The following information should be read in conjunction with
Kraig Biocraft Laboratories, Inc.and its subsidiaries ("we", "us", "our", or the "Company") condensed unaudited financial statements and the notes thereto contained elsewhere in this report. Information in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Form 10-Q that does not consist of historical facts, are "forward-looking statements." Statements accompanied or qualified by, or containing words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements, and as such, are not a guarantee of future performance. Forward-looking statements are subject to risks and uncertainties, certain of which are beyond our control. Actual results could differ materially from those anticipated as a result of the factors described in the "Risk Factors" and detailed in our other Securities and Exchange Commission("SEC") filings. Risks and uncertainties can include, among others, international, national and local general economic and market conditions: demographic changes; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to obtain sufficient financing to continue and expand business operations; the ability to develop technology and products; changes in technology and the development of technology and intellectual property by competitors; the ability to protect technology and develop intellectual property; and other factors referenced in this and previous filings. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. 25 Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this report or incorporated by reference might not transpire. Factors that cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described elsewhere in this report and in the "Risk Factors" section of our registration statement on Form S-1.
The company disclaims any obligation to update the forward-looking statements contained in this report.
Kraig Biocraft Laboratories, Inc.is a corporation organized under the laws of Wyomingon April 25, 2006. Kraig Labswas organized to develop high strength fibers using recombinant DNA technology for commercial applications in technical textile. We use genetically engineered silkworms that produce spider silk proteins to create our recombinant spider silk. Applications include performance apparel, workwear, filtration, luxury fashion, flexible composites, medical implants, cosmetics and more. We believe that we have been a leader in the research and development of commercially scalable and cost effective spider silk for technical textile and non-fibrous applications. Our primary proprietary fiber technology includes natural and engineered variants of spider silk produced in domesticated mulberry silkworms. Our business brings twenty-first century biotechnology to the historical silk industry, permitting us to introduce materials with innovative properties and claims into an established commercial ecosystem of silkworm rearing, silk spinning and weaving, and manufacture of garments and other products that can include our specialty fibers and textiles. Specialty fibers are engineered for specific uses that require exceptional strength, flexibility, heat resistance and/or chemical resistance. The specialty fiber market is exemplified by two synthetic fiber products that come from petroleum derivatives: (1) aramid fibers; and (2) ultra-high molecular weight polyethylene fibers. The technical textile industry involves products for both industrial and consumer products, such as filtration fabrics, medical textiles (e.g., sutures and artificial ligaments), safety and protective clothing and fabrics used in military and aerospace applications (e.g., high-strength composite materials). We are using genetic engineering technologies to develop fibers with greater strength, resiliency and flexibility for use in our target markets, namely the specialty fiber and technical textile industries. In 2020, we developed a new technology platform, based on a non-CRISPR Cas9 gene editing knock-in knock-out technology. This is our first knock-in knock-out technology which we are now using for the development of advanced materials. This system is built on our eco-friendly and cost-effective silkworm production system, which we believe is more advanced than current competing methods. Knock-in knock-out technology allows for the targeting of specific locations and genetic traits for modification, addition, and removal. This capability should allow us to accelerate new product developments and bring products to market more quickly. This capability also allows for genetic trait modifications that were previously impractical, creating opportunities for products outside of silk fibers and increased flexibility in production location. Based on our internal analysis, management believes that this new platform technology will allow us to outpace and surpass Dragon Silk, a fiber that we developed with our previous tools. Samples of Dragon Silkhave already demonstrated to be tougher than many fibers used in bullet proof vests. We expect that this new approach will yield materials beyond those capabilities based upon its potential for significantly improved purity. In August 2019, we received authorization from governmental authorities to begin rearing genetically enhanced silkworms at our production facility in Vietnam. In October 2019, the Company delivered the first batch of these silkworms and began operations. These silkworms served as the basis for the commercial expansion of our proprietary silk technology. On November 4, 2019, we reported that we had successfully completed rearing the first batch of its transgenic silkworms at the Quang Namproduction factory. Seasonal challenges in late December 2019slowed production operations and governmental restrictions imposed due to the global COVID pandemic further delayed our operations in 2020. In January of 2021 we received the first shipment of silk from our factory in Vietnam. We believe that we will be able to target metric tons of capacity of our recombinant spider silk fiber per annum from this factory once it reaches maximum utilization. This capacity will allow us to address initial demand for our products and materials for various applications in the protective, performance, and luxury textile markets. On November 23, 2020, we entered into a Strategic Partnership Agreement (the "SPA") with Mthemovement Kings Pte Ltd("Kings"). Kings is an eco-friendly luxury streetwear apparel line, part of the Kings Group of Companiesand its affiliated companies. On January 25, 2021, the parties exchanged signatures for an amendment to the Agreement, which amended the procedures for termination of the SPA to only allow for the termination of the SPA by mutual agreement of the Company and Kings following a consultation period of 120 (one hundred and twenty) calendar days or such period as agreed otherwise between the parties (the "Amendment," together with the SPA, the "Agreement"). 