UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended June 30, 2011

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________

Commission File number 0-24115

WORLDS INC.

(not affiliated with Worldcom, Inc.)

(Exact Name of Registrant as Specified in Its Charter)

Delaware	22-1848316
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

11 Royal Road
Brookline, MA 02445
(Address of Principal Executive Offices)

(617) 725-8900
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer [ ] Accelerated filer [ ]

Non-accelerated filer [ ] Smaller reporting company [X]

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

As of August 9, 2011, 71,361,909 shares of the Issuer's Common Stock were outstanding.

 

 Worlds Inc.

Table of Contents 

 

	Page
Condensed Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010 (audited)	3
Condensed Statements of Operations for the three and six months ended June 30, 2011 and 2010 (unaudited)	4
Condensed Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)	5
Notes to Condensed Financial Statements	6

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Worlds Inc.

Balance Sheets

June 30, 2011 and December 31, 2010 

 

	Unaudited				Audited
	30-Jun-11				31-Dec-10
Current Assets
Cash and cash equivalents	$	170,946			$	400,848
Due from related party		23,339
Total Current Assets		194,285				400,848
Property and equipment, net of
accumulated depreciation		—				759
Total Assets	$	194,285			$	401,607
Current Liabilities
Accounts payable	$	777,809			$	782,809
Accrued expenses		1,791,904				1,818,751
Loan payable officer		—				2,400
Deferred revenue		—				276,950
Notes payable		773,279				773,279
Total Current Liabilities		3,342,992				3,654,189
Stockholders (Deficit)
Common stock (Par value $0.001 authorized 100,000,000 shares, issued and outstanding 71,361,909 and 62,781,122 at June 30, 2011 and December 31, 2010, respectively)	$	71,360			$	62,780
Common stock subscribed but not yet issued (325,000 and 3,358,331 at June 30, 2011 and December 31, 2010, respectively)		325				3,358
Additional Paid in Capital		24,611,264				23,453,111
Accumulated Deficit		(27,831,656	)			(26,771,831	)
Total stockholders deficit		(3,148,707	)			(3,252,582	)
Total Liabilities and stockholders deficit	$	194,285			$	401,607

 

 See Notes to Condensed Financial Statements

 

 

 

 

 

Worlds Inc.

Statement of Operations

Six and Three Month Ending June 30, 2011 and June 30, 2010

 

	(Unaudited)							(Unaudited)
	Six months ended June 30							Three months ended June 30
	2011				2010			2011			2010
Revenues
Revenue	$	199			$	75,574		$	—		$	38
Total Revenue		199				75,574			—			38
Cost and Expenses
Cost of Revenue		16,959				8,112			4,650			3,331
Gross Profit/(Loss)		(16,760	)			67,462			(4,650	)		(3,293	)
Common Stock issued for services rendered		683,430				—			210,000			—
Selling, General & Admin		225,425				206,675			112,172			122,271
Salaries		134,209				—			61,004			—
Operating loss		(1,059,825	)			(139,213	)		(387,826	)		(125,564	)
Other Income/Expense
Interest Expense		—				—			—			—
Net (Loss)	$	(1,059,825	)		$	(139,213	)	$	(387,826	)	$	(125,564	)
Weighted Average Loss per share		(0.02	)			(0.00)			(0.01	)		(0.00)
Weighted Average Common Shares Outstanding		67,503,361				55,024,810			69,987,733			56,370,906

  

 See Notes to Condensed Financial Statements

 

 

 

 

Worlds Inc.

Statement of Cash Flow

Six Months Ending June 30, 2011 and June 30, 2010

 

		(Unaudited)				(Unaudited)
		30-Jun-11				30-Jun-10
Cash flows from operating activities:
Net (loss)		$	(1,059,825	)		$	(139,213	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation			759				1,562
Common stock issued for services rendered			683,430				10,900
Bank Overdraft			—				(1,175	)
Accounts payable and accrued expenses			(4,972	)			88,847
Contingent Deposit			—				417,500
Deferred revenue			—				(75,000	)
Net cash used in operating activities:			(380,608	)			303,421
Cash flows from financing activities
Proceeds from exercise of warrants			118,446				145,459
Proceeds from exercise of options			58,000				—
Due from related party			(23,339	)			—
Repayment of officer loan payable			(2,400	)			(4,000	)
Net cash provided by financing activities			150,707				141,459
Net increase/(decrease) in cash			(229,901	)			444,880
Cash beginning of period			400,848				0
Cash end of period		$	170,947			$	444,880
Non-cash financing activities
Common stock issued for payable		$	72,375			$	—
Deferred revenue			276,950
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest		$	—			$	—
Income taxes		$	—			$	—

 

See Notes to Condensed Financial Statements

 

 

 

 

Worlds Inc.

