UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10- Q/A
Amendment
No. 1
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the Quarterly Period ended September 30, 2014
(
) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from __________________ to __________________
Commission
File number 0-24115
WORLDS
INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware |
22-1848316 |
(State
or Other Jurisdiction of Incorporation or Organization) |
(I.R.S.
Employer Identification No.) |
|
|
11
Royal Road
Brookline, MA 02445
(Address of Principal Executive Offices)
(617) 725-8900
(Registrant's Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (check one):
Large
accelerated filer [ ] Accelerated filer [ ]
Non-accelerated
filer [ ] Smaller reporting company [X]
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of
November 3, 2014, 96,851,941 shares of the Issuer's Common Stock were outstanding.
EXPLANATORY
NOTE
This Amendment
No. 1 to Quarterly Report on Form 10-Q/A (this “Amended Report”) is being filed with the Securities and
Exchange Commission to amend the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2014 (the “Original
10-Q”) of WORLDS, INC. solely to correct the disclosure with respect to certain employee stock options and investor warrants.
No other changes are being made and this Amended Report still speaks only as of the date it was initially filed.
This Amended
Report includes currently-dated certifications of the Company’s Chief Executive Officer and Chief Financial Officer, as
required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
Worlds
Inc.
Table
of Contents
Part
I - Financial Information |
Page |
Item
1 |
Financial
Statements |
3 |
|
Notes to Financial
Statements |
6 |
Item 2 |
Management’s
Discussions and Analysis of Financial Condition and Results of Operations |
13 |
Item 3 |
Quantitative
and Qualitative Disclosures About Market Risk |
N/A |
Item 4 |
Controls and
Procedures |
15 |
|
|
|
Part
II – Other Information |
|
Item 1 |
Legal Proceedings |
16 |
Item 1A |
Risk Factors |
N/A |
Item 2 |
Unregistered
Sales of Equity Securities and Use of Proceeds |
16 |
Item 3 |
Default Upon
Senior Securities |
16 |
Item 4 |
Mine Safety
Disclosures |
N/A |
Item 5 |
Other Information |
16 |
Item 6 |
Exhibits |
16 |
Signatures |
|
17 |
PART
I – FINANCIAL INFORMATION
Worlds Inc. |
|
|
|
|
|
|
Balance Sheets |
|
|
|
|
|
|
September 30, 2014 and December 31, 2013 |
|
|
|
|
|
| |
Unaudited | |
Unaudited |
| |
September 30, 2014 | |
December 31, 2013 |
| |
(Restated) | |
(Restated) |
ASSETS: | |
| |
|
Current Assets | |
| |
|
Cash and cash equivalents | |
$ | 41,178 | | |
$ | 22,132 | |
Due from related party | |
| 90,387 | | |
| 295,912 | |
Promissory note | |
| 2,000 | | |
| 3,000 | |
| |
| | | |
| | |
Total Current Assets | |
| 133,565 | | |
| 321,044 | |
| |
| | | |
| | |
Patents | |
| 7,000 | | |
| 7,000 | |
| |
| | | |
| | |
Total assets | |
$ | 140,565 | | |
$ | 328,044 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIT: | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Accounts payable | |
$ | 797,908 | | |
$ | 797,908 | |
Accrued expenses | |
| 2,132,019 | | |
| 1,986,726 | |
Derivative liability | |
| 753,527 | | |
| 1,187,600 | |
Notes payable | |
| 773,279 | | |
| 773,279 | |
Notes Payables | |
| 325,000 | | |
| 225,000 | |
Convertible notes payable, net | |
| 13,296 | | |
| 117,534 | |
| |
| | | |
| | |
Total Current Liabilities | |
| 4,795,029 | | |
| 5,088,047 | |
| |
| | | |
| | |
Stockholders' (Deficit) | |
| | | |
| | |
| |
| | | |
| | |
Common stock (Par value $0.001 authorized 100,000,000 shares, issued
and outstanding 96,851,941 and 93,209,823 at September 30, 2014 and December 31, 2013, respectively) | |
| 96,852 | | |
| 93,210 | |
Additional paid in capital | |
| 31,409,427 | | |
| 30,287,412 | |
Common stock-warrants | |
| 97,869 | | |
| 97,869 | |
Deferred compensation | |
| — | | |
| (12,609 | ) |
Accumulated deficit | |
| ( 36,258,612 | ) | |
| ( 35,225,884 | ) |
Total stockholders deficit | |
| (4,654,464 | ) | |
| (4,760,003 | ) |
| |
| | | |
| | |
Total Liabilities and
stockholders' deficit | |
$ | 140,565 | | |
$ | 328,044 | |
See Notes
to Condensed Financial Statements
Worlds Inc. |
|
|
|
|
|
|
|
|
|
|
|
Statements of Operations |
|
|
|
|
|
|
|
|
|
|
Nine and Three Months Ended September 30, 2014 and 2013 |
|
|
|
|
| |
Unaudited | |
Unaudited |
| |
Nine
months ended
September
30 | |
Three Months Ended September
30 |
| |
2014 | |
2013 | |
2014 | |
2013 |
Revenues | |
| |
| |
| |
|
Revenue | |
$ | — | | |
| — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | |
Total Revenue | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Cost and Expenses | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Cost of Revenue | |
| | | |
| — | | |
| | | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
Gross Profit/(Loss) | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Option Expense | |
| 66,451 | | |
| — | | |
| — | | |
| | |
Common Stock issued for services renderred | |
| 75,908 | | |
| 2,955,915 | | |
| — | | |
| 2,723,399 | |
Selling, General & Admin. | |
| 266,821 | | |
| 431,856 | | |
| 105,902 | | |
| 66,775 | |
Salaries and related | |
| 152,788 | | |
| 159,357 | | |
| 48,125 | | |
| 47,119 | |
| |
| | | |
| | | |
| | | |
| | |
Operating loss | |
| (561,969 | ) | |
| (3,547,128 | ) | |
| (154,027 | ) | |
| (2,837,293 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other Income (Expense) | |
| | | |
| | | |
| | | |
| | |
Gain (Loss) on change in fair value of derivative
liability | |
| ( 127,834 | ) | |
| ( 585,785 | ) | |
| 33,833 | | |
| 814,556 | |
Interest Expense | |
| (342,925 | ) | |
| (365,461 | ) | |
| (43,966 | ) | |
| (53,558 | ) |
Interest Income | |
| — | | |
| 1,430 | | |
| — | | |
| — | |
Net Income/(Loss) | |
$ | (1,032,728 | ) | |
| ( 4,496,944 | ) | |
| (164,160 | ) | |
$ | ( 2,076,295 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Loss per share | |
$ | (0.01 | ) | |
$ | (0. 05 | ) | |
| ** | | |
$ | ( 0.02 ) | |
Weighted Average Common Shares Outstanding | |
| 95,387,270 | | |
| 84,998,810 | | |
| 96,606,082 | | |
| 89,243,523 | |
| |
| | | |
| | | |
| | | |
| | |
** Less than 0.01 | |
| | | |
| | | |
| | | |
| | |
See Notes
to Condensed Financial Statements
Worlds Inc. |
|
|
|
|
|
|
Statements of Cash Flows |
|
|
|
|
|
|
Nine Months Ended September 30, 2014 and 2013 |
|
|
|
|
|
|
| |
Unaudited | |
Unaudited |
| |
9/30/2014 | |
9/30/2013 |
Cash flows from operating activities: | |
| |
|
Net (loss) | |
$ | ( 1,032,728 | ) | |
$ | ( 4,496,944 | ) |
Adjustments to reconcile net loss to net cash (used in) operating
activities | |
| | | |
| | |
Fair value of stock options issued | |
| 66,451 | | |
| — | |
Common stock issued for services renderred | |
| 75,908 | | |
| 2,955,915 | |
Amortization of discount to note payable | |
| 320,136 | | |
| 259,178 | |
Derivative expenses | |
| | | |
| 3,007,846 | |
Changes in fair value of derivative liabilities | |
| 127,834 | | |
| ( 2,422,061 | ) |
Promissory note payable | |
| 1,000 | | |
| — | |
Accounts payable and accrued expenses | |
| 154,918 | | |
| (69,275 | ) |
Due from related party | |
| 205,525 | | |
| (131,542 | ) |
Net cash (used in) operating activities: | |
| (80,955 | ) | |
