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

FORM 10-Q

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

For the Quarterly Period ended September 30, 2012

( ) 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.

(not affiliated with Worldcom, Inc.)

(Exact Name of Registrant as Specified in Its Charter)

Delaware	22-1848316
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

11 Royal Road
Brookline, MA 02445
(Address of Principal Executive Offices)

(617) 725-8900
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer [ ] Accelerated filer [ ]

Non-accelerated filer [ ] Smaller reporting company [X]

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of November 14, 2012, 77,723,071 shares of the Issuer's Common Stock were outstanding.

 

Worlds Inc.

Table of Contents

Part I - Financial Information		Page
Item 1	Financial Statements	2
	Notes to Financial Statements	5
Item 2	Management’s Discussions and Analysis of Financial Condition and Results of Operations	13
Item 3	Quantitative and Qualitative Disclosures About Market Risk	N/A
Item 4	Controls and Procedures	15
Part II - Other Information
Item 1	Legal Proceedings	16
Item 1A	Risk Factors	16
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3	Default Upon Senior Securities	16
Item 4	Mine Safety Disclosures	N/A
Item 5	Other Information	16
Item 6	Exhibits	17
	Index to Exhibits	18
	Signatures	19

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

Worlds Inc.
Balance Sheets
September 30, 2012 and December 31, 2011
	Unaudited				Audited
	30-Sep-12				31-Dec-11
Current Assets
Cash and cash equivalents	$	5,905			$	152,526
Due from related party		65,788				43,819
Prepaid expense		-				82,633
Total Current Assets		71,694				278,978
Patents		7,000				—
TOTAL ASSETS	$	78,694			$	278,978
Current Liabilities
Accounts payable	$	797,908			$	798,808
Accrued expenses		1,900,643				1,866,172
Notes payable		773,279				773,279
Total Current Liabilities		3,471,830				3,438,259
Stockholders (Deficit)
Common stock (Par value $0.001 authorized 100,000,000 shares, issued and outstanding 77,723,071 and 74,862,146 at September 30, 2012 and December 31, 2011, respectively)		77,723				74,862
Common stock subscribed but not yet issued (371,942 and 525,000 at September 30, 2012 and December 31, 2011, respectively)		372				525
Additional paid in capital		25,703,295				25,231,804
Accumulated deficit		(29,174,526	)			(28,466,471	)
Total stockholders deficit		(3,393,136	)			(3,159,281	)
Total Liabilities and stockholders deficit	$	78,694			$	278,978
The accompanying notes are an integral part of these financial statements

 

 

 

 

Worlds Inc.
Statements of Operations
Nine and Three Months Ended September 30, 2012 and September 30, 2011
		Unaudited								Unaudited
		Nine months ended Sept. 30								Three months ended Sept. 30
		2012				2011				2012				2011
Revenues
Revenue		$	—			$	199			$	—			$	—
Total Revenue			—				199				—				—
Cost and Expenses
Cost of Revenue			—				16,959				—				—
Gross Profit/(Loss)			—				(16,760	)			—				—
Common Stock issued for services rendered			299,333				796,797				65,297				113,367
Selling, General & Admin.			211,614				259,138				53,077				33,713
Payroll and related taxes			197,108				134,209				68,267				—
Operating loss			(708,055	)			(1,206,905	)			(186,641	)			(147,080	)
Other Income Expense
Interest Expense			—				—				—				—
Net (Loss)		$	(708,055	)		$	(1,206,905	)		$	(186,641	)		$	(147,080	)
Weighted Average Loss per share			(0.01	)		$	(0.02	)			*			$	*
Weighted Average Common Shares Outstanding			76,194,707				68,818,329				77,132,854				71,405,387
*-less than $0.01
The accompanying notes are an integral part of these financial statements

 

 

 

 

