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 March 31, 2006
[_] 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 32,304,448 as of May 1, 2006.
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 MARCH 31, 2006
IN U.S. DOLLARS
UNAUDITED
INDEX
PAGE
-----
CONSOLIDATED BALANCE SHEET 2 - 3
CONSOLIDATED STATEMENTS OF OPERATIONS 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 - 10
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. DOLLARS
MARCH 31,
2006
----------
UNAUDITED
----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $6,335,112
Trade receivables 95,325
Other accounts receivable, prepaid expenses,
and related parties 109,796
----------
TOTAL current assets 6,540,233
----------
SEVERANCE PAY FUND 134,741
----------
PROPERTY AND EQUIPMENT, NET 730,857
----------
ACQUIRED TECHNOLOGY, NET 690,640
----------
Total assets $8,096,471
==========
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
MARCH 31,
------------
2006
------------
UNAUDITED
------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Short-term bank credit $ 10,044
Trade payables 335,627
Employees and payroll accruals 343,462
Accrued expenses and other liabilities 133,648
------------
TOTAL current liabilities 822,781
------------
ACCRUED SEVERANCE PAY 333,015
------------
TOTAL liabilities 1,155,796
------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock of $ 0.001 par value:
Authorized: 75,000,000 shares at March 31, 2006 and 2005;
Issued and outstanding: 32,304,448 and 23,250,010
shares at March 31, 2006 and 2005, respectively 32,304
Additional paid-in capital 14,851,701
Accumulated other comprehensive income (loss) (16,430)
Deficit accumulated during the development stage (7,926,900)
------------
TOTAL stockholders' equity (deficiency) 6,940,675
------------
TOTAL liabilities and stockholders' equity (deficiency) $ 8,096,471
============
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
APRIL 2001
THREE MONTHS ENDED (COMMENCEMENT
MARCH 31, OF OPERATIONS)
-------------------------------- THROUGH MARCH 31,
2006 2005 2006
------------ ------------ ------------
UNAUDITED
----------------------------------------------------
Revenues:
Software applications $ 184,361 $ 150,424 $ 2,058,308
Sale of software applications to related party - - 704,340
------------ ------------ ------------
Total revenues 184,361 150,424 2,762,648
Cost of revenues 97,616 11,065 817,614
------------ ------------ ------------
Gross profit 86,745 139,359 1,945,034
------------ ------------ ------------
Operating expenses:
Research and development 673,454 568,947 5,583,882
Selling and marketing 169,795 235,045 1,849,509
General and administrative 250,022 203,582 2,254,153
------------ ------------ ------------
Total operating expenses 1,093,271 1,007,574 9,687,544
------------ ------------ ------------
Operating loss (1,006,526) (868,215) (7,742,510)
Financial income (expenses), net 2,669 8,343 (82,465)
Taxes on income - - (1,900)
------------ ------------ ------------
Net loss $ (1,003,857) $ (859,872) $ (7,826,875)
============ ============ ============
Basic and diluted net income (loss) per share $ (0.041) $ (0.038)
============ ============
Weighted average number of shares of Common stock used in
computing basic and diluted net loss per share 24,543,867 22,450,344
============ ============
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
APRIL 2001
THREE MONTHS ENDED (COMMENCEMENT
MARCH 31, OF OPERATIONS)
------------------------------------ THROUGH
2006 2005 MARCH 31, 2006
------------ ------------ ------------
UNAUDITED
-----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,003,857) $ (859,872) $ (7,826,875)
Adjustments required to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 162,404 28,294 658,429
Loss from sale of property - - 1,702
Increase in trade and other accounts receivable prepaid
expenses, and related parties 48,110 (9,797) (205,187)
Amortization of deferred compensation 179,643 114,900 998,109
Increase (decrease) in trade payables (94,410) (19,512) 335,628
Increase (decrease) in employees and payroll accruals (5,738) (40,586) 343,462
Increase (decrease) in accrued expenses and other
liabilities (26,684) (78,156) 18,420
Accrued severance pay, net 4,246 13,683 198,274
Compensation related to issuance of common stock to a
service provider 18,000 69,000 298,881
------------ ------------ ------------
Net cash used in operating activities (718,286) (782,046) (5,179,157)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,019) (178,968) (966,401)
------------ ------------ ------------
Net cash used in investing activities (5,019) (178,968) (966,401)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares in respect of reverse acquisition (1) - - 4,391
Issuance of shares and warrants, net 6,462,001 3,846,657 12,482,599
Short-term bank credit, net (7,703) 14,444 10,044
------------ ------------ ------------
Net cash provided by financing activities 6,454,298 3,861,101 12,497,034
------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents 84 432 (16,364)
------------ ------------ ------------
Increase in cash and cash equivalents 5,731,077 2,900,519 6,335,112
Cash and cash equivalents at the beginning of the period 604,035 144,077 -
------------ ------------ ------------
Cash and cash equivalents at the end of the period $ 6,335,112 $ 3,044,596 $ 6,335,112
============ ============ ============
NON-CASH TRANSACTION
Purchase of property and equipment $ 80,081 $ - $ 115,227
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 680 $ 491 $ 24,924
============ ============ ============
(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.