| (758,334 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Patent | |
| — | | |
| — | |
Net cash (used in) investing activities: | |
| — | | |
| — | |
| |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | |
Proceeds from issuance of common stock | |
| — | | |
| 97,500 | |
Proceeds from exercise of warrants | |
| — | | |
| 131,000 | |
Proceeds from issuance of convertible note payable | |
| — | | |
| 2,400,000 | |
Proceeds from issuance of note payable | |
| 100,000 | | |
| 50,000 | |
Redemption of notes payable | |
| | | |
| (1,951,400 | ) |
Net cash provided by financing activities | |
| 100,000 | | |
| 727,100 | |
| |
| | | |
| | |
Net increase/(decrease) in cash and cash equivalents | |
| 19,045 | | |
| (31,234 | ) |
| |
| | | |
| | |
Cash and cash equivalents, including restricted, beginning of year | |
| 22,132 | | |
| 95,069 | |
| |
| | | |
| | |
Cash and cash equivalents, including restricted,
end of period | |
$ | 41,178 | | |
$ | 63,836 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Cash paid during the year for: | |
| | | |
| | |
Interest | |
$ | — | | |
$ | — | |
Income taxes | |
$ | — | | |
$ | — | |
See Notes
to Condensed Financial Statements
Worlds
Inc.
NOTES
TO FINANCIAL STATEMENTS
Nine Months
Ended September 30, 2014
(Unaudited)
NOTE
1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Description of Business
On May
16, 2011, the Company transferred, through a spin-off to its then wholly owned subsidiary, Worlds Online Inc., the majority of
its operations and related operational assets. The Company retained its patent portfolio which it intends to continue to increase
and to more aggressively enforce against alleged infringers. The Company also entered into a License Agreement with Worlds Online
Inc. to sublicense its patented technologies.
Basis of Presentation
The accompanying
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America
("US GAAP"), which contemplates continuation of the Company as a going concern. The Company has always been considered
a developmental stage business, has incurred significant losses since its inception and has had minimal revenues from operations.
The Company will require substantial additional funds for development and enforcement of its patent portfolio. There can be no
assurance that the Company will be able to obtain the substantial additional capital resources to pursue its business plan or
that any assumptions relating to its business plan will prove to be accurate. The Company has not been able to generate sufficient
revenue or obtain sufficient financing which has had a material adverse effect on the Company, including requiring the Company
to reduce operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. For the
past year the Company has been operating at a significantly reduced capacity, with only one full time employee, performing primarily
consulting services and licensing software and using consultants to perform any additional work that may be required.
Use of Estimates
The preparation
of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents
are comprised of highly liquid money market instruments, which have original maturities of three months or less at the time of
purchase.
Due from Related Party
Due from
related party is comprised of cash payments made by Worlds Inc. on behalf of Worlds Online Inc. for shared operating expenses.
Revenue Recognition
Effective
for the second quarter of 2011, the Company spun off its online businesses to Worlds Online Inc. The Company’s sources of
revenue after the spin off 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.
Research and Development
Costs
Research
and development costs are charged to operations as incurred.
Property and Equipment
Property
and equipment are stated at cost. Depreciation is provided on a straight line basis over the estimated useful lives of the assets
ranging from three to five years. When assets are retired or disposed of, the cost and accumulated depreciation are removed from
the accounts, and any resulting gains or losses are included in income. Maintenance and repairs are charged to expense in the
period incurred.
Impairment of Long Lived
Assets
The Company
evaluates the recoverability of its fixed assets and other assets in accordance with section 360-10-15 of the FASB Accounting
Standards Codification for disclosures about Impairment or Disposal of Long-Lived Assets. Disclosure requires recognition of impairment
of long-lived assets in the event the net book value of such assets exceeds its expected cash flows. If so, it is considered to
be impaired and is written down to fair value, which is determined based on either discounted future cash flows or appraised values.
The Company adopted the statement on inception. No impairments of these types of assets were recognized during the nine months
ended September 30, 2014.
Stock-Based Compensation
The Company
accounts for stock-based compensation using the fair value method following the guidance set forth in section 718-10 of the FASB
Accounting Standards Codification for disclosure about Stock-Based Compensation. This section requires a public entity to measure
the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide
service in exchange for the award- the requisite service period (usually the vesting period). No compensation cost is recognized
for equity instruments for which employees do not render the requisite service.
Income Taxes
The Company
accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification. Deferred income tax assets and
liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred
tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets
will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the
enactment date.
ASC 740
prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements
uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized
in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.
Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant
facts.
Notes
Payable
The
Company has $773,279 in short term notes outstanding at September 30, 2014 and December 31, 2013. These are old notes payable
which the statute of limitations has passed.
The
company has an additional $325,000 and $225,000 in notes outstanding at September 30, 2014 and December 31, 2013, respectively.
Comprehensive
Income (Loss)
The Company
reports comprehensive income and its components following guidance set forth by section 220-10 of the FASB Accounting Standards
Codification which establishes standards for the reporting and display of comprehensive income and its components in the financial
statements. There were no items of comprehensive income (loss) applicable to the Company during the period covered in the financial
statements.
Loss Per Share
Net loss
per common share is computed pursuant to section 260-10-45 of the FASB ASC. Basic net loss per share is computed by dividing net
loss by the weighted average number of shares of common stock outstanding during the period. As of September 30, 2014, there were
8,600,000 options and 5,273,214 warrants whose effect is anti-dilutive and not included in diluted net loss per share for the
three and nine months ended September 30, 2014. The options and warrants may dilute future earnings per share.
