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EDVA
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I am part of a small investment group that combines significant business experience in product marketing and communications with legal analysis and interpretation. My partners and I combine for over 50 years of experience in these fields.
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  • Worlds Inc. (WDDD) Making A Move 19 comments
    Feb 28, 2013 8:54 AM | about stocks: WDDD, VRNG, PRKR, VHC

    I have had several people email me in the past couple of days asking about the recent rise in Worlds Inc. (OTCQB:WDDD) and what could be expected from here. In early January I mentioned it in a Yahoo post as an attractive patent play for those looking to diversify a little from the likes of VRNG, VHC, PRKR and...well you get the idea. The reason WDDD caught my eye is at a price of .21 with an attractive share structure and a relatively low float (confirmed by Worlds CEO Thom Kidrin in an interview with joenatural here-make sure to read down to the update in the comments section) combined with the prospect of a total award in the $500M range, this appeared to be a prospector's dream. At a closing price of .44 Wednesday the market would seem to agree. Worlds currently has 82M shares outstanding with only 100M authorized. Having recently raised over $300K Mr. Kidrin states the company has enough cash for the next 12 months. Since the venerable firm of Susman Godfrey has taken Worlds' case on a contingency basis, it appears the cost of operations are little more than SEC filing fees, modest salaries, consulting and administrative.

    In their lawsuit against Activision, Worlds cites no less than 59 claims of infringement across a handful of patents in the Massively Multiplayer Online Role Playing Game space (MMORPG). Remember that for a finding of infringement only one claim need be infringed. Note: One of the things that I look for is who does the original prosecution of the patents. That patent work was done by Townsend, Townsend and Crew, a well respected and first-rate boutique IP firm out of San Francisco (now Kilpatrick Townsend & Stockton LLP). In short Worlds created the ability for people, hundreds of thousands of people in fact, through player/Avatars, to enter a 3-D 'World' where they could play in the same game together seamlessly.

    One of the things that stands out in evaluating WDDD's future prospects (since no one likes a one trick pony) is the realization that to play a MMORPG game it appears one must use the technology created by Worlds Inc. Thus there are many other potential infringers beyond Activision in a space of some $13b annually. Mr. Kidrin mentioned in an interview that he expected the District Court in Massachusetts to schedule a trial (if necessary) within 8 months of the Markman Hearing which puts the date somewhere in the first half of 2014. Interestingly, The District Court adopted rule 16.6 in 2008 to better streamline patent cases and in-so-doing has made Massachusetts a more inviting home for Patent litigants.

    Demand for the stock is compelling and the volume on successive days this week has been over 2 Million shares which marks the most ever for the company. WDDD has an all important Markman Hearing coming up on June 27th where in a majority of cases the party that prevails in such hearings often prevails in the litigation. My own take is that Worlds was undervalued from the start and in many ways that stems from lack of recognition by investors. Worlds is a very small company that had struggled to survive for many years but which has developed technology that it appears numerous companies are making billions from. It is now ready for its long awaited day in court. And before you label Worlds a patent troll please understand that the original Worlds patents were created by Worlds employees or those under contract with Worlds to do so.

    One thing that it appears investors are beginning to realize is that there is limited risk in a pre-Markman stock. By way of example many people (including me and those I work with) are awaiting Judge Jackson's final post-trial rulings in the Vringo v. Google case at the time of this writing. That is far from a risk-free trading zone. While I expect the Judge to affirm the jury's verdict and the stock to ultimately find a home far north of where it is, a ruling for Google's motion for judgment as a matter of law with respect to infringement, for example, would be disastrous for Vringo and its shareholders (at least near-term and the battle would be uphill from there). Worlds does not face such peril at this time and is not likely to until we await the results of the Markman Hearing which are likely to come at end of July.

