UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
 
OR
 
TRANSITION REPORT PURSUANT TO PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from_____ to _____
 
KRAIG BIOCRAFT LABORATORIES, INC.
(Exact Name of Registrant as Specified in Charter)
 
Wyoming
 
 
 
83-0459707
(State or Other Jurisdiction of Incorporation)
 
(Commission File No.)
 
(I.R.S. Employer Identification No.)
 
 
2723 South State St. Suite 150
Ann Arbor, Michigan 48104
 
(734) 619-8066
(Address of Principal Executive Offices)
 
(Registrant’s Telephone Number)
 
(Former name and address, if changed since last report)
 
Copies to:
Hunter Taubman Fischer & Li LLC
1450 Broadway, 26th Floor
New York, NY 10018
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of exchange on which registered
None
-
-
 
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 ☑   No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and emerging growth company in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer    ☐
Accelerated filer    ☐
Non-accelerated filer   ☑
Smaller reporting company  ☑
Emerging growth company  ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐   No ☑
 
As of November 13, 2019, there were 844,468,378 shares of the issuer’s Class A common stock, no par value per share, outstanding, 0 shares of the issuer’s Class B common stock, no par value per share, outstanding and 2 shares of preferred stock, no par value per share, outstanding.
 
 
1
 
 
 
TABLE OF CONTENTS


 Page
 
 
PART I FINANCIAL INFORMATION
 
 
 
Item 1. Unaudited Condensed Financial Statements:
  3
 
    
Condensed Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018 (Audited)
  3
 
    
Condensed Statements of Operations (Unaudited) for the three and nine month ended September 30, 2019 and 2018
  4
 
 
Condensed Statements of Stockholders’ Deficit for December 31, 2018 and the nine months ended September 30, 2019 (Unaudited)
 5
 
 
Condensed Statements of Cash Flows (Unaudited) for the nine month ended September 30, 2019 and 2018
6
 
    
Notes to Condensed Financial Statements (Unaudited)
 
 
    
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 22
 
    
Item 3. Quantitative and Qualitative Disclosures about Market Risk
  28
 
    
Item 4. Controls and Procedures
  28
 
    
PART II OTHER INFORMATION
  28
 
    
Item 1. Legal proceedings
  28
 
    
Item 1A. Risk Factors 
  28
 
    
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  28
 
    
Item 3. Defaults upon Senior Securities
  29
 
    
Item 4. Mine Safety Disclosures
  29
 
    
Item 5. Other information
  29
 
 
 
2
 
 
 
PART I
 
ITEM 1. FINANCIAL STATEMENTS
 
 
Kraig Biocraft Laboratories, Inc. and Subsidiary
 
 
Condensed Balance Sheets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
 
December 31, 2018
 
 
 
 (Unaudited)
 
 
 
 
Current Assets
 
 
 
 
 
 
   Cash
 $283,148 
 $13,697 
Prepaid expenses
  12,670 
  6,858 
     Total Current Assets
  295,818 
  20,555 
 
    
    
Property and Equipment, net
  97,828 
  47,310 
Operating lease right-of-use asset, net
  501,445 
  - 
Security deposit
  3,518 
  3,518 
 
    
    
Total Assets
 $898,609 
 $71,383 
 
    
    
 
    
    
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
    
    
Current Liabilities
    
    
Accounts payable and accrued expenses
 $342,506 
 $793,482 
Note payable - related party
  442,000 
  322,000 
Royalty agreement payable - related party
  65,292 
  65,292 
Accounts payable and accrued expenses - related party
  3,891,007 
  3,349,832 
Operating lease liability, current
  107,661 
  - 
Loan payable
  55,200 
  - 
Total Current Liabilities
  4,903,666 
  4,530,606 
 
    
    
Long Term Liabilities
    
    
 Loan payable, net of current
  202,044 
  - 
 Operating lease liability, net of current
  398,306 
  - 
 
    
    
Total Liabilities
  5,504,016 
  4,530,606 
 
    
    
Commitments and Contingencies
    
    
 
    
    
Stockholders' Deficit
    
    
  Preferred stock Series A, no par value;
    
    
2 and 2 shares issued and outstanding, respectively
  5,217,800 
  5,217,800 
  Common stock Class A, no par value; unlimited shares authorized,
    
    
844,468,378 and 816,883,910 shares issued and outstanding, respectively
  16,757,079 
  15,145,798 
  Common stock Class B, no par value; unlimited shares authorized,
    
    
no shares issued and outstanding
  - 
  - 
  Common Stock Issuable, 1,122,311 and 1,122,311 shares, respectively
  22,000 
  22,000 
  Additional paid-in capital
  2,294,501 
  2,043,235 
  Accumulated Deficit
  (28,896,787)
  (26,888,056)
 
    
    
Total Stockholders' Deficit
  (4,605,407)
  (4,459,223)
 
    
    
Total Liabilities and Stockholders' Deficit
 $898,609 
 $71,383 
 
 
 
3
 
 
 
 
Kraig Biocraft Laboratories, Inc. and Subsidiary
 
 
Condensed Statements of Operations
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended
 
 
For the Nine Months Ended
 
 
 
September 30, 2019
 
 
September 30, 2018
 
 
September 30, 2019
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 $- 
 $140,761 
 $- 
 $401,620 
 
    
    
    
    
Operating Expenses
    
    
    
    
General and Administrative
  826,571 
  123,695 
  1,066,724 
  404,643 
Professional Fees
  54,230 
  31,287 
  242,458 
  79,463 
Officer's Salary
  129,577 
  110,626 
  395,782 
  345,064 
Rent - Related Party
  2,487 
  2,880 
  11,913 
  8,640 
Research and Development
  43,987 
  20,221 
  87,228 
  91,242 
Total Operating Expenses
  1,056,852 
  288,709 
  1,804,105 
  929,052 
 
    
    
    
    
Loss from Operations
  (1,056,852)
  (147,948)
  (1,804,105)
  (527,432)
 
    
    
    
    
Other Income/(Expenses)
    
    
    
    
Gain on forgiveness of debt
  - 
  - 
  - 
  19,924 
Interest expense
  (73,276)
  (59,033)
  (210,891)
  (166,992)
Interest income
  1,640 
  - 
  6,265 
  - 
Total Other Income/(Expenses)
  (71,636)
  (59,033)
  (204,626)
  (147,068)
 
    
    
    
    
Net (Loss) before Provision for Income Taxes
  (1,128,488)
  (206,981)
  (2,008,731)
  (674,500)
 
    
    
    
    
Provision for Income Taxes
  - 
  - 
  - 
  - 
 
    
    
    
    
Net (Loss)
 $(1,128,488)
 $(206,981)
 $(2,008,731)
 $(674,500)
 
    
    
    
    
Net Income (Loss) Per Share - Basic and Diluted
 $(0.00)
 $(0.00)
 $(0.00)
 $(0.00)
 
    
    
    
    
Weighted average number of shares outstanding
    
    
    
    
  during the period - Basic and Diluted
  839,837,716 
  816,883,910 
  832,594,572 
  816,871,251 
 
 
 
4
 
 
 
Kraig Biocraft Laboratories, Inc. and Subsidiary
 
Condensed Statement of Changes in Stockholders Deficit
 For December 31, 2018 and the nine months ended September 30, 2019 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A Shares
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock - Series A
 
 
Common Stock - Class A
 
 
Common Stock - Class B
 
 
To be issued
 
 
 
 
 
Accumulated Deficit
 
 
 
 
 
 
 Shares
 
 
Par
 
 
 Shares
 
 
Par
 
 
 Shares
 
 
Par
 
 
Shares
 
 
Par
 
 
APIC
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
  2 
 $5,217,800 
  816,847,910 
 $15,144,722 
  - 
 $- 
  1,122,311 
 $22,000 
 $1,958,751 
 $(25,719,079)
 $(3,375,806)
 
    
    
    
    
    
    
    
    
    
    
    
Warrants issued for services
  - 
 $- 
  - 
 $- 
  - 
 $- 
  - 
 $- 
 $72,575 
 $- 
 $72,575 
 
    
    
    
    
    
    
    
    
    
    
    
Stock issued for services ($0.0299/Sh)
  - 
 $- 
  36,000 
 $1,076 
  - 
 $- 
  - 
 $- 
 $- 
 $- 
 $1,076 
 
    
    
    
    
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
    
    
    
    
Imputed interest - related party
  - 
 $- 
  - 
 $- 
  - 
 $- 
  - 
 $- 
 $11,909 
 $- 
 $11,909 
Net loss for the year ended December 31, 2018
  - 
 $- 
  - 
 $- 
  - 
 $- 
  - 
 $- 
 $- 
 $(1,168,977)
 $(1,168,977)
 
