SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
Commission file number 2-31876
WORLDS INC.
(Exact name of small business issuer as specified in its charter)
New Jersey
(State or other jurisdiction of
incorporation or organization)
22-184316
(IRS Employer Identification No.)
15 Union Wharf, Boston, Massachusetts 02109
(Address of principal executive offices)(Zip Code)
(617) 725-8900
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock outstanding was 16,637,881 shares as of
August 13, 1999
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion should be read in conjunction with the
financial statements and related notes which are included under Item 1.
Statements made below which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, our
ability to complete development and then market our products, competitive
factors and other risk factors as stated in other of our public filings with the
Securities and Exchange Commission.
We were formed on May 20, 1968. From 1975 until December 1997 we were
inactive with no operations and our only income was from interest, gain on the
sale of securities and dividends. In December 1997 a series of mergers occurred
involving us, Worlds Acquisition Corp. and our predecessor, Worlds Inc.
Following the mergers, we have been engaged in the business and operations
formerly conducted by our predecessor and have changed our name to adopt that of
our predecessor, Worlds Inc. Accordingly, a discussion and analysis of our
financial condition and results of our operations without discussing our
predecessor would be of limited importance to any reader. Thus, included herein
is a discussion of our predecessor's pre-mergers operations.
Background
Predecessor was formed in April 1994 to design, develop and
commercialize 3D multi-user tools and technologies for the Internet market. From
inception through 1997, predecessor's operations were limited and consisted
primarily of start-up activities, including recruiting personnel, raising
capital, custom production work, and research and development. In the third
quarter of 1996, predecessor launched its first commercial user-oriented 3D chat
site, Worlds Chat 1.0, and began selling the client interface software through
direct sales channels. These sales were nominal. In October of 1996, predecessor
introduced its first commercial toolset for developing 3D multi-user
applications. In the first quarter of 1997, after an unsuccessful effort to
raise capital, predecessor became insolvent and released most of its personnel,
and management sought to sell predecessor and/or its technology. Predecessor did
not generate significant revenues.
While we have completed development and market testing of Worlds Gamma
and 3D Internet music sites, we may not generate significant revenues until
after we successfully attract and retain a significant number of VIP
subscribers, customers and/or advertisers. We anticipate continuing to incur
significant losses until, at the earliest, we generate sufficient revenues to
offset the substantial up-front expenditures and operating costs associated with
developing and commercializing our proposed products. There can be no assurance
that we will be able to attract and retain a sufficient number of VIP
subscribers, customers and/or advertisers to generate significant revenues or
achieve profitable operations or that our products and services will prove to be
commercially viable.
We classify our expenses into three broad groups: (1) research and
development; (2) cost of revenues; and (3) selling, general and administration.
Software development costs, consisting primarily of salaries and related
expenses, incurred prior to establishing technological feasibility are expensed
in accordance with Financial Accounting Standards Board (FASB) Statement No. 86.
In accordance with FASB 86, we will capitalize software development costs at
<PAGE>
such time as the technological feasibility of the product has been established.
We began capitalizing our software in the 4th quarter of 1998 with the
commercial release of three products, Animal House, BowieWorld and Worlds
Ultimate 3D Chat. For the first quarter of 1999 approximately $214,000 of such
expenditures were capitalized. For the second quarter of 1999 approximately
$225,000 of such expenditures were capitalized.
Plan of Operation
During the fourth quarter of 1998, we successfully completed the
development of our Gamma development tool kit and commercially released three
products utilizing our 3D Internet technology. During the first and second
quarters of 1999 we continued holding discussions with several major record
labels and companies for them to distribute Worlds Gamma, along with music
related web site access. Our strategy of distributing our products on CD+ is
wholly dependent upon obtaining distribution agreements with record labels,
artists or record companies. We have also begun to distribute our services via
internet service providers, broadband service providers via cable modems and a
mini-downloadable version. To date, we have entered into several agreements.
We have also been actively pursuing strategic alliances with a number
of companies that can provide exposure and distribution of our products and
technology. These meetings started paying dividends during the first half of
1999 as we engaged in serious negotiations that led to the following agreements.
In June 1999 we launched HansonWorld, the first 3D chat environment
utilizing our 3D technology on a special CD which was distributed to
the fan club of Hanson.
We entered into two agreements with Freeserve Plc., United Kingdom's
largest Internet Service Provider and a leading UK Internet Portal.
The first agreement provides for us to be the official 3D Internet
broadband chat content provider on Freeserve which will include our 3D
Internet Technology and 3D broadband content on millions of new
Freeserve ISP access CDs. The second agreement provides for us to be
the official and exclusive 2D, or HTML, Internet chat content provider
on the Freeserve ISP service.
We entered into agreements with third party content providers to be
integrated into the Road Runner broadband offering, [email protected].
