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Kraig Biocraft (OTCQB:KBLB) is trading very overvalued. The share price approximates to 223x its total assets per share. Other peers are not selling at such a high valuation. Besides, it appears impossible that Kraig generates sufficient revenue to justify an EV/forward sales ratio of 252x. Keep in mind that the company only sold to one client in 2017 and 2018. With this in mind, Kraig represents an attractive selling opportunity.
Business Activity And Assessment Of The Intangible Assets
Founded in 2006, Kraig is a biotechnology company focused on the development of genetically engineered silk-based fiber technologies.
Using recombinant DNA technology, the company designs and commercializes applications that utilize both the specialty fiber and textile sectors. The specialty fiber industry demands aramid fibers and ultra-high molecular weight polyethylene fiber. The technical textile industry requires very different materials for medical textiles, protective clothing, and military applications among others. Kraig offers these sectors products with large strength, chemical resistance, and heat resistance.
Kraig's long history is its most favorable feature. Keep in mind that the company should have accumulated a large amount of know-how. Besides, market participants should understand that Kraig should have generated industrial contacts that are valuable. The financial statements don't show these intangible assets, so it is critical to note them here.
Kraig has received several patents, which are not shown in the balance sheet either. A quick search of the name of the company in Google Scholar shows 24 results. As shown in the lines below, Kraig works with university laboratories to generate new intangible assets:
We have licensed the right to use the patented genetic sequences and genetic engineering technology developed in university laboratories. The Company has been working collaboratively with university laboratories to develop fibers with the mechanical characteristics of spider silk."
Source: Google Scholar
The images below were taken from Google Scholar. They show a few examples of the type of patents owned by Kraig. Notice that the name of the company is shown as assignee along with the University of Wyoming and the University of Notre Dame.
Source: Google Scholar - US20150322121A1
Source: Google Scholar - US20190106467A1
Assessing the value of the patents owned by Kraig is difficult. However, reviewing the licensing agreements signed provides relevant information. As shown in the lines below, the University Of Wyoming receives annual license fees of $10,000 and the company provides $13,700 annually to support the University research:
In May 2006, the company entered into a licensing agreement with the University Of Wyoming, which granted the company the exclusive global rights to use and commercialize patented genetic sequences in silkworm. In exchange for this license, the University of Wyoming received $10,000 cash payment, and the University of Wyoming Foundation received 17,500,000 shares of the company's common stock. Under the terms of the licensing agreement, the company is obligated to provide annual license fees of $10,000 and support the University research with $13,700 annually."
In 2015, the University of Notre Dame signed an agreement, under which Kraig offered more than $0.5 million in financial support. Read the lines below for further information on this matter:
Under the 2015 Notre Dame Research agreement, the company provided approximately $534,000 in financial support. In May 2017, the 2015 Notre Dame Agreement was amended to increase the total funding by approximately $189,000, and the duration of this agreement was extended to September 30, 2017."
Expected Capacity And Concentration Of Sales
As shown in the lines below, the company paid a total of $0.01 million in 2018. Besides, it signed an agreement with Kraig's President and will pay a monthly rent of $960.
On January 23, 2017, the Company signed an 8 year property lease with the Company's President for land in Texas where the Company grows its mulberry. The Company pays a monthly rent of $960. Rent expense -related party for the year ended December 31, 2018 and 2017 was $11,520 and $10,560, respectively."
The fact that the President is involved in this transaction is a conflict of interest. Most market participants will not like the deal.
With that, a subsidiary of Kraig in Vietnam has recently signed a lease agreement to have a 50,000 ft2 facility in Quang Nam province. Read the lines below on this matter:
Prodigy Textiles, the Company has signed a new 5 year lease on a factory, expanding its production footprint in Vietnam. The roughly 50,000 ft2 facility in Quang Nam province is expected to play a major role in supporting the Company's increasing production capacity of its proprietary recombinant spider silk technologies."
Source: Press Release
The market pushed the share price up when Kraig released its agreement in Vietnam. While the news is favorable, there is little information on the amount of revenue that the company could generate.
In 2018 and 2017, Kraig had a sole customer, which is very worrying. Investors should wonder whether the company will be able to sell a lot of silk to the same customer. Take a look at the table below for further details on the matter:
The Company Trades At 290x Its Cash Per Share
As of March 31, 2019, the company reports $0.9 million in cash and $1.11 million in total assets. Using a share count of 835.7 million, Kraig notes cash per share of $0.001. Additionally, the share price approximates to 290x its cash per share and more than 223x its total assets per share. The table below offers the income statement reported in the last quarterly report:
As of March 31, 2019, the total amount of liabilities approximates to $4.7 million. It means that the book value per share is negative. With that, the financial debt is below the total amount of cash, so the bankruptcy risk is low. The most significant liability is accounts payable, which approximates to $3.5 million. The image below offers further information on this matter:
Income Statement: Get to Know The Salary Of Officers
For the three months ended March 31, 2019, Kraig did not report revenues. Besides, the total expenses were 22% more than that in the same period in 2018. The most significant expenses were general and administrative costs worth $117k. The image below offers further information on this matter:
For the year ended December 31, 2018, the revenue growth was impressive. The company reported $0.4 million, 312% more than that in 2017. With that, the company is still far from break-even point. The total operating expenses were equal to $1.36 million, with general and administrative costs worth $0.5 million.
Investors should notice that officers' salary approximated to $0.528 million, which is above the total amount of annual revenue. The annual report notes that the company has only two officers, a COO and a CEO, who is also the CFO. The table below offers further information on this matter:
The compensation table is also provided below. It is always debatable whether executives receive too much salary. However, investors should get to know why the company is reporting net income losses:
The table below provides the income statement:
Trading At 252x Forward Revenue
In 2018, Kraig reported $0.4 million, 312% more than that in 2017. Let's assume a 2019 forward revenue of $1 million. As of May 15, 2019, the company reports a share count of 835.7 million. The image below was taken from the OTC Market website. It offers further information on the equity structure of Kraig:
Source: OTC Markets
As shown in the table below, Kraig also reports stock warrants and convertible preferred stock. Thus, let's add 36 million shares more. The total figure approximates to 871 million.
With the share price at $0.29, cash of $0.9 million, and financial debt of $0.6 million, I get a total enterprise value of $252 million. With forward sales of $1 million, Kraig trades at 252x forward revenue. It appears a high valuation. While the revenue growth is very significant, most market participants will not be able to justify such a high ratio.
Other competitors of similar size like AdvanSource (OTCQB:ASNB) are not trading at high valuations. Take a look at the chart below. ASNB reports annual revenue of $2 million and has an enterprise value of $2.9 million. With these figures in mind, Kraig appears to be very overvalued as compared to ASNB.
Conclusion: Kraig Is A Clear Sell
Trading at 252x forward revenue and 223x its total assets per share, Kraig is massively overvalued. Other peers like ASNB are trading at a lower valuation than Kraig. The company has several patents, which have some value. However, their value cannot be that large to justify an enterprise value of $252 million.
In May 2019, the market pushed the share price up following the announcement of a new facility in Vietnam. The news is favorable. However, the amount of information delivered cannot explain the current valuation. Kraig notes cash per share of $0.001 and the book value per share is negative. With this in mind, my price target is $0.001.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.