NOTES
TO FINANCIAL STATEMENTS
Three
Months Ended March 31, 2020
(Unaudited)
NOTE
1 – GOING CONCERN
As
reflected in the accompanying financial statements, the Company has a working capital deficiency of $1,872,616 and a stockholder’s
deficiency of $1,666,044 and used $241,050 of cash in operations for the year ended December 31, 2019. This raises substantial
doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent
on the Company’s ability to raise additional capital and implement its business plan. The financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as a going concern.
Management
believes that the actions presently being taken to obtain additional funding and implement its strategic plans provide the opportunity
for the Company to continue as a going concern.
NOTE
2 – 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. (currently
called MariMed 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.
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"). The Company 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. As the Company has focused its attention on increasing its patent portfolio and enforcing it,
the Company has been operating at a reduced capacity, with only one 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.
Revenue
Recognition
Effective
January 1, 2018, the Company adopted ASC 606. There was no impact in adopting ASC 606 as the Company has no revenue at this
time. In the second quarter of 2011, the Company spun off its online businesses to MariMed Inc. (then called Worlds Online,
Inc.). The Company’s sources of revenue after the spinoff was expected 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
by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the
contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the
contract; and (5) recognize revenue when each performance obligation is satisfied.
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 2019 and 2018.
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 (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, 2020 and December 31, 2019. 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 had an additional $750,000 in short term notes outstanding at December 31, 2018. The Company paid off these notes during
the first quarter of 2019 and the balance is $0 at December 31, 2019.
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, 2020 and March
31, 2019, there were 11,140,000 options and 4,480,000 warrants outstanding whose effect is anti-dilutive and not included in net
loss per share for March 31, 2020 or for March 31, 2019. 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, 2020, and December 31, 2019 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, 2019.
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.
Warrant
and option expense was measured by using level 3 valuation.
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.
Recent
Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements, 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.
The
Company accounts for stock-based compensation for employees and directors in accordance with Accounting Standards
Codification 718, Compensation (“ASC 718”) as issued by the Financial Accounting Standards Board
(“FASB”). ASC 718 requires all share-based payments to employees, including grants of employee stock options, to
be recognized in the statement of operations based on their fair values. Under the provisions of ASC 718, stock-based
compensation costs are measured at the grant date, based on the fair value of the award, and are recognized as an expense
over the employee’s requisite service period (generally the vesting period of the equity grant). The fair value of the
Company’s common stock options are estimated using the Black Scholes option-pricing model with the following
assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company expenses
stock-based compensation by using the straight-line method. In accordance with ASC 718 and, excess tax benefits realized from
the exercise of stock-based awards are classified as cash flows from operating activities. All excess tax benefits and tax
deficiencies (including tax benefits of dividends on share-based payment awards) are recognized as income tax expense or
benefit in the condensed consolidated statements of operations. The Company accounts for stock-based compensation awards
issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the
instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date
guidelines enumerated in ASU 2018-07.
In
February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases” Topic 842, which amends the
guidance in former ASC Topic 840, Leases. The new standard increases transparency and comparability most
significantly by requiring the recognition by lessees of right-of-use assets and lease liabilities on the
balance sheet for all leases longer than 12 months. Under the standard, disclosures are required to meet the objective of
enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from
leases. For lessees, leases will be classified as finance or operating, with classification affecting the pattern and
classification of expense recognition in the income statement. The Company adopted the new lease guidance effective January
1, 2019. The Company is not a party to any leases and therefore is not showing any asset or liability related to leases
in the current period or prior periods.
NOTE
3 - NOTES PAYABLE
Notes payable at
March 31, 2020 consist of the following:
|
|
|
Unsecured note payable bearing 8% interest,
|
|
|
|
|
entire balance of principal
and unpaid interest due on demand
|
|
$
|
124,230
|
|
Unsecured note payable bearing 10% interest,
|
|
|
|
|
entire balance of principal and unpaid interest
due on demand
|
|
$
|
649,049
|
|
Total notes
|
|
$
|
773,279
|
|
2020
|
|
$
|
773,279
|
|
2021
|
|
$
|
-0-
|
|
2022
|
|
$
|
-0-
|
|
2023
|
|
$
|
-0-
|
|
2024
|
|
$
|
-0-
|
|
|
|
$
|
773,279
|
|
The
Company imputed interest of $18,919 on the notes during the quarter ended March 31, 2020. The Company repaid the $600,000 in notes
payable and $150,000 in notes payable related party with accrued interest totaling $189,118 during the first quarter of 2019.
NOTE
4 - EQUITY
All
common stock numbers and exercise prices in this Note are reflected on a post reverse split (5 to 1) basis. As a result of the
reverse split on February 9, 2018, the Company had to issue an additional 167 shares due to rounding.
