FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION NO. 333-120174
PROSPECTUS SUPPLEMENT NO. 2
DATED DECEMBER 6, 2005
TO PROSPECTUS DATED FEBRUARY 9, 2005, AS AMENDED BY POST-EFFECTIVE AMENDMENT
NO. 1 DATED JUNE 20, 2005, AND SUPPLEMENTED BY PROSPECTUS SUPPLEMENT
DATED AUGUST 26, 2005.
16,448,630 SHARES
[Zone 4 Play, Inc. logo]
COMMON STOCK
This prospectus supplement supplements the prospectus dated February 9, 2005, as
amended by post-effective amendment no. 1 dated June 20, 2005, and supplemented
by prospectus supplement dated August 26, 2005, relating to the offer and sale
by the selling stockholders identified in the prospectus of up to 16,448,630
shares of common stock of Zone 4 Play, Inc. This prospectus supplement includes:
o Our Quarterly Report on Form 10-QSB for the quarter ended September
30, 2005, which was filed with the Securities and Exchange Commission
on November 14, 2005.
The information contained in the report included in this prospectus supplement
is dated as of the period of such report. This prospectus supplement should be
read in conjunction with the prospectus dated February 9, 2005, as amended by
post-effective amendment No. 1 dated June 20, 2005, and supplemented by
prospectus supplement dated August 26, 2005, which are to be delivered with this
prospectus supplement. This prospectus supplement is qualified by reference to
the prospectus except to the extent that the information in this prospectus
supplement updates and supersedes the information contained in the prospectus
dated February 9, 2005, as amended by post-effective amendment No. 1 dated June
20, 2005, and supplemented by prospectus supplement dated August 26, 2005,
including any supplements or amendments thereto.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS DECEMBER 6, 2005
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, 2005
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
Commission file number 000-51255
ZONE 4 PLAY, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 98-037121
(State of incorporation) (IRS Employer Identification No.)
103 FOULK ROAD, WILMINGTON, DELAWARE
(972) - 3 - 6471884
(Address and telephone number of principal executive offices)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the last 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.)
Yes [_] No [X]
The number of shares outstanding of the registrant's Common Stock, $0.001 par
value, was 23,925,010 as of November 14, 2005.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ZONE 4 PLAY INC.
AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2005
IN U.S. DOLLARS
UNAUDITED
INDEX
PAGE
----
CONSOLIDATED BALANCE SHEET 2 - 3
CONSOLIDATED STATEMENTS OF OPERATIONS 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5 - 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - 11
ZONE 4 PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. DOLLARS
SEPTEMBER 30,
2005
----------
UNAUDITED
----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,362,729
Trade receivables 271,864
Other accounts receivable and prepaid expenses 64,988
----------
TOTAL current assets 1,699,581
----------
SEVERANCE PAY FUND 94,086
----------
PROPERTY AND EQUIPMENT, NET 769,307
----------
TECHNOLOGY, NET 857,306
----------
TOTAL assets $3,420,280
==========
The accompanying notes are an integral part of the consolidated financial
statements.
- 2 -
ZONE 4 PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
SEPTEMBER 30,
2005
-----------
UNAUDITED
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit $ 13,559
Trade payables 319,078
Employees and payroll accruals 342,828
Deferred revenues 111,113
Accrued expenses and other liabilities 61,935
-----------
TOTAL current liabilities 848,513
-----------
ACCRUED SEVERANCE PAY 276,416
-----------
STOCKHOLDERS' EQUITY:
Common stock of $ 0.001 par value:
Authorized: 75,000,000 shares at September
30, 2005; Issued and outstanding:
23,925,010 shares at September 30, 2005 23,925
Additional paid-in capital 8,894,921
Deferred stock compensation (914,687)
Accumulated other comprehensive loss (19,471)
Deficit accumulated during the development stage (5,689,337)
-----------
TOTAL stockholders' equity 2,295,351
-----------
TOTAL liabilities and stockholders' equity $ 3,420,280
===========
The accompanying notes are an integral part of the consolidated financial
statements.