We added the following artists to our e-commerce website,
WorldsStore.com.
Wu Wear store.com, Five store.com, B*Witched store.com, Sheryl Crow
store.com, Eminem store.com, Bruce Springsteen store.com, Ricky Martin
store.com, Deftones store.com, Metallica store.com, Tim McGraw store.com, The
Cranberries store.com and Britney Spears store.com.
During this quarter we also continued to upgrade our e-commerce web
site, WorldsStore.com, purchased inventory for sale through our web site,
enhanced features to our core technology by improving the audio and video
streaming features, continued to improve our voice-to-voice Internet telephony
and increased our customer service program.
<PAGE>
Our present cash resources are insufficient to meet all of our
requirements over the next twelve months unless additional funds are raised
through our current private offering and through other financings. We currently
have nine full-time employees and are working with seven independent software
contractors who were former employees of our predecessor. We do not anticipate
hiring additional employees or purchasing additional plant or equipment other
than that needed on a day-to-day basis until product sales increase
significantly and/or significant additional financing is obtained.
We are currently in the midst of a private offering. We are offering up
to 66 units at a price of $60,000 per unit. Each unit consists of 15,000 shares
of our common stock and 7,500 warrants to purchase shares of our common stock at
a price of our common stock at a price of $5.00 per share. As of June 30, 1999
and through August 13, 1999, $2,460,000 has been released from escrow. The
escrow agent for the offering is currently holding an additional $419,930, but
is unable to predict how much, if any, of such funds will eventually be released
for our use. The offering is currently schedule to terminate on August 21, 1999.
Results of Our Operations
Six Months Ended June 30, 1999 Compared with Six Months Ended June 30, 1998
The following data extracted from the attached financial statements
compares the results of our operations for the six months ended June 30, 1999 to
the six months ended June 30, 1998.
Six months ended
6/30/99 6/30/98
Net Revenue $ 92,925 $16,132
Costs & Expenses:
Cost of revenues (70,355) (25,101)
Selling, general
& administrative (1,425,495) (1,307,525)
Research & development - (534,428)
Operating Loss (1,402,925) (1,850,922)
Other Income (Expense):
Interest income 17,966 76,992
Interest expense (68,922) (72,112)
Loss before taxes & extraordinary item (1,453,881) (1,846,042)
Extraordinary item - gain on debt settlement - 151,654
Net Loss (1,453,881) (1,694,388)
<PAGE>
In the first half of 1999, we continued to upgrade our core technology
and began production on various new projects. We continue to have discussions
with potential new clients and/or partners, no assurance can be given that any
negotiations will lead to the consummation of any additional agreements. In the
first quarter of 1998 we continued the implementation of our new business plan.
Significant expenditure was incurred towards completion of the Gamma technology
and also with legal and professional fees.
Revenues are nominal and are derived from our Worlds Ultimate 3D Chat
product and from sales on our e-commerce web site where we currently operate
artist or artist related Internet stores such as DavidBowieStore.com,
NinetyEightDegreesStore.com and EltonJohnStore.com, among others. Revenue was
$92,925 and had associated direct costs of $70,355 for the six months ended June
30, 1999, compared to $16,132 in revenue and $25,101 of direct costs for the
same period in 1998.
Selling, general and administrative expenses were $1,425,495 for the
six months ended June 30, 1999. This represented an increase of $117,970 from
$1,307,525 compared to the six months ended June 30, 1998. This increase was
directly attributable to the higher costs associated with maintaining our new
e-commerce site, retaining expert software developers to improve and upgrade our
existing products and costs involved in beginning work on some of the new
projects discussed above.
We incurred no research and development costs during the six months
ended June 30, 1999 as compared to $534,428 for the six months ended June 30,
1998. This decrease is directly attributable to the fact that since our
technology is now technologically feasible, i.e., it works, all expenses
previously charged to research and development are capitalized. For the six
months ended June 30, 1999 $439,000 of such expenditures were capitalized.
Other income included $17,966 of interest income in the six months to
June 30, 1999 earned from the remainder of the proceeds of our share offerings
as compared to $76,992 in the six months ended June 30, 1998. Other expenses
included interest expense of $68,922 directly attributable to the Predecessor's
notes payable in the six months to June 30, 1999. Interest expense in the six
months to June 30, 1998 was $72,112.
As a result of the foregoing we incurred a net loss of $1,453,881 for
the six months ending June 30, 1999, compared to a loss of $1,694,388 for the
six months ending June 30, 1998, a decrease of $240,507. The loss in the 1998
quarter was after an extraordinary gain of $151,654. See Statement of Operations
on Page F-4.