During
the three months ended March 31, 2020, the Company recorded an option expense of $81,079 representing the amortization of the
value of the options issued in 2018 that have not yet vested.
During
the three months ended March 31, 2019, the Company recorded an option expense of $19,173 representing the amortization of the
value of the options issued in 2018 that have not yet vested.
Stock
Warrants and Options
|
Stock
warrants/options outstanding and exercisable on March 31, 2020 are as follows:
|
|
Exercise
Price per Share
|
|
Shares
Under Option/warrant
|
|
Remaining
Life in Years
|
Outstanding
|
|
|
|
|
$
|
0.325
|
|
|
|
3,500,000
|
|
|
|
3.83
|
|
$
|
0.15
|
|
|
|
5,220,000
|
|
|
|
2.50
|
|
$
|
0.15
|
|
|
|
580,000
|
|
|
|
0.70
|
|
$
|
0.05
|
|
|
|
200,000
|
|
|
|
2.70
|
|
$
|
0.30
|
|
|
|
200,000
|
|
|
|
2.70
|
|
$
|
0.55
|
|
|
|
60,000
|
|
|
|
0.25
|
|
$
|
0.65
|
|
|
|
60,000
|
|
|
|
0.25
|
|
$
|
0.25
|
|
|
|
5,000,000
|
|
|
|
3.42
|
|
$
|
0.24
|
|
|
|
800,000
|
|
|
|
3.42
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
$
|
0.325
|
|
|
|
3,500,000
|
|
|
|
3.83
|
|
$
|
0.15
|
|
|
|
5,220,000
|
|
|
|
2.50
|
|
$
|
0.15
|
|
|
|
580,000
|
|
|
|
0.70
|
|
$
|
0.05
|
|
|
|
200,000
|
|
|
|
2.70
|
|
$
|
0.30
|
|
|
|
200,000
|
|
|
|
2.70
|
|
$
|
0.55
|
|
|
|
60,000
|
|
|
|
0.25
|
|
$
|
0.65
|
|
|
|
60,000
|
|
|
|
0.25
|
|
$
|
0.25
|
|
|
|
2,000,000
|
|
|
|
3.42
|
|
$
|
0.24
|
|
|
|
800,000
|
|
|
|
3.42
|
|
NOTE
5 - COMMITMENTS AND CONTINGENCIES
The
Company is committed to an employment agreement with its President and CEO, Thom Kidrin. The agreement, dated as of August 28,
2018, is for five years with a one-year renewal option held by Mr. Kidrin. The agreement provides for a base salary of $200,000,
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 5 million shares of Worlds Inc. common stock at an exercise
price of $0.25 per share, 2 million of which vested on August 28, 2018, 1.5 million shall vest on August 28, 2019 and the
remaining 1.5 million shall vest on August 28, 2020 ; 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
6 - RELATED PARTY TRANSACTIONS
The
Company paid $150,000 in notes payables with accrued interest to related parties during the first quarter of 2019.
The
balance in the accrued expense attributable to related parties is $70,370 and $341,624 at March 31, 2020 and December 31, 2019,
respectively.
NOTE
7 - 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. On September 20,
2019, the Company filed a lawsuit against Linden Research, Inc. in the US District court for the District of
Delaware. Davidson, Berquist, Jackon & Gowdey LLP is lead counsel for the Company.
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
8 – ACCRUED EXPENSES
Accrued
expenses is comprised of $70,370 owed to related parties. $205,000 is related to a judgment against the Company relating to unpaid
consulting services dating back to April of 2001. $1,305,009 is related to old accruals for which the statute of limitations has
passed and therefore the Company does not expect it will ever have to repay those amounts. The balance of $46,113 is related to
accruals for recurring operating expenses.
NOTE
9 – CONVERTIBLE NOTE RECEIVABLE – RELATED PARTY
The
Company made an investment in the form of a convertible note in the amount of $200,000 to Canadian American Standard Hemp
(CASH). The convertible note has a 7% annual interest rate and matures in 2 years. Interest and principle is payable at
maturity. The note can be converted at any time and either all or part of the amount due can be converted into the borrowers
equity at a price of $0.50 per share. If converted into common stock, the Company would own 1% of CASH based upon current
number of CASH shares outstanding.. Messrs. Kidrin, Toboroff and Christos are Directors of CASH and Mr. Kidrin is the CEO and Mr. Ryan is
the CFO of CASH.
During
the three months ended March 31, 2020, the Company earned $3,539 in interest on the note.
NOTE
10 – SUBSEQUENT EVENTS
The
Company reviewed for subsequent events and there are none to report.