    So what would a Markman win mean for Worlds? I'm guessing we could see a valuation of some $200-250M as the court will have sent its strongest signal as to how it will determine things at trial. I think we could see half of that number leading to June 27th because people by their nature are more optimistic in these cases, especially when they see attorneys of the caliber of Max Tribble (lead counsel for Susman Godfrey in the Worlds case) lining up to face down the likes of Activision. I won't do it here because others have done it so well elsewhere, but do a little diligence on Max and on Susman Godfrey in general and you will know what I'm talking about. None of this is to say that Worlds case is a slam dunk, far from it, but given what I have seen thus far I like their chances.

    Disclosure: I am long OTCQB:WDDD, VRNG.

    Additional disclosure: This instablog is published for informational purposes only and the author advises anyone interested in any of the companies mentioned to do their own due diligence or speak with a qualified investment professional prior to investing in these or any other companies.

    Themes: Patent litigation, legal Stocks: WDDD, VRNG, PRKR, VHC
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Comments (19)
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  • fiscalSaint
    , contributor
    Comments (64) | Send Message
     
    Could you elaborate on how you come up with such valuations? What is your basis?
    28 Feb 2013, 01:25 PM Reply Like
  • EDVA
    , contributor
    Comments (117) | Send Message
     
    Author’s reply » I can tell you the factors I look at but will leave it up to you to come up with what you think:

     

    -Activision estimated revs for WOW & COD since early 2007 (likely date of constructive notice)
    -Apportionment based upon value of invention
    -RR determination (I use a minimum of 3.5%-very unlikely it will be less).
    -Factor in Willful Infringement-Judge has final word (my guess if Jury finds for it, it will be reduced to 2X damages by Judge)
    -Factor in Worlds NOL's of $40M
    -Factor in Susman Godfrey fee (35% is my guess since Thom Kidrin said fee was more favorable than usual-50% is rumored to be SG going contingency rate)

     

    I'm probably forgetting something but those are the basics...and I said an "all in" award of around $500M-past and future. Thanks
    28 Feb 2013, 02:07 PM Reply Like
  • coolerheadsprevail
    , contributor
    Comments (92) | Send Message
     
    EDVA,

     

    Appreciate your sharing your valuation basis; it makes sense. A few questions for clarity, if you don't mind:

     

    Would you know whether the suit is only targeting COD and WOW revenues? Or were those franchises simply being highlighted as they contribute the most to ATVI's revenues derived from the claimed infringement? If ALL revenues from all MMORPG-infringing titles are in play, would you have any kind of idea as to the ballpark % of ATVI's $4B in annual revenues would be on the table?

     

    Would you know whether all 7 asserted patents expire at the same time? If not, then would it be correct to say that -- should it go to trial and WDDD emerges victorious -- future royalties would extend out until the expiration of the last patent?

     

    Thanks!!!
    28 Feb 2013, 04:18 PM Reply Like
  • EDVA
    , contributor
    Comments (117) | Send Message
     
    Author’s reply » 1) Only COD and WOW named in complaint
    2) $2-3b as a base
    3) all patents do not expire at the same time
    4) royalties would extend to last patent that has an infringed claim
    28 Feb 2013, 04:31 PM Reply Like
  • coolerheadsprevail
    , contributor
    Comments (92) | Send Message
     
    Interesting. Would you have any thoughts as to why WDDD is not going after all ATVI titles that incorporate MMORPG technology? Why just WOW/COD? I would imagine that ATVI has been evolving all their titles from desktop box units to to online platforms?

     

    Also, my amateur research identified 8,161,385 as the most "recent" of the 7 patents being asserted, with a patent grant date of 4/17/12 -- would your research be able to confirm this? And collectively, the 7 patents have grant dates as far back as 2001 ('045), correct?

     

    So if I am understanding you correctly, the future value of any successful litigation hinges on which of these 7 is found to be infringing -- with a "worst case" victory scenario of royalties thru 2021 if only '045 is deemed infringing all the way up to "best case" scenario of royalties thru 2032 if any of the 3 patents that expire in 2012 are found to be infringing?

     

    So in your $500M "all in" estimate, this is net of legal and taxes, right? And how many future years are you using as a placeholder for this estimate?