NOTES TO FINANCIAL STATEMENTS

Three and Six Months Ended June 30, 2011

(Unaudited)

 

NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

 

Description of Business

 

On May 16, 2011, the Company transferred, through a spin-off to its then wholly owned subsidiary, Worlds Online Inc., the majority of its operations and related operational assets. The Company retained its patent portfolio which it intends to continue to increase and to more aggressively enforce against infringers. The Company also entered into a License Agreement with Worlds Online Inc. to sublicense patented technologies.

 

Basis of Presentation

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP"), which contemplates continuation of the Company as a going concern. The Company has always been considered a developmental stage business, has incurred significant losses since its inception and has had minimal revenues from operations.  The Company will require substantial additional funds for development and enforcement of its patent portfolio. There can be no assurance that the Company will be able to obtain the substantial additional capital resources to pursue its business plan or that any assumptions relating to its business plan will prove to be accurate. The Company has not been able to generate sufficient revenue or obtain sufficient financing which has had a material adverse effect on the Company, including requiring the Company to reduce operations. These factors raise substantial doubt about the Company's ability to continue as a going concern.  For the past year the Company has been operating at a significantly reduced capacity, with only one full time employee, performing primarily consulting services and licensing software and using consultants to perform any additional work that may be required.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP 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.

 

Due from Related Party

 

Due from related party is comprised of cash payments made by Worlds Inc. on behalf of Worlds Online Inc.

 

Revenue Recognition

 

Effective for the second quarter of 2011, the Company spun off its online businesses to Worlds Online Inc. The Company’s sources of revenue after the spin off will be from sublicensing the patented technology and any revenue that may be generated from enforcing those patents in the market. The Company had the following sources of revenue: (1) consulting/licensing revenue from the performance of development work performed on behalf of the Company, licensing revenue or from the sale of certain software to third parties; and (2) VIP subscriptions to our Worlds Ultimate 3-D Chat service.   The Company recognizes revenue when all of the following criteria are met: evidence of an arrangement exists such as a signed contract, delivery has occurred, the price is fixed or determinable, and collectibility is reasonable assured.  This will usually be in the form of a receipt of a customer’s acceptance indicating the product has been completed to their satisfaction except for development work and service revenue which is recognized when the services have been performed.  Deferred revenue represents cash payments received in advance to be recorded as revenue when earned.  The corresponding cost associated with those contracts is also deferred as deferred costs until the revenue is ultimately recognized.

 

 

 

 

NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (con’t) 

 

Research and Development Costs

 

Research and development costs are charged to operations as incurred.

 

Property and Equipment

 

Property and equipment are stated at cost.   Depreciation is provided on a straight line basis over the estimated useful lives of the assets ranging from three to five years.  When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income.  Maintenance and repairs are charged to expense in the period incurred.

 

Impairment of Long Lived Assets

 

The Company evaluates the recoverability of its fixed assets and other assets in accordance with section 360-10-15 of the FASB Accounting Standards Codification for disclosures about Impairment or Disposal of Long-Lived Assets. Disclosure requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds its expected cash flows. If so, it is considered to be impaired and is written down to fair value, which is determined based on either discounted future cash flows or appraised values. The Company adopted the statement on inception. No impairments of these types of assets were recognized during the six months ended June 30, 2011 and 2010.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation using the fair value method following the guidance set forth in section 718-10 of the FASB Accounting Standards Codification for disclosure about Stock-Based Compensation. This section requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award- the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service.

 

Income Taxes

 

The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.

 

 

NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (con’t) 

 

Notes Payable

 

The Company has $773,279 in short term notes outstanding at June 30, 2011.

