FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION NO. 333-120174
PROSPECTUS SUPPLEMENT NO. 3
DATED AUGUST 15, 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 AND DECEMBER 6,
2005.
16,448,630 SHARES
[ZONE 4 PLAY INC LOGO]
COMMON STOCK
This prospectus supplement supplements the prospectus dated February 9, 2005, as
amended by post-effective amendment no. 1 dated June 20, 2005, and by post
effective amendment no. 2 dated July 27, 2006, and supplemented by prospectus
supplements dated August 26, 2005 and December 6, 2005, relating to the offer
and sale by the selling stockholders identified in the prospectus of up to
16,448,630 shares of common stock of Zone 4 Play, Inc. This prospectus
supplement includes:
o Our Quarterly Report on Form 10-QSB for the quarter ended June 30,
2006, which was filed with the Securities and Exchange Commission on
August 15, 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 and December 6, 2005, which are to be delivered with this
prospectus supplement. This prospectus supplement is qualified by reference to
the prospectus except to the extent that the information in this prospectus
supplement updates and supersedes the information contained in the prospectus
dated February 9, 2005, as amended by post-effective amendment No. 1 dated June
20, 2005, and by post effective amendment no. 2 dated July 27, 2006, and
supplemented by prospectus supplements dated August 26, 2005 and December 6,
2005, including any supplements or amendments thereto.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS AUGUST 15, 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 June 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 32,315,698 as of August 1, 2006.
ZONE 4 PLAY, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 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 2 Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6 Exhibits 23
Signatures 25
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 JUNE 30, 2006
IN U.S. DOLLARS
UNAUDITED
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. DOLLARS
JUNE 30,
2006
----------
UNAUDITED
----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $4,969,058
Trade receivables 95,081
Other accounts receivable and prepaid expenses 146,198
----------
TOTAL current assets 5,210,337
----------
SEVERANCE PAY FUND 140,479
----------
PROPERTY AND EQUIPMENT, NET 770,565
----------
ACQUIRED TECHNOLOGY, NET 607,307
----------
TOTAL assets $6,728,688
==========
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
JUNE 30,
2006
------------
UNAUDITED
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit $ 10,638
Trade payables 278,569
Employees and payroll accruals 393,379
Accrued expenses and other liabilities 124,950
------------
TOTAL current liabilities 807,536
------------
ACCRUED SEVERANCE PAY 392,437
------------
TOTAL liabilities 1,199,973
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Common stock of $ 0.001 par value:
Authorized: 75,000,000 shares as of June 30, 2006 and 2005; Issued and outstanding:
32,315,698 shares and 23,925,010 at June 30, 2006 and 2005, respectively 32,315
Additional paid-in capital 16,155,178
Accumulated other comprehensive income (15,961)
Deficit accumulated during the development stage (10,642,817)
------------
TOTAL stockholders' equity 5,528,715
------------
$ 6,728,688
============
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
SIX MONTHS ENDED THREE MONTHS ENDED OPERATIONS (APRIL
JUNE 30, JUNE 30, 2, 2001) THROUGH
------------------------------- ------------------------------- JUNE 30,
2006 2005 2006 2005 2006
------------ ------------ ------------ ------------ ------------
UNAUDITED UNAUDITED
--------------------------------------------------------------------- ------------
Revenues:
Software applications $ 389,959 $ 493,881 $ 205,598 $ 343,457 $ 2,263,906
Sale of software applications to
related party - - 704,340
------------ ------------ ------------ ------------ ------------
TOTAL revenues 389,959 493,881 205,598 343,457 2,968,246
Cost of revenues 197,639 87,712 100,023 76,647 917,637
------------ ------------ ------------ ------------ ------------
Gross profit 192,320 406,169 105,575 266,810 2,050,609
------------ ------------ ------------ ------------ ------------
Operating expenses:
Research and development 1,534,437 1,197,358 860,983 628,411 6,444,865
Selling and marketing 1,370,394 473,143 1,200,599 238,098 3,050,108
General and administrative 1,013,451 485,743 763,429 282,161 3,017,582
------------ ------------ ------------ ------------ ------------
TOTAL operating expenses 3,918,282 2,156,244 2,825,011 1,148,670 12,512,555
