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 March 31, 2014

( ) 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.

(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 [ X ] 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 May 1, 2014, 95,004,838 shares of the Issuer's Common Stock were outstanding.

 

Worlds Inc.

 

Table of Contents

	Page
Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013 (audited)	2
Statements of Operations for the three months ended March 31, 2014 and 2013 (unaudited)	3
Statements of Cash Flows for the three months ended March 31, 2014 and 2013 (unaudited)	4
Notes to Financial Statements	5

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

 

Worlds Inc.
Balance Sheets
March 31, 2014 and December 31, 2013
		Unaudited				Audited
		March 31, 2014				December 31, 2013
ASSETS:
Current Assets
Cash and cash equivalents		$	57,666			$	22,132
Due from related party			287,050				295,912
Promissory note			3,000				3,000
Total Current Assets			347,716				321,044
Patents			7,000				7,000
Total assets		$	354,716			$	328,044
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current Liabilities
Accounts payable		$	797,908			$	797,908
Accrued expenses			2,055,933				1,986,726
Derivative liability			186,602				429,296
Notes payable			773,279				773,279
Notes payables			325,000				225,000
Convertible notes payable, net			136,043				117,534
Total Current Liabilities			4,274,765				4,329,743
Stockholders' (Deficit)
Common stock (Par value $0.001 authorized 100,000,000 shares, issued and outstanding 95,004,838 and 93,209,823 as of March 31, 2014 and December 31, 2013, respectively)			95,005				93,210
Additional paid in capital			31,825,487				30,078,730
Common stock-warrants			97,869				97,869
Deferred compensation			—				(12,609	)
Accumulated deficit			(35,938,408	)			(34,258,898	)
Total stockholders deficit			(3,920,047	)			(4,001,698	)
Total Liabilities and stockholders' deficit		$	354,716			$	328,044
The accompanying notes are an integral part of these financial statements

 

 

 

Worlds Inc.
Statements of Operations
Three Months Ended March 31, 2014 and 2013
			Unaudited				Unaudited
			3/31/2014				3/31/2013
Revenues
Revenue		$	—			$	—
Total Revenue			—				—
Cost and Expenses
Cost of Revenue			—				—
Gross Profit/(Loss)			—				—
Option Expense			1,186,310				—
Common Stock issued for services renderred			36,608				62,263
Selling, General & Admin.			89,535				248,936
Salaries and related			49,038				47,026
Operating loss			(1,361,491	)			(358,225	)
Other Income (Expense)
Gain (Loss) on change in fair value of derivative liability			(71,173	)			54,379
Interest Expense			(246,846	)			(27,518	)
Net (Loss)		$	(1,679,510	)		$	(331,364	)
Weighted Average Loss per share		$	(0.02	)			**
Weighted Average Common Shares Outstanding			94,052,429				81,832,238
** Less than 0.01
The accompanying notes are an integral part of these financial statements

 

 

 

Worlds Inc.
Statements of Cash Flows
Three Months Ended March 31, 2014 and 2013
		Unaudited				Unaudited
		3/31/2014				3/31/2013
Cash flows from operating activities:
Net (loss)		$	(1,679,510	)		$	(331,364	)
Adjustments to reconcile net loss to net cash (used in) operating activities
Fair value of stock options issued			1,186,310				—
Common stock issued for services renderred			36,608				62,263
Amortization of discount to note payable			242,884				21,918
Derivative expenses			—				512,637
Changes in fair value of derivative liabilities			71,173				(567,016	)
Prepaid expense			—				—
Accounts payable and accrued expenses			69,207				(69,384	)
Due from related party			8,862				(102,120	)
Net cash (used in) operating activities:			(64,466	)			(473,066	)
Cash flows from financing activities
Proceeds from issuance of common stock			—				97,500
Proceeds from exercise of warrants			—				78,500
Proceeds from issuance of convertible note payable			—				2,400,000
Proceeds from issuance of note payable			100,000				—
Net cash provided by financing activities			100,000				2,576,000
Net increase/(decrease) in cash and cash equivalents			35,534				2,102,934
Cash and cash equivalents, including restricted, beginning of year			22,132				95,069
Cash and cash equivalents, including restricted, end of period		$	57,666			$	2,198,003
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest		$	—			$	—
Income taxes		$	—			$	—
The accompanying notes are an integral part of these financial statements

 

  

Worlds Inc.

