NOTES TO FINANCIAL STATEMENTS
Nine Months Ended September 30, 2018
(Unaudited)
NOTE 1 – DESCRIPTION OF BUSINESS
AND SUMMARY OF ACCOUNTING POLICIES
Description of Business
On May 16, 2011, the Company transferred,
through a spin-off to its then wholly owned subsidiary, Worlds Online Inc.
(currently called
MariMed Inc.),
the majority of its operations and related operational assets. The Company retained its patent portfolio
which it intends to continue to increase and to more aggressively enforce against alleged infringers. The Company also entered
into a License Agreement with MariMed Inc. to sublicense its patented technologies.
Basis of Presentation
The accompanying financial statements
have been prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP"),
which contemplates continuation of the Company as a going concern. The Company has always been considered a developmental stage
business, has incurred significant losses since its inception and has had minimal revenues from operations. The Company will require
substantial additional funds for development and enforcement of its patent portfolio. There can be no assurance that the Company
will be able to obtain the substantial additional capital resources to pursue its business plan or that any assumptions relating
to its business plan will prove to be accurate. The Company has not been able to generate sufficient revenue or obtain sufficient
financing which has had a material adverse effect on the Company, including requiring the Company to reduce operations. These factors
raise substantial doubt about the Company's ability to continue as a going concern. As the Company has focused its attention on
increasing its patent portfolio and enforcing it, the Company has been operating at a significantly reduced capacity, with only
one full time employee and using consultants to perform any additional work that may be required.
Use of Estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes highly
liquid money market instruments, which have original maturities of three months or less at the time of purchase.
Revenue Recognition
Effective for the second quarter of
2011, the Company spun off its online businesses to MariMed Inc. The Company’s current sources of revenue after the spin
off are expected to be from any revenue that may be generated from enforcing its patents. The Company recognizes revenue when all
of the following criteria are met: evidence of an arrangement exists such as a signed contract, delivery has occurred, the price
is fixed or determinable, and collectability is reasonable assured. This will usually be in the form of a receipt of a customer’s
acceptance indicating the product has been completed to their satisfaction except for development work and service revenue which
is recognized when the services have been performed.
Research and Development Costs
Research and development costs are charged
to operations as incurred.
Property and Equipment
Property and equipment are stated at
cost. Depreciation is provided on a straight line basis over the estimated useful lives of the assets ranging from three to five
years. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income. Maintenance and repairs are charged to expense in the period incurred.
Impairment of Long Lived Assets
The Company evaluates the recoverability
of its fixed assets and other assets in accordance with section 360-10-15 of the FASB Accounting Standards Codification for disclosures
about Impairment or Disposal of Long-Lived Assets. Disclosure requires recognition of impairment of long-lived assets in the event
the net book value of such assets exceeds its expected cash flows. If so, it is considered to be impaired and is written down to
fair value, which is determined based on either discounted future cash flows or appraised values. The Company adopted the statement
on inception. No impairments of these types of assets were recognized during 2017 and thus far in 2018.
Stock-Based Compensation
The Company accounts for stock-based
compensation using the fair value method following the guidance set forth in section 718-10 of the FASB Accounting Standards Codification
for disclosure about Stock-Based Compensation. This section requires a public entity to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That
cost will be recognized over the period during which an employee is required to provide service in exchange for the award the requisite
service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not
render the requisite service.
Income Taxes
The Company accounts for income taxes
under Section 740-10-30 of the FASB Accounting Standards Codification. Deferred income tax assets and liabilities are determined
based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation
allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in the consolidated statements of operations in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model
for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken
or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements
when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must
initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
Notes Payable
The Company has $773,279 in short term
notes outstanding at September 30, 2018 and December 31, 2017. These are old notes payable for which the statute of limitations
has passed and therefore the Company does not expect it will ever have to repay those notes.
The Company has an additional $750,000
in short term notes outstanding at September 30, 2018. As of December 31, 2017 $725,000 of such additional notes were categorized
as long term notes and only $25,000 were categorized as short term notes.
Comprehensive Income (Loss)
The Company reports comprehensive income
and its components following guidance set forth by section 220-10 of the FASB Accounting Standards Codification which establishes
standards for the reporting and display of comprehensive income and its components in the financial statements. There were no items
of comprehensive income (loss) applicable to the Company during the period covered in the financial statements.
