UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

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 _____

 

Commission File Number: 333-146316

 

KRAIG BIOCRAFT LABORATORIES, INC.

(Exact Name of Registrant as Specified in Charter)

 

Wyoming   83-0459707

(State or Other Jurisdiction

of Incorporation)

 

(I.R.S. Employer

Identification No.)

 

2723 South State St. Suite 150

Ann Arbor, Michigan 48104

(Address of Principal Executive Offices)

 

(734) 619-8066

(Registrant’s telephone number, including area code)

 

 

(Former name and address, if changed since last report)

 

Copies to:

Hunter Taubman Fischer & Li LLC

800 Third Ave., Suite 2800

New York, NY 10022

 

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 [X] 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 [X] 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 [X]   Smaller reporting company [X]
    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 [X]

 

As of November 10, 2020, there were 854,410,001 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.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
PART I FINANCIAL INFORMATION  
   
Item 1. Unaudited Condensed Financial Statements: 3
   
Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019 (Audited) 3
   
Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2020 and 2019 4
   
Condensed Consolidated Statements of Stockholders’ Deficit for the three and nine months ended September 30, 2020 and 2019 (Unaudited) 5
   
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2020 and 2019 7
   
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
   
Item 4. Controls and Procedures 34
   
PART II OTHER INFORMATION  
   
Item 1. Legal proceedings 35
   
Item 1A. Risk Factors 35
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
   
Item 3. Defaults upon Senior Securities 35
   
Item 4. Mine Safety Disclosures 35
   
Item 5. Other information 36

 

2

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

Kraig Biocraft Laboratories, Inc. and Subsidiary

Condensed Consolidated Balance Sheets

 

    September 30, 2020     December 31, 2019  
    (Unaudited)     (Audited)  
ASSETS                
Current Assets                
Cash   $ 43,062     $ 125,024  
Prepaid expenses     12,979       31,745  
Total Current Assets     56,041       156,769  
                 
Property and Equipment, net     96,044       117,321  
Operating lease right-of-use asset, net     385,436       473,242  
Security deposit     3,518       3,518  
                 
Total Assets   $ 541,039     $ 750,850  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current Liabilities                
Accounts payable and accrued expenses   $ 520,410     $ 560,948  
Note payable - related party     1,492,000       642,000  
Royalty agreement payable - related party     65,292       65,292  
Accounts payable and accrued expenses - related party     4,614,733       4,145,465  
Operating lease liability, current     122,028       110,678  
Loan payable     60,000       60,000  
SBA Pacheck Protection Loan     90,100       -  
Total Current Liabilities     6,964,563       5,584,383  
                 
Long Term Liabilities                
Loan payable, net of current     140,244       185,244  
Operating lease liability, net of current     276,314       369,281  
                 
Total Liabilities     7,381,121       6,138,908  
                 
Commitments and Contingencies                
                 
Stockholders’ Deficit                
Preferred stock, no par value; unlimited shares authorized, none, issued and outstanding     -       -  
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, 854,410,001 and 844,468,378 shares issued and outstanding, respectively     17,122,236       16,757,079  
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     4,909,082       2,412,969  
Deferred Compensation     -       -  
Accumulated Deficit     (34,111,200 )     (29,797,906 )
                 
Total Stockholders’ Deficit     (6,840,082 )     (5,388,058 )
                 
Total Liabilities and Stockholders’ Deficit   $ 541,039     $ 750,850  

 

3

 

 

Kraig Biocraft Laboratories, Inc. and Subsidiary

Condensed Consolidated Statements of Operations

(Unaudited)

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30, 2020     September 30, 2019     September 30, 2020     September 30, 2019  
                         
Revenue   $ -     $ -     $ -     $ -  
                                 
Operating Expenses                                
General and Administrative     366,243       826,571       3,507,302       1,066,724  
Professional Fees     39,169       54,230       89,643       242,458  
Officer’s Salary     161,861       129,577       361,276       395,782  
Rent - Related Party     3,556       2,487       9,819       11,913  
Research and Development     27,626       43,987       65,408       87,228  
Total Operating Expenses     598,455       1,056,852       4,033,448       1,804,105  
                                 
Loss from Operations     (598,455 )     (1,056,852 )     (4,033,448 )     (1,804,105 )
                                 