    
    
    
    
    
    
    
    
    
    
    
Balance, December 31, 2018
  2 
 $5,217,800 
  816,883,910 
 $15,145,798 
  - 
 $- 
  1,122,311 
 $22,000 
 $2,043,235 
 $(26,888,056)
 $(4,459,223)
 
    
    
    
    
    
    
    
    
    
    
    
Units issued for cash
  - 
 $- 
  14,797,278 
 $1,000,000 
  - 
 $- 
  - 
 $- 
 $- 
 $- 
 $1,000,000 
 
    
    
    
    
    
    
    
    
    
    
    
Shares issued in exchange for accounts payable
  - 
 $- 
  4,052,652 
 $281,659 
  - 
 $- 
  - 
 $- 
 $- 
 $- 
 $281,659 
 
    
    
    
    
    
    
    
    
    
    
    
Options issued for services - related parties
  - 
 $- 
  - 
 $- 
  - 
 $- 
  - 
 $- 
 $584,776 
 $- 
 $584,776 
 
    
    
    
    
    
    
    
    
    
    
    
Exercise of 9,000,000 warrants in exchange for stock
  - 
 $- 
  8,734,538 
 $329,622 
  - 
 $- 
  - 
 $- 
 $(329,622)
 $- 
 $- 
 
    
    
    
    
    
    
    
    
    
    
    
Cancellation of warrants issued for services
  - 
 $- 
  - 
 $- 
  - 
 $- 
  - 
 $- 
 $(19,915)
 $- 
 $(19,915)
 
    
    
    
    
    
    
    
    
    
    
    
Imputed interest - related party
  - 
 $- 
  - 
 $- 
  - 
 $- 
  - 
 $- 
 $16,027 
 $- 
 $16,027 
 
    
    
    
    
    
    
    
    
    
    
    
Net loss for the nine months ended September 30, 2019
  - 
 $- 
  - 
 $- 
  - 
 $- 
  - 
 $- 
 $- 
 $(2,008,731)
 $(2,008,731)
 
    
    
    
    
    
    
    
    
    
    
    
Balance, September 30, 2019
  2 
 $5,217,800 
  844,468,378 
 $16,757,079 
  - 
 $- 
  1,122,311 
 $22,000 
 $2,294,501 
 $(28,896,787)
 $(4,605,407)
 
 
 
5
 
 
 
Kraig Biocraft Laboratories, Inc. and Subsidiary
 Condensed Statements of Cash Flows
(Unaudited)
 
 
 
 
For the Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
2019
 
 
2018
 
Cash Flows From Operating Activities:
 
 
 
 
 
 
Net Loss
 $(2,008,731)
 $(674,500)
  Adjustments to reconcile net loss to net cash used in operations
    
    
      Depreciation expense
  22,448 
  19,809 
      Gain on forgiveness of debt
  - 
  (19,924)
      Imputed interest - related party
  16,027 
  8,097 
      Fair value of options issued for services
  584,776 
    
      Warrants issued/(cancelled) to consultants
  (19,915)
  72,575 
  Changes in operating assets and liabilities:
    
    
       Increase in prepaid expenses
  (5,812)
  3,105 
      (Increase) in accounts receivables, net
  - 
  (73,384)
      Operating lease right-of-use, net
  58,123 
  - 
      Increase in accrued expenses and other payables - related party
  541,175 
  454,345 
 
    
    
      Increase (Decrease) in accounts payable
  95,927 
  40,514 
      Operating lease liabilities, current
  (53,601)
  - 
Net Cash Used In Operating Activities
  (769,583)
  (169,363)
 
    
    
Cash Flows From Investing Activities:
    
    
Purchase of Fixed Assets and Domain Name
  (72,966)
  (11,448)
Net Cash Used In Investing Activities
  (72,966)
  (11,448)
 
    
    
Cash Flows From Financing Activities:
    
    
Proceeds from Notes Payable - related party
  120,000 
  185,000 
Principal payments on debt
  (8,000)
  - 
Proceeds from issuance of common stock
  1,000,000 
  - 
Net Cash Provided by Financing Activities
  1,112,000 
  185,000 
 
    
    
Net Increase in Cash
  269,451 
  4,189 
 
    
    
Cash at Beginning of Period
  13,697 
  18,150 
 
    
    
Cash at End of Period
 $283,148 
 $22,339 
 
    
    
Supplemental disclosure of cash flow information:
    
    
 
    
    
Cash paid for interest
 $- 
 $- 
Cash paid for taxes
 $- 
 $- 
 
    
    
Supplemental disclosure of non-cash investing and financing activities:
    
    
Shares issued in connection with cashless warrants exercise
 $329,622 
 $- 
Settlement of accounts payable with note payable
 $265,244 
 $- 
Settlement of accounts payable with stock issuance
 $281,659 
 $1,076 
Adoption of lease standard ASC 842
 $559,568 
 $- 
 
 
 
 
 
6
 
 
Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
 
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
 
(A) Basis of Presentation
 
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in The United States of America and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information necessary for a comprehensive presentation of financial position and results of operations.
 
It is management's opinion, however that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statements presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.
 
Kraig Biocraft Laboratories, Inc. (the "Company") was incorporated under the laws of the State of Wyoming on April 25, 2006. The Company was organized to develop high strength, protein based fiber, using recombinant DNA technology, for commercial applications in the textile and specialty fiber industries.
 
(B) Foreign Currency
 
The assets and liabilities of Prodigy Textiles, Co., Ltd. (the Company’s Vietnamese subsidiary) whose functional currency is the Vietnamese Dong, are translated into US dollars at period-end exchange rates prior to consolidation. Income and expense items are translated at the average rates of exchange prevailing during the period. The adjustments resulting from translating the Company’s financial statements are reflected as a component of other comprehensive (loss) income. Foreign currency transaction gains and losses are recognized in net earnings based on differences between foreign exchange rates on the transaction date and settlement date.
 
 (C) Use of Estimates
 
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period.  Actual results could differ from those estimates.
 
(D) Cash
 
For the purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.  There were no cash equivalents as of September 30, 2019 or December 31, 2018.
 
(E) Loss Per Share
 
Basic and diluted net loss per common share is computed based upon the weighted average common shares outstanding as defined by the Financial Accounting Standards Board (“FASB” Accounting Standards Codification (“ASC”) No. 260, “Earnings per Share.” For September 30, 2019 and September 30, 2018, warrants were not included in the computation of income/ (loss) per share because their inclusion is anti-dilutive.
 
The computation of basic and diluted loss per share for September 30, 2019 and September 30, 2018 excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:
 
 
 
 
September 30, 2019
 
 
September 30, 2018
 
Stock Warrants (Exercise price - $0.001/share)
  57,495,917 
  36,400,000 
Convertible Preferred Stock
  2 
  2 
Total
  57,495,919 
  36,400,002 
 
(F) Research and Development Costs
 
The Company expenses all research and development costs as incurred for which there is no alternative future use. These costs also include the expensing of employee compensation and employee stock based compensation.
 
 
7
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
(G) Income Taxes
 
The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”). Under ASC No. 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. Under ASC No. 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the transition tax, deferred tax re-measurements, and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118.
 
Effective January 1, 2009, the Company adopted guidance regarding accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all federal or state income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. As of December 31, 2018 and December 31, 2017 there were no amounts that had been accrued in respect to uncertain tax positions.
 
Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.   
 
Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model. 
 
(H) Stock-Based Compensation
 
In December 2004, the FASB issued FASB ASC No. 718, Compensation – Stock Compensation. Under FASB ASC No. 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant- date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. The Company applies this statement prospectively.
 
Equity instruments (“instruments”) issued to other than employees are recorded on the basis of the fair value of the instruments, as required by FASB ASC No. 718. FASB ASC No. 505, Equity Based Payments to Non-Employees defines the measurement date and recognition period for such instruments. In general, the measurement date is when either a (a) performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the FASB ASC.
 
 
8
 
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
(I) Recent Accounting Pronouncements
 
In February 2016, the FASB issued ASU 2016-02, “Leases” Topic 842, which amends the guidance in former ASC Topic 840, Leases. The new standard increases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases longer than 12 months. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. For lessees, leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company adopted the new lease guidance effective January 1, 2019 using the modified retrospective transition approach, applying the new standard to all of its leases existing at the date of initial application which is the effective date of adoption. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. We elected the package of practical expedients which permits us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. We did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment. The adoption of the lease standard did not change our previously reported consolidated statements of operations and did not result in a cumulative catch-up adjustment to opening equity. As a result, the Company has recorded Right-to-use assets and corresponding Lease obligations as more fully discussed in Note 4. 
 
