10-Q/A 1 worldsincq2a.htm

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

FORM 10-Q /A

Amendment No. 1

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

For the Quarterly Period ended June 30, 2014

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________

Commission File number 0-24115

WORLDS INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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 [ X ] No [ ]

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 July 22, 2014, 96,554,322 shares of the Issuer's Common Stock were outstanding.

EXPLANATORY NOTE

This Amendment No. 1 to Quarterly Report on Form 10-Q/A (this “Amended Report”) is being filed with the Securities and Exchange Commission to amend the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2014 (the “Original 10-Q”) of WORLDS, INC. solely to correct the disclosure with respect to certain employee stock options and investor warrants. No other changes are being made and this Amended Report still speaks only as of the date it was initially filed.

This Amended Report includes currently-dated certifications of the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

Worlds Inc.

Table of Contents

Part I - Financial Information		Page
Item 1	Financial Statements	3
	Notes to Financial Statements	6
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	N/A
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	16
Signatures		17

(1)

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Worlds Inc.
Balance Sheets
June 30, 2014 and December 31, 2013

	Unaudited			Audited
	June 30, 2014			December 31, 2013
	( Restated )			( Restated )
ASSETS:
Current Assets
Cash and cash equivalents	$	61,054		$	22,132
Due from related party		200,199			295,912
Promissory note		2,000			3,000

Total Current Assets		263,254			321,044

Patents		7,000			7,000

Total assets	$	270,254		$	328,044


LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current Liabilities
Accounts payable	$	797,908		$	797,908
Accrued expenses		2,094,508			1,986,726
Derivative liability		837,489			1,187,600
Notes payable		773,279			773,279
Notes payables		325,000			225,000
Convertible notes payable, net		32,504			117,534

Total Current Liabilities		4,860,688			5,088,047


Stockholders' (Deficit)

Common stock (Par value $0.001 authorized 100,000,000 shares, issued and outstanding 96,554,322 and 93,209,823 at June 30, 2014 and December 31, 2013, respectively)		96,554			93,210
Additional paid in capital		31,309,596			30,287,412
Common stock-warrants		97,869			97,869
Deferred compensation		—			(12,609	)
Accumulated deficit		( 36,094,453	)		( 35,225,884	)
Total stockholders deficit		(4,590,433	)		(4,760,003	)

Total Liabilities and stockholders' deficit	$	270,254		$	328,044

The accompanying notes are an integral part of these financial statements

(2)

Table of Contents

Worlds Inc.
Statements of Operations
Six and Three Months Ended June 30, 2014 and 2013
	Unaudited						Unaudited
	6 Months Ended						3 Months Ended
	Jun. 30, 2014 ( Restated )			Jun. 30, 2013( Restated )			Jun. 30, 2014 ( Restated )			Jun. 30, 2013( Restated )

Revenues
Revenue	$	—		$	—		$	—		$	—

Total Revenue		—			—			—			—

Cost and Expenses

Cost of Revenue		—			—			—			—

Gross Profit/(Loss)		—			—			—			—

Option Expense		66,451			—			—			—
Common Stock issued for services rendered		75,908			232,516			39,300			170,253
Selling, General & Admin.		160,920			365,081			71,385			116,145
Salaries and related taxes		104,663			112,238			55,625			65,212

Operating (loss)		( 407,943	)	$	(709,835	)	$	(166,310	)	$	(351,610	)

Other Income Expense
Gain (Loss) on change in fair value of derivative liability		( 161,667	)		(1,400,341)		$	( 260,201	)		780,967
Interest Expense		(298,959	)	$	(311,903	)	$	(52,113	)	$	(284,385	)
Interest Income		—			1,430			—			1,430

Net Income (Loss)	$	(868,569	)	$	( 2,420,649	)	$	( 478,624	)		146,402

Weighted Average (Loss) per share	$	(0.02	)	$	( 0.03	)		(0.01	)		*
Weighted Average Common Shares Outstanding		94,767,763			82,841,277			95,475,237			83,839,228
*Less than 0.01

The accompanying notes are an integral part of these financial statements

(3)

