NOTE
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A)
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.
On
October 8, 2019, the Company delivered the first batch of its transgenic silkworm eggs to its production factory in Quang Nam,
Vietnam for the purpose of commencing production at that facility.
On
November 4, 2019, the Company reported that it had successfully completed rearing the first batch of its transgenic silkworms
at its production factory in Quang Nam, Vietnam. The Company expects to continue expanding production of its specialized silk.
In
January 2020, the Company reported challenges related to climate and access to high quality mulberry during the winter months at
its subsidiary in Vietnam. The Company announced that it had already begun planting additional mulberry fields to ensure no future
shortages.
(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 December 31, 2019 or December
31, 2018.
(E)
Loss Per Share
Basic
and diluted net loss per common share is computed based upon the weighted average common shares outstanding as defined by the
Financial Accounting Standards Board (“FASB” Accounting Standards Codification (“ASC”) No. 260, “Earnings
per Share.” For December 31, 2019 and December 31, 2018, warrants were not included in the computation of income/ (loss)
per share because their inclusion is anti-dilutive.
The
computation of basic and diluted loss per share for December 31, 2019 and December 31, 2018 excludes the common stock equivalents
of the following potentially dilutive securities because their inclusion would be anti-dilutive:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Stock Warrants (Exercise price - $0.001-$0.2299/share)
|
|
|
55,995,917
|
|
|
|
36,400,000
|
|
Convertible Preferred Stock
|
|
|
2
|
|
|
|
2
|
|
Total
|
|
|
55,995,919
|
|
|
|
36,400,002
|
|
(F)
Research and Development Costs
The
Company expenses all research and development costs as incurred for which there is no alternative future use. These costs also
include the expensing of employee compensation and employee stock based compensation.
(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.
The
net deferred tax liability in the accompanying balance sheets includes the following amounts of deferred tax assets and liabilities:
|
|
2019
|
|
|
2018
|
|
Expected income tax recovery
(expense) at the statutory rate of 21%
|
|
$
|
(610,845
|
)
|
|
$
|
(1,412,328
|
)
|
Tax effect of expenses that are not
deductible for income tax purposes (net of other amounts deductible for tax purposes)
|
|
|
142,167
|
|
|
|
11,057
|
|
Change in valuation allowance
|
|
|
(468,678
|
)
|
|
|
(1,423,384
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
components of deferred income taxes are as follows:
|
|
Years
Ended December,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax liability:
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
Net
Operating Loss Carryforward
|
|
|
3,379,542
|
|
|
|
2,910,863
|
|
Valuation allowance
|
|
|
(3,379,542
|
)
|
|
|
(2,910,863
|
)
|
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 2039.
The
net change in the valuation allowance for the year ended December 31, 2019 and 2018 was an increase of $610,845 and a decrease
of $1,412,328, respectively.
Fair
value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity
instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company
uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible
debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement.
If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments
as derivative financial instruments.
Once
determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease
in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair
value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.
(H)
Stock-Based Compensation
In
December 2004, the FASB issued FASB ASC No. 718, Compensation – Stock Compensation. Under FASB ASC No. 718, companies
are required to measure the compensation costs of share-based compensation arrangements based on the grant- date fair value and
recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based
compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and
employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation
amounts, if any, are amortized over the respective vesting periods of the option grant. The Company applies this statement prospectively.
Equity
instruments (“instruments”) issued to other than employees are recorded on the basis of the fair value of the instruments,
as required by FASB ASC No. 718. FASB ASC No. 505, Equity Based Payments to Non-Employees defines the measurement date
and recognition period for such instruments. In general, the measurement date is when either a (a) performance commitment, as
defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The
measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular
grant as defined in the FASB ASC.
(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.
Those
amendments do not have an accounting effect. For public business entities, the amendments in Part I of this update are effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted
for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any
adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently
reviewing the impact of adoption of ASU 2017-11 on its financial statements.
All
other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable. The 2018
financial statements have been reclassified to conform to the 2019 presentation.
(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 years ended December 31, 2019 and 2018.
(K)
Fair Value of Financial Instruments
We
hold certain financial assets, which are required to be measured at fair value on a recurring basis in accordance with the Statement
of Financial Accounting Standard No. 157, “Fair Value Measurements” (“ASC Topic 820-10”). ASC Topic
820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level
1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value as
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
on the measurement date. Level 1 instruments include cash, account receivable, prepaid expenses, inventory and account payable
and accrued liabilities. The carrying values are assumed to approximate the fair value due to the short term nature of the instrument.