------------ ------------ ------------ ------------ ------------
Operating loss (3,725,962) (1,750,075) (2,719,436) (881,860) (10,461,946)
Financial income (expenses), net 6,188 17,745 3,519 9,402 (78,946)
Taxes on income 1,900
------------ ------------ ------------ ------------ ------------
Net loss $ (3,719,774) $ (1,732,330) $ (2,715,917) $ (872,458) $(10,542,792)
============ ============ ============ ============ ============
Basic and diluted net loss per
share $ (0.13) $ (0.075) $ (0.08) $ (0.037)
============ ============ ============ ============
Weighted average number of shares
of Common stock used in
computing basic and diluted net
loss per share 28,449,574 23,117,165 32,312,448 23,514,789
============ ============ ============ ============
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
SIX MONTHS ENDED THREE MONTHS ENDED OPERATIONS (APRIL
JUNE 30, JUNE 30, 2, 2001) THROUGH
----------------------------- ----------------------------- JUNE 30,
2006 2005 2006 2005 2006
------------ ------------ ------------ ------------ ------------
UNAUDITED UNAUDITED
--------------------------------------------------------------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (3,719,774) $ (1,732,330) $ (2,715,917) $ (872,458) $(10,542,792)
Adjustments required to
reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 314,785 124,168 152,381 95,874 810,810
Loss from sale of property - - - - 1,702
Increase in trade and other
accounts receivable and
prepaid expenses 12,128 (54,119) (35,858) (44,153) (241,169)
Amortization of deferred
compensation 1,540,689 236,745 1,361,046 121,845 2,359,155
Increase (decrease) in trade
payables (233,733) (48,398) (139,323) (28,886) 196,305
Increase (decrease) in
employees and payroll
accruals 44,179 (45,103) 49,917 (4,517) 393,379
Increase (decrease) in accrued
expenses and other
liabilities 44,699 (54,940) (8,698) 23,216 89,803
Accrued severance pay, net 57,930 24,341 53,684 10,658 251,958
Compensation related to
issuance of Common stock to
a service provider 18,000 148,500 - 79,500 298,881
------------ ------------ ------------ ------------ ------------
Net cash used in operating
activities (1,921,097) (1,401,136) (1,282,768) (618,921) (6,381,968)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (111,591) (205,115) (26,491) (26,147) (1,072,973)
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities (111,591) (205,115) (26,491) (26,147) (1,072,973)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of shares in respect of
reverse acquisition - - - - 4,391
Issuance of shares and warrants,
net 6,398,256 3,846,657 (63,745) - 12,418,854
Exercise of employees stock
options 6,187 - 6,187 - 6,187
Short-term bank credit, net (7,109) 432 594 (14,012) 10,638
Repayment of short-term loans
from stockholders and others - (1,229) - (1,229) -
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 6,397,334 3,845,860 (56,964) (15,241) 12,440,070
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes on
cash and cash equivalents 377 (9,087) 169 (9,688) (16,071)
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents 4,365,023 2,230,522 (1,366,054) (669,997) 4,969,058
Cash and cash equivalents at the
beginning of the period 604,035 144,077 6,335,112 3,044,596 -
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at the
end of the period $ 4,969,058 $ 2,374,599 $ 4,969,058 $ 2,374,599 $ 4,969,058
============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
- 5 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS
PERIOD FROM
COMMENCEMENT OF
OPERATIONS
(APRIL 2,
SIX MONTHS ENDED THREE MONTHS ENDED 2001) THROUGH
JUNE 30, JUNE 30, JUNE 30,
-------------------- -------------------- --------
2006 2005 2006 2005 2006
-------- -------- -------- -------- --------
UNAUDITED UNAUDITED
-------------------------------------------- --------
NON-CASH TRANSACTION
Purchase of property and
equipment $ 82,265 $ 38,966 $ 2,184 $ 38,966 $117,411
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 631 $ 651 $ 180 $ 160 $ 24,875
======== ======== ======== ======== ========
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 subsidiary, Zone4Play (Delaware), and its wholly-owned
subsidiaries Zone4Play Limited, an Israeli corporation incorporated in
July 2001, which is engaged in research and development and marketing
of the applications, and Zone4Play (UK) Limited, a United Kingdom
corporation, incorporated in November 2002, which is engaged in
marketing of the applications, and MixTV Ltd., an Israeli corporation
which develops and markets participation TV games applications.
