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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

  

(Mark One)

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

 

 

For the fiscal year ended December 31, 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)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class  

Name Of Each Exchange

On Which Registered

     
None   Not Applicable

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $.001 par value

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  £    No  S

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes  £    No  S

 

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  S    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 S No £

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £

 

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       S Smaller reporting company

 

(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 Act.):    Yes  £   No  S

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked closing price of such common equity, as of June 28, 2013 (closing price was $0.33) was approximately $27,427,083.

As of March 14, 2014, 93,209,823 shares of the Issuer's Common Stock were outstanding.

 

(1)

 

TABLE OF CONTENTS

 

  Part I Page #  
Item 1  Business 4  
Item 1A  Risk Factors 6  
Item 1B  Unresolved Staff Comments N/A  
Item 2  Properties 8  
Item 3  Legal Proceedings 8  
Item 4  Mine Safety Disclosures N/A  
       
  Part II    
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 9  
Item 6 Selected Financial Data    
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 10  
Item 7A Quantitative and Qualitative Disclosures About Market Risk N/A  
Item 8 Financial Statements 12  
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 26  
Item 9A Controls and Procedures 26  
Item 9B Other Information 26  
       
  Part III    
Item 10 Directors, Executive Officers and Corporate Governance 27  
Item 11 Executive Compensation 29  
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 31  
Item 13 Certain Relationships and Related Transactions, and Director Independence 31  
Item 14 Principal Accountant Fees and Services 31  
Item 15 Exhibits 32  

 

(2)

 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

 

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve risks and uncertainties and our actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "believe," and similar language, including those set forth in the discussion under "Description of Business," "Risk Factors" and "Management's Discussion and Analysis or Plan of Operation" as well as those discussed elsewhere in this Form 10-K. We base our forward-looking statements on information currently available to us, and we believe that the assumption and expectations reflected in such forward-looking statements are reasonable, and we assume no obligation to update them. Statements contained in this Form 10-K that are not historical facts are forward-looking statements that are subject to the "safe harbor" created by the Private Securities Litigation Reform Act of 1995.

 

(3)

 

 

PART I

 

ITEM 1. BUSINESS.

 

General

 

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.

 

Before the spin-off, Worlds was a leading 3D entertainment portal which leveraged its proprietary technology, which we retained through our patent portfolio, to offer visitors a network of virtual, multi-user environments which we call "worlds". These worlds are visually engaging online environments featuring animation, motion and content where people can come together and, by navigating through the website, shop, interact with others, attend events and be entertained. In support of this portal and the overall business strategy, we design and develop software, content and related technology for the creation of interactive, three-dimensional ("3D") Internet web sites. Using our technology, we created our own Internet sites, as well as sites available through third-party online service providers.

 

Sites using our technology allow numerous, simultaneous visitors to enter, navigate and share interactive "worlds". Our 3D Internet sites are designed to promote frequent, repeat and prolonged visitation by users by providing them with unique online communities featuring dynamic graphics, highly useful and entertaining information content, and interactive capabilities. We believe that sites are highly attractive to advertisers because they offer access to demographic-specific user bases comprised of people that visit the site frequently and stay for relatively long periods of time.

 

Recent developments

 

On October 6 through October 27, 2013 we issued four Promissory Notes totaling $175,000. 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 is payable upon the earlier of (a) 24 months from the date of the promissory notes 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 notes 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 holders shall receive a preferred return (i) in an amount equal to up to 200% of the initial face amount of the notes out of available cash by sharing with all other investors in this series of notes in the allocation of 50% of the available cash received by the Company from $2M - $4M and (ii) in an amount equal to up to 100% of the initial face amount of the notes 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.

On January 10, 2014, Mr. Edward J. Gildea joined our Board of Directors.

On March 31, 2011, it was announced that our board had determined it would be in the best interest of our shareholders to transfer all of our online and operational technologies to our subsidiary, Worlds Online Inc. The assets were transfered as of May 16, 2011 and included: Worlds’ technology platform, Worlds Ultimate Chat, Aerosmith World, DMC Worlds, Cinema Virtual, Pearson contracts and related revenue, URLs: Worlds.com, Cybersexworld.com, Hang.com, and Worldsfunds.com, a digital inventory of over 10,000 3D objects, animation sequences, an extensive avatar library, texture maps and virtual world architectures.

Worlds Inc. has retained all of its related Intellectual Property (IP) consisting of the nine existing patents, 6,219,045; 7,181,690; 7,493,558; 7,945,856; 8,082,501; 8,145,998; 8,161,385, 8,407,592 and 8,640,028 and all continuance claims currently before the USPTO including any to be filed going forward.

We intend to endeavor to prosecute our issued patents and any future issued patents against all parties that the company and our legal counsel believe to be infringing on said patents.

 

Enforcement actions are subject to the analysis of all relevant prior art and the costs associated with litigation.

 

We may also seek to acquire additional patents we believe will enhance our portfolio position in the markets within which our existing patents cover.

 

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

 

As of December 31, 2013, we own an approximately 19% equity interest in Worlds Online.

On February 7, 2011 we changed our domicile from New Jersey to Delaware, changed our name to Worlds Inc., increased our authorized common stock to 100 million shares and added 5 million shares of “blank check” preferred stock.

We used our proprietary technology to produce three-dimensional portals and web sites. We believe that our core technology delivers a considerably faster frame rate for user experiences and, in some cases, a meaningful productivity increase in art production and integration over its previous generation production tools. Our technology permits the development of virtual worlds which have broad applications. These applications include but are not limited to:

 

o a virtual meeting place (such as a fan club);

 

o a 3D e-commerce store (where merchandise can be viewed in 3D and purchased online); and

 

o a virtual classroom (where content can be viewed via video streaming and then discussed in real time).

 

Our core technology has substantial elements written in Sun Microsystem's programming language, Java, including WorldsBrowser and WorldsShaper, so we expect that it can be made portable across Windows and UNIX Platforms because of Java's platform independence.

 

Our core technology includes:

 

o   WorldsShaper: WorldsShaper is the visual authoring component of our platform. It allows for quick assembly of pieces to create multi-user, shared state, virtual worlds. The WorldsShaper is an advanced compositing 3D building tool that integrates pre-existing or custom content, such as 3D models, textures or images created in Adobe's Photoshop, or midi or wave sound files, with architectural geometry and interactive behaviors and actions written in Java. The architectural building blocks for creating 3D worlds, the flexibility and power of integrating professional modeling and imaging tools, and the extensibility via Java make the WorldsShaper a tool well-suited for rapid creation of 3D environments.

 

o   WorldsServer: WorldsServer is the scalable software that we use to control and operate our on-line virtual communities. WorldsServer manages the registration and authentication of users, the locations of users within the 3D environment, the physical structure of the 3D environment, all information regarding objects that are "shared" by the participants and any of the interactions between the users such as text chat. This platform also integrates an HTTP server for the delivery of other content such as audio and video streaming and secure e-commerce applications.

 

o   WorldsBrowser: WorldsBrowser is used to access the 3D environments. The browser is optimized for speed, delivering relatively fast frame rates per second in highly textured virtual 3D worlds.

 

o   WorldsPlayer™: The WorldsPlayer allows users to view and experience our multi-user, interactive technology. Any world created with the WorldsShaper will be viewable and navigable with the WorldsPlayer. The WorldsPlayer has a high frame rate for fast, quality graphics, an easy-to-use graphic user interface, 2D web browser integration, automatic upgrade capability over the internet and a complete communication tool set including text chat, voice-to-voice chat, e-mail and animation.

 

o   Worlds Gamma Libraries: The Worlds Gamma Libraries are composed of sample worlds, textures, models, avatars, actions, sensors, sounds, motion sequences, and other behaviors.

 

 

(4)

 

Our Strategy

 

Worlds Inc. will be focused solely on expanding our patent portfolio and to enforce our rights where it believes parties are infringing on its IP portfolio.

 

We have contracted to Worlds Online Inc. a perpetual world-wide license to our patented technology. Pursuant to the license, Worlds Online has the right to issue unlimited sublicenses to the licensed technology, subject to our reasonable consent. The sublicenses are subject to a revenue share negotiated between the two Companies.

Competition

 

Since all operations were transferred to Worlds Online and our business is now the expansion of our patented technology, the Company does not have any direct competition as it did in the past. However, inasmuch as we believe that multi-user, interactive 3D is becoming a “hot” area, we expect other companies, many with far more resources than us, to move into this space.

 

Currently, there are many companies collaborating to establish standardization of 3D usage on the Internet, the adoption of which may require changes to our technology.

