10-Q 1 worldsinc10q.htm

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended June 30, 2013

( ) 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 July 29, 2013, 85,152,677 shares of the Issuer's Common Stock were outstanding.

 

(1)

 

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 Forward Looking Statements 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk N/A
Item 4 Controls and Procedures 13
     
Part II - Other Information  
Item 1 Legal Proceedings 14
Item 1A Risk Factors N/A
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 3 Default Upon Senior Securities 14
Item 4 Mine Safety Disclosures N/A
Item 5 Other Information 14
Item 6 Exhibits 14
Signatures   15

 

 

(2)

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

 

Worlds Inc.
Balance Sheets
June 30, 2013 and December 31, 2012
 
    Unaudited   Audited
    June 30, 2013   December 31, 2012
ASSETS:        
Current Assets        
Cash and cash equivalents   $ 106,901     $ 95,069  
Restricted cash and cash equivalents     1,951,430       —    
Due from related party     256,995       134,654  
                 
Total Current Assets     2,315,326       229,724  
                 
Patents     7,000       7,000  
                 
Total assets   $ 2,322,326     $ 236,724  
                 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT:                
Current Liabilities                
Accounts payable   $ 797,908     $ 797,908  
Accrued expenses     1,977,459       1,953,934  
Derivative liability     1,949,470       —    
Notes payable     773,279       773,279  
Convertible notes payable, net     221,370       —    
                 
Total Current Liabilities     5,719,486       3,525,121  
                 
                 
Stockholders' (Deficit)                
                 
Common stock (Par value $0.001 authorized 100,000,000 shares, issued and outstanding 85,152,677 and 79,813,071 at June 30, 2013 and December 31, 2012, respectively)     85,153       79,813  
Common stock subscribed but not yet issued (100,000 and 1,500,000 at June 30, 2013 and December 31, 2012, respectively)     100       1,500  
Subscription receivable     —         (10,000 )
Additional paid in capital     27,395,123       26,580,244  
Common stock-warrants     97,869       203,237  
Deferred compensation     (274,934 )     (12,500 )
Accumulated deficit     (30,700,471 )     (30,130,692 )
Total stockholders deficit     (3,397,160 )     (3,288,398 )
                 
Total Liabilities and stockholders' deficit   $ 2,322,326     $ 236,723  

 

See Notes to Condensed Financial Statements

 

(3)

 

 

Worlds Inc.
Statements of Operations
Six and Three Months Ended June 30, 2013 and  2012
 
    Unaudited     Unaudited  
    Six months ended June 30     Three months ended June 30  
    2013   2012     2013   2012  
Revenues                    
Revenue   $     $         $     $  
                                     
Total Revenue                            
                                     
                                     
Cost and Expenses                            
                                     
Cost of Revenue                            
                                     
Gross Profit/(Loss)                            
                                     
                                     
                                   
Common Stock issued for services renderred     232,516       234,036           170,253       27,001  
Selling, General & Admin.     365,081       158,537           116,145       108,377  
Salaries and related     112,238       128,841           65,212       80,526  
                                     
Operating loss     (709,835 )     (521,414 )         (351,610 )     (215,904 )
                                     
                                     
Other Income (Expense)                                    
Gain on change in fair value of derivative liability     450,530                 396,151        
Interest Expense     (311,903 )               (284,385 )      
Interest Income     1,430                 1,430        
Net (Loss)   $ (569,779 )   $ (521,414 )       $ (238,414 )   $ (215,904 )
                                     
Weighted Average Loss per share   $ (0.01 )   $ (0.01 )       $  *      $  *   
Weighted Average Common Shares Outstanding     82,841,277       75,720,479           83,839,228       76,505,325  
                                     
See Notes to Condensed Financial Statements
* Less than $0.01 per share

 

 

 

(4)

 

 

