10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2020

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to______.

XG SCIENCES, INC.

(Exact name of registrant as
specified in its
charter)

Michigan	333-209131	20-4998896
(State or other jurisdiction of incorporation or organization)	(Commission File No.)	(I.R.S. Employer Identification No.)

3101 Grand Oak Drive

Lansing, MI 48911

(Address of principal executive offices) (zip code)

(517) 703-1110

(Issuer Telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ¨

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller

reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller

reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	þ	Smaller reporting company	þ
		Emerging growth company	þ

If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. þ

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act: None

As of June 15, 2020, there were 3,949,443 shares of the registrant’s common stock outstanding.

XG SCIENCES, INC.

FORM 10-Q

March 31, 2020

INDEX

PART I
ITEM 1.	FINANCIAL STATEMENTS	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26
ITEM 4.	CONTROLS AND PROCEDURES	26
PART II
ITEM 1.	LEGAL PROCEEDINGS	27
ITEM 1A.	RISK FACTORS	27
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	27
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	27
ITEM 4.	MINE SAFETY DISCLOSURES	27
ITEM 5.	OTHER INFORMATION	27
ITEM 6.	EXHIBITS	28
SIGNATURES		29

2

FORWARD-LOOKING STATEMENTS

The information in this Quarterly Report on Form 10-Q contains “forward-looking statements” and information within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) relating to XG Sciences, Inc., a Michigan corporation and its subsidiary, XG Sciences IP, LLC, a Michigan limited liability company (collectively referred to as “we”, “us”, “our”, “XG Sciences”, “XGS”, or the “Company”), which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenue, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the risks set forth beginning on page 12 under the section entitled “Risk Factors” in our annual report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on April 29, 2020. 

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ITEM 1 - FINANCIAL STATEMENTS  

XG SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
	March 31, 2020			December 31, 2019
ASSETS
CURRENT ASSETS
Cash	$	458,845		$	1,129,702
Accounts receivable, less allowance for doubtful accounts of $158,600 at March 31, 2020 and 179,600 at December 31, 2019		121,331			72,227
Inventories		874,710			891,587
Other current assets		317,288			334,493
Total current assets		1,772,174			2,428,009
PROPERTY, PLANT AND EQUIPMENT, NET		3,466,419			3,676,142
LEASE DEPOSIT		61,467			77,544
INTANGIBLE ASSETS, NET		770,746			753,862
RIGHT OF USE ASSET		1,486,112			1,606,443
TOTAL ASSETS		7,556,918			8,542,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable		892,700			634,564
Other current liabilities		171,493			238,554
Deferred revenue		10,310			—
Current portion of long-term debt		—			—
Current portion of lease liabilities		536,786			520,197
Total current liabilities		1,611,289			1,393,315
LONG-TERM LIABILITIES
Long-term portion of lease liabilities		1,042,745			1,183,872
Long term debt		9,219,420			8,111,610
Total long-term liabilities		10,262,165			9,295,482
TOTAL LIABILITIES		11,873,454			10,688,797
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, 3,000,000 shares authorized, 1,890,354 shares issued and outstanding, liquidation value of $22,684,248 at March 31, 2020 and December 31, 2019		22,307,480			22,307,480
Common stock, no par value, 25,000,000 shares authorized, 4,024,443 shares issued and outstanding at March 31, 2020 and December 31, 2019		32,376,876			32,351,876
Additional paid-in capital		8,931,527			8,774,975
Accumulated deficit		(67,932,419	)		(65,581,128	)
Total stockholders' equity (deficit)		(4,316,536	)		(2,146,797	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		7,556,918			8,542,000

See notes to unaudited condensed consolidated financial statements

4

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) - USD ($)
	For the Three Months Ended March 31,
	2020			2019
REVENUE
Product Sales	$	167,063		$	857,278
Grants		—			—
Total Revenues		167,063			857,278
COST OF GOODS SOLD
Direct costs		103,570			681,153
Unallocated manufacturing expenses		658,913			493,469
Cost of Goods Sold		762,483			1,174,622
GROSS LOSS		(595,420	)		(317,344	)
OPERATING EXPENSES
Research & Development Expense		285,727			385,245
Sales, General & Administrative Expense		1,292,135			1,420,922
Total Operating Expenses		1,577,862			1,806,167
OPERATING LOSS		(2,173,282	)		(2,123,511	)
OTHER EXPENSE
Interest expense, net		(178,009	)		(76,665	)
Total Other Expense		(178,009	)		(76,665	)
Net Loss	$	(2,351,291	)	$	(2,200,176	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - Basic and diluted (in shares)		4,024,443			3,774,879
NET LOSS PER SHARE - Basic and diluted (in dollars per share)	$	(0.58	)	$	(0.58	)

See notes to unaudited condensed consolidated financial statements

5

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY For the Three Months Ended  March 31, 2020 and 2019 - USD ($)
	Preferred stock A				Common stock					Additional paid-in capital		Accumulated deficit			Total
	Shares		Amount		Shares		Amount			Amount		Amount
Balances, December 31, 2019		1,890,354	$	22,307,480		4,024,443	$	32,351,876		$	8,774,975	$	(65,581,128	)	$	(2,146,797	)
Stock issued for cash															$	0
Stock issuance fees and expenses								—							$	0
Stock-based compensation expense						—		25,000			85,276				$	110,276
Warrants issued with Dow financing											71,276				$	71,276
Net loss												$	(2,351,291	)	$	(2,351,291	)
Balances, March 31, 2020		1,890,354	$	22,307,480		4,024,443	$	32,376,876		$	8,931,527	$	(67,932,419	)	$	(4,316,536	)
Balances, December 31, 2018		1,890,354	$	22,307,480		3,760,268	$	30,268,476		$	8,101,923	$	(55,687,160	)	$	4,990,719
Stock issued for cash						51,250		410,000							$	410,000
Stock issuance fees and expenses								(16,000	)						$	(16,000	)
Transition adjustment for adoption of new lease standard													(116,319	)	$	(116,319	)
Stock-based compensation expense						—		20,000			88,288				$	108,288
Warrants issued with Dow financing											—				$	0
Net loss												$	(2,200,176	)	$	(2,200,176	)
Balances, March 31, 2019		1,890,354	$	22,307,480		3,811,518	$	30,682,476		$	8,190,211	$	(58,003,655	)	$	3,176,512

See notes to unaudited condensed consolidated financial   statements

6

XG Sciences, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
	For the Three Months Ended March 31,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net loss to net cash used in operating activities:
Net loss	$	(2,351,291	)	$	(2,200,176	)
Depreciation		216,013			194,055
Amortization of intangible assets		18,047			15,858
Stock-based compensation expense		110,276			108,288
Non-cash interest expense		179,086			13,166
Changes in current assets and liabilities:
Accounts receivable		(49,104	)		393,201
Inventory		16,876			(45,688	)
Other current and non-current assets		29,075			(2,613	)
Accounts payable and other liabilities		201,385			(313,986	)
NET CASH USED IN OPERATING ACTIVITIES		(1,629,637	)		(1,837,895	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(6,290	)		(217,021	)
Purchases of intangible assets		(34,929	)		(25,623	)
NET CASH USED IN INVESTING ACTIVITIES		(41,219	)		(242,644	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of capital lease obligations		--			(15,527	)
Repayments of long-term loan debt		--			(157,200	)
Proceeds from issuance of common stock		--			410,000
Common stock issuance fees and expenses		--			(16,000	)
Proceeds from long-term loan		1,000,000
NET CASH PROVIDED BY FINANCING ACTIVITIES		1,000,000			221,273
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(670,857	)		(1,859,266	)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD		1,129,702			4,893,974
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD		458,845			3,034,708
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		--			--
Value of preferred stock issued for AAOF capital lease obligations		--			--
Value of Warrants issued with Dow financing		71,276			--

See notes to unaudited condensed consolidated financial statements

7

XG SCIENCES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION

XG Sciences, Inc., a Michigan company located in Lansing, Michigan and its subsidiary, XG Sciences IP, LLC (collectively referred to as “we”, “us”, “our”, or the “Company”) manufactures graphene nanoplatelets made from graphite, using two proprietary manufacturing processes to split natural flakes of crystalline graphite into very small and thin particles, which we sell as xGnP^® graphene nanoplatelets. We sell our nanoplatelets in the form of bulk powders or dispersions to other companies for use as additives to make composite and other materials with specialty engineered characteristics. We also manufacture and sell integrated, value-added products containing these graphene nanoplatelets such as greases, composites, thin sheets, inks and coating formulations that we sell to other companies. Additionally, we have licensed our technology to other companies in exchange for royalties and other fees.

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and do not include all of the information and footnotes required by GAAP for complete financial statements. All intercompany transactions have been eliminated in consolidation.

Certain information and footnote disclosures normally included in our annual audited consolidated financial statements and accompanying notes have been condensed or omitted in these interim condensed consolidated financial statements. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019, as filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on April 29, 2020.

The results of operations presented in this quarterly report are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments and accruals, consisting only of normal recurring adjustments that are necessary for a fair statement of the results of all interim periods reported herein.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, together with amounts disclosed in the related notes to the financial statements. Actual results and outcomes may differ from our estimates, judgments and assumptions. Significant estimates, judgments and assumptions used in these condensed consolidated financial statements include, but are not limited to, those related to revenue, accounts receivable and related allowances, inventory valuations, contingencies, useful lives and recovery of long-term assets, including intangible assets, income taxes, and the fair value of stock-based compensation. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in estimates are reflected in the financial statements prospectively from the date of the change in estimate.

8

XG SCIENCES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

Liquidity 

We have historically incurred losses from operations and we may continue to generate negative cash flows as we implement our business plan. Our consolidated financial statements are prepared using US GAAP as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

In December 2016, we entered into a Draw Loan Note and Agreement with The Dow Chemical Company (the “Dow Facility”) to provide up to $10 million of secured debt financing at an interest rate of 5% per year, drawable at our request under certain conditions. We drew $2 million at closing, $1 million on each of July 18, 2017, September 22, 2017 and December 4, 2017. After December 1, 2017, an additional $5 million became available under the Dow Facility as a result of the Company having raised $10 million of equity capital after October 31, 2016. We drew $2 million on July 8, 2019, an additional $2 million on November 19, 2019 and, on February 12,2020, we drew the remaining $1 million.

As of June 10, 2020, we had cash on hand of $969,716.   Due to lower than expected revenue in 2019 and the current COVID-19 global pandemic impacting both our operations and that of our customers, Management has taken several steps to ensure we are able to fund our operations from existing cash on hand, operating cash flows, additional borrowings and restructured debt obligations.

In March of 2020, we restructured our organization by reducing headcount by 45%, by furloughing substantially all manufacturing employees, and by implementing temporary salary reductions ranging from 15-20% which has resulted in a 58% reduction in annual payroll and related costs. In April 2020, we furloughed additional employees in our R&D and Engineering departments. We also reduced our annual cash run rate for all other expenses by 17%. Salary reductions will be in place until the Company has recorded quarterly revenue of at least $1 million for two consecutive quarters, at which time salaries will return to their previous levels. 