     

    Also, a quick sidebar: Much needed breather in the sp today, IMO. Any stock that has a chart that looks like a continuous 45-degree line is only asking for trouble down the road without some periodic corrections.

     

    Again, thank you!
    28 Feb 2013, 04:48 PM Reply Like
  • EDVA
    , contributor
    Comments (117) | Send Message
     
    Author’s reply » coolerheads, thanks for your comments and questions. My responses in order:

     

    1) Not sure, I just know what the complaint says.

     

    2) Yes, and if you notice the same core inventors are listed on all the patents and they are claiming continuation status of the 045 patent which expires in April, 2021. Therefore, given a reasonable timeframe for litigation there may be 6-7 years of future royalties left on the current patents as Thom Kidrin has said himself.

     

    3) My estimate centers around the time of constructive notice which in this case the complaint notes 2007 which is within the six year period (since the suit was filed in 2012) that would otherwise be subject to a laches defense if longer. As for damages so much depends on the credibility of the damages experts and the critical establishment of base, apportionment and appropriate running royalty. There is clearly a range here but if Worlds is able to get a verdict in its favor I think that the damages numbers will be significant mainly because I believe the apportionment will also be significant.

     

    One other note which I have not seen discussed but I am quite sure that Susman Godfrey is working on now is the application of the Entire Market Value Rule to this case. The rule states "to assert reasonable royalty based upon the EMV rule, Patent owner must show that the demand for the entire product was driven by the infringing feature." Given the intrinsic nature of the invention I think a case can be made for this and short of that a considerable apportionment-perhaps 50%. So I would not be prepared to say that the $500M is net of legal and taxes, no. Furthermore, the market will value the gross number award (they always seem to- certainly in the aftermath) and is likely to assign a multiple to cash particularly since a victory will mean easier sledding ahead with future defendants/licensees. And yes, a breather was in order today. People can get too caught up in the day to day movement and lose sight of the mid & longer terms. Thanks.
    28 Feb 2013, 08:51 PM Reply Like
  • coolerheadsprevail
    , contributor
    Comments (92) | Send Message
     
    EDVA,

     

    So based on your understanding, would the following understanding of WDDD asserting a continuation status of '045 be correct:

     

    (1)
    The various patent grant dates of the 7 patents being asserted in the suit are irrelevant, and that WDDD is basically saying that all 7 should be deemed to have been granted on 4/17/01, the date '045 was granted.

     

    (2)
    As such, from an investor standpoint, it doesn't matter which claim for which patent may be determined to be infringed by a jury. Whether it is '045 (grant date 4/17/01), '690 (grant date 2/20/07), or '385 (grant date 4/17/12), any future royalty awards should be based upon a patent expiration of 4/17/21.

     

    **************

     

    Additionally, would you concur that the extent of past damages would not be able to be reasonably determined at this time due to the varying assertions of when constructive knowledge occurred for each patent, respectively?

     

    Althogh WDDD, in its complaint, is hinting that ATVI had constructive knowledge for all the patents as far back as the NCSoft case (suit filed 12/24/08 and settled in May-2010), it is claiming that at worst ATVI knew when each patent became granted.

     

    As such, if a jury were to hypothetically find infringement only on '690 (WDDD claiming constructive knowledge back to patent grant date of Feb-2007), then past damages would cover the ~5 year period from Feb-2007 thru the date the suit was filed (3/30/12), correct?

     

    And similarly, if a jury were to hypothetically find infringement only on '501 (again, w/assumed constructive knowledge as of the patent grant date of Dec-2011), then past damages would cover only the period from Dec-2011 thru 3/30/12.

     

    Or is my understanding incorrect on past damages?

     

    Again, THANK YOU for continuing to provide pieces of the puzzle for us!
    1 Mar 2013, 01:46 AM Reply Like
  • fidcow
    , contributor
    Comments (40) | Send Message
     
    This has nothing to do with Vringo.
    28 Feb 2013, 05:25 PM Reply Like
  • EDVA
    , contributor
    Comments (117) | Send Message
     
    Author’s reply » "Activision has been on constructive notice of the ‘690 patent by at least as early as February 20, 2007, when the ‘690 patent was issued." This seems to be the date they are centering on because it avoids a laches defense given when the complaint was filed and offers the most past damages so the answer to your question is yes.

