



ii.

Interest at 10% per annum, due on June 1, 2002:



- RedRuth Ventures

           212,725

212,725

Total

$ 212,725

$212,725

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003

(Unaudited)

(Expressed in U.S. dollars)


6.

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 stockholder 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.  The promissory note is secured through a first priority lien and security interest in the Crediplay System and amount due to Mr. Mitch White (the “Purchaser”) totalling $517,613 (2001 – nil).  As at December 31, 2001, the present value of the promissory note is $1,565,452, with discount rate at 7% per annum. As at December 31, 2002, the present value of the promissory note is $1,585,034 after calculating at the discount of 7% and accruing interest at 5%. Interest receivable was calculated at 1,800,000 X 5% or $90,000.   

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:

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 2001

$

2,270,394

Accumulated gain recognized

 

(74,083)

Deferred gain as at September 30, 2003

$

2,196,311

 

The 2001 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

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003

(Unaudited)

(Expressed in U.S. dollars)



7.

Related Party Transactions

Related party transactions not disclosed elsewhere in the consolidated financial statements are as follows:

(a)

During the period ending September 30, 2003, the Company accrued imputed interest of $50,351at an interest rate of 10% per annum on interest-free loan on a weighted average totaling $730,492 from a director and stockholder of the Company and an individual related to a director and stockholder of the Company.  

(b)

Interest expenses of $nil was paid to a director and a stockholder of the Company.

(c)

Interest receivable of $22,500 was booked in the quarter as 5% on the $1,800,000 promissory note from a director of the company in connection with the sale and license back of software.  (see note 6)

(d)       See Note 4, and 5 (a)

8.

Income Taxes

As at September 30, 2003 the Company has non-capital losses and undepreciated capital cost of approximately $1,685,000 and $43,000, respectively, which can be carried forward for tax purposes and are available to reduce taxable income of future years. The non-capital losses expire commencing in 2006 through 2009.

The tax effect of temporary differences that give rise to the Company’s deferred tax assets are as follows:

 

September 30

2003

December 31

2002

Undepreciated capital cost of capital assets over their net book value

15,000

13,000

Estimated tax loss carryforwards

590,000

520,000

Less: valuation allowance

(605,000)

(533,000)

 

-

-

   

The valuation allowance reflects the realization of the tax assets is uncertain.










CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003

(Unaudited)

(Expressed in U.S. dollars)



9.

Stock Option  

The following is a summary of the stock option outstanding as at September 30, 2003:

 


Shares

Weighted Average

Exercise Price

Options outstanding at September 30, 2002

125,000

$

0.20


Options Outstanding and Exercisable


Range of Exercise Prices

Number Outstanding and Exercisable

Weighted Average Remaining

Contractual Life


Weighted Average Exercise Price

$0 - $1.00

125,000

2.42

$0.20

    

10.

Geographic Information

The Company’s fixed assets are located in the United States.


11.

Legal Proceedings

Former independent contractors filed complaints under the Employment Standards Act, R.S.B.C. 1996, c. 113 with the Employment Standards Branch of British Columbia. A subsequent Determination made by the Delegate of the Director of Employment Standards dated July 14, 2003 rendered a decision that the three complainants are not independent contractors and determined the complainants to be employees of the Company. The Company on August 21, 2003 appealed this determination. As at this date a final determination has not been rendered by the Employment Standards Tribunal.

Further with respect to the above complainants an audit for payroll taxes is being conducted by Canada Customs and Revenue Agency (“CCRA”).   

12.

Non Cash Investing Activity

During the period, the Company issued 600,000 common shares valued at $36,000 to acquire computer hardware.













CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements

Nine months ended September 30, 2003

(Unaudited)

(Expressed in U.S. dollars)




14.

Share Split


The Company announced on September 26, 2003 that by a special directors resolution dated September 19, 2003: "That the Secretary of the corporation is hereby ordered and directed to obtain the written consent of stockholders owning at least a majority or the voting power of the outstanding stock of the corporation for the following purpose, to amend Article Four to effect a forward split of the stock of the corporation on a basis of one (1) share of the presently outstanding stock being surrendered for five (5) shares of the newly authorized stock."   


The financial statements of the Company have been restated to reflect the five (5) shares to one (1) share forward split.








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 three months and nine months ended September 30, 2003.  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.


We have been primarily focused on developing our product for market launch.  Management has financed most of our operations to date.  Management will continue to fund our operations through shareholders loans for the next 12 months or until such time as we are able to raise equity or debt financing and/or until we have positive cash flow.  We will satisfy cash requirements solely from funds loaned by management or family and friends or private investors.  However, management is not under any contractual obligation to provide continued funding.  We will spend approximately $1/2 million in the next 12 months to maintain current operations at our current expenditure rate; not including any marketing initiatives or expansion plans. Additional funds in the amount of $1.5 million will be required for a complete launch of the Crediplay system including a full marketing budget.


We anticipate contracting human resources as required during the next 12 months.  We did acquire computer hardware at a deemed price of $36,000 with the issuance of 600,000 common shares on September 30,2003. This hardware was primarily servers and we do not expect to acquire any further material physical assets or significant equipment in the next 12 months.  We will not be performing any significant research and development in the next 12 months as our pay for play software is complete and tested.


In September 2002, we launched a suite of free and “pay for play” games including card, strategy, arcade, sports and multiplayer games, terminating our licensing contract with Bingo.com.  These games are licensed from third-party’s and the company continues to talk to and discuss arrangements with third party game developers to ensure leading edge games are available on the proprietary site www.skillarcade.com for our members. As at September 30, 2003 there is approximately 160,000 members and 220 affiliate portals.


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.  


Liquidity and Capital Resources


At September 30, 2003 the Company had a working capital deficit of $(1,070,869) with the deficiency arising primarily from $786,561 in loans from directors, compared to a working capital deficit of  ($518,321) at September 30, 2002 to satisfy requirements for operations for the same period ending September 30, 2002. No assurances can be given that the Company will




successful in realizing sufficient funding to continue operations. While development of the Crediplay system is complete and operational very little cash is available for the process of marketing and promoting the Crediplay system and www.skillarcade.com the proprietary site.


Deterioration of funding sources for internet based businesses has continued into the calendar year 2003 creating financial stresses for the Company. Operations have continued with funding from management. Funding will continue from management for baseline operations. The Company continues to search for investors in this sector in order to raise capital during the remainder of 2003.


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, 2003, there were no material commitments for capital expenditures.


Results of operations for the quarter ended September 30, 2003 as compared to the quarter ended September 30, 2002.


For the quarter ended September 30, 2003 the Company generated revenue of $4,030, from operations. The same period ending September 30, 2002 generated revenues of $34,359 including $29,666 from ad serving. Current revenues are now from a wide variety of affiliates and the company’s proprietary URL.  The Company had general and administrative expenses of $43,366 for the period compared with $129,719 for the same three-month period in 2002. Software development costs were NIL for both comparative periods ending September 30. This is indicative of completion of development. Advertising and promotion was, $1,522 for the three-month period, compared to $24,772 in 2002.  


"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.


Controls and Procedures


The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports required to be filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.






Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.


There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.


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 302 of the Sarbanes-Oxley Act of 2002.


Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


(b)

Reports on Form 8-K











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 13, 2003

Per:    /s/ Mitch White____________

        Mitch White, CEO and Director