NOTES TO FINANCIAL STATEMENTS
Three Months Ended March 31, 2021
(Unaudited)
NOTE 1 – GOING CONCERN
As reflected in the accompanying financial statements,
the Company has a working capital deficiency of $3,184,228 and a stockholder’s deficiency of $2,963,461 and used $319,495 of cash
in operations for the three months ended March 31, 2021. This raises substantial doubt about its ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital and
implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
Management believes that the actions presently being
taken to obtain additional funding and implement its strategic plans provide the opportunity for the Company to continue as a going concern.
NOTE 2 – 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.
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 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 include highly liquid money
market instruments, which have original maturities of three months or less at the time of purchase.
Revenue Recognition
Effective January 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) for disclosures about Impairment or Disposal of Long-Lived Assets. Disclosure requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds its expected cash flows. If so, it is considered to be impaired
and is written down to fair value, which is determined based on either discounted future cash flows or appraised values. The Company adopted
the statement on inception. No impairments of these types of assets were recognized during 2020 and 2019.
Stock-Based Compensation
The Company accounts for stock-based compensation
using the fair value method following the guidance set forth in section 718-10 of the FASB ASC for disclosure
about Stock-Based Compensation. This section requires a public entity to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). No compensation
cost is recognized for equity instruments for which employees do not render the requisite service.
Income Taxes
The Company accounts for income taxes under Section
740-10-30 of the FASB ASC. Deferred income tax assets and liabilities are determined based upon differences
between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management
concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations
in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for how companies
should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on
a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the
position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as
the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority
assuming full knowledge of the position and relevant facts.
Notes Payable
The Company has $773,279 in short term notes outstanding
at March 31, 2021 and December 31, 2020. 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.
Comprehensive Income (Loss)
The Company reports comprehensive income and its components
following guidance set forth by section 220-10 of the FASB ASC which establishes standards for the reporting
and display of comprehensive income and its components in the 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, 2021, there were 11,720,000 options and 4,380,000 warrants outstanding
and as of March 31, 2020, there were 11,140,000 options and 4,380,000 warrants outstanding whose effect is anti-dilutive and not included
in diluted net loss per share for March 31, 2021 or for March 31, 2020. The options and warrants may dilute future earnings per share.
Commitments and Contingencies
The Company follows subtopic 450-20 of the FASB ASC to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are
issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur.
The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies
related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company
evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought
or expected to be sought therein.
If the assessment of a contingency indicates that
it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would
be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate
of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally
not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon
information available at this time, that these matters will have a material adverse effect on the Company’s financial position,
results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s
business, financial position, and results of operations or cash flows.
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, 2021, and December 31, 2020 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, 2020.
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.
The Company accounts for stock-based compensation
for employees and directors in accordance with Accounting Standards Codification 718, Compensation (“ASC 718”) as issued by
the FASB. ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the
statement of operations based on their fair values. Under the provisions of ASC 718, stock-based compensation costs are measured at the
grant date, based on the fair value of the award, and are recognized as an expense over the employee’s requisite service period
(generally the vesting period of the equity grant). The fair value of the Company’s common stock options are estimated using the
Black Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the
expected life. The Company expenses stock-based compensation by using the straight-line method. In accordance with ASC 718 and, excess
tax benefits realized from the exercise of stock-based awards are classified as cash flows from operating activities. All excess tax benefits
and tax deficiencies (including tax benefits of dividends on share-based payment awards) are recognized as income tax expense or benefit
in the condensed consolidated statements of operations. The Company accounts for stock-based compensation awards issued to non-employees
for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for
such services, whichever is more readily determinable, using the measurement date guidelines enumerated in Accounting Standards Update
(“ASU”) 2018-07.