     

    Past damages is not an exact science but there is support it appears for 5 years. I'm most interested in their approach via their damages expert however. I have my own theory as to base, apportionment and so on but it is just that-my own theory.
    1 Mar 2013, 09:13 AM Reply Like
  • coolerheadsprevail
    , contributor
    Comments (92) | Send Message
     
    EDVA,

     

    In reading the complaing, I do not see anywhere that WDDD is centering on 2/20/07. This particular date is mentioned specifically in the context of its section re: 690. However, this section is identical word-for-word to the 3 other sections where they discuss 501, 856, and 558, where they similarly refer to constructive knowledge also being on 12/20/11, 5/17/11, and 2/17/09, respectively.

     

    Based on your undestanding, is simply saying that an accused infringer should have been aware that a patent had been granted sufficient as a laches defense?

     

    I understand that laches is an affirmative defense, but if the tables should get turned (ala VRNG), it seems that the complaint is saying that all WDDD has done is to post notices of their patents on its website and downloadable software -- is this sufficient???

     

    Also, to circle back to the continuation patent issue, I'm not sure I'm as to your reply, so I'll try to ask it another way: Hypothetically, if the jury were to find that the only patent that was infringed upon is 501 (patent granted in 2011), any future royalties would only extend to 2021 and NOT 2031 because the continuation ties it to the parent patent 690's grant date in 2001 -- which translates to a 2021 expiration.

     

    And in the above hypothetical scenario, even if 501 was the only patent infringed, the continuation claim means that even if 690 is NOT found to be infringed, past damages for 501 can still be claimed back to 2007, the purported date of constructive knowledge for 690?

     

    The devil is always in the details as I am sure you can appreciate, so I do thank you once again for your time in discussing this level of minutae with a fellow WDDD shareholder.
    1 Mar 2013, 09:54 AM Reply Like
  • EDVA
    , contributor
    Comments (117) | Send Message
     
    Author’s reply » The earliest date of constructive knowledge is what I refer to which is not NCsoft but 690. No they don't say that that is what they are centering on but it fits to avoid laches and still get the maximum in terms of past damages.

     

    Yes, is the answer to your hypothetical.
    1 Mar 2013, 10:41 AM Reply Like
  • microman
    , contributor
    Comments (37) | Send Message
     
    based on the thoroughness of your coverage on WDDD, I look forward to what thoughts you might have on SPEX, a recent entrant in the patent enforcement arena
    4 Mar 2013, 11:16 AM Reply Like
  • EDVA
    , contributor
    Comments (117) | Send Message
     
    Author’s reply » -will take a look at it microman...has not been on my radar. thx.
    5 Mar 2013, 10:59 AM Reply Like
  • PatentPlayer
    , contributor
    Comments (47) | Send Message
     
    Looks like a new base is building getting ready for the next leg up! EDVA isn't it more likely to reach a settlement the longer the patents last? 8 years is a long time who would want to pay that bill every Q for 8 years? Seems like settlement is the best for both sides???
    7 Mar 2013, 06:10 AM Reply Like
  • EDVA
    , contributor
    Comments (117) | Send Message
     
    Author’s reply » I agree that Worlds looks ready to make its next move. Still incredibly undervalued yet I expect as more people with deeper pockets learn about it we will see much greater movement then we have so far. Settlement is a ways off simply because Activision is going to want to make sure Worlds has the goods on them before they pay. A successful Markman Hearing for WDDD would be the first catalyst for a settlement if ATVI wants to shut it down. Sure ATVI would have to pay more at that point but they will take that risk. It's just part of the game.
    7 Mar 2013, 10:13 AM Reply Like
  • PatentPlayer
    , contributor
    Comments (47) | Send Message
     