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.  
 
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC No. 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.
 
In June 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.  
 
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.  
 
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception.  
 
Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently reviewing the impact of adoption of ASU 2017-11on its financial statements.  
 
All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable. The 2018 financial statements have been reclassified to conform to the 2019 presentation.
 
 
9
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
(J) Equipment
 
The Company values property and equipment at cost and depreciates these assets using the straight-line method over their expected useful life. The Company uses a five year life for automobiles.  
 
In accordance with FASB ASC No. 360, Property, Plant and Equipment, the Company carries long-lived assets at the lower of the carrying amount or fair value. Impairment is evaluated by estimating future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flow is less than the carrying amount of the assets, an impairment loss is recognized. Fair value, for purposes of calculating impairment, is measured based on estimated future cash flows, discounted at a market rate of interest.  
 
There were no impairment losses recorded for the nine months ended September 30, 2019 and 2018.
 
(K) Fair Value of Financial Instruments
 
We hold certain financial assets, which are required to be measured at fair value on a recurring basis in accordance with the Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“ASC Topic 820-10”). ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Level 1 instruments include cash, account receivable, prepaid expenses, inventory and account payable and accrued liabilities. The carrying values are assumed to approximate the fair value due to the short term nature of the instrument.
 
The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:
o
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. We believe our carrying value of level 1 instruments approximate their fair value at September 30, 2019 and December 31, 2018.
o
  Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
o
  Level 3 - Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. We consider depleting assets, asset retirement obligations and net profit interest liability to be Level 3. We determine the fair value of Level 3 assets and liabilities utilizing various inputs, including NYMEX price quotations and contract terms.
 
 
 
 
 
September 30,
2019
 
 
 
 
December 31,
2018
 
 
Level 1
 $- 
 $- 
Level 2
 $- 
 $- 
Level 3
 $- 
 $- 
Total
 $- 
 $- 
 
(L) Revenue Recognition
 
During the year ended December 31, 2018, the Company’s revenues were generated primarily from a contract with the U.S. Government. The Company performs work under this cost-plus-fixed-fee contract. Under the base phase of that contract the Company produced recombinant spider silk woven into ballistic shootpack panels. Those shootpack panels were delivered to the U.S. Government customer. Under an option period award starting in July 2017, to that original contract, the Company has worked to develop new recombinant silks.
 
Effective January 1, 2018, the Company adopted ASC No. 606 — Revenue from Contracts with Customers. Under ASC No. 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC No. 605 — Revenue Recognition. Under ASC No. 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists;(2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.
 
10
 
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
 
For the nine months ended September 30, 2019 and 2018, the Company recognized $0 and $401,620 respectively in revenue from the Government contract. These revenues were generated for work performed in the development and production of the Company’s recombinant silks under the base and option period phases of our ongoing contract with the US Army.
 
On July 24, 2017, the Company signed a contract option extension with the US Army to research and deliver recombinant spider silk fibers and threads. This contract option increased the total contract award by an additional $921,130 to a total of $1,021,092 and added 12 months to the contract duration. This effort was scheduled to end on September 24, 2018, but the Company requested an extension of this contract option period through April 2019 to complete the work. The Company has been in communication with the contracting office and is working with them as they determine the best path forward; Management believes there is a possibility of securing a follow-up contract to complete the delivery of all materials for the contract. The Company is also continuing to pursue additional contract opportunities with the Department of Defense, Department of Energy and other governmental agencies.
 
(M) Concentration of Credit Risk
 
The Company at times has cash in banks in excess of FDIC insurance limits. At September 30, 2019 and December 31, 2018, the Company had approximately $33,148 and $0, respectively in excess of FDIC insurance limits.
 
For the nine months ended September 30, 2019 and 2018, the Company had a concentration of sales of:
 
Customer
 
September 30, 2019
 
 
September 30, 2018
 
Customer A
  - 
  100%
Customer A
 $- 
 $401,620 
 
For the nine months ended September 30, 2019 and 2018, the Company booked $0 and $0 for doubtful accounts.
 
NOTE 2 GOING CONCERN  
 
As reflected in the accompanying financial statements, the Company has a working capital deficiency of $4,607,848 and stockholders’ deficiency of $4,605,407 and used $769,583 of cash in operations for nine months ended September 30, 2019. This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
 
Management believes that actions presently being taken to obtain additional funding and implement its strategic plans provide the opportunity for the Company to continue as a going concern.
 
NOTE 3 EQUIPMENT
 
At September 30, 2019 and December 31, 2018, property and equipment, net, is as follows: 
 
 
 
 
As of September 30, 2019
 
 
 
 
December 31, 2018
 
 
Automobile
 $41,805 
 $41,805 
Laboratory Equipment
  80,010 
  73,194 
Office Equipment
  7,260 
  7,260 
Leasehold Improvements
  74,088 
  7,938 
Less: Accumulated Depreciation
  (105,335)
  (82,887)
Total Property and Equipment, net
 $97,828 
 $47,310 
 
Depreciation expense for the nine months ended September 30, 2019 and 2018, was $22,448 and $19,809, respectively. 
 
Depreciation expense for the three months ended September 30, 2019 and 2018, was $9,044 and $6,774, respectively.
 
 
11
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
NOTE 4 - RIGHT TO USE ASSETS AND LEASE LIABILITITY
 
Since September of 2015, we rent office space at 2723 South State Street, Suite 150, Ann Arbor, Michigan 48104, which is our principal place of business. We pay an annual rent of $2,508 for conference facilities, mail, fax, and reception services located at our principal place of business.
 
On January 23, 2017 the Company signed an 8 year property lease with the Company’s President for land in Texas where the Company grows its mulberry. The Company pays a monthly rent of $960. Rent expense – related party for the nine months ended September 30, 2019 and 2018, was $11,913 and $5,760, respectively (See Note 9).
 
On September 13, 2017, the Company signed a new two year lease commencing on October 1, 2017 and ending on September 30, 2019. The Company pays an annual rent of $39,200 for the year one of lease and $42,000 for the year two of lease for office and manufacturing space.
 
On May 9, 2019 the Company signed a 5 year property lease with the Socialist Republic of Vietnam which consists of 4,560.57 square meters of space, which it leases at a current rent of approximately $45,150 per year one and two and with the 5% increase per year for years three through five.
 
In February 2016, the FASB issued ASU 2016-02, “Leases” Topic 842, which amends the guidance in former ASC Topic 840, Leases. The new standard increases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases longer than 12 months. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. For lessees, leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
 
The Company adopted the new lease guidance effective January 1, 2019 using the modified retrospective transition approach, applying the new standard to all of its leases existing at the date of initial application which is the effective date of adoption. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. We elected the package of practical expedients which permits us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. We did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment. The adoption of the lease standard did not change our previously reported consolidated statements of operations and did not result in a cumulative catch-up adjustment to opening equity. The adoption of the new guidance resulted in the recognition of ROU assets of $529,135 and lease liabilities of $531,462.
 
The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. In calculating the present value of the lease payments, the Company elected to utilize its incremental borrowing rate based on the remaining lease terms as of the January 1, 2019 adoption date. This rate was determined to be 8% and the Company determined the initial present value, at inception, of $559,568. 
 
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred, if any.
 
The Company has elected the practical expedient to combine lease and non-lease components as a single component. The lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on the balance sheet as right-of-use assets, current operating lease liabilities and non-current operating lease liabilities.
 
The new standard also provides practical expedients and certain exemptions for an entity’s ongoing accounting. We have elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases where the initial lease term is one year or less or for which the ROU asset at inception is deemed immaterial, we will not recognize ROU assets or lease liabilities. Those leases are expensed on a straight line basis over the term of the lease
 
Right to use assets is summarized below:
 
 
 
 
September 30,
2019
 
 
Right to use assets, net – related party
 $79,100 
Right to use assets, net
  55,942 
Right to use assets, net
  366,403 
Total
 $501,445 
 
 
 
12
 
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
During the nine months ended September 30, 2019, the Company recorded $75,575 as lease expense to current period operations.
 
During the nine months ended September 30, 2019, the Company recorded $11,913 as lease expense – related party to current period operations.
 