In late March / early April   of 2020, we applied for relief under the Coronavirus Aid, Relief and Economic Security Act (CARES) by submitting an application with the Small Business Administration (SBA) for an Economic Injury Disaster Loan (“EIDL”) and by submitting an application to an SBA lender bank, PNC, for a Paycheck Protection Plan (“PPP”) loan. On April 18, 2020, we received an approved and fully executed PPP Term Note for $825,200 with a term of two years, a six-month repayment deferral period, and an annual rate of interest of 1%, with a potential for some or all of the loan to be forgiven, dependent upon use of the loan proceeds. On April 20, 2020, we received the $825,200 of proceeds under the PPP loan. On May 17, 2020, the SBA issued us a decline letter for the EIDL for which we have requested reconsideration.

On April 23, 2020, we entered into an amended and restated Draw Loan Note and Agreement and related transaction documents (collectively, the “Amended Dow Facility”) with the Dow Chemical Company to amend the terms of our current loan facility to allow us to structure a private placement of units (“Units”) comprised (in part) of subordinated, secured convertible notes (“Convertible Notes” and such offering, the “Unit Offering”), to support ongoing cash needs.  In the Amended Dow Facility, the Company and Dow agreed to 1) extend the term of such loan facility by two years to December 1, 2023, 2) significantly reduce any required prepayment to Dow from the proceeds of new equity or equity-linked financings from the current 30-50% prepayment requirement on the pre-existing Dow Facility to a 10% prepayment requirement in the Amended Dow Facility, which does not begin until after we have raised an additional $7 million in equity or equity-linked capital from the date of the amendment, 3) capitalize all interest payable until such time as we have recorded GAAP revenue of at least $2 million for two consecutive calendar quarters 4) increase the rate of interest to 6.5% per annum from 5% in the pre-existing Dow Facility, and 5) allow for a subordinated security interest to be granted to new investors in the Unit Offering.

Immediately after the execution of the transaction documents related to the Amended Dow Facility, we commenced the Unit Offering in a private placement to accredited investors. The Unit Offering is comprised of the Convertible Notes and a right to exchange two shares of previously issued Common Stock of the Company for two shares of Series B Convertible Preferred Stock of the Company (“Series B Preferred Stock”) for every $8.00 invested in the Unit Offering (the “Exchange Rights”). The Convertible Notes are secured by a junior security interest in all the assets of the Company, bear an interest rate of 7.5% per annum and mature on December 31, 2024. Each investor’s Exchange Rights are exercisable for a period of thirty (30) days after acceptance by the Company of a fully executed subscription agreement.

At the option of each holder, the Convertible Notes are convertible into either i) Series B Preferred Stock at a conversion price of $8.00/share; or ii) any other form of preferred or common stock (“Subsequent Stock”) issued by the Company at a conversion price per share equal to 80% of the purchase price per share at which such Subsequent Stock is sold (or if the value per share is fixed, 120% of the number of shares that might otherwise be issuable).

If and when we raise at least $15 million of equity capital (excluding capital raised in this Unit Offering), the Convertible Notes will be automatically converted into whichever of the following equity securities would result in the greatest number of shares of Common Stock being issued to the holders on an “as-if-converted” basis at such time: (i) Series B Preferred Stock at a note conversion price of $8.00/share; or (ii) Subsequent Stock at a note conversion price per share equal to 80% of the purchase price per share at which such Subsequent Stock is sold (or if the value per share is fixed, 120% of the number of shares that might otherwise be issuable); provided, however, in the event the Company raises at least $15 million of equity capital within one hundred and twenty (120) days after the first issue date of Convertible Notes, such percentages will be changed to 90% of the purchase price per share at which such Subsequent Stock is sold (or, if the value per share is fixed, 110% of the number of shares that might otherwise be issuable).

9

Each share of Series B Preferred Stock has an original issue price of $8.00 per share (the “Series B Original Issue Price”) and a liquidation preference of $8.00 per share, with both the Series B Original Issue Price and the liquidation preference per share subject to adjustment for stock splits, recapitalizations, and the like. The Series B Preferred Stock will be senior to the Company’s Common Stock and pari-passu with the Series A Preferred Stock in terms of right of repayment in a liquidation.

The Series B Preferred Stock has full ratchet antidilution protection that provides that each share of Series B Preferred Stock outstanding may be converted by an Investor at any time into that number of shares of Common Stock determined by dividing the then current Series B Original Issue Price by the applicable Conversion Price (as defined below) with the resulting fraction equal to the “Series B Conversion Rate”. The total number of shares of Common Stock issuable will be equal to the number of shares of Series B Preferred Stock being converted multiplied by the Series B Conversion Rate. The “Conversion Price” is, at any time, the price per share equal to the lesser of a) the Series B Original Issue Price per share and b) the lowest price per share at which the Company has sold equity or equity-linked securities (other than customary exclusions) at any future date while any shares of the Series B Preferred Stock remain outstanding. The Series B Original Issue Price and Conversion Price in effect at any time are also subject to proportional adjustment for share splits, share dividends, recapitalizations and the like.

On April 23, 2020, certain members of our Board of Directors and their affiliates purchased $550,000 of Units. In additions, these Board members and their affiliates have made additional commitments to the Company to match any purchases of Units by disinterested third parties on a dollar for dollar basis up to an additional $1.5 million of Units purchased by such disinterested parties.

Taking into consideration our current cash on hand, we estimate that we will need to raise approximately $500,000- $1,000,000 of additional capital in order to continue our operations for the next twelve months in a minimal to no revenue growth environment. If we are able to raise $1.5 million of capital from disinterested third parties, the commitments from our Board members to match this amount would result in $3.0 million of total capital to the Company, which we estimate would allow the Company to continue operating for 24 months in a minimal to no revenue growth environment.

There has been no public market for our securities and a public market may never develop, or, if any market does develop, it may not be sustained. Our Common Stock is not currently quoted on or traded on any exchange or on any over-the-counter market. In the event we are unable to fund our operations from existing cash on hand, operating cash flows, additional borrowings or raising equity capital, we may be forced to reduce our expenses, slow down our growth rate, or discontinue operations. Our condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.  

10

XG SCIENCES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Inventory    

 The following amounts were included in inventory at the end of the period:

	March 31,		December 31,
	2020		2019
Raw Materials	$	57,779	$	68,784
Consumables		70,103		70,103
Finished Goods		746,828		752,700
Total	$	874,710	$	891,587
		874,710		891,587

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for us for annual periods beginning January 1, 2021. We are currently reviewing the provisions of this new pronouncement, and the impact, if any, the adoption of this guidance has on our financial position and results of operations.

In January 2020, the FASB issued ASU 2020-01, "Investments—Equity Securities (Topic 321)", "Investments—Equity Method and Joint Ventures (Topic 323)", and "Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815", which clarifies that an entity should consider observable transactions when either applying or discontinuing the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321. ASU 2020-01 clarifies that for certain forward contracts or purchased options to acquire investments, an entity should not consider whether, upon settlement of the forward contract or exercise of the purchased option, the underlying securities would be accounted for under the equity method or the fair value option. ASU 2020-01 is effective for us for annual periods beginning January 1, 2021. Early adoption is permitted. We are currently reviewing the provisions of this new pronouncement and the impact, if any, the adoption of this guidance has on our financial position and results of operations.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional guidance and expedients for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are intended to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update are elective and are effective upon issuance. We are currently assessing whether and how we will elect to apply ASU 2020-04.

With the exception of the standards discussed above, we believe there have been no new accounting pronouncements effective or not yet effective that have significance, or potential significance, to our Consolidated Financial Statements.

11

XG SCIENCES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 –FINANCING AGREEMENT

Dow Facility

In December 2016, we entered into the Dow Facility which provided us with up to $10 million of secured debt financing at an interest rate of 5% per year, drawable at our request under certain conditions. We received $2 million at closing and an additional $1 million on each of July 18, 2017, September 22, 2017 and December 4, 2017. After December 1, 2017, an additional $5 million became available under the Dow Facility as a result of the Company having raised $10 million of equity capital after October 31, 2016. We drew $2 million on July 8, 2019, an additional $2 million on November 19, 2019 and, on February 12,2020, we drew the remaining $1 million and issued warrants to purchase up to 25,000 more of our shares of Common Stock.

The Dow Facility is senior to our other debt and is secured by all of our assets (Dow was subordinate only to the capital leases with AAOF which was paid off and closed December 31, 2018).

Under the original terms, the loan matured on December 1, 2021 (subject to certain mandatory prepayments based on our equity financing activities). In addition, after we raised a cumulative amount of equity capital exceeding $15 million, we were required to prepay an amount equal to 30% of the amount raised over $15 million, but less than $25 million.

We began these prepayments on equity raised as of September 10, 2018. Interest was payable beginning January 1, 2017 although we elected, per the loan documents, to capitalize the interest as part of the outstanding debt through January 1, 2019. Beginning April 1, 2019, current interest was payable in cash on the first day of following the quarter.   

Dow received warrant coverage of one share of common stock for each $40 in loans received by us, equating to 20% warrant coverage, with an exercise price of $8.00 per share for the warrants issued at closing of the initial $2 million draw. After the initial closing, the strike price of future warrants issued is subject to adjustment if we sell shares of common stock at a lower price. As of March 31, 2020, we have issued 250,000 warrants to Dow, which are exercisable on or before the expiration date of December 1, 2023. 

On April 23, 2020, we entered into an amended and restated Draw Loan Note and Agreement and related transaction documents (collectively, the “Amended Dow Facility”) whereby the Company and Dow agreed to 1) extend the term of such loan facility by two years to December 1, 2023, 2) significantly reduce any required prepayment to Dow from the proceeds of new equity or equity-linked financings from the current 30-50% prepayment requirement on the pre-existing Dow Facility to a 10% prepayment requirement in the Amended Dow Facility, which does not begin until after we have raised an additional $7 million in equity or equity-linked capital from the date of the amendment, 3) capitalize all interest payable until such time as we have recorded GAAP revenue of at least $2 million for two consecutive calendar quarters, 4) increase the rate of interest to 6.5% per annum from 5% in the pre-existing Dow Facility, and 5) allow for a subordinated security interest to be granted to new investors in the Unit Offering.

The aforementioned warrants meet the criteria for classification within stockholders’ equity. Proceeds were allocated between the debt and the warrants at their relative fair value on the date of issue. The total debt discount on the Dow Facility was approximately $676,000. This debt discount is being amortized to interest expense using the effective interest method over the term of the loans using an average effective interest rate of 8.2%. During the three months ended March 31, 2020, we recognized $179,085 of amortization expense consisting of $115,318 of interest expense accrued and $63,767 of amortization from debt discount accretion related to the Dow Facility warrants. We borrowed an additional $1,000,000 in the three months ended March 31, 2020, resulting in a carrying value of $9,219,420 for the Dow Facility as of March 31, 2020.    

The Dow Facility entitles Dow to appoint an observer to our Board. Dow will maintain this observation right until the amount of principal and interest outstanding under the Dow Facility is less than $5 million. 