26 Pursuant to the Agreement, the parties formed a joint venture, Spydasilk Enterprises Pte. Ltd., to develop and sell the Company's spider silk fibers under the new innovative apparel and fashion brand, trade named SpydaSilk™ and potential other trademarks to be announced. All intellectual property related to SpydaSilk™ will be jointly owned by the Company and Kings. Under the terms of the Agreement, the Company granted the joint venture and the SpydaSilk brand an exclusive geographic license to all the Company's technologies for the Association of Southeast Asian Nations, in exchange for a 4-year firm commitment to purchase up to $32 millionof the Company's raw recombinant spider silk over the 4-year period, with an initial payment of $250,000to the Company. Kings is projected to purchase an additional $8 millionof material in the fourth year, but there is no guarantee that such additional purchase will be made. In consideration for its ownership position in the joint venture, the Company shall issue 1,000,000 shares of its common stock to Kings. The Agreement has a 60-month term, which can be terminated at any time by mutual agreement following a consultation period of 120 days, or such other period as agreed by the parties. If applicable, the parties will honor their share of committed expenditures of the joint venture and King will repay the Company any unused brand funds.
We are experiencing our strongest cash position to date and plan to expand production, expand product offerings and accelerate R&D for products in the near term.
The Report of Independent Registered Public Accounting Firm to our financial statements as of
December 31, 2021includes an explanatory paragraph stating that our net loss from operations and net capital deficiency at December 31, 2021raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Plan of Operations
Over the next twelve months, we expect to take the following steps to further develop our business and implement our action plan:
? We plan to develop a fabric and clothing line in a joint venture with:
Kings to create a clothing line under
with trade names including SpydasilkTM, SpydraTM and others.
? We plan to continue developing and signing agreements with a third party contract
manufactures to expand production of our recombinant materials, including:
Monster Silk®, Dragon Silk™, Spydasilk™ and Spydra™.
? We plan to continue expanding our manufacturing operations on our
company registration certificates, including the planting of additional
mulberry fields in collaboration with local agricultural cooperatives and the rental
of additional direct staff for our factory, if necessary.
? We plan to accelerate both our microbiological and selective breeding programs, as well as:
and provide more resources for our material testing protocols. we spent
high strength polymers. In the first half of 2022, we focused our research and
development efforts to increase our internal capabilities; we plan to continue
to dedicate our efforts to growing our internal in the second half of 2022
research and development programs.
? We will consider acquiring an established, revenue-producing business in a
compatible business, to broaden our financial base and
commercialization of our products; on the date of this we have not had one
formal consultations or final agreements about this have been made;
? We will also actively consider possibilities for joint research
with private labs in research areas that
existing research and development. One such potential area for collaboration
research the company is considering is protein expression platforms. if
our funding allows, management will strongly consider increasing breadth
of our research to include protein expression platform technologies. 27
? We intend to actively pursue joint research and product testing
opportunities with companies in biotechnology, materials, textiles and others
? We intend to actively pursue additional commercial commercialization,
marketing and production opportunities at companies in the textile and
material sectors for the fibers we have developed and for all the new polymers we
create in 2022 and move forward.
? We intend to actively pursue the development of commercial scale production of:
our recombinant materials, including Monster Silk®, Dragon SilkTM, SpydasilkTM,
? We have started and plan to accelerate our efforts at large scale
production. This work includes the research and possible production of a
new transgenic tailored specifically domestic production. Limited Operating History We have not previously demonstrated that we will be able to expand our business through an increased investment in our research and development efforts. We cannot guarantee that the research and development efforts described in this filing will be successful. Our business is subject to risks inherent in growing an enterprise, including limited capital resources, risks inherent in the research and development process and possible rejection of our products in development.
If funding is not available on satisfactory terms, we may not be able to continue our research and development and other activities. Equity financing will lead to dilution of existing shareholders.
