Kraig Biocraft Creates Mutant Spider Moths: Great Story, Lousy Investment

Kraig Biocraft Creates Mutant Spider Moths: Great Story,

Lousy Investment

eptember

, 2010

Staff

When this headline came out on September 13, 2010, shares of Kraig Biocraft (KBLB)

jumped over the

next few days from below 4 cents to as high as 18 cents. To get an

idea

what traders were paying, the

500 million shares that are issued and outstanding

were worth

$7.5 million just a month ago. On

September 16, 2010, they were worth

$90

million. That's

not bad for a company with no revenues

since inception in April of

2006, and consistent

expenses of $1 million a year. What is particularly

interesting is

that the company actually

released this news story six days earlier, but used the term

transgenic silkworms. The

company thought that the layperson would better

understand “spider-

moth”. That word

change quadrupled the value of the company

seemingly overnight, but reality would

soon set

in as the stock has already given back

half of it's gains.

Back in mid August when the

company released their late

quarterly filing, the stock jumped

from just over a penny to around 3

cents. Lets take a look at that filing,

shall we. First of all,

just before it

came out, the company disclosed

that they fired the accounting firm

responsible

for their filings, and

hired a new one. This in and of

itself is rarely a good sign, but what

makes this particular situation even

more ominous is an unusual

disclosure. The

companies former

accounting firm complained that

Kraig Biocraft's internal controls

necessary to develop reliable

financial statements are not

effective because of material

weaknesses in the Company's internal control over financial reporting. These weaknesses

include failure to reconcile all of their consulting agreements in a timely manner, as well as

discrepancies with the CEO's employment agreement. What the company has properly

disclosed, however, is there only source of funding: dilution.

The company issues shares for cash, for services, and in connection with convertible notes.
Although the pace of these issuances has slowed over the past couple of years, the amount
of shares needed to be issued has increased. These issuances only seem to raise enough
cash to operate for a few weeks at a time, one was even for as little as $75 dollars; perhaps
a working lunch. As if half a billion shares was not enough to discourage investors; oh yes
there will be more, a lot more. The company has a long list of people to pay if tiny
incremental achievements are realized from both a market cap perspective and
revenue/earnings perspective. All of this is not necessarily unusual for a development stage
company, what is unusual, perhaps, is the amount of success these spider moths will have
to achieve just for the company to make enough money to sustain such a high share count. It
seems almost inevitable that reverse stock splits are to come. Additionally, the founder owns
over 300 million shares which is about twice what the current float is.

What about the significance of the latest milestone, the company says, "The creation of these
transgenics was greeted with much celebration among the scientists and in the corporate
office. In my view our accomplishment establishes that we have been on the right track all
along. This achievement is a landmark event for the Company. It clears a major hurdle in our
path and puts us well ahead of our development schedule.”

Fanfare from the scientists working on the project and in the corporate office is not
necessarily the same as fanfare from the scientific community. There are two big if's with
this success that will impact whether or not the company can begin engaging in the $100
billion technical textiles market, or essentially have to start over. First of all, it is not yet known
if these worms are germline stable, meaning they can pass the new DNA on to offspring.
The second 'if' is the results of any testing done on the silk itself, and what kind of properties
they have achieved. The company plans a conference call to discuss the recent
developments, but has yet to provide a date or time. They may need to issue a few shares to
raise enough cash for the press release.