- 5 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 1:- GENERAL
a. Zone4Play Inc. ("the Company") was incorporated under the laws of the
State of Nevada on April 23, 2002 as Old Goat Enterprises, Inc. On
February 1, 2004, the Company acquired Zone4Play, Inc. ("Zone4Play
(Delaware))" (see b. below), which was incorporated under the laws of
the State of Delaware on April 2, 2001, and subsequently changed the
Company's name to Zone4Play, Inc., a Nevada corporation. 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, Zone4Play (Delaware), and its wholly-owned
subsidiaries Zone4Play Limited, an Israeli corporation incorporated in
July 2001, which is engaged in research and development and marketing
of the applications, and Zone4Play (UK) Limited, a United Kingdom
corporation, incorporated in November 2002, which is engaged in
marketing of the applications, and MixTV Ltd., an Israeli corporation
which develops and markets participation TV games applications.
The Company's shares of common stock are currently traded on the OTC
Bulletin Board under the trading symbol "ZFPI.OB."
b. According to the agreement between the Company and Zone4Play
(Delaware), the Company issued 10,426,190 shares of common stock to
the former holders of equity interest in Zone4Play (Delaware). The
acquisition has been accounted for as a reverse acquisition, whereby
the Company was treated as the acquiree and Zone4Play (Delaware) as
the acquirer, primarily because Zone4Play (Delaware) shareholders
owned a majority, approximately 58% of the Company's common stock,
upon completion of the acquisition. Immediately prior to the
consummation of the transaction, the Company had no material assets
and liabilities, hence the reverse acquisition is treated as a capital
stock transaction in which Zone4Play (Delaware) is deemed to have
issued the common stock held by the Company shareholders for the net
assets of the Company. The historical financial statements of
Zone4Play (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. The Company's and its subsidiaries' activities also
include raising capital and recruiting personnel. In the course of
such 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
flow from operations. The Company's accumulated deficit during the
development stage aggregated to $ 7,926,900 as of March 31, 2006.
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 issuance and private placements and revenues from
product sales.
- 6 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 1:- GENERAL
d. On January 15, 2006, the Company signed an agreement with a new
non-employee director. Under which the Company granted an option to
purchase up to 192,261 shares of common stock of the Company under the
terms of the Company's option plan ("Option"). The exercise price for
the shares subject to the Option is $ 1 per share of common stock of
the Company on the date of grant. The Option vests in three equal
annual installments, whereby the director has the right to purchase
1/3 of the shares subject to the Option at the expiration of the
first, second and third year respectively from the date of the
agreement, provided that the director remains a member of the Board of
Directors at such time. In the event of termination of the agreement
for cause at any time, the Option, if not exercised, shall terminate
and be cancelled and non-exercisable.
e. On February 2, 2006, the Company issued 30,000 shares of common stock
to a service provider, pursuant to a service agreement. Therefore, an
expense was recognized on the date of grant, according to EITF 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services".
f. On March 24, 2006, the Company completed a $4.5 million private
placement consisting of 6,234,485 units consisting of one share of its
common stock of $ 0.001 par value and one warrant to purchase one
share of common stock each. The purchase price per unit for the common
stock and the warrant was $ 0.725. Each warrant is exercisable for 36
months at a price of $ 1.125 per share. The Company agreed to prepare
and file with the Securities and Exchange Commission ("SEC") a
registration statement covering the resale of the common stock on or
before May 9, 2006 for certain investors. If such registration
statement covering the shares of common stock purchased by those
certain investors is not declared effective within 120 days from the
closing date, then the Company must pay those investors liquidated
damages equal to 1% per month of the aggregate purchase price paid by
them. On May 4, 2006 the Company filed a registration statement
covering the resale of the shares and the shares underlying the
warrants.