Worlds Inc.
Statements of Cash Flows
Nine Months Ended September 30, 2012 and September 30, 2011
			Unaudited				Unaudited
			30-Sep-12				30-Sep-11
Cash flows from operating activities:
Net (loss)		$	(708,055	)		$	(1,206,905	)
Adjustments to reconcile net (loss) to net cash (used in) operating activities
Depreciation			—				759
Common stock issued for services rendered			299,333				796,797
Accounts payable and accrued expenses			33,571				11,652
Due from related party			(21,970	)			(73,048	)
Net cash (used in) operating activities:			(397,121	)			(470,745	)
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			250,000				150,000
Proceeds from exercise of options			7,500				58,000
Proceeds from exercise of warrants			—				118,446
Repayment of officer loan payable			—				(2,400	)
Net cash provided by financing activities			257,500				324,046
Net increase/(decrease) in cash			(146,621	)			(146,699	)
Cash beginning of period			152,526				400,848
Cash end of period		$	5,905			$	254,149
Non-cash financing activities
Common stock issued for accounts payable		$	—			$	72,375
Deferred revenue			—				276,950
Prepayment of expenses through issuance of common stock			—				66,300
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	—			$	—
Income taxes		$	—			$	—
The accompanying notes are an integral part of these financial statements

 

 

 

 

Worlds Inc.

NOTES TO FINANCIAL STATEMENTS

Nine Months Ended September 30, 2012

(Unaudited)

 

NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

 

Description of Business

 

On May 16, 2011, the Company transferred, through a spin-off to its then wholly owned subsidiary, Worlds Online Inc., the majority of its operations and related operational assets. The Company retained its patent portfolio which it intends to continue to increase and to more aggressively enforce against alleged infringers. The Company also entered into a License Agreement with Worlds Online Inc. to sublicense its patented technologies.

 

Basis of Presentation

 

The accompanying 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 is expected to be from sublicenses of the patented technology by Worlds Online and any revenue that may be generated from enforcing its patents in the market. During the second quarter of 2012 the Company had no revenue. 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. Deferred revenue represents cash payments received in advance to be recorded as revenue when earned. The corresponding cost associated with those contracts is also deferred as deferred costs until the revenue is ultimately recognized.

 

Research and Development Costs

 

Research and development costs are charged to operations as incurred.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is provided on a straight line basis over the estimated useful lives of the assets ranging from three to five years. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income. Maintenance and repairs are charged to expense in the period incurred.

 

Impairment of Long Lived Assets

 

The Company evaluates the recoverability of its fixed assets and other assets in accordance with section 360-10-15 of the FASB Accounting Standards Codification for disclosures about Impairment or Disposal of Long-Lived Assets. Disclosure requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds its expected cash flows. If so, it is considered to be impaired and is written down to fair value, which is determined based on either discounted future cash flows or appraised values. The Company adopted the statement on inception. No impairments of these types of assets were recognized during the nine months ended September 30, 2012 and 2011.

 

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.

 

Notes Payable

 

The Company has $773,279 in short term notes outstanding at September 30, 2012. See Note 5 for a further description thereof.

 

Deferred Revenue

 

As part of a debt refinancing in 2000, $631,950 of debt was renegotiated to deferred revenue representing future services to be provided by the Company. $355,000 has been amortized into income since then. The balance was transferred over to Worlds Online Inc. and no longer appears on the Company’s balance sheet.

 

 

Call Option Agreements

 

The Company has entered into call option agreements with 13 of its major shareholders. The call options give the Company the right to purchase up to 4,150,000 shares of stock back at prices ranging from $0.15 per share up to $0.40 per share. The Company issued an aggregate of 680,000 shares of stock to these shareholders as an inducement to enter into these call option agreements. The call option agreements have expiration dates of 1 and 2 years. In 2011, 12 of the call options were extended for 1 year. The Company issued 315,000 additional shares as an inducement to enter into the 1 year extensions.

 

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 consolidated financial statements. There were no items of comprehensive income (loss) applicable to the Company during the period covered in the consolidated financial statements.

 

Loss Per Share

 

Net loss per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. 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. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period.

 

Commitments and Contingencies

 

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, 2012 and December 31, 2011 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.

 

 

 

Recent Accounting Pronouncements

 

Recently issued accounting standards

 

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 consolidated financial condition or the consolidated results of its operations.

 

In May 2011, FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”).  ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively.  The Company anticipates that the adoption of this standard will not materially expand its financial statement note disclosures.