The
three levels of the fair value hierarchy under ASC Topic 820-10 are described below:
|
●
|
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, 2019 and December
31, 2018.
|
|
|
|
|
●
|
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, 2019
|
|
|
December
31, 2018
|
|
Level 1
|
|
$
|
-
|
|
|
$
|
-
|
|
Level 2
|
|
$
|
-
|
|
|
$
|
-
|
|
Level 3
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
(L)
Revenue Recognition
During
the year ended December 31, 2018, the Company’s revenues were generated primarily from a contract with the U.S. Government.
The Company performs work under this cost-plus-fixed-fee contract. Under the base phase of that contract the Company produced
recombinant spider silk woven into ballistic shootpack panels. Those shootpack panels were delivered to the U.S. Government customer.
Under an option period award starting in July 2017, to that original contract, the Company has worked to develop new recombinant
silks. This contract ended in September of 2018.
Effective
January 1, 2018, the Company adopted ASC No. 606 — Revenue from Contracts with Customers. Under ASC No. 606, the Company
recognizes revenue from the commercial sales of products, licensing agreements and contracts by applying the following steps:
(1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction
price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each
performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under
ASC No. 605 — Revenue Recognition. Under ASC No. 605, revenue is recognized when the following criteria are met: (1) persuasive
evidence of an arrangement exists;(2) the performance of service has been rendered to a customer or delivery has occurred; (3)
the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.
For
the years ended December 31, 2019 and 2018, the Company recognized $0 and $401,620 respectively in revenue from the Government
contract. These revenues were generated for work performed in the development and production of the Company’s recombinant
silks under the base and option period phases of our ongoing contract with the US Army.
On
July 24, 2017, the Company signed a contract option extension with the US Army to research and deliver recombinant spider silk
fibers and threads. This contract option increased the total contract award by an additional $921,130 to a total of $1,021,092
and added 12 months to the contract duration. This effort was scheduled to end on September 24, 2018, but the Company requested
an extension of this contract option period through April 2019 to complete the work. The Company has been in communication with
the contracting office and is working with them as they determine the best path forward; Management believes there is a possibility
of securing a follow-up contract to complete the delivery of all materials for the contract. The Company is also continuing to
pursue additional contract opportunities with the Department of Defense, Department of Energy and other governmental agencies.
(M)
Concentration of Credit Risk
The
Company at times has cash in banks in excess of FDIC insurance limits. At December 31, 2019 and December 31, 2018, the Company
had approximately $0 and $0, respectively in excess of FDIC insurance limits.
For
the years ended December 31, 2019 and 2018, the Company had a concentration of sales of:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Customer
|
|
|
|
|
|
|
Customer A
|
|
|
-
|
|
|
|
100
|
%
|
Customer A
|
|
$
|
-
|
|
|
$
|
401,620
|
|
For
the years ended December 31, 2019 and 2018, the Company booked $0 and $0 for doubtful accounts.
NOTE
2 GOING CONCERN
As reflected in the accompanying financial
statements, the Company has a working capital deficiency of $5,427,614 and stockholders’ deficiency of $5,388,058
and used $1,087,881 of cash in operations for year ended December 31, 2019. This raises substantial doubt about its ability
to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s
ability to raise additional capital and implement its business plan. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
Management
believes that actions presently being taken to obtain additional funding and implement its strategic plans provide the opportunity
for the Company to continue as a going concern.
NOTE
3 EQUIPMENT
At
December 31, 2019 and December 31, 2018, property and equipment, net, is as follows:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Automobile
|
|
$
|
41,805
|
|
|
$
|
41,805
|
|
Laboratory Equipment
|
|
|
96,536
|
|
|
|
73,194
|
|
Office Equipment
|
|
|
7,260
|
|
|
|
7,260
|
|
Leasehold Improvements
|
|
|
85,388
|
|
|
|
7,938
|
|
Less: Accumulated Depreciation
|
|
|
(113,668
|
)
|
|
|
(82,887
|
)
|
Total Property and Equipment, net
|
|
$
|
117,321
|
|
|
$
|
47,310
|
|
Depreciation
expense for the years ended December 31, 2019 and 2018, was $30,781 and $26,632, 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,
2019 and 2018, was $11,913 and $5,760, respectively (See Note 9).