  

Intellectual Property

 

U.S. Patents: Worlds has been granted U.S patent 6,219,045, 7,181,690, 7,493,558, 7,945,856, 8,082,501, 8,145,998, 8,161,385, 8,407,592 and 8,640,028 for multi-server technology for 3D applications, which is our core technology.  We are now looking into the implications and breadth of the patent in order to maximize its benefits.  The description of the initial patent is as follows:

 

"The present invention provides a highly scalable architecture for a three dimensional, multi-user, interactive virtual world system.  In a preferred embodiment a plurality of users interact in the three-dimensional, computer-generated graphical space where each user executes a client process to view a virtual world from the perspective of that user.  The virtual world shows Avatars representing the other users who are neighbors of the user viewing the virtual world.  In order that the view can be updated to reflect the motion of the remote user's Avatar, motion information is transmitted to a central server process that provides position updates to client processes for neighbors of the user at that client process.  The client process also uses an environment database to determine which background objects to render as well as to limit the number of displayable Avatars to a maximum number of Avatars displayable by that client."

 

Trademark: Worldsplayer - The WorldsPlayer is especially designed to allow users to view and experience the multi-user, interactive Worlds Gamma technology. Any world created with the WorldsShaper will be viewable and navigable with WorldsPlayer.  Utilizing the WorldsPlayer, a user assumes a persona (via a digital actor, or Avatars), and can then move, view, chat, play, express one's self via gestures and animations, voice chat, send email, join discussion groups, listen to music, shop at Worlds 3D stores, and watch videos, all in the company of users from around the world, within the 3D environment.  The WorldsPlayer boasts high frame rate for fast, high quality graphics, an easy to use graphic user interface, seamless 2D Web browser integration, auto-upgrade capability over the Internet, and a complete communication tool set including chat, voice-to-voice chat, email and animation. The WorldsPlayer offers users the unique and creative experience of customizing their Avatars, while maintaining the ability to animate and activate their Avatars.

 

In addition to our patents and trademark, we intend to enter into confidentiality agreements with key employees and consultants to protect our IP and general know-how.

 

Employees

 

As of December 31, 2013, we had one employee, our president, Thomas Kidrin, who divided his time between us and Worlds Online.

 

Corporate History

 

We were formed as a result of the contemporaneous mergers on December 3, 1997 of Worlds Inc., a Delaware corporation formed on April 26, 1994 with and into Worlds Acquisition Corp., a Delaware corporation formed on April 8, 1997 and of Worlds Acquisition Corp. with and into Academic Computer Systems, Inc., a New Jersey corporation formed on May 20, 1968 (the "Mergers"). Academic Computer Systems changed its name to Worlds Inc. after the Mergers. In December 1999, we changed our name from Worlds Inc. to Worlds.com Inc. in order to better reflect our business as a consumer Internet web site that offers virtual "worlds" in which consumers interact, conduct e-commerce and receive entertainment.

 

The Company created a wholly-owned subsidiary named Worlds Online Inc. on January 25, 2011. On May 16, 2011, Worlds Inc. transferred to Worlds Online Inc. the majority of its operations and related operational assets, except for its patent portfolio.

 

(5)

 

 

ITEM 1A. RISK FACTORS

 

Our business is subject to numerous risks, including but not limited to those set forth below. Our operations and performance could also be subject to risks that do not exist as of the date of this report but emerge thereafter as well as risks that we do not currently deem material.

 

Risks related to our operations

 

Our auditors have expressed doubt about our ability to continue as a going concern. If we do not generate substantial revenue from our patent litigation and are also unable to obtain capital from other resources, we will significantly curtail our operations or halt them entirely. 

Our capital requirements have been and will continue to be significant. Historically, we have been dependent on financings to fund our development and working capital needs. As of December 31, 2013, we had only limited cash or cash equivalents. Accordingly, if we do not develop sources of revenues from our patent portfolio, we would have to severely diminish our operations or halt them entirely. The opinion of our auditors contains an explanatory paragraph regarding our ability to continue as a going concern. 

We have experienced relatively large losses during our development and, without significant increases in the market penetration of our services and improvements to our operating margins, we will not achieve profitability. 

Since inception we have incurred significant net losses as set forth in the financial information included herein. We anticipate that we will continue to incur significant losses for at least the short-term. We will not achieve profitable operations until we successfully developed sources of revenues from our patent portfolio or generate revenues from other sources that are sufficient to offset our operating costs. We may never be able to accomplish these objectives. 

It will be difficult for you to evaluate us based on our past performance because we have a relatively new business strategy with a limited operating history. 

We have been actively engaged in the business of being an IP company for a relatively short period of time and, accordingly, have only limited financial results on which you can evaluate our company and its new operations. We are subject to, and have not been successful in addressing, the risks typically encountered by new enterprises and companies operating in the rapidly evolving Internet marketplace, including those risks relating to:

 

 • the failure to develop brand name recognition and reputation;

•  the failure to achieve market acceptance of our services; and 

• an inability to grow and adapt our business and technology to evolving consumer demand. 

 

Our limited resources may restrict our ability to manage any growth we may experience.

Growth of our business may place a significant strain on our management systems and resources and may require us to implement new operating and financial systems, procedures and controls. Our failure to manage our growth and expansion could adversely affect our business, results of operations and financial condition. Failure to implement new systems effectively or within a reasonable period of time could adversely affect our business, results of operations and financial condition.

If we are unable to protect our intellectual property rights, competitors may be able to use our technology or trademarks, which could weaken our competitive position.

In addition to our patents, we rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also intend to enter into confidentiality or license agreements with our employees, consultants and customers, and control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. 

We cannot guarantee that the patents issued to us will be broad enough to provide any meaningful protection nor can we assure you that one of our competitors may not develop more effective technologies, designs or methods without infringing our intellectual property rights or that one of our competitors might not design around our proprietary technologies.

If we are not able to protect our proprietary technology, trade secrets and know-how, our competitors may use our inventions to develop competing products. We own certain patents relating to the multi-user 3D technology. However, these patents may not protect us against our competitors, and patent litigation is very expensive. We may not have sufficient cash available to pursue any patent litigation to its conclusion because currently we do not generate revenues.

We cannot rely solely on our current patents to be successful. The standards that the U.S. Patent and Trademark Office and foreign patent office's use to grant patents, and the standards that U.S. and foreign courts use to interpret patents, are not the same and are not always applied predictably or uniformly and can change, particularly as new technologies develop. As such, the degree of patent protection obtained in the U.S. may differ substantially from that obtained in various foreign countries. In some instances, patents have been issued in the U.S. while substantially less or no protection has been obtained in Europe or other countries.

We cannot be certain of the level of protection, if any that will be provided by our patents if we attempt to enforce them and they are challenged in court where our competitors may raise defenses such as invalidity, unenforceability or possession of a valid license. In addition, the type and extent of any patent claims that may be issued to us in the future are uncertain. Any patents which are issued may not contain claims that will permit us to stop competitors from using similar technology.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

Third parties have, and others may, challenge the validity of our patents and other intellectual property rights, resulting in costly litigation or other time-consuming and expensive proceedings, which could deprive us of valuable rights. If we become involved in any intellectual property litigation, interference or other judicial or administrative proceedings, we may incur substantial expenses and the diversion of financial resources and technical and management personnel. An adverse determination may subject us to significant liabilities or require us to seek licenses that may not be available from third parties on commercially favorable terms, if at all. Further, if such claims are proven valid, through litigation or otherwise, we may be required to pay substantial financial damages, which can be tripled if the infringement is deemed willful, or be required to discontinue or significantly delay development, marketing, selling and licensing of the affected products and intellectual property rights.

Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. There may be third-party patents, patent applications and other intellectual property relevant to our potential products that may block or compete with our products or processes. If another party has filed a United States patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the United States Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such inventions. In addition, we cannot assure you that we would prevail in any of these suits or that the damages or other remedies if any, awarded against us would not be substantial. Claims of intellectual property infringement may require us to enter into royalty or license agreements with third parties that may not be available on acceptable terms, if at all. We may also become subject to injunctions against the further development and use of our technology, which would have a material adverse effect on our business, financial condition and results of operations.

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

If we lose any of our key personnel or fail to hire and retain other talented employees, our operations could be harmed. 

Our success is currently dependent, in large part, on the personal efforts of Thomas Kidrin, our president and chief executive officer.  The loss of Mr. Kidrin's services could have a material adverse effect on our business and prospects. Our success is also dependent upon our ability to hire and retain additional qualified management, marketing, technical, financial, and other personnel, if and when our business grows. Competition for qualified personnel is intense and we may not be able to hire or retain additional qualified personnel. Any inability to attract and retain qualified management and other personnel would have a material adverse effect on our ability to grow our business and operations. 

