Worlds Inc. (WDDD), the owner of patents for multi-user interactive technology, has agreed to deliver shares of common stock currently worth about $1.52 million to Hudson Bay IP Opportunities Master Fund to settle a dispute over its refusal to convert warrants issued in three private placements.
Brookline, Mass.-base Worlds said in a filing with the Securities and Exchange Commission today that on January 23 it entered into an agreement with Hudson Bay IP Opportunities Master Fund LP “to, among other things, terminate the litigation between us, terminate all agreements between us, cancel all warrants we have previously issued to them as well as the outstanding balance of the Class C Note, provide for mutual releases and our delivery of eight million shares of our common stock, of which seven million shares will be subject to certain volume limitations upon resale.”
Shares of Worlds are currently trading at around 19 cents a share. They have traded between 6 cents and 29 cents over the past year.
Worlds owns the rights to nine patents for inventions that provide highly scalable architecture for a three-dimensional graphical, multi-user, interactive world system. Worlds is engaged in active litigation against Activision Blizzard Inc. and related companies in an infringement case filed in U.S. District Court for the District of Massachusetts.
In September, Hudson Bay IP Opportunities fund, which is a unit of Hudson Bay Capital Management, run by Sander Gerber, filed a lawsuit against Worlds in New York Supreme Court asserting that the Hudson Bay IP Opportunities Fund is entitled to a significant downward adjustment of the exercise price of the warrants because of a decision by Worlds board to substantially extend the term of 7.5 million stock options held by CEO Thom Kidrin.
The downward adjustment known as a full-ratchet anti-dilution provision meant that if Hudson Bay was entitled to purchase 100 shares at a $1 and Worlds issued stock at 50 cents, then Hudson Bay was entitled to reset the price of its warrants to 50 cents and receive 200 shares instead.
Hudson Bay had been seeking money damages of $914,876 and the turnover of 4.95 million common shares, as well as attorney fees and a preliminary injunction with respect to the shares.
Kidrin didn’t return a telephone call seeking comment.
Yoav Roth, who runs the Hudson Bay IP Opportunities Fund, declined to comment for this article.
The dispute has its roots in a series of convertible debt and warrant private investment in public equity financings that Worlds issued to Hudson Bay IP Opportunities Fund, Iroquois Capital LP and GRQ Consultants in March 2013.
Hudson Bay IP Opportunity received a warrant to purchase 2.17 million shares of common stock of Worlds at 50 cents a share subject to a full-ratchet downward adjustment anti-dilution protection.
During the time period relevant to the dispute, Worlds stock traded between 13 cents and 54 cents.
Although New York-based Iroquois and Boca Raton-based GRQ Consultants, which is run by micro cap financier Barry Honig, invested in the same PIPEs, neither Iroquois nor GRQ joined Hudson Bay IP Opportunities Funds' suit.
Worlds said it plans to offer the same terms given to Hudson Bay to Iroquois and GRQ.
“We expect to enter into essentially similar agreements with the other holders of our Class C Notes, albeit for less shares,” the company said in the filing.
Hudson Bay, Iroquois and GRQ have invested together or separately in a number of companies in the patent monetization business, including Vringo Inc. (VRNG), Spherix Inc. (SPEX), and Marathon Patent Group (MARA).
For his part, Kidrin had said in an interview last year that Worlds didn't believe that options given to him seven years ago and incorporated into a securities filing in error could trigger the anti-dilution provisions cited by Hudson Bay.
In an Oct. 14 securities filing, Worlds said it previously reported that in January 2014 it extended the term of 7.5 million stock options granted to Kidrin from March 31, 2014 to March 31, 2016.
“We have now learned that this disclosure was incorrect inasmuch as the approval of the extension was premised on the erroneous supposition that Mr. Kidrin’s options were only 18 month options and were expiring on March 31, 2014, when in fact they were five (5) year options expiring in September 2017.
“The options in question were granted pursuant to the terms of Mr. Kidrin’s Employment Agreement dated as of August 30, 2012, which was filed as Exhibit 10.2 to our Annual Report on Form 10-K for the ended December 31, 2012, which clearly states that the options had a term of five (5) years.
The company said it reported in the Form 10-K for the year ended December 31, 2012 and in subsequent periods that Kidrin’s options were for an eighteen-month period, which was predicated on the execution of an option agreement of similar term.
“We inadvertently executed two versions of an option agreement in March 2013, one having a five-year term based upon the terms contained in the Employment Agreement and one having an eighteen month term based upon an earlier proposal by the board without realizing that there were two versions.”
As a result, although the five-year version was maintained in the company’s files, it “erroneously provided only the eighteen-month version to our independent auditor and prepared our financial statements and disclosures based upon an eighteen-month option term for Mr. Kidrin. We continued to erroneously rely on the wrong document until September 2014” when Hudson Bay cited the 18-month version in its suit.
Kidrin played down the mistake, saying it changed nothing and blamed it on the fact that Worlds is run by only one full-time employee, himself, and a part time CFO. He also stressed that, otherwise, Worlds’ compliance with regulatory filings has been exemplary compared with Pink Sheet companies that never meet their filing requirements.
Kidrin owned about 6.8 million shares of Worlds, which is equivalent to about a 5% stake.
In an affidavit filed with the New York Supreme Court, Kidrin explained that the dispute stems from 15 million stock options which exercised at 5 cents and were granted to him in 2007 as part of his compensation.
In June 2012, with his options about to expire Kidrin said he began negotiations with the company about the terms of his employment and compensation going forward.
"Taking into account the company's financial condition and the need for additional work, including litigation (the Patent Lawsuit), that needed to be completed before the company would commence earning revenue, I was willing to continue serving as CEO on substantially the same terms, but with a lower base salary.
"In or about early August 2012, in consideration for my not exercising my 15 million options, which would have significantly limited the company's ability to raise additional funds through an equity sale and diluted the then current shareholders, the board proposed to issue me the 7.5 million options at $0.076 per share for 18 months. This offer was made prior to the renewal agreement, which was still being negotiated.”
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