 

Deferred Revenue

 

As part of a debt refinancing in 2000, $631,950 of debt was renegotiated to deferred revenue representing future services to be provided by the Company. $355,000 has been amortized into income since then. The balance was transferred over to Worlds Online Inc. and no longer appears on the Company’s balance sheet.

 

 

Call Option Agreements

 

The Company has entered into call option agreements with 13 of its major shareholders. The call options give the Company the right to purchase up to 4,150,000 shares of stock back at prices ranging from $0.15 per share up to $0.40 per share. The Company issued an aggregate of 680,000 shares of stock to these shareholders as an inducement to enter into these call option agreements. The call option agreements have expiration dates of 1 and 2 years.

 

Comprehensive Income (Loss)

 

The Company reports comprehensive income and its components following guidance set forth by section 220-10 of the FASB Accounting Standards Codification which establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. There were no items of comprehensive income (loss) applicable to the Company during the period covered in the consolidated financial statements.

 

Loss Per Share

 

Net loss per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period. There were no potentially dilutive shares outstanding as of June 30, 2011 and 2010.

 

 

 

 

 

NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (con’t)

Stockholders Equity

 

3,173,382 shares of common stock were issued for services rendered during the six months ended June 30, 2011.

 

Commitments and Contingencies

 

During 2000 the Company was involved in a lawsuit relating to unpaid consulting services. In April, 2001 a judgment against the Company was rendered for approximately $205,000. As of June 30, 2011 and December 31, 2010 the Company recorded a reserve of $205,000 for this lawsuit, which is included in accrued expenses in the accompanying balance sheets.

 

Risk and Uncertainties

 

The Company is subject to risks common to companies in the service and technology industries, including, but not limited to, litigation, development of new technological innovations and dependence on key personnel.

 

Recent Accounting Pronouncements

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

 

FASB Accounting Standards Codification

(Accounting Standards Update (“ASU”) 2009-01)

 

In June 2009, FASB approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental US GAAP. All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (“SEC”), have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification did not change US GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts the Company’s consolidated financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification during the fiscal year ended December 31, 2010 or the six months ended June 30, 2011.

 

As a result of the Company’s implementation of the Codification during the fiscal year ended December 31, 2009, previous references to new accounting standards and literature are no longer applicable. In the current annual consolidated financial statements, the Company will provide reference to both new and old guidance to assist in understanding the impacts of recently adopted accounting literature, particularly for guidance adopted since the beginning of the current fiscal year but prior to the Codification.

 

 

NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (con’t)

 

Subsequent Events

(Included in Accounting Standards Codification (“ASC”) 855 “Subsequent Events”, previously SFAS No. 165 “Subsequent Events”)

 

SFAS No. 165 established general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the consolidated financial statements are issued or available to be issued (“subsequent events”). An entity is required to disclose the date through which subsequent events have been evaluated and the basis for that date. For public entities, this is the date the consolidated financial statements are issued. SFAS No. 165 does not apply to subsequent events or transactions that are within the scope of other GAAP and did not result in significant changes in the subsequent events reported by the Company. SFAS No. 165 became effective for interim or annual periods ending after June 15, 2009 and did not impact the Company’s consolidated financial statements. The Company evaluated for subsequent events through the issuance date of the Company’s consolidated financial statements. No recognized or non-recognized subsequent events were noted.

 

Determination of the Useful Life of Intangible Assets

(Included in ASC 350 “Intangibles — Goodwill and Other”, previously FSP SFAS No. 142-3 “Determination of the Useful Lives of Intangible Assets”)

 

FSP SFAS No. 142-3 amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under previously issued goodwill and intangible assets topics. This change was intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under topics related to business combinations and other GAAP. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. FSP SFAS No. 142-3 became effective for consolidated financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FSP SFAS No. 142-3 did not impact the Company’s consolidated financial statements.

 

Non-controlling Interests

(Included in ASC 810 “Consolidation”, previously SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51”)

 

SFAS No. 160 changed the accounting and reporting for minority interests such that they will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 became effective for fiscal years beginning after December 15, 2008 with early application prohibited. The Company implemented SFAS No. 160 at the start of fiscal 2009 and no longer records an intangible asset when the purchase price of a non-controlling interest exceeds the book value at the time of buyout. The adoption of SFAS No. 160 did not have any other material impact on the Company’s financial statements.

