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, 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 0-54433

WORLDS ONLINE INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	27-4672745
(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 July 22, 2014, 31,954,236 shares of the Issuer's Common Stock were outstanding.

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Worlds Online Inc.

 

Table of Contents

 

			Page
Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013 (audited)			3
Statements of Operations for the six and three months ended June 30, 2014 and 2013 (unaudited)			4
Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (unaudited)			5
Notes to Unaudited Condensed Financial Statements			6

 

 

Worlds Online Inc.

Balance Sheets

As of June 30, 2014 and December 31, 2013

 

			Unaudited				Audited
			30-Jun-14				31-Dec-13
Current Assets
Cash		$	358,153			$	8,538
Trading securities			7,373				31,181
Total Current Assets			365,526				39,719
TOTAL ASSETS		$	365,526			$	39,719
Current Liabilities
Accrued expenses			692,591				529,639
Account payable - related party			200,129				295,913
Deferred revenue			226,950				226,950
Total Current Liabilities			1,119,670				1,052,502
Notes Payables			450,000				—
Total Liabilities		$	1,569,670			$	1,052,502
Stockholders' (Deficit)
Common Stock (Par value $0.001 authorized 100,000,000 shares, 31,954,236 and 31,824,548 common shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively)		$	31,954			$	31,825
Common stock subscribed but not yet issued			400				400
Common Stock Warrants			1,165,563				1,165,563
Additional Paid in Capital			(392,521	)			(458,219	)
Accumulated Deficit			(2,009,540	)			(1,752,351	)
Total stockholders' deficit			(1,204,144	)			(1,012,782	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	365,526			$	39,719
See Notes to Condensed Financial Statements

 

 

Worlds Online Inc.

Statement of Operations

For the Six Months and Three Months Ended June 30, 2014 and 2013

 

 

		Six Months Ended										Three Months Ended
		Unaudited				Unaudited						Unaudited				Unaudited
		30-Jun-14				30-Jun-13						30-Jun-14				30-Jun-13
Revenues
Revenue		$	444			$	339					$	222			$	128
Total			444				339						222				128
Cost and Expenses
Cost of Revenue			4,900				18,285						2,400				13,585
Gross (Loss)			(4,456	)			(17,946	)					(2,178	)			(13,457	)
Option Expense			35,999				3,198						—				3,198
Common Stock issued for services rendered			—				81,500						—				17,000
Selling, General & Admin.			99,302				98,298						47,950				49,337
Payroll and related taxes			96,250				98,278						48,125				43,750
Total expenses			231,551				263,328						96,075				99,828
Operating (loss)			(236,007	)			(299,220	)					(98,253	)			(126,742	)
Other Income (Expense):
Interest expense			(1,299	)			—						(1,299)				—
Loss on extinguishment of Debt			—				—						(19,078)				—
Gain on trading securities			5,404				—						—				—
Unrealized  loss on trading securities			(6,208	)			—						(6,551	)			—
Unrealized  Gain on trading securities			—				1,375										1,375
Net (Loss)		$	(257,189	)		$	(297,845	)				$	(123,882	)		$	(125,367	)
Weighted Average Loss per share (basic and fully diluted)		$	(0.01	)		$	(0.01	)				$	**				**
Weighted Average Common Shares Outstanding			31,844,610				29,183,114						31,864,452				31,347,664
**=less than $0.01
See Notes to Condensed Financial Statements

 

 

Worlds Online Inc

Statements of Cash Flows

Six Months Ended June 30, 2014 and 2013

 

 

		Unaudited			Unaudited
		30-Jun-14			30-Jun-13
Cash flows from operating activities:
Net (loss)		$	(257,189)		$	(297,846)
Adjustments to reconcile net (loss) to net cash (used in) operating activities
Loss on extinguishment of Debt			19,078			-
Realized gain on trading securities			(5,404)			-
Unrealized loss on trading securities			6,208			-
Unrealized gain on trading securities			-			(1,375)
Common stock issued for services rendered			-			81,500
Fair value of stock options issued to Directors			35,999			-
Changes in operating assets and liabilities
Accounts payable and accrued expenses			173,701			89,541
Accounts payable related party			(95,783)			122,327
Net cash (used in) operating activities:			(123,389)			(5,853)
Cash flows from investing activities:
Proceeds from sales of trading securities			23,004			-
Net cash provided by investing activities:			23,004			-
Cash flows from financing activities:
Issuance of convertible notes payable			450,000			-
Net cash provided by financing activities			450,000			-
Net (decrease) in cash and cash equivalents			349,615			(5,853)
Cash and cash equivalents beginning of period			8,538			8,585
Cash and cash equivalents end of period		$	358,153		$	2,732
Non-cash financing activities:
Common stock issued for accrued expense		$	29,958			-
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	-		$	-
Income taxes		$	-		$	-
See Notes to Condensed Financial Statements

 

 

Worlds Online Inc.