On
September 13, 2017, the Company signed a new two year lease commencing on October 1, 2017 and ending on December 31, 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 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.
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 $559,568 and lease liabilities
of $559,568.
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,
|
|
Right to use assets, net
– related party
|
|
$
|
69,884
|
|
Right to use assets, net
|
|
|
53,799
|
|
Right to use assets, net
|
|
|
349,559
|
|
Total
|
|
$
|
473,242
|
|
During
the year ended December 31, 2019, the Company recorded $75,575 as lease expense to current period operations.
During
the year ended December 31, 2019, the Company recorded $11,913 as lease expense – related party to current period operations.
Lease
liability is summarized below:
|
|
December
31,
|
|
Right to use liability,
net – related party
|
|
|
55,372
|
|
Right to use liability, net
|
|
|
70,901
|
|
Right to use liability, net
|
|
|
353,686
|
|
Total
|
|
|
479,959
|
|
Less: short term portion
|
|
$
|
(110,678
|
)
|
Long term position
|
|
$
|
369,281
|
|
Lease
expense for the year ended December 31, 2019 was comprised of the following:
Operating lease expense
|
|
$
|
43,666
|
|
Operating lease expense
|
|
$
|
64,327
|
|
Operating lease expense – related
party
|
|
$
|
14,793
|
|
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 and
$100,000 on December 18, 2019. Pursuant to the terms of the loan, the advance bears an interest at 3%, is unsecured, and due on
demand. Total loan payable to principal stockholder for as of December 31, 2018 is $322,000. Total loan payable to this principal
stockholder as of December 31, 2019 is $642,000. 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. During the year ended December
31, 2018, the Company recorded $11,909 as an in-kind contribution of interest related to the loan and recorded accrued interest
payable of $7,071.
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, 2019, the Company paid $20,000 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.
NOTE
7 STOCKHOLDERS’ DEFICIT
(A)
Common Stock Issued for Cash
On
March 9, 2019, the Company entered into a purchase agreement with one investor (the “Purchase Agreement”). Pursuant
to the Purchase Agreement, the Company issued the investor 14,797,278 Units at a purchase price of $0.06758 per Unit, for total
gross proceeds to the Company of $1,000,000. The Units consist of 14,797,278 shares of the Company’s Class A Common Stock
(the “Common Stock”) and two warrants (the “Warrants”): (i) one warrant entitles the investor to purchase
up to 14,797,278 shares of Common Stock at an exercise price of $0.06 per share (the “6 Cent Warrants”) and (ii) one
warrant entitles the investor to purchase up to 7,398,639 shares of Common Stock at an exercise price of $0.08 per share (the
“8 Cent Warrant”). The Warrants shall be exercisable at any time from the issuance date until the following expiration
dates:
●½
of all $0.06 Warrants shall expire on March 8, 2021;
●½
of all $0.06 Warrants shall expire on March 8, 2022;
●½
of all $0.08 Warrants shall expire on March 8, 2022; and,
●½
of all $0.08 Warrants shall expire on March 8, 2023.
(B)
Common Stock Issued for Services
Shares
issued for services as mentioned below were valued at the closing price of the stock on the date of grant.
On
March 20, 2019, the Company issued 4,052,652 shares of its class A common stock with a fair value of $281,659 ($0.0695/share)
on the date of settlement. The Company settled $243,159 of accounts payable to the University of Notre Dame. The Company recorded
an additional amount of $38,500 based on the fair value of the shares on the date of settlement. See Note 8 (A).
On
April 6, 2018, the Company issued 36,000 shares with a fair value of $1,076 ($0.0299/share) to a consultant as consideration for
consulting fees owed from October 1, 2014 through December 31, 2018 of $21,000. The issuance of shares resulted in gain on settlement
of accounts payable of $19,924. See Note 8(B).
On
March 20, 2018, the Company issued 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. This warrant was cancelled on April 4, 2019 for a cash payment
of $6,000.
(C)
Common Stock Warrants and Options
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, 2019, the Company recorded $106,006 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, 2019, the Company recorded $57,889 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, 2019, the Company recorded $6,625, 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, 2019, the Company recorded $3,618, 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, 2019, the Company recorded $2,615, 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, 2018, the Company recorded $19,915 as an expense for
warrants issued. On April 5, 2019, the Company cancelled 600,000 warrant issued to a consultant on February 20, 2018 in exchange
for $6,000 cash payment. In addition the Company also recorded a $19,915 reduction to warrant expense related to the warrant cancellation.