Worlds Inc.
Statements of Cash Flows
Six Months Ended June 30, 2013 and 2012
 
    Unaudited   Unaudited
    2013   2012
Cash flows from operating activities:        
Net (loss)   $ (569,779 )   $ (521,414 )
Adjustments to reconcile net loss to net cash (used in) operating activities                
Common stock issued for services rendered     232,516       234,036  
Amortization of discount to note payable     221,370       —    
Derivative expenses     512,637       —    
Changes in fair value of derivative liabilities     (963,167 )     —    
Accounts payable and accrued expenses     23,525       (34,578 )
Due from related party     (122,341 )     (12,054 )
Net cash (used in) operating activities:     (665,239 )     (334,010 )
                 
Cash flows from investing activities:                
Patent     —         (7,000 )
Net cash (used in) investing activities:     —         (7,000 )
                 
Cash flows from financing activities                
Proceeds from issuance of common stock     97,500       250,000  
Proceeds from exercise of warrants     131,000          
Proceeds from issuance of note payable     2,400,000       —    
Net cash provided by financing activities     2,628,500       250,000  
                 
Net increase/(decrease) in cash and cash equivalents     1,963,261       (91,010 )
                 
Cash and cash equivalents, including restricted, beginning of year     95,069       152,526  
                 
Cash and cash equivalents, including restricted, end of year   $ 2,058,331     $ 61,516  
                 
Non-cash financing activities                
                 
Supplemental disclosure of cash flow information:                
Cash paid during the year for:                
Interest   $ —       $ —    
Income taxes   $ —       $ —    
                 
See Notes to Condensed Financial Statements

 

 

 

  

(5)

 

 

 

Worlds Inc.

NOTES TO FINANCIAL STATEMENTS

Six Months Ended June 30, 2013

(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 unaudited condensed consolidated financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

 

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the Company’s annual audited consolidated financial statements for the preceding fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the years ended December 31, 2012 and 2011 thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

 

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. Prior to the spin-off, the Company had the following sources of revenue: (1) consulting/licensing revenue from the performance of development work performed on behalf of the Company and licensing revenue or from the sale of certain software to third parties; and (2) VIP subscriptions to our Worlds Ultimate 3-D Chat service. Following the spin-off we expect to receive revenue from royalties on licenses of our IP and from litigation settlements from infringers of our IP. 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 collectibility is reasonable assured. This will usually be in the form of a receipt of a customer’s acceptance indicating the product has been completed to their satisfaction except for development work and service revenue which is recognized when the services have been performed. Deferred revenue represents cash payments received in advance to be recorded as revenue when earned. The corresponding cost associated with those contracts is also deferred as deferred costs until the revenue is ultimately recognized. 

 

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 (“ASC”) 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 six months ended June 30, 2013 and 2012.

 

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 ASC 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 ASC. 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 June 30, 2013.

 

 

Comprehensive Income (Loss)

 

The Company reports comprehensive income and its components following guidance set forth by section 220-10 of the FASB ASC which establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. There were no items of comprehensive income (loss) applicable to the Company during the period covered in the consolidated 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 June 30, 2013, there were 8,462,500 options, 5,273,214 warrants and 100,000 common shares subscribed but not issued whose effect was anti-dilutive and not included in diluted net loss per share for the three and six months ended June 30, 2013. The options and warrants may dilute future earnings per share.

 

Commitments and Contingencies

 

The Company follows subtopic 450-20 of the FASB ASC 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. 

 

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 FASB ASC 740-10-25 for the six months ended June 30, 2013 and 2012. 

 

Recent Accounting Pronouncements

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements up to ASU 2013-09, and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated results of its operations.

 

(6)

 

NOTE 2 - GOING CONCERN

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Since its inception, the Company has had periods where it had only minimal revenues from operations. There can be no assurance that the Company will be able to obtain the additional capital resources to fully implement its business plan or that any assumptions relating to its business plan will prove to be accurate. The Company is pursuing sources of additional financing and there can be no assurance that any such financing will be available to the Company on commercially reasonable terms, or at all. Any inability to obtain additional financing will likely have a material adverse effect on the Company, including possibly requiring the Company to reduce and/or cease operations.

 

These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

NOTE 3 - PRIVATE PLACEMENTS OF EQUITY

 

During the six months ended June 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 six months ended June 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 six months ended June 30, 2013, 100,000 stock options were exercised at a price of $0.11 per share for cash proceeds of $11,000.