Table of Contents

Worlds Inc.
Statements of Cash Flows
Six Months Ended June 30, 2014 and 2013
	Unaudited
	6 Months Ended
	Jun. 30, 2014 ( Restated )			Jun. 30, 2013 ( Restated )
Cash flows from operating activities:
Net (loss)	$	( 868,569	)	$	( 2,420,649	)
Adjustments to reconcile net (loss) to net cash (used in) operating activities
Fair value of stock options issued		66,451			—
Common stock issued for services rendered		75,908			232,516
Amortization of discount to note payable		289,345			221,370
Derivative expense		—			3,007,846
Changes in fair value of derivative liabilities		161,667			( 1,607,506	)
Promissory note payable		1,000			—
Accounts payable and accrued expenses		117,407			23,525
Due from related party		95,713			(122,341	)
Net cash (used in) operating activities:		(61,078	)		(665,239	)

Cash flows from financing activities
Proceeds from issuance of common stock		—			97,500
Proceeds from exercise of warrants		—			131,000
Proceeds from issuance of convertible note payable		—			2,400,000
Proceeds from issuance of note payable		100,000			—
Net cash provided by financing activities		100,000			2,628,500

Net increase/(decrease) in cash and cash equivalents		38,922			1,963,261

Cash and cash equivalents, beginning of year		22,132			95,069

Cash and cash equivalents, end of year	$	61,054		$	2,058,330

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

(4)

Table of Contents

Worlds Inc.

NOTES TO FINANCIAL STATEMENTS

Six Months Ended June 30, 2014

(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 will be from sublicenses of the patented technology by Worlds Online and any revenue that may be generated from enforcing its patents. Prior to the spin-off, the Company had the following sources of revenue: (1) consulting/licensing revenue from the performance of development work performed on behalf of the Company, licensing revenue or from the sale of certain software to third parties; and (2) VIP subscriptions to our Worlds Ultimate 3-D Chat service. The Company recognizes revenue when all of the following criteria are met: evidence of an arrangement exists such as a signed contract, delivery has occurred, the price is fixed or determinable, and collectability is reasonable assured. This will usually be in the form of a receipt of a customer’s acceptance indicating the product has been completed to their satisfaction except for development work and service revenue which is recognized when the services have been performed. 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.

(5)

Table of Contents

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 six months ended June 30, 2014.

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 June 30, 2014 and December 31, 2013. The company has $325,000 and $225,000 in notes outstanding at June 30, 2014 and December 31, 2013, respectively.

(6)

Table of Contents

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 June 30, 2014, there were 8,600,000 options and 5,273,214 warrants whose effect is anti-dilutive and not included in diluted net loss per share for the three and six months ended June 30, 2014.. 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 June 30, 2014, and December 31, 2013 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 six months ended June 30, 2014 and 2013, respectively.

Subsequent Events

The Company evaluated for subsequent events through the issuance date of the Company’s financial statements.

Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements up to ASU 2014-05, and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

(7)

Table of Contents

NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS

The Company identified errors related to understatement of option expense for the year ended December 31, 2012. The facts underlying the Company’s original conclusion is that 7.5 million stock options granted to President and CEO of the Company, Thom Kidrin, were only 18 month options and were expiring on March 31, 2014. Such 7.5 million stock options were additionally extended for 2 years with new expiration date on March 31, 2016. In fact they were five (5) year options expiring in September 2017 and no extension was granted. Accordingly, all the financial statements for the year ended December 31, 2012 and for the six months ended June 30, 2014 are restated.

In addition, the Company identified errors related to understatement of derivative liabilities as of June 30, 2014, and loss on change in the fair value of the derivative liability for the three and six months ended June 30, 2014. The facts underlying the Company’s original conclusion is that there were no derivative liabilities incurred when 4,535,714 warrants were granted to the investors in connection with the strategic financing agreements entered into in March of 2013. In fact such warrants’ ratchet features triggered derivative liabilities of the Company.

The following table sets forth all the accounts in the original amounts and restated amounts, respectively.

