FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION NO. 333-120174
PROSPECTUS SUPPLEMENT NO. 4
DATED NOVEMBER 17, 2006
TO PROSPECTUS DATED FEBRUARY 9, 2005, AS AMENDED BY POST-EFFECTIVE AMENDMENT NO.
1 DATED JUNE 20, 2005, AND BY POST EFFECTIVE AMENDMENT NO. 2 DATED JULY 27, 2006
AND SUPPLEMENTED BY PROSPECTUS SUPPLEMENTS DATED AUGUST 26, 2005, DECEMBER 6,
2005 AND AUGUST 15, 2006, RESPECTIVELY.
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 by post
effective amendment no. 2 dated July 27, 2006, and supplemented by prospectus
supplements dated August 26, 2005, December 6, 2005 and August 15, 2006,
respectively, 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, 2006, which was filed with the Securities and Exchange Commission
on November 14, 2006.
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 by post effective
amendment no. 2 dated July 27, 2006, and supplemented by prospectus supplements
dated August 26, 2005, December 6, 2005 and August 15, 2006, respectively, 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 by post effective amendment no. 2 dated
July 27, 2006, and supplemented by prospectus supplements dated August 26, 2005,
December 6, 2005 and August 15, 2006, respectively, 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 NOVEMBER 17, 2006
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, 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 32,319,031 as of November 1, 2006.
ZONE 4 PLAY, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet 2-3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5-6
Notes to the Consolidated Financial Statements 7-15
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3 Controls and Procedures 22
PART II. OTHER INFORMATION
Item 5 Other Events 24
Item 6 Exhibits 24
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, 2006
IN U.S. DOLLARS
UNAUDITED
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. DOLLARS
SEPTEMBER 30,
2006
----------
UNAUDITED
----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,624,361
Trade receivables 114,349
Other accounts receivable and prepaid expenses 128,236
----------
TOTAL current assets 3,866,946
----------
SEVERANCE PAY FUND 143,482
----------
PROPERTY AND EQUIPMENT, NET 732,744
----------
ACQUIRED TECHNOLOGY, NET 523,974
----------
TOTAL assets $5,267,146
==========
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
SEPTEMBER 30,
2006
------------
UNAUDITED
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit $ 10,720
Trade payables 225,903
Employees and payroll accruals 396,469
Accrued expenses and other liabilities 67,478
------------
TOTAL current liabilities 700,570
------------
ACCRUED SEVERANCE PAY 367,737
------------
TOTAL liabilities 1,068,307
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Common stock of $ 0.001 par value:
Authorized: 75,000,000 shares as of September 30, 2006
and 2005; Issued and outstanding: 32,315,698 shares
and 23,925,010 at September 30, 2006 and 2005, respectively 32,315
Additional paid-in capital 16,442,561
Accumulated other comprehensive loss (16,334)
Deficit accumulated during the development stage (12,259,703)
------------
TOTAL stockholders' equity 4,198,839
------------
$ 5,267,146
============
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
PERIOD FROM
COMMENCEMENT OF
NINE MONTHS ENDED THREE MONTHS ENDED OPERATIONS (APRIL
SEPTEMBER 30, SEPTEMBER 30, 2, 2001) THROUGH
------------------------------ ------------------------------- SEPTEMBER 30,
2006 2005 2006 2005 2006
------------ ------------ ------------ ------------ ------------
UNAUDITED UNAUDITED
------------------------------------------------------------------- ------------
Revenues:
Software applications $ 602,673 $ 868,322 $ 212,714 $ 374,451 $ 2,476,620
Sale of software applications to
related party - - - - 704,340
------------ ------------ ------------ ------------ ------------
TOTAL revenues 602,673 868,322 212,714 374,451 3,180,960
Cost of revenues 293,166 183,016 95,527 95,304 1,013,164
------------ ------------ ------------ ------------ ------------
Gross profit 309,507 685,306 117,187 279,147 2,167,796
------------ ------------ ------------ ------------ ------------
Operating expenses:
Research and development 2,423,921 1,854,835 889,484 657,487 7,334,349
Selling and marketing 1,775,739 689,258 405,345 216,115 3,455,453
General and administrative 1,446,018 904,230 432,567 418,487 3,450,149
------------ ------------ ------------ ------------ ------------
TOTAL operating expenses 5,645,678 3,448,333 1,727,945 1,292,089 14,239,951
------------ ------------ ------------ ------------ ------------
Operating loss 5,336,171 2,763,017 1,610,208 1,012,942 12,072,155
Financial income (expenses), net 489 31,348 (6,678) 13,603 (85,623)
Taxes on income 1,900
------------ ------------ ------------ ------------ ------------
Net loss $ 5,336,660 $ 2,731,669 $ 1,616,886 $ 999,339 $ 12,159,678