We may not be able to economically comply with any new government regulation that may be adopted with respect to the Internet. 

New Internet legislation or regulation, or the application of existing laws and regulations to the Internet and e-commerce could add additional costs and risks to doing business on the Internet. We are subject to regulations applicable to businesses generally and laws or regulations directly applicable to communications over the Internet and access to e-commerce. Although there are currently few laws and regulations directly applicable to e-commerce, it is possible that a number of laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust, taxation and characteristics and quality of products and services. 

(6)

 

Risks related to our common stock

 

Possible issuances of our capital stock would cause dilution to our existing shareholders.

While we currently have approximately 93,209,823 shares of common stock outstanding, we are authorized to issue up to 150,000,000 shares of common stock. Therefore, we will be able to issue a substantial number of additional shares without obtaining shareholder approval. In the event we elect to issue additional shares of common stock in connection with any financing, acquisition or otherwise, current shareholders could find their holdings substantially diluted, which means they will own a smaller percentage of our company. There are also 5 million shares of preferred stock that the board can issue under any terms it wants and without any shareholder approval. 

Certain shareholders control a substantial portion of our outstanding common stock. 

Our chief executive officer owns a significant portion of the outstanding shares of our common stock and Mr. Kidrin may be issued an additional 7.5 million shares of our common stock upon the exercise of outstanding stock options. Accordingly, he will be able to influence the election of our directors and thereby influence or direct our policies. 

No dividends have been paid on our common stock. 

To date, we have not paid any cash dividends on our common stock and we do not expect to declare or pay dividends on the common stock in the foreseeable future. In addition, the payment of cash dividends may be limited or prohibited by the terms of any future loan agreements. 

We are subject to "penny stock" regulations which may adversely impact the liquidity and price of our common stock. 

Our common stock is currently deemed a "penny stock." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information on penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, broker-dealers who sell such securities to persons other than established customers and accredited investors (generally, those persons with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse), the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. 

 

These requirements could reduce the level of trading activity, if any, in the secondary market for our common stock. As a result of the foregoing, our shareholders may find it more difficult to sell their shares. 

 

The exercise or conversion of outstanding options into common stock will dilute the percentage ownership of our other shareholders. The sale of such common stock or other common stock in the open market could adversely affect the market price of our common stock. 

 

As of March 15, 2014, there are outstanding options and warrants to purchase an aggregate of 13,735,714  shares of our common stock and more options and warrants will likely be granted in the future to our officers, directors, employees and consultants. We have also issued $450,000 of convertible notes, of which all are currently outstanding, that currently convert into 2,453,787 shares based upon an average market price of $0.18, which, this number of shares will fluctuate based upon market price of the common stock. The exercise of outstanding stock options and warrants and conversion of notes will dilute the percentage ownership of our other shareholders. Sales, or the expectation of sales, of a substantial number of shares of our common stock in the public market, including shares of our common stock issuable upon exercise of our stock options, could adversely affect the prevailing market price of our common stock

 

 

(7)

 

 

 

ITEM 2. DESCRIPTION OF PROPERTIES.

 

We do not own any property nor do we have any contracts or options to acquire any property in the future. Presently, we are operating out of offices in our president's residence at 11 Royal Road, Brookline, Massachusetts 02445, where we occupy approximately 800 square feet.  This space is adequate for our present and our planned future operations. We currently pay no rent to our president for use of this space, although when funds are available we may do so in the future. In addition we have no written agreement or formal arrangement with our president pertaining to the use of this space. We have no current plans to occupy other or additional office space.

 

ITEM 3. LEGAL PROCEEDINGS.

 

In early October 2013, Activision Publishing, Inc., a subsidiary of Activision Blizzard, Inc.  filed a lawsuit claiming patent infringement against Worlds Inc. and Worlds Online Inc., in the U.S. District Court for the Central District of California. Activision alleges that Worlds violates U.S. Patent No. 6,014,145 entitled “Navigation with optimum viewpoints in three-dimensional workspace interactive displays having three-dimensional objects with collision barriers” and U.S. Patent No. 5,883,628 entitled “Climability: property for objects in 3-D virtual environments.”  

 

The company believes Activision/ Blizzards' suit against Worlds is without merit and an attempt to apply pressure to Worlds due our lawsuit against them. Worlds' patent pre-dates Activision/ Blizzards' patents by more than one year. 

 

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 4. MINE SAFETY DISCLOSURES.

 

N/A 

 

(8)

 

   

PART II

 

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Our common stock began trading on the OTC Bulletin Board on October 20, 1998 under the symbol "WLDI." On February 11, 2000, in connection with the change in our name from Worlds Inc. to Worlds.com Inc., our symbol was changed to "WDDD." During 2001, our stock was no longer quoted on the OTC Bulletin Board and was quoted on the Pink Sheets, but returned to the Bulletin Board in the third quarter of 2008. The following table sets forth, for the periods indicated, the high and low bids for our common stock as reported on the OTC Bulletin Board or the Pink Sheets (representing interdealer quotations, without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions):

 

Year Ended December 31, 2012:  High  Low
       First quarter  $0.35   $0.09 
       Second quarter  $0.27   $0.11 
       Third quarter  $0.16   $0.08 
   Fourth quarter  $0.20   $0.12 

 

Year Ended December 31, 2013:  High  Low
       First quarter  $0.46   $0.19 
       Second quarter  $0.54   $0.30 
       Third quarter  $0.36   $0.18 
Third Fourth quarter  $0.22   $0.13 

 

 

Holders

 

As of December 31, 2013, we had 622 shareholders of record of our common stock.

 

Dividends

 

We have never paid a cash dividend on our common stock and do not anticipate paying any dividends in the near future.

 

Recent Sales of Unregistered Securities 

 

The Company issued an aggregate of $2,400,000 of convertible notes payable but then redeemed the Series A and B and returned $1,950,000. In the year ended December 31, 2013 the company raised $97,500 from a private placement of common stock at a price of $0.10 per share and one warrant for each two shares purchased at a price of $0.15 per share. In the year ended December 31, 2013 company raised $120,000 from the exercising of warrants for common stock and $11,000 from the exercise of options in the year ended December 31, 2013.

 

The Company raised $307,000 in November/December, 2012 through the sale in an exempt private placement of shares at a price of $0.10 per share and one warrant for each two shares purchased exercisable at a price of $0.15 per share.

 

All of these issuances were exempt from registration in as much as they were all sold to accredited investors in private offerings without the use of advertising. 

 

Company Equity Compensation Plans

 

The following table sets forth information as of December 31, 2013 with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.

 

Plan Category  

Number of securities to be

issued upon exercise of

outstanding options, warrants and rights

 

  Weighted-average exercise price of outstanding options, warrants and rights   Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by stockholders     13,735,714       $ 0.387       11,264,286  
Equity compensation plans not approved by stockholders     0       $

 

N/A

      —    
Total     13,735,714       $ 0.387       11,264,286  

 

 

 

(9)

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Forward Looking Statements

 

When used in this form 10-K and in future filings by the Company with the Commission, The words or phrases such as "anticipate," "believe," "could," "would," “should,” "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 to general economic and business conditions; changes in current pricing levels that we can charge for our services or which we pay to our suppliers and business partners; 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; foreign currency fluctuations; changes in the business prospects of our business partners and customers; increased competition, including from our business partners; 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 financial statements and related notes which are included in this report under Item 8.

 

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.

 

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 in litigation or otherwise.

Revenues

 

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 in litigation or otherwise.

Prior to the spin-off we generated only modest revenue from VIP subscriptions to the Worlds Ultimate 3-D Chat service.

 

Expenses

 

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.

 

 

(10)

 

RESULTS OF OPERATIONS

 

Our net revenues for each of the years ended December 31, 2013 and 2012 were $0.  All the operations were transferred over to Worlds Online Inc. in the spin off. The Company’s future sources of revenue after the spin off are 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 in litigation or otherwise. 

Year ended December 31, 2013 compared to year ended December 31, 2012

 

Revenue was $0 for the years ended December 31, 2013 and 2012.  All the operations were transferred over to Worlds Online Inc. in the spin off. 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 years ended December 31, 2013 and 2012.

 

Selling general and administrative (S, G & A) expenses increased by $242,057, from $355,761 to $597,818 for the year ended December 31, 2013 and 2012, respectively.  Expenses are primarily professional fees and business consulting including broker fees. Expenses increased during the year due to the financings and all the activity surrounding those financings. Salaries decreased by $55,476 to $185,382 from $240,858 for the years ended December 31, 2013 and 2012, respectively. Decrease is due to the CEO working under an employment agreement in 2013 whereby in 2012 his salary was based on an allocation of time spent between Worlds Inc. and the spin-off entity, Worlds Online Inc. Common stock issued for services rendered increased by $2,790,029 to $3,151,714 in 2013 compared to $361,685 in 2012. Increase 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.