As of June 30, 2014

	Original			Adjustment			Restated

Derivative liability	$	75,722		$	761,767		$	837,489
Additional paid in capital	$	32,220,773		$	(911,177	)	$	31,309,596
Accumulated deficit	$	(36,243,863	)	$	149,410		$	(36,094,453	)

For the six months ended June 30, 2014

	Original			Adjustment			Restated

Option expenses	$	1,186,310		$	(1,119,859	)	$	66,451
Gain (loss) on change in fair value of derivative liability	$	(158,204	)	$	3,463		$	(161,667	)
Net (loss)		(1,984,965	)		1,116,396			(868,569	)
Weighted average loss per share	$	(0.02	)	$	0.01		$	(0.01	)

For the three months ended June 30, 2014

	Original			Adjustment			Restated

Gain (loss) on change in fair value of derivative liability	$	(87,031	)	$	(173,170	)	$	(260,201	)
Net (loss)		(305,454	)		(173,170	)		(478,624	)
Weighted average loss per share		**		$	(0.01	)	$	(0.01	)

Statement of Equity as of January 1, 2014

	Original			Adjustment			Restated

Additional paid in capital	$	30,078,730		$	208,682		$	30,287,412
Accumulated deficit	$	(34,258,898	)	$	(966,986	)	$	(35,225,884	)

** Less than $0.01

NOTE 3 - GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Since its inception, the Company has had periods where it had only minimal revenues from operations. There can be no assurance that the Company will be able to obtain the additional capital resources to fully implement its business plan or that any assumptions relating to its business plan will prove to be accurate. The Company is pursuing sources of additional financing and there can be no assurance that any such financing will be available to the Company on commercially reasonable terms, or at all. Any inability to obtain additional financing will likely have a material adverse effect on the Company, including possibly requiring the Company to reduce and/or cease operations.

These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 4 - PRIVATE PLACEMENTS OF EQUITY

During the six months ended June 30, 2014, the Company issued 2,830,973 common shares by converting $374,375 of the convertible notes payable into common stock.

During the six months ended June 30, 2014, the Company issued an aggregate of 450,000 shares of common stock as payment for services rendered with an aggregate value of $63,300. The Company also recognized stock issued for services in the amount of $12,609 for stocks issued in year 2013 but amortized in this period.

During the six months ended June 30, 2014, the Company issued 63,526 shares to an officer of the company as payment for an accrued expense in the amount of $9,625.

During the six months ended June 30, 2013, the Company sold 875,000 common shares for a cash investment of $87,500. The company received $10,000 for stock issued in 2012 and recorded as subscription receivable.

During the six months ended June 30, 2013, the Company raised $120,000 with the exercise of warrants covering 800,000 shares of its common stock at a price of $0.15 per share.

During the six months ended June 30, 2013, 100,000 stock options were exercised at a price of $0.11 per share for cash proceeds of $11,000.

During the six months ended June 30, 2013, the Company issued an aggregate of 1,525,000 shares of common stock as payment for services rendered with an aggregate value of $494,950, $274,934 of which was recorded as deferred compensation as of June 30, 2013.

During the six months ended June 30, 2013, the Company issued 1,500,000 common shares for a cash investment of $150,000 which was received in 2012. The shares were not issued as of December 31, 2012, and were recorded as common stock subscribed but not yet issued at December 31, 2012.

(8)

Table of Contents

NOTE 5 - NOTES PAYABLE

We issued an aggregate of $2.4 million face amount of Senior Secured Convertible Notes (the “Notes”). The Notes are divided into Series A, Series B and Series C with the Series A and B Notes aggregating to $1.95 million and the Series C Notes aggregating to $450,000. The Series A and Series B Notes were exchanged by the return of the face amount of the Notes and for 7 million shares of common stock of the Company. The remaining Series C Note carries a 14% annual interest rate upon default and is payable on March 13, 2016. The Company has determined that the conversion feature of the Notes represent an embedded derivative since the Notes are convertible into a variable number of shares upon conversion. The Notes are classified as a derivative liability and not a note payable, see Note 10 below.