============ ============ ============ ============ ============
Basic and diluted net loss per
share $ 0.18 $ 0.117 $ 0.05 $ 0.042
============ ============ ============ ============
Weighted average number of shares
of Common stock used in
computing basic and diluted net
loss per share 29,752,443 23,389,406 32,315,698 23,925,010
============ ============ ============ ============
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
NINE MONTHS ENDED THREE MONTHS ENDED OPERATIONS (APRIL
SEPTEMBER 30, SEPTEMBER 30, 2, 2001) THROUGH
------------------------------- ------------------------------- SEPTEMBER 30,
2006 2005 2006 2005 2006
------------ ------------ ------------ ------------ ------------
UNAUDITED UNAUDITED
--------------------------------------------------------------------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (5,336,660) $ (2,731,669) $ (1,616,886) $ (999,339) $(12,159,678)
Adjustments required to
reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 481,323 265,762 166,538 142,314 977,348
Loss from sale of property - - - - 1,702
Increase in trade and other
accounts receivable and
prepaid expenses 10,709 (127,003) (1,419) (64,673) (242,588)
Amortization of deferred
compensation 1,841,209 376,480 300,520 139,735 2,659,675
Increase (decrease) in trade
payables (208,079) 67,537 25,654 76,969 221,959
Increase (decrease) in
employees and payroll
accruals 47,269 8,382 3,090 53,485 396,469
Increase (decrease) in accrued
expenses and other
liabilities (12,773) (20,477) (57,472) 71,638 32,331
Accrued severance pay, net 30,227 36,947 (27,703) 12,606 224,255
Compensation related to
issuance of Common stock to
a service provider 18,000 148,500 - - 298,881
------------ ------------ ------------ ------------ ------------
Net cash used in operating
activities (3,128,775) (1,975,541) (1,207,678) (567,265) (7,589,646)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (235,295) (638,146) (123,704) (433,751) (1,196,677)
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities (235,295) (638,146) (123,704) (433,751) (1,196,677)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of shares in respect of
reverse acquisition - - - - 4,391
Issuance of shares and warrants,
net 6,385,119 3,846,656 (13,137) - 12,405,717
Exercise of employees stock
options 6,187 - - 6,187
Short-term bank credit, net (7,027) 3,447 82 3,015 10,720
Repayment of short-term loans
from stockholders and others - (1,229) - - -
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 6,384,279 3,848,874 (13,055) 3,015 12,427,015
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes on
cash and cash equivalents 117 (16,535) (260) (13,869) (16,331)
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents 3,020,326 1,218,652 (1,344,697) (1,011,870) 3,624,361
Cash and cash equivalents at the
beginning of the period 604,035 144,077 4,969,058 2,374,599 -
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at the
end of the period $ 3,624,361 $ 1,362,729 $ 3,624,361 $ 1,362,729 $ 3,624,361
============ ============ ============ ============ ============
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
NINE MONTHS ENDED THREE MONTHS ENDED OPERATIONS (APRIL
SEPTEMBER 30, SEPTEMBER 30, 2, 2001) THROUGH
--------------------------- ----------------------------- SEPTEMBER 30,
2006 2005 2006 2005 2006
----------- ---------- ------------ ----------- ----------
UNAUDITED UNAUDITED
-------------------------------------------------------------- ----------
NON-CASH TRANSACTION
Purchase of property and
equipment $ 3,945 $ 42,477 $ 3,945 $ 3,511 $ 121,356
=========== ========== ============ =========== ==========
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 $ 1,669 $ 1,040 $ 1,038 $ 389 $ 25,913
=========== ========== ============ =========== ==========
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
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 subsidiaries, (1) Zone4Play (Delaware), (2) Zone4Play
Limited, an Israeli corporation incorporated in July 2001, which is
engaged in research and development and marketing of the applications,
(3) Zone4Play (UK) Limited, a United Kingdom corporation, incorporated
in November 2002, which is engaged in marketing of the applications,
(4) MixTV Ltd., an Israeli corporation which develops and markets
participation TV games applications, and (5) Gaming Ventures Plc
("GV") , a company incorporated in the Isle of Man.
On July 11, 2006, the Company formed GV. GV conducts its operations
and business with and through its wholly-owned subsidiaries: RNG
Gaming Limited ("RNG"), an Isle of Man corporation incorporated on
July 12, 2006 which is engaged in development of its software and
licensing it to third parties, and Get21 Limited ("Get21"), an Isle of
Man corporation incorporated on July 12, 2006 which is engaged in
providing marketing services of gaming applications.