Other Income/(Expenses)                                
Interest expense     (94,703 )     (73,276 )     (279,846 )     (210,891 )
Interest income     -       1,640       -       6,265  
Total Other Income/(Expenses)     (94,703 )     (71,636 )     (279,846 )     (204,626 )
                                 
Net (Loss) before Provision for Income Taxes     (693,158 )     (1,128,488 )     (4,313,294 )     (2,008,731 )
                                 
Provision for Income Taxes     -       -       -       -  
                                 
Net (Loss)   $ (693,158 )   $ (1,128,488 )   $ (4,313,294 )   $ (2,008,731 )
                                 
Net Income (Loss) Per Share - Basic and Diluted   $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.00 )
                               
Weighted average number of shares outstanding during the period - Basic and Diluted     851,168,167       839,837,716       846,717,942       832,594,572  

 

4

 

 

Kraig Biocraft Laboratories, Inc. and Subsidiary

Condensed Consolidated Statement of Changes in Stockholders Deficit

For the three and nine months ended September 30, 2020

(Unaudited)

 

    Preferred Stock -     Common Stock -     Common Stock -     Common Stock - Class A Shares                    
    Series A     Class A     Class B     To be issued           Accumulated        
    Shares     Par     Shares     Par     Shares     Par     Shares     Par     APIC     Deficit     Total  
                                                                   
Balance, December 31, 2019     2     $ 5,217,800       844,468,378     $ 16,757,079             -     $       -       1,122,311     $ 22,000     $ 2,412,969     $ (29,797,906 )   $ (5,388,058 )
                                                                                         
Warrants issued for services - related parties     -       -       -       -       -       -       -       -       2,754,031       -       2,754,031  
                                                                                         
Warrants issued for services     -       -       -       -       -       -       -       -       50,763       -       50,763  
                                                                                         
Exercise of 10,000,000 warrants in exchange for stock     -       -       9,941,623       365,157       -       -       -       -       (365,157 )     -       -  
                                                                                         
Contributed capital - related party     -       -       -       -       -       -       -       -       17,495       -       17,495  
                                                                                         
Imputed interest - related party     -       -       -       -       -       -       -       -       38,981       -       38,981  
                                                                                         
Net loss for the nine months ended September 30, 2020     -       -       -       -       -       -       -       -       -       (4,313,294 )     (4,313,294 )
                                                                                         
Balance, September 30, 2020     2     $ 5,217,800       854,410,001     $ 17,122,236       -     $ -       1,122,311     $ 22,000     $ 4,909,082     $ (34,111,200 )   $ (6,840,082 )
                                                                                         
Balance, June 30, 2020     2     $ 5,217,800       844,468,378     $ 16,757,079       -     $ -       1,122,311     $ 22,000     $ 5,107,560     $ (33,418,042 )   $ (6,313,603 )
                                                                                         
Warrants issued for services - related parties     -       -       -       -       -       -       -       -       141,620       -       141,620  
                                                                                         
Warrants issued for services     -       -       -       -       -       -       -       -       8,050       -       8,050  
                                                                                         
Exercise of 10,000,000 warrants in exchange for stock     -       -       9,941,623       365,157       -       -       -       -       (365,157 )     -       -  
                                                                                         
Imputed interest - related party     -       -       -       -       -       -       -       -       17,009       -       17,009  
                                                                                         
Net loss for the three months ended September 30, 2020     -       -       -       -       -       -       -       -       -       (693,158 )     (693,158 )
                                                                                         
Balance, September 30, 2020     2     $ 5,217,800       854,410,001     $ 17,122,236       -     $ -       1,122,311     $ 22,000     $ 4,909,082     $ (34,111,200 )   $ (6,840,082 )

 

5

 

 

Kraig Biocraft Laboratories, Inc. and Subsidiary

Condensed Consolidated Statement of Changes in Stockholders Deficit

For the three and nine months ended September 30, 2019

(Unaudited)

 

   

Preferred Stock -

Series A

   

Common Stock -

Class A

   

Common Stock -

Class B

   

Common Stock

Class A Shares

To be issued

          Accumulated        
    Shares     Par     Shares     Par     Shares     Par     Shares     Par     APIC     Deficit     Total  
                                                                   
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 )
                                                                                         
Balance, June 30, 2019     2     $ 5,217,800       835,733,840     $ 16,427,457       -     $ -       1,122,311     $ 22,000     $ 2,033,777     $ (27,768,299 )   $ (4,067,265 )
                                                                                         