Notes payable at June 30, 2014 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

2014	$	773,279
2015	$	325,000
2016	$	-0-
2017	$	-0-
2018	$	-0-
	$	1,098,279

We issued promissory notes in the amount of $100,000 during the six months ended June 30, 2014. We had issued promissory notes in the amount of $225,000 during the year ended December 31, 2013. One of the Promissory Notes in the amount $50,000 was in lieu of payment of cash for an outstanding balance due to a consultant of the Company. The promissory notes carry a 6% annual interest rate and are payable upon the earlier of (a) 24 months from the date of the promissory note or (b) the Company reaching a settlement(s) on a patent infringement claim(s) and receiving an aggregate of at least $2 million net proceeds from such settlement(s).

The holders of the promissory notes shall receive repayment in the full face amount of the note from the initial $500,000 the Company actually receives from the net proceeds of its patent infringement claim(s) or from the net proceeds of a public offering. In addition the holder shall receive a preferred return (i) in an amount equal to up to 200% of the initial face amount of the note out of available cash by sharing with all other investors in this series of notes in the allocation of 50% of the available cash received by the Company form $2M - $4M and (ii) in an amount equal to up to 100% of the initial face amount of the note out of available cash by sharing with all other investors in this series of notes in the allocation of 25% of the available cash received by the Company from $4M - $6M. In other words, if the Company collects $6M in the net proceeds of available cash, the holder will receive a return equal to 400% of its investment.

(9)

Table of Contents

NOTE 6 – STOCK OPTIONS

During the six months ended June 30, 2014, the Company issued 450,000 options to the Company’s directors. The directors, Bernard Stolar, Robert Fireman and Edward Gildea each received 100,000 options for serving as board members in 2014. Edward Gildea joined the board on January 10, 2014 and received an additional 150,000 options for joining the Company’s board.

No stock options or warrants were exercised during the six months ended June 30, 2014.

During the six months ended June 30, 2013, the Company issued 4,535,714 warrants as part of the offering of the senior secured convertible notes. Such warrants triggered derivative liabilities of the Company due to their ratchet features (see Note 11 below). During the six months ended June 30, 2013, 800,000 warrants were exercised for cash proceeds of $120,000. During the six months ended June 30, 2013, 100,000 stock options were exercised for cash proceeds of $11,000. During the six months ended June 30, 2013, 900,000 stock options were exercised through a cashless exercise of options resulting in the issuance of 639,606 shares of common stock.

During the six months ended June 30, 2014, the Company recorded an option expense of $66,451 , equal to the estimated fair value of the options at the date of grants. The fair market value was calculated using the Black-Scholes options pricing model, assuming approximately 1.73% risk-free interest, 0% dividend yield, 294% volatility, and expected life of 5 years.

Stock Warrants and Options
Stock warrants/options outstanding and exercisable on June 30, 2014 are as follows:

Exercise Price per Share		Shares Under Option/warrant		Remaining Life in Years

	Outstanding
$	1.00		4,535,714		3.71
$	0.19		200,000		3.50
$	0.155		200,000		4.50
$	0.15		737,500		0.50
$	0.14		250,000		4.72
$	0.115		300,000		3.33
$	0.11		150,000		0.80
$	0.070		7,500,000		3.25
$
	Exercisable
$	1.00		4,535,714		3.71
$	0.19		200,000		3.50
$	0.15		737,500		0.50
$	0.115		300,000		3.33
$	0.11		150,000		0.80
$	0.070		7,500,000		3.25

(10)