 

During the six months ended June 30, 2013, the Company issued an aggregate of 1,525,000 shares of common stock as payment for services rendered with an aggregate value of $494,950, $274,934 of which was recorded as deferred compensation as of June 30, 2013.

 

During the six months ended June 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. 

During the six months ended June 30, 2012, the Company issued 1,000,000 common shares for a cash investment of $250,000.

 

During the six months ended June 30, 2012, the Company issued an aggregate of 938,198 shares of common stock as payment for services rendered with an aggregate value of $234,036. 

 

 

(7)

 

 

NOTE 4 - 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. All of the Notes carry a 14% annual interest rate upon default and are 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. These Notes are classified as a derivative liability and not a note payable, see Note 10 below.

 

 

 

Notes payable at June 30, 2013 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  
         
2013   $ 773,279  
2014   $ -0-  
2015   $ -0-  
2016   $ -0-  

2017

 

  $ -0-  
    $ 773,279  

 

 

(8)

 

 

NOTE 5 – STOCK OPTIONS

 

During the six months ended June 30, 2013, the Company issued 4,535,714 warrants as part of the offering of the senior secured convertible notes. During the six months ended June 30, 2013, 800,000 warrants were exercised for cash proceeds of $120,000. During the six months ended June 30, 2013, 100,000 stock options were exercised for cash proceeds of $11,000. During the six months ended June 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 six months ended June 30, 2012, no stock options or warrants were exercised.

 

 

Stock Warrants and Options
Stock warrants/options outstanding and exercisable on June 30, 2013 are as follows:
     
Exercise Price per Share Shares Under Option/warrant Remaining Life in Years
                 
  Outstanding              
$ 0.50     4,535,714     4.71  
$ 0.35     212,500     0.50  
$ 0.20     100,000     0.50  
$ 0.19     200,000     4.50  
$ 0.15     737,500     1.50  
$ 0.115     300,000     4.33  
$ 0.11     150,000     1.80  
$ 0.076     7,500,000     0.75  
$                
   Exercisable              
$ 0.50     4,535,714     4.71  
$ 0.35     212,500     0.50  
$ 0.20     100,000     0.50  
$ 0.15     737,500     1.50  
$ 0.115     300,000     4.33  
$ 0.11     150,000     1.80  
$ 0.076     7,500,000     0.75  

 

(9)

 

 

NOTE 6 - INCOME TAXES

 

At June 30, 2013, the Company had federal and state net operating loss carry forwards of approximately $41,600,000 that expire in various years through the year 2026.

 

Due to operating losses, there is no provision for current federal or state income taxes for the six months ended June 30, 2013 and 2012.

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for federal and state income tax purposes.

 

The Company’s deferred tax asset at June 30, 2013 consists of net operating loss carry forwards calculated using federal and state effective tax rates equating to approximately $16,224,000 less a valuation allowance in the amount of approximately $16,224,000. Because of the Company’s lack of earnings history, the deferred tax asset has been fully offset by a valuation allowance. The valuation allowance increased by approximately $164,000 and $200,000 for the six months ended June 30, 2013 and 2012, respectively.

 

The Company’s total deferred tax asset as of June 30, 2013 is as follows:

 

Net operating loss carry forwards   $ 16,224,000  
Valuation allowance     (16,224,000)  
         
Net deferred tax asset   $  

 

 

The reconciliation of income taxes computed at the federal and state statutory income tax rate to total income taxes for the three months ended June 30, 2013 and 2012 is as follows:

 

Income tax computed at the federal statutory rate 34%
Income tax computed at the state statutory rate 5%
Valuation allowance (39%)
Total deferred tax asset 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  $0.076 per share, all of which vested on August 30, 2012; a death benefit of at least $2 million dollars; and a payment equal to 2.99 times his base amount (as defined in the agreement) in the event of a Change of Control (as defined in the agreement).  The agreement also provides that Mr. Kidrin can be terminated for cause (as defined in the agreement) and that he is subject to restrictive covenants for 12 months after termination.  

 

The Company is committed to a consulting agreement with an unrelated business consultant. The contract is dated January 1, 2012, calls for monthly payments in the amounts of $5,000 for the 24 month term of the contract and expires on December 31, 2013.