Impact of COVID-19 Outbreak
January 30, 2020, the World Health Organizationdeclared the coronavirus outbreak a "Public Health Emergency of International Concern" and on March 10, 2020, declared it to be a pandemic. Actions taken around the world relating to coronavirus include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. Governmental actions taken relating to coronavirus are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. While the closures and limitations on movement, domestically and internationally, are expected to be temporary, if these actions continue, the duration of the supply chain disruption could reduce the availability or result in delays, of materials or supplies to and from the Company, which in turn could materially interrupt the Company's business operations. Given the speed and frequency of the continuously evolving developments with respect to this pandemic, the Company cannot reasonably estimate the magnitude of the impact to its consolidated results of operations. We have taken every known and reasonable precaution possible to ensure the safety of our employees. On March 19, 2020, we furloughed non-essential staff in response to governmental regulations relating to COVID. This decision primarily impacted staff at our fully owned subsidiary, Prodigy Textiles, in Vietnamand resulted in the temporary closing of silk rearing operations at that facility. As of the date hereof, we have resumed silk production operations at the factory in Vietnam. The Company supported its furloughed staff and paid their salaries during all mandatory closures. During the duration of the furlough, the Company's CEO voluntarily waved the payment or accrual of his salary. The Company leveraged this forced closure time to improve its production infrastructure based on the lessons learned from its operations. After the mandated closure, the Company has enhanced its production operations with process automation, moved its production headquarters to a facility designed for silk production, created a more self-reliant supply chain, and established a microbiology laboratory in its factory for enhanced quality control. On October 24, 2020, silk production operations at the factory resumed. The global COVID pandemic and government regulations associated with the pandemic continue to evolve. We will continue to monitor the situation closely, including its potential effect on our plans and timelines. The actions of governments in response to COVID, both domestic and foreign, have impacted our ability to transport goods, people, essential equipment, and other items essential to our production. In turn, these restrictions are impacting our ability to produce intermediate and end products and are delaying our timelines for commercialization and revenue. 28 Additionally, it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, including losses on inventory; impairment losses related to goodwill and other long-lived assets and current obligations. Note financings January 2022On January 18, 2022, we entered into a securities purchase agreement with YA IIPN, LTD., a Cayman Islandsexempt company ("Yorkville"), pursuant to which Yorkville purchased secured convertible debentures (the "Securities Purchase Agreement") in the aggregate principal amount of USD$3,000,000(the "Convertible Debentures"), which are convertible into shares of Common Stock (as converted, the "Conversion Shares"), of which a secured convertible debenture (the "First Convertible Debenture") in the principal amount of $1,500,000(the "First Convertible Debenture Purchase Price") shall be issued upon signing the Securities Purchase Agreement and a secured convertible debenture (the "Second Convertible Debenture," together with the First Convertible Debenture, each a "Convertible Debenture" and collectively, the "Convertible Debentures") in the principal amount of $1,500,000(the "Second Convertible Debenture Purchase Price") shall be issued on or about the date that the Securities and Exchange Commissiondeclares the registration statement registering the shares of common stock underlying the notes effective (collectively, the First Convertible Debenture Purchase Price and the Second Convertible Debenture Purchase Price shall collectively be referred to as the "Purchase Price") (the "Yorkville Transaction"). These additional funds, together with those from the previously completed transactions we conducted with Yorkville between December 2020and March 2021, account for an $8 milliontotal Yorkville investment; as of the date hereof, $250,000remains under the debentures previously issued to Yorkville pursuant thereto. The Company also issued Yorkville a warrant to purchase 12,500,000 shares of the Company's Common Stock, at an initial exercise price of $0.12per share and a warrant to purchase 4,285,714 shares of the Company's Common Stock, at an initial exercise price of $0.14per share. The warrants have a term of five (5) years and can be exercised via cashless exercise. If the Company issues or sells securities at a price less than the applicable warrant exercise price, the exercise price of the applicable warrant shall be reduced to such lower price. The warrants also have the same ownership cap as set forth in the Convertible Debentures, as described below. The Company is also required to reserve no less than 300% of the maximum number of shares of Common Stock issuable upon conversion of all the outstanding Convertible Debentures. Pursuant to the Securities Purchase Agreement, the Company is prohibited from incurring specified indebtedness, liens, except with the prior written consent from the holders of at least 75% of the then outstanding principal amount of Convertible Debentures.
