Worlds Inc. (WDDD) Making A Move

Feb. 28, 2013 8:54 AM ETWDDD, XWEL, PRKR, VHC19 Comments
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Long Only, Growth, Momentum

Contributor Since 2012

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.

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.

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