 

(10)

 

 

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 June 30, 2013 is $256,995.  

 

NOTE 9 - PATENTS

Worlds Inc. currently has seven patents, 6,219,045 - 7,181,690 - 7,493,558 – 7,945,856, - 8,082,501, 8,145,998 and 8,161,383. On March 30, 2012, the Company filed a patent infringement lawsuit against Activision Bizzard Inc., Blizzard Entertainment Inc. and Activision Publishing Inc. in the United States District Court for the District of Massachusetts. Susman Godfrey LLP is lead counsel for the Company. The costs to prosecute those parties that the Company and our legal counsel believe to be infringing on said patents were capitalized under patents until a resolution is reached.

There can be no assurance that the Company will be successful in its ability to prosecute its IP portfolio or that we will be able to acquire additional patents.

NOTE 10 – DERIVATIVE LIABILITIES

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.

 

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. Accordingly, the Notes are 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 Notes. Such discount will be accreted from the grant date to the maturity date of the Notes. 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 Notes resulted in an initial debt discount of $2,400,000 and an initial loss on the valuation of derivative liabilities of $512,637 based on the initial fair value of the derivative liability of $2,912,637. 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 $2,912,637 3.0 $0.326 $0.465 238% 0.0038

 

At June 30, 2013, the Company revalued the embedded derivative liability. For the period from the grant date to June 30, 2013, the Company decreased the derivative liability of $2,912,637 by $963,167 resulting in a derivative liability of $1,949,470 at June 30, 2013.

 

The fair value of the embedded derivative liability was calculated at June 30, 2013 utilizing the following assumptions:

  

 

Fair Value

 

Term

(Years)

Assumed Conversion

Price

 

Volatility Percentage

 

Risk-free

Rate

$1,949,470   2.72 $0.328 247% 0.0036

 

The carrying value of the Notes was $1,949,470 as of June 30, 2013. The Company recorded interest expense related to this note of $90,533 and amortization of the debt discount in the amount of $221,370 during the period ended June 30, 2013.

 

 

NOTE 11 - SUBSEQUENT EVENT

 

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)

 

(11)

 

 

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.

 

We classify our expenses into two broad groups:

 

O   cost of revenues; and

 

O   selling, general and administration.

  

 

Liquidity and Capital Resources

 

We have had to limit our operations since mid 2001 due to a lack of liquidity.  However, we were able to issue equity and convertible debt in the last few years and raise small amounts of capital from time to time that enabled us to begin upgrading our technology, develop new products and actively solicit additional business.  We continue to pursue additional sources of capital though we have no current arrangements with respect to, or sources of, additional financing at this time and there can be no assurance that any such financing will become available. If we cannot raise additional capital, form an alliance of some nature with another entity, or start to generate sufficient revenues, we may need to once again scale back operations.

 

RESULTS OF OPERATIONS

 

Our net revenues for each of the three months ended June 30, 2013 and 2012 were $0 and $0, respectively. Our net revenue for each of the six months ended June 30, 2013 and 2012 were $0 and $0, respectively. The Company’s sources of revenue after the spin off is 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.

 

(12)

 

 

Three and six months ended June 30, 2013 compared to three and six months ended June 30, 2012

 

Revenue is $0 for the three months ended June 30, 2013 and 2012. 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 June 30, 2013 and 2012.

 

Selling general and administrative (S, G & A) expenses increased by $7,768 or 7% from $108,377 to $116,145 for the three months ended June 30, 2012 and 2013, respectively. Common stock issued for services rendered increased by $143,252 to $170,253 for three months June 30, 2013 compared to $27,001 for the same period in 2012. The increase is due to the Company signing strategic business consulting, marketing and advice agreements during 2013. Salaries and related decreased by $15,314 to $65,212 from $80,526 for the three months ended June 30, 2013 and 2012, respectively.

 

For the three months ended June 30, 2013, the Company had a gain on change in fair value of derivative liability of $396,151 and interest expense of $284,385, both related to the issuance of the senior secured convertible notes that are required to be recorded as a derivative liability.