- 3 -
ZONE 4 PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
PERIOD FROM
COMMENCEMENT
OF OPERATIONS
NINE MONTHS ENDED THREE MONTHS ENDED (APRIL 2,
SEPTEMBER 30, SEPTEMBER 30, 2001) THROUGH
----------------------------- ----------------------------- SEPTEMBER 30,
2005 2004 2005 2004 2005
------------ ------------ ------------ ------------ ------------
UNAUDITED
----------------------------------------------------------------------------------
Revenues:
Software applications $ 868,332 $ 432,883 $ 374,451 $ 140,364 $ 1,679,860
Sale of software applications to
related party - 196,000 - - 704,340
------------ ------------ ------------ ------------ ------------
TOTAL revenues 868,332 628,883 374,451 140,364 2,384,200
Cost of revenues 40,322 113,296 11,971 13,372 460,362
------------ ------------ ------------ ------------ ------------
Gross profit 828,010 515,587 362,480 126,992 1,923,838
------------ ------------ ------------ ------------ ------------
Operating expenses:
Research and development 1,997,539 812,436 740,820 358,915 4,358,332
Selling and marketing 689,258 293,563 216,115 142,012 1,501,499
General and administrative 904,230 277,726 418,487 139,441 1,599,626
------------ ------------ ------------ ------------ ------------
TOTAL operating expenses 3,591,027 1,383,725 1,375,422 640,368 7,459,457
------------ ------------ ------------ ------------ ------------
Operating loss 2,763,017 868,138 1,012,942 513,376 5,535,619
Financial income (expenses), net 31,348 (27,471) 13,603 (21,900) (53,693)
------------ ------------ ------------ ------------ ------------
Net loss $ 2,731,669 $ 895,609 $ 999,339 $ 535,276 $ 5,589,312
============ ============ ============ ============ ============
Basic and diluted net earnings per share $ 0.117 $ 0.049 $ 0.042 $ 0.026
============ ============ ============ ============
Weighted average number of shares of
Common stock used in computing basic
and diluted net loss per share 23,389,406 18,262,350 23,925,010 20,012,050
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
- 4 -
ZONE 4 PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS
PERIOD FROM
COMMENCEMENT
OF OPERATIONS
NINE MONTHS ENDED THREE MONTHS ENDED (APRIL 2,
SEPTEMBER 30, SEPTEMBER 30, 2001) THROUGH
---------------------------- ---------------------------- SEPTEMBER 30,
2005 2004 2005 2004 2005
----------- ----------- ----------- ----------- -----------
UNAUDITED
-------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,731,669) $ (895,609) $ (999,339) $ (535,276) $(5,589,312)
Adjustments required to reconcile net
loss to net cash used in operating
activities:
Depreciation 265,762 32,407 142,314 17,511 341,935
Loss from sale of property - - - - 1,702
Decrease (increase) in other accounts
receivable and prepaid expenses (127,003) 34,350 (64,673) 111,364 (344,376)
Amortization of deferred compensation 376,480 - 139,735 - 678,731
Increase in trade payables 67,537 53,006 76,969 34,887 319,078
Increase in employees and payroll accruals 8,382 39,910 53,485 8,004 342,828
Increase (decrease) in deferred revenues 111,113 (243,500) 98,506 - 111,113
Increase (decrease) in accrued expenses
and other liabilities (131,590) (131,967) (26,868) (208,934) 21,438
Accrued severance pay, net 36,947 54,489 12,606 16,894 182,330
Issuance of Common stock to a service
provider 148,500 51,914 - 12,001 200,414
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities (1,975,541) (1,005,000) (567,265) (543,549) (3,734,119)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (638,146) (62,563) (433,751) (11,478) (927,773)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities (638,146) (62,563) (433,751) (11,478) (927,773)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares in respect of reverse
acquisition (1) - 4,391 - - 4,391
Issuance of Capital stock 3,846,656 2,173,932 - 976,135 6,020,588
Short-term bank credit, net 3,447 (27,662) 3,015 (6,316) 13,559
Receipt of short-term loans from
stockholders and others - 50,000 - - 484,295
Proceeds from short-term loans from
stockholders and others (1,229) (532,395) - (2,097) (484,295)
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities 3,848,874 1,668,266 3,015 967,722 6,038,538
----------- ----------- ----------- ----------- -----------
Effect of exchange rate changes on cash
and cash equivalents (16,535) 620 (13,869) 2,906 (13,917)
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents 1,218,652 601,323 (1,011,870) 415,601 1,362,729
Cash and cash equivalents at beginning of
period 144,077 49,882 2,374,599 235,604 -
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,362,729 $ 651,205 $ 1,362,729 $ 651,205 $ 1,362,729
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
- 5 -
ZONE 4 PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS
PERIOD FROM
COMMENCEMENT
OF OPERATIONS
NINE MONTHS ENDED THREE MONTHS ENDED (APRIL 2,
SEPTEMBER 30, SEPTEMBER 30, 2001) THROUGH
-------------------------- --------------------------- SEPTEMBER 30,
2005 2004 2005 2004 2005
---------- ----------- ----------- ----------- ----------
UNAUDITED
-------------------------------------------------------------------------
NON-CASH TRANSACTIONS:
Purchase of property and equipment $ 42,477 $ - $ 3,511 $ - $ 42,477
========== =========== =========== =========== ==========
Issuance of shares in respect of
minority interest in subsidiary $1,000,000 $ - $ - $ - $1,000,000
========== =========== =========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 1,040 $ 651 $ 389 $ 160 $ 22,932
========== =========== =========== =========== ==========
(1) On February 1, 2004, the Company was acquired by Zone4Play Inc. (Nevada)
through a reverse shell purchase acquisition (see Note 1b).
