NOTES TO FINANCIAL STATEMENTS
Nine Months Ended September 30, 2016
(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. As the Company has focused its attention
on increasing its patent portfolio and enforcing it, the Company has been operating at a significantly reduced capacity, with
only one full time employee 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 includes
highly liquid money market instruments, which have original maturities of three months or less at the time of purchase.
Due to Related Party
Due to related
party is comprised of cash payments made by Worlds Online Inc. on behalf of Worlds 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
will 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 2016 and 2015.
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 September 30, 2016 and December 31, 2015. These are old notes payable for which the statute of limitations
has passed and therefore the Company does not expect it will ever have to repay those notes.
The Company has an additional $750,000
and $460,000 in notes, and $0 and $349,500 (net of $21,000 discount) in convertible notes outstanding at September 30, 2016 and
December 31, 2015, respectively. The convertible notes were prepaid in August 2016.
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 September 30, 2016, there were 9,050,000 options and no
warrants, whose effect is anti-dilutive and not included in diluted net loss per share for September 30, 2016. 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 September 30, 2016, and 2015 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 nine months ended September 30, 2016 or 2015.
Fair Value of Financial Instruments
The Company measures assets and liabilities
at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents
the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction
between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an
asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair
value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
•
|
|
Level 1 – Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
•
|
|
Level 2 – Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
•
|
|
Level 3 – Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The carrying amounts of the Company’s
financial assets and liabilities, such as cash, other receivables, accounts payable & accrued expenses, due to related party,
notes payable and notes payables, approximate their fair values because of the short maturity of these instruments. The Company's
convertible notes payable are measured at amortized cost.
The Company accounts for its derivative liabilities, at fair value, on
a recurring basis under level 3. See Note 5.
Embedded Conversion Features
The Company evaluates embedded conversion
features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion
feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair
value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated
under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
Derivative Financial Instruments
The Company does not use derivative
instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments,
including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or
credits to income.
For option-based simple derivative
financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception
and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded
as liabilities or as equity, is re-assessed at the end of each reporting period.
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 2015-16, and does not believe
the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results
of its operations.
NOTE 2 - GOING
CONCERN
The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. Since its inception, the Company has had periods
where it had only minimal revenues from operations. There can be no assurance that the Company will be able to obtain the additional
capital resources to fully implement its business plan or that any assumptions relating to its business plan will prove to be accurate.
The Company is pursuing sources of additional financing and there can be no assurance that any such financing will be available
to the Company on commercially reasonable terms, or at all. Any inability to obtain additional financing will likely have a material
adverse effect on the Company, including possibly requiring the Company to completely 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 - EQUITY
During the nine months
ended September 30, 2016, the Company issued 35,000,000 shares of common stock at a price of $0.01 per share raising
$350,000. In connection with this raise, the Company issued 35,000,000 warrants with each to purchase one share of common
stock at a price of $0.012. The warrants will expire in five years from the date of the purchase of the common shares.
During the nine months ended September
30, 2016, the Company issued 54,963,098 shares of common stock by converting $384,159 of the principal of convertible notes payable.
During the nine months ended
September 30, 2015, the Company issued 15,608,696 common shares to the Class C Note holders in order to terminate the
litigation between us and the Note holders, terminate all agreements between us, and cancel all warrants we have previously
issued to them as well as the outstanding balance of the Class C Notes.
NOTE 4 - NOTES PAYABLE
The Notes are classified as a derivative
liability and not a note payable, see Note 9 below.
Notes payable at September 30, 2016 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
|
|
$
|
700,000
|
|
Notes Payable - related party
|
|
$
|
50,000
|
|
Total notes
|
|
$
|
1,523,279
|
|
2016
|
|
$
|
863,279
|
|
2017
|
|
$
|
660,000
|
|
2018
|
|
$
|
-0-
|
|
2019
|
|
$
|
-0-
|
|
2020
|
|
$
|
-0-
|
|
|
|
$
|
1,523,279
|
|
We issued promissory notes in the amount of $290,000
during the nine months ended September 30, 2016. 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
from $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.
We issued promissory notes in the amount of $135,000 during the year ended December 31, 2015. One of
the promissory notes in the amount of $25,000 was in lieu of payment of cash for an outstanding balance due to a consultant of
the Company. The notes carry the same terms as those issued in 2016.
NOTE 5 - CONVERTIBLE DEBENTURES
On May 8, 2015, the Company issued
convertible debentures to certain accredited investors. The total principal amount of the debentures was $300,000 with a maturity
date of November 8, 2015 with a zero percent interest rate. The debentures are convertible into shares of the Company’s
common stock at the lower of the fixed price ($0.89) or fifty five percent (55%) of the average of the three lower trading price
for 20 trading days prior to conversion.
