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 December 31, 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 December 31, 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 December 31, 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 December
31, 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 December 31, 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 year ended December 31, 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 reduce
and/or cease operations.
These
factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
NOTE
3 - NOTES PAYABLE
Notes
payable at December 31, 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 year ended December 31, 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.
As of December 31, 2016, $1,098,279
of the notes payables are defaulted. $325,000 of the notes payables are defaulted as of April 17, 2017 and the remaining $100,000
of the notes payables will be matured as of April 22, 2017.
NOTE
4 - 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 year ended December 31, 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 December 31, 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.
The
Convertible notes payable are summarized in the following table:
Notes
payables & accrued interest payable roll forward
|
|
Notes
payable
|
Payable
|
|
|
370,500
|
|
Accrued interest expense
during 2016
|
|
|
—
|
|
Discount as of 12-31-2015
|
|
|
(21,000
|
)
|
Additional convertible
notes during 2016
|
|
|
145,550
|
|
New Discount during
2016
|
|
|
(341,050
|
)
|
Amortization of discount
|
|
|
362,050
|
|
Conversion to common
stock during 2016
|
|
|
(384,159
|
)
|
Repaid by cash
|
|
|
(131,891
|
)
|
Discount as of
12-31-2016
|
|
|
—
|
|
NOTE
5 - 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 December 31, 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 December 31, 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.
|
(D)
|
Settlement of Derivative Liabilities
|
During the year ended December 31, 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. 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. As of December 31, 2016, the Company reserved shares in the Transfer
Agent for these options. And therefore, these options will not generate any derivative liabilities.
The
fair value at the commitment and re-measurement dates for the Company’s derivative liabilities as of December 31, 2016
and 2015,are summarized in the following table:
Derivative liabilities roll-forward
|
|
DL-NP
|
|
DL-options
|
|
Total
|
Initial Derivative liabilities generated during 2015
|
|
|
446,282
|
|
|
|
468,814
|
|
|
|
915,096
|
|
Fair value mark to market adjustment
|
|
|
(18,698
|
)
|
|
|
(278,059
|
)
|
|
|
(296,757
|
)
|
Reclassified to Additional paid in capital due to conversion
|
|
|
(202,633
|
)
|
|
|
—
|
|
|
|
(202,633
|
)
|
Derivative liabilities as of 12.31.2015
|
|
|
224,951
|
|
|
|
190,755
|
|
|
|
415,706
|
|
Initial Derivative liabilities
|
|
|
340,614
|
|
|
|
—
|
|
|
|
340,614
|
|
Fair value mark to market adjustment
|
|
|
133,517
|
|
|
|
(139,708
|
)
|
|
|
(6,191
|
)
|
Reclassified to Additional paid in capital due to conversion
|
|
|
(583,445
|
)
|
|
|
(51,047
|
)
|
|
|
(634,493
|
)
|
Gain in debt settlement - GL
|
|
|
(115,637
|
)
|
|
|
|
|
|
|
(115,637
|
)
|
Derivative liabilities as of 12.31.2016
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
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, 2016 and 2015:
|
|
Commitment
Date
|
|
Remeasurement
Date
|
Expected
dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
183
- 233
|
%
|
|
|
208
- 233
|
%
|
Expected
term
|
|
|
1.89
- 4.64
|
years
|
|
|
0.001
- 4.5
|
years
|
Risk
free interest rate
|
|
|
0.89
– 1.75
|
%
|
|
|
1.06%
- 1.76
|
%
|
NOTE 6 - DEBT DISCOUNT
The debt discount was recorded
in 2016 and 2015 and pertains to convertible debt issued that contains ratchet features that are required to be reported at
fair value.
Debt discount is summarized as follows:
Discount roll-forward
|
|
Discount
|
Payable
|
|
|
21,000
|
|
Discount during 2016
|
|
|
341,050
|
|
Amortization of debt discount during 2016
|
|
|
(362,050
|
)
|
Discount as of 12-31-2016
|
|
|
—
|
|
Amortization of debt discount on notes
payable for the year ended December 31, 2016 and December 31, 2015 was $362,050 and $144,322, respectively.