The accompanying notes are an integral part of the consolidated financial
statements.
- 6 -
ZONE 4 PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 1:- GENERAL
a. Zone 4 Play, Inc. ("the Company") was incorporated under the laws of
the State of Nevada on April 23, 2002, under the name of Old Goat
Enterprises, Inc. On February 1, 2004, the Company acquired (in a
reverse merger transaction, see b hereinafter) Zone 4 Play, Inc.
("Zone 4 Play, (Delaware)"), which was incorporated under the laws of
the State of Delaware on April 2, 2001 (see b below). The Company
develops and markets interactive games applications for Internet,
portable devices and interactive TV platforms.
The Company conducts its operations and business with and through its
wholly-owned subsidiary, Zone 4 Play, (Delaware), and its wholly-owned
subsidiaries, Zone 4 Play, (Israel) Ltd., an Israeli company, which is
engaged in research, development and marketing of the applications,
Zone 4 Play, (UK) Limited, a United Kingdom corporation, which is
engaged in marketing of the applications, and through MixTV Ltd., an
Israeli company incorporated in June 2004, which is engaged in mobile
messaging TV technologies.
The Company's shares are currently traded on the OTC Bulletin Board
under the trading symbol "ZFPI.OB."
b. According to the agreement dated February 1, 2004 between the Company
and Zone 4 Play, (Delaware), the Company issued 10,426,190 shares of
Common stock to the former holders of equity interests in Zone 4 Play,
(Delaware). The acquisition has been accounted for as a reverse
acquisition, whereby the Company was treated as the acquiree and Zone
4 Play, (Delaware) as the acquirer - primarily because the
stockholders of Zone 4 Play, (Delaware) owned approximately 58% of the
Company's Common stock - upon completion of the acquisition.
Immediately prior the consummation of the transaction, the Company had
no material assets and liabilities, hence the reverse acquisition was
treated as a capital stock transaction in which Zone 4 Play,
(Delaware) is deemed to have issued the Common stock held by the
Company's stockholders for the net assets of the Company. The
historical financial statements of Zone 4 Play, (Delaware) became the
historical financial statements of the Company.
c. The Company and its subsidiaries are devoting substantially all of
their efforts toward conducting research, development and marketing of
their software. In the course of its activities, the Company and its
subsidiaries have sustained operating losses and expect such losses to
continue in the foreseeable future. The Company and its subsidiaries
have not generated sufficient revenues and have not achieved
profitable operations or positive cash flows from operations. The
Company's accumulated deficit aggregated to $ 5,689,337 as of
September 30, 2005. There is no assurance that profitable operations,
if ever achieved, could be sustained on a continuing basis.
The Company plans to continue to finance its operations with a
combination of stock issuances and revenues from product sales.
d. Concentration of risk that may have a significant impact on the
Company:
In the nine months ended September 30, 2005, the Company derived 81%
of its revenues from 5 major customers (see Note 4b).
- 7 -
ZONE 4 PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 1:- GENERAL (CONT.)
e. On January 27, 2005, the Company completed a private placement,
pursuant to which it sold an aggregate of 2,659,998 shares of Common
stock for aggregate gross proceeds of $ 3,989,999.
Pursuant to the aforementioned private placement, the Company issued
to its investment bank 25,000 warrants exercisable until December 31,
2007 at a price of $ 0.80 per share, and 53,200 warrants exercisable
until December 31, 2007 at a price of $ 1.50 per share.
f. On January 3, 2005 and April 20, 2005, the Company issued 50,000 and
50,000 shares, respectively, of fully vested Common stock to a service
provider, pursuant to a consulting contract. Expenses in the amount of
$ 69,000 and $ 79,500, respectively, were recorded in the Company's
statements of operations, based on the market share price at the grant
date.
g. On March 10, 2005, the Company signed a stock purchase agreement ("the
Agreement") with NetFun Ltd. ("NetFun"), regarding which the closing
took place in April 2005. According to the Agreement, the Company
acquired the remaining minority interests held by NetFun of 49.9% in
its consolidated subsidiary MixTV Ltd. ("MixTV"), for consideration of
625,000 shares of Common stock of the Company, which have a fair value
of $ 1,000,000 based on the average market price of the shares in or
about the date of the signing of the Agreement. As a result of the
Agreement, the Company holds the entire ownership interest in MixTV.