Table of Contents

NOTE 7 - COMMITMENTS AND CONTINGENCIES

The Company is committed to an employment agreement with its President and CEO, Thom Kidrin. The agreement, dated as of August 30, 2012, is for five years with a one-year renewal option held by Mr. Kidrin. The agreement provides for a base salary of $175,000, which increases 10% on September 1 of each year; a monthly car allowance of $500; an annual bonus equal to 2.5% of Pre-Tax Income (as defined in the agreement); an additional bonus as follows: $75,000, if Pre-Tax Income for the year is between 150% and 200% of the prior fiscal year’s Pre-Tax Income or (B) $100,000, if Pre-Tax Income for the year is between 201% and 250% of the prior fiscal year’s Pre-Tax Income or (C) $200,000, if Pre-Tax Income for the year is 251% or greater than the prior fiscal year’s Pre-Tax Income, but in no event shall this additional bonus exceed five (5%) percent of Pre-Tax Income for such year; payment of up to $10,000 in life insurance premiums; options to purchase 7.5 million shares of Worlds Inc. common stock at an exercise price of $0.070 per share, all of which vested on October 1, 2012; a death benefit of at least $2 million dollars; and a payment equal to 2.99 times his base amount (as defined in the agreement) in the event of a Change of Control (as defined in the agreement). The agreement also provides that Mr. Kidrin can be terminated for cause (as defined in the agreement) and that he is subject to restrictive covenants for 12 months after termination.

NOTE 8 - RELATED PARTY TRANSACTIONS

Due from related party is comprised of cash payments made by Worlds Inc. on behalf of Worlds Online Inc. for shared operating expenses. The balance due at June 30, 2014 is $200,199.

NOTE 9 - PATENTS

Worlds Inc. currently has nine patents, 6,219,045 - 7,181,690 - 7,493,558 – 7,945,856, - 8,082,501, – 8,145,998 – 8,161,383, – 8,407,592 and 8,640,028. On March 30, 2012, the Company filed a patent infringement lawsuit against Activision Bizzard Inc., Blizzard Entertainment Inc. and Activision Publishing Inc. in the United States District Court for the District of Massachusetts. Susman Godfrey LLP is lead counsel for the Company. The costs to prosecute those parties that the Company and our legal counsel believe to be infringing on said patents were capitalized under patents until a resolution is reached.

A Federal District Court issued a ruling on March 13, 2014 on the Motion for Summary Judgment hearing that allows the company to proceed with its patent infringement suit against Activision Blizzard, Inc., Blizzard Entertainment, Inc. and Activision Publishing, Inc.'s (Activision). The MSJ hearing held October 17, 2013 addressed Activision's dispute of Worlds Inc.'s November 1995 patent priority date. The court did not dismiss the case as requested by Activision. The Court’s ruling does prevent the company from pursuing damages for the period prior to the U.S. Patent and Trademark Office's (USPTO) issuance of Certificates of Correction on September 24, 2013 that amended the Company’s 6,219,045 and 7,181,790 patents to include comprehensive priority information, which specifically references Worlds November 1995 provisional patent application and confirms Worlds 1995 priority date.

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.

(11)

Table of Contents

NOTE 10 – DERIVATIVE LIABILITIES

Derivative liabilities due to variable conversion ratio

On March 20, 2013 the Company entered into strategic financing agreements with several institutional investors that could provide the Company with up to $2.3 million of debt financing based upon the amount of conversions and redemptions. The transaction documents provide, among other things, that (i) the investors will receive five year warrants in an amount equal to 100% of the number of shares of our common stock the investors would receive if the Notes (defined below) were converted on March 13, 2013, at an exercise price of $0.50 per share, (ii) $1.950 million of the funds will deposited in one of our bank accounts but will be subject to a control account agreement which will provide that the Company can only withdraw funds from the account as the investors convert or redeem the Notes, (iii) the investors have demand and piggy-back registration rights for the shares of common stock underlying the warrants and Notes, (iv) the Notes will be secured by a first priority security interest in all of our assets, other than our patents, (v) each investor may not convert any Note or exercise any warrants if doing so will cause the investor to own more than 4.99% of our outstanding common stock at any time, although under certain circumstances they can each own up to 9.99% of our outstanding common stock, (vi) we paid $40,000 of the investors’ legal fees incurred with respect to this transaction, and (vii) for the next three years the investors have a right to participate in up to 50% of any of our future financings. The warrants and Notes contain standard anti-dilution provisions and the Securities Purchase Agreements contains standard covenants for a financing of this nature. In the event the Company acquires any subsidiaries while the Notes are outstanding, such subsidiaries will be obligated to guaranty the Notes and any other obligations we owe to the investors pursuant to the transaction documents.