Each Convertible Debenture shall mature thirteen (13) months after the date of issuance, unless extended by the Yorkville, and accrues interest at the rate of 10% per annum. Principal, interest and any other payments due under the Convertible Debentures shall be paid in cash. The debenture holder may convert all or part of the Convertible Debentures into shares of common stock at any time after issuance at a conversion rate equal to 85% of the lowest daily volume weighted average price of the Common Stock during the 10 consecutive trading days immediately preceding the conversion date or other date of determination. The debenture holder may not convert the Convertible Debenture if such conversion would result in such holder holding in excess of in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion or receipt of shares as payment of interest, unless waived by the holder with at least 65 days prior notice to the Company (the "Ownership Cap"). The Company also has the option to redeem, in part or in whole, the outstanding principal and interest under a Convertible Debenture prior to the maturity date. The Company shall pay an amount equal to the principal and interest amount being redeemed plus a redemption premium equal to 15% of the outstanding principal amount. Standard events of default are included in the Convertible Debenture, pursuant to which the holder may declare it immediately due and payable. During an event of default, the interest rate shall increase to 15% per annum until the event of default is cured; the holder also has the right to convert the Convertible Debenture into shares of common stock during an event of default. 29
The Convertible Debentures are secured by all assets of the Company and its subsidiaries subject to (i) that certain amended and restated security agreement by and between Yorkville, the Company and the Company's subsidiaries (all such security agreements shall be referred to as the "Security Agreement") pursuant to which the Company and its wholly owned subsidiaries agree to provide Yorkville a security interest in all personal property of the Prodigy Textiles, the Company's subsidiary organized under the laws of
Vietnam("Prodigy"), (ii) the amended and restated intellectual property security agreement by and between Yorkville, the Company and the Company's subsidiaries referenced therein dated January 18, 2022(all such security agreements shall be referred to as the "IP Security Agreement"), pursuant to which the Company and its wholly owned subsidiaries agree to provide Yorkville a security interest in the intellectual property collateral (as this term is defined in the IP Security Agreement), and (iii) the amended and restated global guaranty by and between Prodigy, in favor of Yorkville, with respect to all of the Company's obligations to Yorkville dated as of January 18, 2022(the "Guaranty" and collectively with the Security Agreement and the IP Security Agreement shall be referred to as the "Security Documents"). Pursuant to the Guaranty, Prodigy guarantees the payment and performance of all of the Company's obligations under the Convertible Debentures, Warrants and related transaction documents. In connection with the Securities Purchase Agreement, the Company also entered into a Registration Rights Agreement with Yorkville, pursuant to which the Company agreed to register all of the shares of Common Stock underlying the Convertible Debentures and warrants and with respect to subsequent registration statements, if any, such number of shares of Common Stock as requested by Yorkville not to exceed 300% of the maximum number of shares of Common Stock issuable upon conversion of all Convertible Debentures then outstanding (assuming for purposes hereof that (x) such Convertible Debentures are convertible at the then current conversion price and (y) any such conversion shall not take into account any limitations on the conversion of the Convertible Debentures set forth therein, in each case subject to any cutbacks set forth in the Registration Rights Agreement.
After signing the letter of intent for the Yorkville transaction, the Company paid:
The Securities Purchase Agreement also contains customary representation and warranties of the Company and the Investor, indemnification obligations of the Company, termination provisions, and other obligations and rights of the parties. The foregoing description of the Securities Purchase Agreement, Convertible Debentures, Warrant, Security Agreement, IP Security Agreement, Registration Rights Agreement and Guaranty Agreement is qualified by reference to the full text of the forms of Securities Purchase Agreement, Convertible Debenture and Warrant, which are filed as Exhibits hereto and incorporated herein by reference.