Lease liability is summarized below: 
 
   
 
 
September 30,
2019
 
 
Right to use liability, net – related party
  57,120 
Right to use liability, net
  79,864 
Right to use liability, net
  368,983 
Total
  505,967 
Less: short term portion
 $(107,661)
Long term position
 $398,306 
 
Lease expense for the nine months ended September 30, 2019 was comprised of the following:
 
Operating lease expense
 $22,522 
Operating lease expense
 $16,733 
Operating lease expense – related party
 $11,913 
 
NOTE 5 ACCRUED INTEREST – RELATED PARTY
 
On June 6, 2016, the Company received a $50,000 loan from our principal stockholder. Subsequently on December 1, 2017, the Company received an additional $30,000 loan from the same stockholder. On January 8, 2018 and March 31, 2018 the Company received an additional loan of $100,000 and $15,000, respectively. The Company received additional loan funds from the same stockholder as follows: $20,000 on April 26, 2018; $15,000 on June 21, 2018; $15,000 on June 29, 2018; $20,000 on July 5, 2018; $26,000 on October 1, 2018; $11,000 on October 12, 2018; $20,000 on December 21, 2018; $3,000 on January 4, 2019; $30,000 on January 17, 2019; $30,000 on February 1, 2019; $20,000 on February 15, 2019; $20,000 on March 1, 2019; and $17,000 on January 4, 2019. Pursuant to the terms of the loan, the advance bears an interest at 3%, is unsecured, and due on demand. Total loan payable to principal stockholder for as of December 31, 2018 is $322,000.  Total loan payable to this principal stockholder as of September 30, 2019 is $442,000.  During the nine months ended September 30, 2019, the Company recorded $16,027 as an in-kind contribution of interest related to the loan and recorded accrued interest payable of $10,624. During the nine months ended September 30, 2018, the Company recorded $8,097 as an in-kind contribution of interest related to the loan and recorded accrued interest payable of $4,968.
 
NOTE 6 NOTE PAYABLE 
 
On March 1, 2019, the Company entered into an unsecured promissory note with Notre Dame - an unrelated party in the amount of $265,244 in exchange for outstanding account payable due to the debtor. Pursuant to the terms of the note, the note bears 10% interest per year from the date of default until the date the loan is paid in full. The term of the loan is twenty four months. The loan repayment commenced immediately over a twenty-four month period according to the following table. During the nine months ended September 30, 2019, the Company paid $8,000 of the loan balance (See Note 8 (A):
 
 
1. $1,000 per month for the first six months;
2. $2,000 per month for the months seven and eight;
3. $5,000 per month for months nine through twenty three; and,
4. Final payment of all remaining balance, in the amount of $180,224 in month 24.
 
 
13
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
NOTE 7 STOCKHOLDERS' DEFICIT
 
(A) Common Stock Issued for Cash
 
On March 9, 2019, the Company entered into a purchase agreement with one investor (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Company issued the investor 14,797,278 Units at a purchase price of $0.06758 per Unit, for total gross proceeds to the Company of $1,000,000. The Units consist of 14,797,278 shares of the Company’s Class A Common Stock (the “Common Stock”) and two warrants (the “Warrants”): (i) one warrant entitles the investor to purchase up to 14,797,278 shares of Common Stock at an exercise price of $0.06 per share (the “6 Cent Warrants”) and (ii) one warrant entitles the investor to purchase up to 7,398,639 shares of Common Stock at an exercise price of $0.08 per share (the “8 Cent Warrant”). The Warrants shall be exercisable at any time from the issuance date until the following expiration dates:
 
●½ of all $0.06 Warrants shall expire on March 8, 2021; 
●½ of all $0.06 Warrants shall expire on March 8, 2022;
●½ of all $0.08 Warrants shall expire on March 8, 2022; and,
●½ of all $0.08 Warrants shall expire on March 8, 2023.
 
 (B) Common Stock Issued for Services
 
Shares issued for services as mentioned below were valued at the closing price of the stock on the date of grant.    
 
On March 20, 2019, the Company issued 4,052,652 shares of its class A common stock with a fair value of $281,659 ($0.0695/share) on the date of settlement. The Company settled $243,159 of accounts payable to the University of Notre Dame. The Company recorded an additional amount of $38,500 based on the fair value of the shares on the date of settlement. See Note 8 (A).
 
On April 6, 2018, the Company issued 36,000 shares with a fair value of $1,076 ($0.0299/share) to a consultant as consideration for consulting fees owed from October 1, 2014 through December 31, 2018 of $21,000. The issuance of shares resulted in gain on settlement of accounts payable of $19,924. See Note 8(B).
 
(C) Common Stock Warrants and Options
 
On August 8, 2019, the Company issued a 2-year option to purchase 2,000,000 shares of common stock at an exercise price of $0.2299 per share to a related party for services rendered. The options had a fair value of $267,574, based upon the Black-Scholes option-pricing model on the date of grant and are fully vested on the date granted. Options will be exercisable on August 8, 2020, and for a period of 3 years expiring on August 8, 2024. During the nine months ended September 30, 2019, the Company recorded $267,574 as an expense for options issued.
 
 Expected dividends
  0%
 Expected volatility
  105.73%
 Expected term
 
2 years
 
 
 Risk free interest rate
  1.62%
 Expected forfeitures
  0%
 
On August 8, 2019, the Company issued a 2-year option to purchase 2,000,000 shares of common stock at an exercise price of $0.2299 per share to a related party for services rendered. The options had a fair value of $267,574, based upon the Black-Scholes option-pricing model on the date of grant and is fully vested on August 8, 2020. Options will be exercisable on August 8, 2022, and for a period of 3 years expiring on August 8, 2025. During the nine months ended September 30, 2019, the Company recorded $38,747 as an expense for options issued.
 
 Expected dividends
  0%
 Expected volatility
  105.73%
 Expected term
 
2 years
 
 
 Risk free interest rate
  1.62%
 Expected forfeitures
  0%
 
On August 8, 2019, the Company issued a 3-year option to purchase 2,000,000 shares of common stock at an exercise price of $0.2299 per share to a related party for services rendered. The options had a fair value of $291,842, based upon the Black-Scholes option-pricing model on the date of grant and is fully vested on August 8, 2021. Options will be exercisable on August 8, 2023, and for a period of 3 years expiring on August 8, 2026. During the nine months ended September 30, 2019, the Company recorded $21,160 as an expense for options issued.
 
 Expected dividends
  0%
 Expected volatility
  105.73%
 Expected term
 
3 years
 
 
 Risk free interest rate
  1.54%
 Expected forfeitures
  0%
 
14
 
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
 
 
On August 8, 2019, the Company issued a 2-year option to purchase 1,000,000 shares of common stock at an exercise price of $0.2299 per share to a related party for services rendered. The options had a fair value of $118,874, based upon the Black-Scholes option-pricing model on the date of grant and are fully vested on the date granted. Options will be exercisable on August 8, 2020, and for a period of 3 years expiring on August 8, 2023. During the nine months ended September 30, 2019, the Company recorded $118,874 as an expense for options issued.
 
 Expected dividends
  0%
 Expected volatility
  105.73%
 Expected term
 
2 years
 
 
 Risk free interest rate
  1.62%
 Expected forfeitures
  0%
 
 
On August 8, 2019, the Company issued a 2-year option to purchase 1,000,000 shares of common stock at an exercise price of $0.2299 per share to a related party for services rendered. The options had a fair value of $118,874, based upon the Black-Scholes option-pricing model on the date of grant and are fully vested on the date granted. Options will be exercisable on August 8, 2021, and for a period of 3 years expiring on August 8, 2024. During the nine months ended September 30, 2019, the Company recorded $118,874 as an expense for options issued.
 
 Expected dividends
  0%
 Expected volatility
  105.73%
 Expected term
 
2 years
 
 
 Risk free interest rate
  1.62%
 Expected forfeitures
  0%
 
On August 8, 2019, the Company issued a 2-year option to purchase 125,000 shares of common stock at an exercise price of $0.2299 per share to an employee for services rendered. The options had a fair value of $14,859, based upon the Black-Scholes option-pricing model on the date of grant and are fully vested on the date granted. Options will be exercisable on August 8, 2020, and for a period of 3 years expiring on August 8, 2023. During the nine months ended September 30, 2019, the Company recorded $14,859 as an expense for options issued.
 
 Expected dividends
  0%
 Expected volatility
  105.73%
 Expected term
 
2 years
 
 
 Risk free interest rate
  1.62%
 Expected forfeitures
  0%
 
 
On August 8, 2019, the Company issued a 2-year option to purchase 125,000 shares of common stock at an exercise price of $0.2299 per share to a related party for services rendered. The options had a fair value of $16,723, based upon the Black-Scholes option-pricing model on the date of grant and are fully vested on August 8, 2020. Options will be exercisable on August 8, 2022, and for a period of 3 years expiring on August 8, 2025. During the nine months ended September 30, 2019, the Company recorded $2,422, as an expense for options issued.
 