12

XG SCIENCES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – STOCK WARRANTS ACCOUNTED FOR AS EQUITY INSTRUMENTS

The following table summarizes the warrants (including the warrants previously accounted for as derivatives) outstanding at March 31, 2020, which are accounted for as equity instruments, all of which are exercisable: 

Date Issued	Expiration Date	Indexed Stock	Exercise Price		Number of  Warrants
10/08/2012	10/08/2027	Common	$	12.00		5,000
01/15/2014 - 12/31/2014	01/15/2024	Series A Convertible Preferred	$	12.00		972,720
04/30/2015- 05/26/2015	04/30/2022	Common	$	16.00		218,334
06/30/2015	06/30/2022	Common	$	16.00		6,563
12/31/2015	12/31/2020	Common	$	8.00		20,625
03/31/2016	03/31/2021	Common	$	10.00		10,600
04/30/2016	04/30/2021	Common	$	10.00		895
12/14/2016	12/01/2023	Common	$	8.00		50,000
07/18/2017	12/01/2023	Common	$	8.00		25,000
09/22/2017	12/01/2023	Common	$	8.00		25,000
12/04/2017	12/01/2023	Common	$	8.00		25,000
07/08/2019	12/01/2023	Common	$	8.00		50,000
11/01/2019	12/01/2023	Common	$	8.00		50,000
02/12/2020	12/01/2023	Common	$	8.00		25,000
						1,484,737

Each warrant indexed to Series A Convertible Preferred Stock is currently exercisable and exchangeable into 1.875 shares of common stock. On a common stock equivalent basis, the exercise price would equal $6.40/common share.

NOTE 5 – STOCKHOLDERS’ EQUITY (DEFICIT)

Series B Convertible Preferred Stock

As of March 31, 2020, and December 31, 2019, the Company was authorized to issue up to 1,500,000 shares Series B Preferred Stock, of which none were issued and outstanding as of March 31, 2020 and December 31, 2019.

Each share of the Series B Preferred, is convertible at any time, at the option of the holder, into one share of common stock. The Series B Preferred also contains typical anti-dilution provisions that provide for adjustment of the conversion price to reflect stock splits, stock dividends, or similar events. Each share of Series B Preferred is subject to mandatory conversion into common stock at the then-effective Series B conversion rate upon the public listing by the Company of its common stock on a Qualified National Exchange. However, the Series B Preferred is not subject to the mandatory conversion until all outstanding Convertible Securities are also converted into common stock. The Series B Preferred ranks senior to all other equity or equity equivalent securities of the Company other than those securities which are explicitly senior or pari passu in rights and liquidation preference to the Series B Preferred and pari passu with the Company’s Series A Preferred.

On April 27, 2020, the Company filed the Second Amended and Restated Certificate of Designations of the Series B Preferred Stock in connection with the Unit Offering and the Amended Dow Facility, lowering the liquidation preference from $16.00 per share to $8.00 per share, and lowering the conversion price from $16.00 per share to $8.00 per share, among other things. The Company also adjusted certain provisions to harmonize the rights of the Series B Preferred with the rights in the Series A Certificate of Designations.

The Series A Preferred and Series B Preferred are not redeemable for cash and the Company concluded that they are more akin to equity-type instruments than debt-type instruments. Accordingly, the embedded conversion option in each agreement is clearly and closely related to an equity-type host and the conversion option does not require classification and measurement as a derivative financial instrument. Therefore, the securities meet the conditions for stockholders’ equity classification. 

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XG SCIENCES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – EQUITY INCENTIVE PLAN  

On September 30, 2019 and September 30, 2018, the Company granted each Board member 2,500 stock options and 2,500 shares of restricted stock for their Board services. The options were granted at a price of $8.00 per share and vest ratably over a four-year period beginning on the one-year anniversary. The options had an aggregate grant date fair value of $38,295 and $29,580 on September 30, 2019 and September 30, 2018, respectively. The restricted stock issued to the Board members has an aggregate fair value of $260,000 and vests ratably in arrears over four quarters on the last day of each fiscal quarter following the grant date. As of March 31, 2020, and 2019, 29,375 and 17,500 of the 32,500 shares of restricted stock issued had vested, resulting in compensation expense of $25,000 and $20,000 for the three months ended March 31, 2020 and March 31, 2019 and 2018, respectively.    

The following table shows the stock options activity as of March 31, 2020 is as follows:

				Weighted
	Number			Average
	Of			Exercise
	Options			Price
Options outstanding at December 31, 2019		839,625		$	8.00
Changes during the period:
Expired		(65,000	)		8.00
New Options Granted – at market price					8.00
Options outstanding at March 31, 2020		774,625		$	8.00
Options exercisable at March 31, 2020		514,011		$	8.00

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XG SCIENCES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – LEASES  

Right of Use Asset and Leased Liability:

Estimated Lease Life – Lease term through December 2022

	Three Months Ended March 31, 2019			Three Months Ended March 31, 2020
Right-of-use lease assets- operating as of January 1, 2019 and 2020, respectively	$	1,982,739		$	1,606,443
Less: Accumulated amortization		(111,373	)		(120,332	)
Right-of-use lease assets- operating as of current qtr-end	$	1,871,366		$	1,486,112
Lease liability-operating as of January 1, 2019 and 2020, respectively	$	2,094,958		$	1,704,068
Less: Accumulated Amortization		(113,163	)		(124,538	)
Lease liability operating-as of current qtr-end	$	1,981,795		$	1,579,531
Operating lease expense for the twelve months ended March 31	$	150,557		$	159,958
Actual remaining lease payments	$	2,369,312		$	1,800,209
Present value of remaining payments	$	1,981,795		$	1,579,531
Supplemental cash flow information related to leases:
		Leases Three Months Ended March 31, 2019			Leases Three Months Ended March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	152,347		$	164,164
The undiscounted annual future lease payments summarized by year in the table below:
Maturities of leases liabilities were as follows:
Year ending December 31, 2019 (excluding the three months ended March 31, 2019)	$	464,708
Year ending December 31, 2020		622,878		$	496,223
Year ending December 31, 2021		638,178			660,438
Year ending December 31, 2022		643,548			643,548
Total Lease payments	$	2,369,312		$	1,800,209
Less imputed interest		(387,517	)		(220,678	)
Total	$	1,981,795		$	1,579,531
Weighted average remaining lease term- operating leases ( in months)		41.2			28.5
Weighted average discount rate- operating leases (annual)		9.98	%		9.98	%

15

XG SCIENCES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – RELATED PARTY TRANSACTIONS

We have a licensing agreement for exclusive use of patents and pending patents with Michigan State University (“MSU”), a shareholder of the Company via the MSU Foundation. During the three months ended March   31, 2020 and 2019 we recorded licensing expense of zero and $12,500 per quarter, respectively.  Effective January 1, 2020, we have suspended accruing any royalty payable under this license as we renegotiate the agreement.

During the three months ended March 31, 2020 we did not issue any Series A Preferred or Series B Preferred stock.

NOTE 10 – SUBSEQUENT EVENTS

On April 1, 2020, we capitalized the Dow Facility interest expense of $115,318 for the three months ended March 30, 2020, which would normally have been payable on April 1, 2020 but was permitted to be capitalized and included in the opening loan balance for purposes of the Amended Dow Facility effective April 22, 2020.

During the period from April 1 through the filing date of this report, we entered into the Amended Dow Facility, commenced the Unit Offering and received $550,000 in funding therefrom, we amended and restated our Certificate of Designation of Series B Preferred Stock, received a Paycheck Protection Program loan of $825,200, and received a $10,000 Economic Industry Disaster Loan grant, all of which was disclosed in detail in the Company’s Annual Report on Form 10-K as filed April 29, 2020.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

In this Quarterly Report on Form 10-Q, unless otherwise indicated, the words “we”, “us”, “our”, “XG”, “XGS”, “XG Sciences” or the “Company” refer to XG Sciences, Inc. and its wholly owned subsidiary, XG Sciences IP, LLC, a Michigan limited liability company.

Introduction

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements, and the notes thereto included herein. The information contained below includes statements of the Company’s or management’s beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. For a discussion on these risk factors, please refer to the Company’s Annual Report on Form 10-K as filed April 29, 2020. For a discussion on forward-looking statements, see the information set forth in the introductory note to this quarterly report on Form 10-Q under the caption “Forward-Looking Statements”, which information is incorporated herein by reference.

Overview of our Business

XG Sciences was formed in May 2006 for the purpose of commercializing certain technology to produce graphene nanoplatelets and integrated, value-added products containing graphene nanoplatelets. First isolated and characterized in 2004, graphene is a single layer of carbon atoms configured in an atomic-scale honeycomb lattice. Among many noted properties, monolayer graphene is harder than diamonds, lighter than steel but significantly stronger, and conducts electricity better than copper. Graphene nanoplatelets are particles consisting of multiple layers of graphene. Graphene nanoplatelets have unique capabilities for energy storage, thermal conductivity, electrical conductivity, barrier properties, lubricity and the ability to impart physical property improvements when incorporated into plastics, metals or other matrices.

We believe the unique properties of graphene and graphene nanoplatelets will enable numerous new product applications and the market for such products will quickly grow to be a significant market opportunity. Our business model is to design, manufacture and sell advanced materials we call xGnP^® graphene nanoplatelets and value-added products incorporating xGnP^® nanoplatelets. We currently have many customers trialing our products for numerous applications, including, but not limited to lithium ion batteries, lead acid batteries, thermally conductive adhesives, composites, thermal management and heat transfer, inks and coatings, printed electronics, construction materials, cement, and in a range of other industrial uses. We believe our proprietary processes have enabled us to be a low-cost producer of high-quality, graphene nanoplatelets and value-added integrated products containing graphene nanoplatelets and that we are well positioned to address a wide range of end-use applications.  

Our Customers

We sell products to customers around the world and have sold materials to over 1,500 customers in 47 countries since 2008. Some of these customers are research organizations and some are commercial organizations. Our customers have included well-known automotive and OEM suppliers around the world (Ford, Johnson Controls, Magna, Honda Engineering), global-scale lithium ion battery manufacturers in the U.S., South Korea and China (Samsung SDI, LG Chemical, Lishen, A123) and diverse specialty material companies (3M, BASF, Henkel, Dow Chemical, DuPont), as well as leading research centers such as Lawrence Livermore National Laboratory and Oakridge National Laboratory. The majority of our customers are still ordering in smaller quantities consistent with their development and engineering qualification work. We expect our average order size to increase in 2020 as many of our customers have expressed their intention of beginning to order commercial quantities of product from us in 2020.

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Our Products

XG Sciences is a manufacturer of graphene nanoplatelets marketed under the brand xGnP^® and value-added products that contain graphene nanoplatelets. The term “graphene” is used widely in the literature and the popular press to cover a variety of specific forms of the material. We generally think about two broad classes of graphene materials: 

1. One-atom thick films of carbon commonly referred to as monolayer graphene, manufactured typically from gases by assembling molecules to form relatively large, transparent sheets of material. These materials have been characterized by their performance attributes that differentiate them from other advanced materials and that may include: strength up to 200 times that of steel, flexible and able to stretch up to 25% of its original length, optically transparent, more electrically conductive than copper, more thermally conductive than any other known material and atomic-level barrier properties. XG Sciences does not manufacture these films and does not participate in the markets for these films and believes that in general, the markets for these films do not compete with those for graphene nanoplatelets.

2. Ultra-thin particles of carbon that consist of layers of graphene sheets ranging in thickness from a few layers to many layers – that are commonly referred to as graphene nanoplatelets (“GNP” or “GNPs”). Because GNPs are thin and can be manufactured in a range of diameters, they are useful for a wide variety of applications. XG Sciences manufactures GNPs that range in thickness from a few nanometers and up to 10-20 nanometers and with diameters ranging from less than 1 micron and up to 100 microns. The manufacture of these graphene particles is our main area of expertise, and their use in practical applications is the focus of our sales, marketing and development activities.