The Company signed a Forbearance Agreement
on October 26, 2015 for the 10% convertible debenture with the principal amount of $300,000 that was due November 8, 2015. The
new maturity date of the debenture is May 8, 2016. As of June 30, 2016, the convertible debenture was completely converted into
common stock of the Company.
On October 30, 2015, the Company entered
into a new Debenture with the same Lender, with a face amount of $405,000 having similar terms as the first Convertible Debenture
with a maturity date of April 30, 2016. The debenture included a forbearance fee of $90,000 and had an original issue discount
of 10%.
During the nine months ended September
30, 2016, the Company issued 54,963,098 shares of common stock by converting $384,159 of the principal of convertible notes payable.
On June 1, 2016, the Company entered
into a new Debenture with an accredited investor, with a face amount of $50,000. The debenture is convertible into shares of the
Company’s common stock at the lower of the fixed price ($0.005) or fifty five percent (55%) of the average of the three
lowest closing trading prices for 20 trading days prior to conversion. The Debenture has a maturity date of December 1, 2016.
The debenture had an original issue discount of 10%.
On August 4, 2016, The Company paid
off the balance of the debenture with the proceeds raised from issuing 35,000,000 shares of common stock.
During the year ended December 31,
2015, the Company issued 6,746,356 shares of common stock by converting $150,000 of the principal of convertible notes payable.
As
of September 30, 2016, the aggregate carrying value of the debentures was $0. As of December 31, 2015, the aggregate carrying
value of the debentures was $370,500.
NOTE 6 - DERIVATIVE LIABILITIES
|
(A)
|
Convertible Notes Issued in May 8, 2015
|
The Company identified conversion features
embedded within convertible debt issued in May 8, 2015. The Company has determined that the features associated with the embedded
conversion option, in the form a ratchet provision, should be accounted for at fair value, as a derivative liability, as the Company
cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions.
The convertible debt was completely converted as of September 30, 2016.
As a result of the application of ASC No. 815, the fair
value of the ratchet feature related to convertible debt is summarized as follow:
|
|
Derivative
Liabilities
|
Balances
as of December 31, 2015
|
|
$
|
224,951
|
|
Reclassified
to Additional paid in capital due to conversion
|
|
|
(224,951
|
)
|
Balances
as of September 30, 2016
|
|
|
—
|
|
|
(B)
|
Convertible Notes Issued in October 30, 2015
|
The Company identified conversion features
embedded within convertible debt issued on October 30, 2015. The Company has determined that the features associated with the
embedded conversion option, in the form a ratchet provision, should be accounted for at fair value, as a derivative liability
as of the maturity date of April 30, 2016. The convertible debt was completely converted as of September 30, 2016.
As a result
of the application of ASC No. 815, the fair value of the ratchet feature related to convertible debt is summarized as follow:
|
|
Derivative
Liabilities
|
Fair
Value at re-measurement date of April 30, 2016
|
|
$
|
340,614
|
|
Changes
in derivative liabilities
|
|
|
118,840
|
|
Reclassified
to Additional paid in capital due to conversion
|
|
|
(459,454
|
)
|
Balance
as of September 30, 2016
|
|
|
—
|
|
|
(C)
|
Convertible Notes Issued in June 1, 2016
|
The Company identified conversion features
embedded within convertible debt issued on June 1, 2016. The Company has determined that the features associated with the embedded
conversion option, in the form a ratchet provision, should be accounted for at fair value, as a derivative liability at June 1,
2016. The convertible note was paid in full on August 10, 2016.
As a result of the application of ASC No. 815, the fair value of
the ratchet feature related to convertible debt is summarized as follow:
|
|
Derivative
Liabilities
|
Fair
Value at re-measurement date of June 1, 2016
|
|
$
|
116,540
|
|
Changes
in derivative liabilities
|
|
|
(23,549
|
)
|
Reclassifed
to Additional paid in capital
|
|
|
(92,991
|
)
|
Balances
as of September 30, 2016
|
|
|
—
|
|
|
(D)
|
Settlement of Derivative Liabilities
|
During the nine months ended September
30, 2015 the Company settled a lawsuit brought forth by the note holders, effectively terminating and canceling all remaining
agreements, warrants and notes. As a result of the settlement, the Company recorded a loss on settlement of convertible notes
of $2,336,035 during the year ended December 31, 2015.
As of the date of the settlement with the noteholders, the Company revalued
the embedded derivative liability and recorded a loss on change in fair value of derivative liability of $143,383.
|
(E)
|
Options
identified as derivative liability
|
The Company identified options
issued to directors and officers are a derivative liability due to a lack of number of authorized shares to cover all the
options issued by the Company if they are all exercised as of December 31, 2015. As of September 30, 2016, the Company
reserved shares in the Transfer Agent for these options. And therefore, these options will not generate any derivative liabilities.