The acquisition was accounted under the purchase method of accounting
and, accordingly, the purchase price has been allocated to MixTV's
technology. The technology will be amortized over the weighted-average
useful life of three years. No other significant net assets were
acquired.
h. On March 31, 2005, the Company granted to each of its non-employee
directors, an option under the terms of the Company's option plan, to
purchase 192,261 shares of Common stock of the Company at an exercise
price of $ 1.00 per share. Each director's right to exercise such
option will vest in three equal annual installments during a period of
three years commencing in May 2005, provided that the Company's
agreement with such director does not terminate earlier. The Company
recorded deferred stock compensation in the amount of $ 307,618 in
respect of those options.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. The significant accounting policies applied in the annual consolidated
financial statements of the Company as of December 31, 2004 are
applied consistently in these consolidated financial statements.
b. These financial statements should be read in conjunction with the
audited annual financial statements of the Company as of December 31,
2004 and their accompanying notes.
- 8 -
ZONE 4 PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. Accounting for stock-based compensation:
The Company accounts for stock-based compensation in accordance with
the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and
Financial Accounting Standards Board Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation"
("FIN No. 44"). Under APB No. 25, when the exercise price of an
employee's options equals or is higher than the market price of the
underlying Common stock on the date of grant, no compensation expense
is recognized. Under Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
pro-forma information regarding net income and income per share is
required, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of SFAS No.
123.
The fair value of these options is amortized over their vesting period
and estimated at the date of grant using a Black-Scholes multiple
option pricing model with the following weighted average assumptions
for the nine-month periods ended September 30, 2005 and for the year
ended 2004:
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2005 2004
--------- -------
UNAUDITED AUDITED
--------- -------
Risk free interest 2% 2%
Dividend yields 0% 0%
Volatility 0.97 1.11
Expected life (years) 2.1 2.1
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2005 2004
---------- ------------
UNAUDITED
------------------------------
Net loss as reported $2,731,669 $ 895,609
Deduct - stock-based employee compensation expenses
included in reported net loss 376,380 -
Add - stock-based compensation expense determined under
fair value method for all awards 494,459 -
---------- ------------
Pro forma net loss $2,849,748 $ 895,609
========== ============
Basic and diluted net loss per share, as reported $ 0.117 $ 0.049
========== ============
Pro forma basic and diluted net loss per share $ 0.122 $ 0.049
========== ============
- 9 -
ZONE 4 PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 3:- BASIS OF PRESENTATION
The accompanying interim consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States and the rules and regulations of the
Securities and Exchange Commission, and include the accounts of the Company
and its subsidiaries. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States, have been
condensed or omitted pursuant to such rules and regulations. In the opinion
of the Company, the unaudited financial statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position at September 30, 2005 and the
operating results and cash flows for the nine months ended September 30,
2005 and 2004.
The results of operations for the nine months ended September 30, 2005 are
not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year ending December 31, 2005.
NOTE 4:- SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION
Summary information about geographic areas:
The Company manages its business on the basis of one reportable segment
(see Note 1 for a brief description of the Company's business) and follows
the requirements of SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information".
a. The following is a summary of operations within geographic areas,
based on the location of the customers:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2005 2004
-------- --------
UNAUDITED
------------------------
England $527,006 $475,693
United states 210,372 125,257
Australia 100,000 -
Israel 27,080 19,236
Others 3,874 8,697
-------- --------
$868,332 $628,883
======== ========
- 10 -
ZONE 4 PLAY INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA
NOTE 4:- SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION (CONT.)
b. Major customer data as a percentage of total revenues:
NINE MONTHS ENDED
SEPTEMBER 30,
----------------
2005 2004
----- -----
UNAUDITED
----------------
Customer A 27% 34%
===== =====
Customer B (Related party) - 31%
===== =====
Customer C - 13%
===== =====
Customer D 21% -
===== =====
Customer E 12% -
===== =====
Customer F 11% *)
===== =====
Customer G 10% *)
===== =====
*) Represents an amount lower than 10%.
- 11 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-QSB contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and Federal securities laws, and is subject to the safe-harbor created by
such Act and laws. Forward-looking statements may include our statements
regarding our goals, beliefs, strategies, objectives, plans, including product
and service developments, future financial conditions, results or projections or
current expectations. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms, or other comparable terminology. These statements are subject to
known and unknown risks, uncertainties, assumptions and other factors that may
cause actual results to be materially different from those contemplated by the
forward-looking statements. The business and operations of Zone 4 Play, Inc. are
subject to substantial risks, which increase the uncertainty inherent in the
forward-looking statements contained in this report. We undertake no obligation
to release publicly the result of any revision to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Further information
on potential factors that could affect our business is described under the
heading "Risk Related to Our Business" in Part I, Item 1, "Description of
Business" of our Annual Report on Form 10-KSB for the fiscal year ended December
31, 2004. Readers are also urged to carefully review and consider the various
disclosures we have made in this document.
