WORLDS INC - Quarter Report: 2009 September (Form 10-Q)

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WORLDS.COM INC.

 

(not affiliated with Worldcom, Inc.)

 

(Exact name of registrant as specified in its charter)

New Jersey                                         22-1848316  -------------------------------                     ----------------------- (State or other jurisdiction of                     (I.R.S. Employer ID No.)                                                                                                  incorporation or organization)

11 Royal Road

Brookline, MA 02445

 (Address of principal executive offices)

(617) 725-8900

 (Registrant  telephone number)

 

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  o 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.

 

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 11, 2009, 53,663,758 shares of the Issuer's Common Stock were outstanding.

 

Worlds.com Inc.

NOTES TO FINANCIAL STATEMENTS

Three and Nine Months Ended September 30, 2009

(Unaudited)

NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

Description of Business

Worlds.com Inc. (the "Company") designs and develops software content and related technologies for the creation of interactive, three-dimensional ("3D") Internet sites on the World Wide Web. Using in-house patented and proprietary technology the Company creates its own Internet sites, as well as sites available through third party on-line service providers.

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 us as a going concern. We have always been considered a developmental stage business, have incurred significant losses since our inception and have not always had significant revenues from operations. We will require substantial additional funds for development and marketing of our products. There can be no assurance that we will be able to obtain the substantial additional capital resources necessary to pursue our business plan or that any assumptions relating to our business plan will prove to be accurate. We have not been able to generate sufficient revenue or obtain additional financing which has had a material adverse effect on us, including requiring us to severely diminish operations in recent years and at times halting them entirely. These factors raise substantial doubt about our ability to continue as a going concern. We have been operating at a significantly reduced capacity in recent years with no full time employees and performing primarily consulting services and licensing software using consultants to perform any 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.

Property and Equipment

Net property and equipment owned by us as of September 30, 2009 total $4,664.

Income Recognition

We have the following sources of revenue: (1) consulting/licensing revenue from the performance of development work performed on our behalf or from the sale of certain software to third parties; and (2) VIP subscriptions to our Worlds Ultimate 3-D Chat service.

Deferred revenue represents cash payments received in advance to be recorded as licensing revenue as earned.

Income Taxes

We use the liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred income tax assets and liabilities are recognized based on the temporary differences between the financial statement and income tax bases of assets, liabilities and net operating loss carry forwards using enacted tax rates. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Notes Payable

We had short term notes of $948,279 outstanding at September 30, 2009.

As part of a debt refinancing in 2000, $631,950 of debt was renegotiated to deferred revenue representing future services to be provided by us.  To date $90,000 in services has been provided.

Commitments and Contingencies

 

During 2000, we were involved in a lawsuit relating to unpaid consulting services. On March 20, 2001 a judgment against us was rendered for approximately $205,000. As of September 30, 2009, we recorded a reserve of $205,000 for this lawsuit, which is included in accrued expenses in the accompanying balance sheet.

 

Impairment of Long Lived Assets

We review the carrying value of long-lived assets to determine if circumstances exist indicating whether there has been any impairment of the carrying value of property and equipment or whether the depreciation periods should be modified. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable. As of the date of the financial statements, we have no long lived assets.

NOTE 2 - GOING CONCERN

 

From mid-2001 through most of 2007, we had to significantly curtail and at times cease operations due to lack of resources. The accompanying financial statements have been prepared assuming that we will continue as a going concern. Since its inception, we had periods where we had only minimal revenues from operations. There can be no assurance that we will be able to obtain the substantial additional capital resources necessary to pursue our business plan or that any assumptions relating to our business plan will prove to be accurate. We are pursuing sources of additional financing and there can be no assurance that any such financing will be available to us on commercially reasonable terms, or at all. Any inability to obtain additional financing will likely have a material adverse effect on us, including possibly requiring us to reduce and/or cease operations.

These factors raise substantial doubt about our ability 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 – 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, three-dimensional ("3D") entertainment portal on the internet.

