NOTE
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
Organization
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.
On
March 5, 2018, the Company issued a board resolution authorizing investment in a Vietnamese subsidiary and appointing a representative
for the subsidiary.
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.
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.
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.
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 December 31, 2020 or December
31, 2019.
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 December 31, 2020 and December 31, 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 December 31, 2020 and 2019 excludes the common stock equivalents of the following
potentially dilutive securities because their inclusion would be anti-dilutive:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Stock
Warrants (Exercise price - $0.001- $0.16/share)
|
|
|
49,120,917
|
|
|
|
57,995,917
|
|
Stock Options
(Exercise price - $0.1150/Share)
|
|
|
27,340,000
|
|
|
|
-
|
|
Convertible
Preferred Stock
|
|
|
2
|
|
|
|
2
|
|
Total
|
|
|
76,460,919
|
|
|
|
57,995,919
|
|
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.
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.
The
net deferred tax liability in the accompanying balance sheets includes the following amounts of deferred tax assets and liabilities:
|
|
2020
|
|
|
2019
|
|
Expected
income tax (recovery) expense at the statutory rate of 21%
|
|
$
|
(1,043,948
|
)
|
|
$
|
(610,845
|
)
|
Tax
effect of expenses that are not deductible for income tax purposes (net of other amounts deductible for tax purposes)
|
|
|
608,152
|
|
|
|
142,167
|
|
Change
in valuation allowance
|
|
|
435,795
|
|
|
|
468,678
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
components of deferred income taxes are as follows:
|
|
Years
Ended December,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred
tax liability:
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
tax asset
|
|
|
|
|
|
|
|
|
Net
Operating Loss Carryforward
|
|
|
3,815,336
|
|
|
|
3,379,542
|
|
Valuation
allowance
|
|
|
(3,815,336
|
)
|
|
|
(3,379,542
|
)
|
Net
deferred tax asset
|
|
|
-
|
|
|
|
-
|
|
Net
deferred tax liability
|
|
$
|
-
|
|
|
$
|
-
|
|
The
valuation allowance was established to reduce the deferred tax asset to the amount that will more likely than not be realized.
This is necessary due to the Company’s continued operating losses and the uncertainty of the Company’s ability to
utilize all of the net operating loss carryforwards before they will expire through the year 2040.
The
net change in the valuation allowance for the year ended December 31, 2020 and 2019 was an increase of $435,795 and an increase
of $610,845, respectively.
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.
Recent
Accounting Pronouncements
Changes
to accounting principles are established by the FASB in the form of ASU’s to the FASB’s Codification. We consider
the applicability and impact of all ASU’s on our financial position, results of operations, stockholders’ deficit,
cash flows, or presentation thereof.
In
December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, as part of its initiative to reduce
complexity in accounting standards. The amendments in the ASU include removing exceptions to incremental intraperiod tax allocation
of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim
period losses, and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, the
ASU requires that entities recognize franchise tax based on an incremental method and requires an entity to evaluate the accounting
for step-ups in the tax basis of goodwill as inside or outside of a business combination. The amendments in the ASU are effective
for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted,
including adoption in interim or annual periods for which financial statements have not yet been issued. We have not early adopted
this ASU as of December 31, 2020. The ASU is currently not expected to have a material impact on our financial statements.
In
August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
The ASU simplifies the accounting for convertible instruments by removing certain separation models in ASC 470- 20, Debt—Debt
with Conversion and Other Options, for convertible instruments. The ASU updates the guidance on certain embedded conversion features
that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial
premiums accounted for as paid-in capital, such that those features are no longer required to be separated from the host contract.
The convertible debt instruments will be accounted for as a single liability measured at amortized cost. This will also result
in the interest expense recognized for convertible debt instruments to be typically closer to the coupon interest rate when applying
the guidance in Topic 835, Interest. Further, the ASU made amendments to the EPS guidance in Topic 260 for convertible instruments,
the most significant impact of which is requiring the use of the if-converted method for diluted EPS calculation, and no longer
allowing the net share settlement method. The ASU also made revisions to Topic 815-40, which provides guidance on how an entity
must determine whether a contract qualifies for a scope exception from derivative accounting. The amendments to Topic 815-40 change
the scope of contracts that are recognized as assets or liabilities. The ASU is effective for interim and annual periods beginning
after December 15, 2021, with early adoption permitted for periods beginning after December 15, 2020. Adoption of the ASU can
either be on a modified retrospective or full retrospective basis. The ASU is currently not expected to have a material impact
on our financial statements.