 

Other expenses include options expense of $34,691 for the year ended December 31, 2013 compared to option expense of $705,918 for the year ended December 31, 2012.  Decrease is due to new options being issued to the CEO to replace those that expired during 2012.

 

For the year ended December 31, 2013, the Company had a gain on change in fair value of derivative liability of $386,760 and interest expense of $546,790, 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 $4,128,206 for the year ended December 31, 2013 compared to a loss of $1,664,221 in the year ended December 31, 2012, an increase in net losses of $2,463,985.

 

Liquidity and Capital Resources

 

Our cash and cash equivalents were $22,132 at December 31, 2013. We raised an aggregate of $2,300,000 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 in the year ended December 31, 2013.  

 

At December 31, 2012, we had cash and cash equivalents of $95,069.  We raised an aggregate of $307,500 in the fourth quarter of 2012 from a private placement, $210,000 of the proceeds was received in 2012 with $97,500 being received in 2013.  During the 2nd quarter of 2012 we raised an aggregate of $250,000 from a private placement. 

  

No capital expenditures were made in 2013 or 2012.

 

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 2012 and 2013 financings were and will be used to develop new products and services, 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.

 

Subsequent Events 

 

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.

 

Recent Accounting Pronouncements

 

Recently issued accounting standards

 

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.

 

 

(11)

 

 

CONTENTS
   
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 13
   
BALANCE SHEETS 14
   
STATEMENTS OF OPERATIONS 15
   
 STATEMENT OF STOCKHOLDERS’ DEFICIT 16
   
STATEMENTS OF CASH FLOWS 17
   
NOTES TO FINANCIAL STATEMENTS 18
   

 

 

(12)

 

 

 

 
 

 

 

Bongiovanni&

Associates, P.A.

 

 

FL Office

7951 SW 6th St., Suite. 216

Plantation, FL 33324

Tel: 954-424-2345

Fax: 954-424-2230

 

NC Office

19720 Jetton Road, 3rd Floor

Cornelius, NC 28031

Tel: 704-892-8733

Fax: 704-892-6487

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Worlds Inc.

 

We have audited the accompanying balance sheets of Worlds Inc. (the “Company”) as of December 31, 2013 and 2012 and related statements of operations, stockholders’ deficit, and cash flows for the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Worlds Inc. (a Delaware corporation) as of December 31, 2013 and 2012 and the results of its operations and its cash flows for two years then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has suffered recurring operating losses, has an accumulated stockholders’ deficit, has negative working capital, has had minimal revenues from operations, and has yet to generate an internal cash flow that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/ Bongiovanni & Associates, P.A./

Bongiovanni & Associates, P.A.

Certified Public Accountants

Cornelius, North Carolina

The United States of America

April 1, 2014

 

www.ba-cpa.net

 

(13)

  

 

Worlds Inc.        
Balance Sheets        
December 31, 2013 and 2012        
         
    December 31, 2013   December 31, 2012
ASSETS:                
Current Assets                
Cash and cash equivalents   $ 22,132     $ 95,069  
Due from related party     295,912       134,654  
Promissory note     3,000       —    
                 
Total Current Assets     321,044       229,724  
                 
Patents     7,000       7,000  
                 
Total assets   $ 328,044     $ 236,724  
                 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT:                
Current Liabilities                
Accounts payable   $ 797,908     $ 797,908  
Accrued expenses     1,986,726       1,953,934  
Derivative liability     429,296       —    
Notes payable     773,279       773,279  
Notes Payables     225,000       —    
Convertible notes payable, net     117,534       —    
                 
Total Current Liabilities     4,329,743       3,525,121  
                 
                 
Stockholders' (Deficit)                
                 
Common stock (Par value $0.001 authorized 100,000,000 shares, issued and outstanding 93,209,823 and 79,813,071 at December 31, 2013 and December 31, 2012, respectively)     93,210       79,813  
Common stock subscribed but not yet issued (0 and 1,500,000 at December 31, 2013 and December 31, 2012, respectively)     —         1,500  
Subscription receivable     —         (10,000 )
Additional paid in capital     30,078,730       26,580,244  
Common stock-warrants     97,869       203,237  
Deferred compensation     (12,609 )     (12,500 )
Accumulated deficit     (34,258,898 )     (30,130,692 )
Total stockholders deficit     (4,001,698 )     (3,288,398 )
                 
Total Liabilities and stockholders' deficit   $ 328,044     $ 236,723  

 

The Report of Independent Registered Public Accounting Firm and accompanying notes are an integral part of these financial statements.

 

(14)

 

 

 

Worlds Inc.        
Statements of Operations    
For the Years Ended December 30, 2013 and  2012    
     
    For the Years Ended December 31,
    2013   2012
Revenues                
Revenue     —       $ —    
                 
Total Revenue     —         —    
                 
                 
Cost and Expenses                
                 
Cost of Revenue             —    
                 
Gross Profit/(Loss)     —         —    
                 
                 
Option Expense     34,691       705,918  
Common Stock issued for services renderred     3,151,714       361,685  
Selling, General & Admin.     597,818       355,761  
Salaries and related     185,382       240,858  
                 
Operating loss     (3,969,606 )     (1,664,221 )
                 
                 
Other Income (Expense)                
Gain on change in fair value of derivative liability     386,759       —    
Interest Expense     (546,790 )     —    
Interest Income     1,430          
Net (Loss)     (4,128,206 )   $ (1,664,221 )
                 
Weighted Average Loss per share   $ (0.05 )   $ (0.02 )
Weighted Average Common Shares Outstanding     87,029,777       76,792,137  

 

 

The Report of Independent Registered Public Accounting Firm and accompanying notes are an integral part of these financial statements.

 

 

(15)

 

 

 

Worlds Inc.        
Statements of Cash Flows        
Years Ended December 31, 2013 and 2012        
    For the Years Ended December 31,
    2013   2012
Cash flows from operating activities:                
Net (loss)   $ (4,128,206 )   $ (1,664,221 )
Adjustments to reconcile net loss to net cash (used in) operating activities                
Fair value of stock options issued     34,691       705,918  
Common stock issued for services renderred     3,151,714       361,684  
Amortization of discount to note payable     308,588       —    
Changes in fair value of derivative liabilities     (386,759 )     —    
Prepaid expense     —         82,633  
Accounts payable and accrued expenses     82,792       86,864  
Promisoory note     (3,000 )        
Due from related party     (161,258 )     (90,835 )
Net cash (used in) operating activities:     (1,101,438 )     (517,957 )
                 
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       460,000  
Proceeds from exercise of options     11,000       7,500  
Proceeds from exercise of warrants     120,000          
Proceeds from notes payable     175,000          
Proceeds from issuance of convertible note payable     2,400,000       —    
Redemption of convertible notes payable     (1,950,000 )        
Proceeds from issuance of note payable     175,000          
Net cash provided by financing activities     1,028,500       467,500  
                 
Net increase/(decrease) in cash and cash equivalents     (72,938 )     (57,457 )
                 
Cash and cash equivalents, including restricted, beginning of year     95,069       152,526  
                 
Cash and cash equivalents, including restricted, end of period   $ 22,132     $ 95,069  
                 
Non-cash financing activities                
Payment of expenses through issuance of note payable   $ 50,000     $ —    
                 
Supplemental disclosure of cash flow information:                
Cash paid during the year for:                
Interest   $ —       $ —    
Income taxes   $ —       $ —    

 

 

The Report of Independent Registered Public Accounting Firm and accompanying notes are an integral part of these financial statements.