Expected dividends
|
|
|
0
|
%
|
Expected volatility
|
|
|
97.56
|
%
|
Expected term
|
|
|
4
Years
|
|
Risk free interest rate
|
|
|
2.65
|
%
|
Expected forfeitures
|
|
|
0
|
%
|
On
February 9, 2018, the Company issued a 3-year o to purchase 3,000,000 shares of common stock at an exercise price of $0.056 per
share to a consultant for services rendered. The options had a fair value of $52,660, based upon the Black-Scholes option-pricing
model on the date of grant and are fully vested on the date granted. Options will be exercisable on August 9, 2019, and for a
period of 2 years expiring on August 9, 2021. During the year ended December 31, 2018, the Company recorded $52,660 as
an expense for options issued.
Expected dividends
|
|
|
0
|
%
|
Expected volatility
|
|
|
96.95
|
%
|
Expected term
|
|
|
3
Years
|
|
Risk free interest rate
|
|
|
2.26
|
%
|
Expected forfeitures
|
|
|
0
|
%
|
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (In Years)
|
|
Balance as of December 31, 2018
|
|
|
34,300,000
|
|
|
|
|
|
|
|
3.0
|
|
Granted
|
|
|
30,695,917
|
|
|
|
|
|
|
|
2.94
|
|
Exercised
|
|
|
(9,000,000
|
)
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
(600,000
|
)
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
55,395,917
|
|
|
|
|
|
|
|
2.77
|
|
Intrinsic Value
|
|
$
|
10,852,009
|
|
|
|
|
|
|
|
|
|
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, 2018, the following warrants were outstanding:
Exercise
Price Warrants Outstanding
|
|
|
Warrants
Exercisable
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Aggregate
Intrinsic Value
|
|
$
|
0.001
|
|
|
|
29,600,000
|
|
|
|
2.9
|
|
|
$
|
1,523,900
|
|
$
|
0.056
|
|
|
|
3,000,000
|
|
|
|
2.6
|
|
|
$
|
147,000
|
|
$
|
0.04
|
|
|
|
2,300,000
|
|
|
|
2.7
|
|
|
$
|
112,700
|
|
(D)
Amendment to Articles of Incorporation
On
February 16, 2009, the Company amended its articles of incorporation to amend the number and class of shares the Company is authorized
to issue as follows:
●Common
stock Class A, unlimited number of shares authorized, no par value
●Common
stock Class B, unlimited number of shares authorized, no par value
●Preferred
stock, unlimited number of shares authorized, no par value
Effective
December 17, 2013, the Company amended its articles of incorporation to designate a Series A no par value preferred stock. Two
shares of Series A Preferred stock have been authorized and were issued
(E)
Common Stock Issued for Debt
None
NOTE
8 COMMITMENTS AND CONTINGENCIES
On
November 10, 2010, the Company entered into an employment agreement with its CEO, effective January 1, 2011 through the December
31, 2015. The term of the agreement is a five year period at an annual salary of $210,000. There is a 6% annual increase. For
the year ending December 31, 2015, the annual salary was $281,027. The employee is also to receive a 20% bonus based on the annual
based salary. Any stock, stock options bonuses have to be approved by the board of directors. On January 1, 2016 the agreement
was renewed with the same terms for another 5 years with an annual salary of $297,889 for the year ended December 31, 2016. On
January 1, 2017 the agreement renewed with the same terms for another 5 years, but with an annual salary of $315,764 for the year
ended December 31, 2017. On January 1, 2019 the agreement renewed again with the same terms for another 5 years, but with an annual
salary of $354,791 for the year ended December 31, 2018. As of December 31, 2019 and December 31, 2018, the accrued salary balance
is $2,535,203 and $2,109,454, respectively. (See Note 9).
On
January 20, 2015, the board of directors appointed Mr. Jonathan R. Rice as our Chief Operating Officer. Mr. Rice’s employment
agreement has a term of one year and can be terminated by either the Company or Mr. Rice at any time. Under the employment agreement,
Mr. Rice is entitled to an annual cash compensation of $120,000, which includes salary, health insurance, 401K retirement plan
contributions, etc. The Company also agreed to reimburse Mr. Rice for his past educational expenses of approximately $11,000.