Recently
Adopted Accounting Standards
In
June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, to require financial assets
carried at amortized cost to be presented at the net amount expected to be collected based on historical experience, current conditions,
and forecasts. Subsequently, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables
arising from operating leases are within the scope of lease accounting standards. Further, the FASB issued ASU No. 2019-04, ASU
No. 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-02, and ASU 2020-03 to provide additional guidance on the credit losses standard.
Adoption of the ASUs is on a modified retrospective basis. We adopted the ASUs on January 1, 2020. The ASUs did not have a material
impact on our consolidated financial statements. ASU No. 2016-13 applies to all financial assets including loans, trade receivables
and any other financial assets not excluded from the scope that have the contractual right to receive cash. The adoption of this
ASU did not have any impact on our financial statements.
Equipment
The
Company values property and equipment at cost and depreciates these assets using the straight-line method over their expected
useful life.
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 years ended December 31, 2020 and 2019.
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:
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●
|
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 December 31, 2020 and 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.
|
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Level
1
|
|
$
|
-
|
|
|
$
|
-
|
|
Level
2
|
|
$
|
-
|
|
|
$
|
-
|
|
Level
3
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
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.
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 years ended December 31, 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.
Concentration
of Credit Risk
The
Company at times has cash in banks in excess of FDIC insurance limits. At December 31, 2020 and December 31, 2019, the Company
had approximately $500,006 and $0, respectively in excess of FDIC insurance limits.
For
the years ended December 31, 2020 and 2019, the Company booked $0 and $0 for doubtful accounts.
Original
Issue Discount
For
certain notes issued, the Company provides the debt holder with an original issue discount. The original issue discount is recorded
as a debt discount, reducing the face amount of the note, and is amortized to interest expense in the consolidated statements
of operations over the life of the debt.
Debt
Issue Cost
Debt
issuance cost paid to lenders, or third parties are recorded as debt discounts and amortized to interest expense in the consolidated
statements of operations, over the life of the underlying debt instrument.
Beneficial
Conversion Feature
For
conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion
feature” (“BCF”) and related debt discount.
When
the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective
debt instrument. The discount is amortized to interest expense over the life of the debt
NOTE
2 GOING CONCERN
As
reflected in the accompanying financial statements, the Company has a working capital deficiency of $6,631,299 and stockholders’
deficiency of $6,573,564 and used $1,254,712 of cash in operations for the year ended December 31, 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
December 31, 2020 and December 31, 2019, property and equipment, net, is as follows:
|
|
December
31, 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
|
|
|
(141,743
|
)
|
|
|
(113,669
|
)
|
Total
Property and Equipment, net
|
|
$
|
89,247
|
|
|
$
|
117,321
|
|
Depreciation
expense for the years ended December 31, 2020 and 2019, was $28,074 and $30,781, respectively.
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 years ended December 31,
2020 and 2019, was $13,092 and $14,793, 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 paid an annual rent of $39,200 for year one of lease and $42,000 for year two of lease for office and manufacturing
space.
On
September 5, 2019, we signed a new two-year lease for a 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. We pay an annual rent of $42,000 for year
one of the lease and will pay $44,800 for year two of the lease.
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:
|
|
December
31,
2020
|
|
Right
to use assets, net – related party
|
|
$
|
44,849
|
|
Right
to use assets, net
|
|
|
41,138
|
|
Right
to use assets, net
|
|
|
279,038
|
|
Total
|
|
$
|
365,025
|
|
During
the years ended December 31, 2020, the Company recorded $98,888 as lease expense to current period operations.
Lease
liability is summarized below:
|
|
December
31,
2020
|
|
Right
to use liability, net – related party
|
|
|
47,418
|
|
Right
to use liability, net
|
|
|
42,918
|
|
Right
to use liability, net
|
|
|
289,385
|
|
Total
|
|
|
379,720
|
|
Less:
short term portion
|
|
$
|
(124,909
|
)
|
Long
term position
|
|
$
|
254,811
|
|
Lease
expense for the years ended December 31, 2020 was comprised of the following:
Operating
lease expense
|
|
$
|
49,505
|
|
Operating
lease expense
|
|
$
|
36,291
|
|
Operating
lease expense – related party
|
|
$
|
13,092
|
|
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,$100,000 on September 10, 2020 $30,000
on October 19, 2020, $30,000 on November 4, 2020, $35,000 on November 17, 2020 and $70,000 on December 1, 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 December 31, 2020 is $1,657,000.