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 )     -       -  
                                                                                         
Imputed interest - related party     -       -       -       -       -       -       -       -       5,570       -       5,570  
                                                                                      -  
Net loss for the three months ended September 30, 2019     -       -       -       -       -       -       -       -       -       (1,128,488 )     (1,128,488 )
                                                                                         
Balance, September 30, 2019     4     $ 5,217,800       844,468,378     $ 16,757,079       -     $ -       1,122,311     $ 22,000     $ 2,294,501     $ (28,896,787 )   $ (4,605,407 )

 

6

 

 

Kraig Biocraft Laboratories, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

    For the nine months ended
September 30,
 
    2020     2019  
Cash Flows From Operating Activities:                
Net Loss   $ (4,313,294 )   $ (2,008,731 )
Adjustments to reconcile net loss to net cash used in operations                
Depreciation expense     21,277       22,448  
Imputed interest - related party     38,981       16,027  
Fair value of options issued for services     2,804,794       584,776  
Warrants issued/(cancelled) to consultants     -       (19,915 )
Decrease (Increase) in prepaid expenses     18,766       (5,812 )
Operating lease right-of-use, net     87,806       58,123  
Increase in accrued expenses and other payables - related party     469,268       541,175  
(Decrease) Increase in royalty agreement payable - related party                
(Decrease)Increase in accounts payable     (40,538 )     95,927  
Operating lease liabilities, current     (81,617 )     (53,601 )
Net Cash Used In Operating Activities     (994,557 )     (769,583 )
                 
Cash Flows From Investing Activities:                
Purchase of Fixed Assets and Leasehold Improvements     -       (72,966 )
Net Cash Used In Investing Activities     -       (72,966 )
                 
Cash Flows From Financing Activities:                
Proceeds from Notes Payable - related party     850,000       120,000  
Principal payments on debt     (45,000 )     (8,000 )
Contributed capital - related party     17,495       -  
Proceeds from SBA Paycheck Protection Loan     90,100       -  
Proceeds from issuance of common stock     -       1,000,000  
Net Cash Provided by Financing Activities     912,595       1,112,000  
                 
Net Increase (Decrease) in Cash     (81,962 )     269,451  
                 
Cash at Beginning of Period     125,024       13,697  
                 
Cash at End of Period   $ 43,062     $ 283,148  
                 
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   $ 365,157     $ 329,622  
Settlement of accounts payable with note payable   $ -     $ 265,244  
Settlement of accounts payable with stock issuance   $ -     $ 281,659  
Adoption of lease standard ASC 842   $ -     $ 559,568  
 

7

 

 

Kraig Biocraft Laboratories, Inc.

Notes to Condensed Consolidated Financial Statements as of September 30, 2020 and 2019

 

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, 2020 or December 31, 2019.

 

(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, 2020 and September 30, 2019, 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, 2020 and September 30, 2019 excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:

 

    September 30, 2020     September 30, 2019  
Stock Warrants (Exercise price - $0.001/share)     45,995,917       57,995,917  
Stock Options (Exercise price - $0.1150/Share)     27,340,000       -  
Convertible Preferred Stock     2       2  
Total     73,335,919       57,995,919  

 

8

 

 

(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.

 

(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 September 30, 2020 and December 31, 2019 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.

 

9

 

 

(H) Stock-Based Compensation

 

The Company accounts for stock-based compensation for employees and directors in accordance with ASC 718, Compensation (“ASC 718”). ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Under the provisions of ASC 718, stock-based compensation costs are measured at the grant date, based on the fair value of the award, and are recognized as expense over the employee’s requisite service period (generally the vesting period of the equity grant). The fair value of the Company’s common stock options are estimated using the Black Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company expenses stock-based compensation by using the straight-line method. In accordance with ASC 718 and, excess tax benefits realized from the exercise of stock-based awards are classified as cash flows from operating activities. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) are recognized as income tax expense or benefit in the condensed consolidated statements of operations.

 

The Company accounts for stock-based compensation awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASU 2018-07.

 

(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.

 

All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.

 

10

 

 

(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, 2020 and 2019.

 

(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:

 

  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, 2020 and December 31, 2019.
     
  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.
     