According to an agreement dated July 12, 2006 between GV and Zone4Play
(Delaware), GV purchased from Zone4Play (Delaware) all right, title,
and interest in its Intellectual Property Rights and assets related to
its Black Jack business ("BJ Business") on a "Going concern" and "As
is" basis, in exchange for a promissory note in the principal amount
of $2.25 million. The valuation was based on an appraisal report made
by an independent appraiser. This Promissory Note shall be in effect
for five years (60 months). Principal shall be paid in five (5) equal
annual installments of $450,000 each and will carry interest of $US
Libor +1.5% per annum.
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.
- 7 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
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 $ 12,259,703 as of September 30, 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.
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. During the reported period the
Company recognized an expense of $15,467 according to Statement of
Financial Accounting Standard ("SFAS") No. 123R, "Share-Based Payment"
("SFAS 123(R)").
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 in the amount of $18,000 was recognized on the date of grant,
according to Emerging Issuer Task Force ("EITF") 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF
96-18").
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 was
not declared effective within 120 days from the closing date, then the
Company would have had to pay those investors liquidated damages equal
to 1% per month of the aggregate purchase price paid by them which
would not exceed fifteen percent (15.0%) of the aggregate purchase. On
May 4, 2006 the Company filed a registration statement covering the
resale of the shares and the shares underlying the warrants, which
went effective on June 6, 2006.
- 8 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
g. On March 30, 2006, the Company completed a $2.0 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 was not declared effective within 120 days
from the closing date, then the Company would have had to pay those
investors liquidated damages equal to 1% per month of the aggregate
purchase price paid by them which would not exceed fifteen percent
(15.0%) of the aggregate purchase. On May 4, 2006 the Company filed a
registration statement covering the resale of the shares and the
shares underlying the warrants, which went effective on June 6, 2006.
h. On April 3, 2006, pursuant to Section 4(2) of the Securities Act of
1933, as amended, The Company 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, 155,250 shares on October 1,
2006, 155,250 shares on January, 1, 2007 and 51,750 shares on April 1,
2007. During the reported period the Company recognized an expense in
the amount of $1,117,071 according to Statement of Financial
Accounting Standard ("SFAS") No. 123R, "Share-Based Payment" ("SFAS
123(R)").
i. On April 3, 2006 the Company issued to one of its non-employee
directors an option to purchase up to 200,000 shares of common stock
of the Company under the terms of the Company's option plan ("Director
Option"). The exercise price for the shares subject to the Director
Option is $ 0.725 per share of common stock of the Company. The option
is fully vested. This transaction was recorded in accordance with EITF
96-18.
j. 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. . This transaction was
recorded in accordance with EITF 96-18.
k. On May 15, 2006, the Company issued to one of its advisors a warrant
to purchase a total of 200,000 shares of the Company's common stock
with an exercise price of $1.35 per share. This transaction was
recorded in accordance with EITF 96-18.
l. On June 6, 2006, the Company issued to its financial advisor a
warrants to purchase a total of 110,345 shares of the Company's common
stock with an exercise price of $1.00 per share, and a warrant to
purchase 40,000 shares of the Company's common stock with an exercise
price of $1.35 per share. This transaction was recorded in accordance
with EITF 96-18.
m. Concentration of risk that may have a significant impact on the
Company:
During the nine months ended September 30, 2006, the Company derived
82% of its revenues from three major customers (see Note 4b).
- 9 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
n. On September 14, 2006, GV, RNG, and Golden Palace Ltd. ("Golden
Palace"), entered into an agreement under which Golden Palace agreed
to invest $600,000 in RNG in return for 20% of the ordinary shares of
RNG. Pursuant to terms of this agreement, Golden Palace has an option,
that can be exercised upon the occurrence of certain events as defined
in the agreement, to acquire an additional 30% of the ordinary shares
of RNG (but not more than 50% of RNG or more than the amount owned by
GV) at a price of $180,000 per each additional percentage interest of
the ordinary shares of RNG. Concurrently, GV, RNG and Golden Palace
entered into a shareholders agreement under which Golden Palace has a
right to appoint one of RNG's 4 directors (as long as Golden Palace
owns 20% of RNG) and GV has a right to appoint the 3 other directors.
Upon Golden Palace becoming an owner of 50% of RNG, it will have the
right to appoint an equal number of directors to the number we are
entitled to appoint. As of November 9, 2006, the shares were not
issued yet to Golden Palace.
