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 March 31, 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)
13-3768554
(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 16,418,531 shares as
of May 10, 1999
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Worlds Inc.
(a development stage enterprise)
Financial Statements
Periods Ended March 31, 1998 and 1999
<PAGE>
Worlds Inc.
(a development stage enterprise)
Financial Statements
Periods Ended March 31, 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' deficit F-5
Statements of cash flows F-6
Summary of accounting policies F-7 - F-11
Notes to financial statements F-12 - F-14
F-2
<PAGE>
Worlds Inc.
(a development stage enterprise)
Balance Sheets
<TABLE>
<S> <C> <C>
December 31, 1998 March 31, 1999
---------------------------------------------------------------- --------------------------- ----------------------
Assets (unaudited)
Current:
Cash and cash equivalents $ 1,581,764 $ 894,421
Prepaid expenses and other current assets 53,486 26,133
Inventory 58,516 37,052
---------------------------------------------------------------- --------------------------- ----------------------
Total current assets 1,693,766 957,606
Property, equipment and software development costs, net of
accumulated depreciation and amortization 214,246 378,246
---------------------------------------------------------------- --------------------------- ----------------------
$ 1,908,012 $ 1,335,852
---------------------------------------------------------------- --------------------------- ----------------------
Liabilities and Stockholders' Deficit
Current:
Accounts payable $ 319,906 $ 242,708
Accrued expenses 446,333 579,609
Current maturities of notes payable 246,648 269,148
---------------------------------------------------------------- --------------------------- ----------------------
Total current liabilities 1,012,887 1,091,465
Long-term portion, notes payable 1,875,018 1,852,518
---------------------------------------------------------------- --------------------------- ----------------------
Total liabilities 2,887,905 2,943,983
---------------------------------------------------------------- --------------------------- ----------------------
Stockholders' deficit (Notes 2 and 3):
Common stock, $.001 par value - shares authorized 18,032 18,032
30,000,000; outstanding 18,031,996
Additional paid-in capital 8,401,970 8,401,970
Deficit accumulated during the development stage (9,335,152) (9,963,390)
---------------------------------------------------------------- --------------------------- ----------------------
(915,150) (1,543,388)
Treasury stock, at cost, 113,465 shares (64,743) (64,743)
---------------------------------------------------------------- --------------------------- ----------------------
Total stockholders' deficit (979,893) (1,608,131)
---------------------------------------------------------------- --------------------------- ----------------------
$ 1,908,012 $ 1,335,852
---------------------------------------------------------------- --------------------------- ----------------------
</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>
Cumulative,
period from
April 8, 1997
(inception) to
Three months ended March 31, March 31,
--------------------------------------
1998 1999 1999 (a)
--------------------------------------------------------- ------------------
------------------ -------------------
Net revenues $ 4,002 $ 35,177 $ 65,707
Costs and expenses:
Cost of revenues (2,601) (21,464) (50,743)
Selling, general and administrative (548,340) (615,815) (3,941,548)
Research and development (231,912) - (992,932)
Acquired research and development - - (6,135,538)
--------------------------------------------------------- ------------------ ------------------- ------------------
Operating loss (778,851) (602,102) (11,055,054)
Other income (expenses):
Gain resulting from reversal of certain predecessor - - 810,140
liabilities
Interest income 41,938 12,786 150,385
Interest expense (36,456) (38,922) (167,184)
--------------------------------------------------------- ------------------ ------------------- ------------------
Loss before extraordinary item (773,369) (628,238) (10,261,713)
Extraordinary item - gain on debt settlement 151,654 - 298,323
--------------------------------------------------------- ------------------ ------------------- ------------------
Net loss $ (621,715) $ (628,238) $(9,963,390)
--------------------------------------------------------- ------------------ ------------------- ------------------
Loss per share (basic and diluted):
Loss before extraordinary item $ (.05) $ (.04)
Extraordinary item .01 -
--------------------------------------------------------- ------------------ -------------------
Net loss per share (basic and diluted) $ (.04) $ (.04)
--------------------------------------------------------- ------------------ -------------------
Weighted average common shares outstanding:
Basic and diluted 16,149,996 17,918,531
--------------------------------------------------------- ------------------ -------------------
</TABLE>
------------
(a) Includes the results of Predecessor and Academic (from December 4,
1997) which were merged into the Company on December 3, 1997.
See accompanying summary of accounting policies
and notes to financial statements.