 Expected dividends
  0%
 Expected volatility
  105.73%
 Expected term
 
2 years
 
 
 Risk free interest rate
  1.62%
 Expected forfeitures
  0%
 
 
15
 
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
 
On August 8, 2019, the Company issued a 2-year options to purchase 125,000 shares of common stock at an exercise price of $0.2299 per share to a related party for services rendered. The options had a fair value of $18,240, based upon the Black-Scholes option-pricing model on the date of grant and are fully vested on August 8, 2021. Options will be exercisable on August 8, 2023, and for a period of 3 years expiring on August 8, 2026. During the nine months ended September 30, 2019, the Company recorded $1,322, as an expense for options issued.
 
 Expected dividends
  0%
 Expected volatility
  105.73%
 Expected term
 
3 years
 
 
 Risk free interest rate
  1.54%
 Expected forfeitures
  0%
 
On August 8, 2019, the Company issued a 2-year options to purchase 125,000 shares of common stock at an exercise price of $0.2299 per share to a related party for services rendered. The options had a fair value of $19,525, based upon the Black-Scholes option-pricing model on the date of grant and are fully vested on August 8, 2022. Options will be exercisable on August 8, 2024, and for a period of 3 years expiring on August 8, 2027. During the nine months ended September 30, 2019, the Company recorded $944, as an expense for options issued.
 
 Expected dividends
  0%
 Expected volatility
  105.73%
 Expected term
 
3 years
 
 
 Risk free interest rate
  1.54%
 Expected forfeitures
  0%
 
 
On February 9, 2018, the Company issued a 3-year o to purchase 3,000,000 shares of common stock at an exercise price of $0.056 per share to a consultant for services rendered. The options had a fair value of $52,660, based upon the Black-Scholes option-pricing model on the date of grant and are fully vested on the date granted. Options will be exercisable on August 9, 2019, and for a period of 2 years expiring on August 9, 2021. During the year ended December 31, 2018, the Company recorded 52,660 as an expense for options issued.
 
 Expected dividends
  0%
 Expected volatility
  96.95%
 Expected term
 
3 years
 
 
 Risk free interest rate
  2.26%
 Expected forfeitures
  0%
 
On March 20, 2018, the Company issued a 4-year warrant to purchase 600,000 shares of common stock at an exercise price of $0.001 per share to a consultant for services rendered. The warrants had a fair value of $19,915, based upon the Black-Scholes option-pricing model on the date of grant and are fully vested on March 20, 2018. Warrants will be exercisable on March 20, 2019, and for a period of 3 years expiring on March 20, 2022. During the year ended December 31, 2018, the Company recorded $19,915 as an expense for warrants issued. On April 5, 2019, the Company cancelled 600,000 warrant issued to a consultant on February 20, 2018 in exchange for $6,000 cash payment.  In addition the Company also recorded a $19,915 reduction to warrant expense related to the warrant cancellation.
 
 
 Expected dividends
  0%
 Expected volatility
  97.56%
 Expected term
 
 
4 years 
 
 Risk free interest rate
  2.65%
 Expected forfeitures
  0%
 
 
16
 
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
On September 26, 2019, the Company issued 766,667 shares in connection with the cashless exercise of the 1,000,000 warrants. 
 
On August 14, 2019, the Company issued 7,967,871 shares in connection with the cashless exercise of the 8,000,000 warrants. 
 
 
 
 
Number of
Warrants
 
 
 
Weighted Average Exercise Price
 
 
 
Weighted Average Remaining Contractual Life (in Years)
 
 
Balance, December 31, 2018
  35,800,000 
 
 
 
  3.0 
Granted
  30,695,917 
  - 
  2.94 
Exercised
  (9,000,000)
  - 
    
 Cancelled/Forfeited
  (600,000)
  - 
    
Balance, September 30, 2019
  57,495,917 
    
  3.02 
 Intrinsic Value
 $11,786,663 
    
    
 
For the nine months ended September 30, 2019, the following warrants were outstanding:
 
 
 
Exercise Price Warrants Outstanding
 
 
 
 
Warrants Exercisable
 
 
 
 
Weighted Average Remaining Contractual Life
 
 
 
 
Aggregate Intrinsic Value 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 $0.001 
  30,500,000 
  1.8 
 $10,059,538 
 $0.056 
  3,000,000 
  1.86 
 $615,000 
 $0.04 
  2,300,000 
  1.90 
 $471,500 
 $0.06 
  7,398,639 
  1.44 
 $1,516,721 
 $0.06 
  7,398,639 
  2.44 
 $1,516,721 
 $0.08 
  3,699,320 
  2.44 
 $758,360 
 $0.08 
  3,699,320 
  3.44 
 $758,360 
 $0.2299 
  8,500,000 
  5.64 
 $1,742,500 
    
    
    
    
 
For the year ended December 31, 2018, the following warrants were outstanding:
 
 
 
Exercise Price Warrants Outstanding
 
 
 
 
Warrants Exercisable
 
 
 
 
Weighted Average Remaining Contractual Life 
 
 
 
 
Aggregate Intrinsic Value 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 $0.001 
  31,100,000 
  2.9 
 $1,523,900 
 $0.056 
  3,000,000 
  2.6 
 $147,000 
 $0.04 
  2,300,000 
  2.7 
 $112,700 
 
 (D) Amendment to Articles of Incorporation
 
 
On February 16, 2009, the Company amended its articles of incorporation to amend the number and class of shares the Company is authorized to issue as follows:
 
●Common stock Class A, unlimited number of shares authorized, no par value
●Common stock Class B, unlimited number of shares authorized, no par value
●Preferred stock, unlimited number of shares authorized, no par value
 
Effective December 17, 2013, the Company amended its articles of incorporation to designate a Series A no par value preferred stock. Two shares of Series A Preferred stock have been authorized.
 
(E) Common Stock Issued for Debt
 
None
 
 
17
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
NOTE 8 COMMITMENTS AND CONTINGENCIES
 
On November 10, 2010, the Company entered into an employment agreement with its CEO, effective January 1, 2011 through the December 31, 2015. The term of the agreement is a five year period at an annual salary of $210,000. There is a 6% annual increase. For the year ending December 31, 2015, the annual salary was $281,027. The employee is also to receive a 20% bonus based on the annual based salary. Any stock, stock options bonuses have to be approved by the board of directors. On January 1, 2016 the agreement was renewed with the same terms for another 5 years with an annual salary of $297,889 for the year ended December 31, 2016. On January 1, 2017 the agreement renewed with the same terms for another 5 years, but with an annual salary of $315,764 for the year ended December 31, 2017. On January 1, 2019 the agreement renewed again with the same terms for another 5 years, but with an annual salary of $354,791 for the year ended December 31, 2018. As of September 30, 2019 and December 31, 2018, the accrued salary balance is $2,375,547 and $2,109,454, respectively. (See Note 9).
 
On January 20, 2015, the board of directors appointed Mr. Jonathan R. Rice as our Chief Operating Officer. Mr. Rice’s employment agreement has a term of one year and can be terminated by either the Company or Mr. Rice at any time. Under the employment agreement, Mr. Rice is entitled to an annual cash compensation of $120,000, which includes salary, health insurance, 401K retirement plan contributions, etc. The Company also agreed to reimburse Mr. Rice for his past educational expenses of approximately $11,000. In addition, Mr. Rice was issued a three-year warrant to purchase 2,000,000 shares of common stock of the Company at an exercise price of $0.001 per share (the “January 2015 Warrant”) pursuant to the employment agreement. Additionally, on May 28, 2015, the Company issued a three-year warrant to purchase 3,000,000 shares of common stock of the Company at an exercise price of $0.001 per share (the "May 20165 Warrant") to Mr. Rice. The 2,000,000 share warrant fully vested on October 28, 2016. For the year ended December 31, 2015, the Company recorded $121,448 for the warrants issued to Mr. Rice. On January 14, 2016, the Company signed a new employment agreement with Mr. Rice. The employment agreement has a term of one year and can be terminated by either the Company or Mr. Rice at any time. Under the employment agreement, Mr. Rice is entitled to annual cash compensation of $140,000, which includes salary, health insurance, 401K retirement plan contributions, etc. In addition, Mr. Rice was issued a three-year warrant to purchase 6,000,000 shares of common stock of the Company at an exercise price of $0.001 per share pursuant to the employment agreement. For the year ended December 31, 2016, the Company recorded $193,652 for the warrants issued to Mr. Rice in 2016. For the year ended December 31, 2017, the Company recorded $17,473 for the warrants issued to Mr. Rice in2016. On January 9, 2018, the Company extended the expiration date of the January 2015 Warrant from January 19, 2018 to January 31, 2020 and on March 15, 2018, the Company signed an extension of its at-will employment agreement with its COO, extending the term to January 31, 2019. On March 25, 2019, the Company signed an extension of its at-will employment agreement with its COO, extending the term to January 1, 2020. On April 26, 2019, the Company signed an agreement to increase Mr .Rice’s base salary by $20,000 per year and issue a one-time $20,000 bonus. Additionally, on August 15, 2019, the Company signed an agreement to increase Mr. Rice’s base salary by an additional $20,000 per year. The salary increase and the bonus is accrued and to be paid in full earlier by the direction of the Board or upon the earlier of 
 
The Company maintaining $6,000,000 or more in working capital,
Upon the transfer of ownership of more than 50% of the Corporation's voting share or an assignment for the benefit of creditors or bankruptcy, or
Upon the fifth year anniversary of the salary increase and the bonus issuance.
  
