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, 2007
[_] 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 May 1, 2007.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ZONE 4 PLAY, INC.
AND ITS SUBSIDIARIES
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2007
IN U.S. DOLLARS
UNAUDITED
INDEX
PAGE
CONSOLIDATED BALANCE SHEETS 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
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS
MARCH 31, DECEMBER 31
---------- ----------
2007 2006
---------- ----------
UNAUDITED AUDITED
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,845,526 $3,019,282
Trade receivables 876,455 1,005,161
Other accounts receivable, prepaid expenses , and related parties 267,927 164,648
---------- ----------
TOTAL current assets 2,989,908 4,189,091
---------- ----------
SEVERANCE PAY FUND 117,422 104,729
---------- ----------
PROPERTY AND EQUIPMENT, NET 619,887 699,040
---------- ----------
ACQUIRED TECHNOLOGY, NET 357,308 440,641
---------- ----------
Total assets $4,084,525 $5,433,501
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
- 2 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS
MARCH 31, DECEMBER 31
------------ ------------
2007 2006
------------ ------------
UNAUDITED AUDITED
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit $ 56,699 $ 16,750
Trade payables 331,057 436,342
Employees and payroll accruals 448,968 427,106
Accrued expenses and other liabilities 554,867 552,113
------------ ------------
TOTAL current liabilities 1,391,591 1,432,311
------------ ------------
Minority Interest 82,003 138,374
Call option 114,850 114,850
Accrued Severance pay 287,251 281,834
------------ ------------
TOTAL Long term liabilities 484,104 535,058
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY :
Common stock of $ 0.001 par value:
Authorized: 75,000,000 shares at March 31, 2007 and December 31,
2006; Issued and outstanding: 32,319,031 shares
at March 31, 2007 and December 31,2006, respectively 32,318 32,318
Additional paid-in capital 16,951,154 16,800,396
Accumulated other comprehensive loss (18,439) (18,588)
Deficit accumulated during the development stage (14,756,203) (13,347,994)
------------ ------------
TOTAL stockholders' equity 2,208,830 3,466,132
------------ ------------
TOTAL liabilities and stockholders' equity $ 4,084,525 $ 5,433,501
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
- 3 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS (EXCEPT SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2007 2006
----------- -----------
UNAUDITED
---------------------------
Revenues from software applications $ 290,833 $ 184,361
----------- -----------
Cost of revenues 133,166 97,616
----------- -----------
Gross profit 157,667 86,745
----------- -----------
Operating expenses:
Research and development 739,037 673,454
Selling and marketing 627,872 169,795
General and administrative 274,521 250,022
----------- -----------
Total operating expenses 1,641,430 1,093,271
----------- -----------
Operating loss 1,483,763 1,006,526
Financial expenses, net 4,827 2,669
----------- -----------
Other income 24,010 -
Minority interests in losses of subsidiaries 56,371 -
----------- -----------
Net loss $ 1,408,209 $ 1,003,857
=========== ===========
Basic and diluted net loss per share $ 0.044 $ 0.041
=========== ===========
Weighted average number of shares of Common stock
used in computing basic and diluted net loss
per share 32,319,031 24,543,867
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
- 4 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS
THREE MONTHS ENDED
MARCH 31,
----------------------------
2007 2006
----------- -----------
UNAUDITED
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,408,209) $(1,003,857)
Adjustments required to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 173,421 162,404
Increase in trade and other accounts receivable
prepaid expenses, and related parties 25,197 48,110
Stock-based compensation 150,758 179,643
Decrease in trade payables (105,285) (94,410)
Increase (decrease) in employees and payroll accruals 21,862 (5,738)
Decrease in accrued expenses and other liabilities 2,754 (26,684)
Accrued severance pay, net (7,276) 4,246
Minority interests in losses of subsidiaries (56,371)
Compensation related to issuance of common
stock to a service provider - 18,000
----------- -----------
Net cash used in operating activities (1,203,149) (718,286)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,935) (5,019)
----------- -----------
Net cash used in investing activities (10,935) (5,019)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares and warrants, net - 6,462,001
Short-term bank credit, net 39,949 (7,703)
----------- -----------
Net cash provided by financing activities 39,949 6,454,298
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 379 84
----------- -----------
Increase (decrease) in cash and cash equivalents (1,173,756) 5,731,077
Cash and cash equivalents at the beginning of the period 3,019,282 604,035
----------- -----------
Cash and cash equivalents at the end of the period $ 1,845,526 $ 6,335,112
=========== ===========
NON-CASH TRANSACTION
Purchase of property and equipment $ - $ 80,081
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 463 $ 680
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
- 5 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
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
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
("Gaming") , a company incorporated in the Isle of Man .