NOTES TO FINANCIAL STATEMENTS

Six Months Ended June 30, 2014 and 2013

(Unaudited)

 

NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES 

Description of Business

 

Worlds Online Inc. (the "Company") designs and develops software content and related technologies for the creation of interactive, three-dimensional ("3D") Internet sites on the World Wide Web. Using licensed technology the Company creates its own Internet sites, as well as sites available through third party on-line service providers.

 

The Company was formed on January 25, 2011 as a wholly-owned subsidiary of Worlds Inc. (formerly known as Worlds.com Inc.). On May 16, 2011, Worlds Inc. transferred to the Company the majority of its operations and related operational assets, except for its patent portfolio. Worlds Inc. has also given to the Company a perpetual world-wide license to its patented technology. Pursuant to the license, the Company has the right to issue unlimited sublicenses to the licensed technology, subject to World Inc.’s reasonable consent.

 

The assets transferred to us include: Worlds Inc.’s technology platform, Worlds Ultimate Chat, Aerosmith World, DMC Worlds, Cinema Virtual, Pearson contracts and related revenue, the following URLs: Worlds.com, Cybersexworld.com, Hang.com, and Worldsfunds.com, a digital inventory of over 10,000 3D objects, animation sequences, an extensive avatar library, texture maps and virtual world architectures. None of the transferred assets have any carrying value on the financial statements of the Company.

 

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 will require substantial additional funds for development and marketing of its products. There can be no assurance that the Company will be able to obtain the substantial additional capital resources necessary to pursue its business plan or that any assumptions relating to its business plan will prove to be accurate. Worlds Online Inc. was not able to generate sufficient revenue or obtain sufficient financing which had a material adverse effect on Worlds Online Inc., including requiring Worlds Online Inc. to reduce operations. These factors raise substantial doubt about the Company's ability to continue as a going concern.  

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.

Trading Securities

Trading securities are common stock in publicly traded companies, one that was received as compensation for performing consulting services. The other was purchased as an investment. The carrying value of the investments is the market price of the shares at June 30, 2014 and December 31, 2013. Any unrealized gain or loss are recorded under other income/(expense) in the accompanying statements of operations.

 

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.

Revenue Recognition

The Company has the following source of revenue: 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 collectability 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. 

Research and Development Costs

Research and development costs will be charged to operations as incurred.

Property and Equipment

Property and equipment will be stated at cost.   Depreciation will be 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 will be 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 (“ASC”) 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.

Fair Value of Financial Instruments

 

The Company follows paragraph 825-10-50-10 of the FASB ASC for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB ASC (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in US GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

Level 1	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3	Pricing inputs that are generally observable inputs and not corroborated by market data.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their fair values because of the short maturity of these instruments.

  

Accounts Payable Related Party

 

Accounts payable related party is comprised of cash payments made by Worlds Inc. on behalf of Worlds Online Inc. for shared operating expenses.

 

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.  

 

 

Extinguishment of liabilities

 

The Company accounts for extinguishment of liabilities in accordance with the guidance set forth in section 405-20 of the FASB ASC 405-20. Extinguishments of Liabilities When the conditions are met for the extinguishment accounting, the liabilities are derecognized and the gain or loss on the extinguishment is recognized.

 

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 ASC 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 ASC (“ASC 740”). 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.

 

Related Party Transactions

 

The Company follows subtopic 850-10 of the FASB ASC for the identification of related parties and disclosure of related party transactions.

 

Pursuant to Section 850-10-20 the Related parties include a. affiliates of the Company; b. Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management of the Company; f. other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of financial statements is not required in those statements. The disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement. 

 

Comprehensive Income (Loss)

 

The Company reports comprehensive income and its components following guidance set forth by section 220-10 of the FASB ASC 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 financial statements.