Therefore, the fair value of the options
have been recorded as liabilities on the balance sheet. The change in the fair value of the derivative liabilities 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 liabilities
on the balance sheet. The fair value of the embedded derivative liabilities was determined using the Black-Scholes valuation model
on the issuance dates with the assumptions in the table below.
As a result of the application of ASC No. 815, the fair value of
the options is summarized as follow:
|
|
Derivative Liabilities
|
Balances as of December 31, 2015
|
|
$
|
190,755
|
|
Fair value mark to market adjustment
|
|
|
(30,356
|
)
|
Balances as of September 30, 2016
|
|
|
160,399
|
|
Reclassified to Additional paid in capital
|
|
|
—
|
|
Ending Balance
|
|
|
—
|
|
The fair value at the re-measurement
date for the Company’s derivative liabilities were based upon the following management assumptions as of September 30, 2016:
|
Remeasurement Date
|
Expected dividends
|
|
0
|
%
|
|
Expected volatility
|
|
235
|
%
|
|
Expected term
|
|
1.25 - 4.00
|
years
|
|
Risk free interest rate
|
|
0.38
|
%
|
|
The fair value at the commitment and
re-measurement dates for the Company’s derivative liabilities as of December 31, 2015 were:
|
|
Derivative Liabilities
|
Fair value at the commitment date - November 8, 2015
|
|
$
|
468,814
|
|
Fair value mark to market adjustment
|
|
|
(278,059
|
)
|
Balances as of December 31, 2015
|
|
|
190,755
|
|
The fair value at the commitment and
re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of
December 31, 2015:
|
|
Commitment
Date
|
|
Remeasurement
Date
|
Expected
dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
183
|
%
|
|
|
208
|
%
|
Expected
term
|
|
|
1.89
- 4.64
|
years
|
|
|
1.75
- 4.5
|
years
|
Risk
free interest rate
|
|
|
0.89
– 1.75
|
%
|
|
|
1.06%
- 1.76
|
%
|
NOTE 7 – STOCK OPTIONS
No stock options were issued during
the nine months ended September 30, 2016 and no stock options were exercised during the nine months ended September 30, 2016.
The Company issued 35,000,000 warrants as part of the subscription agreement that included the sale of 35,000,000 shares of common
stock. Each warrant entitles the holder to purchase one share of common stock at a price of $0.012. The warrants expire in five
years.
No stock options were issued during
the nine months ended September 30, 2015 and no stock options were exercised during the nine months ended September 30, 2015.
On January 23, 2015 we entered into
an agreement with the Class C note holders who held four million five hundred thirty five thousand seven hundred and fourteen
warrants to purchase our common stock. The settlement agreement, among other things, cancelled all warrants we have previously
issued to them.
Stock
Warrants and Options
|
Stock
warrants/options outstanding and exercisable on September 30, 2016 are as follows:
|
|
|
Exercise
Price per Share
|
|
|
|
Shares
Under Option/warrant
|
|
|
|
Remaining
Life in Years
|
|
|
Outstanding and Exercisable
|
|
|
|
|
|
|
|
|
|
$
|
0.012
|
|
|
|
35,000,000
|
|
|
|
4.99
|
|
$
|
0.19
|
|
|
|
200,000
|
|
|
|
1.25
|
|
$
|
0.155
|
|
|
|
200,000
|
|
|
|
2.25
|
|
$
|
0.14
|
|
|
|
250,000
|
|
|
|
2.25
|
|
$
|
0.115
|
|
|
|
300,000
|
|
|
|
1.00
|
|
$
|
0.11
|
|
|
|
300,000
|
|
|
|
3.75
|
|
$
|
0.03
|
|
|
|
300,000
|
|
|
|
3.75
|
|
$
|
0.070
|
|
|
|
7,500,000
|
|
|
|
1.00
|
|
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 $0.076 per
share, all of which vested on August 30, 2012; a death benefit of at least $2 million dollars; and a payment equal to 2.99 times
his base amount (as defined in the agreement) in the event of a Change of Control (as defined in the agreement). The agreement
also provides that Mr. Kidrin can be terminated for cause (as defined in the agreement) and that he is subject to restrictive covenants
for 12 months after termination.
NOTE 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
to related party is comprised of cash payments for operating expenses made by Worlds Online Inc. on behalf of Worlds Inc. The
balance at September 30, 2016 is $5,310 and the balance on December 31, 2015 is $36,310.
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 are capitalized under patents until a resolution is reached.
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.