NOTES TO FINANCIAL STATEMENTS
Three Months Ended March 31, 2019
(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").
The Company has incurred significant losses since its inception and has had minimal revenues from operations. The Company will
require substantial additional funds for development and enforcement of its patent portfolio. There can be no assurance that the
Company will be able to obtain the substantial additional capital resources to pursue its business plan or that any assumptions
relating to its business plan will prove to be accurate. The Company has not been able to generate sufficient revenue or obtain
sufficient financing which has had a material adverse effect on the Company, including requiring the Company to reduce operations.
As the Company has focused its attention on increasing its patent portfolio and enforcing it, the Company has been operating at
a reduced capacity, with only one 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 June 1, 2018, the Company
adopted ASC 606. There was no impact in adopting ASC 606 as the Company has no revenue at this time. In the second quarter of 2011,
the Company spun off its online businesses to MariMed Inc. The Company’s sources of revenue after the spinoff was expected
to be from sublicenses of the patented technology by Worlds Online and any revenue that may be generated from enforcing its patents.
The Company recognizes revenue by applying the following steps: (1) identify the contract with a customer; (2) identify the performance
obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation
in the contract; and (5) recognize revenue when each performance obligation is satisfied.
Research and Development Costs
Research and development costs are charged
to operations as incurred.
Property and Equipment
Property and equipment are stated at
cost. Depreciation is provided on a straight line basis over the estimated useful lives of the assets ranging from three to five
years. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income. Maintenance and repairs are charged to expense in the period incurred.
Impairment of Long Lived Assets
The Company evaluates the recoverability
of its fixed assets and other assets in accordance with section 360-10-15 of the FASB Accounting Standards Codification for disclosures
about Impairment or Disposal of Long-Lived Assets. Disclosure requires recognition of impairment of long-lived assets in the event
the net book value of such assets exceeds its expected cash flows. If so, it is considered to be impaired and is written down to
fair value, which is determined based on either discounted future cash flows or appraised values. The Company adopted the statement
on inception. No impairments of these types of assets were recognized during 2019 and 2018.
Stock-Based Compensation
The Company accounts for stock-based
compensation using the fair value method following the guidance set forth in section 718-10 of the FASB Accounting Standards Codification
for disclosure about Stock-Based Compensation. This section requires a public entity to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That
cost will be recognized over the period during which an employee is required to provide service in exchange for the award 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 March 31, 2019 and December 31, 2018. These are old notes payable for which the statute of limitations has
passed and therefore the Company does not expect it will ever have to repay those notes.
The Company had an additional $750,000
in short term notes outstanding at December 31, 2018. The Company paid off these notes during the quarter and the balance is $0
at March 31, 2019.
Comprehensive Income (Loss)
The Company reports comprehensive income
and its components following guidance set forth by section 220-10 of the FASB Accounting Standards Codification which establishes
standards for the reporting and display of comprehensive income and its components in the financial statements. There were no items
of comprehensive income (loss) applicable to the Company during the period covered in the financial statements.
Loss Per Share
Net loss per common share is computed
pursuant to section 260-10-45 of the FASB ASC. Basic net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the period. As of March 31, 2019 and December 31, 2018, there were 11,140,000
options and 4,480,000 warrants outstanding, whose effect is anti-dilutive and not included in diluted net loss per share for March
31, 2019 or for December 31, 2018. The options and warrants may dilute future earnings per share.
Commitments and Contingencies
The Company follows subtopic 450-20
of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date
the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more
future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves
an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted
claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims
as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material
loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent
liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote
are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not
believe, based upon information available at this time, that these matters will have a material adverse effect on the Company’s
financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and
adversely affect the Company’s business, financial position, and results of operations or cash flows.
During 2000 the Company was involved
in a lawsuit relating to unpaid consulting services. In April, 2001 a judgment against the Company was rendered for approximately
$205,000. As of March 31, 2019, and December 31, 2018 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, 2018.