<PAGE>
Three Months Ended June 30, 1999 Compared with Three Months Ended June 30, 1998
Three months ended
6/30/99 6/30/98
Net Revenue $57,748 $12,130
Costs & Expenses:
Cost of revenues (48,891) (22,500)
Selling, general
& administrative (809,680) (759,185)
Research & development - (302,516)
Operating Loss (800,825) (1,072,071)
Other Income (Expense):
Interest income 5,180 35,054
Interest expense (30,000) (35,656)
Loss before taxes (825,643) (1,072,673)
Net Loss (825,643) (1,072,623)
Revenues are nominal and are derived from our Worlds Ultimate 3D Chat product
and from sales on our e-commerce web site where we currently operate artist or
artist related Internet stores such as DavidBowieStore.com,
NinetyEightDegreesStore.com and EltonJohnStore.com, among others. Revenue was
$57,748 and had associated direct costs of $48,891 for the three months ended
June 30, 1999, compared to $12,130 in revenue and $22,500 of direct costs for
the same period in 1998.
Selling, general and administrative expenses were $809,680 for the three months
ended June 30, 1999. This represented an increase of $50,495 from $759,185
compared to the three months ended June 30, 1998. This increase was directly
attributable to the higher costs associated with maintaining our new e-commerce
site, retaining expert software developers to improve and upgrade our existing
products and costs involved in beginning work on some of the new projects
discussed above.
We incurred no research and development costs during the three months ended June
30, 1999 as compared to $302,516 for the three months ended June 30, 1998. This
decrease is directly attributable to the fact that since our technology is now
technologically feasible, i.e., it works, all expenses previously charged to
research and development are capitalized. For the second quarter of 1999,
$225,000 of such expenditures were capitalized.
Other income included $5,180 of interest income in the three months to June 30,
1999 earned from the remainder of the proceeds of our share offerings as
compared to $35,054 in the three months ended June 30, 1998. Other expenses
included interest expense of $30,000 directly attributable to the Predecessor's
notes payable in the three months to June 30, 1999. Interest expense in the
three months to June 30, 1998 was $35,656.
<PAGE>
As a result of the foregoing we incurred a net loss of $825,643 for the three
months ending June 30, 1999, compared to a loss of $1,072,673 for the three
months ending June 30, 1998, a decrease of $247,030. See Statement of Operations
on Page F-4.
Liquidity and Capital Resources of the Company
Net cash provided from January 1, 1999 through June 30, 1999 was
$955,853. At June 30, 1999, we had working capital of $1,179,631 and cash and
cash equivalents in the amount of $2,537,617.
On December 3, 1997, the mergers were deemed to close as well as the
first round of a private placement of our common stock raising gross proceeds of
$3.8 million, by selling 3.8 million shares, of which we netted approximately
$3,000,000. We also acquired approximately an additional $560,000 from one of
the other parties to the mergers.
Prior to the mergers, we had 910,000 shares outstanding. Effective
December 31, 1997, we closed on an additional $585,000 of gross proceeds from
the private offering, of which we netted $529,000, and issued an additional
585,000 shares of common stock and on January 2, 1998 received an additional
$30,000, of which we netted $26,500, and issued an additional 30,000 shares. In
June 1998, we closed on a secondary offering of $1,832,000 gross proceeds, of
which we netted $1,715,800 by selling 1,832,000 shares at $1.00 per share. On
May 12, 1999 we commenced a new private offering. While the offering is
continuing, as of August 13, 1999 we received $2,460,000 and escrow agent for
the offering is holding an additional $419,930 pending completion of some
related paperwork.
Our capital requirements relating to the commercialization of Worlds
Gamma and development of web site access and content for the music industry have
been and will continue to be significant. We are dependent on the proceeds of
future financings in order to continue in business and develop and further
commercialize our proposed products.
We anticipate, based on currently proposed business plans and
assumptions relating to our operations, including the timetable of, and costs
associated with, product development and commercialization, that we have only a
portion of the funds necessary to complete product development and
commercialization. Satisfactory completion of product development and
commercialization will require capital resources substantially greater than
those currently available to us. In addition, as a result of the mergers by
operation of law, we assumed predecessor's then liabilities of approximately
$4.6 million, the majority of which has since been paid or renegotiated. At June
30, 1999, our total liabilities were approximately $3,360,000 million, including
the long term portion of notes payable of $1,853,000.
There can be no assurance that we will be able to obtain the
substantial additional capital necessary to permit us to attract and retain a
<PAGE>
sufficient number of subscribers or that any assumptions relating to our
business plan will prove to be accurate. While we hope to raise additional
financing, we have no current arrangements with respect to, or sources of,
additional financing and there can be no assurance that any such financing,
particularly the significant amounts of financing that would be required, will
be available to us on commercially reasonable terms, or at all. Any inability to
obtain additional financing will have a material adverse effect, including
possibly requiring us to significantly curtail or cease operations.