NOTES TO FINANCIAL STATEMENTS

Three Months Ended March 31, 2014

(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 alleged infringers. The Company also entered into a License Agreement with Worlds Online Inc. to sublicense its 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. for shared operating expenses.

 

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 is anticipated to be from sublicenses of the patented technology by Worlds Online and any revenue that may be generated from enforcing its patents. 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.

 

 

 

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 three months ended March 31, 2014.

 

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.

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

Notes Payable

 

The Company has $773,279 in short term notes outstanding at March 31, 2014 and December 31, 2013. The company has $325,000 and $225,000 in notes outstanding at March 31, 2014 and December 31, 2013, respectively. 

 

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 financial statements. There were no items of comprehensive income (loss) applicable to the Company during the period covered in the financial statements.

 

 

 

Loss Per Share

 

Net loss per common share is computed pursuant to section 260-10-45 of the FASB ASC. 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. As of March 31, 2014, there were 8,600,000 options and 5,273,214 warrants whose effect is anti-dilutive and not included in diluted net loss per share for March 31, 2014. The options and warrants may dilute future earnings per share.

 

Commitments and Contingencies

 

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time that these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows. 

 

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 March 31, 2014, and 2013 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 technology industries, including, but not limited to, litigation, development of new technological innovations and dependence on key personnel.

 

Off Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements.

 

Uncertain Tax Positions

 

The Company did not take any uncertain tax positions and had no adjustments to unrecognized income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the three months ended March 31, 2014 and 2013, respectively.

 

Subsequent Events

A Federal District Court issued a ruling on March 13, 2014 on the Motion for Summary Judgment hearing that allows the company to proceed with its patent infringement suit against Activision Blizzard, Inc., Blizzard Entertainment, Inc. and Activision Publishing, Inc.'s (Activision). The MSJ hearing held October 17, 2013 addressed Activision's dispute of Worlds Inc.'s November 1995 patent priority date. The court did not dismiss the case as requested by Activision. The Court’s ruling does prevent the company from pursuing damages for the period prior to the U.S. Patent and Trademark Office's (USPTO) issuance of Certificates of Correction on September 24, 2013 that amended the Company’s 6219045 and 7181790 patents to include comprehensive priority information, which specifically references World’s November 1995 provisional patent application and confirms World’s 1995 priority date.

 

Recent Accounting Pronouncements

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements up to ASU 2014-05, and does 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.

 

 

NOTE 2 - GOING CONCERN

 

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 the three months ended March 31, 2014, the Company issued 1,645,015 common shares by converting $224,375 of the convertible notes payable into common stock.

 

During the three months ended March 31, 2014, the Company issued an aggregate of 150,000 shares of common stock as payment for services rendered with an aggregate value of $24,000.

 

During the three months ended March 31, 2013, the Company sold 875,000 common shares for a cash investment of $87,500. The company received $10,000 for stock issued in 2012 and recorded as subscription receivable.

 

During the three months ended March 31, 2013, the Company raised $78,500 with the exercise of warrants covering 523,333 shares of its common stock at a price of $0.15 per share.

 

During the three months ended March 31, 2013, the Company issued an aggregate of 1,050,000 shares of common stock as payment for services rendered with an aggregate value of $281,800, $232,037 of which was recorded as deferred compensation as of March 31, 2013.

 

During the three months ended March 31, 2013, the Company issued 1,500,000 common shares for a cash investment of $150,000 which was received in 2012. The shares were not issued as of December 31, 2012, and were recorded as common stock subscribed but not yet issued at December 31, 2012. 

 

 

NOTE 4 - NOTES PAYABLE

 

We issued an aggregate of $2.4 million face amount of Senior Secured Convertible Notes (the “Notes”). The Notes are divided into Series A, Series B and Series C with the Series A and B Notes aggregating to $1.95 million and the Series C Notes aggregating to $450,000. The Series A and Series B Notes were exchanged by the return of the face amount of the Notes and for 7 million shares of common stock of the Company. The remaining Series C Note carries a 14% annual interest rate upon default and is payable on March 13, 2016. The Company has determined that the conversion feature of the Notes represent an embedded derivative since the Notes are convertible into a variable number of shares upon conversion. The Notes are classified as a derivative liability and not a note payable, see Note 10 below.