Three months ended
Our revenue, operating expenses, and net loss from operations for the three month period ended
June 30, 2022as compared to the three month period ended June 30, 2021, were as follows - some balances on the prior period's combined financial statements have been reclassified to conform to the current period presentation: Three Months Ended % Change June 30, Increase 2022 2021 Change (Decrease) NET REVENUES $ - $ - - - OPERATING EXPENSES: General and Administrative 212,419 369,312 (156,893 ) -42.48 % Professional Fees 109,534 119,038 (9,504 ) -7.98 % Officer's Salary 164,845 171,694 (6,849 ) -3.99 % Rent - Related Party - 410 (410 ) -100.00 % Research and Development 49,869 44,726 5,143 11.50 % Total operating expenses 536,667 705,180 (168,513 ) -23.90 % Loss from operations (536,667 ) (705,180 ) 168,513 -23.90 % Interest expense (298,444 ) (199,619 )
(98,825) 49.51 % Amortization of debt issuance costs (174,669) (1,848,976) 1,674,307
-90.55 % Net change in unrealized appreciation on investment in gold bullion (28,352 ) - (28,352 ) -100.00 % Net Loss
$ (1,038,132 ) $ (2,753,775 )1,715,643 -62.30 % Net Revenues: During the three months ended June 30, 2022, we realized $0of revenues from our business. During the three months ended June 30, 2021, we realized $0of revenues from our business. The change in revenues between the quarter ended June 30, 2022and 2021 was $0or 0%. Cost of Revenues: Costs of revenues for the three months ended June 30, 2022were $0, as compared to $0for the three months ended June 30, 2021, a change of $0or 0%.
Gross profit: during the three months that ended
Research and development expenses: During the three months ended
June 30, 2022, we incurred $49,869of research and development expenses. During the three months ended June 30, 2021, we incurred $44,726of research and development expenses. This was an increase of $5,143or 11.50% in 2022 compared with the same period in 2021. This increase was due to an increase in research spending.
Professional Fees: During the three months ended
Officers Salary: During the three months ended
June 30, 2022, officers' salary expenses decreased to $164,845or 3.99% from $171,694for the three months ended June 30, 2021. This decrease was primarily due to a 6% annual increase for the Company's CEO and offset by a reinstatement of salary for the CEO, which he voluntarily suspended during the forced shutdown of the Company's Vietnamoperations due to COVID in 2020. 31 General and Administrative Expense: General and administrative expenses decreased by $156,893or 42.48% to $212,419for the three months ended June 30, 2022from $369,312for the three months ended June 30, 2021. Our general and administrative expenses for the three months ended June 30, 2022consisted of other general and administrative expenses (which includes expenses such as auto, business development, SECfilings, investor relations, general office, warrants and shares issued for services) of $23,797, travel of $12,388, consulting $30,000and office salary of $146,234for a total of $212,419. Our general and administrative expenses for the three months ended June 30, 2021consisted of other general and administrative expenses (which includes expenses such as auto, business development, SECfilings, investor relations, general office, warrants issued for services) of $344,743, travel of $3,420, and office salary of $21,149for a total of $369,312. Rent - Related Party: During the three months ended June 30, 2022, rent- related party expense decreased to $0or 100% from $410for the three months ended June 30, 2021. The rent-related party expense was attributable to the Company signing an eight-year property lease with the Company's President on January 23, 2017. On April 5, 2021, the Company ended this lease agreement with its President. Net Change in Unrealized Depreciation on Investment in Gold Bullion: Net change in unrealized appreciation on investment in gold bullion decreased by $28,352to $28,352for the three-month period ended June 30, 2022from $0for the three month period ended June 30, 2021. The decrease was primarily due to a net change in unrealized appreciation on investment in gold bullion.
Interest charges: interest charges increased by
Amortization of original issue and debt discounts: Amortization of original issue and debt discount decreased to
$174,669, or 90.55% for the three months ended June 30, 2022compared to $1,848,976for the three months ended June 30, 2021. The decrease was primarily due to amortization of original issue and debt discounts on convertible loans. Net Loss: Net loss decreased by $1,715,643, or 62.30%, to a net loss of $1,038,132for the three-month period ended June 30, 2022from a net loss of $2,753,775for the three month period ended June 30, 2021. This decrease in net loss was primarily attributable to decreases in amortization of original issue debt discount, warrant expense and professional fees, general and administrative expenses and offset by an increase in research and development fees.