Commitments and Contingencies
The Company
follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions
may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be
resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against
the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal
proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the
assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment
indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material,
would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed. Management does not believe, based upon information available at this time that these matters will have a material
adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance
that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations
or cash flows.
During
2000 the Company was involved in a lawsuit relating to unpaid consulting services. In April, 2001 a judgment against the Company
was rendered for approximately $205,000. As of September 30, 2014, and December 31, 2013 the Company recorded a reserve of $205,000
for this lawsuit, which is included in accrued expenses in the accompanying balance sheets.
Risk and Uncertainties
The Company
is subject to risks common to companies in the technology industries, including, but not limited to, litigation, development of
new technological innovations and dependence on key personnel.
Off Balance Sheet Arrangements
The Company does not have
any off-balance sheet arrangements.
Uncertain Tax Positions
The Company
did not take any uncertain tax positions and had no adjustments to unrecognized income tax liabilities or benefits pursuant to
the provisions of Section 740-10-25 for the nine months ended September 30, 2014 and 2013, respectively.
Subsequent Events
The Company
evaluated for subsequent events through the issuance date of the Company’s financial statements.
Recent Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements up to ASU 2014-05, and does not believe
the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results
of its operations.
NOTE – 2 RESTATEMENT
OF FINANCIAL STATEMENTS
The
Company identified errors related to understatement of option expense for the year ended December 31, 2012. The facts underlying
the Company’s original conclusion is that 7.5 million stock options granted to President and CEO of the Company, Thom Kidrin,
were only 18 month options and were expiring on March 31, 2014. Such 7.5 million stock options were additionally extended for
2 years with new expiration date on March 31, 2016. In fact they were five (5) year options expiring in September 2017 and no
extension was granted. Accordingly, all the financial statements for the year ended December 31, 2012 and for the nine months
ended September 30, 2014 are restated.
In
addition, the Company identified errors related to understatement of derivative liabilities as of September 30, 2014, and loss
on change in the fair value of the derivative liability for the three and nine months ended September 30, 2014. The facts underlying
the Company’s original conclusion is that there were no derivative liabilities incurred when 4,535,714 warrants were granted
to the investors in connection with the strategic financing agreements entered into in March of 2013. In fact such warrants’
ratchet features triggered derivative liabilities of the Company.
The following table sets
forth all the accounts in the original amounts and restated amounts, respectively.
As of September
30, 2014
| |
Original | |
Adjustment | |
Restated |
| |
| |
| |
|
Derivative liability | |
$ | 21,160 | | |
$ | 732,367 | | |
$ | 753,527 | |
Additional paid in capital | |
$ | 31,370,075 | | |
$ | 39,352 | | |
$ | 31,409,427 | |
Accumulated deficit | |
$ | (35,486,893 | ) | |
$ | (771,719 | ) | |
$ | (36,258,612 | ) |
For the nine months
ended September 30, 2014
| |
Original | |
Adjustment | |
Restated |
| |
| |
| |
|
Gain (loss) on change in fair
value of derivative liability | |
$ | (153,771 | ) | |
$ | 25,937 | | |
$ | (127,834 | ) |
Net (loss) | |
| (1,058,665 | ) | |
| 25,937 | | |
| (1,032,728 | ) |
For the three months
ended September 30, 2014
| |
Original | |
Adjustment | |
Restated |
| |
| |
| |
|
Gain (loss) on change in fair
value of derivative liability | |
$ | 4,433 | | |
$ | 29,400 | | |
$ | 33,833 | |
Net (loss) | |
| (193,560 | ) | |
| 29,400 | | |
| (164,160 | ) |
Statement of Equity
as of January 1, 2014
| |
Original | |
Adjustment | |
Restated |
| |
| |
| |
|
Additional paid in capital | |
$ | 30,078,730 | | |
$ | 208,682 | | |
$ | 30,287,412 | |
Accumulated deficit | |
$ | (34,258,898 | ) | |
$ | (966,986 | ) | |
$ | (35,225,884 | ) |
NOTE
3 - GOING CONCERN
The accompanying
financial statements have been prepared assuming that the Company will continue as a going concern. Since its inception, the Company
has had periods where it had only minimal revenues from operations. There can be no assurance that the Company will be able to
obtain the additional capital resources to fully implement its business plan or that any assumptions relating to its business
plan will prove to be accurate. The Company is pursuing sources of additional financing and there can be no assurance that any
such financing will be available to the Company on commercially reasonable terms, or at all. Any inability to obtain additional
financing will likely have a material adverse effect on the Company, including possibly requiring the Company to reduce and/or
cease operations.
These
factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
NOTE 4 - PRIVATE PLACEMENTS
OF EQUITY
During
the nine months ended September 30, 2014, the Company issued 3,128,592 common shares by converting $424,375 of the convertible
notes payable into common stock.
During
the nine months ended September 30, 2014, the Company issued an aggregate of 450,000 shares of common stock as payment for services
rendered with an aggregate value of $63,300. The Company also recognized stock issued for services in the amount of $12,609 for
shares issued in year 2013 but amortized in this period.
During
the nine months ended September 30, 2014, the Company issued 63,526 shares to an officer of the company as payment for an accrued
expense in the amount of $9,625.
During
the nine months ended September 30, 2013, the Company sold 875,000 common shares for a cash investment of $87,500. The company
received $10,000 for stock issued in 2012 and recorded as subscription receivable.
During
the nine months ended September 30, 2013, the Company raised $120,000 with the exercise of warrants covering 800,000 shares of
its common stock at a price of $0.15 per share.
During
the nine months ended September 30, 2013, 100,000 stock options were exercised at a price of $0.11 per share for cash proceeds
of $11,000.
During
the nine months ended September 30, 2013, the Company issued an aggregate of 7,675,800 shares of common stock as payment for services
rendered with an aggregate value of $2,609,332, $160,867 of which was recorded as deferred compensation as of September 30, 2013.
During
the nine months ended September 30, 2013, the Company issued 1,500,000 common shares for a cash investment of $150,000 which was
received in 2012. The shares were not issued as of December 31, 2012, and were recorded as common stock subscribed but not yet
issued at December 31, 2012.
NOTE
5 - NOTES PAYABLE
We issued
an aggregate of $2.4 million face amount of Senior Secured Convertible Notes (the “Notes”). The Notes are divided
into Series A, Series B and Series C with the Series A and B Notes aggregating to $1.95 million and the Series C Notes aggregating
to $450,000. The Series A and Series B Notes were exchanged by the return of the face amount of the Notes and for 7 million shares
of common stock of the Company. The remaining Series C Note carries a 14% annual interest rate upon default and is payable on
March 13, 2016. The Company has determined that the conversion feature of the Notes represent an embedded derivative since the
Notes are convertible into a variable number of shares upon conversion. The Notes are classified as a derivative liability and
not a note payable, see Note 10 below.
