UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q /A
Amendment
No. 1
(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.
EXPLANATORY
NOTE
This
Amendment No. 1 to Quarterly Report on Form 10-Q/A (this “Amended Report”) is being filed with the Securities
and Exchange Commission to amend the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2014 (the “Original
10-Q”) of WORLDS, INC. solely to correct the disclosure with respect to certain employee stock options and investor warrants.
No other changes are being made and this Amended Report still speaks only as of the date it was initially filed.
This
Amended Report includes currently-dated certifications of the Company’s Chief Executive Officer and Chief Financial Officer,
as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
Worlds
Inc.
Table
of Contents
Part
I - Financial Information |
Page |
Item
1 |
Financial
Statements |
3 |
|
Notes to Financial
Statements |
6 |
Item 2 |
Management’s
Discussions and Analysis of Financial Condition and Results of Operations |
13 |
Item 3 |
Quantitative
and Qualitative Disclosures About Market Risk |
N/A |
Item 4 |
Controls and
Procedures |
15 |
|
|
|
Part
II – Other Information |
|
Item 1 |
Legal Proceedings |
16 |
Item 1A |
Risk Factors |
N/A |
Item 2 |
Unregistered
Sales of Equity Securities and Use of Proceeds |
16 |
Item 3 |
Default Upon
Senior Securities |
16 |
Item 4 |
Mine Safety
Disclosures |
N/A |
Item 5 |
Other Information |
16 |
Item 6 |
Exhibits |
16 |
Signatures |
|
17 |
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 |
| |
(Restated) | |
(Restated) |
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 | |
| 775,199 | | |
| 1,187,600 | |
Notes payable | |
| 773,279 | | |
| 773,279 | |
Notes payables | |
| 325,000 | | |
| 225,000 | |
Convertible notes
payable, net | |
| 136,043 | | |
| 117,534 | |
| |
| | | |
| | |
Total Current Liabilities | |
| 4,863,362 | | |
| 5,088,047 | |
| |
| | | |
| | |
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 | |
| 30,914,310 | | |
| 30,287,412 | |
Common stock-warrants | |
| 97,869 | | |
| 97,869 | |
Deferred compensation | |
| — | | |
| (12,609 | ) |
Accumulated deficit | |
| ( 35,615,828 | ) | |
| ( 35,225,884 | ) |
Total stockholders deficit | |
| (4,508,644 | ) | |
| (4,760,003 | ) |
| |
| | | |
| | |
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 | |
| |
| (Restated) | | |
| (Restated) | |
Revenues | |
| | | |
| | |
Revenue | |
$ | — | | |
$ | — | |
| |
| | | |
| | |
Total Revenue | |
| — | | |
| — | |
| |
| | | |
| | |
Cost and Expenses | |
| | | |
| | |
| |
| | | |
| | |
Cost of Revenue | |
| — | | |
| — | |
| |
| | | |
| | |
Gross Profit/(Loss) | |
| — | | |
| — | |
| |
| | | |
| | |
Option Expense | |
| 66,451 | | |
| — | |
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 | |
| ( 241,632 | ) | |
| (358,225 | ) |
| |
| | | |
| | |
Other Income (Expense) | |
| | | |
| | |
Gain (Loss) on change in fair value of
derivative liability | |
| 98,534 | | |
| ( 2,181,308 | ) |
Interest Expense | |
| (246,846 | ) | |
| (27,518 | ) |
Net (Loss) | |
$ | ( 389,944 | ) | |
$ | ( 2,567,051 | ) |
| |
| | | |
| | |
Weighted Average Loss per share | |
$ | ** | | |
| ( 0.03 | ) |
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 (Restated) | |
3/31/2013 (Restated) |
Cash flows from operating activities: | |
| | | |
| | |
Net (loss) | |
$ | ( 389,944 | ) | |
$ | (331,364 | ) |
Adjustments to reconcile net loss to net
cash (used in) operating activities | |
| | | |
| | |
Fair value of stock options issued | |
| 66,451 | | |
| — | |
Common stock issued for services renderred | |
| 36,608 | | |
| 62,263 | |
Amortization of discount to note payable | |
| 242,884 | | |
| 21,918 | |
Derivative expenses | |
| — | | |
| 3,007,846 | |
Changes in fair value of derivative liabilities | |
| ( 98,534 | ) | |
| ( 826,538 | ) |
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 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.
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 RESTATEMENT OF FINANCIAL STATEMENTS
The
Company identified errors related to understatement of option expense for the year ended December 31, 2012. The facts underlying
the Company’s original conclusion is that 7.5 million stock options granted to President and CEO of the Company, Thom Kidrin,
were only 18 month options and were expiring on March 31, 2014. Such 7.5 million stock options were additionally extended for
2 years with new expiration date on March 31, 2016. In fact they were five (5) year options expiring in September 2017 and no
extension was granted. Accordingly, all the financial statements for the year ended December 31, 2012 and for the three months
ended March 31, 2014 are restated.