In addition, Mr. Rice was issued a three-year warrant to purchase 2,000,000 shares of common stock of the Company at an exercise
price of $0.001 per share (the “January 2015 Warrant”) pursuant to the employment agreement. Additionally, on May
28, 2015, the Company issued a three-year warrant to purchase 3,000,000 shares of common stock of the Company at an exercise price
of $0.001 per share (the “May 20165 Warrant”) to Mr. Rice. The 2,000,000 share warrant fully vested on October 28,
2016. For the year ended December 31, 2015, the Company recorded $121,448 for the warrants issued to Mr. Rice. On January 14,
2016, the Company signed a new employment agreement with Mr. Rice. The employment agreement has a term of one year and can be
terminated by either the Company or Mr. Rice at any time. Under the employment agreement, Mr. Rice is entitled to annual cash
compensation of $140,000, which includes salary, health insurance, 401K retirement plan contributions, etc. In addition, Mr. Rice
was issued a three-year warrant to purchase 6,000,000 shares of common stock of the Company at an exercise price of $0.001 per
share pursuant to the employment agreement. For the year ended December 31, 2016, the Company recorded $193,652 for the warrants
issued to Mr. Rice in 2016. For the year ended December 31, 2017, the Company recorded $17,473 for the warrants issued to Mr.
Rice in2016. On January 9, 2018, the Company extended the expiration date of the January 2015 Warrant from January 19, 2018 to
January 31, 2020 and on March 15, 2018, the Company signed an extension of its at-will employment agreement with its COO, extending
the term to January 31, 2019. On March 25, 2019, the Company signed an extension of its at-will employment agreement with its
COO, extending the term to January 1, 2020. On April 26, 2019, the Company signed an agreement to increase Mr. Rice’s base
salary by $20,000 per year and issue a one-time $20,000 bonus. Additionally, on August 15, 2019, the Company signed an agreement
to increase Mr. Rice’s base salary by an additional $20,000 per year. The salary increase and the bonus is accrued and to
be paid in full earlier by the direction of the Board or upon the earlier of
●The
Company maintaining $6,000,000 or more in working capital,
●Upon
the transfer of ownership of more than 50% of the Corporation’s voting share or an assignment for the benefit of creditors
or bankruptcy, or
●Upon
the fifth year anniversary of the salary increase and the bonus issuance.
As
of December 31, 2019 and December 31, 2018 the Company owes $64,352 and $24,433, 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, 2019, the accrued salary balance is $1,154.
(A)
License Agreement
On
May 8, 2006, the Company entered into a license agreement. Pursuant to the terms of the agreement, the Company paid a non- refundable
license fee of $10,000. The Company will pay a license maintenance fee of $10,000 on the one year anniversary of this agreement
and each year thereafter. The Company will pay an annual research fee of $13,700 with first payment due January 2007, then on
each subsequent anniversary of the effective date commencing May 4, 2007. The annual research fees are accrued by the Company
for future payment. Pursuant to the terms of the agreement the Company may be required to pay additional fees aggregating up to
a maximum of $10,000 a year for patent maintenance and prosecution relating to the licensed intellectual property.
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, 2019, the Company paid $20,000 of the balance (See Notes 6).
(B)
Royalty and Research Agreements
On
May 1, 2008 the Company entered into a five year consulting agreement for research and development. Pursuant to the terms of the
agreement, the Company will be required to pay $1,000 per month, or at the Company’s option, the consulting fee may be paid
in the form of Company common stock based upon the greater of $0.05 per share or the average of the closing price of the Company’s
shares over the five days preceding such stock issuance. On April 6, 2018, the Company issued 36,000 shares with a fair value
of $1,076 ($0.0299/share) to a consultant as consideration for consulting fees owed from October 1, 2014 through December 31,
2018 of $21,000. The issuance of shares resulted in gain on settlement of accounts payable of $19,924. On April 1, 2018, the Company
ended the consulting agreement and no additional compensation will be issued. (See Note 7 (B)).
On
December 26, 2006, the Company entered into an addendum to the intellectual property transfer agreement with Mr. Thompson, its
CEO. In accordance with FASB ASC No 480, Distinguishing Liabilities from Equity, the Company determined that the present
value of the payment of $120,000 that was due on December 26, 2007. As of December 31, 2018 and December 31, 2017, the outstanding
balance is $65,292. In 2019 the Company recorded $1,959 in interest expensed and related accrued interest payable. As of December
31, 2019, the Company recorded interest expense and related accrued interest payable of $6,543.