The Company's shares of common stock are currently traded on the OTC
Bulletin Board under the trading symbol "ZFPI.OB."
b. According to the agreement between the Company and Zone4Play
(Delaware), the Company issued 10,426,190 shares of common stock to
the former holders of equity interest in Zone4Play (Delaware). The
acquisition has been accounted for as a reverse acquisition, whereby
the Company was treated as the acquiree and Zone4Play (Delaware) as
the acquirer, primarily because Zone4Play (Delaware) shareholders
owned a majority, approximately 58% of the Company's common stock,
upon completion of the acquisition. Immediately prior to the
consummation of the transaction, the Company had no material assets
and liabilities, hence the reverse acquisition is treated as a capital
stock transaction in which Zone4Play (Delaware) is deemed to have
issued the common stock held by the Company shareholders for the net
assets of the Company. The historical financial statements of
Zone4Play (Delaware) became the historical financial statements of the
Company.
c. The Company and its subsidiaries are devoting substantially all of
their efforts toward conducting research, development and marketing of
their software. The Company's and its subsidiaries' activities also
include raising capital and recruiting personnel. In the course of
such activities, the Company and its subsidiaries have sustained
operating losses and expect such losses to continue in the foreseeable
future. The Company and its subsidiaries have not generated sufficient
revenues and have not achieved profitable operations or positive cash
flow from operations. The Company's accumulated deficit during the
development stage aggregated to $ 10,642,817 as of June 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.
- 7 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
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. The Company recognized an
expense of $8,906 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 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.
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.
- 8 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
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. The Company recognized an expense in the amount of $1,155,088
according to 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
h. Concentration of risk that may have a significant impact on the
Company:
The Company derived 79% of its revenues from 3 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 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 Earnings:
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------- ----------
2006 2006
---------- ----------
(UNAUDITED) (UNAUDITED)
---------- ----------
Research and development expenses $ 185,436 $ 105,549
Sales and marketing expenses 977,521 950,399
General and administrative expenses 377,732 305,098
---------- ----------
Total $1,540,689 $1,361,046
========== ==========
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:
- 10 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 2:- SIGNIFI CANT ACCOUNTING POLICIES (CONT.)
SIX MONTHS ENDED,
JUNE 30,
-------------------
2006 2005
---- ----
UNAUDITED
-------------------
Risk free interest 5.06% 2%
Dividend yields 0% 0%
Volatility 73% 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:
SIX MONTHS ENDED JUNE 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 4,455,261 1.14 576,783 1.12
Forfeited (163,750) 0.70 (212,261) 1.33
Exercised (11,250) 0.55 - -
---------- ---- ---------- ----
Outstanding at the end of
the quarter 6,474,783 1.00 1,824,522 0.74
========== ==== ========== ====
Options exercisable at the
end of the quarter 1,314,438 0.65 581,673 0.59
========== ==== ========== ====
- 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 six months ended June 30, 2005 had we
applied the fair value recognition provisions of SFAS No. 123(R):
SIX MONTHS ENDED
JUNE 30,
----------
2005
----------
UNAUDITED
----------
Net loss as reported $1,732,330
==========
Deduct: stock-based employee compensation - intrinsic
value 236,745
Add: Total stock-based employee compensation expense
determined under the fair value based method of SFAS No
123 for all awards 308,223
----------
Pro forma net loss $1,803,808
==========
Net loss per share:
Basic and diluted - as reported $ 0.075
==========
Basic and diluted - pro forma $ 0.078
==========
The Company applies SFAS123 "Accounting for Stock-Based Compensation"
("SFAS No. 123") and EITF 96-18, with respect to options and warrants
issued to non-employees. SFAS No. 123 requires use of an option
valuation model to measure the fair value of these options at the
measurement date, as defined in EITF 96-18.
- 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 six months ended June 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 on
consolidation.