The well-publicized isolation and characterization of graphene in 2004 at the University of Manchester, has spawned a new class of 2D materials based on layers of carbon atoms arranged in a hexagonal array and each carbon having lone pair electrons. The unique characterization and related performance of this new class of materials is derived from their two-dimensional nature and their composition of sp² carbon atoms arranged in a hexagonal array. The ability of any new material to be exploited in industrial applications will depend on its fit-for-performance. In the case of graphene nanoplatelets, the fit-for-performance is very much related to their aspect ratio (among other factors) in that the diameter is typically significantly greater than the thickness. This is what differentiates the material from bulk graphite of high crystallinity and purity. We classify nanoplatelets consisting of largely basel planes of carbon atoms packed in a hexagonal array (i.e., graphene) as graphene nanoplatelets so long as their aspect ratio may be classified as two-dimension and are thus in the form of platelets. Such a definition implies that the thickness is nanoscale – GNPs having a thickness in the range from generally 0.6 nanometers and up to many 10’s of nanometers. For context one nanometer is one billionth of a meter, and the average thickness of a human hair is about 75,000 nanometers. We have chosen to utilize the definitions as set out by the Carbon Journal editorial team (Carbon, volume 65, pp.1-6) and Fullerex (Bulk Graphene Pricing Report, 2019) which provides classification for the various material types which provide meaningful descriptions of commercially available graphene.

Graphene Product Thickness Definitions Based on Thickness

Number of Layers	Product Description
1	Graphene (monolayer)
1-3	Very Few Layer Graphene (vFLG)
2-5	Few Layer Graphene (FLG)
2-10	Multilayer Graphene (MLG)
>10	Graphene Nanoplatelets (GNP)

Bulk Materials. We sell bulk materials under the trademarked brand name of xGnP^® graphene nanoplatelets. These materials are produced in various grades, which are analogous to average particle thickness, and average particle diameters. There are three commercial grades (Grades H, M & R), each of which is offered in three standard particle sizes and a fourth, Grade C, which is offered in three standard surface areas. We also have access to other development grades (Grade T, for example), but which are not yet made available commercially and have been used internally for those products containing graphene nanoplatelets. These bulk materials, which normally ship in the form of a dry powder, are especially applicable for use as additives in polymeric or metallic composites, or in coatings or other formulations where particular electrical, thermal or barrier applications are desired by our customers. We also offer our material in the form of dispersions of nanoplatelets in liquids such as water, alcohol, or organic solvents, or mixed into resins or polymers such as thermoplastics or thermosets. We use two different commercial processes to produce these bulk materials:

Grade H/M/R/T materials are produced through chemical intercalation of natural graphite followed by thermal exfoliation using a proprietary process developed by us. The “grade” designates the thickness and surface characteristics of the material, and each grade is available in various average particle diameters. Surface area, calculated by the Brunauer, Emmet, and Teller (BET) Method, is used as a convenient proxy for thickness, so each grade of products produced through chemical intercalation is designated by its average surface area, which ranges from 50 to 150 m²/gram of material. We are able to extend the surface area higher (250 m²/gram for T Grade) but are not yet producing these materials in metric-ton quantities. As the market need emerges for this class of materials, we will scale them as needed. For example, we introduced a new Grade of xGnP^® powders, R-Grade, with improved electrical conductivity targeting use in applications for electrically and thermally conductive ink and composites and have scaled R-Grade to metric-ton quantities. 

Grade C materials are produced through a high-shear mechanical exfoliation using a proprietary process and equipment that we invented, designed, constructed and patented. The Grade C materials are smaller particles than those grades produced through chemical exfoliation, and Grade C materials are designated by their BET surface area, which ranges from 300 to 800 m²/gram. We are able to produce other surface areas and may make those available commercially as needed by our customers.

The following graphic depicts xGnP^® graphene nanoplatelets as a function of both layer thickness and aspect ratio (thickness by diameter), two key parameters which will influence their performance in a range of industrial applications.

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XG Sciences’ Graphene Nanoplatelet Product Portfolio and Versus Graphite

Composites. These consist of compositions of specially designed xGnP^® graphene nanoplatelets formulated in pre-dispersed mixtures that can be easily incorporated in various polymers. Our integrated composites portfolio includes pre-compounded resins derived from a range of thermoplastics as well as master batches of resins and xGnP^® nanoplatelets and their combination with resins and fibers for use in various end-use applications that may include industrial, automotive, packaging and sporting goods and which have demonstrated efficacy in standard injection molding, compression molding, blow molding and 3-D processes, to name but a few. Our current product portfolio of polymer resins containing various forms of our xGnP^® graphene nanoplatelets and in varying concentration includes polyurethane (XGPU), polypropylene (XGPP™), polyethylene terephthalate (XGPET™), nylon (XGNylon)and high-density polyethylene (XGHDPE™). Others polymers may be added over time depending on the end-market and customer needs. In addition, we offer various bulk materials with demonstrated efficacy in plastic composites to impart improved physical performance to such matrices, which may be supplied as dry powders or as aqueous or solvent-based dispersions or cakes as described above. We have also targeted use of our graphene nanoplatelets as an additive in cement mixtures, which we believe results in improved barrier resistance, durability, toughness and corrosion protection. Our XGConcrete™ Additive promotes the formation of more uniform and smaller grain structure in cement. This fine-grain and uniform structure gives the concrete improvements in flexural and compressive strength. In addition, the embedded graphene nanoplatelets will stop cracks from forming and retard crack propagation, should any cracks form – the combination of which will improve lifetime and durability of cement.

Inks and Coatings. These consist of specially-formulated dispersions of xGnP^® together with solvents, binders, and other additives to make electrically or thermally conductive products designed for printing or coating and which are showing promise in diverse customer applications such as advanced packaging, electrostatic dissipation and thermal management. We also offer a set of standardized ink formulations suitable for printing. These inks offer the capability to print electrical circuits or antennas and may be suitable for other electrical or thermal applications. All of these formulations can be customized for specific customer requirements.

Energy Storage Materials. These consist of specialty advanced materials that have been formulated for specific applications in the energy storage segment. We offer various bulk materials for use as conductive additives for cathodes and anodes in lithium-ion batteries, as an additive to anode slurries for lead-carbon batteries, as a component in coatings for current collectors in lithium-ion batteries and we are investigating the use of our materials as part of other battery components.

Thermal Management Materials.  These consist mainly of various thermal interface materials (“TIM”) in the form of custom greases or pastes. Our custom XG TIM^® greases and pastes are also designed to be used in various high temperature environments. Additionally, we offer various bulk materials for use as active components in adhesives, liquids, coatings and plastic composites to impart improved thermal management performance to such matrices.

Our Focus Areas

We believe we are a “platform play” in advanced materials, because our proprietary processes allow us to produce varying grades of graphene nanoplatelets that can be mapped to a variety of applications and in many market segments. However, we are prioritizing our efforts in specific areas and with specific customers that we believe represent opportunities for either relatively near-term revenue or especially large and attractive markets. At this time, we are focused on four key vertical markets: Automotive, Sporting Goods, Packaging and Industrial. The following graphic provides examples of target applications within each of the four key verticals where XG Sciences has either commercial sales or is in development with one or more customers.

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XGS Market/Application Focus Areas

Addressable Markets

The markets for our materials are large and growing. As one example, the 2019 North American packaging market for plastic bottles and containers is estimated to be more than $34 billion (Mordor Intelligence). Further, Mordor estimates the 2019 global market for PET water bottles at 543.8 billion units. XG Sciences is engaged in the supply of xGnP^® graphene nanoplatelets for use in water bottles manufactured initially in North America and we are expanding our market activities into other geographies. If each water bottle produced in 2019 were to incorporate just 1 milligram of xGnP® graphene nanoplatelets, the total revenue available to XG Sciences may range from $200 to $300 million, depending on product form. As a second example, the 2019 Global market for rubber used in tires is estimated at 30 million metric tons (European Rubber Journal, January 9, 2019 and according the International Rubber Study Group). Graphene nanoplates have been shown to provide performance improvements when incorporated into tires. If graphene nanoplatelets were used in just 1 weight percent of all rubber used in tires, and used in only 20% of the available tire market, then there would exist a total global market for use of graphene nanoplatelets in tires of 60,000 metric tons on dry powder basis.

Commercialization Process

Because graphene is a new material, most of our customers are still developing applications that use our products. Commercialization is a process, the exact timing of which is often difficult to predict. It starts with our own internal R&D to validate performance for an identified market or customer-specific need. Our customers then validate the performance of our materials and determine whether our products can be incorporated into their manufacturing processes. This is initially done at pilot production scale levels. Our customers then have to introduce products that incorporate our materials to their own customers to validate performance. After their customers have validated performance, our customers will then move to commercial scale production. Every customer goes through the same process, but will do so at varying speeds, depending on the customer, the product application and the end-use market. Thus, we are not always able to predict when our customers will begin ordering commercial volumes of our materials or predict their expected volumes over time. However, as customers move through the process, we generally receive feedback and gain greater insights regarding their commercialization plans. According to our respective customers, the following are examples where our products are providing value to our customers at levels that are either in commercial production or we believe will warrant their use on a commercial basis.

· In 2018, Callaway Golf Company introduced new dual-core Chrome Soft and Chrome Soft X golf balls incorporating our xGnP^® graphene nanoplatelets into the outer core, resulting in a new class of golf ball that enables higher driving speeds, greater distance and increased control, allowing Calloway to command a premium price for their golf balls in the marketplace.  In2019, Callaway expanded the use of our technology to incorporate our xGnP^® into the ERC Soft line of golf balls.  In 2020, Callaway continued to use our products in the newly launch Chrome Soft line of golf balls.  The 2020 version of the Chrome Soft X is based on a solid core, which no longer benefited from use of our products;

· The Ford Motor Company, after having demonstrated a 17 percent reduction in noise, a 20 percent improvement in mechanical properties and a 30 percent improvement in heat endurance properties compared with that of polyurethane foam used without graphene, began incorporating our graphene nanoplatelets for polyurethane based foam parts in over ten under hood components on the Ford F-150 and Mustang in 2018.  In late 2019, our products were qualified for use in engine covers in all Ford and Lincoln light truck and passenger car platforms.  To meet this new demand, we began an expanded level of production in early 2020

· International specialty materials company formulating our products into an adhesive used in production by a European automotive manufacturer to improve thermal performance.  In 2018 we shipped them 800 Kgs of our products.  In 2019 their demand increased by 225% to 1,800 Kilograms.  In 2020, their initial forecasts were for a 166% increase in demand to 3,000 Kilograms.  We shipped 700 Kgs in the first quarter, but their May delivery was pushed to July due to COVID-19;

· Lead acid battery manufacturers incorporating our materials in the commercial supply of batteries demonstrated improvements in measured cycle life, capacity and charge acceptance;

· In 2019, we also announced the use of our products in an engine oil additive supplied by Hella, an innovative family-owned company serving the automotive and industrial markets with annual revenue of approximately 7 billion Euros;

· A US-based construction company has demonstrated a 40% improvement in strength when our products are incorporated into composite panels, targeted for commercial introduction in 2020;

· Large plastics packaging company having demonstrated more than a 2x improvement in strength upon adoption of our xGnP graphene nanoplatelets and while maintaining low color and optical transparency, are now targeting commercial introduction impacting recycling and light weighting; and

· Several customers are currently in initial scale production using our products for applications including resistive heating, additives for use in the oil and gas industry, coatings to improve load-bearing and thermal conductivity, chemical resistance and barrier. We expect that demand for our products will grow as new applications gain market momentum.