Six months ended
Our revenue, operating expenses, and net loss from operations for the six month period ended
June 30, 2022as compared to the six month period ended June 30, 2021, were as follows - some balances on the prior period's combined financial statements have been reclassified to conform to the current period presentation: Six Months Ended % Change June 30, Increase 2022 2021 Change (Decrease) NET REVENUES $ - $ - - - OPERATING EXPENSES: General and Administrative 425,438 675,899 (250,461 ) -37.06 % Professional Fees 229,914 226,523 3,391 1.50 % Officer's Salary 349,653 331,592 18,061 5.45 % Rent - Related Party - 3,683 (3,683 ) -100.00 % Research and Development 77,373 132,494 (55,121 ) -41.60 % Total operating expenses 1,082,378 1,370,191 (287,813 ) -21.01 % Loss from operations (1,082,378 ) (1,370,191 ) 287,813 -21.01 % Interest expense (460,331 ) (329,878 )
(130,453 ) 39.55 % Amortization of debt issuance costs (536,701 ) (2,084,468) 1,547,767
-74.25 % Net change in unrealized appreciation on investment in gold bullion (5,401 ) - (5,401 ) -100.00 % Gain on debt extinguishment (PPP) - 90,100
(90,100 ) -100.00 % Net Loss
$ (2,084,811 ) $ (3,694,437 )1,609,626 -43.57 %
Net income: during the six months that ended
Cost of Revenues: Costs of revenues for the six months ended
June 30, 2022were $0, as compared to $0for the six months ended June 30, 2021, a change of $0or 0%. Gross Profit: During the six months ended June 30, 2022, we realized a gross profit of $0, as compared to $0for the six months ended June 30, 2021, a change of $0or 0%. Research and development expenses: During the six months ended June 30, 2022, we incurred $77,373of research and development expenses. During the six months ended June 30, 2021, we incurred $132,494of research and development expenses. This was a decrease of $55,121or 41.60% in 2022 compared with the same period in 2021. This decrease was due to an increase in research spending.
Professional Fees: During the Six Months Ended
Officers Salary: During the six months ended
June 30, 2022, officers' salary expenses increased to $349,653or 5.45% from $331,592for the six months ended June 30, 2021. This increase was primarily due to a 6% annual increase for the Company's CEO and a reinstatement of salary for the CEO, which he voluntarily suspended during the forced shutdown of the Company's Vietnamoperations due to COVID in 2020. 32 General and Administrative Expense: General and administrative expenses decreased by $250,461or 37.06% to $425,438for the six months ended June 30, 2022from $675,899for the six months ended June 30, 2021. Our general and administrative expenses for the six months ended June 30, 2022consisted of other general and administrative expenses (which includes expenses such as auto, business development, SECfilings, investor relations, general office, warrants and shares issued for services) of $139,687, travel of $15,389, consulting $60,000and office salary of $210,362for a total of $425,438. Our general and administrative expenses for the six months ended June 30, 2021consisted of other general and administrative expenses (which includes expenses such as auto, business development, SECfilings, investor relations, general office, warrants issued for services) of $99,198, travel of $6,515, and office salary of $120,810for a total of $675,899. Rent - Related Party: During the six months ended June 30, 2022, rent- related party expense decreased to $0or 100% from $3,683for the six months ended June 30, 2021. The rent-related party expense was attributable to the Company signing an eight-year property lease with the Company's President on January 23, 2017. On April 5, 2021, the Company ended this lease agreement with its President. Net Change in Unrealized Depreciation on Investment in Gold Bullion: Net change in unrealized appreciation on investment in gold bullion decreased by $5,401to $5,401for the six-month period ended June 30, 2022from $0for the six month period ended June 30, 2021. The decrease was primarily due to a net change in unrealized appreciation on investment in gold bullion.
Interest charges: interest charges increased by
Amortization of original issue and debt discounts: Amortization of original issue and debt discount decreased to
$1,547,767, or 74.25% for the six months ended June 30, 2022compared to $536,701for the six months ended June 30, 2021. The decrease was primarily due to amortization of original issue and debt discounts on convertible loans. Net Loss: Net loss increased by $1,609,626, or 43.57%, to a net loss of $2,084,811for the six-month period ended June 30, 2022from a net loss of $3,694,437for the six month period ended June 30, 2021. This increase in net loss was primarily attributable to increases in amortization of original issue debt discount, warrant expense and professional fees and offset by a decrease in general and administrative expenses and research and development fees.
Sources of capital and liquidity
Our financial statements have been presented on the basis that are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As presented in the unaudited condensed financial statements, we incurred a net loss of
$2,084,811during the six months ended June 30, 2022, and losses are expected to continue in the near term. The accumulated deficit is $44,899,797at June 30, 2022. Refer to Note 2 for our discussion of stockholder deficit. We have been funding our operations through private loans and the sale of common stock in private placement transactions. Refer to Note 6 and Note 7 in the financial statements for our discussion of notes payable and shares issued, respectively. Our cash resources are insufficient to meet our planned business objectives without additional financing. These and other factors raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of our company to continue as a going concern. Management anticipates that significant additional expenditures will be necessary to develop and expand our business before significant positive operating cash flows can be achieved. Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. At June 30, 2022, we had $4,824,787of cash on hand. These funds are insufficient to complete our business plan and as a consequence, we will need to seek additional funds, primarily through the issuance of debt or equity securities for cash to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in the case of equity financing.