 

Consolidation of Variable Interest Entities — Amended

(To be included in ASC 810 “Consolidation”, SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”)

 

SFAS No. 167 amends FASB Interpretation No. 46(R) “Consolidation of Variable Interest Entities regarding certain guidance for determining whether an entity is a variable interest entity and modifies the methods allowed for determining the primary beneficiary of a variable interest entity. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS No. 167 is effective for the first annual reporting period beginning after November 15, 2009, with earlier adoption prohibited. The adoption of SFAS No. 167 in 2010 did not have a material impact on the Company’s financial statements.

 

 

 

NOTE 2 - GOING CONCERN

 

 

From mid-2001 through most of 2007, the Company had to significantly curtail and at times almost cease operations due to lack of resources. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Since its inception, the Company has had periods where it had only minimal revenues from operations. There can be no assurance that the Company will be able to obtain the additional capital resources to fully implement 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 likely have a material adverse effect on the Company, including possibly requiring the Company to reduce and/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.

 

 

NOTE 3 - PRIVATE PLACEMENTS OF EQUITY

 

During 2010, the Company completed a private placement of 1,454,590 shares of its common stock at a price per share of $0.10 for aggregate proceeds of $145,459.  The five “accredited” investors also received an aggregate of 975,338 warrants as part of the equity investment exercisable at $0.15 per share.  

The Company also converted the $175,000 in notes payable from the 2009 financing into 1,750,000 shares of its common stock. Also in 2010, the Company completed a private placement of 3,333,331 shares of its common stock at a price per share of $0.12 for aggregate proceeds of $400,000.

 

During 2010, the Company issued an aggregate of 5,912,774 shares of common stock as payment for services rendered. During the six months ended June 30, 2011 the Company issued an aggregate of 3,173,382 shares of common stock as payment for services rendered.

 

During the six months ended June 30, 2011, the Company raised $118,446 with the exercise of warrants covering 1,160,804 shares of its common stock at a price per share ranging from $0.01 to $0.15 per share. 

 

During the six months ended June 30, 2011, the Company raised $58,000 with the exercise of options covering 928,529 shares of its common stock at a price ranging from $0.05 to $0.30 per share. 128,529 of those shares were exercised on a cashless basis by the surrender to the Company of an aggregate of 131,747 options with a value of $38,558 being equal to the difference in price between the exercise price and the market price on the date of exercise.

 

 

 

 

NOTE 4 – DEFERRED REVENUE

 

Deferred revenue represents advance payments for the license, the design and development of the software, content and related technology for the creation of an interactive, 3D entertainment portal on the internet.  As part of a debt refinancing in 2000, $631,950 of debt was renegotiated to deferred revenue representing future services to be provided by the Company.  During 2010, $265,000 worth of services was provided leaving a balance of $276,950 at December 31, 2010. As part of the spin off, the deferred revenue agreement was transferred to Worlds Online Inc. As of June 30, 2011 the balance is $0.

 

NOTE 5 - NOTES PAYABLE

 

Short term notes payable at June 30, 2011 consist of the following:
Unsecured note payable to a shareholder bearing 8% interest.
Entire balance of principal and unpaid interest due on demand.	$124,230
Unsecured note payable to a shareholder bearing  10% interest
Entire balance of principal and unpaid interest due on demand.	$649,049
Total current	$773,279
2011	$773,279
2012	$       -0-
2013	$       -0-
2014	$       -0-
2015	$       -0-
	$773,279

 

NOTE 6- PROPERTY AND EQUIPMENT

 

The detail composition of property and equipment at June 30, 2011 and December 31, 2010 is as follows: 

 

			30-Jun				31-Dec
			2011				2010
Computer equipment		$	10,891			$	10,891
Less: accumulated depreciation			10,891				10,132
		$	0			$	759

Depreciation expense recorded for the three months ended June 30, 2011 and 2010 was $0 and $781, respectively.

 

 

NOTE 7 – STOCK OPTIONS

 

During 2010 the Company issued stock options to various parties.  The stock options allow the parties to purchase shares of the Company’s common stock at various prices per share per each individual option agreement.  The options allow the various parties to purchase one share of its stock for each option.  The options expire at various times through October 28, 2013 per each individual option agreement. The Company did not grant any registration rights with respect to any shares of common stock issuable upon exercise of the options. There were no forfeited options during 2010. During the year ended December 31, 2010, the Company recorded an expense of $42,543, equal to the estimated fair value of the options at the date of grants.  The fair market value was calculated using the Black-Scholes options pricing model, assuming approximately 5.0% risk-free interest, 0% dividend yield, 60% volatility, and expected lives ranging from one to three years.