Notes payable at
September 30, 2014 consist of the following: |
|
|
|
|
|
Unsecured note payable to a shareholder
bearing 8% interest. |
|
|
|
|
Entire balance of principal
and unpaid interest due on demand |
|
$ |
124,230 |
|
|
|
|
|
|
Unsecured note payable to a shareholder
bearing 10% interest |
|
|
|
|
Entire balance of principal and unpaid
interest due on demand |
|
$ |
649,049 |
|
|
|
|
|
|
Total current |
|
$ |
773,279 |
|
|
|
|
|
|
2014 |
|
$ |
773,279 |
|
2015 |
|
$ |
325,000 |
|
2016 |
|
$ |
-0- |
|
2017 |
|
$ |
-0- |
|
2018 |
|
$ |
-0- |
|
|
|
$ |
1,098,279 |
|
We issued
promissory notes in the amount of $100,000 during the nine months ended September 30, 2014. We had issued promissory notes in
the amount of $225,000 during the year ended December 31, 2013. One of the Promissory Notes in the amount $50,000 was in lieu
of payment of cash for an outstanding balance due to a consultant of the Company. The promissory notes carry a 6% annual interest
rate and are payable upon the earlier of (a) 24 months from the date of the promissory note or (b) the Company reaching a settlement(s)
on a patent infringement claim(s) and receiving an aggregate of at least $2 million net proceeds from such settlement(s).
The holders
of the promissory notes shall receive repayment in the full face amount of the note from the initial $500,000 the Company actually
receives from the net proceeds of its patent infringement claim(s) or from the net proceeds of a public offering. In addition
the holder shall receive a preferred return (i) in an amount equal to up to 200% of the initial face amount of the note out of
available cash by sharing with all other investors in this series of notes in the allocation of 50% of the available cash received
by the Company form $2M - $4M and (ii) in an amount equal to up to 100% of the initial face amount of the note out of available
cash by sharing with all other investors in this series of notes in the allocation of 25% of the available cash received by the
Company from $4M - $6M. In other words, if the Company collects $6M in the net proceeds of available cash, the holder will receive
a return equal to 400% of its investment.
NOTE 5 – STOCK OPTIONS
We previously
reported that in January 2014 we extended the term of 7.5 million stock options granted to our President and CEO, Thom Kidrin,
from March 31, 2014 to March 31, 2016. We have now learned that this disclosure was incorrect inasmuch as the approval of the
extension was premised on the erroneous supposition that Mr. Kidrin’s options were only 18 month options and were expiring
on March 31, 2014, when in fact they were five (5) year options expiring in September 2017. The options in question were granted
pursuant to the terms of Mr. Kidrin’s Employment Agreement dated as of August 30, 2012, which was filed as Exhibit 10.2
to our Annual Report on Form 10-K for the ended December 31, 2012, which clearly states that the options had a term of five (5)
years.
We reported
in the Form 10-K for the year ended December 31, 2012 and in subsequent periods that Mr. Kidrin’s options were for an eighteen-month
period, which was predicated on the execution of an option agreement of similar term. We inadvertently executed two versions of
an option agreement in March 2013, one having a five-year term and one having an eighteen month term without realizing that there
were two versions. The five-year version was maintained in our files, but we erroneously provided only the eighteen-month version
to our independent auditor and prepared our financial statements and disclosures based upon an eighteen-month option term for
Mr. Kidrin. We continued to erroneously rely on the wrong document until September 2014.
Accordingly,
to the extent that the Board extended the options in January 2014, such extension was premised upon a mistake of fact and the
Board action was taken in error. Indeed, because even the purported extension would, if effective, shorten the five year term
of Mr. Kidrin’s options, such action would have been contrary to the Board’s intent. However, in the Annual Report
for 2012 and in each periodic report since that date, the options were erroneously described as 18 month options expiring in March
2014 and our two most recent quarterly reports reported the erroneous extension. The disclosure came to light as we reviewed our
disclosures as a result of the lawsuit described below, and located the March 2013 version of the option agreement. Inasmuch as
disclosing the options as 18 months versus five years did not impact in any way our assets or retained earnings, it had an impact
of approximately 10% on our income statement, (an understatement of net loss by approximately $208,682 for 2012; no impact on
net income for 2013; and an overstatement of net loss by approximately $1,119,859 for each of the first two quarters of 2014).
Management believes that this is non-cash book entry is not indicative in any way as to the health of the company. However, in
an abundance of caution, we have restated our annual reports for 2012 and 2013 and all periodic reports commencing in 2013 and
2014. As required by this Item, upon learning of the erroneous disclosures (i.e. 18 month options vs. 5 year options and the now
redundant extension), our executive officers brought the matter to the attention of our independent auditor.
During
the nine months ended September 30, 2014, the Company issued 450,000 options to the Company’s directors. The directors,
Bernard Stolar, Robert Fireman and Edward Gildea each received 100,000 options for serving as board members in 2014. Edward Gildea
joined the board on January 10, 2014 and received an additional 150,000 options for joining the Company’s board.
No stock
options or warrants were exercised during the nine months ended September 30, 2014.
During
the nine months ended September 30, 2013, the Company issued 4,535,714 warrants as part of the offering of the senior secured
convertible notes. Such warrants triggered derivative liabilities of the Company due to their ratchet features (see Note 11
below) . During the nine months ended September 30, 2013, 800,000 warrants were exercised for cash proceeds of $120,000. During
the nine months ended September 30, 2013, 100,000 stock options were exercised for cash proceeds of $11,000. During the nine months
ended September 30, 2013, 900,000 stock options were exercised through a cashless exercise of options resulting in the issuance
of 639,606 shares of common stock.
During
the nine months ended September 30, 2014, the Company recorded an option expense of $66,451, equal to the estimated fair value
of the options at the date of grants. The fair market value was calculated using the Black-Scholes options pricing model, assuming
approximately 1.73% risk-free interest, 0% dividend yield, 294% volatility, and expected life of 5 years for the Director’s
options.