g. On March 30, 2006, the Company completed a $2 million private
placement consisting of 2,000,000 units consisting of one share of its
common stock of $ 0.001 par value and one warrant to purchase one
share of Common stock each. The purchase price per unit for the common
stock and the warrant was $1. Each warrant is exercisable for 36
months at a price of $ 1.35 per share. The Company agreed to prepare
and file with the SEC a registration statement covering the resale of
the common stock on or before May 15, 2006 for certain investors. If
such registration statement covering the shares of common stock
purchased by those certain investors is not declared effective within
120 days from the closing date, then the Company must pay those
investors liquidated damages equal to 1% per month of the aggregate
purchase price paid by them. On May 4, 2006 the Company filed a
registration statement covering the resale of the shares and the
shares underlying the warrants.
h. Concentration of risk that may have a significant impact on the
Company:
The Company derived 82% of its revenues from 3 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
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. The significant accounting policies applied in the annual consolidated
financial statements of the Company as of December 31, 2005 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,
2005 and their accompanying notes.
c. Accounting for stock-based compensation
Effective January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standard ("SFAS") No. 123R,
"Share-Based Payment" ("SFAS 123(R)"), which requires the Company to
measure all employee stock-based compensation awards using a fair
value method and record the related expense in the financial
statements. The Company elected to use the modified prospective method
of adoption which requires that compensation expense be recorded in
the financial statements over the expected requisite service period
for any new options granted after the adoption of SFAS 123(R) as well
as for existing awards for which the requisite service has not been
rendered as of the date of adoption and requires that prior periods
not be restated.
The following table shows the total stock-based compensation charge
included in the Consolidated Statement of Earnings:
THREE MONTHS
ENDED
MARCH 31,
---------
2006
---------
(UNAUDITED)
---------
Research and development expenses 79,887
Sales and marketing expenses 27,122
General and administrative expenses 72,634
---------
Total $ 179,643
=========
Under SFAS 123(R), the charge has been determined as if the Company
had accounted for its employee stock options under the fair value
method of SFAS 123(R). The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
- 8 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
THREE MONTHS ENDED
MARCH 31,
------------------
2006
------------------
Unaudited
------------------
Risk free interest 4.74%
Dividend yields 0%
Volatility 63%
Expected forfeiture 10%
Expected life 6 years
A summary of the Company's share option activity to employees and
directors, and related information is as follows:
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2006 2005
------------------ ------------------
UNAUDITED UNAUDITED
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE
---------- ----- ---------- -----
$ $
----- -----
Outstanding at the
beginning of the year 2,194,522 0.68 1,460,000 0.68
Granted 192,261 1.00 576,783 1.12
Forfeited 40,000 0.70 20,000 1.00
--------- ---------
Outstanding at the end of
the quarter 2,346,783 0.71 2,016,783 0.71
========= ==== ========= ====
Options exercisable at the
end of the quarter 1,136,521 0.63 453,337 0.56
========= ==== ========= ====
- 9 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company issues stock options to its employees, directors and
certain consultants and provides the right to purchase stock pursuant
to approved stock option and employee stock purchase programs. Prior
to the adoption of SFAS 123(R) the Company elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Options Issued to Employees" and related interpretations (collectively
"APB No. 25"), in accounting for its stock option plans. Under APB No.
25, when the exercise price of an employee stock option is less than
the market price of the underlying stock on the date of grant,
compensation expense is recognized. All options granted under these
plans had an exercise price equal to the fair market value of the
underlying common stock on the date of grant.
The following table illustrates the pro forma effect on net income and
net income per share for the three months ended March 31, 2005 had we
applied the fair value recognition provisions of SFAS No. 123:
THREE MONTHS ENDED
MARCH 31,
--------
2005
--------
UNAUDITED
--------
Net loss as reported $859,872
========
Deduct: stock-based employee compensation - intrinsic value 114,900
Add: Total stock-based employee compensation expense
determined under the fair value based method of SFAS No
123 for all awards 147,687
--------
Pro forma net loss $892,659
========
Net loss per share:
Basic and diluted - as reported $ 0.038
========
Basic and diluted - pro forma $ 0.040
========
The Company applies Statement of Financial Accounting Standard No. 123
("SFAS No.123") and EITF 96-18, "Accounting for Equity Instruments
that Are Issued to Other than Employees for Acquiring or in
Conjunction with Selling, Goods or Services" with respect to options
and warrants issued to non-employees. SFAS No. 123 requires use of an
option valuation model to measure the fair value of these options at
the measurement date, as defined in EITF 96-18.