The process of “designing-in” new materials is relatively complex and involves the use of relatively small amounts of the new material in laboratory and engineering development for an extended period of time. Following successful development, customers that incorporate our materials into their products will then order much larger quantities of material to support commercial production. Although, our customers are under no obligation to report to us on the usage of our materials, some have indicated that they have introduced or will soon introduce commercial products that use our materials. Thus, while many of our customers are currently purchasing our materials in kilogram (one or two pound) quantities, some are now ordering at multiple ton quantities and we believe many will require tens of tons or even hundreds of tons of material as they commercialize products that incorporate our materials. We also believe that those customers already in production will increase their order volume as demand increases and others will begin to move into commercial volume production as they gain more experience in working with our materials and engage new customers.

20

Commercialization Trends

We are tracking the commercial and development status of more than 75 different customer applications using our materials with some customers pursuing multiple applications. As of March 31, 2020, we had twenty (20) specific customer applications where our materials are incorporated into our customers’ products and such customers are actively selling these products to their own customers. In addition, we have another nineteen (19) customer applications where our customers have indicated that they expect to begin shipping product incorporating our materials in the next 3 – 6 months and have another twenty-two (22) customer applications where our customers have indicated an intent to commercialize in the next 6 – 9 months. We are also working with numerous additional customers that have not yet indicated an exact date for commercialization, but we believe have the potential to contribute to meaningful revenue in 2020. The following graphic demonstrates the commercialization trends over the past 8 fiscal quarters as an increasing number of customers indicate their intent to commercialize applications and move into actively selling or promoting products for future sales. We experienced an impact from the coronavirus pandemic during the quarter with several customers pushing out the timing for commercial adoption. This is reflected in the reduction in the number of customers indicating their intent to commercialize in the next 6-9 months. Also, we experienced a reduction in the number of “commercial” customers as some customers previously promoting their products to their customers suspended their marketing efforts until such time as overall market conditions are more favorable. We anticipate we may continue and see customer delays over the next several quarters due to COVID-19. 

 

(a) Customer applications where our materials are used in customer products and they are actively selling them to their customers.

(b) Customer applications where our customers are indicating that they expect to begin shipping products incorporating our materials in the next 3-6 months.

(c) Customer applications where our customers are indicating an intent to commercialize in the next 6-9 months.

In addition to the above, there are many additional customers demonstrating efficacy and moving through the qualification process.

Manufacturing Capacity

We completed the first phase of expansion in our newest 64,000 square-foot facility in the first half of 2018. The expansion has added 90 metric tons of graphene nanoplatelet production capacity, bringing the total capacity of the facility up to approximately 180 metric tons of dry powder. Phase two of the expansion was partially complete by year-end 2018 and resulted in up to ~270 metric tons of total graphene nanoplatelet output capacity at the facility. We completed the last portion of this phase two expansion in the second half of 2019, resulting in up to ~400 metric tons of total graphene nanoplatelet output capacity. Our total graphene nanoplatelet output capacity across both of our manufacturing facilities, as of March 31, 2020, is an approximate 450 metric tons per year on a dry powder basis. The expansions support our mission to continue commercializing the use of graphene in customer products across diverse industries. XG’s increasing capacity will support our expected growth in demand for our products over the next several fiscal quarters. However, additional manufacturing capabilities for certain value-added products and certain bulk materials remain to be developed and may require the acquisition of additional facilities. In particular, the production processes for certain integrated products will require additional capital and may require additional facilities to meet expected future customer demand.

Some of the Company’s products are new products that have not yet been fully developed and for which manufacturing operations have not yet been fully scaled. Although we believe we will continue to scale our production capability, we have not yet demonstrated the capability to produce sufficient materials to generate the ongoing revenues necessary to sustain our operations in the long-term.

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Our Intellectual Property

Some of our proprietary manufacturing processes were developed at Michigan State University (MSU) and licensed to us in 2006. We license two U.S. patents from MSU. On August 8, 2016, we signed an agreement acquiring an exclusive license with Metna Co. (Meta) to Metna’s background IP for use of graphene nanoplatelets as additives to concrete mixtures. For purposes of the agreement, Metna’s background IP relates to the U.S. Patent 8,951,343. Also, on August 8, 2016, we entered into a second agreement for an exclusive license related to all Metna’s background technology and foreground technology, including any jointly-owned foreground technology where the end use is known to be any graphite additive dispersed in concrete mixtures. On April 25, 2019 we signed an Intellectual Property License, Joint Development and Commercialization Agreement with Niagara Bottling acquiring exclusive license to certain of Niagara’s patents and applications relating to the use of graphene nanoplatelets in packaging applications. For purposes of the agreement, Niagara’s IP relates to five (5) U.S. patents and patent applications and two (2) international applications and future registered intellectual property directed at the field. Over time, our scientists and engineers have made many further discoveries and inventions that are embodied in the form of (and as of March 31, 2020): eighteen (18) additional U.S. patents, twenty-three (23) foreign patents, thirteen (13) additional U.S. patent applications and numerous trade secrets. For many of the applications filed in the U.S., additional filings are made in other countries such as the European Union, Japan, South Korea, China, Taiwan or other applicable countries. As of March 31, 2020, we maintained fifteen (15) international patent applications. These filings and analyses are made on a case-by-case basis. Typically, patents that are defensive in nature are not filed abroad, while those that are protective of active XGS products or applications are filed in relevant countries abroad. Our general IP strategy is to keep as trade secrets those manufacturing processes that are difficult to enforce should they be disclosed and to seek patent coverage for other manufacturing processes, materials derived from those processes, unique combinations of materials and end uses of materials containing graphene nanoplatelets. We believe that the combination of our rights under various licenses, our patents and patent applications, and our trade secrets create a strong intellectual property position.

Operating Segment

We have one reportable operating segment that manufactures xGnP^® graphene nanoplatelets and value-added products produced therefrom, conducts research on graphene nanoplatelets and related products, and licenses our technology as appropriate. As of March 31, 2020, we shipped products on a worldwide basis, however all of our assets were located within the United States.

Results of Operations for the Three Months Ended March 31, 2020 compared with the Three Months Ended March 31, 2019

	For the Three Months Ended March 31,						Change 2020 to 2019
	2020			2019			$			%
Total Revenues		167,063			857,278			(690,215	)		-80.5	%
Cost of Goods Sold		762,483			1,174,622			412,139			35.1	%
Gross Loss		(595,420	)		(317,344	)		(278,076	)		-87.6	%
Research & Development Expense		285,727			385,245			99,518			25.8	%
Sales, General & Administrative Expense		1,292,135			1,420,922			128,787			9.1	%
Total Operating Expenses		1,577,862			1,806,167			228,305			12.6	%
Operating Loss		(2,173,282	)		(2,123,511	)		(49,771	)		-2.3	%
Other Expense		(178,009	)		(76,665	)		101,344			-132.2	%
Net Loss		(1,995,273	)		(2,046,846	)		51,573			2.5	%

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Revenue 

For the three months ending March 31, 2020 we reported revenue of $167,063, a 17.7% increase from the $141,962 reported in the immediately prior three-month period ending on December 31, 2019 and an 80.5% decrease from the $857,913 reportedfor the three months ending March 31, 2019. Since we are in the business of developing new materials and for use in new ways, accurately forecasting new product adoption can be a challenge for our customers. Accordingly, our business is subject to the vagaries of unpredictable demand and inaccurate forecasts and is as seen in our first quarter, year-on-year decrease in revenue. The $690,850 decrease in revenue for the three months ended March 31, 2020 from the comparable period in the prior year, is primarily due to three customers who purchased $774,176 of our products in the first quarter of 2019 who did not purchase any products in the first quarter of 2020 All three of these customers are still using our products in production, but given the newness of our products, demand for their products incorporating our products is also unpredictable. We believe these customers will continue to ship their products incorporating our material and we expect they will resume purchasing our products at historical levels in the next few quarters. Another customer purchased $38,700 of our products in the first three months of 2019 and $83,172 in the first three months of 2020, or an increase of 115%. We have a very strong customer pipeline and continue to establish a robust baseline of customers who are nearing commercial status. We believe that once these customers reach commercial status with products that incorporate our products, each will begin to order from us on a regular basis, which will help to mitigate the quarter to quarter revenue variability. However, until such time, we expect to see variations in quarterly revenue resulting from variable order patterns from our customers.

Product sales consist of two broad categories: (1) material sold to customers for research or development purposes; and (2) production orders for customers. Typically, the order sizes for the first category are relatively small, however we expect orders in the second category to be much larger in the future. In addition, other customers are moving through development programs towards commercialization, requiring larger quantities of our materials for advanced testing, pilot production and commercial-scale production activities. We believe that those customers already in production will increase their order volume as demand increases and others will begin to move into commercial volume production as they gain more experience in working with our materials and engage their own customers.

We ship our products from our Lansing, MI manufacturing facilities to customers around the world. During the three months ended March 31, 2020, we shipped materials to customers in 16 countries, as compared to 13 countries during the same period in 2019. For the three months ended March 31, 2020, sales to two countries, South Korea and Switzerland, accounted for more than 10% of revenue. For the three months ended March 31, 2019, shipments to South Korea accounted for more than 10% of product sales.

Order Summary

The table below shows a comparison of domestic and international orders fulfilled (excluding orders for free samples). The table also includes the average order size for product sales. The average order size for product revenue during the three months ended March 31, 2020 decreased by 85%, as compared to the same period in 2019. The relatively small average order size means that the majority of our customer base remains active with research and development projects that only use limited amounts of our material. We expect our average order size to increase significantly as more customers reach commercial status.

Order Summary	For the Three Months Ended March   31,
(unaudited)	2020		2019		Change
Number of orders - domestic		48		33		15
Number of orders - international		28		26		2
Number of orders - total		76		59		17
Average order size for product sales recorded in our Statement of Operations	$	2,201	$	15,018	$	(12,817	)
% change						(85	%)

Cost of Goods Sold

We use a standard cost system to estimate the direct costs of products sold. Variances between the standard costs and the actual costs are then properly capitalized to the inventories and expensed to cost of goods sold. Direct costs include estimates of raw material costs, packaging, freight charges net of those billed to customers, and an allocation for direct labor and manufacturing overhead. Because of the nature of our production processes, there is a substantial fixed manufacturing expense requirement that represents the ongoing cost of maintaining production facilities that are not directly related to products sold, so we use a “full capacity” allocation of overhead based on an estimate of what product costs would be if the manufacturing facilities were operating on a full-time basis and producing products at the designed capacity.