In
addition, the Company identified errors related to understatement of derivative liabilities as of March 31, 2014, and loss on
change in the fair value of the derivative liability for the three months ended March 31, 2014. The facts underlying the Company’s
original conclusion is that there were no derivative liabilities incurred when 4,535,714 warrants were granted to the investors
in connection with the strategic financing agreements entered into in March of 2013. In fact such warrants’ ratchet features
triggered derivative liabilities of the Company.
The
following table sets forth all the accounts in the original amounts and restated amounts, respectively.
As
of March 31, 2014
| |
Original | |
Adjustment | |
Restated |
| |
| |
| |
|
Derivative
liability | |
$ | 186,602 | | |
$ | 588,597 | | |
$ | 775,199 | |
Additional paid
in capital | |
$ | 31,825,487 | | |
$ | (911,177 | ) | |
$ | 30,914,310 | |
Accumulated deficit | |
$ | (35,938,408 | ) | |
$ | 322,580 | | |
$ | (35,615,828 | ) |
For
the three months ended March 31, 2014
| |
Original | |
Adjustment | |
Restated |
| |
| |
| |
|
Option
expenses | |
$ | 1,186,310 | | |
$ | (1,119,859 | ) | |
$ | 66,451 | |
Gain (loss) on
change in fair value of derivative liability | |
$ | (71,173 | ) | |
$ | 169,707 | | |
$ | 98,534 | |
Net (loss) | |
| (1,679,510 | ) | |
| 1,289,566 | | |
| (389,944 | ) |
Weighted average loss per share | |
$ | (0.02 | ) | |
$ | 0.02 | | |
| ** | |
Statement
of Equity as of January 1, 2014
| |
Original | |
Adjustment | |
Restated |
| |
| |
| |
|
Additional
paid in capital | |
$ | 30,078,730 | | |
$ | 208,682 | | |
$ | 30,287,412 | |
Accumulated deficit | |
$ | (34,258,898 | ) | |
$ | (966,986 | ) | |
$ | (35,225,884 | ) |
**
Less than $0.01
NOTE
3 - 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
4 - 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
5 - 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 11 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
6 – 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.
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.
Such warrants triggered derivative liabilities of the Company due to their ratchet features (see Note 11 below) . 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 $66,451, 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 1.73% risk-free interest, 0% dividend yield, 294% volatility, and expected life of 5 years.
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 |
|
$ |
0.070 |
|
|
7,500,000 |
|
|
3.5 |
|
$ |
|
|
|
|
|
|
|
|
|
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 |
|
$ |
0.070 |
|
|
7,500,000 |
|
|
3.5 |
|
NOTE
7 - INCOME TAXES
At
March 31, 2014, the Company had federal and state net operating loss carry forwards of approximately $36,000,000 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 $14,040,000 less a valuation allowance in the amount of approximately $14,040,000. 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 $390,000 and $1,170,000 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 | |
$ | 14,040,000 | |
Valuation allowance | |
| (14,040,000 | ) |
| |
| | |
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
8 - 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 $0.070 per share, all of which vested on October 1 , 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
9 - 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
10 - 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
11 – DERIVATIVE LIABILITIES
| 1) | Derivative
liabilities due to variable conversion ratio |
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
$171,658 based on the initial fair value of the derivative liability of $621,658. 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 |
|
$ |
621,658 |
|
|
|
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 $514,883 by $328,281 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 |
| 12/31/2013 | | |
| |
$ | 514,883 | | |
| 2.22 | | |
$ | 0.126 | | |
$ | 0.15 | | |
| 275 | % | |
| 0.0078 | |
| 12/31/2014 | | |
| |
$ | 186,602 | | |
| 1.97 | | |
$ | 0.15 | | |
$ | 0.156 | | |
| 179 | % | |
| 0.0093 | |
| | | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| 2) | Derivative
liabilities due to ratchet features of the warrants |
On
March 20, 2013, the Company issued 4,535,714 warrants (the “Warrants”) as part of the senior secured convertible
notes. Pursuant to the warrants agreements, if and whenever on or after the grant date of the Warrants, the Company issued or
sold, or in accordance with the warrants agreements is deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but excluding any Excluded Securities
issued or sold or deemed to have been issued or sold) for a consideration per share (the “New Issuance Price”)
less than a price equal to the Exercise Price of the Warrants in effect immediately prior to such issue or sale or deemed issuance
or sale (“Dilutive Issuance”), then immediately after such Dilutive Issuance, the Exercise Price then in effect
shall be reduced to an amount equal to the New Issuance Price.