 

In June 2011, FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”), which amends current comprehensive income guidance.  This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity.  Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements.  ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011, with early adoption permitted.  The Company is reviewing ASU 2011-05 to ascertain its impact on the Company’s financial position, results of operations or cash flows as it only requires a change in the format of the current presentation.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, which allows, but does not require, an entity when performing its annual goodwill impairment test the option to first do an initial assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount for purposes of determining whether it is even necessary to perform the first step of the two-step goodwill impairment test. Accordingly, based on the option created in ASU 2011-08, the calculation of a reporting unit’s fair value is not required unless, as a result of the qualitative assessment, it is more likely than not that fair value of the reporting unit is less than its carrying amount. If it is less, the quantitative impairment test is then required. ASU 2011-08 also provides for new qualitative indicators to replace those currently used. Prior to ASU 2011-08, entities were required to test goodwill for impairment on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is performed to measure the amount of impairment loss, if any. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company adopted ASU 2011-08 during the first quarter of fiscal 2013. The adoption of ASU 2011-08 did not impact the Company’s results of operations or financial condition.

In December 2011, FASB issued Accounting Standards Update 2011-11, “Balance Sheet - Disclosures about Offsetting Assets and Liabilities” to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity's balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. The update only requires additional disclosures, as such, the Company does not expect that the adoption of this standard will have a material impact on its results of operations, cash flows or financial condition.

In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”. The guidance allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test.

ASU 2012-02 allows companies the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired, before determining whether it is necessary to perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. Companies can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets or choose to only perform the quantitative impairment test for any indefinite-lived intangible in any period.

ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company is in the process of evaluating the guidance and the impact ASU 2012-02 will have on its consolidated financial statements.

 

 

 

 

NOTE 2 - GOING CONCERN

 

From mid-2001 through most of 2007, the Company had to significantly curtail and at times almost cease operations due to lack of resources. 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 nine months ended September 30, 2011 the Company completed a private placement of 1,000,000 shares of common stock at a price per share of $0.15 for aggregate proceeds of $150,000.

 

During the nine months ended September 30, 2011 the Company issued an aggregate of 4,059,495 shares of common stock as payment for services rendered.

 

During the nine months ended September 30, 2011, the Company raised $118,446 with the exercise of warrants covering 1,160,804 shares of its common stock at a price per share ranging from $0.01 to $0.15 per share.

 

During the nine months ended September 30, 2011, the Company raised $58,000 with the exercise of options covering 928,529 shares of its common stock at a price ranging from $0.05 to $0.30 per share. 128,529 of those shares were exercised on a cashless basis by the surrender to the Company of an aggregate of 131,747 options with a value of $38,558 being equal to the difference in price between the exercise price and the market price on the date of exercise.

 

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

 

During the nine months ended September 30, 2012, the Company issued an aggregate of 3,323,382 shares of common stock as payment for services rendered with an aggregate value of $299,333.

 

During the nine months ended September 30, 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.

 

 

 

NOTE 4 – DEFERRED REVENUE

 

Deferred revenue represents advance payments for the license, the design and development of the software, content and related technology for the creation of an interactive, 3D entertainment portal on the internet. As part of a debt refinancing in 2000, $631,950 of debt was renegotiated to deferred revenue representing future services to be provided by the Company. During 2010, $265,000 worth of services was provided leaving a balance of $276,950 at December 31, 2010. As part of the spin off, the deferred revenue agreement was transferred to Worlds Online Inc. Accordingly, as of September 30, 2012, the balance is $0.

 

 

NOTE 5 - NOTES PAYABLE

 

Short term notes payable at September 30, 2012 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
2012		$	773,279
2013		$	-0-
2014		$	-0-
2015		$	-0-
2016		$	-0-
		$	773,279

 

 

 

NOTE 6- PROPERTY AND EQUIPMENT

 

The detail composition of property and equipment at September 30, 2012 and December 31, 2011 is as follows:

			30-Sept				31-Dec
			2012				2011
Computer equipment		$	10,891			$	10,891
Less: accumulated depreciation			10,891				10,891
		$	0			$	0

 

Depreciation expense recorded for the nine months ended September 30, 2012 and 2011 was $0 and $0, respectively.

 

 

NOTE 7 – STOCK OPTIONS

 

No stock options were issued during the nine months ended September 30, 2012.

 

During the nine months ended September 30, 2012, stock options representing 150,000 shares at $0.05 per share were exercised. No warrants were exercised. There are no outstanding warrants as of September 30, 2012.