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 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 3 - NOTES PAYABLE
|
Notes payable at March 31, 2021 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
|
|
|
2021
|
|
$
|
773,279
|
|
|
2022
|
|
$
|
0
|
|
|
2023
|
|
$
|
0
|
|
|
2024
|
|
$
|
0
|
|
|
2025
|
|
$
|
0
|
|
|
|
|
$
|
773,279
|
|
The Company imputed interest of $18,891 on the notes
during the quarter ended March 31, 2021.
NOTE 4 - EQUITY
All common stock numbers and exercise prices in this
Note are reflected on a post reverse split (5 to 1) basis, which reverse split was effectuated on February 9, 2018.
During the three months ended March 31, 2021, the
Company issued 297,673 shares of common stock as settlement of accounts payable to a related party. The value of the shares at the date
of issuance was $70,810 resulting in a loss of $8,685.
During the three months ended March 31, 2021, the
Company recorded an option expense of $58,182 representing the amortization of the value of the options issued in 2020 that have not yet
vested.
During the year ended December 31, 2020, the Company
issued 700,000 options. 300,000 options were issued to Chris Ryan, the Chief Financial Officer of the Company, and 400,000 options were
issued to Directors of the Company. The Company recorded an option expense of $267,647 in 2020. $256,574 of this amount relates
to the 2018 grant to Mr. Kidrin, the CEO. $11,073 relates to the grant in 2020 to Mr. Ryan, the CFO. The directors’ options were
granted on December 31, 2020 and no expense was recorded for these options. The option expense represents the amortization of the value
of the options issued in 2020 and 2018 that have not yet vested. The fair market value for Mr. Ryan’s options was calculated using
the Black Scholes method assuming a risk free interest of .36%, 0% dividend yield, volatility of 204%, and an exercise price of $0.266
per share with a market price of $0.266 per share at issuance date and an expected life of 5 years. The options vest one year from the
date of grant.
During the three months ended March 31, 2020, the
Company recorded an option expense of $81,079 representing the amortization of the value of the options issued in 2018 that have not yet
vested.
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Stock Warrants and Options
|
|
Stock warrants/options outstanding and exercisable on March 31, 2021 are as follows
|
|
Exercise
Price per Share
|
|
Shares
Under Option/warrant
|
|
Remaining
Life in Years
|
|
Outstanding
|
|
|
|
|
|
$
|
0.325
|
|
|
|
3,400,000
|
|
|
|
0.83
|
|
|
$
|
0.15
|
|
|
|
5,220,000
|
|
|
|
1.50
|
|
|
$
|
0.15
|
|
|
|
580,000
|
|
|
|
1.75
|
|
|
$
|
0.05
|
|
|
|
200,000
|
|
|
|
1.75
|
|
|
$
|
0.30
|
|
|
|
200,000
|
|
|
|
1.75
|
|
|
$
|
0.25
|
|
|
|
5,000,000
|
|
|
|
2.42
|
|
|
$
|
0.24
|
|
|
|
800,000
|
|
|
|
2.42
|
|
|
$
|
0.27
|
|
|
|
300,000
|
|
|
|
4.63
|
|
|
$
|
0.30
|
|
|
|
400,000
|
|
|
|
4.75
|
|
|
Total
|
|
|
|
|
16,100,000
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.325
|
|
|
|
3,400,000
|
|
|
|
0.83
|
|
|
$
|
0.15
|
|
|
|
5,220,000
|
|
|
|
1.50
|
|
|
$
|
0.15
|
|
|
|
580,000
|
|
|
|
1.75
|
|
|
$
|
0.05
|
|
|
|
200,000
|
|
|
|
1.75
|
|
|
$
|
0.30
|
|
|
|
200,000
|
|
|
|
1.75
|
|
|
$
|
0.25
|
|
|
|
5,000,000
|
|
|
|
2.42
|
|
|
$
|
0.24
|
|
|
|
800,000
|
|
|
|
2.42
|
|
|
Total
|
|
|
|
|
15,400,000
|
|
|
|
|
|
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 vested on August 28, 2019 and the
remaining 1.5 million vested 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
The Company issued 297,673 shares of common stock
to Chris Ryan the CFO as settlement of amounts previously recorded. The value of the shares on the date of issuance was $70,810. The Company
recorded a loss of $8,685 on the issuance of the shares.