 

Loss Per Share

 

Net income (loss) per common share is computed pursuant to section 260-10-45 of the FASB ASC. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. If applicable, diluted earnings per share assume the conversion, exercise or issuance of all common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share.  Convertible debentures and preferred stock conversions are not considered in the calculations, as the impact of the potential common shares would be to decrease the loss per share. In addition, stock options totaling 5,650,000 shares are excluded as well, since the impact of the potential common shares would be to decrease loss per share. Therefore no diluted loss per share figures is presented.

 

Commitments and Contingencies

 

The Company follows subtopic 450-20 of the FASB ASC 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. 

 

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 period ended June 30, 2014.

 

Subsequent Events

 

The Company evaluated for subsequent events through the issuance date of the Company’s financial statements. 

 

Recent Accounting Pronouncements

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements up to ASU 2014-08, 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. Worlds Online Inc. has had only minimal revenues from operations, has a negative working capital, has a negative stockholders deficit and negative cash flows from operations. There can be no assurance that the Company will be able to obtain the substantial additional capital resources necessary 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 - NOTES PAYABLE

 

As of June 30, 2014, the Company issued an aggregate of $450,000 of Unsecured Convertible Notes (the “Notes”). The Notes carry a 6% annual interest rate and are payable on May 31, 2016. Pursuant to the Notes, the holders of the Notes have an option to convert the then outstanding principal amount of the Notes into the common stock of the Company at a price of 75% of the sale price of the Company’s next financing. There were no derivative liabilities accounted due to the uncertainty of future offering.

During the three and six months ended June 30, 2014, the Company recorded interest expense of $1,299 and $1,299, respectively, related to the Notes.

 

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.  During the period herein, no services were provided. The deferred revenue balance is $226,950.

 

NOTE 5 – STOCK OPTIONS

During the six months ended June 30, 2014, the Company issued 450,000 stock options to Directors of the Company. The Company issued 100,000 shares to each of the Company’s independent directors, Bernard Stolar, Robert Fireman and Edward Gildea for serving as a Director in 2014. The stock options allow each director to purchase 100,000 shares of the Company’s common stock at $0.08 per share per each individual option. The options expire on January 2, 2019. The Company issued an additional 150,000 shares to the new Director, Edward Gildea for joining the board during the quarter. The Company did not grant any registration rights with respect to any shares of common stock issuable upon exercise of the options.

 

Accordingly, the Company recorded an expense of $35,999 during the six months ended June 30, 2014 equal to the estimated fair value of the options at the date of grants. These options were granted for services to be performed.  The fair market value was calculated using the Black-Scholes options pricing model, assuming approximately 1.52% risk-free interest, 0% dividend yield, 375% volatility, and expected life of five years.

 

During the six months ended June 30, 2014, no stock options or warrants were exercised. There are no outstanding warrants as of June 30, 2014.

 

Stock options outstanding and exercisable as of June 30, 2014 are as follows:
Exercise Price per Share				Shares Under Option				Remaining Life in Years
	Outstanding
$	0.08				450,000				4.50
$	0.025				200,000				3.50
$	0.025				500,000				3.47
$	0.01				4,500,000				3.17
					5,650,000
	Exercisable
$	0.025				200,000				3.50
$	0.025				500,000				3.47
$	0.01				4,500,000				3.17
					5,000,000

 

 

NOTE 6 LOSS ON EXTINGUISHMENT OF DEBT

 

During the six months ended June 30, 2014, the Company issued 129,688 shares of common stock with a $29,828 fair market value to pay off the accrued expense in amount of $10,750. The $19,078 difference between the fair market value of the common stock and the balance of accrued expense was booked as loss on extinguishment of debt.

 

 

NOTE 7 - Trading Securities

Marketable equity securities		Cost				Market value				Unrealized Gain/(Loss)
Paid, Inc.		$	13,200			$	6,728			$	(6,472	)
Global Links Corp.		$	381			$	646			$	265

 

Fair market measurement at June 30, 2014 was computed using quoted prices in an active market for identified assets, (level 1). The shares were obtained as compensation for performing consulting services.

 

There was an unrealized loss of $6,207 for the six months ended June 30, 2014.

 

There was an unrealized gain of $1,375 for the six months ended June 30, 2013.