On July 15, 2013 we entered into Amendment and Exchange Agreements with each of the existing holders of our Series A, B and C Senior Secured Convertible Notes and related warrants to purchase our common stock, which securities were originally issued pursuant to that certain Securities Purchase Agreement dated as of March 14, 2013 (“Securities Purchase Agreement”), by and among us and such holders.

Each Exchange Agreement provides for, among other things, that:

	(i)	Various restrictive provisions of the Securities Purchase Agreement and the Class C Senior Secured Convertible Notes were either eliminated by amendment or waived;
	(ii)	the related warrants, initially exercisable into an aggregate of 4,535,714 shares of Common Stock at an initial exercise price of $0.50, were exchanged for new warrants, initially exercisable into an aggregate of 4,535,714 shares of Common Stock at an initial exercise price of $1.00; and
	(iii)	the Series A and B Senior Secured Convertible Notes, with an aggregate original principal amount of $1,950,000, were exchanged for an aggregate of 7 million shares of our common stock and the payment by the Company to such holders of an aggregate of approximately $1,951,400 (the remaining cash amount held in a control account pursuant to the terms and conditions of the Series A and B Senior Secured Convertible Notes)

The Company has determined that the conversion feature of the Note represent an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly, the Note is not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the balance sheet with the corresponding amount recorded as a discount to the Note. Such discount will be accreted from the grant date to the maturity date of the Note. The change in the fair value of the derivative liability will be recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative liability on the balance sheet. The beneficial conversion feature included in the Note resulted in an initial debt discount of $450,000 and an initial loss on the valuation of derivative liabilities of $171,658 based on the initial fair value of the derivative liability of $621,658. The fair value of the embedded derivative liability was calculated at grant date utilizing the following assumptions:

Grant Date	Fair Value		Term (Years)		Assumed Conversion Price		Market Price on Grant Date		Volatility Percentage			Risk-free Rate
3/20/13	$	621,658		3.0	$	0.326	$	0.465		238	%		0.0038

During the six months ended June 30, 2014, $374,375 of the convertible notes was converted into 2,830,973 shares of the Company’s common stock. $75,188 in convertible notes remain.

At June 30, 2014, the Company revalued the embedded derivative liability. For the period from December 31, 2013 to June 30, 2014, the Company decreased the derivative liability of $514,883 by $439,161 resulting in a derivative liability of $75,722 at June 30, 2014.

The fair value of the embedded derivative liability was calculated at June 30, 2014 utilizing the following assumptions:

Date		Fair Value		Term (Years)		Assumed Conversion Price		Market Price		Volatility Percentage			Risk-free Rate
	12/31/13	$	514,883		2.22	$	0.126	$	0.15		275	%		0.0078
	6/30/14	$	75,722		1.72	$	0.16	$	0.21		170	%		0.0049

Derivative liabilities due to ratchet features of the warrants

On March 20, 2013, the Company issued 4,535,714 warrants (the “Warrants”) as part of the senior secured convertible notes. Pursuant to the warrants agreements, if and whenever on or after the grant date of the Warrants, the Company issued or sold, or in accordance with the warrants agreements is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but excluding any Excluded Securities issued or sold or deemed to have been issued or sold) for a consideration per share (the “New Issuance Price”) less than a price equal to the Exercise Price of the Warrants in effect immediately prior to such issue or sale or deemed issuance or sale (“Dilutive Issuance”), then immediately after such Dilutive Issuance, the Exercise Price then in effect shall be reduced to an amount equal to the New Issuance Price.

The Company has determined that the ratchet features of the Warrants represent an embedded derivative since the Warrants are exercisable into a variable number of shares upon exercise. Accordingly, the Warrants are not considered to be conventional warrants under EITF 00-19 and the embedded ratchet feature must be accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the balance sheet with the corresponding amount recorded as derivative expenses. The change in the fair value of the derivative liability will be recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative liability on the balance sheet. The ratchet feature included in the Warrants resulted in an initial derivative expenses of $2,092,336 on the grant date based on the initial fair value of the derivative liability. The fair value of the embedded derivative liability was calculated at grant date utilizing the following assumptions:

Grant Date

Fair Value

Term

(Years)

Exercise Price

Market Price on Grant Date

Volatility Percentage

Risk-free

Rate

3/20/13

$2,092,336

5.0

$0.50

$0.465

238%

0.0038

At June 30, 2014, the Company revalued the embedded derivative liability, based on the new exercise price of $1.00 per share pursuant to the Amendment and Exchange Agreements entered into on July 15, 2013. For the period from December 31, 2013 to June 30, 2014, the Company increased the derivative liability of $672,717 by $89,050, resulting in a derivative liability of $761,767 at June 30, 2014.