As of September 30, 2019 and December 31, 2018 the Company owes $53,417 and $24,433, respectively, to Mr. Rice for payroll payable.
 
On July 3, 2019, the board of directors appointed Mr. Kenneth Le as the Company’s Director of Government relations and President of Prodigy Textiles. Mr. Le’s employment agreement has a term of one year and can be terminated by either the Company or Mr. Rice at any time. Under the employment agreement, Mr. Le is entitled to annual cash compensation of $60,000. In addition, Mr. Le was issued two three-year warrants to purchase 2,000,000 shares of common stock of the Company at an exercise price of $0.2299 per share. As of September 30, 2019, the accrued salary balance is $1,154.
 
(A)License Agreement 
 
On May 8, 2006, the Company entered into a license agreement. Pursuant to the terms of the agreement, the Company paid a non-refundable license fee of $10,000. The Company will pay a license maintenance fee of $10,000 on the one year anniversary of this agreement and each year thereafter. The Company will pay an annual research fee of $13,700 with first payment due January 2007, then on each subsequent anniversary of the effective date commencing May 4, 2007. The annual research fees are accrued by the Company for future payment. Pursuant to the terms of the agreement the Company may be required to pay additional fees aggregating up to a maximum of $10,000 a year for patent maintenance and prosecution relating to the licensed intellectual property.
 
 
18
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
On October 28, 2011, the Company entered into a license agreement with the University of Notre Dame. Under the agreement, the Company received exclusive and non-exclusive rights to certain spider silk technologies including commercial rights with the right to sublicense such intellectual property. In consideration of the licenses granted under the agreement, the Company agreed to issue to the University of Notre Dame 2,200,000 shares of its common stock and to pay a royalty of 2% of net sales. The license agreement has a term of 20 years which can be extended on an annual basis after that. It can be terminated by the University of Notre Dame if the Company defaults on its obligations under the agreement and fails to cure such default within 90 days of a written notice by the university. The Company can terminate the agreement upon a 90 day written notice subject to payment of a termination fee of $5,000 if the termination takes place within 2 years after its effectiveness, $10,000 if the termination takes place within 4 years after its effectiveness and $20,000 if the Agreement is terminated after 4 years. On May 5, 2017, the Company signed an addendum to that agreement relating to tangible property and project intellectual property. On March 1, 2019, the Company singed an addendum to that agreement. The Company entered into a separate loan agreement and promissory noted dated March 1, 2019 as a payment for expenses paid by the University prior to January 31, 2019 totaling $265,244 and issued 4,025,652 shares of Class A common stock with a fair value of $281,659 as payment of certain debt. In the event of default the license agreement will be terminated.  During the nine months ended September 30, 2019, the Company paid $8,000 of the land balance (See Notes 6).
 
(B) Royalty and Research Agreements
 
On May 1, 2008 the Company entered into a five year consulting agreement for research and development. Pursuant to the terms of the agreement, the Company will be required to pay $1,000 per month, or at the Company’s option, the consulting fee may be paid in the form of Company common stock based upon the greater of $0.05 per share or the average of the closing price of the Company’s shares over the five days preceding such stock issuance. On April 6, 2018, the Company issued 36,000 shares with a fair value of $1,076 ($0.0299/share) to a consultant as consideration for consulting fees owed from October 1, 2014 through December 31, 2018 of $21,000. The issuance of shares resulted in gain on settlement of accounts payable of $19,924. On April 1, 2018, the Company ended the consulting agreement and no additional compensation will be issued. (See Note 7 (B)).
 
On December 26, 2006, the Company entered into an addendum to the intellectual property transfer agreement with Mr. Thompson, its CEO. In accordance with FASB ASC No 480, Distinguishing Liabilities from Equity, the Company determined that the present value of the payment of $120,000 that was due on December 26, 2007. As of December 31, 2018 and December 31, 2017, the outstanding balance is $65,292. As of December 31, 2017, the Company recorded interest expense and related accrued interest payable of $2,623. In 2019 the Company recorded $1,469 in interest expensed and related accrued interest payable. As of September 30, 2019, the Company recorded interest expense and related accrued interest payable of $6,053.
 
On December 30, 2015, the Company entered into a cooperative agreement for the research and pilot production of hybrid silkworms in Vietnam. Under this agreement, the Company will establish a subsidiary in Vietnam where it will develop and produce hybrid silkworms. On April 24, 2018, the Company announced that it had received its investment registration certificate for its new Vietnamese subsidiary Prodigy Textiles Co., Ltd. On May 1, 2018, the Company announced that it had received its enterprise registration certificate for its new Vietnamese subsidiary Prodigy Textiles Co., Ltd.
 
(C) Consulting Agreement
 
On February 9, 2018, the Company issued a 3-year warrant to purchase 3,000,000 shares of common stock at an exercise price of $0.056 per share to a consultant for services rendered. The warrants had a fair value of $52,660, based upon the Black-Scholes option-pricing model on the date of grant and are fully vested on the date granted. Warrants will be exercisable on August 9, 2019, and for a period of 2 years expiring on August 9, 2021. During the year ended December 31, 2018, the Company recorded 52,660 as an expense for warrants issued (See Note 7 (C)).
 
On February 20, 2018, the Company signed an agreement with a consultant to provide services. Under this agreement the consultant will receive a warrant for 600,000 shares of common stock and may be awarded additional warrants for up to 3,000,000 shares of common stock if performance metrics are achieved. On March 20, 2018, the Company issued a 4-year warrant to purchase 600,000 shares of common stock at an exercise price of $0.001 per share to a consultant for services rendered. The warrants had a fair value of $19,915, based upon the Black-Scholes option-pricing model on the date of grant and are fully vested on March 20, 2018. Warrants will be exercisable on March 20, 2019, and for a period of 3 years expiring on March 20, 2022. During the year ended December 31, 2018, the Company recorded $19,915 as an expense for warrants issued (See Note 7 (C)).’ On April 5, 2019, the Company cancelled 600,000 warrant issued to a consultant on February 20, 2018 in exchange for $6,000 cash payment.
 
 (D) Operating Lease Agreements
 
 Since September of 2015, we rent office space at 2723 South State Street, Suite 150, Ann Arbor, Michigan 48104, which is our principal place of business. We pay an annual rent of $2,508 for conference facilities, mail, fax, and reception services located at our principal place of business.
 
On May 9, 2019 the Company signed an 5 year property lease Socialist Republic of Vietnam which consists of 4,560.57 square meters of space, which it leases at a current rent of approximately $45,150 per year one and two and with the 5% increase per year for years three through five.
 
On January 23, 2017 the Company signed an 8 year property lease with the Company’s President for land in Texas where the Company grows its mulberry. The Company pays a monthly rent of $960. Rent expense – related party for the nine months ended September 30, 2019 and 2018, was $11,913 and $5,760, respectively (See Note 9).
 
On September 13, 2017, the Company signed a new two year lease commencing on October 1, 2017 and ending on September 30, 2019. The Company pays an annual rent of $39,200 for the year one of lease and $42,000 for the year two of lease for office and manufacturing space.
 
 
19
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
NOTE 9 RELATED PARTY TRANSACTIONS
 
On December 26, 2006, the Company entered into an addendum to the intellectual property transfer agreement with Mr. Thompson, its CEO. Pursuant to the addendum, the Company agreed to issue either 200,000 preferred shares with the following preferences; no dividends and voting rights equal to 100 common shares per share of preferred stock or the payment of $120,000, the officer agreed to terminate the royalty payments due under the agreement and give title to the exclusive license for the non-protective apparel use of the intellectual property to the Company. On the date of the agreement, the Company did not have any preferred stock authorized with the required preferences. In accordance with FASB ASC No. 480, Distinguishing Liabilities from Equity, the Company determined that the present value of the payment of $120,000 that was due on December 26, 2007, one year anniversary of the addendum, should be recorded as an accrued expense until such time as the Company has the ability to assert that it has preferred shares authorized. As of December 31, 2018 the outstanding balance is $65,292. Additionally, the accrued expenses are accruing 7% interest per year. As of September 30, 2019, the Company recorded interest expense and related accrued interest payable of $6,053.
 