NOTE
7 - EQUITY
During
the year ended December 31, 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 in the next five years. The warrants will expire in five years from the date of the purchase of the common shares. During
the year ended December 31, 2016, 10,600,000 warrants were exercised raising an additional $127,200. As of December 31, 2016,
these common stock were not issued.
During
the year ended December 31, 2016, the Company issued 54,963,098 shares of common stock by converting $384,159 of the principal
of convertible notes payable.
During
the year ended December 31, 2015, the company issued 15,608,696 common shares to the Class C Note holders in order to terminate
the litigation between us, terminate all agreements between us, cancel all warrants we have previously issued to them as well
as the outstanding balance of the Class C Notes. In order to have sufficient shares to deliver, we implemented the previously
authorized amendment to our certificate of incorporation and increased our authorized common stock to one hundred fifty million
shares.
During
the year ended December 31, 2015, the Company issued an aggregate of 804,000 shares of common stock as payment for services rendered,
an aggregate value of $80,400
During
the year ended December 31, 2015, the Company issued 182,057 shares to an officer of the company as payment for an accrued expense
in the amount of $24,506.07.
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.
NOTE
8 – STOCK OPTIONS
No
stock options were issued during the year ended December 31, 2016 and no stock options were exercised during the year ended
December 31, 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. 10,600,000 warrants were exercised for 10,600,000 shares of common stock during
the year ended December 31, 2016. As of December 31, 2016 these shares were not issued.
During
the year ended December 31, 2015, the Company issued 300,000 options to the Company’s directors. Each received 100,000 options
for serving as board members in 2015. An additional 300,000 options were issued to the Chief Financial Officer of the Company.
During
the year ended December 31, 2015, the Company recorded an option expense of $47,007 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
1.63% risk-free interest, 0% dividend yield, 175% volatility, and expected life of 5 years.
No
stock options were exercised during the year ended December 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 December 31, 2016 are as follows:
|
|
|
Exercise
Price per Share
|
|
|
|
Shares
Under Option/warrant
|
|
|
|
Remaining
Life in Years
|
|
|
Outstanding and Exercisable
|
|
|
|
|
|
|
|
|
|
$
|
0.012
|
|
|
|
24,400,000
|
|
|
|
4.74
|
|
$
|
0.19
|
|
|
|
200,000
|
|
|
|
1.00
|
|
$
|
0.155
|
|
|
|
200,000
|
|
|
|
2.00
|
|
$
|
0.14
|
|
|
|
250,000
|
|
|
|
2.00
|
|
$
|
0.115
|
|
|
|
300,000
|
|
|
|
0.75
|
|
$
|
0.11
|
|
|
|
300,000
|
|
|
|
3.50
|
|
$
|
0.03
|
|
|
|
300,000
|
|
|
|
3.50
|
|
$
|
0.070
|
|
|
|
7,500,000
|
|
|
|
0.75
|
|
NOTE
9 - INCOME TAXES
At
December 31, 2016, the Company had federal and state net operating loss carry forwards of approximately $40,000,000 that
expire in various years through the year 2036.
Due
to operating losses, there is no provision for current federal or state income taxes for the year ended December 31, 2016 and
2015.
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 December 31, 2016 consists of net operating loss carry forwards calculated using federal
and state effective tax rates equating to approximately $16,137,000 less a valuation allowance in the amount of approximately
$16,137,000. 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 $441,000 and $1,575,000 for the years ended December 31, 2016 and
2015, respectively.
The
Company’s total deferred tax asset as of December 31, 2016 is as follows:
Net
operating loss carry forwards
|
|
$
|
$16,137,700
|
|
Valuation
allowance
|
|
|
($16,137,700
|
)
|
|
|
|
|
|
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 years
ended December 31, 2016 and 2015 is as follows:
|
|
2016
|
|
2015
|
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 10 - 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 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
11 - 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 December 31, 2016 is $5,053 and at December 31, 2015 is $36,310. The balance of accrued expense and accounts
payables to related party is $742,032 and $571,923 at December 31, 2016 and 2015, respectively.
NOTE
12 - 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.
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
13 - SUBSEQUENT EVENT
The
company received an additional $292,800 in January and February upon the exercise of 24,400,000 warrants to purchase 24,400,000
shares of the Company’s common stock at $0.012 per share.