  

Notes payable at March 31, 2014 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
Promissory notes		$	325,000
Total current		$	1,098,279
2014		$	1,098,279
2015		$	-0-
2016		$	-0-
2017		$	-0-
2018		$	-0-
		$	1,098,279

 

We issued promissory notes in the amount of $100,000 during the three months ended March 31, 2014. We had issued promissory notes in the amount of $225,000 during the year ended December 31, 2013. One of the Promissory Notes in the amount $50,000 was in lieu of payment of cash for an outstanding balance due to a consultant of the Company. The promissory notes carry a 6% annual interest rate and are payable upon the earlier of (a) 24 months from the date of the promissory note or (b) the Company reaching a settlement(s) on a patent infringement claim(s) and receiving an aggregate of at least $2 million net proceeds from such settlement(s). 

The holders of the promissory notes shall receive repayment in the full face amount of the note from the initial $500,000 the Company actually receives from the net proceeds of its patent infringement claim(s) or from the net proceeds of a public offering. In addition the holder shall receive a preferred return (i) in an amount equal to up to 200% of the initial face amount of the note out of available cash by sharing with all other investors in this series of notes in the allocation of 50% of the available cash received by the Company form $2M - $4M and (ii) in an amount equal to up to 100% of the initial face amount of the note out of available cash by sharing with all other investors in this series of notes in the allocation of 25% of the available cash received by the Company from $4M - $6M. In other words, if the Company collects $6M in the net proceeds of available cash, the holder will receive a return equal to 400% of its investment. 

 

 

NOTE 5 – STOCK OPTIONS

 

During the three months ended March 31, 2014, the Company issued 450,000 options to the Company’s directors. The directors, Bernard Stolar, Robert Fireman and Edward Gildea each received 100,000 options for serving as board members in 2014. Edward Gildea joined the board on January 10, 2014 and received an additional 150,000 options for joining the Company’s board.

 

During the three months ended March 31, 2014, the company extended the expiration date on the CEO’s 7,500,000 options. They were set to expire on March 31, 2014 but were extended two years to March 31, 2016. No stock options or warrants were exercised during the three months ended March 31, 2014.

 

During the three months ended March 31, 2013, the Company issued 4,535,714 warrants as part of the senior secured convertible notes. No stock options were issued. During the three months ended March 31, 2013, 523,333 stock options were exercised for cash proceeds of $78,500.

 

During the three months ended March 31, 2014, the Company recorded an option expense of $1,186,310, 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 0.93% risk-free interest, 0% dividend yield, 210% volatility, and expected life of 5 years for the Director’s options and 2 years for the CEO’s options.

  

Stock Warrants and Options
Stock warrants/options outstanding and exercisable on March 31, 2014 are as follows:
Exercise Price per Share			Shares Under Option/warrant			Remaining Life in Years
	Outstanding
$	1.00			4,535,714			3.96
$	0.19			200,000			3.75
$	0.155			200,000			4.75
$	0.15			737,500			0.75
$	0.14			250,000			4.97
$	0.115			300,000			3.58
$	0.11			150,000			1.05
$	0.076			7,500,000			2.00
$
	Exercisable
$	1.00			4,535,714			3.96
$	0.19			200,000			3.75
$	0.15			737,500			0.75
$	0.115			300,000			3.58
$	0.11			150,000			1.05
$	0.076			7,500,000			2.00

 

 

 

 

NOTE 6 - INCOME TAXES

 

At March 31, 2014, the Company had federal and state net operating loss carry forwards of approximately $42,121,000 that expire in various years through the year 2034.

 

Due to operating losses, there is no provision for current federal or state income taxes for the three months ended March 31, 2014 and 2013.

 

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 March 31, 2014 consists of net operating loss carry forwards calculated using federal and state effective tax rates equating to approximately $16,427,000 less a valuation allowance in the amount of approximately $16,427,000. Because of the Company’s lack of earnings history, the deferred tax asset has been fully offset by a valuation allowance. The valuation allowance increased by approximately $54,000 and $86,000 for the three months ended March 31, 2014 and 2013, respectively.