OVERVIEW
Our financial statements are stated in United States Dollars (US$) and are
prepared in accordance with United States Generally Accepted Accounting
Principles.
You should read the following discussion of our financial condition and
results of operations together with the unaudited financial statements and the
notes to unaudited financial statements included elsewhere in this filing.
COMPANY HISTORY
Zone4Play, Inc. (hereinafter referred to as "Zone4Play", "the Company",
"us" or "we") was incorporated under the laws of the State of Nevada on April
23, 2002, as Old Goat Enterprises, Inc. On February 1, 2004, Old Goat
Enterprises, Inc. issued the shareholders of Zone 4 Play, Inc., a Delaware
corporation ("Zone4Play Delaware"), 10,426,190 shares of common stock, in
consideration for the entire share capital of Zone4Play Delaware. Immediately
after the issuance, the shareholders of Zone4Play Delaware held 58% of the
issued and outstanding share capital of Old Goat Enterprises, Inc., and
subsequently changed its name to Zone 4 Play, Inc., a Nevada corporation. The
transaction was accounted for as a reverse acquisition, whereby Old Goat was
treated as the acquired company and Zone4Play Delaware as the acquirer. The
historical financial statements of Zone4Play Delaware became our historical
financial statements. We conduct our operations through our wholly owned
subsidiaries, Zone4Play (Israel) Ltd., an Israeli corporation incorporated in
July 2001, Zone4Play (UK) Limited, a United Kingdom corporation incorporated in
November 2002, and Zone4Play Delaware. On April 27, 2005, pursuant to an
agreement with NetFun Ltd., we increased our ownership percentage of the issued
and outstanding share capital of MixTV Ltd. From 50.1% to 100%. Our shares of
common stock are currently traded on the OTC Bulletin Board under the trading
symbol "ZFPI.OB"
OUR BUSINESS
We are a software and technology developer and provider to companies that
service the interactive gaming industry, delivering cross-platform systems that
are built for mass participation gaming over mobile devices, TV and the
internet. Our software provides and supports play-for-fun and play-for-real
interactive games (currently such play-for-real gaming solutions are only
provided in the UK where fixed odds gaming are permitted by licensed
bookmakers).
We develop five core solutions to companies that offer play-for-real gaming,
namely:
(i) Mobile gaming: the provision of services on mobile devices, including
fixed odds games, multiplayer games, sports betting services, scratch
cards and exchange betting.
(ii) Interactive TV gaming: the provision of software and technology
supporting fixed odds games, skill games, scratch card services, and
multiplayer blackjack and poker.
(iii) Participating/SMS-TV gaming: the provision of services via the
interaction of television broadcasts and mobile text messages, IVR
lines or Java Interaction. Services currently include fixed odds games
and virtual racing.
(iv) Online gaming: the provision of fixed odds and casino games over the
internet.
(v) Multiplayer gaming: multiplayer poker, bingo and blackjack products
that allow competition between players who play on mobile devices,
Interactive TV or the internet.
We also provide:
(i) Games for fun: the provision of play-for-fun gaming alternatives on
mobile, Interactive TV, participating/SMS-TV and the internet.
(ii) Games of skill: the provision of play-for-fun games of skill on
Interactive TV, participating/SMS-TV and the internet are under
development.
Our customers include online gaming operators (Cosmotrade Investments Limited),
bookmakers (Eurobet UK Limited, Littlewoods Promotions Limited, The Gaming
Channel Limited, Two Way Media Limited), betting exchanges (Betfair [the
Sporting Exchange Limited]), cable and satellite television service providers
(CSC Holdings Inc., Echostar Satellite L.L.C., RCN Telecom Services), TV gaming
channel providers (The Poker Channel Ltd., Channel 5 Broadcasting Ltd. ), mobile
operators (O2 (online) Ltd.), internet service providers (Chello Broadband N.V.
and Commonwealth Telephone Enterprises Inc. [CTE]) and hospitality service
providers (LodgeNet Entertainment Corporation). Our technology allows our
customers to generate additional revenue from their existing infrastructure and
user base by allowing a subscriber to switch from one platform, such as
Interactive TV, mobile or internet, to another platform using a single account
with the same account balance and user information. One of the key features of
our software is its ability to utilize a single account to play a game on
mobile, Interactive TV and internet platforms. In addition, our technology
allows mobile service providers, TV broadcasters and channels to provide
additional content as well as an increased variety of services to their
customers.