The significant accounting policies applied in the annual consolidated
financial statements of the Company as of December 31, 2005, contained in
the Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission on April 11, 2006, have been applied consistently in
these unaudited interim condensed consolidated financial statements.
NOTE 4:- SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION
Summary information about geographic areas:
The Company manages its business on the basis of one reportable segment
(see Note 1 for a brief description of the Company's business) and follows
the requirements of 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:
SIX MONTHS ENDED
JUNE 30,
-----------------------
2006 2005
-------- --------
TOTAL REVENUES
-----------------------
England $ 94,315 $313,011
Australia 175,000 -
United states 118,562 158,394
Others 2,082 22,476
-------- --------
$389,959 $493,881
======== ========
- 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:
SIX MONTHS ENDED
JUNE 30,
----------------------
2006 2005
------ ------
Customer A 45% -
====== ======
Customer B 19% 11%
====== ======
Customer C 15% *)
====== ======
Customer D *) 33%
====== ======
Customer E *) 13%
====== ======
Customer F - 19%
====== ======
*) Represents an amount lower than 10%.
NOTE 5: RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2006, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments" ("FAS 155"),
which amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133") and SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS 140").
FAS 155 provides guidance to simplify the accounting for certain hybrid
instruments by permitting fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative, as well as clarifies that
beneficial interests in securitized financial assets are subject to FAS 133. In
addition, FAS 155 eliminates a restriction on the passive derivative instruments
that a qualifying special-purpose entity may hold under FAS 140. FAS 155 is
effective for all financial instruments acquired, issued or subject to a new
basis occurring after the beginning of an entity's first fiscal year that begins
after September 15, 2006. We believe that the adoption of this statement will
not have a material effect on our financial condition or results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" ("FAS 156"), which amends SFAS No. 140. FAS 156 provides
guidance addressing the recognition and measurement of separately recognized
servicing assets and liabilities, common with mortgage securitization
activities, and provides an approach to simplify efforts to obtain hedge
accounting treatment. FAS 156 is effective for all separately recognized
servicing assets and liabilities acquired or issued after the beginning of an
entity's fiscal year that begins after September 15, 2006, with early adoption
being permitted. We believe that the adoption of this statement will not have a
material effect on our financial condition or results of operations
NOTE 6:- SUBSEQUENT EVENTS
A. On July 11, 2006, we formed Gaming Ventures Plc ("GV") as a wholly
owned subsidiary of the Company, incorporated under the laws of the
Isle of Man. The purpose of GV is to exploit gaming software and other
related intellectual property and to further develop its software and
potentially other gaming software. GV conducts its operations and
business with and through its wholly-owned subsidiaries: RNG Gaming
Limited, 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, an Isle of Man corporation
incorporated on July 12, 2006 which is engaged in providing marketing
services of gaming applications.
- 14 -
ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS
NOTE 6:- SUBSEQUENT EVENTS (CONT.)
According to an agreement 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. Zone4Play (Delaware)
intends to secure this promissory note by establishing a lien on all of
GV's assets including its shares in its two subsidiaries.
B. The Company as the holding company of GV, has the intention of spining
off the shares of GV to its shareholders. In order to affect the
spinoff to the shareholders, the Board of the Company would declare
and set a record date for a dividend of the shares of GV on a
one-for-one pro rata basis to the shareholders of the Company as of
such record date.
- 15 -
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. 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 "Risk Related to Our Business" in
Part I, Item 1, "Description of Business" of our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2005. Readers are also urged to carefully
review and consider the various disclosures we have made in this report.
OVERVIEW
Our financial statements are stated in United States Dollars (US$) and are
prepared in accordance with United States Generally Accepted Accounting
Principles.
You should read the following discussion of our financial condition and results
of operations together with the unaudited financial statements and the notes to
unaudited financial statements included elsewhere in this report.