NOTE 4 – RESTATEMENT OF FINANCIAL STATEMENTS

On May 11, 2009, our management concluded that our audited financial statements for the years ended December 31, 2007 and 2008 and our unaudited quarterly financial statements for the quarterly periods in such years should no longer be relied upon.  Specifically, our liabilities were understated by approximately $1,699,179 on December 31, 2007 and by approximately $2,780,930 on December 31, 2008 (which amount is cumulative and includes the amount understated in 2007) with an overstatement of income on such dates of $1,699,179 and $1,081,750, respectively.  The facts underlying our original conclusion is that all of such liabilities have exceeded the applicable statutes of limitations and based upon an opinion of counsel which stated that the likelihood of our having to pay these liabilities was highly improbable, our independent auditor concurred with our decision to write off all of such liabilities.  The staff (“Staff”) of the Securities and Exchange Commission, without disagreeing with our position that payment of such liabilities was highly improbable, advised us that under the facts of our situation, it was their conclusion that GAAP accounting required that the liabilities not be written off at this time.  Following a series of calls with various Staff members, our management, in consultation with our counsel and independent auditor, agreed to accept the Staff’s position.  We have received guidance from the Staff as to the necessary steps we need to take to properly write off these liabilities and we expect to begin that process with certain of the largest creditors.  Regardless of whether we are ultimately successful in writing off all or some of these liabilities, we do not believe that these restatements will have any impact on our results of operations or cash flows as the fact remains that the statute of limitations has indeed passed with respect to these liabilities and the likelihood of our having to pay them remains highly improbable.

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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 current pricing levels that we can charge for our services or which we pay to our suppliers and business partners; 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; foreign currency  fluctuations; changes in the business prospects of our business partners and customers; increased competition, including from our business partners; 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. Additional risk factors pertaining to our business and the value of our stock is contained in our Annual Report on Form 10-K for the year ended December 31, 2008 and is available for review at no charge at www.sec.gov.

The following discussion should be read in conjunction with the 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

Worlds.com  is a leading 3D entertainment portal which leverages its  proprietary technology to offer visitors a network of virtual, multi-user environments which we call "worlds". These worlds are visually engaging online environments featuring animation, motion and content where people can come together and, by navigating through the website, shop, interact with others, attend events and be entertained.

 Sites using our technology allow numerous simultaneous visitors to enter, navigate and share interactive "worlds". Our 3D Internet sites are designed to promote frequent, repeat and prolonged visitation by users by providing them with unique online communities featuring dynamic graphics, highly useful and entertaining information content, and interactive capabilities. We believe that our sites are highly attractive to advertisers because they offer access to demographic-specific user bases comprised of people that visit the site frequently and stay for relatively long periods of time.

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 halt them all together.

Revenues

We generated revenue during the quarter as we have continued ramping up operations which have been in quasi hibernation since mid-2001. The revenue that was generated was generated in the following manner:

 

·	VIP subscriptions to our Worlds Ultimate 3-D Chat service; and

·	Software development to provide a demo site for a 3-D world.

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 severely diminish our operations from mid-since 2001 until the last half of 2007 due to a lack of liquidity. We were able to issue equity in the last two years and raise capital that will help us to be better positioned to compete for new business. We continue to pursue additional sources of capital. We have no current and debt arrangements with respect to, or sources of, additional financing and there can be no assurance that any such financing would become available.  If we cannot start to generate sufficient revenues, we may need to halt operations.

RESULTS OF OPERATIONS

Our net revenues for each of the three months ended September 30, 2009 and 2008 were $10,374 and $266, respectively. Our net revenues for each of the nine months ended September 30, 2009 and 2008 were $100,967 and $92,141, respectively.  Revenue over the nine month period has remained steady. We had revenue during the 9 months of 2009 from developing a 3-D world under our deferred revenue agreement and designing and developing a virtual world prototype.  For 2008 we had a software development project to provide a demo 3-D world for a client. While this amount of business from operations is still relatively inconsequential, we believe it is indicative of our recent awakening and hopefully, a return to active operations.