 

During 2010 we also issued 500,000 stock options exercisable at $0.05 per share to one person, who is not an officer or a director. No stock options have been issued in the six months ended June 30, 2011.

 

During the three months ended June 30, 2011, 928,529 stock options were exercised and 920,160 warrants were exercised. There are no outstanding warrants as of June 30, 2011.

 

Stock Options
Stock options outstanding and exercisable on June 30, 2011 are as follows:

Exercise Price per Share		Shares Under Option				Remaining Life in Years
Outstanding
$0.35			212,500				2.50
$0.30			60,000				1.25
$0.20			300,000				1.50
$0.20			300,000				2.50
$0.11			15,000				3.80
$0.11			15,000				1.24
$0.11			300,000				1.79
$0.05			15,450,000				1.20
$0.05			100,000				2.35
Exercisable
$0.35			212,500				2.50
$0.30			60,000				1.25
$0.20			300,000				1.50
$0.20			300,000				2.50
$0.11			15,000				3.80
$0.11			15,000				1.24
$0.11			300,000				1.79
$0.05			15,450,000				1.20
$0.05			100,000				2.35

 

 

 

NOTE 8 - INCOME TAXES

 

At June 30, 2011, the Company had federal and state net operating loss carry forwards of approximately $40,000,000 that expire in various years through the year 2024.

 

Due to operating losses, there is no provision for current federal or state income taxes for the six months ended June 30, 2011 and 2010.

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for federal and state income tax purposes.

 

The Company’s deferred tax asset at June 30, 2011 consists of net operating loss carry forwards calculated using federal and state effective tax rates equating to approximately $16,000,000 less a valuation allowance in the amount of approximately $16,000,000. Because of the Company’s lack of earnings history, the deferred tax asset has been fully offset by a valuation allowance.

 

The Company’s total deferred tax asset as of June 30, 2011 is as follows:

 

Net operating loss carry forwards		$	16,000,000
Valuation allowance			(16,000,000)
Net deferred tax asset		$	—

 

The reconciliation of income taxes computed at the federal and state statutory income tax rate to total income taxes for the six months ended June 30, 2011 is as follows:

 

Income tax computed at the federal statutory rate	34%
Income tax computed at the state statutory rate	5%
Valuation allowance	(39%)
Total deferred tax asset	0%

 

 

 

Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

When used in this form 10-Q and in future filings by the Company with the Commission, the words or phrases such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will" or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

 

 

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. These factors include, but are not limited to, changes that may occur to general economic and business conditions; changes in current pricing levels that we can charge for our services or which we pay to our suppliers and business partners; changes in political, social and economic conditions in the jurisdictions in which we operate; changes to regulations that pertain to our operations; changes in technology that render our technology relatively inferior, obsolete or more expensive compared to others; foreign currency fluctuations; changes in the business prospects of our business partners and customers; increased competition, including from our business partners; delays in the delivery of broadband capacity to the homes and offices of persons who use our services; general disruptions to Internet service; and the loss of customer faith in the Internet as a means of commerce.

 

The following discussion should be read in conjunction with the unaudited financial statements and related notes which are included under Item 1.

 

We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.

 

Overview

 

General

 

On May 16, 2011, the Company transferred, through a spin-off to its then wholly owned subsidiary, Worlds Online Inc., the majority of its operations and related operational assets. The Company retained its patent portfolio which it intends to continue to increase and to more aggressively enforce against infringers. The Company also entered into a License Agreement with Worlds Online Inc. to sublicense patented technologies.

 

Starting in mid-2001 we were not able to generate enough revenue to sustain full operations and other sources of capital were not available. As a result, we have had to significantly curtail our operations since that time and at times almost halt them all together.

 

Revenues

 

We generated no revenue during the quarter because we transferred the operations of the Company to Worlds Online Inc.

 

 

 

 

Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations (con’t)

 

Expenses

 

We classify our expenses into two broad groups:

 

o cost of revenues; and

 

o selling, general and administration.