On November 10, 2010, the Company entered into an employment agreement, with its CEO, effective January 1, 2011 through the December 31, 2015. Subsequently, on January 1, 2018 the agreement renewed with the same terms for another 5 years with an annual salary of $334,708 for the year ended December 31, 2018. As of September 30, 2019 and December 31, 2018, the accrued salary balance is $2,286,849 and $2,109,454, respectively. 
  
On January 14, 2016 the Company signed a new employment agreement with Mr. Rice, the Company's COO. The employment agreement has a term of one year and can be terminated by either the Company or Mr. Rice at any time. Under the employment agreement, Mr. Rice is entitled to annual cash compensation of $140,000, which includes salary, health insurance, 401K retirement plan contributions, etc. In addition, Mr. Rice was issued a three-year warrant to purchase 6,000,000 shares of common stock of the Company at an exercise price of $0.001 per share pursuant to the employment agreement. For the year ended December 31, 2016, the Company recorded $193,654 for the warrants issued to Mr Rice. For the year ended December 31, 2017 the Company recorded $17,473 for the warrants issued to Mr. Rice in 2016. On January 9, 2018, the Company extended the expiration date of a warrant for 2,000,000 shares of common stock from January 19, 2018 to January 31, 2020 for Mr Rice. Additionally, on March 15, 2018, the Company signed an extension of its at-will employment agreement with its COO. On April 26, 2019, the Company signed an agreement to increase Mr .Rice’s base salary by $20,000 per year and issue a one-time $20,000 bonus. Additional, on August 15, 2019, the Company signed an agreement to increase Mr .Rice’s base salary by an additional $20,000 per year. The salary increase and the bonus is accrued and to be paid in full earlier by the direction of the Board or upon the earlier of:
 
The Company maintaining $6,000,000 or more in working capital,
Upon the transfer of ownership of more than 50% of the Corporation's voting share or an assignment for the benefit of creditors or bankruptcy, or
Upon the fifth year anniversary of the salary increase and the bonus issuance.
 
As of September 30, 2019 and December 31, 2018, the Company owes $46,384 and $24,433, respectively, to Mr. Rice for payroll payable.
 
On July 3, 2019, the board of directors appointed Mr. Kenneth Le as the Company’s Director of Government relations and President of Prodigy Textiles. Mr. Le’s employment agreement has a term of one year and can be terminated by either the Company or Mr. Rice at any time. Under the employment agreement, Mr. Le is entitled to an annual cash compensation of $60,000. In addition, Mr. Le was issued two three-year warrants to purchase 2,000,000 shares of common stock of the Company at an exercise price of $0.2299 per share. As of September 30, 2019, the accrued salary balance is $1,154.
 
On June 6, 2016, the Company received a $50,000 loan from our principal stockholder. Subsequently on December 1, 2017, the Company received an additional $30,000 loan from the same stockholder. On January 8, 2018 and March 31, 2018 the Company received an additional loan of $100,000 and $15,000, respectively. The Company received additional loan funds from the same stockholder as follows: $20,000 on April 26, 2018; $15,000 on June 21, 2018; $15,000 on June 29, 2018; $20,000 on July 5, 2018; $26,000 on October 1, 2018; $11,000 on October 12, 2018; $20,000 on December 21, 2018; $3,000 on January 4, 2019; $30,000 on January 17, 2019; $30,000 on February 1, 2019; $20,000 on February 15, 2019; $20,000 on March 1, 2019; and $17,000 on January 4, 2019. Pursuant to the terms of the loan, the advance bears an interest at 3%, is unsecured, and due on demand. Total loan payable to this principal stockholder for as of December 31, 2018 is $322,000.  Total loan payable to principal stockholder for as of September 30, 2019 is $442,000.  During the nine months ended September 30, 2019, the Company recorded $16,027 as an in-kind contribution of interest related to the loan and recorded accrued interest payable of $10,624. During the nine months ended September 30, 2018, the Company recorded $8,097 as an in-kind contribution of interest related to the loan and recorded accrued interest payable of $4,968.
 
On January 23, 2017, the Company signed an 8 year property lease with the Company’s President for land in Texas. The Company pays $960 per month starting on February 1, 2017 and uses this facility to grow mulberry for its U.S. silk operations. Rent expense – related party for nine months ended September 30, 2019 and 2018 was $11,913 and $5,760, respectively.
 
 
20
 
 

Kraig Biocraft Laboratories, Inc.
Notes to Consolidated Financial Statements as of September 30, 2019 and 2018
As of September 30, 2019 and December 31, 2018, there was $297,732 and $247,652, respectively, included in accounts payable and accrued expenses - related party, which is owed to the Company’s Chief Executive Officer and Chief Operations Officer.
 
As of September 30, 2019, there was $1,124,398 of accrued interest- related party and $38,759 in shareholder loan interest – related party included in accounts payable and accrued expenses – related party, which is owed to the Company’s Chief Executive officer.
 
As of December 31, 2018, there was $940,158 of accrued interest- related party and $28,135 in shareholder loan interest – related party included in accounts payable and accrued expenses – related party, which is owed to the Company’s Chief Executive officer.
 
As of September 30, 2019, the Company owes $2,375,547 in accrued salary to principal stockholder, $53,417 to the Company’s COO, $1,153 to Director of Prodigy Textiles and $4,786 to its office employees.
 
As of December 31, 2018, the Company owes $2,109,454 in accrued salary to principal stockholder, $24,433 to the Company’s COO, and $7,640 to its office employees.
 
The Company owes $65,292 in royalty payable to related party as of September 30, 2019 and December 31, 2018.
 
 
NOTE 10 SUBSEQUENT EVENTS
The Company has analyzed its operations subsequent to November 13, 2019 through the date these financial statements were issued, and has determined that, other than disclosed below, it does not have any material subsequent events to disclose.
 
On October 8, 2019, the Company delivered the first batch of its transgenic silkworm eggs to its production factory in Quang Nam, Vietnam for the purpose of commencing production at that facility.
 
On October 21, 2019, the Company signed an agreement to increase Mr .Rice’s base salary by $20,000 per year (effective August 15, 2019). The salary increase is accrued and to be paid in full earlier by the direction of the Board or upon the earlier of:
 
●The Company maintaining $6,000,000 or more in working capital,
●Upon the transfer of ownership of more than 50% of the Corporation’s voting share or an assignment for the benefit of creditors or bankruptcy, or
●Upon the fifth year anniversary of the salary increase and the bonus issuance.  
 
On November 4, 2019, the Company reported that it had successfully completed rearing the first batch of its transgenic silkworms at its production factory in Quang Nam, Vietnam.  The Company expects to continue expanding production of its specialized silk.
 
 
21
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
FORWARD-LOOKING INFORMATION
 
The following information should be read in conjunction with Kraig Biocraft Laboratories, Inc. and its subsidiaries ("we", "us", "our", or the “Company”) condensed unaudited financial statements and the notes thereto contained elsewhere in this report. Information in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Form 10-Q that does not consist of historical facts, are "forward-looking statements."  Statements accompanied or qualified by, or containing words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements, and as such, are not a guarantee of future performance. 
 
Forward-looking statements are subject to risks and uncertainties, certain of which are beyond our control. Actual results could differ materially from those anticipated as a result of the factors described in the “Risk Factors” and detailed in our other Securities and Exchange Commission (“SEC”) filings. Risks and uncertainties can include, among others, international, national and local general economic and market conditions: demographic changes; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to obtain sufficient financing to continue and expand business operations; the ability to develop technology and products; changes in technology and the development of technology and intellectual property by competitors; the ability to protect technology and develop intellectual property; and other factors referenced in this and previous filings. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. 
 
Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this report or incorporated by reference might not transpire. Factors that cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described elsewhere in this report and in the “Risk Factors” section of our registration statement on Form S-1.
 
The Company disclaims any obligation to update the forward-looking statements in this report.
 
Overview
 
Kraig Biocraft Laboratories, Inc. is a corporation organized under the laws of Wyoming on April 25, 2006. We were organized to develop high strength fibers using recombinant DNA technology, for commercial applications in both the specialty fiber and technical textile industries. Specialty fibers are engineered for specific uses that require exceptional strength, flexibility, heat resistance and/or chemical resistance. The specialty fiber market is exemplified by two synthetic fiber products: aramid fibers and ultra-high molecular weight polyethylene fiber. The technical textile industry involves products for both industrial and consumer products, such as filtration fabrics, medical textiles (e.g., sutures and artificial ligaments), safety and protective clothing and fabrics used in military and aerospace applications (e.g., high-strength composite materials).
 