Effect of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." ("SFAS No. 133"), which requires companies
to recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. The Company does not
presently enter into any transactions involving derivative financial instruments
and, accordingly, does not anticipate the new standard will have any effect on
its financial statements.
Year 2000 Disclosure
We are Year 2000 compliant and we do not anticipate any internal
problems. In the event any internal problems should arise, we have many expert
computer technicians on our payroll and we believe that we will be able to
satisfactorily address any such problems. However, we are dependent on the
integrity of the Internet being maintained to derive income from the sale of
merchandise on our own e-commerce site and through links to the products we
create. We have employed a redundancy system as a safeguard to protect the
viability of our site by having our site hosted by two of the larger Internet
Service Providers. Thus, in the event one of our hosts should fail, we could
continue uninterrupted on the other Internet Service Provider. We have been
advised that our hosts are addressing the Year 2000 issue and hope to be
compliant. We use Wells Fargo to process our e-mail transactions. Wells Fargo
processes a significant portion of all Internet e-commerce transactions and if
it fails due to Year 2000 problems we will be negatively impacted, but not
likely more than many other e-commerce vendors. In summary, we are totally
dependent upon 3rd parties for hosting and processing our e-commerce activities
and while we cannot control the actions of these 3rd parties, we believe that
given our redundant safeguards, the availability of other hosts and processors
to switch to in the event our current hosts and/or processor crashes and the
fact that we only see nominal revenue from our e-commerce at this time, we do
not believe that our profitability or operations will be materially affected by
the Year 2000 problem.
PART II
OTHER INFORMATION
Item 5. Other Information.
On May 12, 1999, we began an exempt private offering under Rule 506 as
promulgated under The Securities Act of 1933, as amended. We are seeking to
<PAGE>
raise $2-4 million through the sale of a unit offering. The offering was offered
solely to "accredited investors" and pursuant to a Private Placement Memorandum
and Subscription Agreement. The offering terminated on July 31, 1999. We
received $2,460,000 and the escrow agent is holding an additional $419,930
pending clarification of some of the submitted paperwork. We can venture no
opinion at this time as to how much additional funds will be released to us.
On August 8, 1999 we adopted the name Worlds.com as the new name under
which we will conduct business.
The previous disclosure in this Item 5 is a "forward looking statement"
which may never eventuate.
Item 6. Exhibits and Reports on Form 8-K.
(a) A financial data schedule is filed herewith as an exhibit.
(b) No reports on Form 8-K were filed during the quarter for
which this report is being filed.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned thereto duly
authorized.
Date: August 12, 1999
WORLDS INC.
By: /s/
Thomas Kidrin,
President, CEO and Treasurer
<PAGE>
Worlds Inc.
(a development stage enterprise)
Financial Statements
Periods Ended June 30, 1998 and 1999
<PAGE>
Worlds Inc.
(a development stage enterprise)
Financial Statements
Periods Ended June 30, 1998 and 1999
F-1
<PAGE>
Worlds Inc.
(a development stage enterprise)
Contents
Unaudited financial statements:
Balance sheets F-3
Statements of operations F-4
Statement of stockholders' equity (deficit) F-5
Statements of cash flows F-6
Summary of accounting policies F-7 - F-11
Notes to financial statements F-12 - F-15
F-2
<PAGE>
Worlds Inc.
(a development stage enterprise)
Balance Sheets
<TABLE>
<S> <C> <C>
December 31, 1998 June 30, 1999
------------------------------------------------------------------ --------------------------- ----------------------
Assets (unaudited)
Current:
Cash and cash equivalents $ 1,581,764 $ 2,537,617
Accounts receivable - 19,918
Prepaid expenses and other current assets 53,486 42,512
Inventory 58,516 87,052
------------------------------------------------------------------ --------------------------- ----------------------
Total current assets 1,693,766 2,687,099
Property, equipment and software development costs, net of
accumulated depreciation and amortization 214,246 562,132
Other assets (Note 5) - 503,095
------------------------------------------------------------------ --------------------------- ----------------------
$ 1,908,012 $ 3,752,326
------------------------------------------------------------------ --------------------------- ----------------------
Liabilities and Stockholders' Equity (Deficit)
Current:
Accounts payable $ 319,906 $ 468,488
Accrued expenses 446,333 769,832
Current maturities of notes payable 246,648 269,148
------------------------------------------------------------------ --------------------------- ----------------------
Total current liabilities 1,012,887 1,507,468
Long-term portion, notes payable 1,875,018 1,852,518
------------------------------------------------------------------ --------------------------- ----------------------
Total liabilities 2,887,905 3,359,986
------------------------------------------------------------------ --------------------------- ----------------------
Contingencies (Note 4)
Stockholders' equity (deficit) (Notes 2 and 3):
Common stock, $.001 par value - shares authorized 30,000,000;