COMPANY HISTORY
Zone4Play, Inc. (hereinafter referred to as "Zone4Play", "the Company", "us" or
"we") was incorporated under the laws of the State of Nevada on April 23, 2002,
as Old Goat Enterprises, Inc. On February 1, 2004, Old Goat Enterprises, Inc.
issued the shareholders of Zone 4 Play, Inc., a Delaware corporation ("Zone4Play
Delaware"), 10,426,190 shares of common stock, in consideration for the entire
share capital of Zone4Play Delaware. Immediately after the issuance, the
shareholders of Zone4Play Delaware held 58% of the issued and outstanding share
capital of Old Goat Enterprises, Inc., and subsequently changed its name to Zone
4 Play, Inc., a Nevada corporation. The transaction was accounted for as a
reverse acquisition, whereby Old Goat was treated as the acquired company and
Zone4Play Delaware as the acquirer. The historical financial statements of
Zone4Play Delaware became our historical financial statements. We conduct our
operations through our wholly owned subsidiaries, Zone4Play (Israel) Ltd., an
Israeli corporation incorporated in July 2001, Zone4Play (UK) Limited, a United
Kingdom corporation incorporated in November 2002, and Zone4Play Delaware. On
April 27, 2005, pursuant to an agreement with NetFun Ltd., we increased our
ownership percentage of the issued and outstanding share capital of MixTV Ltd.
From 50.1% to 100%. 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 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 ("BJ
Software") on a "going concern" and "as is" basis, in exchange for a 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%. The note will be secured
by a Debenture and Equitable Share Charge between Zone4Play Delaware and Gaming.
Zone4Play Delaware intends to have a lien on all of Gaming's assets including
its shares in its two subsidiaries. On July 17, 2006, Gaming entered into an
agreement with RNG under which Gaming assigned all of its rights in the BJ
Software to RNG in consideration for all outstanding and issued ordinary shares
of RNG. The purpose of RNG is to exploit the BJ 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 -
Get21 will provide marketing services related to the BJ Software business and
potentially other games. Get21 will seek 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 August 4. 2006, Gaming filed with the Securities and Exchange Commission
("SEC") a registration statement on Form 20-F. 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.".
OUR BUSINESS
We are a software and technology developer and provider to companies that
service the interactive gaming industry, delivering cross-platform systems that
are built for mass participation gaming over mobile devices, TV and the
internet. Our software provides and supports play-for-fun and play-for-real
interactive games (currently such play-for-real gaming solutions are only
provided in the United Kingdom where fixed odds gaming are permitted by licensed
bookmakers).
We offer five core solutions to companies that offer play-for-real gaming,
namely:
(i) Mobile gaming: the provision of services on mobile devices, including fixed
odds games, multiplayer games, sports betting services, scratch cards and
exchange betting.
(ii) Interactive TV gaming: the provision of software and technology currently
supporting fixed odds games.
(iii) Participating TV gaming: the provision of services via the interaction of
television broadcasts and mobile text messages, IVR (interactive voice
response) lines or Java interaction.
(iv) Online gaming: the provision of fixed odds and casino games over the
internet.
(v) Multiplayer blackjack tournaments: 24/7 availability of variety of
blackjack tournaments games based on a peer-to-peer technology allowing
users to compete against each other and not against the "house".
We also offer games for fun and skills games: the provision of play-for-fun
gaming alternatives on mobile, Interactive TV, participating TV and the
internet.
Our customers include online gaming operators (Cosmotrade Investments Limited),
bookmakers (Eurobet UK Limited, The Gaming Channel Limited, Two Way Media
Limited), betting exchanges (Betfair, the Sporting Exchange Limited), cable and
satellite television service providers (CSC Holdings Inc., RCN Telecom
Services), mobile operators (O2 (online) Ltd.), internet service providers
(Chello Broadband N.V., 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.