- 10 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 3:- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (including
non-recurring adjustments attributable to reorganization and severance and
impairment) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2006 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2006. For further information, reference is made to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2005.
The interim condensed consolidated financial statements incorporate the
financial statements of the Company and all of its subsidiaries. All
significant intercompany balances and transactions have been eliminated on
consolidation.
The significant accounting policies applied in the annual consolidated
financial statements of the Company as of December 31, 2005, contained in
the Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission on April 11, 2006, have been applied consistently in
these unaudited interim condensed consolidated financial statements.
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 Statement of Financial Accounting Standard 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:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2006 2005
-------- --------
TOTAL REVENUES
-----------------------
England $ 38,734 $103,506
Australia 87,500 -
United states 56,709 35,264
Others 1,418 11,654
-------- --------
$184,361 $150,424
======== ========
- 11 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 4:- SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION (CONT)
b. Major customer data as a percentage of total revenues:
2006 2005
------------ ----------
Customer A - 59%
============ ==========
Customer B - 13%
============ ==========
Customer C - 11%
============ ==========
Customer D 47% -
============ ==========
Customer E 21% *)
============ ==========
Customer F 14% *)
============ ==========
*) Represents an amount lower than 10%.
NOTE 5:- RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2006, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments" ("FAS 155"),
which amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133") and SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS 140").
FAS 155 provides guidance to simplify the accounting for certain hybrid
instruments by permitting fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative, as well as clarifies that
beneficial interests in securitized financial assets are subject to FAS 133. In
addition, FAS 155 eliminates a restriction on the passive derivative instruments
that a qualifying special-purpose entity may hold under FAS 140. FAS 155 is
effective for all financial instruments acquired, issued or subject to a new
basis occurring after the beginning of an entity's first fiscal year that begins
after September 15, 2006. We believe that the adoption of this statement will
not have a material effect on our financial condition or results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" ("FAS 156"), which amends SFAS No. 140. FAS 156 provides
guidance addressing the recognition and measurement of separately recognized
servicing assets and liabilities, common with mortgage securitization
activities, and provides an approach to simplify efforts to obtain hedge
accounting treatment. FAS 156 is effective for all separately recognized
servicing assets and liabilities acquired or issued after the beginning of an
entity's fiscal year that begins after September 15, 2006, with early adoption
being permitted. We believe that the adoption of this statement will not have a
material effect on our financial condition or results of operations
NOTE 6:- SUBSEQUENT EVENTS
a. On April 3, 2006, pursuant to Section 4(2) of the Securities Act of
1933, as amended, we issued to a company, which is owned by the
Company's Chief Executive Officer, an option to buy 1,863,000 shares
of the Company's common stock with an exercise price of $1.15 per
share in consideration for services provided by the Chief Executive
Officer to the Company. The option vests in the following manner:
1,500,750 shares on July 1, 2006, two equal installments of 155,250
shares, one vests on October 1, 2006 and one vests on January, 1, 2007
and an installment of 51,750 shares on April 1, 2007.
b. On April 27, 2006, the Company issued to two of its advisors warrants
to purchase a total of 200,000 shares of the Company's common stock
with an exercise price of $1.00 per share.
- 12 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-QSB contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
Federal securities laws, and is subject to the safe-harbor created by such Act
and laws. Forward-looking statements may include our statements regarding our
goals, beliefs, strategies, objectives, plans, including product and service
developments, future financial conditions, results or projections or current
expectations. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms, or other comparable terminology. These statements are subject to
known and unknown risks, uncertainties, assumptions and other factors that may
cause actual results to be materially different from those contemplated by the
forward-looking statements. The business and operations of Zone 4 Play, Inc. are
subject to substantial risks, which increase the uncertainty inherent in the
forward-looking statements contained in this report. We undertake no obligation
to release publicly the result of any revision to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Further information
on potential factors that could affect our business is described under the
heading "Risk Related to Our Business" in Part I, Item 1, "Description of
Business" of our Annual Report on Form 10-KSB for the fiscal year ended December
31, 2005. Readers are also urged to carefully review and consider the various
disclosures we have made in this report.
OVERVIEW
Our financial statements are stated in United States Dollars (US$) 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 report.
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 United Kingdom where fixed odds gaming are permitted by licensed
bookmakers).