Loss Per Share
Net loss per common share is computed
pursuant to section 260-10-45 of the FASB ASC. Basic net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the period. As of September 30, 2018 there were 5,430,000 options and 4,480,000
warrants whose effect is anti-dilutive and not included in diluted net loss per share. As of December 31, 2017, there were 5,430,000
(post reverse split) options and 7,980,000 (post reverse split) warrants, whose effect is anti-dilutive and not included in diluted
net loss per share for December 31, 2017. The options and warrants may dilute future earnings per share.
Commitments and Contingencies
The Company follows subtopic 450-20
of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date
the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more
future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves
an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted
claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims
as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material
loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent
liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote
are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not
believe, based upon information available at this time, that these matters will have a material adverse effect on the Company’s
financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and
adversely affect the Company’s business, financial position, and results of operations or cash flows.
During 2000 the Company was involved
in a lawsuit relating to unpaid consulting services. In April, 2001 a judgment against the Company was rendered for approximately
$205,000. As of September 30, 2018 and December 31, 2017, the Company recorded a reserve of $205,000 for this lawsuit, which is
included in accrued expenses in the accompanying balance sheets.
Risk and Uncertainties
The Company is subject to risks common
to companies in the technology industries, including, but not limited to, litigation, development of new technological innovations
and dependence on key personnel.
Off Balance Sheet Arrangements
The Company does not have any off-balance
sheet arrangements.
Uncertain Tax Positions
The Company did not take any uncertain
tax positions and had no adjustments to unrecognized income tax liabilities or benefits pursuant to the provisions of Section 740-10-25
for the year ended December 31, 2017.
Fair Value of Financial Instruments
The Company measures assets and liabilities
at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents
the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction
between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset
or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value
on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels
of inputs to measure fair value:
|
•
|
Level 1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
•
|
Level 3 - Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The carrying amounts of the Company’s
financial assets and liabilities, such as cash, other receivables, accounts payable & accrued expenses, due to related party,
notes payable and notes payables, approximate their fair values because of the short maturity of these instruments.
Warrant and option expense was measured
by using level 3 valuation.
Embedded Conversion Features
The Company evaluates embedded conversion
features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion
feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value
recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated
under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
Derivative Financial Instruments
The Company does not use derivative
instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments,
including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or
credits to income.
For option-based simple derivative financial
instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is re-assessed at the end of each reporting period.
Subsequent Events
The Company evaluated for subsequent
events through the issuance date of the Company’s financial statements.
Recent Accounting Pronouncements
The Company has reviewed all recently
issued, but not yet effective, accounting pronouncements, and does not believe the future adoption of any such pronouncements may
be expected to cause a material impact on its financial condition or the results of its operations.
The Company has reviewed the new tax
law recently enacted and determined that there will not be a material impact on the financial statements.
NOTE 2 - EQUITY
On February 9, 2018 the Company implemented
a 5 for 1 reverse split of the Company’s common stock.
During the nine months ended September
30, 2018 the Company received an additional $875,000 upon the exercise of 35,000,000 warrants (pre reverse split) to purchase 35,000,000
(pre reverse split) shares of the Company’s common stock at $0.025 per share.
During the nine months ended September
30, 2018, the Company issued 3,500,000 warrants as part of a subscription agreement. Each warrant entitles the holder to purchase
one share of common stock at a price of $0.325. The warrants expire in five years. The Company recorded a warrant expense
of $1,339,420 equal to the estimated fair value of the warrants at the date of issuance. The fair market value was calculated using
the Binomial option price calculation method assuming approximately 2.52% risk-free interest, 0% dividend yield, 443% volatility,
exercise price of $0.325 per share with a current market price of $0.385 and an expected life of 5 years.
During the nine months ended September
30, 2017 the Company received an additional $292,800 upon the exercise of 24,400,000 warrants (pre reverse split) to purchase 24,400,000
(pre reverse split) shares of the Company’s common stock at $0.012 per share.