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The following table shows the relationship of direct costs to product sales for the three months ended March 31, 2020 and 2019:

Gross Loss Summary	For the Three Months Ended March 31,						Change 2020 to 2019
	2020			2019			$			%
Product Sales	$	167,063		$	857,278		$	(690,215	)		(80.5	)
Direct Costs		103,570			681,153			(577,583	)		(84.8	)
Direct Cost Margin	$	63,494		$	176,125		$	(112,631	)		(63.9	)
% of Sales		38.0	%		20.5	%
Unallocated Manufacturing Expense		658,913			493,469			165,444			33.5
Gross Loss on Product Sales	$	(595,420	)	$	(317,344	)	$	(278,076	)		87.6

We believe that the fluctuations in gross loss on product sales and direct cost from period to period are not indicative of future margins because of the relatively small size of our sales in comparison to our future expectations. Direct costs vary depending on the size of an order, the specific products being ordered, and other factors like shipping destination (which on small orders can represent a significant percentage of the cost).

The remaining “non-direct” costs of operating our manufacturing facilities are recorded as unallocated manufacturing expenses. These expenses include personnel costs, rent, utilities, indirect supplies, depreciation, and related indirect expenses. Unallocated manufacturing expenses are expensed as incurred. We allocate these costs to direct product costs based on the proportion of these expenses that would be representative of direct product costs if we were operating our factory at full capacity.

For the three months ended March 31, 2020, unallocated manufacturing expenses increased by 33.5% to $658,913 as compared to $493,469 for the same period in 2019. The increase of $165,444 is largely due to fixed overhead cost not being allocated to finished goods due to capacity underutilization.

Sales, General and Administrative Expenses 

During the three months ended March 31, 2020, we incurred selling, general and administrative expenses (SG&A) of $1,292,136. This is a decrease of $128,787 or 9.1% from the same period in 2019. This decrease in SG&A expense is primarily related to decreased personnel costs as the Company began taking measures in anticipation of slower demand and delays in customer adoption caused by COVID-19.

Research and Development Expenses

During the three months ended March 31, 2020, we incurred research and development expenses (R&D) of $285,727. This is a decrease of $99,518 or 25.8% from the same period in 2019. This decrease in R&D is primarily due to decreased personnel costs as we realign our R&D efforts to be more product focused.

Other Expense

Other income and expense consist primarily of Interest expense on the Dow Facility. Following shows a comparison of other income and expense for the three months ended March 31, 2020 and 2019:

	For the Three Months Ended March 31
	2020		2019			Change
Interest expense, net	$	(178,009)	$	(76,665)	)	$	(101,344)	)

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Liquidity and Capital Expenditures

Liquidity 

We have historically incurred recurring losses from operations and we may continue to generate negative cash flows as we implement our business plan. Our consolidated financial statements are prepared using accounting principles generally accepted in the United States (“US GAAP”) as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

In December 2016, we entered into a Draw Loan Note and Agreement with The Dow Chemical Company (the “Dow Facility”) to provide up to $10 million of secured debt financing at an interest rate of 5% per year, drawable at our request under certain conditions. We drew $2 million at closing, $1 million on each of July 18, 2017, September 22, 2017 and December 4, 2017. After December 1, 2017, an additional $5 million became available under the Dow Facility as a result of the Company having raised $10 million of equity capital after October 31, 2016. We drew $2 million on July 8, 2019, an additional $2 million on November 19, 2019 and, on February 12,2020, we drew the remaining $1 million.

As of June 10, 2020, we had cash on hand of $969,716.   Due to lower than expected revenue in 2019 and the current COVID-19 global pandemic impacting both our operations and that of our customers, Management has taken several steps to ensure we are able to fund our operations from existing cash on hand, operating cash flows, additional borrowings and restructured debt obligations.

In March of 2020, we restructured our organization by reducing headcount by 45%, by furloughing substantially all manufacturing employees, and by implementing temporary salary reductions ranging from 15-20% which has resulted in a 58% reduction in annual payroll and related costs. In April 2020, we furloughed additional employees in our R&D and Engineering departments. We also reduced our annual cash run rate for all other expenses by 17%. Salary reductions will be in place until the Company has recorded quarterly revenue of at least $1 million for two consecutive quarters, at which time salaries will return to their previous levels. 

In late March / early April   of 2020, we applied for relief under the Coronavirus Aid, Relief and Economic Security Act (CARES) by submitting an application with the Small Business Administration (SBA) for an Economic Injury Disaster Loan (“EIDL”) and by submitting an application to an SBA lender bank, PNC, for a Paycheck Protection Plan (“PPP”) loan. On April 18, 2020, we received an approved and fully executed PPP Term Note for $825,200 with a term of two years, a six-month repayment deferral period, and an annual rate of interest of 1%, with a potential for some or all of the loan to be forgiven, dependent upon use of the loan proceeds. On April 20, 2020, we received the $825,200 under the PPP loan. On May 17, 2020, the SBA issued us a decline letter for the EIDL for which we have requested reconsideration.

On April 23, 2020, we entered into an amended and restated Draw Loan Note and Agreement and related transaction documents (collectively, the “Amended Dow Facility”) with the Dow Chemical Company to amend the terms of our current loan facility to allow us to structure a private placement of units (“Units”) comprised (in part) of subordinated, secured convertible notes (“Convertible Notes” and such offering, the “Unit Offering”), to support ongoing cash needs.  In the Amended Dow Facility, the Company and Dow agreed to 1) extend the term of such loan facility by two years to December 1, 2023, 2) significantly reduce any required prepayment to Dow from the proceeds of new equity or equity-linked financings from the current 30-50% prepayment requirement on the pre-existing Dow Facility to a 10% prepayment requirement in the Amended Dow Facility, which does not begin until after we have raised an additional $7 million in equity or equity-linked capital from the date of the amendment, 3) capitalize all interest payable until such time as we have recorded GAAP revenue of at least $2 million for two consecutive calendar quarters 4) increase the rate of interest to 6.5% per annum from 5.0% on the pre-existing Dow Facility, and 5) allow for a subordinated security interest to be granted to new investors in the Unit Offering.

Immediately after the execution of the transaction documents related to the Amended Dow Facility, we commenced the Unit Offering in a private placement to accredited investors. The Unit Offering is comprised of the Convertible Notes and a right to exchange two shares of previously issued Common Stock of the Company for two shares of Series B Convertible Preferred Stock of the Company (“Series B Preferred Stock”) for every $8.00 invested in the Unit Offering (the “Exchange Rights”). The Convertible Notes are secured by a junior security interest in all the assets of the Company, bear an interest rate of 7.5% per annum and mature on December 31, 2024. Each investor’s Exchange Rights are exercisable for a period of thirty (30) days after acceptance by the Company of a fully executed subscription agreement.

At the option of each holder, the Convertible Notes are convertible into either i) Series B Preferred Stock at a conversion price of $8.00/share; or ii) any other form of preferred or common stock (“Subsequent Stock”) issued by the Company at a conversion price per share equal to 80% of the purchase price per share at which such Subsequent Stock is sold (or if the value per share is fixed, 120% of the number of shares that might otherwise be issuable).

If and when we raise at least $15 million of equity capital (excluding capital raised in this Unit Offering), the Convertible Notes will be automatically converted into whichever of the following equity securities would result in the greatest number of shares of Common Stock being issued to the holders on an “as-if-converted” basis at such time: (i) Series B Preferred Stock at a conversion price of $8.00/share; or (ii) Subsequent Stock at a note conversion price per share equal to 80% of the purchase price per share at which such Subsequent Stock is sold (or if the value per share is fixed, 120% of the number of shares that might otherwise be issuable); provided, however, in the event the Company raises at least $15 million of equity capital within one hundred and twenty (120) days after the first issue date of Convertible Notes, such percentages will be changed to 90% of the purchase price per share at which such Subsequent Stock is sold (or, if the value per share is fixed, 110% of the number of shares that might otherwise be issuable).

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Each share of Series B Preferred Stock has an original issue price of $8.00 per share (the “Series B Original Issue Price”) and a liquidation preference of $8.00 per share, with both the Series B Original Issue Price and the liquidation preference per share subject to adjustment for stock splits, recapitalizations, and the like. The Series B Preferred Stock will be senior to the Company’s Common Stock and pari-passu with the Series A Preferred Stock in terms of right of repayment in a liquidation.

The Series B Preferred Stock has full ratchet antidilution protection that provides that each share of Series B Preferred Stock outstanding may be converted by an Investor at any time into that number of shares of Common Stock determined by dividing the then current Series B Original Issue Price by the applicable Conversion Price (as defined below) with the resulting fraction equal to the “Series B Conversion Rate”. The total number of shares of Common Stock issuable will be equal to the number of shares of Series B Preferred Stock being converted multiplied by the Series B Conversion Rate. The “Conversion Price” is, at any time, the price per share equal to the lesser of a) the Series B Original Issue Price per share and b) the lowest price per share at which the Company has sold equity or equity-linked securities (other than customary exclusions) at any future date while any shares of the Series B Preferred Stock remain outstanding. The Series B Original Issue Price and Conversion Price in effect at any time are also subject to proportional adjustment for share splits, share dividends, recapitalizations and the like.

On April 23, 2020, certain members of our Board of Directors and their affiliates purchased $550,000 of Units. In additions, these Board members and their affiliates have made additional commitments to the Company to match any purchases of Units by disinterested third parties on a dollar for dollar basis up to an additional $1.5 million of Units purchased by such disinterested parties.

As of June 10, 2020, we had cash on hand of $969,716. Taking into consideration our current cash on hand, we estimate that we will need to raise approximately $500,000- $1,000,000 of additional capital in order to continue our operations for the next twelve months in a minimal to no revenue growth environment. If we are able to raise $1.5 million of capital from disinterested third parties, the commitments from our Board members to match this amount would result in $3.0 million of total capital to the Company, which we estimate would allow the Company to continue operating for 24 months in a minimal to no revenue growth environment.

There has been no public market for our securities and a public market may never develop, or, if any market does develop, it may not be sustained. Our Common Stock is not currently quoted on or traded on any exchange or on any over-the-counter market. In the event we are unable to fund our operations from existing cash on hand, operating cash flows, additional borrowings or raising equity capital, we may be forced to reduce our expenses, slow down our growth rate, or discontinue operations.  Our condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Smaller reporting companies are not required to provide this information.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As required by SEC Rule 15d-15, our management carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.

(b) Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

26

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

Smaller reporting companies are not required to provide this information.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following sets forth information regarding all unregistered securities sold from July 1, 2019 through March 31, 2020:

(1) We granted stock options to purchase an aggregate of 32,500 shares at an exercise prices of $8.00 per share to Board members, consultants and directors under the 2017 Equity Plan;

(2) We granted an aggregate of 32,500 shares of restricted stock with an aggregate fair value of $260,000 under the 2017 Incentive Plan.

The issuances of securities described in paragraphs (1) and (2) above were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 promulgated under the Securities Act as transactions by an issuer not involving a public offering or under benefit plans and contracts relating to compensation as provided under Rule 701.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

None.

ITEM 5. OTHER INFORMATION.

On April 27, 2020, the Company amended and restated the Certificate of Designation of it Series B Preferred Stock, a copy of which is filed as Exhibit 3.1 hereto.

27

ITEM 6. EXHIBITS.

