We’ve said it before, and we’ll say it again – there’s nothing like a US government contract to boost prospects in the micro cap space. Companies of all shapes and sizes rely on government revenues as bread and butter income, and Kraig Biocraft Laboratories Inc (OTCMKTS:KBLB) is the latest player trying to get in on the action. The company just announced its first government contract (well, sort of, we’ll get to this in a little more detail in a minute) and is up nearly 12% as a result.
Here’s what you need to know.
This one’s an interesting one. Kraig Biocraft uses genetically engineered silkworms to create a composite of worm produced silk and spider silk, which it then brands as genetically engineered spider silk under names like Monster Silk and Dragon Silk. Basically, the company has genetically modified silkworms to give them spider silk glands, and it now breeds and harvests these silkworms to get its product.
As yet, however, no such product has been sold. Think of this phase as the early phases of a biotech company – Kraig is developing its product in a lab with the goal of selling it in to the government near term. Because of this, finances are a bit of a mess. Again, this is something we’ll get to shortly.
Before we do, though, let’s hop back and look at this government contract. A DoD contract is a sort of holy grail for a company like Kraig. It has spent the last ten years or so trying to prove its silk product can compete with already established strong fabrics like Kevlar, and if the US DoD agrees to use it, then this suggestion becomes vindicated.
On July 12, Kraig led with this release header:
KRAIG BIOCRAFT LABORATORIES ANNOUNCES CONTRACT WITH U.S. ARMY TO DELIVER DRAGON SILK
At first glance, that’s great news. It goes on to say:
ANN ARBOR, Mich., -July 12, 2016- Kraig Biocraft Laboratories, Inc. (OTCQB: KBLB) (“Company”), the leading developer of spider silk based fibers, today announced that it has received a contract valued at up to $1.0 million, if the option phase is awarded, for the development of high performance fibers for protective apparel applications
A $1 million contract isn’t massive for a government deal, but for a company that generates no revenues and is looking for proof of concept, it’s a great start, right?
Well, not so fast. Note the ” if the option phase is awarded” element. This is basically a test phase, whereby Kraig will provide ten months’ worth of its product to the DoD in return for a very specific $99,962. Not quite $1 million, then.
Kim K Thompson, CEO and founder, said this of the update:
We’re proud to be working with the Department of Defense to assess the exciting potential of spider silk for military applications… We are honored that the U.S. Army has selected us for this program. This effort will provide Kraig Labs with the opportunity to validate our longstanding belief that spider silk technology has had an incredible potential for protective and lifesaving materials and expand our ability to design and engineer innovative materials solutions.
If the test phase is successful, there’s scope for expansion to the tune of $1 million. It’s a big if.
Add the company’s financial situation in to the picture, and things get even more iffy. It basically needs $7.5 million across the next two years to keep its work with two universities – Notre Dame and Wyoming – operational. It’s getting this money from a pretty convoluted put right deal, the terms of which dictate that it can sell up to $200,000 worth of shares per month to an entity called Calm Seas Capital, LLC, up to a total of 110 million shares, across the next two years. Every one of these put offers is going to be dilutive:
Each month we may put up to $200,000 of our Class A common stock under the Letter Agreement, which will purchase such shares at a price per share equal to 80% of the lowest price of our Class A common stock during the five consecutive trading days immediately following the date the notice of our election to put shares
80% isn’t terrible, so the terms aren’t outright toxic, but there are a lot of discount shares up for grabs, and that’s really what it comes down to.
So what’s next? Well, we’ve seen double digit gains on a DoD test, so we’re on the lookout for any clue as to how this test is going. It’s not a buy and hold, but there could be some short term upswings if the DoD serves up some positive feedback across the next ten months.
We’re watching how things play out, so you don’t have to. Subscribe to our updates below and stay in the loop.
Disclosure: We have no position in KBLB and have not been compensated for this article.