 

(16)

 

 

 

Worlds Inc.                                  
Statement of Stockholders' Deficit                            
For the Years Ended December 31, 2013 and 2012                  
                                                                                 
      Common stock Shares       Common stock Amount       Additional Paid-in capital       Common stock Warrants       Subscription Receivable       Common Shares  Subscribed but not  Issued       Common Stock Subscribed but not  Issued       Deferred compensation       Accumulated Deficit       Total stockholders' equity (deficit)  
                                                                                 
Balances, December 31, 2011     74,862,146     $ 74,862     $ 25,231,804     $ —       $ —         525,000     $ 525     $ —       $ (28,466,471 )   $ (3,159,281 )
Issuance of common stock for services rendered     3,100,925       3,101       371,609       —         —         (525,000 )     (525 )     (12,500 )     —         361,684  
Issuance of common stock for cash investment     1,700,000       1,700       466,800       —         (10,000 )     1,500,000       1,500       —         —         460,000  
Issuance of stock options     —         —         705,918       —         —         —         —         —         —         705,918  
Exercise of stock options     150,000       150       7,350       —         —         —         —         —         —         7,500  
Warrants issued with PPM     —                 (203,237 )     203,237       —         —         —         —         —         —    
Net Loss for the year ended December 31, 2012     —         —         —         —         —         —         —         —         (1,664,221 )     (1,664,221 )
Balances, December 31, 2012     79,813,071       79,813       26,580,244       203,237       (10,000 )     1,500,000       1,500       (12,500 )     (30,130,692 )     (3,288,397 )
Issuance of common stock for services rendered     9,482,146       9,482       3,142,341       —         —         —         —         (109 )     —         3,151,714  
Issuance of common stock for cash investment     2,375,000       2,375       86,625       —         10,000       (1,500,000 )     (1,500 )     —         —         97,500  
Issuance of stock options     —         —         34,691       —         —         —         —         —         —         34,691  
Exercise of stock options     100,000       100       10,900       —         —         —         —         —         —         11,000  
Cashless exercise of sock options     639,606       640       (640 )     —         —         —         —         —         —         —    
Exercise of warrants     800,000       800       224,568       (105,368 )     —         —         —        —         —         120,000  
Warrants issued with PPM     —         —         —         —         —         —         —         —         —         —    
Net Loss for the year ended December 31, 2013     —         —         —         —         —         —         —         —         (4,128,206 )     (4,128,206 )
Balances, December 31, 2013     93,209,823     $ 93,210     $ 30,078,730     $ 97,869     $ —       $ —       $ —       $ (12,609 )   $ (34,258,898 )   $ (4,001,698 )

 

 

 

 

The Report of Independent Registered Public Accounting Firm and accompanying notes are an integral part of these financial statements.

 

(17)

  

Worlds Inc.

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2013 and 2012

 

 

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. 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, licensing revenue or from the sale of certain software to third parties; and (2) VIP subscriptions to our Worlds Ultimate 3-D Chat service. 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.

 

(18)

 

 

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 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 Accounting Standards Codification for disclosure about Stock-Based Compensation. This section requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award- the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service.

 

Income Taxes

 

The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

Notes Payable

 

The Company has $773,279 in short term notes outstanding at December 31, 2013 and 2012. The company has $225,000 in notes outstanding at December 31, 2013 and $0 at December 31, 2012.

 

(19)

 

 

Comprehensive Income (Loss)

 

The Company reports comprehensive income and its components following guidance set forth by section 220-10 of the FASB Accounting Standards Codification which establishes standards for the reporting and display of comprehensive income and its components in the financial statements. There were no items of comprehensive income (loss) applicable to the Company during the period covered in the financial statements.

 

 

Loss Per Share

 

Net loss per common share is computed pursuant to section 260-10-45 of the FASB ASC. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. As of December 31, 2013, 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 December 31, 2013. The options and warrants may dilute future earnings per share.

 

Commitments and Contingencies

 

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time that these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows. 

 

During 2000 the Company was involved in a lawsuit relating to unpaid consulting services. In April, 2001 a judgment against the Company was rendered for approximately $205,000. As of December 31, 2013, and 2012 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 years ended December 31, 2013 or 2012.

 

Subsequent Events

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 6219045 and 7181790 patents to include comprehensive priority information, which specifically references Worlds November 1995 provisional patent application and confirms Worlds 1995 priority date.

 

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.

 

(20)

 

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 year ended December 31, 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 year ended December 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 year ended December 31, 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 year ended December 31, 2013, 100,000 stock options were exercised at a price of $0.11 per share for cash proceeds of $11,000.

 

During the year ended December 31, 2013, the Company issued an aggregate of 9,482,146 shares of common stock as payment for services rendered with an aggregate value of $3,151,714, of which $12,609 was recorded as deferred compensation as of December 31, 2013.

  

During the year ended December 31, 2012, the Company sold 3,200,000 common shares for a cash investment of $307,000. $10,000 from the 4th quarter financing was not received until 2013 and 1,500,000 shares were subscribed but not yet issued at December 31, 2012.

 

During the year ended December 31, 2012, the Company issued an aggregate of 2,575,925 shares of common stock as payment for services rendered with an aggregate value of $374,184, $12,500 of which was deferred and performed in the first quarter in 2013. The Company also issued an aggregate of 525,000 shares of common stock for services rendered in prior years.

 

During the year ended December 31, 2012, the Company raised $7,500 with the exercise of options covering 150,000 shares of its common stock at a price of $0.05 per share.

  

(21)

 

 

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. 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 December 31, 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   $ 225,000  
2015   $ -0-  
2016   $ -0-  
2017   $ -0-  
    $ 998,279  

 

We 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. 

   

(22)

 

 

NOTE 5 – STOCK OPTIONS

 

During the year ended December 31, 2013, the Company issued 4,535,714 warrants as part of the offering of the senior secured convertible notes. The Company issued 100,000 options to each of the Company’s directors, Bernard Stolar and Robert Fireman. The stock options allow each director to purchase 100,000 shares of the Company’s common stock at $0.19 per share per each individual option. The options expire on December 31, 2017. The Company did not grant any registration rights with respect to any shares of common stock issuable upon exercise of the options.

 

During the year ended December 31, 2013, 800,000 warrants were exercised for cash proceeds of $120,000. During the year ended December 31, 2013, 100,000 stock options were exercised for cash proceeds of $11,000 and 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 year ended December 31, 2012, the Company issued 8,000,000 stock options to directors and officers of the Company. 7,500,000 stock options were issued as part of the employment agreement with its President and CEO, Thom Kidrin. The stock option allows Mr. Kidrin to purchase 7,500,000 shares of the Company’s common stock at $0.076 per share per each individual option. The options were to expire on March 31, 2014. In January 2014 the options were extended for 2 years and now expire on March 31, 2016. The Company issued 300,000 stock options to Chris Ryan, the Company’s CFO. The stock option allows Mr. Ryan to purchase 300,000 shares of the Company’s common stock at $0.0115 per share per each individual option. The options expire on September 30, 2017. The Company issued 100,000 shares to each of the Company’s directors, Bernard Stolar and Robert Fireman. The stock options allow each director to purchase 100,000 shares of the Company’s common stock at $0.0115 per share per each individual option. The options expire on September 30, 2017. The Company did not grant any registration rights with respect to any shares of common stock issuable upon exercise of the options.

 

During the year ended December 31, 2013, the Company recorded an option expense of $34,691, 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 0.76% risk-free interest, 0% dividend yield, 232% volatility, and expected life of 5 years. For the year ended December 31, 2012, the Company recorded an expense of $705,918, equal to the estimated fair value of the options at the date of grants.

  

Stock Warrants and Options
Stock warrants/options outstanding and exercisable on December 31, 2013 are as follows:
     
Exercise Price per Share Shares Under Option/warrant Remaining Life in Years
                 
  Outstanding              
$ 1.00     4,535,714     4.21  
$ 0.19     200,000     4.00  
$ 0.15     737,500     1.00  
$ 0.115     300,000     3.83  
$ 0.11     150,000     1.30  
$ 0.076     7,500,000     0.25  
$                
   Exercisable              
$ 1.00     4,535,714     4.21  
$ 0.19     200,000     4.00  
$ 0.15     737,500     1.00  
$ 0.115     300,000     3.83  
$ 0.11     150,000     1.30  
$ 0.076     7,500,000     0.25  

 

 

(23)

   

NOTE 6 - INCOME TAXES

 

At December 31, 2013, the Company had federal and state net operating loss carry forwards of approximately $41,983,000 that expire in various years through the year 2033.

 

Due to operating losses, there is no provision for current federal or state income taxes for the year ended December 31, 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 December 31, 2013 consists of net operating loss carry forwards calculated using federal and state effective tax rates equating to approximately $16,373,000 less a valuation allowance in the amount of approximately $16,373,000. 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 $313,000 and $220,000 for the years ended December 31, 2013 and 2012, respectively.

 

The Company’s total deferred tax asset as of December 31, 2013 is as follows:

 

Net operating loss carry forwards   $ 16,373,000  
Valuation allowance     (16,373,000 )
         
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 years ended December 31, 2013 and 2012 is as follows:

 

 

      2013       2012  
Income tax computed at the federal statutory rate     34 %     34 %
Income tax computed at the state statutory rate     5 %     5 %
Valuation allowance     (39 %)     (39 %)
Total deferred tax asset     0 %     0 %

  

NOTE 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 expired on December 31, 2013.

 

(24)

 

 

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 December 31, 2013 is $295,912.  

 

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.

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.