The Company's shares of common stock are currently traded on the OTC
Bulletin Board under the trading symbol "ZFPI.OB."
b. The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The
Company has suffered losses from operations and negative cash flows
from operations since inception. For the three months ended March 31,
2007 the Company incurred a loss from operations of $1,408,209,
negative cash flows from operations of $1,203,149 and has accumulated
deficit of $14,756,203 as of March 31, 2007.
Despite its negative cash flows, the Company has been able to secure
financing in order to support its operation to date, based on shares
issuances. Management believes that, despite the financial hurdles and
funding uncertainties going forward, it has under development a
business plan that, if successfully funded and executed as part of a
financial restructuring can significantly improve operating results.
The consolidated financial statements do not include any adjustments
that may result from the outcome of this uncertainty.
c. 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.
- 6 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
d. The Company and its subsidiaries are devoting substantially all of its
efforts toward conducting research, development and marketing of its
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 aggregated to
$ 14,756,203 as of March 31, 2007. 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.
e. Concentration of risk that may have a significant impact on the
Company:
The Company derived 94% of its revenues from four major customers (see
Note 4b).
NOTE 2: 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, 2007 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2007. 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,
2006.
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, 2006 contained in
the Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission ("SEC") on March 30, 2007, have been applied
consistently in these unaudited interim condensed consolidated financial
statements.
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES
a. The significant accounting policies applied in the annual consolidated
financial statements of the Company as of December 31, 2006 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,
2006 and their accompanying notes.
- 7 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. Accounting for stock-based compensation
Effective January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised
2004) ("SFAS 123(R)"), "Share-Based Payment," and Staff Accounting
Bulletin No. 107 ("SAB 107"), which was issued in March 2005 by the
SEC. SFAS 123(R) addresses the accounting for share-based payment
transactions in which the Company obtains employee services in
exchange for equity instruments of the Company. This statement
requires that employee equity awards be accounted for using the
grant-date fair value method. SAB 107 provides supplemental
implementation guidance on SFAS 123(R), including guidance on
valuation methods, classification of compensation expense, income
statement effects, disclosures and other issues.
The following table shows the total stock-based compensation charge
included in the Consolidated Statement of Operations:
THREE MONTHS ENDED
MARCH 31,
---------------------
2007 2006
-------- --------
(UNAUDITED) (UNAUDITED)
-------- --------
Research and development expenses 57,777 79,887
Sales and marketing expenses 11,529 27,122
General and administrative expenses 81,452 72,634
-------- --------
Total $150,758 $179,643
======== ========
The fair value for these options was estimated at the grant date using
a Black-Scholes option pricing model as allowed Under SFAS 123(R).
A summary of the Company's share option activity to employees and
directors, and related information is as follows:
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
2007 2006
-------------------- --------------------
UNAUDITED UNAUDITED
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE
--------- ---- --------- ----
$ $
---- ----
Outstanding at the beginning of the year 7,653,046 1.01 2,194,522 0.68
Granted - - 192,261 1.00
Forfeited - - 40,000 0.70
--------- ---------
Outstanding at the end of the quarter 7,653,046 1.01 2,346,783 0.71
========= ==== ========= ====
Options exercisable at the end of the quarter 4,009,491 0.95 1,136,521 0.63
========= ==== ========= ====
- 8 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company applies Emerging Issues Task Force 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") with respect to options and warrants issued to non-employees.
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:
THREE MONTHS ENDED
MARCH 31,
---------------------
2007 2006
-------- --------
TOTAL REVENUES
---------------------
England $ 88,891 $ 38,734
Australia 87,500 87,500
Antigua and Barbuda 74,863 -
United States 39,150 56,709
Others 429 1,418
-------- --------
$290,833 $184,361
======== ========
b. Major customer data as a percentage of total revenues:
THREE MONTHS ENDED
MARCH 31,
------------------
2007 2006
------- -------
Customer A 30% 47%
======= =======
Customer B 28% 14%
======= =======
Customer C 26% -
======= =======
Customer D 10% 21%
======= =======
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ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 5: RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). This standard
establishes a framework for measuring fair value and expands related
disclosure requirements; however, it does not require any new fair value
measurement. As applicable to the Company, this statement will be effective
as of the year beginning January 1, 2008. The Company is currently
evaluating the impact that the adoption of SFAS. 157 would have on its
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." ("SFAS 159") This standard
permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which
the fair value option has been elected are reported in earnings. As
applicable to the Company, this statement will be effective as of the year
beginning January 1, 2008. The Company is currently evaluating the impact
that the adoption of SFAS 159 would have on its consolidated financial
statements.