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 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 Operations:
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------- ----------
2006 2006
---------- ----------
(UNAUDITED) (UNAUDITED)
---------- ----------
Research and development expenses $ 277,407 $ 91,971
Sales and marketing expenses 1,081,297 103,776
General and administrative expenses 482,505 104,773
---------- ----------
Total $1,841,209 $ 300,520
========== ==========
- 10 -
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.)
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:
NINE MONTHS ENDED,
SEPTEMBER 30,
------------------------------
2006 2005
------------ ----------
UNAUDITED
------------------------------
Risk free interest 5.06% 2%
Dividend yields 0% 0%
Volatility 90% 97%
Expected forfeiture 11% -
Expected life (years) 6 2.1
A summary of the Company's share option activity to employees and
directors, and related information is as follows:
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
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 4,855,261 1.14 576,783 1.12
Forfeited (223,750) 0.70 (212,261) 1.33
Exercised (11,250) 0.55 - -
---------- ---- ---------- ----
Outstanding at the end of
the quarter 6,814,783 1.01 1,824,522 0.74
========== ==== ========== ====
Options exercisable at the
end of the quarter 3,193,177 0.92 838,183 0.64
========== ==== ========== ====
- 11 -
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.
The following table illustrates the pro forma effect on net income and
net income per share for the nine months ended September 30, 2005 had
we applied the fair value recognition provisions of SFAS 123(R):
NINE MONTHS
ENDED
SEPTEMBER 30,
----------
2005
----------
UNAUDITED
----------
Net loss as reported $2,731,669
==========
Deduct: stock-based employee compensation - intrinsic value 376,380
Add: Total stock-based employee compensation expense
determined under the fair value based method of SFAS No
123 for all awards 494,459
----------
Pro forma net loss $2,849,748
==========
Net loss per share:
Basic and diluted - as reported $ 0.117
==========
Basic and diluted - pro forma $ 0.122
==========
The Company applies SFAS 123 "Accounting for Stock-Based Compensation"
("SFAS 123") and EITF 96-18, with respect to options and warrants
issued to non-employees. SFAS 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.
- 12 -
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 and nine months ended September
30, 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
upon 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 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,
----------------------
2006 2005
-------- --------
TOTAL REVENUES
----------------------
England $162,277 $527,006
Australia 262,500 100,000
United states 173,069 210,372
Others 4,827 30,954
-------- --------
$602,673 $868,322
======== ========
- 13 -
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:
NINE MONTHS ENDED
JUNE 30,
-----------------------------------
2006 2005
---------------- ------------------
Customer A 44% (Australia) 12% (Australia)
================ ================
Customer B 21% (U.K) 11% (U.K)
================ ================
Customer C 17% (U.S.) 10% (U.S.)
================ ================
Customer D *) 27% (U.K)
================ ================
Customer E - 21% (U.K.)
================ ================
*) 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
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN No. 48") "Accounting for Uncertainty in Income Taxes
- An Interpretation of FASB Statement No. 109." FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109. FIN No. 48 also prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN No. 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. The provisions of FIN No. 48 are effective for fiscal years
beginning after December 15, 2006. We believe that the adoption of this
statement will not have a material effect on our financial condition or results
of operations.
- 14 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 5: RECENTLY ISSUED ACCOUNTING STANDARDS (CONT)
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108
"Quantifying Financial Misstatements" which expresses the Staff's views
regarding the process of quantifying financial statement misstatements.
Registrants are required to quantify the impact of correcting all misstatements,
including both the carryover and reversing effects of prior year misstatements,
on the current year financial statements. The techniques most commonly used in
practice to accumulate and quantify misstatements are generally referred to as
the "rollover" (current year income statement perspective) and "iron curtain"
(year-end balance sheet perspective) approaches. The financial statements would
require adjustment when either approach results in quantifying a misstatement
that is material, after considering all relevant quantitative and qualitative
factors. This bulletin is effective for financial statements for the first
fiscal year ending after November 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 September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements,"
("SFAS 157") which provides a definition of fair value, establishes a framework
for measuring fair value and requires expanded disclosures about fair value
measurements. SFAS . 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The provisions of SFAS 157 should be applied prospectively. We are
currently assessing the potential impact of SFAS 157 on our financial condition
and results of operations.