 

 

NOTE 8 - RELATED PARTY TRANSACTIONS

The Company was formed on January 25, 2011 as a wholly-owned subsidiary of Worlds Inc. (formerly known as Worlds.com Inc.). On May 16, 2011 Worlds Inc. transferred to the Company the majority of its operations and related operational assets, except for its patent portfolio. Worlds Inc. has also given to the Company a perpetual world-wide license to its patented technology. Pursuant to the license, the Company has the right to issue unlimited sublicenses to the licensed technology, subject to World Inc.’s reasonable consent.

 

The assets transferred to the Company include: Worlds Inc.’s technology platform, Worlds Ultimate Chat, Aerosmith World, DMC Worlds, Cinema Virtual, Pearson contracts and related revenue, the following URLs: Worlds.com, Cybersexworld.com, Hang.com, and Worldsfunds.com, a digital inventory of over 10,000 3D objects, animation sequences, an extensive avatar library, texture maps and virtual world architectures. None of the transferred assets have any carrying value on the financial statements of the Company. Deferred revenue was also transferred from Worlds Inc. and it was $226,950 at June 30, 2014 and December 31, 2013.

 

Account payable 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 June 30, 2014 is $200,129.

 

 

NOTE 9 - Commitments and Contingencies

 

The Company is committed to an employment agreement with it’s 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 4.5 million shares of Worlds Online Inc. common stock at an exercise price of  $0.01 per share, of which one-third vested on August 30, 2012, one-third vest on August 30, 2013 and the balance vest on August 30, 2014; 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. The balance due Mr. Kidrin at June 30, 2014 is $337,749 and is included in accrued expenses. 

 

NOTE 10 - SEGMENTS

 

The Company determined that it did not operate in any material, separately reportable operating segments as of June 30, 2014 and 2013.  

 

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

 

We are a 3D entertainment portal which leverages its proprietary technology to offer visitors a network of virtual, multi-user environments which we call "worlds". These worlds are visually engaging online environments featuring animation, motion and content where people can come together and, by navigating through the website, shop, interact with others, attend events and be entertained.

 

 Sites using our technology allow numerous simultaneous visitors to enter, navigate and share interactive "worlds". Our 3D Internet sites are designed to promote frequent, repeat and prolonged visitation by users by providing them with unique online communities featuring dynamic graphics, highly useful and entertaining information content, and interactive capabilities. We believe that our sites are highly attractive to advertisers because they offer access to demographic-specific user bases comprised of people that visit the site frequently and stay for relatively long periods of time.

 

We were formed on January 25, 2011 and effective May 16, 2011 Worlds Inc. (formerly known as Worlds.com Inc.) transferred to us a substantial portion of its operational assets and granted us a world-wide license to its existing, and future, 3-D related patent portfolio. Accordingly, we have only had operations of our own since May 16, 2011. Our fiscal year ends on December 31.

 

 

Revenues

 

One source of revenues derives from the entry into development agreement with clients in which a development, license and maintenance fee is paid for the creation and administration of a 3D virtual world to be offered to a select user base.

 

In other types of joint venture agreements we would agree to fund the development costs in return for recoupment of development costs on first monies in from ongoing participation in VIP, advertising and sponsorship revenue.

 

VIP revenues are funds, typically $2 - $6 per month, charged to users for either an enhanced avatar with additional virtual clothes and virtual goods or access to VIP only areas of the virtual World. To illustrate, in Worlds Inc. creation of Aerosmith World, only VIP members have access to Steven Tyler’s studio and his secret world, providing VIP members a greater opportunity to meet Mr.Tyler when he is online as well as mingle with other VIP guests and watch Aerosmith music videos in the VIP media lounge.

 

Our financial statements currently reflect an entry called “deferred revenue”. This is specific to the conversion of a note Worlds Inc. issued to Pearson PLC in 1996 in the initial face amount of $1,263,900. Pearson has agreed to forgive 50% of the note and convert the balance of the note into deferred revenue for products and services Worlds Inc. develops for Pearson in the form of virtual worlds for training and distant learning. Each product Worlds Inc. develops for Pearson has been reviewed and accepted by a senior Pearson executive as part of an ongoing internal sales and capabilities program between various divisions within Pearson. As part of the Spin-off we assumed this obligation and intend to continue to pay down the debt by providing additional products and services.

 

Revenue that was generated resulted 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 raised a small amount of capital to enable us to begin upgrading our technology, develop new products and actively solicit additional business.  We expect to 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 scale back operations.