 

 

Liquidity and Capital Resources

 

We have had to severely diminish our operations from mid-since 2001 until the last half of 2007 due to a lack of liquidity. We were able to issue equity and/or debt in the last few years and raise capital that we expect will help us to be better positioned to compete for new business. We continue to pursue additional sources of capital. We have no current arrangements with respect to, or sources of, additional financing and there can be no assurance that any such financing would become available. If we cannot start to generate sufficient revenues, we may need to halt operations.

 

RESULTS OF OPERATIONS

 

Our net revenues for each of the three months ended June 30, 2011 and 2010 were $0 and $38, respectively. Our net revenue for each of the six months ended June 30, 2011 and 2010 were $199 and $75,574, respectively. The decrease in revenue is due to spinning off the online business to Worlds Online Inc.

 

Three and six months ended June 30, 2011 compared to three and six months ended June 30, 2010

 

Revenue decreased by $38, to $0 for the three months ended June 30, 2011 from $38 in the prior year. Revenue decreased to $0 because VIP subscription business has been transferred to Worlds Online Inc. The business up to the spin off continued to run in a severely diminished mode due to the lack of liquidity. We need to raise a sufficient amount of capital to provide the resources required that would enable us to continue running the business.

 

 

Cost of revenues increased by $1,319 to $4,650 in the three months ended June 30, 2011 from $3,331 in the three months ended June 30, 2010.

 

Selling general and administrative (S, G & A) expenses increased by $50,905 from $122,271 to $173,176 for the three months ended June 30, 2010 and 2011, respectively.  Increase is primarily due to the increase in professional service fees including consulting, legal and accounting fees. Common stock issued for services rendered increased by $210,000 to $210,000 in 2011 compared to $0 for 2010. The increase is due to the strategic business consulting and advice agreements signed during the quarter and in the last quarter of the prior year.

 

As a result of the foregoing, we realized a net loss of $387,826 for the three months ended June 30, 2011 compared to a loss of $125,564 in the three months ended June 30, 2010, an increased loss of $262,262.

 

Revenue decreased by $75,375 to $199 for the six months ended June 30, 2011 from $75,574 in the prior year. The Company spun off the online businesses to Worlds Online Inc. The VIP subscriptions and revenue related to the deferred revenue agreement has been transferred over to Worlds Online Inc. Before the spin off, the business was running in a severely diminished mode due to the lack of liquidity. We still need to raise a sufficient amount of capital to provide the resources required that would enable us to continue to operate the business.

 

Our cost of revenues during the six months ended June 30, 2011 and 2010 are primarily comprised of (1) cost of goods sold: 2% and 4%, respectively, and (2) selling general and administrative expenses: 34% and 96%, respectively (3) Common stock issued for services rendered: 64% and 0%, respectively. Cost of sales on a consolidated basis increased $8,847 to $16,959 for the six months ended June 30, 2011, from $8,112 in the six months ended June 30, 2010. Increase was due to a data recovery project undertaken during the six months ended June 30, 2011 and not the result of sales. Selling general and administrative expenses increased by approximately $152,959, from $206,675 to approximately $359,634 for the six months ended June 30, 2010 and 2011, respectively. Increase is due to an increase in professional service fees including business consulting, legal, accounting and an increase in sales activity.

 

Common stock issued for services rendered increased by $683,430 to $683,430 in 2011 compared to $0 for 2010. The increase is due to the strategic business consulting and advice agreements signed during the quarter and in the last quarter of the prior year, and shares issued to individuals who have been performing valuable services for the company over the years without any form of compensation.

 

As a result of the foregoing we had a net loss of $1,059,825 for the six months ended June 30, 2011 compared to a loss of $139,213 in the six months ended June 30, 2010.

 

 

 

Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations (con’t)

 

Liquidity and Capital Resources

 

Our financial and liquidity position has improved somewhat from the prior year period. Our unrestricted cash and cash equivalents was $170,946 at June 30, 2011. At June 30, 2010, cash and cash equivalents was $27,380. There were no capital expenditures in the three months ended June 30, 2011 or in the three months ended June 30, 2010.

 

Historically, our primary cash requirements have been to fund the cost of operations, to keep the Company in compliance of its reporting requirements, development of our products and patent protection, with additional funds having been used in promotion and advertising and in connection with the exploration of new business lines.