Stock
Warrants and Options |
Stock
warrants/options outstanding and exercisable on September 30, 2014 are as follows: |
|
|
|
Exercise
Price per Share |
Shares
Under Option/warrant |
Remaining
Life in Years |
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
$ |
1.00 |
|
|
4,535,714 |
|
|
3.46 |
|
$ |
0.19 |
|
|
200,000 |
|
|
3.25 |
|
$ |
0.155 |
|
|
200,000 |
|
|
4.25 |
|
$ |
0.15 |
|
|
737,500 |
|
|
0.25 |
|
$ |
0.14 |
|
|
250,000 |
|
|
4.47 |
|
$ |
0.115 |
|
|
300,000 |
|
|
3.08 |
|
$ |
0.11 |
|
|
150,000 |
|
|
0.55 |
|
$ |
0.070 |
|
|
7,500,000 |
|
|
3.0 |
|
$ |
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
|
|
|
|
|
$ |
1.00 |
|
|
4,535,714 |
|
|
3.46 |
|
$ |
0.19 |
|
|
200,000 |
|
|
3.25 |
|
$ |
0.15 |
|
|
737,500 |
|
|
0.25 |
|
$ |
0.115 |
|
|
300,000 |
|
|
3.08 |
|
$ |
0.11 |
|
|
150,000 |
|
|
0.55 |
|
$ |
0.070 |
|
|
7,500,000 |
|
|
3.0 |
|
NOTE 7 - COMMITMENTS AND
CONTINGENCIES
The Company
is committed to an employment agreement with its President and CEO, Thom Kidrin. The agreement, dated as of August 30, 2012, is
for five years with a one-year renewal option held by Mr. Kidrin. The agreement provides for a base salary of $175,000,
which increases 10% on September 1 of each year; a monthly car allowance of $500; an annual bonus equal to 2.5% of Pre-Tax Income
(as defined in the agreement); an additional bonus as follows: $75,000, if Pre-Tax Income for the year is between 150% and 200%
of the prior fiscal year’s Pre-Tax Income or (B) $100,000, if Pre-Tax Income for the year is between 201% and 250% of the
prior fiscal year’s Pre-Tax Income or (C) $200,000, if Pre-Tax Income for the year is 251% or greater than the prior fiscal
year’s Pre-Tax Income, but in no event shall this additional bonus exceed five (5%) percent of Pre-Tax Income for such year;
payment of up to $10,000 in life insurance premiums; options to purchase 7.5 million shares of Worlds Inc. common stock at an
exercise price of $0.070 per share, all of which vested on October 1, 2012; a death benefit of at least $2
million dollars; and a payment equal to 2.99 times his base amount (as defined in the agreement) in the event of a Change of Control
(as defined in the agreement). The agreement also provides that Mr. Kidrin can be terminated for cause (as defined in the
agreement) and that he is subject to restrictive covenants for 12 months after termination.
NOTE 8 - RELATED PARTY
TRANSACTIONS
On May
16, 2011, the Company transferred, through a spin-off to its then wholly owned subsidiary, Worlds Online Inc., the majority of
its operations and related operational assets. The Company retained its patent portfolio which it intends to continue to increase
and to more aggressively enforce against alleged infringers. The Company also entered into a License Agreement with Worlds Online
Inc. to sublicense its patented technologies.
Due from
related party is comprised of cash payments made by Worlds Inc. on behalf of Worlds Online Inc. for shared operating expenses.
The balance due at September 30, 2014 is $90,387.
NOTE
9 - PATENTS
Worlds
Inc. currently has nine patents, 6,219,045 - 7,181,690 - 7,493,558 – 7,945,856, - 8,082,501, – 8,145,998 – 8,161,383,
– 8,407,592 and 8,640,028. On March 30, 2012, the Company filed a patent infringement lawsuit against Activision Bizzard
Inc., Blizzard Entertainment Inc. and Activision Publishing Inc. in the United States District Court for the District of Massachusetts.
Susman Godfrey LLP is lead counsel for the Company. The costs to prosecute those parties that the Company and our legal counsel
believe to be infringing on said patents were capitalized under patents until a resolution is reached.
A Federal
District Court issued a ruling on March 13, 2014 on the Motion for Summary Judgment hearing that allows the company to proceed
with its patent infringement suit against Activision Blizzard, Inc., Blizzard Entertainment, Inc. and Activision Publishing, Inc.'s
(Activision). The MSJ hearing held October 17, 2013 addressed Activision's dispute of Worlds Inc.'s November 1995 patent
priority date. The court did not dismiss the case as requested by Activision. The Court’s ruling does prevent the company
from pursuing damages for the period prior to the U.S. Patent and Trademark Office's (USPTO) issuance of Certificates of Correction
on September 24, 2013 that amended the Company’s 6,219,045 and 7,181,790 patents to include comprehensive priority information,
which specifically references Worlds November 1995 provisional patent application and confirms Worlds 1995 priority date. A Markman
hearing was held October 3, 2014 to address various aspects of the infringement suit claims and how the words in the 11 disputed
“constructions” in the claims should be construed for jury consideration. The additional purpose is for the court
to determine the meaning and intent of the language used in the claims. The court gave no indication of when it would issue the
ruling.
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
10 – DERIVATIVE LIABILITIES
| 1) | Derivative
liabilities due to variable conversion ratio |
On March
20, 2013 the Company entered into strategic financing agreements with several institutional investors that could provide the Company
with up to $2.3 million of debt financing based upon the amount of conversions and redemptions. The transaction documents provide,
among other things, that (i) the investors will receive five year warrants in an amount equal to 100% of the number of shares
of our common stock the investors would receive if the Notes (defined below) were converted on March 13, 2013, at an exercise
price of $0.50 per share, (ii) $1.950 million of the funds will deposited in one of our bank accounts but will be subject to a
control account agreement which will provide that the Company can only withdraw funds from the account as the investors convert
or redeem the Notes, (iii) the investors have demand and piggy-back registration rights for the shares of common stock underlying
the warrants and Notes, (iv) the Notes will be secured by a first priority security interest in all of our assets, other than
our patents, (v) each investor may not convert any Note or exercise any warrants if doing so will cause the investor to own more
than 4.99% of our outstanding common stock at any time, although under certain circumstances they can each own up to 9.99% of
our outstanding common stock, (vi) we paid $40,000 of the investors’ legal fees incurred with respect to this transaction,
and (vii) for the next three years the investors have a right to participate in up to 50% of any of our future financings. The
warrants and Notes contain standard anti-dilution provisions and the Securities Purchase Agreements contains standard covenants
for a financing of this nature. In the event the Company acquires any subsidiaries while the Notes are outstanding, such subsidiaries
will be obligated to guaranty the Notes and any other obligations we owe to the investors pursuant to the transaction documents.
On July
15, 2013 we entered into Amendment and Exchange Agreements with each of the existing holders of our Series A, B and C Senior Secured
Convertible Notes and related warrants to purchase our common stock, which securities were originally issued pursuant to that
certain Securities Purchase Agreement dated as of March 14, 2013 (“Securities Purchase Agreement”), by and among us
and such holders.