We enter into license and/or revenue-sharing agreements with our customers under
which the customers use our software and technology to offer games to their
subscribers and pay us a fixed fee and/or a percentage of the net revenues
generated from those games.
We devote substantially all of our efforts toward conducting research,
development and marketing of our software. In the course of these activities, we
have sustained operating losses and expect such losses to continue in the
foreseeable future. To date, we have not generated sufficient revenues to
achieve profitable operations or positive cash flow from operations. On
September 30, 2005, we had an accumulated deficit of $5,689,337. There is no
assurance that profitable operations, if ever achieved, will be sustained on a
continuing basis. During the nine months ended September 30, 2005, we derived
approximately 81% of our revenues from five major customers.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2004
REVENUES AND COST OF REVENUES
Total revenues for the three months ended September 30, 2005 increased by
167% to $374,451 from $140,364 for the three months ended September 30, 2004.
All such revenues were from sales of software applications and distribution
rights. The increase in revenues from software applications was due to new
contracts, such as contracts with Two Way TV Australia Limited, Two Way Media
Limited and Winner.com (UK) Limited, and from license revenues from our customer
Cosmotrade Investments Ltd., which we did not have in 2004.
Deferred revenues include unearned amounts received under services
contracts, and amounts received from customers but not recognized as revenues.
Total deferred revenues for the three months ended September 30, 2005 was
$98,506 compared with $0 for the three months ended September 30, 2004. The
increase is mainly due to a new contract with Two Way TV Australia Limited that
includes advance payments and deferred revenues as well. The deferred revenues
will be included in our revenues at the end of the first year of the contract
with Two Way TV Australia Limited.
Cost of revenues for the three months ended September 30, 2005 decreased by
10% to $11,971 from $13,372 for the three months ended September 30, 2004. For
the three months ended September 30, 2005, gross profit increased by 185% to
$362,480 when compared to gross profit of $126,992 for the three months ended
September 30, 2004. The decrease in the cost of revenues is attributable to the
fact that there was a decrease in the servers hosting expenses in the three
months ended September 30, 2005 compared with the three months ended September
30, 2004.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended September 30,
2005 increased by 106% to $740,820 from $358,915 for the three months ended
September 30, 2004. The increase is primarily attributable to the our new
projects in the United Kingdom and the United States, which involve adapting our
software to new systems and platforms (ITV, mobile, internet, and SMS-TV by our
subsidiary ,MixTV Ltd.), recruitment of employees, subcontractors' expenses,
increased general and administrative expenses allocated to the research and
development department due to its growth and to the amortization of the
technology which was acquired on April 2005 by acquiring the minority shares in
our SMS-TV subsidiary, MixTV Ltd., and to amortization of deferred compensation
related to options which were granted to the relevant employees in December
2004.
SALES AND MARKETING
Sales and marketing expenses for the three months ended September 30, 2005
increased by 52% to $216,115 from $142,012 for the three months ended September
30, 2004. The increase in sales and marketing expenses is primarily attributable
to marketing efforts made mainly in the United Kingdom and the United States
using our Israeli-based team. Sales and marketing expenses consist mainly of
labor costs, trade shows, travel expenses to the United Kingdom and the United
States, and amortization of deferred compensation related to options which were
granted to the relevant employees in December 2004.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended September 30,
2005 increased by 200% to $418,487 from $139,441 for the three months ended
September 30, 2004. The increase in general and administrative expenses is
primarily attributable to recruitment of employees, additional legal and audit
expenses associated with being a reporting company in the U.S, expenses in
relation to the possible admission of our shares to trade on AIM, a market
operated by the London Stock Exchange plc, and amortization of deferred
compensation related to options which were granted to the relevant employees in
December 2004, and to non-employees directors in March 2005.
NET LOSS
Net loss for the three months ended September 30, 2005 was $999,339 as compared
to net loss of $535,276 for the three months ended September 30, 2004. Net loss
per share for the months ended September 30, 2005 was $0.042 as compared to
$0.026 for the three months ended September 30, 2005. The net loss significantly
increased for the three months ended September 30, 2005 and the increase is
mainly attributable to the increase in the operating expenses. Our weighted
average number of shares of common stock used in competing basic and diluted net
loss per share for the three months ended September 30, 2005 was 23,925,010
compared with 20,012,050 for the three months ended September 30, 2004. The
increase is mainly attributable to issuance of 2,659,998 shares of our common
stock which were sold on a private placement in January 2005, to the issuance of
100,000 shares of our common stock which were issued to service provider
pursuant to consulting contract, and to issuance of 625,000 shares of our common
stock to Netfun Ltd. on April 27, 2005, pursuant to an agreement with Netfun
Ltd., under which we increased our ownership percentage of the issued and
outstanding share capital of MixTV Ltd. from 50.1% to 100%.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2004
Our current financial statements reflect MixTV Ltd.'s revenue and losses for the
nine months ended September 30, 2005. MixTV Ltd. was formed by us and Netfun
Ltd. in June 2004 and therefore only its revenue and losses since the date of
its formation have been reflected in the Company's financial statements for the
nine month period ended September 30, 2004.