outstanding 18,031,996 and 18,815,746 18,032 18,816
Additional paid-in capital 8,401,970 11,227,300
Deficit accumulated during the development stage (9,335,152) (10,789,033)
------------------------------------------------------------------ --------------------------- ----------------------
(915,150) 457,083
Treasury stock, at cost, 113,465 and 1,613,465 shares (64,743) (64,743)
------------------------------------------------------------------ --------------------------- ----------------------
Total stockholders' equity (deficit) (979,893) 392,340
------------------------------------------------------------------ --------------------------- ----------------------
$ 1,908,012 $ 3,752,326
------------------------------------------------------------------ --------------------------- ----------------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-3
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Operations (Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Cumulative,
period from
April 8, 1997
(inception) to
Three months ended June 30, Six months ended June 30, June 30,
1998 1999 1998 1999 1999 (a)
Net revenues $ 12,130 $ 57,748 $ 16,132 $ 92,925 $ 123,455
Costs and expenses:
Cost of revenues (22,500) (48,891) (25,101) (70,355) (99,634)
Selling, general and administrative (759,185) (809,680) (1,307,525) (1,425,495) (4,751,228)
Research and development (302,516) - (534,428) - (992,932)
Acquired research and development - - - - (6,135,538)
Operating loss (1,072,071) (800,823) (1,850,922) (1,402,925) (11,855,877)
Other income (expenses):
Gain resulting from reversal of certain predecessor
liabilities - - - - 810,140
Interest income 35,054 5,180 76,992 17,966 155,565
Interest expense (35,656) (30,000) (72,112) (68,922) (197,184)
Loss before extraordinary item (1,072,673) (825,643) (1,846,042) (1,453,881) (11,087,356)
Extraordinary item - gain on debt settlement - - 151,654 - 298,323
Net loss $(1,072,673) $(825,643) $(1,694,388) $(1,453,881) $(10,789,033)
Loss per share (basic and diluted):
Loss before extraordinary item $ (.06) $ (.05) $ (.11) $ (.08)
Extraordinary item - - .01 -
Net loss per share (basic and diluted) $ (.06) $ (.05) $ (.10) $ (.08)
Weighted average common shares outstanding:
Basic and diluted 16,716,546 16,723,298 16,434,339 17,304,288
--------------
(a) Includes the results of Predecessor and Academic (from December 4, 1997) which were merged into the Company on
December 3, 1997.
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-4
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Stockholders' Equity (Deficit)
Period from April 8, 1997 (inception) to June 30, 1999
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
------------------------------------- ----------------------- -------------- ---------------- ---------- --------------
Deficit
accumulated Total
Additional during the stockholders'
paid-in development Treasury equity
Common stock capital stage stock (deficit)
-----------------------
Shares Amount
------------------------------------- ------------ ---------- -------------- ---------------- ---------- --------------
Balance, January 1, 1998 16,119,996 $16,120 $ 6,661,582 $ (6,686,471) $ $ (8,769)
Sale of shares in private offering
memorandum (January 1998) 30,000 30 26,470 - - 26,500
Sale of shares in public offering
of common stock, net (June 1998) 1,832,000 1,832 1,713,968 - - 1,715,800
Conversion of 113,465 shares to
certain stockholders (June 1998) - - - - (64,743) (64,743)
Conversion of employee stock
options into shares (October
1998) 50,000 50 (50) - - -
Net loss for the year ended
December 31, 1998 - - - (2,648,681) - (2,648,681)
------------------------------------- ------------ ---------- -------------- ---------------- ---------- --------------
Balance, December 31, 1998 18,031,996 18,032 8,401,970 (9,335,152) (64,743) (979,893)
Contribution of 1,500,000 shares by
founders to treasury (April 1999) - - - - - -
Exercise of stock options
(April 1999) 75,000 75 74,925 - - 75,000
Issuance of shares for content
supply agreement (June 1999) 93,750 94 374,906 - - 375,000
Sale of shares in private offering
memorandum (June 1999) 615,000 615 2,375,499 - - 2,376,114
Net loss for the six months ended
June 30, 1999 (unaudited) - - - (1,453,881) - (1,453,881)
------------------------------------- ------------ ---------- -------------- ---------------- ---------- --------------
Balance, June 30, 1999 (unaudited) 18,815,746 $18,816 $11,227,300 $(10,789,033) $(64,743) $ 392,340
------------------------------------- ------------ ---------- -------------- ---------------- ---------- --------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-5
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Cash Flows (Unaudited)
<TABLE>
<S> <C> <C> <C>
Cumulative
period from
April 8, 1997
Six months ended June 30, (inception) to
------------------ -------------------
1998 1999 June 30, 1999
----------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows from operating activities:
Net loss $ (1,694,388) $(1,453,881) $(10,789,033)
----------------------------------------------------------- ------------------ ------------------- ------------------
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of fixed assets - - 54,041
Depreciation and amortization 93,583 105,114 251,189
Gain resulting from reversal of certain
predecessor liabilities - - (810,140)
Gain on debt settlement (151,654) - (298,323)
Acquired research and development - - 6,135,538
Changes in operating assets and liabilities, net
of effects from merger with Predecessor and