 

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 $96,119 based on the initial fair value of the derivative liability of $546,119. 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   $ 546,119       3.0     $ 0.326     $ 0.465       238 %     0.0038  

 

At December 31, 2013, the Company revalued the embedded derivative liability. For the period from the grant date to December 31, 2013, the Company decreased the derivative liability of $546,119 by $116,823 resulting in a derivative liability of $429,296 at December 31, 2013.

 

The fair value of the embedded derivative liability was calculated at December 31, 2013 utilizing the following assumptions: 

 

Date   Fair Value   Term
(Years)
  Assumed Conversion Price   Market Price   Volatility Percentage   Risk-free
Rate
  12/31/13     $ 429,296       2.22     $ 0.126     $ 0.15       275 %     0.0078  

  

NOTE 11 - SUBSEQUENT EVENT

 

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.

(25)

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.  CONTROLS AND PROCEDURES.

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure.  We concluded that our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act were effective as of December 31, 2013 to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, and summarized and reported within the time periods specified in SEC rules and forms.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

 

(i)  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

(ii)  provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

(iii)  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth in Internal Control Over Financial Reporting — Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Subject to the inherent limitations described in the following paragraph, our management has concluded that our internal controls over financial reporting was effective as December 31, 2013 at the reasonable assurance level.

 

Inherent Limitations Over Internal Controls

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.  Accordingly, our internal controls and procedures are designed to provide reasonable assurance of achieving their objectives.

 

Changes in Internal Control over Financial Reporting

 

We have made no change in our internal control over financial reporting during the fourth quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Attestation Report of the Registered Public Accounting Firm

 

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report on Form 10-K.

 

ITEM 9B.  OTHER INFORMATION.

 

None.

 

(26)

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

The following table sets forth the name, age and position of our directors and executive officers. Our directors are elected annually and serve until the next annual meeting of stockholders.  Except for Mr. Kidrin, all of our directors are independent.

 

Name Age Position
Thomas Kidrin 61 President, Chief Executive Officer, Secretary, Treasurer, Director
Christopher J. Ryan 53 Vice President-Finance, Principal Accounting and Chief Financial Officer
Bernard Stolar 67 Director
Robert Fireman 65 Director
Edward Gildea 61 Director

 

 

Thomas Kidrin became a director on October 1997 and has been president, secretary and treasurer from December 1997 through July 2007 then added the title chief executive officer since August 2007. Mr. Kidrin was also president and a director of Worlds Acquisition Corp. from April 1997 to December 1997. He has been the chairman and president of Datastream Corporation, a designer and developer of interactive products and services, since 1993. From December 1991 to June 1996, Mr. Kidrin was a founder, director, and President of UC Television Network Corp., a company engaged in the design and manufacture of interactive entertainment/advertising networks in the college market under the brand name College Television Network, the largest private network on college campuses in the United States sold to MTV in 1996 now operating under MTVU. Mr. Kidrin has attended Drake University and the New School of Social Research.

 

Christopher J. Ryan has been Vice President-Finance since May 2000 and principal accounting and finance officer since August 2000. From August 1991 through April 2000, Mr. Ryan held a variety of financial management positions at Reuters America, an information services company.  From 2001 through 2003, Mr. Ryan was the founder and President of CJR Advisory Services, a personal corporation through which he provided financial consulting services to various entities.  From 2004 to 2010, Mr. Ryan was the CFO of Peminic, Inc.  From 2008 to 2012 Mr. Ryan served as the CFO of Conversive Inc. and since 2012 Mr. Ryan has been the CFO of GlobalServe Inc. Mr. Ryan is an inactive certified public accountant. He is a graduate of Montclair State University in New Jersey and received an M.B.A. degree from Fordham University.

 

 

Bernard Stolar became a director on September 11, 2007 and is noted for his expertise in both identifying and developing market-driving content and forging successful business partnerships, brings to the board over twenty years of senior-level experience within the interactive entertainment industry in all phases of company operations, including sales and marketing, product development, licensing, distribution, strategic planning and management. Mr. Stolar has served in high profile leadership roles at publicly and privately held interactive entertainment companies. Currently, Mr. Stolar is Dean of Games and Game Evangelist for Google, Inc. From February 2006 until its purchase by Google, Inc. in February 2007, Mr. Stolar was the Chairman of the Board of Adscape Media. Prior to this, he was president and chief operating office of BAM! Entertainment, where he transformed the company from a hand-held content company to a developer and marketer of interactive entertainment for next generation video game consoles. In 2000, Mr. Stolar joined Mattel, Inc. as president of Mattel Interactive, where he was responsible for directing and reorganizing the $1 billion Mattel Interactive division. From 1996 to 1999, Mr. Stolar served as president and chief operating officer of Sega of America, Inc. where he helped increase sales from $200 million to over $1 billion in three years, and orchestrated the launch of the Sega Dreamcast(TM), the fastest selling video game console in US history at that time. Mr. Stolar also served as executive vice president of Sony Computer Entertainment of America, where he was a key leader of the Sony Playstation® launch team, directing all third-party publishing in the U.S. Prior to that, Mr. Stolar served as president of Atari America's game division.

 

Robert Fireman became a director on September 11, 2007 and is is a seasoned executive in the building of technology and consumer driven companies. He brings to Worlds vast experience in the development of real time, loyalty based, stored value products and services.  Mr. Fireman was a founder and former Director and General Manager of SmartSource Direct, Inc., a subsidiary of News America Marketing (News Corp).  Mr. Fireman was responsible for the development, marketing and distribution of card-based loyalty, financial, and database products & services in retail, grocery and drug store chains encompassing over 50,000 stores throughout the U.S.  Mr. Fireman has been a practicing attorney for over 25 years and is the managing attorney of Fireman & Associates LLP.

 

Mr. Gildea became a director on January 10, 2014 and contributes expertise in areas of mergers & acquisitions, strategic planning, funding, business development and executive leadership. He has many years of experience as a board member. Mr. Gildea was the CEO, President, and Chairman of the Board Of Directors of Converted Organics Inc., a publicly held company that manufactures organic fertilizer by recycling food waste, from January 2006 until June 2013.  He was also a lawyer for, and COO of, QualityMetric Inc. (healthcare) from 2000-2005 and Grolier Incorporated (publishing) from1980-1989. He spent 10 years at the Kellogg Company (1990-2000) as their vice president of legal where he managed and supervised a legal team responsible for executing mergers, acquisitions and divestitures. He is currently a member of the board of directors of Finjan Holdings Inc. (Intellectual property security software) and WPCS International Inc. (wireless communications and Bitcoin exchange).  He received his undergraduate degree from The College of the Holy Cross and his law degree from Suffolk University.

 

 

The board of directors did not meet during 2013 but acted by written consent seven times during the year.  The board does not have any standing committees and when necessary, the entire board acts to perform such functions.

 

(27)

 

 

 

Family Relationships

 

None.

 

Legal Proceedings

 

None.

 

Audit Committee

 

We do not have a separately designated standing audit committee. Pursuant to Section 3(a)(58)(B) of the Exchange Act, the entire Board of Directors acts as an audit committee for the purpose of overseeing the accounting and financial reporting processes, and audits of our financial statements. The Commission recently adopted new regulations relating to audit committee composition and functions, including disclosure requirements relating to the presence of an "audit committee financial expert" serving on its audit committee.  We have only recently begun increasing our operations, and we are not in a position at this time to attract, retain and compensate additional directors in order to acquire a director who qualifies as an "audit committee financial expert" or to so designate one of our current directors, but we intend to either retain an additional director who will qualify as such an expert or designate one of our current directors as such an expert, as soon as reasonably practicable. Our current directors, by virtue of their past employment experience, have considerable knowledge of financial statements, finance, and accounting, and have significant employment experience involving financial oversight responsibilities. Accordingly, we believe that our current directors capably fulfill the duties and responsibilities of an audit committee in the absence of such a designated expert at this time.

 

Code of Ethics

 

We have adopted a code of ethic (the "Code of Ethics") that applies to our principal chief executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.  A copy of the Code of Ethics was filed  as Exhibit 14.1 to a previous annual report. The Code of Ethics is being designed with the intent to deter wrongdoing, and to promote the following:

 

· Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships

 

· Full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the Commission and in other public communications we make

 

· Compliance with applicable governmental laws, rules and regulations

 

· The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code

 

· Accountability for adherence to the code

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

    Under Section 16(a) of the Exchange Act, all executive officers, directors, and each person who is the beneficial owner of more than 10% of the common stock of a company that files reports pursuant to Section 12 of the Exchange Act, are required to report the ownership of such common stock, options, and stock appreciation rights (other than certain cash-only rights) and any changes in that ownership with the Commission. Specific due dates for these reports have been established, and we are required to report, in this Form 10-K, any failure to comply therewith during the fiscal year ended December 31, 2013.  Except as disclosed below, we believe that all of these filing requirements were satisfied by its executive officers, directors and by the beneficial owners of more than 10% of our common stock. In making this statement, we have relied solely on copies of any reporting forms received by us, and upon any written representations received from reporting persons that no Form 5 (Annual Statement of Changes in Beneficial Ownership) was required to be filed under applicable rules of the Commission.  Each of our directors did not timely file one Form 4.