The fair value of the embedded derivative liability was calculated at December 31, 2013 and June 30, 2014 utilizing the following assumptions:

Date

Fair Value

Term

(Years)

Exercise

Price

Volatility Percentage

Risk-free

Rate

12/31/13

$672,717

4.22

$1.00

275%

0.0175

6/30/14

$761,767

3.72

$1.00

170%

0.0162

(12)

Table of Contents

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.

The Company’s sources of revenue after the spin off will be from sublicenses of the patented technology by Worlds Online and any revenue that may be generated from enforcing its patents in litigation or otherwise.

Revenues

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

Expenses

We classify our expenses into two broad groups:

O	cost of revenues; and

O	selling, general and administration.

Liquidity and Capital Resources

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

RESULTS OF OPERATIONS

Our net revenues for each of the three months ended June 30, 2014 and 2013 were $0. All the operations were transferred over to Worlds Online Inc. in the spin off. The Company’s future sources of revenue after the spin off are anticipated to be from sublicenses of the patented technology to Worlds Online Inc.’s customers and any revenue that may be generated from enforcing our patents in litigation or otherwise.

(13)

Table of Contents

Three months ended June 30, 2014 compared to the three months ended June 30, 2013

Revenue is $0 for the three months ended June 30, 2014 and 2013. We need to raise a sufficient amount of capital to provide the resources required that would enable us to continue running the business.

Cost of revenues is $0 in the three months ended June 30, 2014 and 2013.

Selling general and administrative (SG&A) expenses decreased by $44,760 from $116,145 to $71,385 for the three months ended June 30, 2013 and 2014, respectively. Decrease is due to limited operations in 2014 where last year there was a greater overall level of activity surrounding the lawsuit and professional service fees and consultants with the activity around the strategic financing agreement.

Salaries and related decreased by $9,587 to $55,625 from $65,212 for the three months ended June 30, 2014 and 2013, respectively. The decrease is due to two additional employees last year who are no longer with the company, offset by an increase in the CEO’s salary based on the terms of his employment agreement.

Common stock issued for services rendered decreased by $130,953 to $39,300 from $170,253 for the three months ended June 30, 2014 and 2013 respectively. The Company has only one strategic business consulting and advice agreement for common stock in 2014 where we had several in the past.

For the three months ended June 30, 2014, the company had a loss on change in fair value of derivative liability of $260,201 and interest expense of $52,113. For the three months ended June 30, 2013, the Company had a gain on change in fair value of derivative liability of $780,967 and interest expense of $284,385. The derivative liability are in connection with the issuance of the senior secured convertible notes of $450,000 and 4,535,714 warrants as part of the offering of notes, both of which are required to be recorded as a derivative liability.

As a result of the foregoing, we realized a net loss of $478,624 for the three months ended June 30, 2014 compared to a net income of $146,402 in the three months ended June 30, 2013.

Six months ended June 30, 2014 compared to six months ended June 30, 2013

Revenue is $0 for the six months ended June 30, 2014 and 2013. We need to raise a sufficient amount of capital to provide the resources required that would enable us to continue running the business.

Cost of revenues is $0 in the six months ended June 30, 2014 and 2013.

Selling general and administrative (SG&A) expenses decreased by $204,161 from $365,081 to $160,920 for the six months ended June 30, 2013 and 2014, respectively. Decrease is due to limited operations in 2014 where last year there was a greater overall level of activity surrounding the lawsuit and professional service fees and consultants with the activity around the strategic financing agreement.