Three and nine months ended September 30, 2009 compared to three and nine months ended September 30, 2008

Revenue increased by $10,108, to $10,374 for the three months ended September 30, 2009 from $266 in the prior year. Revenue increased by $8,826 to $100,967 for the nine months ended September 30, 2009 from $92,141 in the prior year. The business has been running in a diminished mode due to the lack of liquidity. We expect  increased, though not necessarily sufficient, operating results until such time that we can raise a sufficient amount of capital to provide the resources required that would enable us to generate significant sales.

Our cost of revenues during the three months ended September 30, 2009 and 2008 are primarily comprised of (1) cost of goods sold: 18% and 8%, respectively, and (2) selling general and administrative expenses: 82% and 92%, respectively. Cost of sales on a consolidated basis decreased $4,162 to $11,727 for the three months ended September 30, 2009, from $15,889 in the three months ended September 30, 2008, reflecting the fairly steady business activity.

Our cost of revenues during the nine months ended September 30, 2009 and 2008 are primarily comprised of (1) cost of goods sold: 35% and 26%, respectively, and (2) selling general and administrative expenses: 57% and 74%, respectively.  For the 2009 there was a warrants expense of 8%.  Cost of sales on a consolidated basis increased $24,005 to $160,214 for the nine months ended September 30, 2009, from $136,209 in the nine months ended September 30, 2008, reflecting the increased business activities.

Selling general and administrative expenses decreased by $123,218, from $175,411 to $52,193 for the three months ended September 30, 2008 and 2009, respectively. Selling general and administrative expenses decreased by $126,930, from $393,437 to $266,507 for the nine months ended September 30, 2008 and 2009, respectively. The decreases were insignificant.

Other expenses for the three months ended September 30, 2009 include interest expense of $1,605 directly attributable to the notes payable in the three months ended September 30, 2009.  Interest expense for the three months ended September 30, 2008 was $18,997.  Other expenses including interest expense for nine months ended September 30, 2009 and 2008 was $3,210 for 2009 and $56,990 in interest expense and $20,000 in financing expense for 2008.

As a result of the foregoing we had a net (loss) of $(55,150) for the three months ended September 30, 2009 compared to a (loss) of $(230,031) in the three months ended September 30, 2008.

 We had a net (loss) of $(364,796) for the nine months ended September 30, 2009 compared to a loss of $(514,495) in the nine months ended September 30, 2008.

Item 4T. Controls And Procedures

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the specified time periods. Our Chief Executive Officer and its Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for maintaining our disclosure controls and procedures. The controls and procedures established by us are designed to provide reasonable assurance that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

 

As of the end of the period covered by this report, the Certifying Officers evaluated the effectiveness of our disclosure controls and procedures. Based on the evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

During the third quarter of 2009, 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.    

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Item 1. Legal Proceedings.

None.

 

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

 

In July we issued 310,929 shares of our common stock as payment to a consultant for services provided. This issuance was approved by our board of directors and was exempt from registration pursuant to section 4(2) of the Securities Act of 1933, as amended, inasmuch as the offering did not involve a public offering. On the date of issuance the closing price of our common stock was $0.09 per share. We also issued 25,000 shares upon the exercise of a warrant at an exercise price of $0.01 per share. In August we issued 500,000 shares of our common stock to settle an outstanding liability. This issuance was approved by our board of directors and was exempt from registration pursuant to section 4(2) of the Securities Act of 1933, as amended, inasmuch as the offering did not involve a public offering. On the date of issuance the closing price of our common stock was $0.09 per share.

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Security Holders.

None.

 

Item 5. Other Information

 None.

Item 6. Exhibits

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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.

 

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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 11, 2009

 

WORLDS.COM INC.

/s/ Thomas Kidrin By:  Thomas Kidrin        President, CEO and Treasurer           /s/ Christopher Ryan By: Christopher Ryan        Chief Financial Officer and        Principal Accounting Officer

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