 

Stock Options
Stock options outstanding and exercisable on September 30, 2012 are as follows:
Exercise Price per Share		Shares Under Option				Remaining Life in Years
Outstanding
$0.35			212,500				1.25
$0.20			300,000				.25
$0.20			300,000				1.25
$0.11			150,000				2.55
$0.11			300,000				.55
$0.076			7,500,000				1.42
$0.05			450,000				1.10
Exercisable
$0.35			212,500				1.25
$0.20			300,000				.25
$0.20			300,000				1.25
$0.11			150,000				2.55
$0.11			300,000				.55
$0.076			7,500,000				1.42
$0.05			450,000				1.10

 

 

 

NOTE 8 - INCOME TAXES

 

At September 30, 2012, the Company had federal and state net operating loss carry forwards of approximately $40,520,000 that expire in various years through the year 2024.

 

Due to operating losses, there is no provision for current federal or state income taxes for the nine months ended September 30, 2012 and 2011.

 

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 September 30, 2012 consists of net operating loss carry forwards calculated using federal and state effective tax rates equating to approximately $16,000,000 less a valuation allowance in the amount of approximately $16,000,000. Because of the Company’s lack of earnings history, the deferred tax asset has been fully offset by a valuation allowance.

 

The Company’s total deferred tax asset as of September 30, 2012 is as follows:

Net operating loss carry forwards		$	15,800,000
Valuation allowance			(15,800,000)
Net deferred tax asset		$	—

 

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

 

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

 

During the nine months ended September 30, 2012 and September 30, 2011, the valuation allowance increased by approximately $200,000 and $400,000, respectively. 

NOTE 9 - PATENTS

Worlds Inc. currently has six patents, 6,219,045 - 7,181,690 - 7,493,558 – 7,945,856, - 8,082,501 and 8,145,998. 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 we will be successful in our ability to prosecute our IP portfolio or that we will be able to acquire additional patents.

Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

 

When used in this Form 10-Q and in future filings by the Company with the Commission, the words or phrases such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will" or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

 

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. These factors include, but are not limited to, changes that may occur to general economic and business conditions; changes in political, social and economic conditions in the jurisdictions in which we operate; changes to regulations that pertain to our operations; changes in technology that render our technology relatively inferior, obsolete or more expensive compared to others; delays in the delivery of broadband capacity to the homes and offices of persons who use our services; general disruptions to Internet service; and the loss of customer faith in the Internet as a means of commerce.

 

The following discussion should be read in conjunction with the unaudited financial statements and related notes which are included under Item 1.

 

We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.

 

Overview

 

General

 

Starting in mid-2001 we were not able to generate enough revenue to sustain full operations and other sources of capital were not available. As a result, we have had to significantly curtail our operations since that time and at times almost halt them all together. Since mid-2007, as more funds became available from our financings, we were able to increase operations and become more active operationally.

 

On May 16, 2011, we transferred, through a spin-off to our then wholly owned subsidiary, Worlds Online Inc., the majority of our operations and related operational assets. We retained our patent portfolio which we intend to continue to increase and to more aggressively enforce against alleged infringers. We also entered into a License Agreement with Worlds Online Inc. to sublicense patented technologies.

 

At present, the Company’s anticipated sources of revenue after the spin off will be from sublicenses of the patented technology by Worlds Online and any revenue that may be generated from enforcing its patents in the market.

Revenues

 

We generated no  revenue during the quarter because we transferred the operations of the Company to Worlds Online Inc.

 

We classify our expenses into two broad groups:

 

O	cost of revenues; and

 

O	selling, general and administration

 

 

 

Liquidity and Capital Resources

 

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

 

RESULTS OF OPERATIONS

 

Our net revenues for each of the three months ended September 30, 2012 and 2011 were $0 and $0, respectively. Our net revenue for each of the nine months ended September 30, 2012 and 2011 were $0 and $199, respectively. The lack of revenue is due to spinning off the online business operations to Worlds Online Inc.

 

Three and nine months ended September 30, 2012 compared to three and nine months ended September 30, 2011

 

Revenue is $0 for the three months ended September 30, 2012 and 2011. Revenue is $0 because the online business operations including the VIP subscription business has been transferred to Worlds Online Inc. The business up to the spin off continued to run in a severely diminished mode due to the lack of liquidity. Post spin off we still need to raise a sufficient amount of capital to provide the resources required that would enable us to continue running the business.

 

Cost of revenues was $0 in the three months ended June 30, 2012 and June 30, 2011.