Salaries and related decreased by $7,575 to $104,663 from $112,238 for the six months ended June 30, 2014 and 2013, respectively. The decrease is due to two additional employees last year who are no longer with the company, offset by an increase in the CEO’s salary based on the terms of his employment agreement.

Common stock issued for services rendered decreased by $156,608 to $75,908 from $232,516 for the six months ended June 30, 2014 and 2013 respectively. The Company has only two strategic business consulting and advice agreement for common stock in 2014 where we had several in the past.

For the six months ended June 30, 2014, the Company recorded an option expense of $66,451, equal to the estimated fair value of the options at the date of grants. The option expense was due to 450,000 options granted to the Company’s directors during the first quarter of 2014. The directors, Bernard Stolar, Robert Fireman and Edward Gildea each received 100,000 options for serving as board members in 2014. Edward Gildea joined the board on January 10, 2014 and received an additional 150,000 options for joining the Company’s board.

For the six months ended June 30, 2014, the company had a loss on change in fair value of derivative liability of $161,667 and interest expense of $298,959. For the six months ended June 30, 2013, the Company had a loss on change in fair value of derivative liability of $1,400,341 and interest expense of $311,903. The derivative liability are in connection with the issuance of the senior secured convertible notes of $450,000 and 4,535,714 warrants as part of the offering of notes, both of which are required to be recorded as a derivative liability.

As a result of the foregoing, we realized a net loss of $868,569 for the six months ended June 30, 2014 compared to a net loss of $2,420,649 in the six months ended June 30, 2013.

(14)

Table of Contents

Liquidity and Capital Resources

At June 30, 2014, our cash and cash equivalents were $61,054. We raised an aggregate of $100,000 from issuing notes payable during the six months ended June 30, 2014.

There were no capital expenditures in the six months ended June 30, 2014.

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

The funds raised in our 2013 and 2014 financings were and will be used to develop new products and services, enhance our patent portfolio, pay salaries to management and pay professional fees to our attorneys and auditors to prepare and file reports with the Securities and Exchange Commission. We hope to raise additional funds to be used for further developing our portfolio of patents and to document our technology in order to enforce our patents where there is infringement. No assurances can be given that we will be able to raise any additional funds.

Item 4. Controls And Procedures

As of June 30, 2014, 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 as of June 30, 2014 our disclosure controls and procedures were ineffective inasmuch as draft documents were commingled with effective documents leading to erroneous documents being relied upon and distributed. 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.

(15)

Table of Contents

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

In Cosmo Communications v. Worlds Inc. (our former name) in the Superior Court Of New Jersey Law Division, Bergen County, the court rendered a decision in favor of the plaintiff, Cosmo Communications on February 13, 2001. The judgment amount entered in April 2001, is approximately $205,000, of which the full amount is accrued. The judgment related to a consulting agreement for raising capital. The court ruled that the terms of the contract are binding on successors of the company and that Worlds.com is a successor company.

A Federal District Court issued a ruling on March 13, 2014 on the Motion for Summary Judgment hearing that allows the company to proceed with its patent infringement suit against Activision Blizzard, Inc., Blizzard Entertainment, Inc. and Activision Publishing, Inc.'s (Activision). The MSJ hearing held October 17, 2013 addressed Activision's dispute of Worlds Inc.'s November 1995 patent priority date. The court did not dismiss the case as requested by Activision. The Court’s ruling does prevent the company from pursuing damages for the period prior to the U.S. Patent and Trademark Office's (USPTO) issuance of Certificates of Correction on September 24, 2013 that amended the Company’s 6219045 and 7181790 patents to include comprehensive priority information, which specifically references Worlds November 1995 provisional patent application and confirms Worlds 1995 priority date. A Markman Hearing has been scheduled for October 3, 2014.

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 2012 Annual Report on Form 10-K. There have been no material changes from the risk factors previously disclosed in our 2012 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

(16)

Table of Contents

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: February 6, 2015

WORLDS INC.

By: /s/ Thomas Kidrin
Thomas Kidrin
President and CEO

By: /s/ Christopher Ryan
Christopher Ryan
Chief Financial Officer

(17)

Table of Contents

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