 

The Company’s total deferred tax asset as of March 31, 2014 is as follows:

 

Net operating loss carry forwards		$	16,427,000
Valuation allowance			(16,427,000	)
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 three months ended March 31, 2014 and 2013 is as follows:

 

 

			2014				2013
Income tax computed at the federal statutory rate			34	%			34	%
Income tax computed at the state statutory rate			5	%			5	%
Valuation allowance			(39	%)			(39	%)
Total deferred tax asset			0	%			0	%

 

 

NOTE 7 - COMMITMENTS AND CONTINGENCIES

 

The Company is committed to an employment agreement with its President and CEO, Thom Kidrin. The agreement, dated as of August 30, 2012, is for five years with a one-year renewal option held by Mr. Kidrin.  The agreement provides for a base salary of $175,000, which increases 10% on September 1 of each year; a monthly car allowance of $500; an annual bonus equal to 2.5% of Pre-Tax Income (as defined in the agreement); an additional bonus as follows: $75,000, if Pre-Tax Income for the year is between 150% and 200% of the prior fiscal year’s Pre-Tax Income or (B) $100,000, if Pre-Tax Income for the year is between 201% and 250% of the prior fiscal year’s Pre-Tax Income or (C) $200,000, if Pre-Tax Income for the year is 251% or greater than the prior fiscal year’s Pre-Tax Income, but in no event shall this additional bonus exceed five (5%) percent of Pre-Tax Income for such year; payment of up to $10,000 in life insurance premiums; options to purchase 7.5 million shares of Worlds Inc. common stock at an exercise price of  $0.076 per share, all of which vested on August 30, 2012; a death benefit of at least $2 million dollars; and a payment equal to 2.99 times his base amount (as defined in the agreement) in the event of a Change of Control (as defined in the agreement).  The agreement also provides that Mr. Kidrin can be terminated for cause (as defined in the agreement) and that he is subject to restrictive covenants for 12 months after termination. 

 

 

 

NOTE 8 - RELATED PARTY TRANSACTIONS

 

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 alleged infringers. The Company also entered into a License Agreement with Worlds Online Inc. to sublicense its patented technologies.

 

Due from related party is comprised of cash payments made by Worlds Inc. on behalf of Worlds Online Inc. for shared operating expenses. The balance due at March 31, 2014 is $287,050.  

 

NOTE 9 - PATENTS

Worlds Inc. currently has nine patents, 6,219,045 - 7,181,690 - 7,493,558 – 7,945,856, - 8,082,501, – 8,145,998 – 8,161,383, – 8,407,592 and 8,640,028. On March 30, 2012, the Company filed a patent infringement lawsuit against Activision Bizzard Inc., Blizzard Entertainment Inc. and Activision Publishing Inc. in the United States District Court for the District of Massachusetts. Susman Godfrey LLP is lead counsel for the Company. The costs to prosecute those parties that the Company and our legal counsel believe to be infringing on said patents were capitalized under patents until a resolution is reached.

A Federal District Court issued a ruling on March 13, 2014 on the Motion for Summary Judgment hearing that allows the company to proceed with its patent infringement suit against Activision Blizzard, Inc., Blizzard Entertainment, Inc. and Activision Publishing, Inc.'s (Activision). The MSJ hearing held October 17, 2013 addressed Activision's dispute of Worlds Inc.'s November 1995 patent priority date. The court did not dismiss the case as requested by Activision. The Court’s ruling does prevent the company from pursuing damages for the period prior to the U.S. Patent and Trademark Office's (USPTO) issuance of Certificates of Correction on September 24, 2013 that amended the Company’s 6,219,045 and 7,181,790 patents to include comprehensive priority information, which specifically references World’s November 1995 provisional patent application and confirms World’s 1995 priority date.