REVENUES AND COST OF REVENUES
Total revenues for the nine months ended September 30, 2005 increased by
38% to $868,332 from $628,883 for the nine months ended September 30, 2004. All
such revenues were from sales of software applications and distribution rights.
For the nine months ended September 30, 2005, revenues from sales of software
applications to related parties were $0, compared with $196,000 for the nine
months ended September 30, 2004. The increase in revenues from software
applications was due to new contracts such as Two Way TV Australia, Two way
Media Limited and Winner.com (UK) Ltd,, and to an increase in penetration with
our existing customers such as NDS Limited, and CSC Holdings Inc. (Cablevision)
Also in the first nine months of 2005, we had license revenues from our
customers, such as Cablevision, Commonwealth Telephone Enterprises Inc (CTE) (to
which we supplied internet packages for play-for-fun), and Cosmotrade
investments Ltd., which we did not have in 2004.
Deferred revenues include unearned amounts received under services
contracts, and amounts received from customers but not recognized as revenues.
Total deferred revenues for the nine months ended September 30, 2005 was
$111,113 compared with $0 for the nine months ended September 30, 2004. The
increase is mainly due to a new contract with Two Way TV Australia Limited that
includes advance payments and deferred revenues as well. The deferred revenues
will be included in our revenues at the end of the first year of the contract
with Two Way TV Australia Limited.
Cost of revenues for the nine months ended September 30, 2005 decreased by
64% to $40,322 from $113,296 for the nine months ended September 30, 2004. Gross
profit increased by 61% for the nine months ended September 30, 2005 to $828,010
from $515,587 for the same period in 2004. The decrease in the cost of revenues
is attributable to the fact that in the nine months ended September 30, 2004
there were revenues generated from related party transactions that have not been
repeated, nor have any costs been incurred in connection with such revenues, in
the nine months ended September 30, 2005.
RESEARCH AND DEVELOPMENT
Research and development expenses for the nine months ended September 30, 2005
increased by 146% to $1,997,539 from $812,436 for the nine months ended
September 30, 2004. The increase is primarily attributable to the our new
projects in the United Kingdom and the United States, which involve adapting our
software to new systems and platforms (ITV, mobile internet, and SMS-TV by our
subsidiary ,MixTV Ltd.), recruitment of employees, subcontractors' expenses,
increased general and administrative expenses allocated to the research and
development department due to it's growth and to the amortization of the
technology which was acquired on April 2005 by acquiring the minority shares in
our SMS-TV subsidiary, MixTV Ltd., and to amortization of deferred compensation
related to options which were granted to the relevant employees in December
2004.
SALES AND MARKETING
Sales and marketing expenses for the nine months ended September 30, 2005
increased by 135% to $689,258 from $293,563 for the nine months ended September
30, 2004. The increase in sales and marketing expenses is primarily attributable
to marketing efforts made mainly in the United Kingdom and the United States
using our Israeli-based team. Sales and marketing expenses consist mainly of
labor costs, trade shows, travel expenses to the United Kingdom and the United
States, and amortization of deferred compensation related to options which were
granted to the relevant employees in December 2004.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the nine months ended September 30, 2005
increased by 226% to $904,230 from $277,726 for the nine months ended September
30, 2004. The increase in general and administrative expenses is primarily
attributable to recruitment of employees, additional legal and audit expenses
associated with being a reporting company in the U.S. expenses in relation to
the possible admission of our shares to trade on AIM, a market operated by the
London Stock Exchange plc, non- cash investor relations expenses and
amortization of deferred compensation related to options which were granted to
the relevant employees in December 2004, and to non-employees directors, which
were granted on March 2005.