Each Exchange Agreement provides
for, among other things, that:
|
(i) |
Various restrictive
provisions of the Securities Purchase Agreement and the Class C Senior Secured Convertible Notes were either eliminated by
amendment or waived; |
|
(ii) |
the related
warrants, initially exercisable into an aggregate of 4,535,714 shares of Common Stock at an initial exercise price of $0.50,
were exchanged for new warrants, initially exercisable into an aggregate of 4,535,714 shares of Common Stock at an initial
exercise price of $1.00; and |
|
(iii) |
the Series
A and B Senior Secured Convertible Notes, with an aggregate original principal amount of $1,950,000, were exchanged for an
aggregate of 7 million shares of our common stock and the payment by the Company to such holders of an aggregate of approximately
$1,951,400 (the remaining cash amount held in a control account pursuant to the terms and conditions of the Series A and B
Senior Secured Convertible Notes) |
The
Company has determined that the conversion feature of the Note represent an embedded derivative since the Note is convertible
into a variable number of shares upon conversion. Accordingly, the Note is not considered to be conventional debt under EITF 00-19
and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly,
the fair value of this derivative instrument has been recorded as a liability on the balance sheet with the corresponding amount
recorded as a discount to the Note. Such discount will be accreted from the grant date to the maturity date of the Note. The change
in the fair value of the derivative liability will be recorded in other income or expenses in the statement of operations at the
end of each period, with the offset to the derivative liability on the balance sheet. The beneficial conversion feature included
in the Note resulted in an initial debt discount of $450,000 and an initial loss on the valuation of derivative liabilities of
$171,658 based on the initial fair value of the derivative liability of $621,658. The fair value of the embedded derivative liability
was calculated at grant date utilizing the following assumptions:
Grant
Date | |
Fair
Value | |
Term
(Years) | |
Assumed
Conversion Price | |
Market
Price on Grant Date | |
Volatility
Percentage | |
Risk-free
Rate |
| 3 | /20/13 | |
$ | 621,658 | | |
| 3.0 | | |
$ | 0.326 | | |
$ | 0.465 | | |
| 238 | % | |
| 0.0038 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
During
the nine months ended September 30, 2014, $424,375 of the convertible notes was converted into 3,128,592 shares of the Company’s
common stock. $25,188 in convertible notes remain.
At
September 30, 2014, the Company revalued the embedded derivative liability. For the period from December 31, 2013 to September
30, 2014, the Company decreased the derivative liability of $514,883 by $493,723 resulting in a derivative liability of $21,160
at September 30, 2014.
The fair
value of the embedded derivative liability was calculated at September 30, 2014 utilizing the following assumptions:
Date | |
Fair
Value | |
Term
(Years) | |
Assumed
Conversion Price | |
Market
Price | |
Volatility
Percentage | |
Risk-free
Rate |
| 12 | /31/13 | |
$ | 514,883 | | |
| 2.22 | | |
$ | 0.126 | | |
$ | 0.15 | | |
| 275 | % | |
| 0.0078 | |
| 9 | /30/14 | |
$ | 21,160 | | |
| 1.47 | | |
$ | 0.18 | | |
$ | 0.22 | | |
| 161 | % | |
| 0.0058 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| 2) | Derivative
liabilities due to ratchet features of the warrants |
On
March 20, 2013, the Company issued 4,535,714 warrants (the “Warrants”) as part of the senior secured convertible
notes. Pursuant to the warrants agreements, if and whenever on or after the grant date of the Warrants, the Company issued or
sold, or in accordance with the warrants agreements is deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but excluding any Excluded Securities
issued or sold or deemed to have been issued or sold) for a consideration per share (the “New Issuance Price”)
less than a price equal to the Exercise Price of the Warrants in effect immediately prior to such issue or sale or deemed issuance
or sale (“Dilutive Issuance”), then immediately after such Dilutive Issuance, the Exercise Price then in effect
shall be reduced to an amount equal to the New Issuance Price.
The
Company has determined that the ratchet features of the Warrants represent an embedded derivative since the Warrants are exercisable
into a variable number of shares upon exercise. Accordingly, the Warrants are not considered to be conventional warrants under
EITF 00-19 and the embedded ratchet feature must be accounted for as a derivative liability. Accordingly, the fair value of this
derivative instrument has been recorded as a liability on the balance sheet with the corresponding amount recorded as derivative
expenses. The change in the fair value of the derivative liability will be recorded in other income or expenses in the statement
of operations at the end of each period, with the offset to the derivative liability on the balance sheet. The ratchet feature
included in the Warrants resulted in an initial derivative expenses of $2,092,336 on the grant date based on the initial fair
value of the derivative liability. The fair value of the embedded derivative liability was calculated at grant date utilizing
the following assumptions:
Grant
Date |
Fair
Value |
Term
(Years) |
Exercise
Price |
Market
Price on Grant Date |
Volatility
Percentage |
Risk-free
Rate |
3/20/13 |
$2,092,336 |
5.0 |
$0.50 |
$0.465 |
238% |
0.0038 |
At
September 30, 2014, the Company revalued the embedded derivative liability, based on the new exercise price of $1.00 per share
pursuant to the Amendment and Exchange Agreements entered into on July 15, 2013. For the period from December 31, 2013 to September
30, 2014, the Company increased the derivative liability of $672,717 by $59,650, resulting in a derivative liability of $732,367
at September 30, 2014.
The
fair value of the embedded derivative liability was calculated at December 31, 2013 and September 30, 2014 utilizing the following
assumptions:
Date | |
Fair
Value | |
Term
(Years) | |
Exercise
Price | |
Volatility
Percentage | |
Risk-free
Rate |
| 12 | /31/13 | |
$ | 672,717 | | |
| 4.22 | | |
$ | 1.00 | | |
| 275 | % | |
| 0.0175 | |
| 9 | /30/14 | |
$ | 732,367 | | |
| 3.47 | | |
$ | 1.00 | | |
| 161 | % | |
| 0.0178 | |
Item
2. Management's Discussions and Analysis of Financial Condition and Results of Operations
Forward
Looking Statements
When
used in this Form 10-Q and in future filings by the Company with the Commission, the words or phrases such as "anticipate,"
"believe," "could," "estimate," "expect," "intend," "may," "plan,"
"predict," "project," "will" or similar expressions are intended to identify “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place
undue reliance on any such forward looking statements, each of which speak only as of the date made. Such statements are subject
to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company has no obligation to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.
These
forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be
materially different. These factors include, but are not limited to, changes that may occur due to general economic and business
conditions; changes in political, social and economic conditions in the jurisdictions in which we operate; changes to regulations
that pertain to our operations; changes in technology that render our technology relatively inferior, obsolete or more expensive
compared to others; delays in the delivery of broadband capacity to the homes and offices of persons who use our services; general
disruptions to Internet service; and the loss of customer faith in the Internet as a means of commerce.
The following
discussion should be read in conjunction with the unaudited financial statements and related notes which are included under Item
1.
We do
not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.
Overview
General
Starting
in mid-2001 we were not able to generate enough revenue to sustain full operations and other sources of capital were not available.
As a result, we have had to significantly curtail our operations since that time and at times almost halt them all together. Since
mid-2007, as more funds became available from our financings, we were able to increase operations and become more active operationally.