NOTE 6:- SUBSEQUENT EVENTS
On October 31, 2006, RNG and Golden Palace entered into a software license
agreement under which RNG has granted Golden Palace a non transferable, limited
license to use, perform, present and operate RNG's Blackjack Software for the
purpose of displaying, managing and operating online gaming according to the
terms and conditions of the Agreement. In return, Golden Palace has agreed to
pay RNG a total of $1,000,000 in license fees, integration costs, technical
support fees and advanced royalty fees, as well as additional royalty fees equal
to 15% of the fees charged by Golden Palace from players who participate in the
blackjack game. On November 9, 2006, Get21 and Golden Palace entered into a
sublicense and software agreement under which Golden Palace granted Get21 a
world wide, non exclusive, non transferable sublicense to the user interface
portion of the multiplayer blackjack and poker gaming software ("Player
Software") and to grant players the right to use the Player Software. According
to the terms of the agreement Get21 shall be responsible for performing all
marketing and promotional functions with respect to bringing players through the
URL web address www.get21.com and www.get21poker.com ("URL") to online gaming
multiplayer blackjack and poker rooms ("Gamerooms") which are operated by Golden
Palace. Get21 and Golden Palace shall share the revenues generated from players
who played in the Gamerooms through the URL according to the terms specified in
the agreement.
- 15 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-QSB contains 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. Except as required by law,
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 "Risks 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
We are a Nevada corporation, but 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 Zone 4 Play, Inc., a Delaware Corporation ("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%. On July 11, 2006, we formed a wholly owned
subsidiary in the Isle of Man, named Gaming Ventures plc ("Gaming"). Gaming has
two wholly owned subsidiaries, RNG Gaming Limited ("RNG") and Get21 Limited
("Get21"), both of which are Isle of Man companies.
On July 12, 2006, Zone4Play Delaware and Gaming entered into an agreement under
which our wholly owned subsidiary Gaming purchased from Zone4Play Delaware all
right, title and interest in its intellectual property rights and assets related
to its newly developed multi-player tournament blackjack software ("Blackjack
Software") on a "going concern" and "as is" basis, in exchange for a secured
promissory note in the principal amount of $2.25 million. The purchase price was
based on an appraisal report made by an independent appraiser. This promissory
note has a term of five years. Principal is payable in five equal annual
installments of $450,000 and will carry annual interest of Libor +1.5%. On July
17, 2006, Gaming entered into an agreement with RNG under which Gaming assigned
all of its rights in the Blackjack Software to RNG in consideration for all
outstanding and issued ordinary shares of RNG. The purpose of RNG is to exploit
the Blackjack Software and related intellectual property and further develop
this software and potentially other gaming software. RNG is expected to license
its software to third parties in exchange for revenue shares and license fees.
- 16 -
Our other indirect subsidiary, Get21, will provide marketing services related to
the Blackjack Software business and potentially other games. Get21 seeks to
outsource to a third party the full operation of the service which includes
payment, processing, customer support, fraud and collusion prevention and other
services.
On September 14, 2006, Gaming, RNG, and Golden Palace Limited ("Golden Palace"),
entered into an agreement under which Golden Palace has agreed to invest
$600,000 in RNG in return for 20% of the ordinary shares of RNG. Pursuant to
terms of this agreement, Golden Palace has an option to acquire an additional
30% of the ordinary shares of RNG (but not more than 50% of RNG or more than the
amount owned by Gaming) at a price of $180,000 per each additional percentage
interest of the ordinary shares of RNG. Such option can be exercised by Golden
Palace during a period commencing on the date of the agreement and terminating
upon the earliest of: (1) the date which is 15 months from the date of the
agreement; (2) RNG becoming a public company; or (3) completion by RNG of a
private placement of not less than $4,000,000 by third parties, at a price
representing a valuation of at least $18,000,000.
Concurrently, Gaming, RNG and Golden Palace entered into a shareholders
agreement under which Golden Palace has a right to appoint one of RNG's 4
directors (as long as Golden Palace owns 20% of RNG) and we have a right to
appoint the 3 other directors. Upon Golden Palace becoming an owner of 50% of
RNG, it will have the right to appoint an equal number of directors to the
number we are entitled to appoint.
On October 31, 2006, RNG and Golden Palace entered into a software license
agreement under which RNG has a granted Golden Palace a non transferable,
limited license to use, perform, present and operate RNG's Blackjack Software
for the purpose of displaying, managing and operating online gaming according to
the terms and conditions of the agreement. In return, Golden Palace has agreed
to pay RNG a total of $1,000,000 in license fees, integration costs, technical
support fees and advanced royalty fees, as well as additional royalty fees equal
to 15% of the fees charged by Golden Palace from players who participate in the
blackjack game. According to the terms of the agreement, the Blackjack Software
shall not be used in the U.S. and or offered for use to U.S. residents, and
Golden Palace has agreed to take certain actions to ensure that the Blackjack
Software is unavailable for U.S. residents.