Academic:
Trade receivable 538 (19,918) (19,918)
Inventory - (28,536) (87,052)
Prepaid expenses and other assets 39,888 (117,121) (2,716)
Accounts payable and accrued expenses (71,395) 472,081 838,271
----------------------------------------------------------- ------------------ ------------------- ------------------
Total adjustments (89,040) 411,620 6,060,890
----------------------------------------------------------- ------------------ ------------------- ------------------
Net cash used in operating activities (1,783,428) (1,042,261) (4,728,143)
----------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows from investing activities:
Acquisition of property and equipment - (14,000) (42,587)
Additions to software development costs - (439,000) (599,000)
----------------------------------------------------------- ------------------ ------------------- ------------------
Net cash used in investing activities - (453,000) (641,587)
----------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows from financing activities:
Proceeds from sale of common stock to founding
stockholders - - 204,000
Proceeds from sale of common stock in private offering
memorandum 26,500 2,376,114 6,097,290
Proceeds from exercise of options - 75,000 75,000
Proceeds from sale of common stock in public offering 1,715,800 - 1,715,800
Payment of conversion price of shares to certain
stockholders (64,743) - (64,743)
Payments on note payable (16,440) - (120,000)
----------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by financing activities 1,661,117 2,451,114 7,907,347
----------------------------------------------------------- ------------------ ------------------- ------------------
Net increase (decrease) in cash and cash equivalents (122,311) 955,853 2,537,617
Cash and cash equivalents, beginning of period 3,541,829 1,581,764 -
----------------------------------------------------------- ------------------ ------------------- ------------------
Cash and cash equivalents, end of period $ 3,419,518 $ 2,537,617 $ 2,537,617
----------------------------------------------------------- ------------------ ------------------- ------------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-6
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
Definitions
The Company is the resulting entity of two contemporaneous
mergers (the "Mergers") of Worlds Inc., a Delaware corporation
("Predecessor"), with and into Worlds Acquisition Corp., a
Delaware corporation ("WAC"), and WAC with and into Academic
Computer Systems, Inc., a New Jersey corporation ("Academic"),
which changed its name to Worlds Inc. (see Note 2). While
Academic was the legal entity that survived the mergers, WAC was
the accounting acquiror in both mergers. The Company's fiscal
year-end is December 31.
The term the "Company," as used herein, refers to the
consolidated entity resulting from the two contemporaneous
mergers, as well the pre-merger Predecessor, WAC and Academic;
however, Predecessor, WAC and Academic are hereinafter sometimes
referred to separately as the context requires.
Nature of Business
WAC was incorporated on April 8, 1997 to design, develop and
market three-dimensional ("3D") oriented Internet sites on the
World Wide Web. These web sites are anticipated to utilize 3D
technologies developed by Predecessor.
Basis of Presentation
The accompanying financial statements are unaudited; however, in
the opinion of management, all adjustments necessary for a fair
statement of financial position and results for the stated
periods have been included. These adjustments are of a normal
recurring nature. Selected information and footnote disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
or omitted. Results for interim periods are not necessarily
indicative of the results to be expected for an entire fiscal
year. It is suggested that these condensed financial statements
be read in conjunction with the audited financial statements and
accompanying notes for the Company for the year ended December
31, 1998 and for the Predecessor for the period ended December 3,
1997.
F-7
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
The financial statements include the results of Predecessor and
Academic from December 4, 1997, the date of the Mergers (the
"Merger Date").
The financial statements have been prepared in accordance with
the provisions of Statement of Financial Accounting Standards
("SFAS") No. 7, "Accounting, and Reporting by Development Stage
Enterprises," which requires development stage enterprises to
employ the same accounting principles as operating companies.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and
short-term debt, approximated fair value as of March 31, 1999
because of the relatively short maturity of the instruments. The
carrying value of long-term debt, including the current portion,
approximates fair value as of June 30 1999, based upon estimates
for similar debt issues.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly liquid money
market instruments, which have original maturities of three
months or less at the time of purchase.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated
useful lives of the assets, which range from two to five years.
F-8
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
Revenue Recognition
Revenue from technology development and licensing contracts is
recognized upon the attainment of contractual milestones
(approximating the percentage-of-completion method). Cash
received in advance of revenues earned is recorded as deferred
revenue.