NOTE 6: SUBSEQUENT EVENTS
On May 8, 2007, the board of directors removed the Chief Executive Officer
and President from his positions. The Chief Financial Officer has been
appointed as acting Chief Executive Officer and President of the Company in
addition to his current position as Chief Financial Officer. On the same
day the CEO has filed a lawsuit against the Company and its directors in
labor court, to prevent his dismissal.
- 10 -
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, 2006. 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.
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. We offer five core solutions to companies that offer
play-for-real gaming, namely:
(i) Multiplayer blackjack tournaments ("Blackjack Software"): 24/7 availability
of a variety of blackjack tournaments games based on a peer-to-peer technology
allowing users to compete against each other and not against the "house".
(ii) Mobile gaming: the provision of services on mobile devices, including fixed
odds games, multiplayer games, sports betting services, scratch cards and
exchange betting.
(iii) Interactive TV gaming: the provision of software and technology currently
supporting fixed odds games.
(iv) 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.
(v) Online gaming: the provision of fixed odds and casino games over the
internet.
We also provide marketing services related to our Blackjack Software business
and potentially other games thorough our subsidiary Get21 Limited ("Get21"),
which is using a third party for the full operation of the service which
includes payment, processing, customer support, fraud and collusion prevention
and other services.
We have recently re-prioritized our operations and currently plan to focus on
two products: the Winner Channel and our Blackjack Software related marketing
services.
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, 2007, we had an accumulated deficit of $14,756,203. There is no assurance
that profitable operations, if ever achieved, will be sustained on a continuing
basis. During the three months ended March 31, 2007, we derived approximately
94% of our revenues from four major customers.
Our shares of common stock are currently traded on the OTC Bulletin Board under
the trading symbol "ZFPI.OB".
GOING CONCERN
We have generated revenues since inception but they were not an adequate source
of cash to fund future operations. Historically we have relied on private
placement issuances of equity.
It is likely that we will need to raise additional working capital to fund our
ongoing operations and growth. The amount of our future capital requirements
depends primarily on the rate at which we increase our revenues and
correspondingly decrease our use of cash to fund operations. Cash used for
operations will be affected by numerous known and unknown risks and
uncertainties including, but not limited to, our ability to successfully market
our products and services and the degree to which competitive products and
services are introduced to the market. As long as our cash flow from operations
remains insufficient to completely fund operations, we will continue depleting
our financial resources and seeking additional capital through equity and/or
debt financing. If we raise additional capital through the issuance of debt,
this will result in increased interest expense. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage
ownership of our company held by existing stockholders will be reduced and those
stockholders may experience significant dilution. In addition, new securities
may contain rights, preferences or privileges that are senior to those of our
common stock.
There can be no assurance that acceptable financing to fund our ongoing
operations can be obtained on suitable terms, if at all. If we are unable to
obtain the financing necessary to support our operations, we may be unable to
continue as a going concern. In that event, we may be forced to cease operations
and our stockholders could lose their entire investment in our company.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2006
REVENUES AND COST OF REVENUES
Total revenues for the three months ended March 31, 2007 increased by 58% to
$290,833 from $184,361 for the three months ended March 31, 2006. The increase
in revenues is mainly due to a new contract with Golden Palace Ltd for the
license of our multiplayer tournaments blackjack, and for marketing services of
our website www.get21.com,. We also increased our revenues from existing
customers such as Two Way Media Limited and Winner.com (UK) Ltd, through
increased penetration of our products.
Cost of revenues for the three months ended March 31, 2007 increased by 36% to
$133,166 from $97,616 for the three months ended March 31, 2006. The increase in
the cost of revenues is primarily attributable to costs related to the marketing
services provided by Get21.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended March 31, 2007
increased by 10% to $739,037 from $673,454 for the three months ended March 31,
2006. The increase is primarily attributable to our continuing efforts 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 decrease of
the $US dollar exchange rate to the New Israeli Shekel ("NIS"), which increased
the dollars amount of our NIS expenses.
SALES AND MARKETING
Sales and marketing expenses for the three months ended March 31, 2007 decreased
by 270% to $627,872 from $169,795 for the three months ended March 31, 2006. The
increase in sales and marketing expenses is primarily attributable to our
marketing efforts through our get21.com site through Get21. We do not expect
this trend to continue.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended March 31, 2007
increased by 10% to $274,521 from $250,022 for the three months ended March 31,
2006. The increase in general and administrative expenses is primarily
attributable to amortization of stock-based compensation related to the general
and administrative department and directors and to our legal expenses.