  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, 2020     December 31, 2019  
Level 1   $     -     $     -  
Level 2   $ -     $ -  
Level 3   $ -     $ -  
Total   $ -     $ -  

 

(L) Revenue Recognition

 

The Company’s revenues have been generated primarily from a contract with the U.S. Government. The Company performed work under a 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 worked to develop new recombinant silks.

 

11

 

 

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 three and nine months ended September 30, 2020 and 2019, the Company recognized $0 and $0 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, 2020 and December 31, 2019, the Company had approximately $0 and $0, respectively in excess of FDIC insurance limits.

 

For the three and nine months ended September 30, 2020 and 2019, 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 $6,908,522 and stockholders’ deficiency of $6,840,082 and used $994,557 of cash in operations for nine months ended September 30, 2020. 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, 2020 and December 31, 2019, property and equipment, net, is as follows:

 

   

As of

September 30, 2020

    December 31, 2019  
Automobile   $ 41,805     $ 41,805  
Laboratory Equipment     96,536       96,536  
Office Equipment     7,260       7,260  
Leasehold Improvements     85,389       85,389  
Less: Accumulated Depreciation     (134,946 )     (113,669 )
Total Property and Equipment, net   $ 96,044     $ 117,321  

 

Depreciation expense for the nine months ended September 30, 2020 and 2019, was $21,277 and $22,448, respectively

 

Depreciation expense for the three months ended September 30, 2020 and 2019, was $8,159 and $9,045, respectively.

 

12

 

 

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, 2020 and 2019, was $9,819 and $11,913, 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.

 

13

 

 

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, 2020  
Right to use assets, net – related party   $ 47,147  
Right to use assets, net     41,136  
Right to use assets, net     297,153  
Total   $ 385,436  

 

During the nine months ended September 30, 2020, the Company recorded $72,428 as lease expense to current period operations.

 

During the nine months ended September 30, 2020, the Company recorded $9,819 as lease expense – related party to current period operations.

 

Lease liability is summarized below:

 

    September 30, 2020  
Right to use liability, net – related party     49,466  
Right to use liability, net     42,918  
Right to use liability, net     305,958  
Total     398,342  
Less: short term portion   $ (122,028 )
Long term position   $ 276,314  

 

Lease expense for the nine months ended September 30, 2020 was comprised of the following:

 

Operating lease expense   $ 33,866  
Operating lease expense   $ 34,743  
Operating lease expense – related party   $ 9,819  

 

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; $17,000 on January 4, 2019, $100,000 on November 20, 2019, $100,000 on December 18, 2019, $100,000 on January 24, 2020, $100,000 on February 19, 2020 $100,000 on March 9, 2020, $100,000 on April 8, 2020, $150,000 on June 3, 2020, $100,000 on July 16, 2020, $100,000 on August 12, 2020 and $100,000 on September 10, 2020. 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, 2019 is $642,000. Total loan payable to this principal stockholder as of September 30, 2020 is $1,492,000. During the nine months ended September 30, 2020, the Company recorded $38,981 as an in-kind contribution of interest related to the loan and recorded accrued interest payable of $24,485. 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.

 

14

 

 

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, 2020, the Company paid $45,000 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.

 

On April 16, 2020, the Company, was granted a loan (the “Loan”) from The Huntington National Bank, in the aggregate amount of $90,100, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020.

 

The Loan, which was in the form of a Note dated on or about April 16, 2020 issued by the Borrower, matures on or about April 16, 2022 and bears interest at an approximate rate of 1% per annum. The Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

 

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).

 

(C) Common Stock Warrants and Options

 

On July 30, 2020, the Company issued 9,941,623 shares of Common stock in connection with the cashless exercise of 10,000,000 warrants.

 

15

 

 

On February 19, 2020 the Company issued a 20-year option to purchase 20,000,000 shares of common stock at an exercise price of $0.115 per share to a related party for services rendered. The options had a fair value of $2,198,411, 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 February 19, 2025, and for a period of 15 years expiring on February 19, 2040. During the nine months ended September 30, 2020, the Company recorded $2,198,411 as an expense for options issued.

 

Expected dividends     0 %
Expected volatility     125.19 %
Expected term     3 years  
Risk free interest rate     1.56 %
Expected forfeitures     0 %

 

On February 19, 2020 the Company issued a 10-year option to purchase 6,000,000 shares of common stock at an exercise price of $0.115 per share to a related party for services rendered. The options had a fair value of $626,047, based upon the Black-Scholes option-pricing model on the date of grant and 2,000,000 options are fully vested on the date granted and 1,000,000 options vest at the end of each successive year for four years. Options will be exercisable on February 19, 2021, and for a period of 10 years expiring on February 19, 2030. During the nine months ended September 30, 2020, the Company recorded $272,673 as an expense for options issued.