We are using genetic engineering technologies to develop fibers with greater strength, resiliency and flexibility for use in our target markets, namely the textile, specialty fiber and technical textile industries.
 
The Report of Independent Registered Public Accounting Firm to our financial statements as of December 31, 2018 include an explanatory paragraph stating that our net loss from operations and net capital deficiency at December 31, 2018 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.
 
Plan of Operations
 
During the next twelve months, we expect to take the following steps in connection with the further development of our business and the implementation of our plan of operations:
 
We plan to establish commercial production(1) of our recombinant spider silk by delivering and scaling up production of our transgenic silkworms at our factory in Quang Nam, Vietnam according to our investment and enterprise registration certificates for Prodigy Textiles. 
 
22
 
 
 We plan to deliver our recombinant spider silk yarn to select companies for collaborative end product development.
 
  We plan to begin commercial sales of our recombinant spider silk yarns.
 We expect to spend approximately $13,700 on collaborative research and development of high strength polymers and spider silk protein at the University of Wyoming over the next twelve months. This level of research spending at the university is also a requirement of our licensing agreement with the university.
We plan to accelerate both our microbiology and selective breeding programs as well as provide more resources for our material testing protocols. We spent approximately $148,069 during the year ended December 31, 2018 on research and development of high strength polymers. In 2018 we directed our research and development efforts on growing our internal capabilities. We may consider renewing funding of the collaborative research and development of high strength polymers at the University of Notre Dame in the future.   
We will consider buying an established revenue producing company in a compatible business, in order to broaden our financial base and facilitate the commercialization of our products. We expect to use a combination of stock and cash for any such purchase.  As of the date hereof, we have not had any formal discussion or entered into any definitive agreements regarding any such purchase.
We will also actively consider pursuing collaborative research opportunities with both private and university laboratories in areas of research which overlap the company’s existing research and development. One such potential area for collaborative research which the company is considering is protein expression platforms. If our financing allows, management will give strong consideration to increasing the breadth of our research to include protein expression platform technologies.
We plan to actively pursue collaborative research and product testing, opportunities with companies in the biotechnology, materials, textile and other industries.
We plan to actively pursue collaborative commercialization, marketing and manufacturing opportunities with companies in the textile and material sectors for the fibers we developed and for any new polymers that we create.
We plan to actively pursue the development of commercial scale production of our recombinant materials including Monster Silk® and Dragon SilkTM.
 
(1) On October 8, 2019, the Company delivered its transgenic silkworms to the factory and has now completed rearing of the first generation in Vietnam.  The Company continues to expand it production capacity at the Quang Nam Factory.

Limited Operating History
 
We have not previously demonstrated that we will be able to expand our business through an increased investment in our research and development efforts. We cannot guarantee that the research and development efforts described in this filing will be successful. Our business is subject to risks inherent in growing an enterprise, including limited capital resources, risks inherent in the research and development process and possible rejection of our products in development.
 
If financing is not available on satisfactory terms, we may be unable to continue our research and development and other operations. Equity financing will result in dilution to existing shareholders.
 
Three months ended September 30, 2019 compared to the three months ended September 30, 2018
 
Our revenue, operating expenses, and net loss from operations for the three month period ended September 30, 2019 as compared to the three month period ended September 30, 2018, were as follows – some balances on the prior period’s combined financial statements have been reclassified to conform to the current period presentation:
 
 

 
Three Months Ended
 
   
 
% Change
 
 
 
 
 
 
September 30, Increase (Decrease)
 
 
 
 
 
     
 
 
 
2019
 
 
2018
 
 
Change
 
 
 
 
NET REVENUES
 $- 
 $140,761 
  (140,761)
  -100.00%
OPERATING EXPENSES:
    
    
    
    
General and Administrative
  826,571 
  123,695 
  702,876 
  568.23%
Professional Fees
  54,230 
  31,287 
  22,943 
  73.33%
Officer's Salary
  129,577 
  110,626 
  18,951 
  17.13%
Rent - Related Party
  2,487 
  2,880 
  (393)
  (13.65%)
Research and Development
  43,987 
  20,221 
  23,766 
  117.53%
Total operating expenses
  1,056,852 
  288,709 
  768,143 
  266.06%
Loss from operations
  (1,056,852)
  (147,948)
  (908,904)
  614.34%
Gain on forgiveness of debt
  - 
  - 
  - 
  100.00%
Interest expense
  (73,276)
  (59,033)
  (14,243)
  24.13%
Interest income
  1,640 
  - 
  1,640 
  100.00%
Net Loss
 $(1,128,488)
 $(206,981)
  (921,507)
  445.21%
 
Net Revenues:  During the three months ended September 30, 2019, we realized $ 0 of revenues from our business. During the three months ended September 30, 2018, we realized $140,761 of revenues from our business. The change in revenues between the quarter ended September 30, 2019 and 2018 was $152,230 or 100%.  This decrease was due to a research and development contract between the Company and the US Army which began in 2016 and ended in 2018.
 
Cost of Revenues:  Costs of revenues for the three months ended September 30, 2019 were $0, as compared to $0 for the three months ended September 30, 2018, a change of $0 or 0%.
 
 
23
 
Gross Profit: During the three months ended September 30, 2019, we realized a gross profit of $0, as compared to $140,761 for the three months ended September 30, 2018, a change of $140,761 or 100%.
 
Research and development expenses:  During the three months ended September 30, 2019, we incurred $43,987 of research and development expenses. During the three months ended September 30, 2018, we incurred $20,221 of research and development expenses, a decrease of $23,766 or 117.53% compared with the same period in 2018.  This decrease was due to a reduction in research spend with the ending of the US Army contract in 2018.
 
Professional Fees:  During the three months ended September 30, 2019, we incurred $54,230 of professional expenses, which increased by $22,943 or 73.33% from $31,287 for the three months ended September 30, 2018.  This increase was primarily due to an increase in professional fees associated with valuation services for the Company's stock.. 
 
Officers Salary:  During the three months ended September 30, 2019, officers’ salary expenses increased to $129,577 or 17.13% from $110,626 for the three months ended September 30, 2018.
 
General and Administrative Expense: General and administrative expenses increased by $702,876 or 568.23% to $826,571 for the three months ended September 30, 2019 from $123,695 for the three months ended September 30, 2018. Our general and administrative expenses for the three months ended September 30, 2019 consisted of other general and administrative expenses (which includes expenses such as auto, business development, SEC filings, investor relations, general office, warrants issued for services) of $742,461, Travel of $9,404 and office salary of $74,706, for a total of $826,571. Our general and administrative expenses for the three months ended September 30, 2018, consisted of consulting fees of $15,350 and other general and administrative expenses (which includes expenses such as auto, business development, SEC filings, investor relations, general office, warrant compensation) of $41,793, travel of $5,979 and office salary of $41,793, for a total of $123,695. The primary reason for this increase was primarily due to an increase in the expense associated with the issuance of warrants for services.
 
Rent – Related Party:  During the three months ended September 30, 2019, rent- related party expense decreased to $2,487 or 0 % from $2,880 for the three months ended September 30, 2018. The rent-related party expense was attributable to the signing on January 23, 2017 the Company signed an eight year property lease with the Company’s President.
 
Interest Expense:  Interest expense increase by $14,243 to $73,276 for the three month period ended September 30, 2019 from $59,033 for the three month period ended September 30, 2018. The increase was primarily due to interest on certain Company loans.
 
Interest Income:  Interest income increased by $1,640 to $1,640 for the three month period ended September 30, 2019 from $0 for the three month period ended September 30, 2018. The increase was primarily due to interest on bank accounts.
 
Net Loss:  Net loss increased by $921,507, or 445.21%, to a net loss of $1,128,488 for the three month period ended September 30, 2019 from a net loss of $206,981 for the three month period ended September 30, 2018. This increase in net loss was primarily attributable to both increases in general and administrative expenses and a decrease in revenues.
 
Nine months ended September 30, 2019 compared to the nine months Ended September 30, 2018
 
Our revenue, operating expenses, and net loss from operations for the nine month period ended September 30, 2019 as compared to the nine month period ended September 30, 2018, were as follows – some balances on the prior period’s combined financial statements have been reclassified to conform to the current period presentation:
 

 
Nine Months Ended
 
   
 
% Change
 
 
 
 
 
 
September 30, Increase (Decrease)
 
 
 
 
 
     
 
 
 
2019
 
 
2018
 
 
Change
 
 
 
 
NET REVENUES
 $- 
 $401,620 
  (401,620)
  -100.00%
OPERATING EXPENSES:
    
    
    
    
General and Administrative
  1,066,724 
  404,643