 

As a result of the foregoing, we realized a net loss of $238,414 for the three months ended June 30, 2013 compared to a loss of $215,904 in the three months ended June 30, 2012, an increased loss of $22,510.

 

Revenue was $0 and $0 for the six months ended June 30, 2013 and 2012. 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 six months ended June 30, 2013 and 2012.

 

Selling general and administrative expenses increased by $206,544, from $158,537 to $365,081 for the six months ended June 30, 2012 and 2013, respectively. Increase is due to an increase in the overall level of activity surrounding the lawsuit as compared to last year with an increase in professional service fees and consultants and with the activity around closing the strategic financing agreement.

 

Common stock issued for services rendered effectively stayed the same, decreased by $1,520 to $232,516 in 2013 compared to $234,036 for 2012. Salaries and related decreased by $16,603 to $112,238 from $128,841 for the six months ended June 30, 2013 and 2012, respectively. For 2013, the CEO is working under an employment agreement where as last year the CEO’s salary was allocated between the Company and Worlds Online based upon a time allocation.

 

For the six months ended June 30, 2013, the Company had a gain on change in fair value of derivative liability of $450,530 and interest expense of $311,903, both related to the issuance of the senior secured convertible notes that are required to be recorded as a derivative liability.

 

As a result of the foregoing we had a net loss of $569,779 for the six months ended June 30, 2013 compared to a loss of $521,414 in the six months ended June 30, 2012.

 

Liquidity and Capital Resources

 

Our financial and liquidity position has improved substantially from the prior year period due primarily to the issuance of the convertible notes payable entered into on March 20, 2013. Our cash and cash equivalents were $106,901 and our restricted cash and cash equivalents were $1,951,430 at June 30, 2013. We raised an aggregate of $2,300,000 from issuing the convertible notes payable; 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 in the six months ended June 30, 2013.  

 

During the six months ended June 30, 2012 we raised an aggregate of $250,000 from a private placement of common stock.  

 

There were no capital expenditures in the six months ended June 30, 2013 or in the six months ended June 30, 2012.

 

Historically, our primary cash requirements have been to fund the cost of operations, to keep the Company in compliance with its reporting requirements, 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.

 

We have had to severely diminish our operations due to a lack of liquidity from mid-2001 through most of 2007. We were able to find a small source of additional capital in each of 2007 - 2010. There can be no assurance that any significant financing would become available to us at this time. The additional capital that we secured in previous years enabled us to bid on new business. There can be no assurance that any such new business would be sold in the future.

 

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

 

Item 4. Controls And Procedures

As of June 30, 2013, 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 our disclosure controls and procedures were effective as of June 30, 2012. 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.

 

 

(13)

  

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.

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   Certification of Chief Executive Officer
     
31.2   Certification of Chief Financial Officer
     
32.1   Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
     
 101.INS* XBRL    Instance Document
     
 101.SCH*XBRL    Taxonomy Extension Schema
     
 101.CAL*XBRL    Taxonomy Extension Calculation Linkbase
     
 101.DEF* XBRL    Taxonomy Extension Definition Linkbase
     
 101.LAB*XBRL    Taxonomy Extension Label Linkbase
     
 101.PRE* XBRL    Taxonomy Extension Presentation Linkbase

 

(14)

 

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: August 13, 2013

WORLDS INC.

By: /s/ Thomas Kidrin
Thomas Kidrin
President and CEO


By: /s/ Christopher Ryan
Christopher Ryan
Chief Financial Officer
 

 

(15)

  

INDEX TO EXHIBITS

 

Exhibit No.   Description
     
31.1   Certification of Chief Executive Officer.
     
31.2   Certification of Chief Financial Officer.
     
32.1   Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
     
 101.INS* XBRL    Instance Document
     
 101.SCH* XBRL    Taxonomy Extension Schema
     
 101.CAL* XBRL    Taxonomy Extension Calculation Linkbase
     
 101.DEF* XBRL    Taxonomy Extension Definition Linkbase
     
 101.LAB* XBRL    Taxonomy Extension Label Linkbase
     
 101.PRE* XBRL    Taxonomy Extension Presentation Linkbase