 

Expected dividends     0 %
Expected volatility     125.19 %
Expected term     3 years  
Risk free interest rate     1.50 %
Expected forfeitures     0 %

 

On February 19, 2020 the Company issued a 7-year option to purchase 1,340,000 shares of common stock at an exercise price of $0.115 per share to employees for services rendered. The options had a fair value of $133,063, based upon the Black-Scholes option-pricing model on the date of grant and 268,000 options are fully vested on the date granted and the remaining option vest equally over the remaining 4 years at the end of each successive year. Options will be exercisable on February 19, 2021, and for a period of 6 years expiring on February 19, 2027. During the nine months ended September 30, 2020, the Company recorded $40,935 as an expense for options issued.

 

Expected dividends     0 %
Expected volatility     125.19 %
Expected term     6 years  
Risk free interest rate     1.46 %
Expected forfeitures     0 %

 

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.

 

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 year ended December 31, 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 %

 

16

 

 

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, 2020, the Company recorded $161,568 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, 2020, the Company recorded $109,391 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 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 year ended December 31, 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 year ended December 31, 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 %

 

17

 

 

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 year ended December 31, 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, 2020, the Company recorded $10,098, 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 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, 2020, the Company recorded $6,837, 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, 2020, the Company recorded $4,881, 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 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, 2019, 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 %

 

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.

 

18

 

 

    Number of Warrants     Weighted Average Exercise Price    

Weighted

Average

Remaining Contractual Life

(in Years)

 
                   
Balance, December 31, 2019     55,395,917               2.77  
Granted     -       -          
Exercised     (10,000,000 )     -          
Cancelled/Forfeited     -       -          
Balance, September 30, 2020     45,395,917               2.02  
Intrinsic Value   $ 9,799,286              

 

For the nine months ended September 30, 2020, the following warrants were outstanding:

 

Exercise Price
Warrants
Outstanding
    Warrants
Exercisable
    Weighted Average
Remaining
Contractual Life
    Aggregate
Intrinsic Value
 
$ 0.001       11,000,000       0.80     $ 4,326,000  
$ 0.056       3,000,000       0.86     $ 618,000  
$ 0.04       2,300,000       0.90     $ 473,800  
$ 0.06       7,398,639       0.44     $ 1,524,120  
$ 0.06       7,398,639       1.44     $ 1,524,120  
$ 0.08       3,699,320       1.44     $ 762,060  
$ 0.08       3,699,320       2.44     $ 762,060  
$ 0.2299       8,500,000       4.63     $ 1,751,000  

 

For the year ended December 31, 2019, the following warrants were outstanding:

 

Exercise Price
Warrants
Outstanding
    Warrants
Exercisable
    Weighted Average
Remaining
Contractual Life
    Aggregate
Intrinsic Value
 
$ 0.001       21,000,000       1.65     $ 4,069,800  
$ 0.056       3,000,000       1.61     $ 387,600  
$ 0.04       2,300,000       1.70     $ 445,740  
$ 0.06       7,398,639       1.19     $ 1,433,856  
$ 0.06       7,398,639       2.19     $ 1,433,856  
$ 0.08       3,699,320       2.19     $ 716,928  
$ 0.08       3,699,320       3.19     $ 719,928  
$ 0.2299       8,500,000       5.39     $ 1,647,300  

 

For the nine months ended September 30, 2020, the following options were outstanding:

 

                  Weighted Average  
Exercise     Options     Options     Remaining  
Price     Outstanding     Exercisable     Contractual Life  
                             
$ 0.115       -       22,267,800       22.8  

 

19

 

 

(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

 

(F) Capital contribution – Related Party

 

For the nine months ended September 30, 2020, the Company recorded $17,495 as contribution of capital by Chief Financial Officer.

 

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, 2019. On January 1, 2020 the agreement renewed again with the same terms for another 5 years, but with an annual salary of $376,078 for the year ended December 31, 2020. As of September 30, 2020 and December 31, 2019, the accrued salary balance is $2,710,706 and $2,535,203, 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. 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 January 10, 2020 the Company extended the expiration date of the warrant to January 23, 2015 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.