NOTE 3 - NOTES PAYABLE
|
Notes payable at September 30, 2018 consist of the following:
|
|
|
|
Entire balance of principal and unpaid interest due on demand
|
|
$
|
124,230
|
|
|
Entire balance of principal and unpaid interest due on demand
|
|
$
|
649,049
|
|
|
Promissory notes
|
|
$
|
700,000
|
|
|
Notes Payable - related party
|
|
$
|
50,000
|
|
|
Total notes
|
|
$
|
1,523,279
|
|
|
2018
|
|
$
|
773,279
|
|
|
2019
|
|
$
|
750,000
|
|
|
2020
|
|
$
|
-0-
|
|
|
2021
|
|
$
|
-0-
|
|
|
2022
|
|
$
|
-0-
|
|
|
|
|
$
|
1,523,279
|
|
The promissory notes and note
payable related party carry a 6% annual interest rate and are payable upon the earlier of (a) 24 months from the date of the promissory
note or (b) the Company reaching a settlement(s) on a patent infringement claim(s) and receiving an aggregate of at least $2 million
net proceeds from such settlement(s). The holders of the promissory notes shall receive repayment in the full face amount
of the note from the initial $500,000 the Company actually receives from the net proceeds of its patent infringement claim(s)
or from the net proceeds of a public offering. In addition the holder shall receive a preferred return (i) in an amount equal
to up to 200% of the initial face amount of the note out of available cash by sharing with all other investors in this series
of notes in the allocation of 50% of the available cash received by the Company from $2M - $4M and (ii) in an amount equal to
up to 100% of the initial face amount of the note out of available cash by sharing with all other investors in this series of
notes in the allocation of 25% of the available cash received by the Company from $4M - $6M. In other words, if the Company collects
$6M in the net proceeds of available cash, the holder will receive a return equal to 400% of its investment. All of the promissory
notes had reached their maturity date and extension agreements have been signed for all of the $750,000 in notes.
NOTE 4 – STOCK OPTIONS AND WARRANTS
Five million stock options were issued
to the CEO as part of his employment agreement on August 28, 2018, see Note 5. An additional 300,000 options were issued to two
new Directors on August 28, 2018. The options expire in five years. The Company recorded an option expense of $1,316,380
equal to the estimated fair value of the options at the date of issuance. The fair market value was calculated using the Binomial
option price calculation method assuming approximately 2.52% risk-free interest, 0% dividend yield, 460% volatility, exercise price
of $0.25 per share with a current market price of $0.25 and an expected life of 5 years. No stock options were exercised during
the nine months ended September 30, 2018.
During the nine months ended September
30, 2018, the Company issued 3,500,000 warrants as part of a subscription agreement. Each warrant entitles the holder to purchase
one share of common stock at a price of $0.325. The warrants expire in five years. The Company recorded a warrant expense
of $1,339,420 equal to the estimated fair value of the warrants at the date of issuance. The fair market value was calculated using
the Binomial option price calculation method assuming approximately 2.52% risk-free interest, 0% dividend yield, 443% volatility,
exercise price of $0.325 per share with a current market price of $0.385 and an expected life of 5 years.
No stock options were issued or exercised
during the nine months ended September 30, 2017.