On May
16, 2011, we transferred, through a spin-off to our then wholly owned subsidiary, Worlds Online Inc., the majority of our operations
and related operational assets. We retained our patent portfolio which we intend to continue to increase and to more aggressively
enforce against alleged infringers. We also entered into a License Agreement with Worlds Online Inc. to sublicense patented technologies.
At
present, the Company’s anticipated 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.
Revenues
We generated
no revenue during the quarter because we transferred the operations of the Company to Worlds Online Inc. and our other anticipated
revenue generation streams did not produce any income during the quarter.
We classify
our expenses into two broad groups:
• |
Selling, general
and administration. |
Liquidity
and Capital Resources
We have
had to limit our operations since mid 2001 due to a lack of liquidity. However, we were able to issue equity and convertible
debt in the last few years and raise small amounts of capital from time to time that enabled us to begin upgrading our technology,
develop new products and actively solicit additional business. We continue to pursue additional sources of capital
though we have no current arrangements with respect to, or sources of, additional financing at this time and there can be no assurance
that any such financing will become available. If we cannot raise additional capital, form an alliance of some nature with another
entity, or start to generate sufficient revenues, we may need to once again scale back operations.
RESULTS OF OPERATIONS
Our
net revenues for each of the three months ended September 30, 2014 and 2013 were $0 and $0, respectively. Our net revenue for
each of the nine months ended September 30, 2014 and 2013 were $0 and $0, respectively. The Company’s sources of revenue
after the spin off are currently anticipated to be from sublicenses of the patented technology to Worlds Online Inc.’s customers
and any revenue that may be generated from enforcing our patents.
Three
and nine months ended September 30, 2014 compared to three and nine months ended September 30, 2013
Revenue
is $0 for the three months ended September 30, 2014 and 2013. Revenue is $0 because the online business operations including the
VIP subscription business has been transferred to Worlds Online Inc. The business up to the spin off continued to run in a severely
diminished mode due to the lack of liquidity. Post spin off we still need to raise a sufficient amount of capital to provide the
resources required that would enable us to continue running the business.
Cost
of revenues is $0 in the three months ended September 30, 2014 and 2013.
Selling
general and administrative (S, G & A) expenses increased by $39,127 from $66,775 to $105,902 for the three months ended September
30, 2013. Increase is due to the activity around the patent litigation and the correction of the option issuance error. Common
stock issued for services rendered decreased by $2,723,399 to $0 for three months ended September 30, 2014 compared to $2,723,399
for the same period in 2013. The decrease is due to the Company converting the Series A and B convertible notes into 7 million
shares and returning the face value of the notes to the investors and signing strategic business consulting, marketing and advice
agreements during the three months ended September 30, 2013. Salaries and related increased by $1,006 to $48,125 from $47,119
for the three months ended September 30, 2014.
For
the three months ended September 30, 2014, the company had a gain on change in fair value of derivative liability of $33,833 and
interest expense of $43,966. For the three months ended September 30, 2013, the Company had a gain on change in fair value of
derivative liability of $814,556 and interest expense of $53,558. The derivative liability are in connection with the issuance
of the senior secured convertible notes of $450,000 and 4,535,714 warrants as part of the offering of notes, both of which are
required to be recorded as a derivative liability.
As
a result of the foregoing, we realized a net loss of $164,160 for the three months ended September 30, 2014 compared to a loss
of $2,076,295 in the three months ended September 30, 2013, a decreased loss of $1,912,135.
Revenue
was $0 and $0 for the nine months ended September 30, 2014 and 2013. Revenue is $0 because the online business operations including
the VIP subscription business has been transferred to Worlds Online Inc. The business up to the spin off continued to run in a
severely diminished mode due to the lack of liquidity. Post spin off we still need to raise a sufficient amount of capital to
provide the resources required that would enable us to continue running the business.
Cost
of revenues is $0 in the nine months ended September 30, 2014 and 2013.
Selling
general and administrative expenses decreased by $165,035, from $431,856 to $266,821 for the nine months ended September 30, 2014.
Decrease is due to limited operations in 2014 where last year there was a greater overall level of activity surrounding the lawsuit
and professional service fees and consultants with the activity around the strategic financing agreement.
Common
stock issued for services rendered decreased by $2,880,007 to $75,908 in 2014 compared to $2,955,915 for 2013. Decrease is due
to the Company converting the Series A and B convertible notes into 7 million shares and returning the face value of the notes
to the investors, and signing strategic business consulting, marketing and advice agreements during 2013. Salaries and related
decreased by $6,569 to $152,788 from $159,357 for the nine months ended September 30, 2014. The decrease is due to two additional
employees last year who are no longer with the company, offset by an increase in the CEO’s salary based on the terms of
his employment agreement.
For
the nine months ended September 30, 2014, the company had a loss on change in fair value of derivative liability of $127,834 and
interest expense of $342,925. For the nine months ended September 30, 2013, the Company had a loss on change in fair value of
derivative liability of $585,785 and interest expense of $365,462. The derivative liability are in connection with the issuance
of the senior secured convertible notes of $450,000 and 4,535,714 warrants as part of the offering of notes, both of which are
required to be recorded as a derivative liability.
As
a result of the foregoing we had a net loss of $1,032,728 for the nine months ended September 30, 2014 compared to a loss of $4,496,944
in the nine months ended September 30, 2013.
Liquidity
and Capital Resources
Our cash
and cash equivalents were $41,178 at September 30, 2014. We raised an aggregate of $100,000 from issuing notes payable during
the nine months ended September 30, 2014.
During
the nine months ended September 30, 2013 we raised an aggregate of $2,400,000 from issuing the convertible notes payable but then
redeemed the Series A and B and returned $1,950,000; we raised $97,500 from a private placement of common stock; we raised $120,000
from the exercising of warrants for common stock; and we raised $11,000 from the exercise of options.
There
were no capital expenditures in the nine months ended September 30, 2014.
Historically,
our primary cash requirements have been used to fund the cost of operations, development of our products and patent protection,
with additional funds having been used in promotion and advertising and in connection with the exploration of new business lines.
The funds
raised in our 2013 and 2014 financings were and are expected to be used to enhance our patent portfolio, pay salaries to
management and pay professional fees to our attorneys and auditors to prepare and file reports with the Securities and Exchange
Commission. We hope to raise additional funds to be used for further developing our portfolio of patents and to document
our technology in order to enforce our patents where there is infringement. No assurances can be given that we will
be able to raise any additional funds.
A
Federal District Court issued a ruling on March 13, 2014 on the Motion for Summary Judgment hearing that allows the company to
proceed with its patent infringement suit against Activision Blizzard, Inc., Blizzard Entertainment, Inc. and Activision Publishing,
Inc.'s (Activision). The MSJ hearing held October 17, 2013 addressed Activision's dispute of Worlds Inc.'s November 1995
patent priority date. The court did not dismiss the case as requested by Activision. The Court’s ruling does prevent the
company from pursuing damages for the period prior to the U.S. Patent and Trademark Office's (USPTO) issuance of Certificates
of Correction on September 24, 2013 that amended the Company’s 6,219,045 and 7,181,790 patents to include comprehensive
priority information, which specifically references Worlds November 1995 provisional patent application and confirms Worlds 1995
priority date.