The Company recorded a gain on forgiveness of accounts
payable related party due to the Company’s CFO in the amount of $16,401.
The balance in the accrued expense attributable to
related parties is $21,899 and $82,214 at March 31, 2021 and December 31, 2020, respectively.
See note 9 for a discussion on the convertible note
receivable from the related party.
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. On September 20, 2019, the Company filed a lawsuit
against Linden Research, Inc. in the US District court for the District of Delaware. On September 25, 2020, the Company filed a lawsuit
against Microsoft Corporation in the U.S. District Court for the Western District of Texas. Davidson, Berquist, Jackon & Gowdey LLP
is lead counsel for the Company. See Legal Proceedings section for more information on the patent infringement lawsuits.
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 – ACCRUED EXPENSES
Accrued expenses is comprised of (i) $21,899 owed to related parties, (ii)
$205,000 related to a judgment against the Company relating to unpaid consulting services dating back to April of 2001, (iii) $1,305,009
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, and (iv) $14,342 related to accruals for recurring operating expenses.
NOTE 9 – CONVERTIBLE NOTE RECEIVABLE –
RELATED PARTY
The Company made an investment in the form of a convertible note in the
amount of $200,000 to Canadian American Standard Hemp (“CASH”). The convertible note has a 7% annual interest rate and matures
in 2 years. Interest and principle is payable at maturity. The note can be converted at any time and either all or part of the amount
due can be converted into the borrower’s equity. During the year ended December 31, 2020, CASH merged with Real Brands, Inc. The
convertible note and accrued interest of $20,767 can be converted into 27,124,585 shares of Real Brands common stock at a conversion price
of $0.008139. If converted into common stock, the Company would own approximately 1% of Real Brands Inc. Messrs. Kidrin, Toboroff and
Christos are Directors of Real Brands and Mr. Kidrin is the CEO and Mr. Ryan is the CFO of Real Brands.
During the three months ended March 31, 2021, the
Company earned $3,500 in interest on the note.
During the three months ended March 31, 2020, the
Company earned $3,539 in interest on the note.
NOTE 10 – 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, 2021 the
Company generated net cash of $431,191 from the sale of 495,000 shares of MariMed Inc. common stock during the three months ended March
31, 2021 and 100,000 shares of MariMed Inc. common stock at the end of December 2020 which was not transferred to the Company’s
bank account until January of 2021. The average price per share was $0.73 per share.
As of March 31, 2021, the Company still owns approximately
2.4 million shares of MariMed Inc. common stock.
No shares were sold in the three months ended
March 31, 2020.
NOTE 11 – SUBSEQUENT EVENTS
Regarding the Company's lawsuit against the Activision
entities filed in 2012, on April 30, 2021, Judge Casper granted Activision’s summary judgment motion, entered an Order finding
that all asserted patents were invalid as directed to patent-ineligible subject matter, and terminated the Company’s lawsuit against
the Activision Entities. The Company has thirty (30) days from entry of this Order to appeal, and plans to seek appellate review
of Judge Casper’s Order by the U.S. Court of Appeals for the Federal Circuit, sitting in Washington, D.C. For further information
see Part II Other Information, legal proceedings.
Regarding the Company’s lawsuit against Linden
Research, Inc., d/b/a Linden Lab (“Linden”) filed on September 20, 2019. On
April 8, 2021, the Company and Linden jointly filed a stipulation to stay the Court’s deadlines for 30 days pending completion of
a settlement agreement between the parties. The Court granted the stay stipulation on the same day. On May 11, 2021, the Company
and Linden jointly reported to the Court that a settlement agreement has been finalized, and they anticipated that a stipulation of dismissal
with prejudice would be filed by May 27, 2021. The Court authorized this proposal on May 12, 2021.