Fair Value of Financial Instruments
The Company measures assets and liabilities
at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents
the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction
between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset
or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value
on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels
of inputs to measure fair value:
|
•
|
Level 1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
•
|
Level 3 - Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The carrying amounts of the Company’s
financial assets and liabilities, such as cash, other receivables, accounts payable & accrued expenses, due to related party,
notes payable and notes payables, approximate their fair values because of the short maturity of these instruments. The Company's
convertible notes payable are measured at amortized cost.
Warrant and option expense was measured
by using level 3 valuation.
Embedded Conversion Features
The Company evaluates embedded conversion
features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion
feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value
recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated
under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
Derivative Financial Instruments
The Company does not use derivative
instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments,
including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or
credits to income.
For option-based simple derivative
financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception
and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded
as liabilities or as equity, is re-assessed at the end of each reporting period.
Recent Accounting Pronouncements
The Company has reviewed all recently
issued, but not yet effective, accounting pronouncements, and does not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the results of its operations.
In
February 2016, the FASB issued ASU 2016-02, “Leases” Topic 842, which amends the guidance in former ASC Topic
840,
Leases
. The new standard increases transparency and comparability most significantly by requiring the recognition
by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases longer than 12
months. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess
the amount, timing, and uncertainty of cash flows arising from leases. For lessees, leases will be classified as finance
or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The
Company adopted the new lease guidance effective January 1, 2019.
The Company is not a party to any leases
and therefore is not showing any asset or liability related to leases in the current period or prior periods.
NOTE 2 - NOTES PAYABLE
|
Notes payable at March 31, 2019 consist of the following:
|
|
|
|
Unsecured note payable bearing 8% interest.
|
|
|
|
Entire balance of principal and unpaid interest due on demand
|
|
$
|
124,230
|
|
|
Unsecured note payable bearing 10% interest
|
|
|
|
|
|
Entire balance of principal and unpaid interest due on demand
|
|
$
|
649,049
|
|
|
Total notes
|
|
$
|
773,279
|
|
|
2019
|
|
$
|
773,279
|
|
|
2020
|
|
$
|
-0-
|
|
|
2021
|
|
$
|
-0-
|
|
|
2022
|
|
$
|
-0-
|
|
|
2023
|
|
$
|
-0-
|
|
|
|
|
$
|
773,279
|
|
The Company repaid the $600,000 in notes
payable and $150,000 in notes payable related party with accrued interest totaling $189,118 during the quarter.
NOTE 3 - EQUITY
All common stock numbers and exercise
prices in this Note are reflected on a post reverse split (5 to 1) basis. As a result of the reverse split on February 9, 2018,
the Company had to issue an additional 167 shares due to rounding.
During the three months ended March
31, 2019, the Company recorded an option expense of $19,173 representing the amortization of the value of the options issued in
2018 that have not yet vested.
During the year ended December 31, 2018
the Company received an additional $875,000 upon the exercise of 7,000,000 warrants to purchase 7,000,000 shares of the Company’s
common stock at $0.0125 per share.
During the year ended December 31, 2018
the Company issued 460,000 shares of the Company’s common stock as payment for services rendered, an aggregate value of $99,372.
During the year ended December 31, 2018,
the Company issued 5,500,000 options. 5,000,000 options were issued to Thom Kidrin, the Chief Executive Officer and President of
the Company and 500,000 options were issued to Directors of the Company. The Company recorded an option expense of $368,728
in 2018 and $19,173 in the 1
st
quarter of 2019 equal to the estimated fair value of the options at the date of grants.
The fair market value was calculated using the Black Scholes method assuming approximately 2.73% risk-free interest, 0% dividend
yield, 104% volatility, an exercise price of $0.25 per share for Thom Kidrin’s options and $0.24 per share for the Directors
options with a current market price of $0.24 and an expected life of 5 years. Mr. Kidrin’s options vest 2,000,000 on the
date of grant, August 28, 2018, 1,500,000 on August 28, 2019 and 1,500,000 on August 28, 2020. The Director’s options vest
one year from the date of grant.