NET LOSS
Net loss for the three months ended March 31, 2007 was $1,408,209 as compared to
net loss of $1,003,857 for the three months ended March 31, 2006. Net loss per
share for the three months ended March 31, 2007 was $0.045 as compared to $0.041
for the three months ended March 31, 2006. The net loss increased for the three
months ended March 31, 2006 mainly due to the increase in the operating expenses
and especially due to our marketing efforts through our get21.com site through
Get21 offset by the share of Golden Palace as the minority shareholder in the
loss of our indirect subsidiary RNG Gaming. 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, 2007 was 32,319,031 compared with
24,543,867 for the three months ended March 31, 2006. The increase was due to
the issuance of additional shares in two private placements in March 2006.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2007, total current assets were $2,989,908 and total current
liabilities were $1,391,591. On March 31, 2007, we had a working capital surplus
of $1,598,317 and an accumulated deficit of $14,785,848. 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 $1,598,317 on March
31, 2007 compared with a working capital of $2,756,780 on December 31, 2006.
Cash and cash equivalents on March 31, 2007 were $1,845,526, a decrease of
$1,173,756 from the $3,019,282 reported on December 31, 2006. The decrease in
cash is primarily attributable to the net loss in the three months ended March
31, 2007.
Operating activities used cash of $1,203,149 in the three months ended March 31,
2007. Cash used by operating activities in the three months ended March 31, 2007
results primarily from a net loss of $1,408,209, a $25,197 increase in accounts
receivable, offset by a $150,758 of stock based compensation, $173,421 of
depreciation, of which $83,333 is related to amortization of acquired
technology, and the rest of which is related to computers and other equipment
offset by decrease of $105,285 in accounts payable and $56,371 of increase in
minority interests in losses of subsidiaries due to the share of Golden Palace
as the minority shareholder in the loss of our indirect subsidiary RNG Gaming.
Investing activities used cash of $10,935 in the three months ended March 31,
2007. Cash used by investing activities in the three months ended March 31, 2007
results from the purchase of computer and software equipment.
Financing activities used cash amount of $39,949 during the three months ended
March 31, 2007. Cash used by financing activities for the three month period
ended March 31, 2007 results primarily from short term bank credit.
RECENTLY ISSUED ACCOUNTING POLICIES
In September 2006, the Financial Accounting Standards Board ( "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 157, "Fair Value
Measurements" ("SFAS 157"). This standard establishes a framework for measuring
fair value and expands related disclosure requirements; however, it does not
require any new fair value measurement. As applicable to us, this statement will
be effective as of the year beginning January 1, 2008. We are currently
evaluating the impact that the adoption of SFAS 157 would have on our
consolidated financial statements.
In February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" ("SFAS 159"). This standard permits entities
to choose to measure many financial assets and financial liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. As applicable to us, this statement will
be effective as of the year beginning January 1, 2008. We are currently
evaluating the impact that the adoption of SFAS 159 would have on our
consolidated financial statements.
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. We will attempt to reduce our operating expenses from $450,000 a
month to below $250,000 per month and have already downsized our workforce.
There can be no assurance that acceptable financing to fund our ongoing
operations can be obtained on suitable terms, if at all. If we are unable to
obtain the financing necessary to support our operations, we may be unable to
continue as a going concern. In that event, we may be forced to cease operations
and our stockholders could lose their entire investment in our company.
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 acting 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 acting 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 acting 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
2007 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 30, 2007, our subsidiary Zone 4 Play, Inc., a Delaware corporation (the
"Company"), and Two Way TV Australia Limited ("TWTVA") entered into an agreement
(the "Revised Agreement"), amending the terms of the exclusive distribution
agreement signed between them on August 17, 2005 (the "Agreement"). According to
the Revised Agreement the Company has granted an exclusive license from June 1,
2005 until June 30, 2008 and non exclusive license from July 1, 2008 until May
31, 2010 to market and distribute the Company's play for fun and play for real
products in Australia. In consideration for these licenses and rights, the
Company is entitled to receive a total fixed annual license fees of $350,000
payable on a quarterly basis until June 30, 2008 and not until May 31, 2010 as
agreed in the Agreement.
On May 15, 2007, Haim Tabak was removed from his position as Chief Operating
Officer.
ITEM 6. EXHIBITS.
10.1 Agreement dated April 30, 2007 between Zone 4 Play, Inc. and Two Way
Limited.
31.1 Section 302 Certification of acting 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 acting Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZONE 4 PLAY, INC.
Dated: May 21, 2007 By: /s/ Uri Levy
----------------
Uri Levy
Acting Chief Executive Officer and
Chief Financial Officer