 

Selling general and administrative (S, G & A) expenses increased by $19,364 or 57% from $33,713 to $53,077 for the three months ended September 30, 2011 and 2012, respectively. Common stock issued for services rendered decreased by $48,070 to $65,297 for three months ended September 30, 2012 compared to $113,367 for the same period in 2011. The decrease is due to certain strategic business consulting and advice agreements ending last year. Salary expense increased by $68,267 to $68,267 for the three months ended September 30, 2012 from $0 for the comparable period for last year.

 

As a result of the foregoing, we realized a net loss of $186,641 for the three months ended September 30, 2012 compared to a loss of $147,080 in the three months ended September 30, 2011, an increased loss of $39,561.

 

Revenue decreased by $199 to $0 for the nine months ended September 30, 2012 from $199 in the prior year. The Company spun off the online businesses to Worlds Online Inc. The VIP subscriptions and revenue related to the deferred revenue agreement has been transferred over to Worlds Online Inc. Before the spin off, the business was running in a severely diminished mode due to the lack of liquidity. We still need to raise a sufficient amount of capital to provide the resources required that would enable us to continue to operate the business.

 

Our cost of revenues during the nine months ended September 30, 2012 and 2011 are primarily comprised of (1) cost of goods sold: 0% and 1%, respectively, (2) selling general and administrative expenses: 30% and 21%, respectively, (3) Common stock issued for services rendered: 42% and 66%, respectively, and (4) payroll and related taxes: 28% and 11%, respectively. Cost of sales on a consolidated basis decreased $16,959 to $0 for the nine months ended September 30, 2012, from $16,959 in the nine months ended September 30, 2011. The decrease was due to a data recovery project undertaken during the nine months ended September 30, 2011 and not the result of sales and there was no activity in 2012 due to the spin off of the online business operations. Selling general and administrative expenses decreased by approximately $47,424, from $259,138 to approximately $211,614 for the nine months ended September 30, 2011 and 2012, respectively. Decrease is due to a decrease in professional service fees including business consulting, legal and accounting.

 

Common stock issued for services rendered decreased by $497,464 to $299,333 in 2012 compared to $796,797 for 2011. The decrease is due to the strategic business consulting and advice agreements in the prior year ending due to the spin off and also last year the Company issued shares to individuals who had been performing valuable services for the company over the years without any form of compensation.

 

As a result of the foregoing we had a net loss of $708,055 for the nine months ended September 30, 2012 compared to a loss of $1,206,905 in the nine months ended September 30, 2011.

 

 

Liquidity and Capital Resources

 

Our financial and liquidity position has deteriorated somewhat from the prior year period. Our cash equivalents was $5,905 at September 30, 2012. We raised an aggregate of $250,000 in March of 2012 from a private placement of common stock.  

 

At September 30, 2011, cash and cash equivalents was $254,149. There were no capital expenditures in the three months ended September 30, 2012 or in the three months ended September 30, 2011.

 

Historically, our primary cash requirements have been to fund the cost of operations, to keep the Company in compliance with its reporting requirements, development of our products and patent protection, with additional funds having been used in promotion and advertising and in connection with the exploration of new business lines.

 

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

 

On March 30, 2012, the Company filed a patent infringement lawsuit against Activision Bizzard Inc., Blizzard Entertainment Inc. and Activision Publishing Inc. in the United States District Court for the District of Massachusetts. Susman Godfrey LLP is lead counsel for the Company

 

Item 4. Controls And Procedures

As of September 30, 2012, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2012. The above statement notwithstanding, you are cautioned that no system is foolproof.

Changes in Internal Control Over Financial Reporting

 

During the quarter covered by this report there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

 

In Cosmo Communications v. Worlds Inc. 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 we are a successor company .

Item 1A. Risk Factors

We are not obligated to disclose our risk factors in this report, however, limited information regarding our risk factors appears in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Forward-Looking Statements” contained in this Quarterly Report on Form 10-Q and in “Item 1A. RISK FACTORS” of our 2011 Annual Report on Form 10-K. There have been no material changes from the risk factors previously disclosed in our 2011 Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosure

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 

 

 

Item 6. Exhibits

 

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

 

 

 

 

INDEX TO EXHIBITS

 

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

 

 

 

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned thereto duly authorized.

Date: November 14, 2012

WORLDS INC.

By: /s/ Thomas Kidrin Thomas Kidrin President and CEO By: /s/ Christopher Ryan Christopher Ryan Chief Financial Officer