F-4
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Stockholders' Deficit
<TABLE>
Period from April 8, 1997 (inception) to March 31, 1999
----------------------------------- ----------------------- -------------- ---------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Common stock Additional Deficit Treasury Total
paid-in accumulated stock stockholders'
capital during the deficit
development
stage
-----------------------
Shares Amount
----------------------------------- ------------ ---------- -------------- ---------------- ---------- --------------
Balance, January 1, 1998 16,119,996 $16,120 $6,661,582 $ (6,686,471) $ $ (8,769)
Sale of shares in private 30,000 30 26,470 - - 26,500
offering memorandum
(January 1998)
Sale of shares in public offering 1,832,000 1,832 1,713,968 - - 1,715,800
of common stock, net
(June 1998)
Conversion of 113,465 shares to - - - - (64,743) (64,743)
certain stockholders (June
1998)
Conversion of employee stock 50,000 50 (50) - - -
options into shares (October
1998)
Net loss for the year ended - - - (2,648,681) - (2,648,681)
December 31, 1998
----------------------------------- ------------ ---------- -------------- ---------------- ---------- --------------
Balance, December 31, 1998 18,031,996 18,032 8,401,970 (9,335,152) (64,743) (979,893)
Net loss for the three months - - - (628,238) - (628,238)
ended March 31, 1999
(unaudited)
----------------------------------- ------------ ---------- -------------- ---------------- ---------- --------------
Balance, March 31, 1999 18,031,996 $18,032 $8,401,970 $(9,963,390) $(64,743) $(1,608,131)
(unaudited)
----------------------------------- ------------ ---------- -------------- ---------------- ---------- --------------
</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
Three months ended March 31, (inception) to
------------------ -------------------
1998 1999 March 31, 1999
--------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows from operating activities:
Net loss $ (621,715) $ (628,238) $(9,963,390)
--------------------------------------------------------- ------------------ ------------------- ------------------
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss on disposal of fixed assets - - 54,041
Depreciation and amortization 54,041 50,000 196,075
Gain resulting from reversal of certain - - (810,140)
predecessor liabilities
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 - -
Inventory - 21,464 (37,052)
Prepaid expenses and other assets 26,737 27,353 141,758
Accounts payable and accrued expenses (46,524) 56,078 422,268
--------------------------------------------------------- ------------------ ------------------- ------------------
Total adjustments (116,862) 154,895 5,804,165
--------------------------------------------------------- ------------------ ------------------- ------------------
Net cash used in operating activities (738,577) (473,343) (4,159,225)
--------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows from investing activities:
Acquisition of property and equipment - - (28,587)
Additions to software development costs - (214,000) (374,000)
--------------------------------------------------------- ------------------ ------------------- ------------------
Net cash used in investing activities - (214,000) (402,587)
--------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows from financing activities:
Proceeds from sale of common stock to founding - - 204,000
stockholders
Proceeds from sale of common stock in private 26,500 - 3,721,176
offering memorandum
Proceeds from sale of common stock in public offering - - 1,715,800
Payment of conversion price of shares to certain - - (64,743)
stockholders
Payments on note payable (8,280) - (120,000)
--------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by financing 18,220 - 5,456,233
activities
--------------------------------------------------------- ------------------ ------------------- ------------------
Net increase (decrease) in cash and cash equivalents (720,357) (687,343) 894,421
Cash and cash equivalents, beginning of period 3,541,829 1,581,764 -
--------------------------------------------------------- ------------------ ------------------- ------------------
Cash and cash equivalents, end of period $2,821,472 $ 894,421 $ 894,421
--------------------------------------------------------- ------------------ ------------------- ------------------
</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") music 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 Instruments 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
March 31, 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 quarter ended March 31, 1999, a further $214,000 was
capitalized in this regard. Amortization of the costs capitalized commenced in
the first quarter of 1999 ($14,000), 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.
(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.
(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.
(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.
F-14
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
4. Subsequent Events
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 contributed 1,500,000 shares to the capital of the
Company.
F-15
<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 such time as the technological feasibility of the product
has been established. We began capitalizing our software in the 4th quarter of
<PAGE>
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.
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 quarter 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. 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 quarter of
1999 as we engaged in serious negotiations that led to the following agreements.
We recently entered into previously announced agreements with two major
companies in the Internet arena. The first is with Excite, the number 3 portal
site on the Internet, which calls for us to provide Excite with select
e-commerce content. The second agreement is with Road Runner, the high-speed
online service owned by Time Warner, MediaOne Group, Microsoft, Compaq Computer
and Advance/Newhouse.