On November 9, 2006, Get21 and Golden Palace entered into a sublicense and
software agreement under which Golden Palace granted Get21 a world wide, non
exclusive, non transferable sublicense to user interface portion of the
multiplayer blackjack and poker gaming software ("Player Software") and to grant
players the right to use the Player Software. According to the terms of the
agreement, Get21 shall be responsible for performing all marketing and
promotional functions with respect to bringing players through the URL web
address www.get21.com and www.get21poker.com ("URL") to online gaming
multiplayer blackjack and poker rooms ("Gamerooms") which are operated by Golden
Palace. Get21 and Golden Palace shall share the revenues generated from players
who played in the Gamerooms through the URL according to the terms specified in
the agreement.
On August 4, 2006, Gaming filed with the Securities and Exchange Commission
("SEC") a registration statement on Form 20-F, which is now effective. As a
result, Gaming is now a separate reporting entity with the SEC that has the
reporting obligations of a foreign private issuer, despite it being our wholly
owned subsidiary. As disclosed in our Current Report on Form 8-K filed with the
SEC on June 20, 2006, we intend to declare a dividend of Gaming's shares on a
one-for-one pro rata basis to our shareholders as of a record date to be
determined by our Board of Directors. Our shares of common stock are currently
traded on the OTC Bulletin Board under the trading symbol "ZFPI.OB".
- 17 -
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, 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), mobile operators (O2 (online) Ltd.),
internet service providers (Commonwealth Telephone Enterprises Inc. ("CTE"))
hospitality service providers (LodgeNet Entertainment Corporation), and
providers of interactive games on digital TV (NDS Ltd). 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
September 30, 2006, we had an accumulated deficit of $12,259,703. We can give no
assurance that profitable operations, if ever achieved, will be sustained on a
continuing basis. During the nine months ended September 30, 2006, we derived
approximately 82% of our revenues from three major customers.
- 18 -
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2005
REVENUES AND COST OF REVENUES
Total revenues for the three months ended September 30, 2006 decreased by 43% to
$212,714 from $374,451 for the three months ended September 30, 2005. All such
revenues were from sales of software applications and distribution rights. The
decrease in revenues is primarily attributable to licenses revenues to
Cosmotrade Investment Ltd., and CTE that we had in the three months ended
September 30, 2005, and a decrease in revenues from the Gaming Channel offset by
new contract with Two Way TV Australia Limited and increase in revenue share
from contracts with customers such as NDS Ltd., Cablevision, Two Way Media
Limited and Winner.com (UK) Limited.
Cost of revenues for the three months ended September 30, 2006 increased by $223
to $95,527 from $95,304 for the three months ended September 30, 2005. The cost
of revenues is attributable primarily to amortization of the technology which
was acquired in the end of April 2005 by acquiring the minority shares in our
participation TV subsidiary, MixTV Ltd. and to server hosting expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended September 30, 2006
increased by 35% to $889,484 from $657,487 for the three months ended September
30, 2005. The increase is primarily attributable to the our new projects in the
United Kingdom, which involve adapting our software to new systems and platforms
(ITV, mobile, internet, and participation TV by our subsidiary, MixTV Ltd.),
development of our multi player black jack tournaments application, recruitment
of employees, increased general and administrative expenses allocated to the
research and development department due to its growth and due to accounting
charges related to stock options under Statement of Financial Accounting
Standard (SFAS) No. 123R, "Share-Based Payment" ("SFAS 123(R)").
SALES AND MARKETING
Sales and marketing expenses for the three months ended September 30, 2006
increased by 88% to $405,345 from $216,115 for the three months ended September
30, 2005. The increase in sales and marketing expenses is primarily attributable
to a our marketing preparations for the launch of our get21.com site through our
indirect subsidiary Get21 and to the amortization of deferred compensation to
stock options granted to our Chief Executive Officer ("CEO") in the amount of
$71,234 and to accounting charges related to stock options under SFAS 123(R).
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended September 30,
2006 increased by 3% to $432,567 from $418,487 for the three months ended
September 30, 2005. The increase in general and administrative expenses is
primarily attributable to a portion of the amortization of deferred compensation
to stock options granted to our CEO in the amount of $17,808 and to expenses
related to evaluation of the spin off of our multi player black jack tournaments
application and due to accounting charges related to stock options under SFAS
123(R).
NET LOSS
Net loss for the three months ended September 30, 2006 was $1,616,886 as
compared to net loss of $999,339 for the three months ended September 30, 2005.