On
December 30, 2015, the Company entered into a cooperative agreement for the research and pilot production of hybrid silkworms
in Vietnam. Under this agreement, the Company will establish a subsidiary in Vietnam where it will develop and produce hybrid
silkworms. On April 24, 2018, the Company announced that it had received its investment registration certificate for its new Vietnamese
subsidiary Prodigy Textiles Co., Ltd. On May 1, 2018, the Company announced that it had received its enterprise registration certificate
for its new Vietnamese subsidiary Prodigy Textiles Co., Ltd.
(C)
Consulting Agreement
On
February 9, 2018, the Company issued a 3-year warrant to purchase 3,000,000 shares of common stock at an exercise price of $0.056
per share to a consultant for services rendered. The warrants had a fair value of $52,660, based upon the Black-Scholes option-pricing
model on the date of grant and are fully vested on the date granted. Warrants will be exercisable on August 9, 2019, and for a
period of 2 years expiring on August 9, 2021. During the year ended December 31, 2018, the Company recorded 52,660 as an expense
for warrants issued (See Note 7 (C)).
On
February 20, 2018, the Company signed an agreement with a consultant to provide services. Under this agreement the consultant
will receive a warrant for 600,000 shares of common stock and may be awarded additional warrants for up to 3,000,000 shares of
common stock if performance metrics are achieved. On March 20, 2018, the Company issued a 4-year warrant to purchase 600,000 shares
of common stock at an exercise price of $0.001 per share to a consultant for services rendered. The warrants had a fair value
of $19,915, based upon the Black-Scholes option-pricing model on the date of grant and are fully vested on March 20, 2018. Warrants
will be exercisable on March 20, 2019, and for a period of 3 years expiring on March 20, 2022. During the year ended December
31, 2018, the Company recorded $19,915 as an expense for warrants issued (See Note 7 (C)).’ On April 5, 2019, the Company
cancelled 600,000 warrant issued to a consultant on February 20, 2018 in exchange for $6,000 cash payment.
(D)
Operating Lease Agreements
Since
September of 2015, we rent office space at 2723 South State Street, Suite 150, Ann Arbor, Michigan 48104, which is our principal
place of business. We pay an annual rent of $2,508 for conference facilities, mail, fax, and reception services located at our
principal place of business.
On
May 9, 2019, the Company signed 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 years ended December 31,
2019 and 2018, was $14,793 and $11,520, respectively (See Note 9).
On
September 13, 2017, the Company signed a new two year lease commencing on October 1, 2017 and ending on December 31, 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 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
9 RELATED PARTY TRANSACTIONS
On
December 26, 2006, the Company entered into an addendum to the intellectual property transfer agreement with Mr. Thompson, its
CEO. Pursuant to the addendum, the Company agreed to issue either 200,000 preferred shares with the following preferences; no
dividends and voting rights equal to 100 common shares per share of preferred stock or the payment of $120,000, the officer agreed
to terminate the royalty payments due under the agreement and give title to the exclusive license for the non-protective apparel
use of the intellectual property to the Company. On the date of the agreement, the Company did not have any preferred stock authorized
with the required preferences. In accordance with FASB ASC No. 480, Distinguishing Liabilities from Equity, the Company
determined that the present value of the payment of $120,000 that was due on December 26, 2007, one year anniversary of the addendum,
should be recorded as an accrued expense until such time as the Company has the ability to assert that it has preferred shares
authorized. As of December 31, 2019 the outstanding balance is $65,292. Additionally, the accrued expenses are accruing 7% interest
per year. As of December 31, 2019, the Company recorded interest expense and related accrued interest payable of $6,543.
On
November 10, 2010, the Company entered into an employment agreement, with its CEO, effective January 1, 2011 through the December
31, 2015. Subsequently, on January 1, 2018 the agreement renewed with the same terms for another 5 years with an annual salary
of $334,708 for the year ended December 31, 2018. As of December 31, 2019 and December 31, 2018, the accrued salary balance is
$2,464,244 and $2,109,454, respectively.
On
January 14, 2016 the Company signed a new employment agreement with Mr. Rice, the Company’s COO. The employment agreement
has a term of one year and can be terminated by either the Company or Mr. Rice at any time. Under the employment agreement, Mr.