During the year ended December 31, 2020, the Company recorded $50,763 as an in-kind contribution of interest related to the loan
and recorded accrued interest payable of $36,562. During the year ended December 31, 2019, the Company recorded $22,337 as an
in-kind contribution of interest related to the loan and recorded accrued interest payable of $15,581.
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 year ended December
31, 2020, the Company paid $40,000 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 CONVERTIBLE NOTE
The
Company issued a $1,000,000, thirteen-month (13), unsecured, convertible note on December 11, 2020, which is due January 11, 2022.
The convertible note bears interest at 10%, with a 5% original issue discount ($50,000), resulting in net proceeds of $950,000.
The note contains a discount to market feature, whereby, the lender can purchase stock at 90% of the lowest trading price for
a period of ten (10) days preceding the conversion date.
Additionally,
the Company issued 3,125,000 five-year (5) warrants. The warrants had a fair value of $2,599,066, based upon using a black-scholes
option pricing model with the following inputs:
Stock
Price
|
|
$
|
0.14
|
|
Exercise
price
|
|
$
|
0.16
|
|
Expected
term (in years)
|
|
|
5
|
|
Expected
volatility
|
|
|
60.64
|
%
|
Annual
rate of quarterly dividends
|
|
|
0
|
%
|
Risk
free interest rate
|
|
|
0.10
|
%
|
The
Company has determined that ASC 815 does not apply since the Company has unlimited authorized shares, which in turn satisfies
the requirement of having sufficient authorized shares available to settle any potential instruments that may require physical
net-share settlement.
Pursuant
to ASC 470, the Company will record a beneficial conversion feature (“BCF”) based upon the relative fair value of
the conversion feature within the convertible note and the related warrants. The BCF cannot exceed the face amount of the note,
therefore, the discount for this note is $1,000,000, and was recorded on the commitment date. The discount is amortized
to amortization of debt discount over the life of the underlying convertible note.
The
Company also paid $86,000 as a debt issuance cost to a placement agent for services rendered. These costs are considered to be
a component of the total debt discount.
The
following represents a summary of the Company’s convertible debt at December 31, 2020:
Convertible
Note Payable
|
|
Amounts
|
|
|
In-Default
|
|
Balance
– December 31, 2019
|
|
|
-
|
|
|
|
-
|
|
Proceeds
– net
|
|
|
950,000
|
|
|
|
-
|
|
Original
issue discount
|
|
|
50,000
|
|
|
|
-
|
|
Debt
discount recorded
|
|
|
(1,000,000
|
)
|
|
|
-
|
|
Amortization
of debt discount
|
|
|
50,505
|
|
|
|
-
|
|
Balance
– December 31, 2020
|
|
$
|
50,505
|
|
|
$
|
-
|
|
Accrued
Interest Payable
|
|
Amounts
|
|
|
In-Default
|
|
Balance
– December 31, 2019
|
|
|
-
|
|
|
|
-
|
|
Interest
Expense 2020
|
|
|
5,479
|
|
|
|
|
|
Balance
– December 31, 2020
|
|
$
|
5,479
|
|
|
$
|
-
|
|
NOTE
8 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.
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 year ended December 31, 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 year ended December 31, 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 year ended December 31, 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
|
%
|
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 year ended December 31, 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 year ended December 31, 2020, the Company recorded $146,121 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
|
%
|
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 year ended December 31, 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 year ended December 31, 2020, the Company recorded $9,133, 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 year ended December 31, 2020, the Company recorded $6,520, 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.
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Life
(in Years)
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2019
|
|
|
55,995,917
|
|
|
|
|
|
|
|
2.77
|
|
Granted
|
|
|
3,125,000
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(10,000,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, December
31, 2020
|
|
|
49,120,917
|
|
|
|
|
|
|
|
1.83
|
|
Intrinsic
Value
|
|
$
|
3,013,010
|
|
|
|
|
|
|
|
|
|
For
the year ended December 31, 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
|
|
|
|
1.19
|
|
|
$
|
1,371,500
|
|
$
|
0.056
|
|
|
|
2,000,000
|
|
|
|
0.60
|
|
|
$
|
139,000
|
|
$
|
0.04
|
|
|
|
2,300,000
|
|
|
|
0.65
|
|
|
$
|
196,650
|
|
$
|
0.06
|
|
|
|
7,398,639
|
|
|
|
0.18
|
|
|
$
|
484,611
|
|
$
|
0.06
|
|
|
|
7,398,639
|
|
|
|
1.18
|
|
|
$
|
484,611
|
|
$
|
0.08
|
|
|
|
3,699,320
|
|
|
|
1.18
|
|
|
$
|
168,319
|
|
$
|
0.08
|
|
|
|
3,699,320
|
|
|
|
2.18
|
|
|
$
|
168,319
|
|
$
|
0.2299
|
|
|
|
8,500,000
|
|
|
|
4.27
|
|
|
$
|
-
|
|
$
|
0.16
|
|
|
|
3,125,000
|
|
|
|
4.95
|
|
|
$
|
-
|
|
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 year ended December 31, 2020, the following options were outstanding:
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
Exercise
|
|
|
Options
|
|
|
Options
|
|
|
Remaining
|
|
Price
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Contractual
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.115
|
|
|
|
-
|
|
|
|
22,267,800
|
|
|
|
22.6
|
|
(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 year ended December 31, 2020, the Company recorded $17,495 as contribution of capital by Chief Financial Officer.