Net loss per share for the three months ended September 30, 2006 was $0.05 as
compared to $0.04 for the three months ended September 30, 2005. The net loss
increased for the three months ended September 30, 2006 mainly due to the
increase in the operating expenses and due to amortization of deferred
compensation to stock options granted to our CEO in the amount of $89,042. In
accordance with SFAS 123(R), this expense was calculated based on the
Black-Scholes model and was amortized under the graded vesting method. Our
weighted average number of shares of common stock used in computing basic and
diluted net loss per share for the three months ended September 30, 2006 was
32,315,698 compared with 23,925,010 for the three months ended September 30,
2005. The increase was primarily due to the issuance of additional shares in two
private placements, as discussed further below.
- 19 -
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2005
REVENUES AND COST OF REVENUES
Total revenues for the nine months ended September 30, 2006 decreased by 31% to
$602,673 from $868,332 for the nine months ended September 30, 2005. All such
revenues were from sales of software applications and distribution rights. The
decrease in revenues is primarily attributable to licenses revenues to
Cosmotrade Investment Ltd, CTE, and Cablevision that we had in the nine months
ended September 30, 2005, and a decrease in revenues from the Gaming Channel
offset by new contracts, such as a contract with Two Way TV Australia Limited,
and increase in revenue share from contracts with customers such as NDS Ltd.,
Cablevision and Two Way Media Limited and Winner.com (UK) Limited.
Cost of revenues for the nine months ended September 30, 2006 increased by 60%
to $293,166 from $183,016 for the nine months ended September 30, 2005. The
increase in the cost of revenues is attributable primarily to amortization of
the technology which was acquired in the end of April 2005 by acquiring the
minority shares in our participation TV subsidiary, MixTV Ltd. For the nine
months ended September 30, 2006, gross profit decreased by 55% to $309,507 when
compared to gross profit of $685,306 for the nine months ended September 30,
2005.
RESEARCH AND DEVELOPMENT
Research and development expenses for the nine months ended September 30, 2006
increased by 31% to $2,423,921 from $1,854,845 for the nine months ended
September 30, 2005. The increase is primarily attributable to our new projects
in the United Kingdom, which involve adapting our software to new systems and
platforms (ITV, mobile, internet, and participation TV by our subsidiary, MixTV
Ltd.), development of our multi player black jack tournaments application,
recruitment of employees, increased general and administrative expenses
allocated to the research and development department due to its growth and due
to accounting charges related to stock options under SFAS 123(R).
SALES AND MARKETING
Sales and marketing expenses for the nine months ended September 30, 2006
increased by 158% to $1,775,739 from $689,258 for the nine months ended
September 30, 2005. The increase in sales and marketing expenses is primarily
attributable to a portion of the amortization of deferred compensation to stock
options granted to our CEO in the amount of $893,657 and to accounting charges
related to stock options under SFAS 123(R), and due to our marketing
preparations for the launch of our get21.com site thorough our indirect
subsidiary Get21.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the nine months ended September 30, 2006
increased by 60% to $1,446,018 from $904,230 for the nine months ended September
30, 2005. The increase in general and administrative expenses is primarily
attributable to recruitment of employees, salary increases, additional expenses
in relation to the possible admission of our shares to trade on AIM, a market
operated by the London Stock Exchange plc, to a portion of the amortization of
deferred compensation to stock options granted to our CEO in the amount of
$223,414 to expenses related to evaluation of the spin off of our multi player
black jack tournaments application and due to accounting charges related to
stock options under SFAS 123(R).
- 20 -
NET LOSS
Net loss for the nine months ended September 30, 2006 was $5,336,660 as compared
to net loss of $2,731,669 for the nine months ended September 30, 2005. Net loss
per share for the nine months ended September 30, 2006 was $0.18 as compared to
$0.12 for the nine months ended September 30, 2005. The net loss increased for
the nine months ended September 30, 2006 mainly due to the increase in the
operating expenses and due to amortization of deferred compensation to stock
options granted to our CEO in the amount of $1,117,071. In accordance with SFAS
123(R), this expense was calculated based on the Black-Scholes model and was
amortized under the graded vesting method. Our weighted average number of shares
of common stock used in computing basic and diluted net loss per share for the
nine months ended September 30, 2006 was 29,752,443 with 23,389,406 for the nine
months ended September 30, 2005. The increase was primarily due to the issuance
of additional shares in two private placements as discussed further below.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2006, total current assets were $3,866,946 and total current
liabilities were $700,570. On September 30, 2006, we had a working capital
surplus of $3,166,376 and an accumulated deficit of $12,259,703. 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 $3,166,376 on
September 30, 2006 compared with a working capital deficit of $20,093 on
December 31, 2005. Cash and cash equivalents on September 30, 2006 were
$3,624,361, an increase of $3,020,326 from the $604,035 reported on December 31,
2005. Cash balances increased in the nine months ended September 30, 2006
primarily as a result of the stock issuances described below, offset by the
increase in our net loss for the nine months ended September 30, 2006.