The
Company has determined that the ratchet features of the Warrants represent an embedded derivative since the Warrants are exercisable
into a variable number of shares upon exercise. Accordingly, the Warrants are not considered to be conventional warrants under
EITF 00-19 and the embedded ratchet feature must be 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 derivative
expenses. 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 ratchet feature
included in the Warrants resulted in an initial derivative expenses of $2,092,336 on the grant date based on the initial fair
value of the derivative liability. The fair value of the embedded derivative liability was calculated at grant date utilizing
the following assumptions:
Grant Date | |
Fair Value | |
Term (Years) | |
Exercise Price | |
Market Price on Grant Date | |
Volatility Percentage | |
Risk-free Rate |
| 3 | /20/13 | |
$ | 2,092,336 | | |
| 5.0 | | |
$ | 0.50 | | |
$ | 0.465 | | |
| 238 | % | |
| 0.0038 | |
At
March 31, 2014, the Company revalued the embedded derivative liability, based on the new exercise price of $1.00 per share pursuant
to the Amendment and Exchange Agreements entered into on July 15, 2013. For the period from December 31, 2013 to March 31, 2014,
the Company decreased the derivative liability of $672,717 by $84,120, resulting in a derivative liability of $588,597 at March
31, 2014.
The
fair value of the embedded derivative liability was calculated at December 31, 2013 and March 31, 2014 utilizing the
following assumptions:
Date | |
Fair Value | |
Term (Years) | |
Exercise Price | |
Volatility Percentage | |
Risk-free Rate |
| 12 | /31/13 | |
$ | 672,717 | | |
| 4.22 | | |
$ | 1.00 | | |
| 275 | % | |
| 0.0175 | |
| 3 | /31/14 | |
$ | 588,597 | | |
| 3.97 | | |
$ | 1.00 | | |
| 179 | % | |
| 0.0173 | |
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 |
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 $66,451, equal to the estimated fair value of
the options at the date of grants. The option expense was due to 450,000 options granted to the Company’s directors during
the first quarter of 2014. 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.
For
the three months ended March 31, 2014, the company had a gain on change in fair value of derivative liability of $98,534 and interest
expense of $246,846. For the three months ended March 31, 2013, the Company had a loss on change in fair value of derivative liability
of $2,181,308 and interest expense of $27,518. The derivative liability are in connection with the issuance of the senior secured
convertible notes of $450,000 and 4,535,714 warrants as part of the offering of notes, both of which are required to be recorded
as a derivative liability.
As
a result of the foregoing, we realized a net loss of $389,944 for the three months ended March 31, 2014 compared to a net loss
of $2,567,051 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 as of March 31, 2014 our disclosure controls and procedures
were ineffective inasmuch as draft documents were commingled with effective documents leading to erroneous documents being relied
upon and distributed. 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 |
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Certification
of Chief Executive Officer |
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31.2 |
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Certification of Chief
Financial Officer |
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32.1 |
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Statement required by
18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Statement required by
18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* XBRL |
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Instance Document |
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101.SCH*XBRL |
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Taxonomy Extension
Schema |
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101.CAL*XBRL |
|
Taxonomy Extension
Calculation Linkbase |
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101.DEF* XBRL |
|
Taxonomy Extension
Definition Linkbase |
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101.LAB*XBRL |
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Taxonomy Extension
Label Linkbase |
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101.PRE* XBRL |
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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:
February 6, 2015
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 |
|
|
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31.1 |
|
Certification
of Chief Executive Officer |
|
|
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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. |
|
|
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32.2 |
|
Statement
required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* XBRL |
|
Instance Document |
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101.SCH* XBRL |
|
Taxonomy Extension
Schema |
|
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101.CAL* XBRL |
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Taxonomy Extension
Calculation Linkbase |
|
|
|
101.DEF* XBRL |
|
Taxonomy Extension
Definition Linkbase |
|
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101.LAB* XBRL |
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Taxonomy Extension
Label Linkbase |
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101.PRE* XBRL |
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Taxonomy Extension
Presentation Linkbase |
EXHIBIT
31.1
Certifications
I,
Thomas Kidrin, certify that:
1.
I have reviewed this amendment to quarterly report on Form 10-Q/A of Worlds Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated
the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date:
February 6, 2015
/s/
Thomas Kidrin
Thomas
Kidrin
Chief
Executive Officer
EXHIBIT
31.2
Certifications
I,
Christopher J. Ryan, certify that:
1.
I have reviewed this amendment to quarterly report on Form 10-Q/A of Worlds Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated
the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date:
February 6, 2015
/s/
Christopher J. Ryan
Christopher
J. Ryan
Chief Financial Officer
Exhibit 32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the amendment to Quarterly Report of Worlds Inc. (the "Company") on Form 10-Q/A for the
three months ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Thomas Kidrin, Chief Executive Officer of the Company, certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to §906
of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:
|
(1) |
|
The
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The
information contained in the Report fairly presents, in all material respects, our financial condition and result of operations. |
|
WORLDS,
INC |
|
(Registrant) |
|
|
Date: February 6, 2015 |
By:/s/ Thomas Kidrin |
|
Thomas Kidrin |
|
Chief Executive Officer
|
Exhibit 32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the amendment to Quarterly Report of Worlds Inc. (the "Company") on Form 10-Q/A for the
three months ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Christopher J. Ryan, Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to
§906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:
|
(1) |
The
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The
information contained in the Report fairly presents, in all material respects, our financial condition and result of operations. |
|
WORLDS,
INC |
|
(Registrant) |
|
|
Date: February 6, 2015 |
By:/s/ Christopher J. Ryan |
|
Christopher J. Ryan |
|
Chief Financial Officer |
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