In early October 2013, Activision Publishing, Inc., a subsidiary of Activision Blizzard, Inc.  filed a lawsuit claiming patent infringement against Worlds Inc. and Worlds Online Inc., in the U.S. District Court for the Central District of California. Activision alleges that Worlds violates U.S. Patent No. 6,014,145 entitled “Navigation with optimum viewpoints in three-dimensional workspace interactive displays having three-dimensional objects with collision barriers” and U.S. Patent No. 5,883,628 entitled “Climability: property for objects in 3-D virtual environments.”   The Company believes Activision/ Blizzards' suit against Worlds Inc. is without merit and an attempt to apply pressure to Worlds due our lawsuit against them. Worlds' parent patent pre-dates Activision/ Blizzards' patents by more than one year. 

 

There can be no assurance that the Company will be successful in its ability to prosecute its IP portfolio or that we will be able to acquire additional patents.

 

NOTE 10 – DERIVATIVE LIABILITIES

On March 20, 2013 the Company entered into strategic financing agreements with several institutional investors that could provide the Company with up to $2.3 million of debt financing based upon the amount of conversions and redemptions. The transaction documents provide, among other things, that (i) the investors will receive five year warrants in an amount equal to 100% of the number of shares of our common stock the investors would receive if the Notes (defined below) were converted on March 13, 2013, at an exercise price of $0.50 per share, (ii) $1.950 million of the funds will deposited in one of our bank accounts but will be subject to a control account agreement which will provide that the Company can only withdraw funds from the account as the investors convert or redeem the Notes, (iii) the investors have demand and piggy-back registration rights for the shares of common stock underlying the warrants and Notes, (iv) the Notes will be secured by a first priority security interest in all of our assets, other than our patents, (v) each investor may not convert any Note or exercise any warrants if doing so will cause the investor to own more than 4.99% of our outstanding common stock at any time, although under certain circumstances they can each own up to 9.99% of our outstanding common stock, (vi) we paid $40,000 of the investors’ legal fees incurred with respect to this transaction, and (vii) for the next three years the investors have a right to participate in up to 50% of any of our future financings. The warrants and Notes contain standard anti-dilution provisions and the Securities Purchase Agreements contains standard covenants for a financing of this nature. In the event the Company acquires any subsidiaries while the Notes are outstanding, such subsidiaries will be obligated to guaranty the Notes and any other obligations we owe to the investors pursuant to the transaction documents.

 

On July 15, 2013 we entered into Amendment and Exchange Agreements with each of the existing holders of our Series A, B and C Senior Secured Convertible Notes and related warrants to purchase our common stock, which securities were originally issued pursuant to that certain Securities Purchase Agreement dated as of March 14, 2013 (“Securities Purchase Agreement”), by and among us and such holders.

 

Each Exchange Agreement provides for, among other things, that:

 

	(i)	Various restrictive provisions of the Securities Purchase Agreement and the Class C Senior Secured Convertible Notes were either eliminated by amendment or waived;
	(ii)	the related warrants, initially exercisable into an aggregate of 4,535,714 shares of Common Stock at an initial exercise price of $0.50, were exchanged for new warrants, initially exercisable into an aggregate of 4,535,714 shares of Common Stock at an initial exercise price of $1.00; and
	(iii)	the Series A and B Senior Secured Convertible Notes, with an aggregate original principal amount of $1,950,000, were exchanged for an aggregate of 7 million shares of our common stock and the payment by the Company to such holders of an aggregate of approximately $1,951,400 (the remaining cash amount held in a control account pursuant to the terms and conditions of the Series A and B Senior Secured Convertible Notes)

 

The Company has determined that the conversion feature of the Note represent an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly, the Note is not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the balance sheet with the corresponding amount recorded as a discount to the Note. Such discount will be accreted from the grant date to the maturity date of the Note. The change in the fair value of the derivative liability will be recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative liability on the balance sheet. The beneficial conversion feature included in the Note resulted in an initial debt discount of $450,000 and an initial loss on the valuation of derivative liabilities of $96,119 based on the initial fair value of the derivative liability of $546,119. The fair value of the embedded derivative liability was calculated at grant date utilizing the following assumptions:

 

Grant Date		Fair Value				Term (Years)				Assumed Conversion Price				Market Price on Grant Date				Volatility Percentage				Risk-free Rate
3/20/13		$	546,119				3.0			$	0.326			$	0.465				238	%			0.0038

 

During the three months ended March 31, 2014, $224,375 of the convertible notes was converted into 1,645,015 shares of the Company’s common stock. $225,188 in convertible notes remain outstanding.