- 17 -
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 June
30, 2006, we had an accumulated deficit of $10,642,817. There is no assurance
that profitable operations, if ever achieved, will be sustained on a continuing
basis. During the six months ended June 30, 2006, we derived approximately 79%
of our revenues from three major customers.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE
MONTHS ENDED JUNE 30, 2005
REVENUES AND COST OF REVENUES
Total revenues for the three months ended June 30, 2006 decreased by 40% to
$205,598 from $343,457 for the three months ended June 30, 2005. All such
revenues were from sales of software applications and distribution rights. The
decrease in revenues from software applications is primarily attributable to
licenses revenues to Cosmotrade Investment Ltd, CTE, and Cablevision that we had
in the three months ended June 30, 2005, and a decrease in revenues from the
Gaming Channel offset by a 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 June 30, 2006 increased by 30% to
$100,023 from $76,647 for the three months ended June 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 three months ended June 30,
2006, gross profit decreased by 60% to $105,575 when compared to gross profit of
$266,810 for the three months ended June 30, 2005.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended June 30, 2006
increased by 37% to $860,983 from $628,411 for the three months ended June 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 as a result of adopting Statement of Financial Accounting Standard
(SFAS) No. 123R, "Share-Based Payment" ("SFAS 123(R)") effective January 1,
2006.
SALES AND MARKETING
Sales and marketing expenses for the three months ended June 30, 2006 increased
by 404% to $1,200,599 from $238,098 for the three months ended June 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 Chief Executive Officer ("CEO") in the amount of $924,071 and to accounting
charges related to the adoption of SFAS 123(R) effective January 1, 2006.
- 18 -
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended June 30, 2006
increased by 171% to $763,429 from $282,161 for the three months ended June 30,
2005. The increase in general and administrative expenses is primarily
attributable to recruitment of employees, salaries increase ,additional expenses
in relation to the possible admission of our shares to trade on AIM on 2005, 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 $231,017, to expenses related to evaluation of the spin off of our
multi player black jack tournaments application and due to accounting charges as
a result of adopting SFAS 123(R) effective January 1, 2006.
NET LOSS
Net loss for the three months ended June 30, 2006 was $2,715,917 as compared to
net loss of $872,458 for the three months ended June 30, 2005. Net loss per
share for the three months ended June 30, 2006 was $0.08 as compared to $0.04
for the three months ended June 30, 2005. The net loss increased for the three
months ended June 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 $1,155,088.. This expense was in accordance with SFAS
123(R) 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 June 30, 2006 was 32,312,448 compared with 23,514,789 for the three
months ended June 30, 2005. The increase was due to the issuance of additional
shares in two private placements, as discussed further below.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS
ENDED JUNE 30, 2005
REVENUES AND COST OF REVENUES
Total revenues for the six months ended June 30, 2006 decreased by 21% to
$389,959 from $493,881 for the six months ended June 30, 2005. All such revenues
were from sales of software applications and distribution rights. The decrease
in revenues from software applications is primarily attributable to licenses
revenues to Cosmotrade Investment Ltd, CTE, and Cablevision that we had in the
six months ended June 30, 2005, and a decrease in revenues from the Gaming
Channel offset by 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 six months ended June 30, 2006 increased by 125% to
197,639 from $87,712 for the six months ended June 30, 2005. The increase in the
cost of revenues is attributable primarily to amortization of the technology
which was acquired on the end April 2005 by acquiring the minority shares in our
participation TV subsidiary, MixTV Ltd. For the six months ended June 30, 2006,
gross profit decreased by 53% to $192,320 when compared to gross profit of
$406,169 for the six months ended June 30, 2005.
RESEARCH AND DEVELOPMENT
Research and development expenses for the six months ended June 30, 2006
increased by 28% to $1,534,437 from $1,197,358 for the six months ended June 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 as a result of adopting SFAS 123R effective January 1, 2006.
- 19 -
SALES AND MARKETING
Sales and marketing expenses for the six months ended June 30, 2006 increased by
190% to $1,370,394 from $473,143 for the six months ended June 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 $924,071 and to accounting charges related to the adoption of
SFAS 123R effective January 1, 2006.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the six months ended June 30, 2006
increased by 109% to $1,013,451 from $485,743 for the six months ended June 30,
2005. The increase in general and administrative expenses is primarily
attributable to recruitment of employees, salaries increase 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
$231,017, to expenses related to evaluation of the spin off of our multi player
black jack tournaments application and due to accounting charges as a result of
adopting SFAS 123R effective January 1, 2006.