 

 

(28)

 

ITEM 11. EXECUTIVE COMPENSATION.

 

 

The following table sets forth the compensation paid by us during the fiscal periods ending December 31, 2013, and 2012, to our chief executive officer, chief financial officer and to our other most highly compensated executive officers whose compensation exceeded $100,000 for those fiscal periods.

 

SUMMARY COMPENSATION TABLE (1)(2)
Name and principal position
(a)
   

Year

(b)

     

Salary ($)

(c)

    Bonus ($)
(d)
   

Stock Awards ($)

(e)

     

Option Awards ($)

(f)

    Securities underlying options
(g)
  All Other Compensation ($)
(i)
   

Total ($)

(j)

 
                                                     
Thomas Kidrin
President and CEO
    2013     $ 185,382 (3)                               $ 185,382 (3) 
      2012     $ 240,858                 $ 652,642             $ 893,500  
                                                     
Chris Ryan, CFO     2013                 $ 38,437                     $ 38,437  
      2012                         $ 31,966             $ 31,966  

 

  

 

 

 

(1) The above compensation does not include other personal benefits, the total value of which do not exceed $10,000.

 

(2) Pursuant to the regulations promulgated by the SEC, the table omits columns reserved for types of compensation not applicable to us.

 

(3) Mr. Kidrin has an employment agreement effective August 30, 2012 with a base annual salary of $175,000.  A portion of his compensation has been deferred due to lack of funds.

 

Stock Option Grants

 

The following table sets forth information as of December 31, 2013 concerning unexercised options, unvested stock and equity incentive plan awards for the executive officers named in the Summary Compensation Table.

 

OUTSTANDING EQUITY AWARDS AT YEAR-ENDED DECEMBER 31, 2013

 

 

 

Name   Number of Securities Underlying Unexercised Options (#) Exercisable   Number of Securities Underlying Unexercised Options (#) Unexercisable   Equity Incentive Plans Awards: Securities Underlying Unexercised Unearned Options (#)   Option Exercise Price   Option Expiration Date
                                     
Thom Kidrin     7,500,000       0       0     $ 0.076     03-31-14 (1)
                                     
Christopher Ryan     300,000       0       0     $ 0.115     09-30-17
                                     

 

(1) The option expiration date was extended two years to March 31, 2016 in January 2014.  

 

Compensation of Directors

 

On September 5, 2007, the Board of Directors adopted a compensation program for the directors whereby each director will receive compensation in the form of stock options for serving on the board. Five-year non-qualified stock options to purchase 100,000 shares of the Corporation’s common stock are to be granted annually on January 1 to each director then in office at an exercise price equal to the last reported trading price of our common stock on that day, with such option to vest in 12 months, provided the director serves for at least six months, following the date of grant.  In addition, every director upon first joining our board receives 150,000 stock options that vest immediately and are exercisable for five years at a price equal to the last reported trading price of our common stock on that day. 

 

The following table sets forth information concerning the compensation paid to each of our non-employee directors during 2013 for their services rendered as directors.

 

DIRECTOR COMPENSATION 

 

Name    

Fees Earned or Paid in Cash

($)

     

Stock

Awards ($)

     

Option

Awards ($) (1)

   

All Other

Compensation ($)

   

Total

($)

 
   Robert Fireman     0       0       17,345           17,345  
   Bernard Stolar     0       0       17,345           17,345  

 

 

(1) This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2013 fiscal year for the fair value of stock options granted to the named director in fiscal year 2013, in accordance with SFAS 123R. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. These amounts reflect our accounting expense for these awards, and do not correspond to the actual value that will be recognized from these awards by the named director.

 

(29)

 

 

 

Employment Agreements 

 

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.   

 

Stock Option Plan

 

On September 4, 2007, our board of directors adopted the 2007 Stock Option Plan which was presented to our shareholders for their approval at our next annual meeting.  The plan provides for the issuance of up to 25 million options of which not more than 22 million can be incentive stock options.  

 

Compensation Committee Interlocks and Insider Participation  

 

All of our officers and directors currently hold the same positions with our former subsidiary, Worlds Online Inc, although it is the intent that our current non-employee directors will only serve during a transition period not to exceed 12 months that transition has extended longer than initially anticipated. We do not have a compensation committee and all of our directors perform the function of a compensation committee, except that Mr. Kidrin, our president and CEO, does not participate in any deliberations with respect to his compensation and physically removes himself from the presence of the other directors while they deliberate over his compensation and bonuses. Accordingly, Mr. Kidrin, who is both our president and CEO and of Worlds Online Inc. may be deemed to fall within the parameters of a compensation committee interlock. To address this situation, as described above, Mr. Kidrin recuses himself from all deliberations of the board with respect to his compensation.

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

Name  

Number of

Securities Underlying 

Unexercised Options (#) Exercisable

 

Number of 

Securities

Underlying

Unexercised Options(#)

Unexercisable

 

Equity Incentive Plan Awards: 

Number of

Securities

Underlying

Unexercised

Unearned Options (#)

 

Option

Exercise Price

($)

 

Option

Expiration Date

Thom Kidrin     7,500,000       0       0     $ 0.076      03-31-16 (1)
 Christopher Ryan     300,000       0       0     $ 0.115      09-30-17

 

(1)  The option expiration date was extended two years from March 31, 2014 to March 31, 2016 in January 2014. 

 

(30)

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The following table sets forth as of March 15, 2014, certain information with respect to the beneficial ownership of Common Stock by (i) each Director, nominee and executive officer of us; (ii) each person who owns beneficially more than 5% of the common stock; and (iii) all Directors, nominees and executive officers as a group. The percentage of shares beneficially owned is based on there having been 93,209,823 shares of common stock outstanding as of March 14, 2014.

 

OFFICERS, DIRECTORS AND BENEFICIAL OWNERS, AS OF MARCH 15, 2014

 

Name & Address of Beneficial Owner(1) Amount & Nature of Beneficial Owner % of Class(2)
Thomas Kidrin 8,790,000(3) 8.7%
Christopher Ryan 1,050,303(4) 1.1%
Robert Fireman 564,484(5) *
Bernard Stolar 200,000(6) *
Edward Gildea 250,000(7) *
Steven Chrust 6,023,661 6.5%
All directors and executive officers as a group (one person) 10,854,787(8 ) 10.4%

 

* less than 1%

 

 

(1) Unless stated otherwise, the business address for each person named is Worlds Inc., 11 Royal Road, Brookline, MA  02445.

 

(2) Calculated pursuant to Rule 13d-3(d) (1) of the Securities Exchange Act of 1934. Under Rule 13d-3(d), shares not outstanding which are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by a person, but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. We believe that each individual or entity named has sole investment and voting power with respect to the shares of common stock indicated as beneficially owned by them (subject to community property laws where applicable) and except where otherwise noted.

 

(3) Includes 7.5 million currently exercisable stock options.

 

(4) Includes 300,000 currently exercisable stock options.

 

(5) Includes common shares and 200,000 options directly and indirectly owned. 100,000 options do not vest until January 1, 2015.

 

(6) Consists of 100,000 options which are currently exercisable and 100,000 options which do not vest until January 1, 2015.

 

(7) Consists of stock options, 150,000 of which are currently exercisable and 100,000 options which do not vest until January 1, 2015. 

 

(8) Includes 8,150,000 currently exercisable stock options.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

We are not currently subject to the requirements of any stock exchange or inter-dealer quotation system with respect to having a majority of “independent directors” although we believe that we meet that standard inasmuch as Messrs. Stolar, Fireman and Gildea are “independent” and only Mr. Kidrin, by virtue of being our president and CEO, is not independent. Although we are not currently subject to such rule, the independence of our directors meets the definition of such term as contained in NASDAQ Rule 5605(a)(2).

 

We currently own 19% of the outstanding common stock of our former wholly-owned subsidiary, Worlds Online Inc., and it has officers and directors which mirror ours, although it is the intent that our current non-employee directors will only serve during a transition period.