In May 1999 we entered into an agreement with Hansonopoly Inc. to
produce our 3D technology on a special CD to be distributed in June to the fan
club of Hanson.
During this quarter we also upgraded our e-commerce web site,
WorldsStore.com, purchased inventory for sale through our web site, enhanced
features to our core technology by adding audio and video streaming, continued
to improve our voice-to-voice Internet telephony and increased our customer
service program.
Our present cash resources are insufficient to meet all of our
requirements over the next twelve months unless additional funds are raised
through our currently contemplated private offering and through other
financings. In fact, we currently have a negative working capital and unless we
shortly raise additional funds we may have to cease operations. 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 additional financing is obtained.
<PAGE>
Results of Our Operations
The following data extracted from the attached financial
statements compares the results of our operations for the three months ended
March 31, 1999 to the three months ended March 31, 1998.
Three months ended
3/31/99 3/31/98
Net Revenue $ 35,177 $ 4,002
Costs & Expenses:
Cost of revenues (21,464) (2,601)
Selling, general
& administrative (615,815) (548,340)
Research & development -- (231,912)
Operating Loss (602,102) (778,851)
--------- ---------
Other Income (Expense):
Interest income 12,786 41,938
Interest expense (38,922) (36,456)
Loss before taxes & extraordinary item (628,238) (773,369)
Extraordinary item - gain on debt settlement -- 151,654
-------
Net Loss (628,238) (621,715)
--------- ---------
In the first quarter of 1999, we continued to upgrade our core
technology and began production on new projects in anticipation of reaching
agreements with other entities with whom we are in negotiation. No assurance can
be given that any negotiation 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
$35,177 and had associated direct costs of $21,464 for the three months ended
March 31, 1999, compared to $4,002 in revenue and $2,601 of direct costs for the
same period in 1998.
Selling, general and administrative expenses were $615,815 for the
three months ended March 31, 1999. This represented an increase of $67,475 from
$548,340 compared to the three months ended March 31, 1998. This increase was
directly attributable to the higher costs associated with maintaining our new
e-commerce site, retaining
<PAGE>
expert software developers to improve and upgrade our existing products
and costs involved in beginning work on some of the new projects discussed
above in anticipation of reaching final agreements.
We incurred no research and development costs during the three
months ended March 31, 1999 as compared to $231,912 for the three months ended
March 31, 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 first
quarter of 1999 $214,000 of such expenditures were capitalized.
Other income included $12,786 of interest income in the three months to
March 31, 1999 earned from the remainder of the proceeds of our share offerings
as compared to $41,938 in the three months ended March 31, 1998. Other expenses
included interest expense of $38,922 directly attributable to the Predecessor's
notes payable in the three months to March 31, 1999. Interest expense in the
three months to March 31, 1998 was $36,456.
As a result of the foregoing we incurred a net loss of $628,238 for the
three months ending March 31, 1999, compared to a loss of $621,715 for the three
months ending March 31, 1998, a negligible increase of $6,523. The loss in the
1998 quarter was after an extraordinary gain of $151,654. See Statement of
Operations on Page F-4.
Liquidity and Capital Resources of the Company
Net cash used from January 1, 1999 through March 31, 1999 was
$687,343. At March 31, 1999, we had a working capitaldeficit of $133,859 and
cash and cash equivalents in the amount of $894,421.
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.
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. We are continuing to explore financing
opportunities and are currently seeking to raise approximately $2-$4 million,
plus an option to raise up to an additional $2 million, in a private equity
<PAGE>
financing. 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 March 31, 1999, our
total liabilities were approximately $2.9 million, including the long term
portion of notes payable of $1.8 million.
There can be no assurance that we will be able to raise any
proceeds from our current private offering of our securities or otherwise obtain
the substantial additional capital necessary to permit us to attract and retain
a 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
<PAGE>
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
raise $2-4 million through the sale of a unit offering. We also reserved the
right to sell additional units to raise up to an additional $2 million. This
offering is being offered solely to "accredited investors" and pursuant to a
Private Placement Memorandum and Subscription Agreement. We can venture no
opinion at this time as to the success of this offering.
The 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: May 14, 1999
WORLDS INC.
By: /s/
Thomas Kidrin,
President, CEO and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENT OF WORLDS, INC. FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BE REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000001961
<NAME> WORLDS INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<SECURITIES> 0
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<PP&E> 800,796
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<COMMON> 18,032
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<TOTAL-LIABILITY-AND-EQUITY> 1,335,852
<SALES> 35,177
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<CGS> 21,464
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