NET LOSS
Net loss for the six months ended June 30, 2006 was $3,719,774 as compared to
net loss of $1,732,330 for the six months ended June 30, 2005. Net loss per
share for the six months ended June 30, 2006 was $0.13 as compared to $0.08 for
the six months ended June 30, 2005. The net loss increased for the six months
ended June 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 $1,155,088 . This expense was in accordance with SFAS 123(R) 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 six months ended June 30,
2006 was 28,449,574 with 23,117,165 for the six months ended June 30, 2005. The
increase was due to the issuance of additional shares in two private placements,
as discussed further below.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2006, total current assets were $5,210,337 and total current
liabilities were $807,356. On June 30, 2006, we had a working capital surplus of
$4,402,801 and an accumulated deficit of $10,642,817. 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 $4,402,801 on June 30, 2006
compared with a working capital deficit of $20,093 on December 31, 2005. Cash
and cash equivalents on June 30, 2006 were $4,969,058, an increase of $4,365,023
from the $604,035 reported on December 31, 2005. Cash balances increased in the
six months ended June 30, 2006 primarily as a result of the stock issuances
described below, offset by the increase in our net loss for the six months ended
June 30, 2006.
Operating activities used cash of $1,921,097 in the six months ended June 30,
2006 and $1,282,768 in the three months ended June 30, 2006. Cash used by
operating activities in the six months ended June 30, 2006 results primarily
from a net loss of $3,719,774, a $44,179 increase in employee payroll accruals,
a $44,699 increase in accrued expenses and other liabilities offset by a
$1,540,689 increase in amortization of deferred compensation (mainly to our CEO
in the amount of $1,155,088), $314,785 of depreciation, of which $166,667 is
related to amortization of acquired technology, and $18,000 of compensation
related to issuance of common stock to a service provider.
- 20 -
Investing activities used cash of $111,591 in the six months ended June 30, 2006
and $26,491 in the three months ended in the same period. Cash used by investing
activities in the six months ended June 30, 2006 results from the purchase of
computer and software equipment.
Financing activities generated cash amount of $6,397,334 during the six months
ended June 30, 2006 and used $56,964 in the three months ended June 30, 2006.
Cash provided by financing activities for the six month period ended June 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.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.
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 six
months ended June 30, 2006 accounted for $1,361,046 and $1,540,689,
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.
- 21 -
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.
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 second quarter of
2006 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
- 22 -
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On April 3, 2006, the Company issued to Citron Investments Ltd., which is owned
by Shimon Citron, an option to buy 1,863,000 shares of the Company's common
stock with an exercise price of $1.15 per share in consideration for services
provided by Mr. Citron to the Company. The option vests in the following manner:
1,500,750 shares on July 1, 2006, two equal installments of 155,250 shares, one
vests on October 1, 2006 and one vests on January, 1, 2007, and an installment
of 51,750 shares on April 1, 2007.
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.
On April 27, 2006, pursuant to an agreement between the Company and Ori Sasson
and Jonathan Medved, the Company issued to each of Mr. Medved and Mr. Sasson as
advisors of the Company a warrant to purchase 200,000 of the Company's shares of
common stock with an exercise price of $1.00 per share.
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 in consideration for advisory services.
On June 6, 2006, pursuant to an advisory agreement dated November 30, 2005 the
Company issued to its financial advisor 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.
All of the above issuances and sales were deemed to be exempt under Regulation
S, Regulation D and/or Section 4(2) of the Securities Act. No advertising or
general solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors, business associates of ours or our executive officers, and transfer
was restricted by us in accordance with the requirements of the Securities Act.
ITEM 6. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
10.1 Option Agreement between Zone 4 Play, Inc. and Citron Investments Ltd.
dated April 3, 2006.
10.2 Master Services Agreement dated April 17, 2006, by and among
Zone4Play, Inc., Two Way Media Limited and Ladbrokes E-Gaming Limited,
and Statement of Work dated April 17, 2006 issued by Ladbrokes
E-Gaming Limited (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 20, 2006).
10.3 Amendment to 2004 Global Share Option Plan of Zone 4 Play, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission
on May 10, 2006).
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).
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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: August 15, 2006 By: /s/ Shimon Citron
-------------------------------------
Shimon Citron
President and Chief Executive Officer
Dated: August 15, 2006 By: /s/ Uri Levy
-------------------------------------
Uri Levy
Chief Financial Officer
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