 

 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Fees Billed For Audit and Non-Audit Services

 

The following table represents the aggregate fees billed for professional audit services rendered to the independent auditor, Bongiovanni & Associates, P.A. (“Bongiovanni”), for our audit of the annual financial statements for the years ended December 31, 2013 and 2012. Bongiovanni was retained as our auditor in 2007. Audit fees and other fees of auditors are listed as follows:

 

Year Ended December 31   2013   2012
      Bongiovanni       Bongiovanni  
                 

 

Audit Fees (1)

  $ 26,500 (2)   $ 26,500  

 

Audit-Related Fees (3)

    15,000       15,000  

 

Tax Fees (4)

  $ 1,500     $ 1,500  

 

All Other Fees (5)

    —        —    
 
Total Accounting Fees and Services
  $ 43,000     $ 43,000  

 

 

  (1) Audit Fees. These are fees for professional services for the audit of our annual financial statements, and for the review of the financial statements included in our filings on Form 10-QSB, and for services that are normally provided in connection with statutory and regulatory filings or engagements.

 

  (2) The amounts shown for Bongiovanni in 2013 and 2012 relate to (i) the audit of our annual financial statements for the years ended December 31, 2013 and 2012, and (ii) the review of the financial statements included in our filings on Form 10-Q for the first, second and third quarters of 2013 and 2012.

 

  (3) Audit-Related Fees. These are fees for the assurance and related services reasonably related to the performance of the audit or the review of our financial statements.

 

  (4) Tax Fees. These are fees for professional services with respect to tax compliance, tax advice, and tax planning.

 

  (5) All Other Fees. These are fees for permissible work that does not fall within any of the other fee categories, i.e., Audit Fees, Audit-Related Fees, or Tax Fees.

 

Pre-Approval Policy For Audit and Non-Audit Services

 

We do not have a standing audit committee, and the full Board performs all functions of an audit committee, including the pre-approval of all audit and non-audit services before we engage an accountant. All of the services rendered to us by Bongiovanni & Associates, P.A. were pre-approved by our Board of Directors.

 

We are presently working with our legal counsel to establish formal pre-approval policies and procedures for future engagements of our accountants. The new policies and procedures will be detailed as to the particular service, will require that the Board or an audit committee thereof be informed of each service, and will prohibit the delegation of pre-approval responsibilities to management. It is currently anticipated that our new policy will provide (i) for an annual pre-approval, by the Board or audit committee, of all audit, audit-related and non-audit services proposed to be rendered by the independent auditor for the fiscal year, as specifically described in the auditor's engagement letter, and (ii) that additional engagements of the auditor, which were not approved in the annual pre-approval process, and engagements that are anticipated to exceed previously approved thresholds, will be presented on a case-by-case basis, by the President or Controller, for pre-approval by the Board or audit committee, before management engages the auditors for any such purposes. The new policy and procedures may authorize the Board or audit committee to delegate, to one or more of its members, the authority to pre-approve certain permitted services, provided that the estimated fee for any such service does not exceed a specified dollar amount (to be determined). All pre-approvals shall be contingent on a finding, by the Board, audit committee, or delegate, as the case may be, that the provision of the proposed services is compatible with the maintenance of the auditor's independence in the conduct of its auditing functions. In no event shall any non-audit related service be approved that would result in the independent auditor no longer being considered independent under the applicable rules and regulations of the Securities and Exchange Commission.

 

(31)

 

 

ITEM 15. EXHIBITS .

 

  3.1   Certificate of Incorporation (a)
       
  3.2   By-Laws- Restated as Amended (a)
       
  4.1   2007 Stock Option Plan (c)
       
  10.1   Consulting Agreement between the Registrant and SGC Advisory, Inc. (b)
       
  10.2   Employment Agreement between the Registrant and Thom Kidrin (d)
       
  10.3   License Agreement between Worlds Online Inc. and Registrant date as of May 16, 2011 (e)
       
  10.4    Securities Purchase Agreement dated as of March 14, 2013 between the registrant and the Buyers listed thereon. (f)
       
   10.5   Form of Security and Pledge Agreement between the registrant the Collaleral Agent . (f) 
       
  10.6   Form of Registration Rights Agreements between the registrant and the Buyers listed thereon. (f)
       
  10.7   Form of Warrant dated March 20, 2013 (f)
       
   10.8   Form of Series A Note dated March 20, 2013 (f)
       
  10.9   Form of Series B Note dated March 20, 2013 (f)
       
   10.10   Form of Series C Note dated March 20, 2013 (f)
       
  14.1   Code of Ethics (d)
       
  31.1   Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer **
       
  31.2   Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial  Officer **
       
  32.1.   Section 1350 Certifications of Chief Executive Officer **
       
  32.2.   Section 1350 Certifications of Chief Financial Officer **
       
  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

 

  

(a)   Filed previously with the Proxy Statement Form DEF 14A on May, 19, 2010, and incorporated herein by reference.
(b)   Filed previously as an exhibit to Registrant's Annual Report on Form 10-KSB filed on March 30, 2000, and incorporated herein by reference.

 

(c)   Filed previously as an exhibit to Registrant's Current Report on Form 8-K filed on September 7, 2007, and incorporated herein by reference.

 

(d)   Filed previously as an exhibit to Registrant's Annual Report on Form 10-KSB filed on April 3, 2008, and incorporated herein by reference.

 

(e) Incorporated by reference from Registration statement on form 10-12G (File No. 000-54433), Amendment No. 2 of Worlds Online Inc. filed on October 7, 2011

  

(f) Filed previously as an exhibit to regisrtant current report on from 8K filed on March 15, 2013 and in coporated herein by referenced.

 

** Filed herewith

 

 

(32)

  

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  

Dated: March 31, 2014                                                                                               WORLDS INC.

(Registrant)

 

 

By:   /s/ Thomas Kidrin

Name: Thomas Kidrin

Title:   President and Chief Executive Officer

 

 

In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signatures   Title     Date  
             

/s/ Thomas Kidrin

Thomas Kidrin

  President, Chief Exectutive Officer and Director     March 31, 2014  
             

/s/ Christopher J. Ryan

Christopher J. Ryan  

  Vice President - Finance and Principal Accounting and Financial Officer     March 31, 2014  
             

/s/ Bernard Stolar

Bernard Stolar

  Director     March 31, 2014  
             

/s/ Robert Fireman

Robert Fireman

  Director     March 31, 2014  
             

/s/ Edward Gildea

Edward Gildea

  Director     March 31, 2014  
             

 

(33)

 

 

EXHIBIT TO INDEX

 

  Exhibit No.   Description
       
  3.1   Certificate of Incorporation (a)
       
  3.2   By-Laws- Restated as Amended (a)
       
  4.1   2007 Stock Option Plan (c)
       
  10.1   Consulting Agreement between the Registrant and SGC Advisory, Inc. (b)
       
  10.2   Employment Agreement between the Registrant and Thom Kidrin (d)
       
  10.3   License Agreement between Worlds Online Inc. and Registrant dated as of May 16, 2011 (e)
       
  10.4   Securities Purchase Agreement dated as of March 14, 2013 between the registrant and the Buyers listed thereon. (f)
       
   10.5   Form of Security and Pledge Agreement between the registrant the Collaleral Agent . (f) 
       
  10.6   Form of Registration Rights Agreements between the registrant and the Buyers listed thereon. (f)
       
  10.7   Form of Warrant dated March 20, 2013 (f)
       
   10.8   Form of Series A Note dated March 20, 2013 (f)
       
  10.9   Form of Series B Note dated March 20, 2013 (f)
       
   10.10   Form of Series C Note dated March 20, 2013 (f)
       
  14.1   Code of Ethics (d)
       
  31.1.   Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer **
       
  31.2.   Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial  Officer **
       
  32.1.   Section 1350 Certifications of Chief Executive Officer **
       
  32.2.   Section 1350 Certifications of Chief Financial Officer **
       
  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

 

 

(a)   Filed previously with the Proxy Statement Form DEF 14A on May, 19, 2010, and incorporated herein by reference.
   
(b)   Filed previously as an exhibit to Registrant's Annual Report on Form 10-KSB filed on March 30, 2000, and incorporated herein by reference.
   
(c) Filed previously as an exhibit to Registrant's Current Report on Form 8-K filed on September 7, 2007, and incorporated herein by reference.
   
(d)  Filed previously as an exhibit to Registrant's Annual Report on Form 10-KSB filed on April 3, 2008, and incorporated herein by reference.
   
(e)  Incorporated by reference from Registration statement on form 10-12G (File No. 000-54433), Amendment No. 2 of Worlds Online Inc. filed on October 7, 2011
   
(f) Filed previously as an exhibit to registrant current report on form 8K filed on March 15, 2013 and incorporated herein by referenced
   

 

** Filed herewith