EXHIBIT NUMBER	DESCRIPTION	LOCATION
3.1	Second Amended and restated Certificate of Designations of Series B Convertible Preferred Stock	Filed herewith
31.1	Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002*	Filed herewith
32.2	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*	Filed herewith
101. INS	XBRL Instance Document	Filed herewith
101. CAL	XBRL Taxonomy Extension Calculation Link base Document	Filed herewith
101. DEF	XBRL Taxonomy Extension Definition Link base Document	Filed herewith
101. LAB	XBRL Taxonomy Label Link base Document	Filed herewith
101. PRE	XBRL Extension Presentation Link base Document	Filed herewith
101. SCH	XBRL Taxonomy Extension Scheme Document	Filed herewith

28

SIGNATURES 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Dated:  June 17 2020	By:	/s/ Philip L. Rose
	Name:	Philip L. Rose
	Title:	Chief Executive Officer
Dated:  June 17, 2020	By:	/s/ Jacqueline M. Lemke
	Name:	Jacqueline M. Lemke
	Title:	Chief Financial Officer

29

EX-3.1

Exhibit 3.1

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Philip L. Rose, certify that:

1. I have reviewed this quarterly report on Form 10-Q of XG Sciences, Inc. for the period ended March 31, 2020;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

(a) designed such disclosure controls and procedures, or have caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

DATE: June 17, 2020

By: /s/ Philip L. Rose

Name: Philip L. Rose

Title: Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF FINANCIAL OFFICER

PURSUANT TO RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jacqueline M. Lemke, certify that:

1. I have reviewed this quarterly report on Form 10-Q of XG Sciences, Inc. for the period ended March 31, 2020;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

(a) designed such disclosure controls and procedures, or have caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

DATE: June 17, 2020

By: /s/ Jacqueline M. Lemke

Name: Jacqueline M. Lemke

Title: Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of XG Sciences, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip L. Rose, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

DATE: June 17, 2020

By:/s/ Philip L. Rose

Name: Philip L. Rose

Titles: Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of XG Sciences, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jacqueline M. Lemke, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

DATE: June 17, 2020

By:/s/ Jacqueline M. Lemke

Name: Jacqueline M. Lemke

Titles: Chief Financial Officer

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FINANCING AGREEMENT (Details Narrative) - USD ($)								1 Months Ended		3 Months Ended
	Feb. 12, 2020	Jul. 08, 2019	Dec. 04, 2017	Sep. 22, 2017	Jul. 18, 2017	Nov. 01, 2016	Jan. 15, 2014	Nov. 19, 2019	Dec. 31, 2016	Mar. 31, 2020	Mar. 31, 2019
Number of common stock issued	25,000
Proceeds from issuance of warrants	$ 1,000,000										$ 410,000
Warrant [Member]
Exercise price (in dollars per share)										$ 12.00
12% Secured Convertible Notes Due March 18, 2018 [Member] | New Technology Business Investment L.L.P, a Subsidiary Samsung Group [Member]
Face amount							$ 3,000,000
12% Secured Convertible Notes Due March 18, 2018 [Member] | New Technology Business Investment L.L.P, a Subsidiary Samsung Group [Member] | Preferred stock (A) [Member] | Warrant [Member]
Number of shares purchased (in shares)							100,000
Exercise price (in dollars per share)							$ 12.00
Warrant term							4 years
Senior Secured Debt Financing [Member] | Draw Loan Note And Agreement [Member]
Proceeds from secured debt										$ 5,000,000
Additional equity capital						$ 10,000,000
Senior Secured Debt Financing [Member] | The Dow Chemical Company [Member] | Draw Loan Note And Agreement [Member]
Face amount									$ 10,000,000	9,219,420
Proceeds from secured debt		$ 2,000,000	$ 1,000,000	$ 1,000,000	$ 1,000,000			$ 2,000,000	$ 2,000,000
Amortization expense of debt										$ 179,085
Number of shares purchased (in shares)										250,000
Exercise price (in dollars per share)										$ 8.00
Description of conversion terms										Interest is payable beginning January 1, 2017 although we have elected, per the loan documents, to capitalize the interest as part of the outstanding debt through January 1, 2019. Beginning April 1, 2019, current interest is payable in cash on the first day of each quarter. Dow received warrant coverage of one share of common stock for each $40 in loans received by us, equating to 20% warrant coverage, with an exercise price of $8.00 per share for the warrants issued at closing of the initial $2 million draw.
Unamortized discount										$ 676,000
Interest rate (in percent)									5.00%
Maturity date										Dec. 01, 2021
Effective intrest rate										8.20%
Non-cash interest expense										$ 115,318
Amortization from debt discount										$ 63,767
Equity capital description										Equity capital exceeding $15 million, we are required to prepay an amount equal to 30% of the amount raised over $15 million, but less than $25 million.
Additional borrowing										$ 1,000,000

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EQUITY INCENTIVE PLAN (Details Narrative) - USD ($)	1 Months Ended		3 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Mar. 31, 2020	Mar. 31, 2019
Number of options granted (in shares)			0
Exercise price (in dollars per share)			$ 8.00
2007 Stock Option Plan [Member] | Restricted Common Stock [Member] | Directors [Member]
Number of options granted (in shares)	2,500
Stock based compensation			$ 25,000	$ 20,000
Exercise price (in dollars per share)	$ 8.00
Number of shares vested (in shares)			20,000
Description of vesting terms	The options vest ratably over a four-year period beginning on the one-year anniversary.
Aggregate grant date fair value	$ 38,295		$ 260,000
Number of restricted stock issued			29,375	17,500
2007 Stock Option Plan [Member] | Stock Option [Member] | Directors [Member]
Number of options granted (in shares)		2,500
Exercise price (in dollars per share)		$ 8.00
Description of vesting terms		The options vest ratably over a four-year period beginning on the one-year anniversary.
Aggregate grant date fair value		$ 29,580

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CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)	Mar. 31, 2020	Dec. 31, 2019
CURRENT ASSETS
Cash	$ 458,845	$ 1,129,702
Accounts receivable, less allowance for doubtful accounts of $158,600 at March 31, 2020 and 179,600 at December 31, 2019	121,331	72,227
Inventories	874,710	891,587
Other current assets	317,288	334,493
Total current assets	1,772,174	2,428,009
LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET	3,466,419	3,676,142
LEASE DEPOSIT	61,467	77,544
INTANGIBLE ASSETS, NET	770,746	753,862
RIGHT OF USE ASSET	1,486,112	1,606,443
TOTAL ASSETS	7,556,918	8,542,000
CURRENT LIABILITIES
Accounts payable	892,700	634,564
Other current liabilities	171,493	238,554
Deferred revenue	10,310
Current portion of long-term debt
Current portion of lease liabilities	536,786	520,197
Total current liabilities	1,611,289	1,393,315
LONG-TERM LIABILITIES
Long-term portion of lease liabilities	1,042,745	1,183,872
Long term debt	9,219,420	8,111,610
Total long-term liabilities	10,262,165	9,295,482
TOTAL LIABILITIES	11,873,454	10,688,797
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, 3,000,000 shares authorized, 1,890,354 shares issued and outstanding, liquidation value of $22,684,248 at March 31, 2020 and December 31, 2019	22,307,480	22,307,480
Common stock, no par value, 25,000,000 shares authorized, 4,024,443 shares issued and outstanding at March 31, 2020 and December 31, 2019	32,376,876	32,351,876
Additional paid-in capital	8,931,527	8,774,975
Accumulated deficit	(67,932,419)	(65,581,128)
Total stockholders' equity	(4,316,536)	(2,146,797)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 7,556,918	$ 8,542,000

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - USD ($)	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Adjustments to reconcile net loss to net cash used in operating activities:
Net loss	$ (2,351,291)	$ (2,200,176)
Depreciation	216,013	194,055
Amortization of intangible assets	18,047	15,858
Stock-based compensation expense	110,276	108,288
Non-cash interest expense	179,086	13,166
Changes in current assets and liabilities:
Accounts receivable	(49,104)	393,201
Inventory	16,876	(45,688)
Other current and non-current assets	29,075	(2,613)
Accounts payable and other liabilities	201,385	(313,986)
NET CASH USED IN OPERATING ACTIVITIES	(1,629,637)	(1,837,895)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment	(6,290)	(217,021)
Purchases of intangible assets	(34,929)	(25,623)
NET CASH USED IN INVESTING ACTIVITIES	(41,219)	(242,644)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of capital lease obligations		(15,527)
Repayments of long-term loan debt		(157,200)
Proceeds from issuance of common stock		410,000
Common stock issuance fees and expenses		(16,000)
Proceeds from long-term loan	1,000,000
NET CASH PROVIDED BY FINANCING ACTIVITIES	1,000,000	221,273
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	(670,857)	(1,859,266)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD	1,129,702	4,893,974
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	458,845	3,034,708
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest
Value of preferred stock issued for AAOF capital lease obligations
Value of Warrants issued with Dow financing	$ 71,276	$ 0

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STOCKHOLDERS' EQUITY (DEFICIT)

3 Months Ended

Mar. 31, 2020

Stockholders Equity Deficit

STOCKHOLDERS' EQUITY (DEFICIT)

NOTE 5 – STOCKHOLDERS’ EQUITY (DEFICIT)

Series B Convertible Preferred Stock

As of March 31, 2020, and December 31, 2019, the Company was authorized to issue up to 1,500,000 shares Series B Preferred Stock, of which none were issued and outstanding as of March 31, 2020 and December 31, 2019.

Each share of the Series B Preferred, is convertible at any time, at the option of the holder, into one share of common stock. The Series B Preferred also contains typical anti-dilution provisions that provide for adjustment of the conversion price to reflect stock splits, stock dividends, or similar events. Each share of Series B Preferred is subject to mandatory conversion into common stock at the then-effective Series B conversion rate upon the public listing by the Company of its common stock on a Qualified National Exchange. However, the Series B Preferred is not subject to the mandatory conversion until all outstanding Convertible Securities are also converted into common stock. The Series B Preferred ranks senior to all other equity or equity equivalent securities of the Company other than those securities which are explicitly senior or pari passu in rights and liquidation preference to the Series B Preferred and pari passu with the Company’s Series A Preferred.

On April 27, 2020, the Company filed the Second Amended and Restated Certificate of Designations of the Series B Preferred Stock in connection with the Unit Offering and the Amended Dow Facility, lowering the liquidation preference from $16.00 per share to $8.00 per share, and lowering the conversion price from $16.00 per share to $8.00 per share, among other things. The Company also adjusted certain provisions to harmonize the rights of the Series B Preferred with the rights in the Series A Certificate of Designations.

The Series A Preferred and Series B Preferred are not redeemable for cash and the Company concluded that they are more akin to equity-type instruments than debt-type instruments. Accordingly, the embedded conversion option in each agreement is clearly and closely related to an equity-type host and the conversion option does not require classification and measurement as a derivative financial instrument. Therefore, the securities meet the conditions for stockholders’ equity classification. 

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SUBSEQUENT EVENTS

3 Months Ended

Mar. 31, 2020

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE 9 – SUBSEQUENT EVENTS

On April 1, 2020, we capitalized the Dow Facility interest expense of $115,318 for the three months ended March 30, 2020, which would normally have been payable on April 1, 2020 but was permitted to be capitalized and included in the opening loan balance for purposes of the Amended Dow Facility effective April 22, 2020.