 

At March 31, 2014, the Company revalued the embedded derivative liability. For the period from December 31, 2013 to March 31, 2014, the Company decreased the derivative liability of $429,296 by $242,694 resulting in a derivative liability of $186,602 at March 31, 2014.

 

The fair value of the embedded derivative liability was calculated at March 31, 2014 utilizing the following assumptions: 

 

Date				Fair Value				Term (Years)				Assumed Conversion Price				Market Price				Volatility Percentage				Risk-free Rate
	3/31/14			$	186,602				1.97			$	0.15			$	0.156				179	%			0.0093

 

 

 

  

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 other 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 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; delays in the delivery of broadband capacity to the homes and offices of persons who license our technology; 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

 

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. Since mid-2007, as more funds became available from our financings, we were able to increase operations and become more active operationally.

 

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

 

The Company’s sources of revenue after the spin off are expected to be from sublicenses of the patented technology by Worlds Online and any revenue that may be generated from enforcing its patents in litigation or otherwise.

Revenues

 

The Company’s sources of revenue after the spin off are expected to be from sublicenses of the patented technology by Worlds Online and any revenue that may be generated from enforcing its patents in litigation or otherwise.

Prior to the spin-off we generated only modest revenue from VIP subscriptions to the Worlds Ultimate 3-D Chat service.

 

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 limit our operations since mid 2001 due to a lack of liquidity.  However, we were able to issue equity and convertible debt in the last few years and raise small amounts of capital from time to time that enabled us to begin upgrading our technology, develop new products and actively solicit additional business.  We continue to pursue additional sources of capital though we have no current arrangements with respect to, or sources of, additional financing at this time and there can be no assurance that any such financing will become available. If we cannot raise additional capital, form an alliance of some nature with another entity, or start to generate sufficient revenues, we may need to once again scale back operations.

 

 

 

 

RESULTS OF OPERATIONS

 

Our net revenues for each of the three months ended March 31, 2014 and 2013 were $0.  All the operations were transferred over to Worlds Online Inc. in the spin off. The Company’s future sources of revenue after the spin off are anticipated to be from sublicenses of the patented technology to Worlds Online Inc.’s customers and any revenue that may be generated from enforcing our patents in litigation or otherwise. 

 

Three months ended March 31, 2014 compared to three months ended March 31, 2013

 

Revenue is $0 for the three months ended March 31, 2014 and 2013. 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 is $0 in the three months ended March 31, 2014 and 2013.

 

Selling general and administrative (SG&A) expenses decreased by $159,401 from $248,936 to $89,535 for the three months ended March 31, 2013 and 2014, respectively. Decrease is due to limited operations in 2014 where last year there was a greater overall level of activity surrounding the lawsuit and professional service fees and consultants with the activity around closing the strategic financing agreement.

 

Salaries and related increased by $2,012 to $49,038 from $47,026 for the three months ended March 31, 2014 and 2013, respectively. The increase is due to the increase in the CEO’s salary based on the terms of his employment agreement.

.

Common stock issued for services rendered decreased by $25,655 to $36,608 from $62,263 for the three months ended March 31, 2014 and 2013 respectively. The Company has only one strategic business consulting and advice agreement for common stock in 2014 where we had several in the past.

 

For the three months ended March 31, 2014, the Company recorded an option expense of $1,186,310, equal to the estimated fair value of the options at the date of grants. The option expense includes the options that were issued to Directors of the Company and the options that were extended for an additional 2 years for the CEO.

 

For the three months ended March 31, 2014, the company had a loss on change in fair value of derivative liability of $71,173 and interest expense of $246,846. For the three months ended March 31, 2013, the Company had a gain on change in fair value of derivative liability of $54,379 and interest expense of $27,518, both related to the issuance of the senior secured convertible notes that are required to be recorded as a derivative liability.

 

As a result of the foregoing, we realized a net loss of $1,679,510 for the three months ended March 31, 2014 compared to a net loss of $331,364 in the three months ended March 31, 2013.

 

Liquidity and Capital Resources

 

At March 31, 2014, our cash and cash equivalents were $57,666. We raised an aggregate of $100,000 from issuing notes payable during the quarter.