33 Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a) raising additional capital and/or obtaining financing; (b) controlling overhead and expenses; and (c) executing material sales or research contracts. There can be no assurance that the Company can successfully accomplish these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing. There can be no assurance that any additional financing will be available to the Company on satisfactory terms and conditions, if at all. As of the date of this Report, we have not entered into any formal agreements regarding the above. In the event the Company is unable to continue as a going concern, the Company may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative, nor does management view it as a likely occurrence. Cash, total current assets, total assets, total current liabilities and total liabilities as of
June 30, 2022as compared to December 31, 2021, were as follows: June 30, December 31, 2022 2021 Cash $ 4,824,787 $ 2,355,060Prepaid expenses $ 1,603 $ 11,055Total current assets $ 4,826,390 $ 2,366,115Total assets $ 5,439,867 $ 3,021,912
Total current liabilities
$ 9,214,671 $ 8,317,787At June 30, 2022, we had a working capital deficit of $4,293,165compared to a working capital deficit of $5,796,531at December 31, 2021. Current liabilities increased to $9,119,555at June 30, 2022from $8,162,646at December 31, 2021, primarily as a result of accounts payable, note payable, convertible note payable, and accrued compensation. For the six months ended June 30, 2022, net cash used in operations of $960,137was the result of a net loss of $2,084,811offset by depreciation expense of $14,721, net change in unrealized depreciation in gold bullions of $5,4011, amortization of debt discount of $436,704, warrants issuance of $118,840, imputed interest on related party loans of $40,093, decrease in prepaid expenses of $9,453and a decrease in operating lease right of use of $22,198, an increase of accrued expenses and other payables-related party of $182,706, increase in accounts payable of $216,057and a decrease in operating lease liabilities
$21,499. For the six months ended June 30, 2021, net cash used in operations of $966,805was the result of a net loss of $3,694,437offset by depreciation expense of $13,446, gain on debt extinguishment of PPP loan of $90,100, amortization of debt discount of $2,084,468, warrants issuance of $319,911, imputed interest on related party loans of $41,085, decrease in prepaid expenses of $890and a decrease in operating lease right of use of $112,673, an increase of accrued expenses and other payables-related party of $224,653, increase in accounts payable of $135,503and a decrease in operating lease liabilities of $114,8934
The net cash flow used in our investing activities was:
Our financing activities resulted in a cash inflow of
$3,429,864for the six months ended June 30, 2022is represented by proceeds from convertible notes payable, net of $2,990,000, repayment of notes payable - related party of $40,000, $30,000loan repayment, payment of debt offering costs of $230,000, and proceeds from a warrant exercise for $739,864. Our financing activities resulted in a cash inflow of $3,822,558for the six months ended June 30, 2021, which is represented by proceeds from convertible notes payable, net of $3,670,000, $25,000loan repayment and proceeds from a warrant exercise for $177,558.
Critical Accounting Policy
Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the year ended
December 31, 2021, for disclosures regarding the Company's critical accounting policies and estimates, as well as updates further disclosed in our interim financial statements as described in this Form 10-Q.
Recent accounting statements
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. Management has evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates ("ASU") through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not yet effective accounting pronouncements, when adopted, will have a material impact on the financial statements of the Company. In
September 2016, the Financial Accounting Standards Board("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance by requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for estimated credit losses on financial assets including trade and other receivables at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842), which extends the effective date of Topic 326 for certain companies until fiscal years beginning after December 15, 2022. The new standard will be effective for the Company in the first quarter of fiscal year beginning January 1, 2023, and early adoption is permitted. We adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have a material effect on the Company's financial statements. In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes." This guidance, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have a material effect on the Company's financial statements. However, based on the Company's history of immaterial credit losses from trade receivables, management does not expect that the adoption of this standard will have a material effect on the Company's financial statements. 35 In August 2020, FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity; Own Equity ("ASU 2020-06"), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the "if-converted" method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company's current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year. The Company adopted the guidance under ASU 2020-06 on January 1, 2022. The adoption of this guidance and had no material impact on the Company's financial statements.
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