Rice is entitled to annual cash compensation of $140,000, which includes salary, health insurance, 401K retirement plan contributions,
etc. In addition, Mr. Rice was issued a three-year warrant to purchase 6,000,000 shares of common stock of the Company at an exercise
price of $0.001 per share pursuant to the employment agreement. For the year ended December 31, 2016, the Company recorded $193,654
for the warrants issued to Mr. Rice. For the year ended December 31, 2017 the Company recorded $17,473 for the warrants
issued to Mr. Rice in 2016. On January 9, 2018, the Company extended the expiration date of a warrant for 2,000,000 shares of
common stock from January 19, 2018 to January 31, 2020 for Mr. Rice. On January 10, 2020, the Company extended the expiration
date of a warrant for 2,000,000 shares of common stock from January 31, 2020 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 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. On August
8, 2019 Mr. Rice was issued a set of three five-year warrant 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. 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.
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.
As
of December 31, 2019 and December 31, 2018, the Company owes $64,351 and $24,433, respectively, to Mr. Rice for payroll payable.
On
July 3, 2019, the board of directors appointed Mr. Kenneth Le as the Company’s Director of Government relations and President
of Prodigy Textiles. Mr. Le’s employment agreement has a term of one year and can be terminated by either the Company or
Mr. Le 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, 2019, the accrued salary balance is $1,154.
On
June 6, 2016, the Company received a $50,000 loan from our principal stockholder. Subsequently on December 1, 2017, the Company
received an additional $30,000 loan from the same stockholder. On January 8, 2018 and March 31, 2018 the Company received an additional
loan of $100,000 and $15,000, respectively. The Company received additional loan funds from the same stockholder as follows: $20,000
on April 26, 2018; $15,000 on June 21, 2018; $15,000 on June 29, 2018; $20,000 on July 5, 2018; $26,000 on October 1, 2018; $11,000
on October 12, 2018; $20,000 on December 21, 2018; $3,000 on January 4, 2019; $30,000 on January 17, 2019; $30,000 on February
1, 2019; $20,000 on February 15, 2019; $20,000 on March 1, 2019; $17,000 on January 4, 2019, $100,000 on November 20, 2019, and
$100,000 on December 18, 2019. Pursuant to the terms of the loan, the advance bears an interest at 3%, is unsecured, and due on
demand. Total loan payable to principal stockholder for as of December 31, 2018 is $322,000. Total loan payable to this principal
stockholder as of December 31, 2019 is $642,000. 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. During the year ended December
31, 2018, the Company recorded $11,909 as an in-kind contribution of interest related to the loan and recorded accrued interest
payable of $7,071.
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, 2019 and 2018 was $14,793 and $11,520, respectively.
As
of December 31, 2019 and December 31, 2018, there was $304,539 and $247,652, respectively, included in accounts payable and accrued
expenses - related party, which is owed to the Company’s Chief Executive Officer and Chief Operations Officer.
As
of 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, 2018, there was $940,158 of accrued interest- related party and $28,135 in shareholder loan interest – related
party included in accounts payable and accrued expenses – related party, which is owed to the Company’s Chief Executive
officer.
As
of 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.
As
of December 31, 2018, the Company owes $2,109,454 in accrued salary to principal stockholder, $24,433 to the Company’s COO,
and $7,640 to its office employees.
The
Company owes $65,292 in royalty payable to related party as of December 31, 2019 and December 31, 2018.
NOTE
10 SUBSEQUENT EVENTS
The
Company has analyzed its operations subsequent to December 31, 2019 through the date these financial statements were issued, and
has determined that, other than disclosed below, it does not have any material subsequent events to disclose.
On January 24, 2020, the Company received
$100,000 from a principal stockholder. Pursuant to the terms of the loan, the advances bear an interest at 3%, is unsecured and
due on demand.
On
February 19, 2020, the Board of Directors issued a total of 27,440,000 share options under the 2019 Employee Stock Option
Plan.
On
February 19, 2020, the Company received $100,000 from a principal stockholder. Pursuant to the terms of the loan, the advances
bear an interest at 3%, is unsecured and due on demand.
On
March 9, 2020, the Company received $100,000 from a principal stockholder. Pursuant to the terms of the loan, the advances bear
an interest at 3%, is unsecured and due on demand.
On
March 19, 2020, the Company furloughed non-essential staff consistent with leading health official recommendations in order
to help prevent the spread of COVID-19. This decision was made in an abundance of caution and will primarily impact staff at
our fully owned subsidiary, Prodigy Textiles, in Vietnam and will result in the temporary closing of silk rearing operations
at that facility. During the duration of the furlough, the Company CEO will not receive or accrue any pay.