 

At March 31, 2013, our cash and cash equivalents were $248,003 and our restricted cash and cash equivalents were $1,950,000. We raised an aggregate of $2,300,000 from issuing the convertible notes payable but then redeemed the Series A and B and returned $1,950,000. We raised $97,500 from a private placement of common stock; and we raised $78,500 from the exercising of warrants for common stock in the three months ended March 31, 2013.  

 

There were no capital expenditures in the three months ended March 31, 2014 or in the three months ended March 31, 2013.

 

Historically, our primary cash requirements have been used to fund the cost of operations, 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.

 

The funds raised in our 2013 and 2014 financings were and will be used to develop new products and services, enhance our patent portfolio, pay salaries to management and pay professional fees to our attorneys and auditors to prepare and file reports with the Securities and Exchange Commission.  We hope to raise additional funds to be used for further developing our portfolio of patents and to document our technology in order to enforce our patents where there is infringement.  No assurances can be given that we will be able to raise any additional funds.

  

A Federal District Court issued a ruling on March 13, 2014 on the Motion for Summary Judgment hearing that allows the company to proceed with its patent infringement suit against Activision Blizzard, Inc., Blizzard Entertainment, Inc. and Activision Publishing, Inc.'s (Activision). The MSJ hearing held October 17, 2013 addressed Activision's dispute of Worlds Inc.'s November 1995 patent priority date. The court did not dismiss the case as requested by Activision. The Court’s ruling does prevent the company from pursuing damages for the period prior to the U.S. Patent and Trademark Office's (USPTO) issuance of Certificates of Correction on September 24, 2013 that amended the Company’s 6,219,045 and 7,181,790 patents to include comprehensive priority information, which specifically references World’s November 1995 provisional patent application and confirms World’s 1995 priority date.

 

Item 4. Controls And Procedures

As of March 31, 2014, 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 March 31, 2014. 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.

 

 

 

 

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

 

In Cosmo Communications v. Worlds.com. (our former name) in the Superior Court Of New Jersey Law Division, Bergen County, the court rendered a decision in favor of the plaintiff, Cosmo Communications on February 13, 2001. The judgment amount entered in April 2001, is approximately $205,000, of which the full amount is accrued.  The judgment related to a consulting agreement for raising capital. The court ruled that the terms of the contract are binding on successors of the company and that Worlds Inc. is a successor company .

 

In early October 2013, Activision Publishing, Inc., a subsidiary of Activision Blizzard, Inc.  filed a lawsuit claiming patent infringement against World’s Inc. and Worlds Online Inc., in the U.S. District Court for the Central District of California. Activision alleges that World’s violates U.S. Patent No. 6,014,145 entitled “Navigation with optimum viewpoints in three-dimensional workspace interactive displays having three-dimensional objects with collision barriers” and U.S. Patent No. 5,883,628 entitled “Climability: property for objects in 3-D virtual environments.”   The Company believes Activision/ Blizzards' suit against Worlds Inc. is without merit and an attempt to apply pressure to Worlds due our lawsuit against them. Worlds' parent patent pre-dates Activision/ Blizzards' patents by more than one year. 

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 2012 Annual Report on Form 10-K. There have been no material changes from the risk factors previously disclosed in our 2012 Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None. 

  

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosure

 

Not applicable.

 

 

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.
101.INS* XBRL		Instance Document
101.SCH*XBRL		Taxonomy Extension Schema
101.CAL*XBRL		Taxonomy Extension Calculation Linkbase
101.DEF* XBRL		Taxonomy Extension Definition Linkbase
101.LAB*XBRL		Taxonomy Extension Label Linkbase
101.PRE* XBRL		Taxonomy Extension Presentation Linkbase

 

 

  

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 15, 2014

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.
101.INS* XBRL		Instance Document
101.SCH* XBRL		Taxonomy Extension Schema
101.CAL* XBRL		Taxonomy Extension Calculation Linkbase
101.DEF* XBRL		Taxonomy Extension Definition Linkbase
101.LAB* XBRL		Taxonomy Extension Label Linkbase
101.PRE* XBRL		Taxonomy Extension Presentation Linkbase