We offer 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 currently
supporting fixed odds games.
(iii) Participating TV gaming: the provision of services via the interaction of
television broadcasts and mobile text messages, IVR (interactive voice
response) lines or Java interaction.
(iv) Online gaming: the provision of fixed odds and casino games over the
internet.
(v) Multiplayer blackjack tournaments: 24/7 availability of variety of
blackjack tournaments games based on a peer-to-peer technology allowing
users to compete against each other and not against the "house".
We also offer games for fun and skills games: the provision of play-for-fun
gaming alternatives on mobile, Interactive TV, participating TV and the
internet.
Our customers include online gaming operators (Cosmotrade Investments Limited),
bookmakers (Eurobet UK 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., RCN Telecom
Services), TV gaming channel providers (The Poker Channel Ltd., Channel 5
Broadcasting Ltd (in the UK)), mobile operators (O2 (online) Ltd.), internet
service providers (Chello Broadband N.V., 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, internet or
participating TV to another platform using a single account with the same
account balance and user information. 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. As of March
31, 2006, we had an accumulated deficit of $7,926,900. There is no assurance
that profitable operations, if ever achieved, will be sustained on a continuing
basis. During the three months ended March 31, 2006, we derived approximately
82% of our revenues from three major customers.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2005
REVENUES AND COST OF REVENUES
Total revenues for the three months ended March 31, 2006 increased by 23% to
$184,361 from $150,424 for the three months ended March 31, 2005. 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.
Cost of revenues for the three months ended March 31, 2006 increased by 782% to
$97,616 from $11,065 for the three months ended March 31, 2005. The increase in
the cost of revenues is attributable to amortization of the technology which was
acquired on April 2005 by acquiring the minority shares in our SMS-TV
subsidiary, MixTV Ltd. For the three months ended March 31, 2006, gross profit
decreased by 38% to $86,745 when compared to gross profit of $139,359 for the
three months ended March 30, 2005.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended March 31, 2006
increased by 18% to $673,454 from $568,947 for the three months ended March 31,
2005. 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, increased general and administrative
expenses allocated to the research and development department due to its growth
and due to accounting changes as a result of adopting SFAS 123R effective
January 1, 2006.
SALES AND MARKETING
Sales and marketing expenses for the three months ended March 31, 2006 decreased
by 28% to $169,795 from $235,045 for the three months ended March 31, 2005. The
decrease in sales and marketing expenses is primarily attributable to decreased
participation in trade shows and a decrease in marketing travel to the US and
the UK, offset by accounting changes related to the adoption of SFAS 123R
effective January 1, 2006.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended March 31, 2006
increased by 23% to $250,022 from $203,582 for the three months ended March 31,
2005. The increase in general and administrative expenses is primarily
attributable to recruitment of employees, additional expenses in relation to the
possible admission of our shares to trade on AIM, a market operated by the
London Stock Exchange plc and due to accounting changes as a result of adopting
SFAS 123R effective January 1, 2006.
NET LOSS
Net loss for the three months ended March 31, 2006 was $1,003,857 as compared to
net loss of $859,872 for the three months ended March 31, 2005. Net loss per
share for the three months ended March 31, 2006 was $0.041 as compared to $0.038
for the three months ended March 31, 2005. The net loss increased for the three
months ended March 31, 2006 mainly due to the increase in the operating
expenses. Our weighted average number of shares of common stock used in
computing basic and diluted net loss per share for the three months ended March
31, 2006 was 24,543,867 compared with 22,450,344 for the three months ended
March 31, 2005. The increase was due to the issuance of additional shares in two
private placements, as discussed further below.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2006, total current assets were $6,540,233 and total current
liabilities were $822,781. On March 31, 2006, we had a working capital surplus
of $5,717,452 and an accumulated deficit of $7,926,900. 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 $5,717,452 on March
31, 2006 compared with a working capital deficit of $20,093 on December 31,
2005. Cash and cash equivalents on March 31, 2006 were $6,335,112, an increase
of $5,731,077 from the $604,035 reported on December 31, 2005. Cash balances
increased in the three months ended March 31, 2006 primarily as a result of the
stock issuances described below, offset by the increase in our net loss for the
three months ended March 31, 2006.