Operating activities used cash of $3,128,775 in the nine months ended September
30, 2006 and $1,207,678 in the three months ended September 30, 2006. Cash used
by operating activities in the nine months ended September 30, 2006 results
primarily from a net loss of $5,336,660, a $47,269 increase in employee payroll
accruals, offset by a $1,841,209 increase in amortization of deferred
compensation (mainly to our CEO in the amount of $1,177,071), $481,323 of
depreciation, of which $249,999 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 $235,295 in the nine months ended September
30, 2006 and $123,704 in the three months ended in the same period. Cash used by
investing activities in the nine months ended September 30, 2006 results from
the purchase of computer and software equipment.
Financing activities generated cash amount of $6,384,279 during the nine months
ended September 30, 2006 and used $13,055 in the three months ended September
30, 2006. Cash provided by financing activities for the nine month period ended
September 30, 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 ("Securities Act"), and Rule 506 promulgated thereunder, we completed an
offering that consisted of 6,234,485 units sold at a price of $.725 per unit to
certain accredited investors ("March 24 Investors") for aggregate gross proceeds
of $4,520,000. 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").
On March 30, 2006, pursuant to Section 4(2) of the Securities Act, 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 to certain accredited investors ("March
30 Investors") for aggregate gross proceeds of $2,000,000. 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"). Costs related to the foregoing offerings amounted
at $123,745.
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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 to obtain
effectiveness of such registration statement within 120 days from closing. If we
did not meet these filing deadlines, we would have been 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 which went effective on June 6, 2006.
On September 14, 2006, our indirect subsidiary, RNG, our subsidiary Gaming and
Golden Palace , entered into an agreement under which Golden Palace has agreed
to invest $600,000 in RNG in return for 20% of the ordinary shares of RNG.
Pursuant to terms of the agreement, Golden Palace has an option, that can be
exercised upon the occurrence of certain events as defined in the agreement, to
acquire an additional 30% of the ordinary shares of RNG (but not more than 50%
of RNG or more than the amount owned by Gaming) at a price of $180,000 per each
additional percentage interest of the ordinary shares of RNG.
CRITICAL ACCOUNTING POLICY
Effective January 1, 2006, the Company adopted the provisions of 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 and nine
months ended September 30, 2006 accounted for $300,520 and $1,841,209,
respectively.
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 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 CEO and Chief Financial Officer
("CFO"), as appropriate to allow timely decisions regarding required
disclosures.
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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
2006 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 5. OTHER EVENTS.
On November 9, 2006, our indirect subsidiary, Get21, and Golden Palace entered
into a sublicense and software agreement under which Golden Palace granted Get21
a world wide, non exclusive, non transferable sublicense to user interface
portion of the multiplayer blackjack and poker gaming software ("Player
Software") and to grant players the right to use the Player Software. According
to the terms of the agreement, Get21 shall be responsible for performing all
marketing and promotional functions with respect to bringing players through the
URL web address www.get21.com and www.get21poker.com ("URL") to online gaming
multiplayer blackjack and poker rooms ("Gamerooms") which are operated by Golden
Palace. The agreement provides that the ownership of the URL shall be
transferred to Golden Palace for the term of the agreement and shall be returned
to Get21 upon the lawful termination of the agreement. Get21 and Golden Palace
shall share the revenues generated from players who played in the Gamerooms
through the URL according to the terms specified in the agreement. The agreement
has a term of 5 years and can be terminated by both parties pursuant to its
terms. The agreement is governed by the laws of England. A copy of the agreement
is filed herewith as Exhibit 10.3 and incorporated by reference herein.
ITEM 6. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
10.1 Share Subscription and Option Agreement dated September 14, 2006, by
and among RNG Gaming Limited, Golden Palace Limited and Gaming
Ventures plc (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 September 14, 2006).
10.2 Software License Agreement dated October 31, 2006 between RNG Gaming
Limited and Golden Palace 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 November 6, 2006).
10.3 Sublicense and Services Agreement dated November 9, 2006 between Get21
Limited and Golden Palace Limited.
16.1 Letter from Kost, Forer, Gabbay & Kassierer a Member of Ernst & Young
Global to the Securities and Exchange Commission dated July 10, 2006
(incorporated by reference to Exhibit 16.1 to the Company's Current
Report on Form 8-K/A filed with the Securities and Exchange Commission
on July 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.
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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, 2006 By: /s/ Shimon Citron
---------------------
Shimon Citron
President and Chief Executive Officer
Dated: November 14, 2006 By: /s/ Uri Levy
---------------------
Uri Levy
Chief Financial Officer
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