Item
4. Controls And Procedures
As
of September 30, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2014 our
disclosure controls and procedures were ineffective inasmuch as draft documents were commingled with effective documents leading
to erroneous documents being relied upon and distributed. The above statement notwithstanding, you are cautioned that no system
is foolproof.
Changes
in Internal Control Over Financial Reporting
During
the quarter covered by this report there were no changes in our internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
PART
II OTHER INFORMATION
Item
1. Legal Proceedings.
In Cosmo
Communications v. Worlds Inc. (our former name) in the Superior Court Of New Jersey Law Division, Bergen County, the court rendered
a decision in favor of the plaintiff, Cosmo Communications on February 13, 2001. The judgment amount entered in April 2001, is
approximately $205,000, of which the full amount is accrued. The judgment related to a consulting agreement for raising
capital. The court ruled that the terms of the contract are binding on successors of the company and that Worlds.com is a successor
company.
A Federal
District Court issued a ruling on March 13, 2014 on the Motion for Summary Judgment hearing that allows the company to proceed
with its patent infringement suit against Activision Blizzard, Inc., Blizzard Entertainment, Inc. and Activision Publishing, Inc.'s
(Activision). The MSJ hearing held October 17, 2013 addressed Activision's dispute of Worlds Inc.'s November 1995 patent
priority date. The court did not dismiss the case as requested by Activision. The Court’s ruling does prevent the company
from pursuing damages for the period prior to the U.S. Patent and Trademark Office's (USPTO) issuance of Certificates of Correction
on September 24, 2013 that amended the Company’s 6,219,045 and 7,181,790 patents to include comprehensive priority information,
which specifically references Worlds November 1995 provisional patent application and confirms Worlds 1995 priority date. A Markman
hearing was held October 3, 2014 to address various aspects of the infringement suit claims and how the words in the 11 disputed
“constructions” in the claims should be construed for jury consideration. The additional purpose is for the court
to determine the meaning and intent of the language used in the claims. The court gave no indication of when it would issue the
ruling.
On or
about September 9, 2014, Hudson Bay IP Opportunities Master Fund L.P. (“Hudson Bay”) commenced a lawsuit against the
Company in the Supreme Court of the State of New York, New York County, seeking preliminary and permanent injunctive relief, and
damages based on the Company’s purported extension of Mr. Kidrin’s 7.5 million stock options for a two year period
from March 2014 to March 2016. Hudson Bay contends that the purported extension of options constitutes a “dilutive issuance”
of shares under a warrant issued to it by the Company. The Company has denied the substantive allegations of the complaint, and
is vigorously contesting the lawsuit, including Hudson Bay’s motion for a preliminary injunction which is scheduled to be
heard by the court on November 24, 2014. The Company has taken the position that the lawsuit is based on an error of fact –
the purported extension of Mr. Kidrin’s stock options was done in error since his options do not expire prior to August
31, 2017 – and is in any event based on a misinterpretation of the parties’ contract.
On November
14, 2014, Hudson Bay filed an amended complaint adding Mr. Kidrin as a defendant, and adding actions for fraudulent inducement,
and a declaratory judgment based on alleged subsequent dilutive issuances. The Company has until December 15 to respond to the
amended complaint and intends to vigorously oppose the claims asserted therein.
Item
1A. Risk Factors
We
are not obligated to disclose our risk factors in this report, however, limited information regarding our risk factors appears
in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under
the caption “Forward-Looking Statements” contained in this Quarterly Report on Form 10-Q and in “Item 1A. RISK
FACTORS” of our 2012 Annual Report on Form 10-K. There have been no material changes from the risk factors previously disclosed
in our 2012 Annual Report on Form 10-K.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosure
Not
applicable.
Item
5. Other Information
None.
Item
6. Exhibits
31.1 |
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Certification
of Chief Executive Officer |
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31.2 |
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Certification of Chief
Financial Officer |
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32.1 |
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Statement required by
18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Statement required by
18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* XBRL |
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Instance Document |
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101.SCH*XBRL |
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Taxonomy Extension
Schema |
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101.CAL*XBRL |
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Taxonomy Extension
Calculation Linkbase |
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101.DEF* XBRL |
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Taxonomy Extension
Definition Linkbase |
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101.LAB*XBRL |
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Taxonomy Extension
Label Linkbase |
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101.PRE* XBRL |
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Taxonomy Extension
Presentation Linkbase |
SIGNATURES
In accordance with
the requirements of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned thereto
duly authorized.
Date: February
6, 2015
WORLDS
INC.
By:
/s/ Thomas Kidrin
Thomas Kidrin
President and CEO
By: /s/ Christopher Ryan
Christopher Ryan
Chief Financial Officer |
|
INDEX
TO EXHIBITS
EXHIBIT 31.1
Certifications
I, Thomas Kidrin, certify that:
1. I have reviewed this amendment
to quarterly report on Form 10-Q/A of Worlds Inc.;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The
registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control
over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness
of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this
report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies
and material weaknesses in the design or operation of internal control which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant's internal control over financial
reporting.
Date: February 6, 2015
/s/ Thomas Kidrin
Thomas Kidrin
Chief Executive Officer
EXHIBIT 31.2
Certifications
I, Christopher J. Ryan, certify
that:
1. I have reviewed this amendment
to quarterly report on Form 10-Q/A of Worlds Inc.;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The
registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control
over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness
of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this
report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies
and material weaknesses in the design or operation of internal control which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant's internal control over financial
reporting.
Date: February 6, 2015
/s/ Christopher J. Ryan
Christopher J. Ryan
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the amendment
to Quarterly Report of Worlds Inc. (the "Company") on Form 10-Q/A for the nine months ended September 30,
2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas Kidrin, Chief
Executive Officer of the Company, certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to §906 of the Sarbanes-Oxley
Act of 2002, that, based on my knowledge:
|
(1) |
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, our financial condition and result of operations. |
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WORLDS INC.
(Registrant) |
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Date: February 6, 2015 |
By: |
/s/ Thomas Kidrin |
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Thomas Kidrin |
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Chief Executive Officer |
Exhibit
32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the amendment
to Quarterly Report of Worlds Inc. (the "Company") on Form 10-Q/A for the nine months ended September 30,
2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Christopher J. Ryan,
Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to §906 of the Sarbanes-Oxley
Act of 2002, that, based on my knowledge:
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, our financial condition and result of operations. |
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WORLDS INC.
(Registrant) |
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|
|
Date: February 6, 2015 |
By: |
/s/ Christopher J. Ryan |
|
Christopher J. Ryan |
|
Chief Financial Officer |
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