 

 

RESULTS OF OPERATIONS

 

Our net revenues for the three months ended June 30, 2014 and 2013 were $222 and $128, respectively. Our net revenue for the six months ended June 30, 2014 and 2013 were $444 and $339, respectively.

 

Three months ended June 30, 2014 compared to three months ended June 30, 2013

 

Revenue increased by $94 to $222 for the three months ended June 30, 2014 compared to $128 for the three months ended June 30, 2013. Revenue was from VIP subscriptions. 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 decreased by $11,185 to $2,400 in the three months ended June 30, 2014 compared to $13,585 for the three months ended June 30, 2013. Decrease is due to software development fees incurred in prior year whereby this year the cost includes hosting fees only.

 

Selling general and administrative (SG&A) for the three months ended June 30, 2014 decreased by $1,387 to $47,950 from $49,337 in the prior year.

Payroll and related taxes for the three months ended June 30, 2014 increased by $4,375 to $48,125 from $43,750. The increase is due to a ten percent increase in the CEO’s salary based upon his employment agreement with the Company.

Common stock issued for services rendered decreased by $17,000 to $0 for the three months ended June 30, 2014 from $17,000 last year. The decrease is due to the agreements that the Company entered into in 2012 ending in 2013.

Other expenses include options expense to directors which was $0 for the three months ended June 30, 2014 and $3,198 for the three months ended June 30, 2013.  Decrease is due to the timing of the options being granted to Directors in 2014 in the first quarter and for 2013 in the second quarter.

 

We recorded a loss on extinguishment of debt in amount of $19,078 for the three months ended June 30, 2014 and $0 for the three months ended June 30, 2013.

 

We had an unrealized loss on trading securities of $6,551 for the three months ended June 30, 2014 compared an unrealized gain on trading securities of $1,375 for the three months ended June 30, 2013.

As a result of the foregoing, for the three months ended June 30, 2014, we realized a net loss of $125,181 compared to a loss of $125,367 for the three months ended June 30, 2013, a decreased loss of $186.

 

Six months ended June 30, 2014 compared to six months ended June 30, 2013

 

Revenue increased by $105 to $444 for the six months ended June 30, 2014 compared to $339 for the six months ended June 30, 2013. Revenue was from VIP subscriptions. 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 decreased by $13,385 to $4,900 in the six months ended June 30, 2014 compared to $18,285 for the six months ended June 30, 2013. Decrease is due to software development fees incurred in prior year whereby this year the cost includes hosting fees only.

 

Selling general and administrative (SG&A) for the six months ended June 30, 2014 increased by $1,004 to $99,302 from $98,298 in the prior year.

Payroll and related taxes for the six months ended June 30, 2014 decreased by $2,028 to $96,250 from $98,278. The decrease is due to having an employee in a portion of the prior year that no longer works for the Company.

Common stock issued for services rendered decreased by $81,500 to $0 for the six months ended June 30, 2014 from $81,500 last year. The decrease is due to the agreements that the Company entered into in 2012 ending in 2013.

Other expenses include options expense to directors which was $35,999 for the six months ended June 30, 2014 and $3,198 for the six months ended June 30, 2013.  Increase is due to adding a new Director in 2014.

 

We recorded a loss on extinguishment of debt $19,078 for the six months ended June 30, 2014 and $0 for the six months ended June 30, 2013.

 

We had a realized gain on trading securities of $5,404 for the six months ended June 30, 2014 compared to $0 for the six months ended June 30, 2013. We had an unrealized loss on trading securities of $6,207 for the six months ended June 30, 2014, compared to an unrealized gain on trading securities of $1,375 for the six months ended June 30, 2013.

As a result of the foregoing, for the six months ended June 30, 2014, we realized a net loss of $257,189 compared to a loss of $297,845 for the six months ended June 30, 2013, a decreased loss of $59,734.

 

Liquidity and Capital Resources

 

Our unrestricted cash and cash equivalents was $358,153 at June 30, 2014. There were no capital expenditures in the three months ending June 30, 2014. 

 

We were able to raise $450,000 by issuing unsecured convertible notes during the second quarter of 2014.  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. 

 

 

Item 4. Controls And Procedures

 

As of June 30, 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 June 30, 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.

 

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.

 

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.”  

This lawsuit was dismissed with prejudice by the court in June of 2014. 

 

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

 

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
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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: August 14, 2014

 

WORLDS ONLINE 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