During the year ended December 31, 2018,
the Company issued 3,400,000 warrants as part of the subscription agreement that included the sale of 7,000,000 shares of common
stock. 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 warrants can be exercised at any time within those five years. The Company recorded a warrant expense of $1,211,403
equal to the estimated fair value of the warrants at the date of issuance. The fair market value was calculated using the Black
Scholes method assuming approximately 2.52% risk-free interest, 0% dividend yield, 153% volatility, exercise price of $0.325 per
share with a current market price of $0.385 and an expected life of 5 years.
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Stock Warrants and Options
|
|
Stock warrants/options outstanding and exercisable on March 31, 2019 are as follows:
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|
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Exercise Price per Share
|
|
Shares Under Option/warrant
|
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Remaining Life in Years
|
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Outstanding
|
|
|
|
|
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$
|
0.325
|
|
|
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3,500,000
|
|
|
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3.83
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|
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$
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0.15
|
|
|
|
5,220,000
|
|
|
|
3.50
|
|
|
$
|
0.15
|
|
|
|
580,000
|
|
|
|
1.70
|
|
|
$
|
0.05
|
|
|
|
200,000
|
|
|
|
3.70
|
|
|
$
|
0.30
|
|
|
|
200,000
|
|
|
|
3.70
|
|
|
$
|
0.55
|
|
|
|
60,000
|
|
|
|
1.25
|
|
|
$
|
0.65
|
|
|
|
60,000
|
|
|
|
1.25
|
|
|
$
|
0.25
|
|
|
|
5,000,000
|
|
|
|
4.42
|
|
|
$
|
0.24
|
|
|
|
800,000
|
|
|
|
4.42
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.325
|
|
|
|
3,500,000
|
|
|
|
4.83
|
|
|
$
|
0.15
|
|
|
|
5,220,000
|
|
|
|
3.50
|
|
|
$
|
0.15
|
|
|
|
580,000
|
|
|
|
1.70
|
|
|
$
|
0.05
|
|
|
|
200,000
|
|
|
|
3.70
|
|
|
$
|
0.30
|
|
|
|
200,000
|
|
|
|
3.70
|
|
|
$
|
0.55
|
|
|
|
60,000
|
|
|
|
1.25
|
|
|
$
|
0.65
|
|
|
|
60,000
|
|
|
|
1.25
|
|
|
$
|
0.25
|
|
|
|
2,000,000
|
|
|
|
4.42
|
|
|
$
|
0.24
|
|
|
|
800,000
|
|
|
|
4.42
|
|
NOTE 4 - 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 5 - RELATED PARTY TRANSACTIONS
The Company repaid $150,000 in notes
payables with accrued interest to related parties during the quarter.
The balance in the accrued expense
attributable to related parties is $341,624 and $329,624 at March 31, 2019 and December 31, 2018, respectively.
NOTE 6 - 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 7 – 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 three
months ended March 31, 2018, the Company sold 1,069,045 shares at an average price of $0.85 per share raising $904,054. The proceeds
from the sale are treated as a gain on sale of marketable securities in the financial statements. No shares were sold in the three
months ended March 31, 2019
.
NOTE 8 – ACCRUED EXPENSES
Accrued expenses is comprised of $341,624
owed to related parties. $205,000 is related to a judgment against the Company relating to unpaid consulting services dating back
to April of 2001. $1,305,009 is related to old accruals for which the statute of limitations has passed and therefore the Company
does not expect it will ever have to repay those amounts. The balance of $61,400 is related to accruals for recurring operating
expenses.
NOTE 9 – SUBSEQUENT EVENTS
The Company evaluated for subsequent
events through the issuance date of the Company’s financial statements.