NET LOSS
Net loss for the nine months ended September 30, 2005 was $2,731,669 as compared
to net loss of $895,609 for the nine months ended September 30, 2004. Net loss
per share for the months ended September 30, 2005 was $0.117 as compared to
$0.049 for the three months ended September 30, 2005. The net loss significantly
increased for the nine months ended September 30, 2005 and the increase is
mainly attributable to the increase in the operating expenses. Our weighted
average number of shares of common stock used in competing basic and diluted net
loss per share for the nine months ended September 30, 2005 was 23,389,406
compared with 18,262,350 for the nine months ended September 30, 2004. The
increase is mainly attributable to issuance of 2,659,998 shares of our common
stock which were sold on a private placement in January 2005, to the issuance of
100,000 shares of our common stock which were issued to service provider
pursuant to consulting contract, and to issuance of 625,000 shares of our common
stock to Netfun Ltd on April 27, 2005, pursuant to an agreement with NetFun
Ltd., under which we increased our ownership percentage of the issued and
outstanding share capital of MixTV Ltd. from 50.1% to 100%.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005, total current assets were $1,699,581 and total
current liabilities were $848,513.On September 30, 2005, we had a working
capital surplus of $ 851,068 and an accumulated deficit of $5,689,337. We
finance our operations and plan to continue doing so with a combination of stock
issuances and revenues from product sales. We had working capital of $851,068 on
September 30, 2005 compared with a working capital deficit of $385,993 on
December 31, 2004. Cash and cash equivalents on September 30, 2005 were
$1,362,729, an increase of $1,218,652 from the $144,077 reported on December 31,
2004. Cash balances increased in the nine months ended September 30, 2005
primarily as a result of a stock issuance, offset by the increase in our net
loss for the nine months ended September 30, 2005.
Operating activities used cash of $1,975,541 in the nine months ended
September 30, 2005 and $567,265 in the three months ended September 30, 2005.
Cash used by operating activities in the nine months ended September 30, 2005
results primarily from a net loss of $2,731,669, a $8,382 increase in employee
payroll accruals, a $131,590 decrease in accrued expenses and other liabilities
offset by a $376,480 increase in amortization of deferred compensation, $111,113
increase in deferred revenues, $265,762 of depreciation and $148,500 of
compensation related to issuance of common stock to a service provider.
Investing activities used cash of $638,146 in the nine months ended
September 30, 2005 and $433,751 in the three months ended on the same date. Cash
used by investing activities in the nine and three months ended September 30,
2005 results from the purchase of computer and software equipment and office
furnishings.
Financing activities generated cash of $3,848,874 during the nine months
ended September 30, 2005 and $3,015 for the three months ended September 30,
2005. Cash provided by financing activities for the nine month period ended
September 30, 2005 results primarily from a stock issuance offset slightly by
repayments of short term loans.
On January 27, 2005, we completed a private offering to accredited
investors under Section 4(2) of the Securities Act of 1933, as amended, pursuant
to which it sold an aggregate of 2,659,998 shares of common stock for aggregate
gross proceeds of $3,989,999. We agreed to prepare and file with the SEC a
registration statement covering the resale of the common stock for certain
investors. The registration statement became effective on April 29, 2005.
OUTLOOK
We believe that our future success will depend upon our ability to enhance
our existing products and solutions and introduce new commercially viable
products and solutions addressing the demands of the evolving markets. As part
of the product development process, we work closely with current and potential
customers, distribution channels and leaders in our industry to identify market
needs and define appropriate product specifications. Our current anticipated
levels of revenue and cash flow are subject to many uncertainties and cannot be
assured. In order to have sufficient cash to meet our anticipated requirements
for the next twelve months, we may be dependent upon our ability to obtain
additional financing. The inability to generate sufficient cash from operations
or to obtain the required additional funds could require us to curtail
operations.
ITEM 3. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES - We maintain a system of
disclosure controls and procedures that are designed for the purposes of
ensuring that information required to be disclosed in our Securities and
Exchange Commission ("SEC") reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), as appropriate to allow timely decisions regarding required
disclosures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our CEO and CFO,
of the effectiveness of our disclosure controls and procedures as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based on that
evaluation, our CEO and CFO concluded that our disclosure controls and
procedures are effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING - There has been no change
in our internal control over financial reporting during the third quarter of
2005 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS.
10.1 Agreement, dated August 17, 2005 between Two Way TV Australia Limited and
Zone 4 Play, Inc., a Delaware corporation and a wholly owned subsidiary of
the Company (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 23, 2005).
10.2 Amended Employment Agreement, dated July 25, 2005, by and between the Zone
4 Play (Israel) Ltd., a wholly-owned Israeli subsidiary of the Company and
Shimon Citron (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 27, 2005).
10.3 Summary of Compensation of the Directors of the Company.
31.1 Section 302 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Section 302 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
ZONE 4 PLAY, INC.
Dated: November 14, 2005 By: /S/ Shimon Citron
--------------------
SHIMON CITRON
President and Chief Executive Officer
Dated: November 14, 2005 By: /S/ Uri Levy
--------------------
URI LEVY
Chief Financial Officer