 

We have had to severely diminish our operations due to a lack of liquidity from mid-2001 through most of 2007. We were able to find a small source of additional capital in 2007, 2008, 2009 and another in 2010. There can be no assurance that any significant financing would become available to us at this time. The additional capital that we secured in previous years enabled us to bid on new business. There can be no assurance that any such new business would be sold in the future.

 

On December 24, 2008 we filed a patent infringement suit against NCSoft Corp in the United States District Court, Eastern District of Texas in order to enforce our intellectual property rights under our patents. In April 2010, the parties agreed to settle the matter, which settlement was later disputed in August 2010 but was resolved finally in September 2010, the terms of which the parties have contractually agreed to keep confidential.

 

On May 11, 2009, our management concluded that our audited financial statements for the years ended December 31, 2007 and 2008 and our unaudited quarterly financial statements for the quarterly periods in such years should no longer be relied upon.  Specifically, our liabilities were understated by approximately $1,714,179 on December 31, 2007 and by approximately $2,719,942 on December 31, 2008 (which amount is cumulative and includes the amount understated in 2007) with an overstatement of income on such dates of $1,714179 and $1,005,763, respectively.  The facts underlying our original conclusion is that all of such liabilities have exceeded the applicable statutes of limitations and based upon an opinion of counsel which stated that the likelihood of our having to pay these liabilities was highly improbable, our independent auditor concurred with our decision to write off all of such liabilities.  The staff (“Staff”) of the Securities and Exchange Commission, without disagreeing with our position that payment of such liabilities was highly improbable, advised us that under the facts of our situation, it was their conclusion that GAAP accounting required that the liabilities not be written off at this time.  Following a series of calls with various Staff members, our management, in consultation with our counsel and independent auditor, agreed to accept the Staff’s position.  We have received guidance from the Staff as to the necessary steps we need to take to properly write off these liabilities and we expect to begin that process with certain of the largest creditors.  Regardless of whether we are ultimately successful in writing off all or some of these liabilities, we do not believe that these restatements will have any impact on our results of operations or cash flows as the fact remains that the statute of limitations has indeed passed with respect to these liabilities and the likelihood of our having to pay them remains highly improbable.

 

 

Item 4. Controls And Procedures

 

As of June 30, 2011, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2011. The above statement notwithstanding, you are cautioned that no system is foolproof.

Changes in Internal Control Over Financial Reporting

During the quarter covered by this report there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.    

 

This quarterly report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s reports in this quarterly report.

 

 

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

 

 

On December 24, 2008 we filed a patent infringement suit against NC Soft Corp. in the United States District Court, Eastern District of Texas in order to enforce our intellectual property rights under our patents. In April 2010, the parties agreed to settle the matter, which settlement was later disputed in August 2010 but was resolved finally in September 2010, the terms of which the parties have contractually agreed to keep confidential.

 

Item 1A. Risk Factors

We are not obligated to disclose our risk factors in this report, however, limited information regarding our risk factors appears in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Forward-Looking Statements” contained in this Quarterly Report on Form 10-Q and in “Item 1A. RISK FACTORS” of our 2010 Annual Report on Form 10-K. There have been no material changes from the risk factors previously disclosed in our 2010 Annual Report on Form 10-K.

 

Item 2. During the first quarter of 2011, 680,000 shares of unregistered common stock were issued to the existing shareholders who entered into call option agreements with the Company. All of the shareholders were “accredited” investors, no public advertising was used, and the stock certificates issued all contained restrictive legends. Accordingly, the issuances were exempt under section 4(2) as not involving a public offering. The board approved the issuance of 1,200,000 shares of unregistered common stock to be issued to individuals who have been performing valuable services over the years to the company without any form of compensation.

 

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Reserved by the SEC.

  

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits 

 

31.1		Certification of Chief Executive Officer
31.2		Certification of Chief Financial Officer
32.1		Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned thereto duly authorized.

Date: August 22, 2011

WORLDS INC.

 

By: /s/ Thomas Kidrin Thomas Kidrin President and CEO By: /s/ Christopher Ryan Christopher Ryan Chief Financial Officer

 

INDEX TO EXHIBITS

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer
31.2		Certification of Chief Financial Officer
32.1		Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.