Inventory
Inventory consists of merchandise held for resale and is valued
at the lower of cost or market on a first-in, first-out (FIFO)
basis.
Software Development Costs
In accordance with the provisions of SFAS No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed", software development costs incurred by the Company
subsequent to establishing technological feasibility of the
resulting product or enhancement and until the product is
available for general release to customers are capitalized and
carried at the lower of unamortized cost or net realizable value.
Net realizable value is determined based on estimates of future
revenues to be derived from the sale of the software product
reduced by the costs of completion and disposing of the product.
During the fourth quarter of 1998, technological feasibility of
the Company's software was established. In this regard, $160,000
was capitalized and included in property, equipment and software
development as of December 31, 1998. During the six months ended
June 30, 1999, a further $439,000 was capitalized in this regard.
Amortization of the costs capitalized commenced in the first
quarter of 1999, based on current and anticipated future revenues
for each product or enhancement with an annual minimum equal to
straight-line amortization over the remaining estimated economic
life of the product or enhancement.
Research and Development Costs
Research and development costs are expensed as incurred.
F-9
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
Income Taxes
The Company uses the liability method of accounting for income
taxes in accordance with SFAS No. 109, "Accounting for Income
Taxes." Deferred income tax assets and liabilities are recognized
based on the temporary differences between the financial
statement and income tax bases of assets, liabilities and
carryforwards using enacted tax rates. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
Loss Per Share
In 1997, the Financial Accounting Standards Board's ("FASB") SFAS
No. 128, "Earnings per Share," replaced the calculation of
primary and fully diluted earnings (loss) per share with basic
and diluted earnings (loss) per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities. Diluted earnings
per share is very similar to the previously reported fully
diluted earnings per share. The loss per share amounts have been
presented to conform to SFAS No. 128 requirements. The common
stock equivalents which would arise from the exercise of stock
options and warrants are excluded from calculation of diluted
loss per share since their effect is anti-dilutive. Therefore,
the amounts reported for basic and diluted loss per share are the
same.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". SFAS No. 123 encourages entities to
adopt the fair value method in place of the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", for all arrangements under which employees
receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company has not
adopted the fair value method encouraged by SFAS No. 123 and will
continue to account for such transactions in accordance with APB
No. 25.
F-10
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by
owners and distributions to owners. Adoption of the standard has
had no effect on financial statement disclosures since there were
no items of comprehensive income during the periods presented.
F-11
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
1. Going Concern
As discussed in Note 3, the Company completed a private placement
raising gross proceeds of $4,415,000, consummated a merger
agreement with a development stage enterprise, Predecessor, and
completed a public offering in June 1998 raising gross proceeds
of $1,832,000. Predecessor had not generated significant revenues
from operations and had an accumulated deficit from inception to
the Merger Date of $21,236,139 and a capital deficit of
$4,135,538. The acquisition of Predecessor by the Company was
accounted for as a purchase. Accordingly, $6,135,538, the portion
of the purchase allocable to in-process research and development
projects that had not reached technological feasibility and had
no probable alternative future uses, was expensed by the Company
at the date of merger.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The Company is
in the development stage and has had minimal revenues from
operations since the series of merger transactions. The Company
anticipates that it currently has only a portion of the funds
necessary to complete product development and commercialization.
There can be no assurance that the Company will be able to obtain
the substantial additional capital resources necessary to pursue
its business plan or that any assumptions relating to its
business plan will prove to be accurate. The Company is pursuing
sources of additional financing and there can be no assurance
that any such financing will be available to the Company on
commercially reasonable terms, or at all. Any inability to obtain
additional financing will have a material adverse effect on the
Company, including possibly requiring the Company to
significantly curtail or cease operations.
These factors raise substantial doubt about the ability of the
Company to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
F-12
<PAGE>
Worlds Inc.-Predecessor
(a development stage enterprise)
Notes to Financial Statements
2. The Mergers
On December 3, 1997, Predecessor was merged with and into WAC in
a series of related transactions which included a simultaneous
capital transaction between the Company and Academic (the
"Mergers") and a private offering of WAC's securities (the
"Private Placement"). In both the merger with Predecessor and the
capital transaction with Academic, WAC was the acquiror for
accounting purposes.
The acquisition of Predecessor was accounted for as a purchase
whereby all of the common and preferred stock of Predecessor were
exchanged for 1,999,996 shares of WAC. The shares issued to
Predecessor common and preferred shareholders were valued at
$1.00 per share which represented the share value in the private
placement that occurred during this time period (see Note 3); a
purchase price of approximately $2,000,000. The exchange ratio
was determined after extensive negotiation between management of
Predecessor and WAC. Predecessor was a development stage company,
had not generated significant revenues from operations and had an
accumulated deficit from inception to December 3, 1997 of
$21,236,139 and a capital deficit of $4,135,538. The assets
acquired of Predecessor (cash, prepaid expenses, property and
equipment) were recorded at fair market value which approximated
book value at December 3, 1997, and, as discussed in Note 1
above, since technological feasibility of the various Predecessor
technologies acquired had not been established, the excess
purchase price over Predecessor's capital deficit of $6,135,538
was expensed as acquired research and development.