 

20

 

 

As of September 30, 2020 and December 31, 2019 the Company owes $95,467 and $64,352, respectively, to Mr. Rice for payroll payable.

 

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 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, 2020 and December 31, 2019, the accrued salary balance is $1,961 and $1,154, respectively.

 

(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.

 

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, 2020, the Company paid $45,000 of the balance (See Notes 6).

 

21

 

 

(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, 2019 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 September 30, 2020 and December 31, 2019, the outstanding balance is $65,292. As of December 31, 2019, the Company recorded interest expense and related accrued interest payable of $2,623. In 2020 the Company recorded $1,469 in interest expensed and related accrued interest payable. As of September 30, 2020 the Company recorded interest expense and related accrued interest payable of $8,013.

 

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 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 a 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, 2020 and 2019, was $9,819 and $11,913, respectively (See Note 9).

 

On September 13, 2017, the Company signed a new two year lease commencing on October 1, 2017 and ending on March 31, 2020. 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 September 5, 2019, the Company signed a new two-year lease for this 5,000 square foot property in Lansing, MI that commenced on October 1, 2019 and ends on September 30, 2021, for its research and development headquarters. The Company pays an annual rent of $42,000 for year one of the lease and $44,800 for year two of the lease.

 

22

 

 

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 September 30, 2020 the outstanding balance is $65,292. Additionally, the accrued expenses are accruing 7% interest per year. As of September 30, 2020, the Company recorded interest expense and related accrued interest payable of $8,013.

 

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, 2019. As of September 30, 2020 and December 31, 2019, the accrued salary balance is $2,710,706 and $2,535,203, 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. 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 and on January 10, 2020, the Company extended the expiration date of the warrant to January 23, 2015 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, 2020 and December 31, 2019, the Company owes $95,467 and $64,351, 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, 2020 and December 31, 2019, the accrued salary balance is $1,961 and $1,154, respectively. .

 

23

 

 

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; $17,000 on January 4, 2019, $100,000 on November 20, 2019, $100,000 on December 18, 2019, $100,000 on January 24, 2020, $100,000 on February 19, 2020, $100,000 on April 8, 2020, $150,000 on June 3, 2020, $100,000 on July 16, 2020, $100,000 on August 12, 2020 and $100,000 on September 10, 2020. 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, 2019 is $642,000. Total loan payable to this principal stockholder as of September 30, 2020 is $1,492,000. During the nine months ended September 30, 2020, the Company recorded $38,981 as an in-kind contribution of interest related to the loan and recorded accrued interest payable of $24,485. 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.

 

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, 2020 and 2019 was $9,819 and $11,913, respectively.

 

As of September 30, 2020 and December 31, 2019, there was $325,516 and $304,539, 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, 2020, there was $1,411,414 of accrued interest- related party and $69,669 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, 2019, there was $1,196,503 of accrued interest- related party and $43,715 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, 2020, the Company owes $2,710,706 in accrued salary to principal stockholder, $95,467 to the Company’s COO, $1,962 to Director of Prodigy Textiles and $22,900 to its office employees.

 

As of December 31, 2019, the Company owes $2,535,203 in accrued salary to principal stockholder, $64,351 to the Company’s COO, $1,153 to Director of Prodigy Textiles and $4,477 to its office employees.

 

The Company owes $65,292 in royalty payable to related party as of September 30, 2020 and December 31, 2019.

 

NOTE 10 SUBSEQUENT EVENTS

 

The Company has analyzed its operations subsequent to November 10, 2020 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 November 4, 2020, the Company received $30,000 from a principal stockholder. Pursuant to the terms of the loan, the advanced bear an interest at 3%, is unsecured and due on demand.

 

24

 

 

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 technical textile. We use genetically engineered silkworms that produce spider silk to create our recombinant spider silk. Applications include performance apparel, workwear, filtration, luxury fashion, flexible composites, medical implants, and more. We believe that we have been a leader in the research and development of commercially scalable and cost effective spider silk for technical textile. Our primary proprietary fiber technology includes natural and engineered variants of spider silk produced in domesticated mulberry silkworms. Our business brings twenty-first century biotechnology to the historical silk industry, permitting us to introduce materials with innovative properties and claims into an established commercial ecosystem of silkworm rearing, silk spinning and weaving, and manufacture of garments and other products that can include our specialty fibers and textiles. 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 that come fro