|
Stock Warrants and Options
|
|
Stock warrants/options outstanding and exercisable on a post reverse split basis on September 30, 2018 are as follows:
|
|
Exercise Price per Share
|
|
Shares Under Option/warrant
|
|
Remaining Life in Years
|
|
Outstanding
|
|
|
|
|
|
$
|
0.325
|
|
|
|
3,500,000
|
|
|
|
4.33
|
|
|
$
|
0.15
|
|
|
|
5,220,000
|
|
|
|
4.00
|
|
|
$
|
0.15
|
|
|
|
580,000
|
|
|
|
2.20
|
|
|
$
|
0.05
|
|
|
|
200,000
|
|
|
|
4.20
|
|
|
$
|
0.30
|
|
|
|
200,000
|
|
|
|
4.20
|
|
|
$
|
0.775
|
|
|
|
40,000
|
|
|
|
0.25
|
|
|
$
|
0.70
|
|
|
|
50,000
|
|
|
|
0.25
|
|
|
$
|
0.55
|
|
|
|
60,000
|
|
|
|
1.75
|
|
|
$
|
0.65
|
|
|
|
60,000
|
|
|
|
1.75
|
|
|
$
|
0.25
|
|
|
|
5,300,000
|
|
|
|
4.92
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
$
|
0.325
|
|
|
|
3,500,000
|
|
|
|
4.33
|
|
|
$
|
0.15
|
|
|
|
5,220,000
|
|
|
|
4.00
|
|
|
$
|
0.15
|
|
|
|
580,000
|
|
|
|
2.20
|
|
|
$
|
0.05
|
|
|
|
200,000
|
|
|
|
4.20
|
|
|
$
|
0.30
|
|
|
|
200,000
|
|
|
|
4.20
|
|
|
$
|
0.775
|
|
|
|
40,000
|
|
|
|
0.25
|
|
|
$
|
0.70
|
|
|
|
50,000
|
|
|
|
0.25
|
|
|
$
|
0.55
|
|
|
|
60,000
|
|
|
|
1.75
|
|
|
$
|
0.65
|
|
|
|
60,000
|
|
|
|
1.75
|
|
|
$
|
0.25
|
|
|
|
2,000,000
|
|
|
|
4.92
|
|
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company is committed to an employment
agreement with its President and CEO, Thom Kidrin. The agreement, dated as of August 28, 2018, is for five years with a one-year
renewal option held by Mr. Kidrin. The agreement provides for a base salary
of $200,000, which increases 10% on September 1 of each year; a monthly car allowance of $500; an annual bonus equal to 2.5% of
Pre-Tax Income (as defined in the agreement); an additional bonus as follows: $75,000, if Pre-Tax Income for the year is between
150% and 200% of the prior fiscal year’s Pre-Tax Income or (B) $100,000, if Pre-Tax Income for the year is between 201% and
250% of the prior fiscal year’s Pre-Tax Income or (C) $200,000, if Pre-Tax Income for the year is 251% or greater than the
prior fiscal year’s Pre-Tax Income, but in no event shall this additional bonus exceed five (5%) percent of Pre-Tax Income
for such year; payment of up to $10,000 in life insurance premiums; options to purchase 5 million shares of Worlds Inc. common
stock at an exercise price of $0.25 per share, 2 million of which vested on August 28, 2018, 1.5 million shall vest on August
28, 2019 and the remaining 1.5 million shall vest on August 28, 2020 ; a death benefit of at least $2 million dollars; and a payment
equal to 2.99 times his base amount (as defined in the agreement) in the event of a Change of Control (as defined in the agreement). The agreement also provides that Mr. Kidrin can be
terminated for cause (as defined in the agreement) and that he is subject to restrictive covenants for 12 months after termination.
NOTE 6 - RELATED PARTY TRANSACTIONS
On May 16, 2011, the Company transferred,
through a spin-off to its then wholly owned subsidiary, MariMed Inc., the majority of its operations and related operational assets.
The Company retained its patent portfolio which it intends to continue to increase and to more aggressively enforce against alleged
infringers.
Due from related party account is comprised
of cash payments for operating expenses made by Worlds Inc on behalf of MariMed Inc. The balance at September 30, 2018 is a due
from related party of $20,998 and the balance on December 31, 2017 is $15,998.
NOTE 7 - PATENTS
Worlds Inc. currently has nine patents,
6,219,045 - 7,181,690 - 7,493,558 – 7,945,856, - 8,082,501, – 8,145,998 – 8,161,383, – 8,407,592 and 8,640,028.
On March 30, 2012, the Company filed a patent infringement lawsuit against Activision Bizzard Inc., Blizzard Entertainment Inc.
and Activision Publishing Inc. in the United States District Court for the District of Massachusetts. 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 are expensed as incurred.
There can be no assurance that the Company
will be successful in its ability to prosecute its IP portfolio or that we will be able to acquire additional patents.
NOTE 8 – SALE OF MARKETABLE
SECURITIES
When
Worlds Inc. spun off Worlds Online Inc. in January 2011, the Company retained 5,936,115 shares of common stock in Worlds Online
Inc. (now named MariMed Inc.). Those shares were retained on the books of the Company with a book value of $0. During the nine
months ended September 30, 2018, the Company sold 1,842,116 shares at an average price of $1.64 per share raising $3,017,790. The
proceeds from the sale are treated as a gain on sale of marketable securities in the financial statements
.