NOTE
9 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 December 31, 2020 and December
31, 2019, the accrued salary balance is $2,804,725 and $2,535,203, respectively. (See Note 10).
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 2015 Warrant”) to Mr. Rice. The May 2015 warrant fully vested on October 28,
2016 and will expire on May 28, 2022. 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 (the “May 2016 Warrant”). The May 2016 warrant fully
vested on February 20, 2017 and will expire on May 20, 2026. 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 January 2015 warrant to January 10, 2025 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 March 5, 2021, the Company signed
an extension of its at-will employment agreement with its COO, extending the term to January 1, 2022. On August 8, 2019, Mr. Rice
was issued a set of three five-year warrants to purchase a total of 6,000,000 shares of common stock of the Company at an exercise
price of $0.2299 per share pursuant to the employment agreement. 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 December 31, 2020 and December 31, 2019 the Company owes $103,730 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 December 31, 2020 and December 31, 2019, the accrued salary balance is $888 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 year ended December 31, 2020, the Company paid $40,000 of the balance (See Notes 6).
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, 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 $1,960 in interest expensed and related accrued interest payable. As of December 31, 2020 the Company
recorded interest expense and related accrued interest payable of $8,503.
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.
(B)
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 8 (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.
(C)
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 year ended December 31,
2020 and 2019, was $9,819 and $11,913, respectively (See Note 10).
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.
NOTE
10 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, 2020 the outstanding balance is $65,292. Additionally, the accrued expenses are accruing 7% interest
per year. As of December 31, 2020, the Company recorded interest expense and related accrued interest payable of $8,503.
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 December 31, 2020 and December 31, 2019, the accrued salary balance is
$2,804,725and $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 10, 2025 for Mr. Rice. Additionally, on March 15, 2018, the Company
signed an extension of its at-will employment agreement with its COO. On March 5, 2021, the Company signed an extension of
its at-will employment agreement with its COO extending until January 1, 2022. 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 December 31, 2020 and December 31, 2019, the Company owes $103,730 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 December 31, 2020 and December 31, 2019, the accrued salary balance is $888 and $1,154, respectively.
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,$100,000 on September 10, 2020 $30,000
on October 19, 2020, $30,000 on November 4, 2020, $35,000 on November 17, 2020 and $70,000 on December 1, 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 December 31, 2020 is $1,657,000.
During the year ended December 31, 2020, the Company recorded $50,763 as an in-kind contribution of interest related to the loan
and recorded accrued interest payable of $36,562. During the year ended December 31, 2019, the Company recorded $22,337 as an
in-kind contribution of interest related to the loan and recorded accrued interest payable of $15,581.
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 years ended December 31, 2020 and 2019 was $13,092 and $14,793, respectively.
As
of December 31, 2020 and December 31, 2019, there was $331,143 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 December 31, 2020, there was $1,562,499 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 December 31, 2020, the Company owes $2,804,725 in accrued salary to principal stockholder, $103,730 to the Company’s
COO, $888 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 December 31, 2020 and December 31, 2019.
NOTE
11 SUBSEQUENT EVENTS
The
Company has analyzed its operations subsequent to March 12, 2021 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
January 25, 2021, the Company issued a stock option for 2,500,000 shares to a related party under the Company’s employee
stock option plan. The exercise price was $0.134 per share
On
January 25, 2021, the Company signed an amendment to a strategic partnership agreement with Kings Group for and exclusive sales
agreement for up to $40 million.
On
March 2, 2021, the Company issued 1,479,728 share of Common Stock in exchange for $88,783.68, per the terms of a cash stock warrant
exercise.
On
March 3, 2021, the Company received forgiveness for a $90,1000.00 Paycheck Protection Program loan granted on April 17, 2020.