Operating activities used cash of $718,286 in the three months ended March 31,
2006. Cash used by operating activities in the three months ended March 31, 2006
results primarily from a net loss of $1,003,857, a $5,738 increase in employee
payroll accruals, a $26,684 increase in accrued expenses and other liabilities
offset by a $179,643 increase in amortization of deferred compensation, $162,404
of depreciation, of which $83,333 is related to amortization of acquired
technology, and $18,000 of compensation related to issuance of common stock to a
service provider.
Investing activities used cash of $5,019 in the three months ended March 31,
2006. Cash used by investing activities in the three months ended March 31, 2006
results from the purchase of computer and software equipment.
Financing activities generated cash amount of $6,454,298 during the three months
ended March 31, 2006. Cash provided by financing activities for the three month
period ended March 31, 2006 results primarily from stock issuances offset
slightly by repayments of short term bank credit.
On March 24, 2006, pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder, we completed an offering that
consisted of 6,234,485 units sold at a price of $.725 per unit. Each unit is
comprised of one share of our common stock (the "March 24 Shares") and a warrant
to purchase one share at an exercise price of $1.125 per share for a period of
36 months ("March 24 Warrants"), to certain accredited investors ("March 24
Investors") for aggregate gross proceeds of $4,520,000.
On March 30, 2006, pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder, we completed an offering that
consisted of 2,000,000 units sold at a price of $1.00 per unit. Each unit is
comprised of one share of our common stock ("March 30 Shares") and a warrant to
purchase one share at an exercise price of $1.35 per share for a period of 36
months (" March 30 Warrants"), to certain accredited investors ("March 30
Investors") for aggregate gross proceeds of $2,000,000.
Pursuant to the terms and conditions of Registration Rights Agreements between
us and the March 24 Investors and between us and the March 30 Investors, we
agreed to prepare and file a registration statement with the Securities and
Exchange Commission covering the resale of the March 24 Shares and the shares
underlying the March 24 Warrants, and the March 30 Shares and the shares
underlying the March 30 Warrants within 45 days from the closing and use our
best efforts to obtain effectiveness of such registration statement within 120
days from closing. In case the we do not meet these filing deadlines, we will be
required to pay a monthly penalty of 1% of the aggregate investment made by the
March 24 Investors and by the March 30 Investors. On May 4, 2006 we filed a
registration statement covering the resale of the March 24 Shares and the shares
underlying the March 24 Warrants, and the March 30 Shares and the shares
underlying the March 30 Warrants.
CRITICAL ACCOUNTING POLICY
Effective January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standard (SFAS) No. 123R, "Share-Based Payment" ("SFAS
123(R)"), which requires the Company to measure all employee stock-based
compensation awards using a fair value method and record the related expense in
the financial statements. The Company elected to use the modified prospective
method of adoption which requires that compensation expense be recorded in the
financial statements over the expected requisite service period for any new
options granted after the adoption of SFAS 123(R) as well as for existing awards
for which the requisite service has not been rendered as of the date of adoption
and requires that prior periods not be restated.
Total expenses related to the implementation of SFAS 123R in the three months
ended March 31, 2006 accounted for $39,908.
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 first quarter of
2006 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On April 3, 2006, pursuant to Section 4(2) of the Securities Act of 1933, as
amended, we issued to Citron Investments Ltd., which is owned by Shimon Citron,
an option to buy 1,863,000 shares of the Company's common stock with an exercise
price of $1.15 per share in consideration for services provided by Mr. Citron to
the Company. The option vests in the following manner: 1,500,750 shares on July
1, 2006, two equal installments of 155,250 shares, one vests on October 1, 2006
and one vests on January, 1, 2007, and an installment of 51,750 shares on April
1, 2007.
ITEM 6. EXHIBITS.
10.1 Master Services Agreement dated April 17, 2006, by and among
Zone4Play, Inc., Two Way Media Limited and Ladbrokes E-Gaming Limited,
and Statement of Work dated April 17, 2006 issued by Ladbrokes
E-Gaming Limited (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 April 20, 2006).
10.2 Amendment to 2004 Global Share Option Plan of Zone 4 Play, Inc.
(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 May 10, 2006).
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.
99.1 Letter from the Company to Mr. Ori Sasson and Mr. Jonathan Medved
dated March 24, 2006 (incorporated by reference to Exhibit 99.1 to the
Company's registration statement on Form SB-2 filed with the
Securities and Exchange Commission on May 4, 2006).
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: May 15, 2006 By: /s/ Shimon Citron
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Shimon Citron
President and Chief Executive Officer
Dated: May 15, 2006 By: /s/ Uri Levy
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Uri Levy
Chief Financial Officer