Academic was an inactive company with no operations. The value
assigned to the 910,000 shares in the capital transaction with
Academic on December 3, 1997 represented Academic's net tangible
assets (primarily cash) of $558,026. During June 1998, 113,465
shares of common stock were converted at $0.57 per share
($64,743) as a result of certain stockholders dissenting with
respect to the Academic/WAC capital transaction of December 3,
1997. Such reacquired shares have been classified as treasury
stock in the accompanying balance sheets.
While no trading market existed for the securities of Academic,
the Company's common stock is traded on the Bulletin Board.
F-13
<PAGE>
Worlds Inc.-Predecessor
(a development stage enterprise)
Notes to Financial Statements
3. Private Placement and Public Offering
The Private Placement called for WAC to offer for sale a maximum
of 50 units (57-1/2 with the over-allotment), each consisting of
120,000 shares of WAC's common stock (the "Units") at a price of
$120,000 per Unit. In connection with the Private Placement, the
placement agent was to receive one warrant to purchase one share
of WAC's common stock at $1 per share for every $40 of gross
proceeds from the sale of the Units. On November 21, 1997, WAC
sold 31.67 Units with gross proceeds of $3,800,000 (3,800,000
shares) (the "Initial Private Placement Closing") and the
placement agent was issued 425,000 shares of common stock. On
December 31, 1997, the Company sold 4.88 Units with gross
proceeds of $585,000 (585,000 shares). On January 2, 1998, a
further 30,000 shares were issued with gross proceeds of $30,000.
Cumulative net proceeds, after commissions and expenses of the
offering, aggregated $3,721,176.
WAC agreed to include the shares of common stock underlying the
Units sold in the Private Placement (the "Private Placement
Shares") in a registration statement to be filed with the
Securities and Exchange Commission (the "SEC"). Such registration
statement was declared effective on May 1, 1998. During June
1998, WAC sold 1,832,000 shares in a public offering of its stock
and received gross proceeds of $1,832,000. Net proceeds, after
commissions of this offering, aggregated $1,715,800.
During June 1999, the Company sold 615,000 shares in a private
offering memorandum and received gross proceeds of $2,460,000.
Net proceeds, after commissions and expenses of this offering,
aggregated $2,376,114.
F-14
<PAGE>
Worlds Inc.-Predecessor
(a development stage enterprise)
Notes to Financial Statements
4. Contingencies
During April 1999, the Company entered into a three-year
financial advisory and consulting agreement with a consulting
firm controlled by the Company's Chairman that provides for an
annual fee of $120,000, escalating to $300,000 annually if the
Company raises $5 million in cash and the market value of the
Company's issued and outstanding common stock is no less than
$100 million. In addition, the Company granted warrants to such
firm to purchase 1,000,000 shares of common stock at $.50 per
share. The warrants are exercisable through April 13, 2006 and
contain anti-dilution provisions and both "demand" and
"piggy-back" registration rights.
Further, in connection with the above consulting agreement, three
founding stockholders of WAC agreed to contribute 1,500,000
shares to the capital of the Company (included in treasury
stock).
5. Content Supply Agreement
During June 1999, the Company entered into a content supply
agreement for a 3D internet site offered by an Internet service
provider (the "Provider"). Under the terms of the agreement, the
Company paid $125,000 and issued 93,750 shares of common stock
upon signing (included in other assets aggregating $500,000). A
further $125,000 and 93,750 shares is required to be delivered to
the Provider upon launch of the site which is expected to occur
during the quarter ended September 30, 1999.
F-15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENT OF WORLDS INC. FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000001961
<NAME> WORLDS INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,537,617
<SECURITIES> 0
<RECEIVABLES> 19,918
<ALLOWANCES> 0
<INVENTORY> 87,052
<CURRENT-ASSETS> 2,687,099
<PP&E> 1,050,600
<DEPRECIATION> 488,468
<TOTAL-ASSETS> 3,752,386
<CURRENT-LIABILITIES> 1,507,468
<BONDS> 0
0
0
<COMMON> 18,816
<OTHER-SE> 373,524
<TOTAL-LIABILITY-AND-EQUITY> 3,752,886
<SALES> 92,925
<TOTAL-REVENUES> 92,925
<CGS> 70,355
<TOTAL-COSTS> 70,355
<OTHER-EXPENSES> 1,425,495
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,922
<INCOME-PRETAX> (1,453,881)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,453,881)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,453,881)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