    EDVA how large is the MMORPG industry? Likely that WDDD will follow the Vringo path beat the big guy then everyone else will pay according to the damages/settlement determined by the initial trial. Surely ATVI is only part of the pool of money, but how big is that pool?
    7 Mar 2013, 05:15 PM Reply Like
  • EDVA
    , contributor
    Comments (117) | Send Message
     
    Author’s reply » $12b-projected to be $17.5b in 2015 by SuperData and Newzoo.
    7 Mar 2013, 08:21 PM Reply Like
  • netprf
    , contributor
    Comments (47) | Send Message
     
    Today at 9:00am, az2c4vr wrote:
    New Form 8K

     

    credit to CBStock67 on IHUB WDDD board post #6083

     

    http://bit.ly/WNZGpx

     

    Form 8-K for WORLDS INC

     

    15-Mar-2013

     

    Entry into a Material Definitive Agreement, Creation of a Direct Financial Obligation

     

    Item 1.01. Entry into a Material Definitive Agreement.
    On March 14, 2013 we 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) $1.850 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 we 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 will pay $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 we acquire 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. Additional information about the financing is provided below. This only purports to be a summary of the terms of the transaction documents and is qualified in its entirety by the terms of the full documents, copies of which are filed as exhibits hereto.

     

    Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
    Pursuant to the terms of a Securities Purchase Agreement, at the closing of the financing described herein, we will issue 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. All of the Notes carry a 14% annual interest rate and are payable on March 13, 2016. Until July 1, 2013 (i) the Series A Notes initially convert into our common stock at a rate of $0.50 per share, (ii) the Series B initially convert at a rate of $0.75 per share and (iii) the Series C Notes initially convert at a rate of $0.35 per share, in each case subject to adjustments as provided in the Notes. Commencing July 1, 2013, the conversion rate for all Notes becomes the lower of (x) the conversion rate described above or (y) 85% of the average of the daily VWAP of each trading day during the twenty (20) consecutive trading day period ending on the trading day immediately prior to the conversion date, subject to adjustments as provided in the Notes. We have the right to redeem, at 120% of face value, up to 75% of the Series A and Series B Notes. The term of the Notes can be accelerated upon the occurrence of various acts of default as more fully described in the Notes and the other transaction documents. Additional information about the financing is provided above and below. This only purports to be a summary of the terms of the transaction documents and is qualified in its entirety by the terms of the full documents, copies of which are filed as exhibits hereto.

     

    Item 3.02. Unregistered Sales of Equity Securities.
    As described above, at the closing of the financing we will issue $2.4 million face amount of convertible Notes and common stock purchase warrants to two institutional investors. Based upon representations supplied by the investors, the investors are "accredited investors" as such term is defined in Rule 501(a) as promulgated under the Securities Act of 1933, and, accordingly, the offering was an exempt transaction pursuant to Rule 506 as promulgated under such Act inasmuch as the offering was made directly by our officers to the investors and advertising of the offering was not made nor were any commissions payable. The conversion terms of the Notes and the exercise terms of the warrants are summarized above, which summary is subject to the terms of the full documents, copies of which are filed as an exhibit hereto.

     

    Item 9.01. Financial Statements and Exhibits.
    (d) Exhibits

     

    Exhibit Description
    10.1 Securities Purchase Agreement dated as of March 14, 2013 between the registrant and the Buyers listed thereon.

     

    10.2 Form of Security and Pledge Agreement between the registrant the Collateral Agent.

     

    10.3 Form of Registration Rights Agreement between the registrant and the Buyers listed thereon.

     

    10.4 Form of Warrant dated

     

    10.5 Form of Series A Note

     

    10.6 Form of Series B Note

     

    10.7 Form of Series C Note

     

    99.1 Form of Press Release of the registrant
    16 Mar 2013, 12:25 PM Reply Like
  • PatentPlayer
    , contributor
    Comments (47) | Send Message
     
    EDVA Thoughts on $2.3 Million dollar deal today? All good? Some good some bad? All bad?
    16 Mar 2013, 06:43 AM Reply Like
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