During the period from April 1 through the filing date of this report, we entered into the Amended Dow Facility, commenced the Unit Offering and received $550,000 in funding therefrom, we amended and restated our Certificate of Designation of Series B Preferred Stock, received a Paycheck Protection Program loan of $825,200, and received a $10,000 Economic Industry Disaster Loan grant, all of which was disclosed in detail in the Company’s Annual Report on Form 10-K as filed April 29, 2020.

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EQUITY INCENTIVE PLAN (Tables)

3 Months Ended

Mar. 31, 2020

Share-based Payment Arrangement [Abstract]

Schedule of summary of the stock option activity

The following table shows the stock options activity as of March 31, 2020   is as follows:

				Weighted
	Number			Average
	Of			Exercise
	Options			Price
Options outstanding at December 31, 2019		839,625		$	8.00
Changes during the period:
Expired		(65,000	)		8.00
New Options Granted – at market price					8.00
Options outstanding at March 31, 2020		774,625		$	8.00
Options exercisable at March 31, 2020		514,011		$	8.00

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CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - USD ($)	Mar. 31, 2020	Dec. 31, 2019
Statement of Financial Position [Abstract]
Allowance for doubtful accounts	$ 158,600	$ 179,600
Series A convertible preferred stock, authorized	3,000,000	3,000,000
Series A convertible Preferred stock, issued	1,890,354	1,890,354
Series A convertible preferred stock, outstanding	1,890,354	1,890,354
Series A convertible preferred stock liquidation value	$ 22,684,248	$ 22,684,248
Common stock, no par value (in dollars per share)	$ 0	$ 0
Common stock, authorized	25,000,000	25,000,000
Common stock, issued	4,024,443	4,024,443
Common stock, outstanding	4,024,443	4,024,443

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NATURE OF BUSINESS AND BASIS OF PRESENTATION

3 Months Ended

Mar. 31, 2020

Organization, Consolidation and Presentation of Financial Statements [Abstract]

NATURE OF BUSINESS AND BASIS OF PRESENTATION

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION

XG Sciences, Inc., a Michigan company located in Lansing, Michigan and its subsidiary, XG Sciences IP, LLC (collectively referred to as “we”, “us”, “our”, or the “Company”) manufactures graphene nanoplatelets made from graphite, using two proprietary manufacturing processes to split natural flakes of crystalline graphite into very small and thin particles, which we sell as xGnP^® graphene nanoplatelets. We sell our nanoplatelets in the form of bulk powders or dispersions to other companies for use as additives to make composite and other materials with specialty engineered characteristics. We also manufacture and sell integrated, value-added products containing these graphene nanoplatelets such as greases, composites, thin sheets, inks and coating formulations that we sell to other companies. Additionally, we have licensed our technology to other companies in exchange for royalties and other fees.

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and do not include all of the information and footnotes required by GAAP for complete financial statements. All intercompany transactions have been eliminated in consolidation.

Certain information and footnote disclosures normally included in our annual audited consolidated financial statements and accompanying notes have been condensed or omitted in these interim condensed consolidated financial statements. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019, as filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on April 29, 2020.

The results of operations presented in this quarterly report are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments and accruals, consisting only of normal recurring adjustments that are necessary for a fair statement of the results of all interim periods reported herein.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, together with amounts disclosed in the related notes to the financial statements. Actual results and outcomes may differ from our estimates, judgments and assumptions. Significant estimates, judgments and assumptions used in these condensed consolidated financial statements include, but are not limited to, those related to revenue, accounts receivable and related allowances, inventory valuations, contingencies, useful lives and recovery of long-term assets, including intangible assets, income taxes, and the fair value of stock-based compensation. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in estimates are reflected in the financial statements prospectively from the date of the change in estimate.

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STOCK WARRANTS ACCOUNTED FOR AS EQUITY INSTRUMENTS (Tables)

3 Months Ended

Mar. 31, 2020

Stock Warrants Accounted For As Equity Instruments Tables

Schedule of common stock warrants (including the warrants previously accounted for as derivatives) outstanding

The following table summarizes the warrants (including the warrants previously accounted for as derivatives) outstanding at March 31, 2020, which are accounted for as equity instruments, all of which are exercisable: 

Date Issued	Expiration Date	Indexed Stock	Exercise Price		Number of  Warrants
10/08/2012	10/08/2027	Common	$	12.00		5,000
01/15/2014 - 12/31/2014	01/15/2024	Series A Convertible Preferred	$	12.00		972,720
04/30/2015- 05/26/2015	04/30/2022	Common	$	16.00		218,334
06/30/2015	06/30/2022	Common	$	16.00		6,563
12/31/2015	12/31/2020	Common	$	8.00		20,625
03/31/2016	03/31/2021	Common	$	10.00		10,600
04/30/2016	04/30/2021	Common	$	10.00		895
12/14/2016	12/01/2023	Common	$	8.00		50,000
07/18/2017	12/01/2023	Common	$	8.00		25,000
09/22/2017	12/01/2023	Common	$	8.00		25,000
12/04/2017	12/01/2023	Common	$	8.00		25,000
07/08/2019	12/01/2023	Common	$	8.00		50,000
11/01/2019	12/01/2023	Common	$	8.00		50,000
02/12/2020	12/01/2023	Common	$	8.00		25,000
						1,484,737

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STOCK WARRANTS ACCOUNTED FOR AS EQUITY INSTRUMENTS

3 Months Ended

Mar. 31, 2020

Equity [Abstract]

STOCK WARRANTS ACCOUNTED FOR AS EQUITY INSTRUMENTS

NOTE 4 – STOCK WARRANTS ACCOUNTED FOR AS EQUITY INSTRUMENTS

The following table summarizes the warrants (including the warrants previously accounted for as derivatives) outstanding at March 31, 2020, which are accounted for as equity instruments, all of which are exercisable: 

Date Issued	Expiration Date	Indexed Stock	Exercise Price		Number of  Warrants
10/08/2012	10/08/2027	Common	$	12.00		5,000
01/15/2014 - 12/31/2014	01/15/2024	Series A Convertible Preferred	$	12.00		972,720
04/30/2015- 05/26/2015	04/30/2022	Common	$	16.00		218,334
06/30/2015	06/30/2022	Common	$	16.00		6,563
12/31/2015	12/31/2020	Common	$	8.00		20,625
03/31/2016	03/31/2021	Common	$	10.00		10,600
04/30/2016	04/30/2021	Common	$	10.00		895
12/14/2016	12/01/2023	Common	$	8.00		50,000
07/18/2017	12/01/2023	Common	$	8.00		25,000
09/22/2017	12/01/2023	Common	$	8.00		25,000
12/04/2017	12/01/2023	Common	$	8.00		25,000
07/08/2019	12/01/2023	Common	$	8.00		50,000
11/01/2019	12/01/2023	Common	$	8.00		50,000
02/12/2020	12/01/2023	Common	$	8.00		25,000
						1,484,737

Each warrant indexed to Series A Convertible Preferred Stock is currently exercisable and exchangeable into 1.875 shares of common stock. On a common stock equivalent basis, the exercise price would equal $6.40/common share.

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RELATED PARTY TRANSACTIONS

3 Months Ended

Mar. 31, 2020

Related Party Transactions [Abstract]

RELATED PARTY TRANSACTIONS

NOTE 8 – RELATED PARTY TRANSACTIONS

We have a licensing agreement for exclusive use of patents and pending patents with Michigan State University (“MSU”), a shareholder of the Company via the MSU Foundation. During the three months ended March   31, 2020 and 2019 we recorded licensing expense of zero and $12,500 per quarter, respectively.  Effective January 1, 2020, we have suspended accruing any royalty payable under this license as we renegotiate the agreement.

During the three months ended March 31, 2020 we did not issue any Series A Preferred or Series B Preferred stock.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($)									1 Months Ended		2 Months Ended	3 Months Ended
	Apr. 01, 2020	Feb. 12, 2020	Jul. 08, 2019	Apr. 12, 2019	Dec. 04, 2017	Sep. 22, 2017	Jul. 18, 2017	Nov. 01, 2016	Nov. 19, 2019	Dec. 31, 2016	Jun. 15, 2020	Mar. 31, 2020	Mar. 31, 2019	Jun. 10, 2020	Dec. 31, 2019
Cash on hand												$ 458,845			$ 1,129,702
Sale of common stock				2,615,425								3,000,000
Share price per share												$ 8.00
Proceeds from issuance of warrants		$ 1,000,000											$ 410,000
Proceeds from loan												1,000,000
Draw Loan Note And Agreement [Member] | Senior Secured Debt Financing [Member]
Proceeds from secured debt												5,000,000
Additional equity capital								$ 10,000,000
Draw Loan Note And Agreement [Member] | Senior Secured Debt Financing [Member] | The Dow Chemical Company [Member]
Face amount										$ 10,000,000		$ 9,219,420
Proceeds from secured debt			$ 2,000,000		$ 1,000,000	$ 1,000,000	$ 1,000,000		$ 2,000,000	$ 2,000,000
Interest rate										5.00%
Subsequent Event [Member]
Cash on hand														$ 969,716
CARES Description	In late March / early April of 2020, we applied for relief under the Coronavirus Aid, Relief and Economic Security Act (CARES) by submitting an application with the Small Business Administration (SBA) for an Economic Injury Disaster Loan (“EIDL”) and by submitting an application to an SBA lender bank, PNC, for a Paycheck Protection Plan (“PPP”) loan. On April 18, 2020, we received an approved and fully executed PPP Term Note for $825,200 with a term of two years, a six-month repayment deferral period, and an annual rate of interest of 1%, with a potential for some or all of the loan to be forgiven, dependent upon use of the loan proceeds. On April 20, 2020, we received the $825,200 under the PPP loan. On May 17, 2020, the SBA issued us a decline letter for the EIDL for which we have requested reconsideration.
Proceeds from loan											$ 825,200
Subsequent Event [Member] | Board of Directors [Member]
Value of units purchased											$ 550,000

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EQUITY INCENTIVE PLAN (Details)	3 Months Ended
	Mar. 31, 2020 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Options outstanding at beginning of year | shares	839,625
Changes during the year:
Expired | shares	(65,000)
New Options Granted - at market price | shares	0
Options outstanding at end of Period | shares	774,625
Options exercisable at end of Period | shares	514,011
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [RollForward]
Options outstanding at beginning of year | $ / shares	$ 8.00
Changes during the year:
Expired | $ / shares	8.00
New Options Granted - at market price | $ / shares	8.00
Options outstanding at end of Period | $ / shares	8.00
Options exercisable at end of Period | $ / shares	$ 8.00

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Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2020	Jun. 15, 2020
Document And Entity Information
Entity Registrant Name	XG SCIENCES INC
Entity Central Index Key	0001435375
Document Type	10-Q
Document Period End Date	Mar. 31, 2020
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity File Number	333-209131
Entity Incorporation, State or Country Code	MI
Entity's Reporting Status Current	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		3,949,443
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2020

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - USD ($)	Preferred stock A	Common Stock [Member]	Additional Paid-In Capital	Accumulated Deficit	Total
Balances at beginning at Dec. 31, 2018	$ 22,307,480	$ 30,268,476	$ 8,101,923	$ (55,687,160)	$ 4,990,719
Balances at beginning (in shares) at Dec. 31, 2018	1,890,354	3,760,268
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock issued for cash		$ 410,000			410,000
Stock issued for cash (in shares)		51,250
Stock issuance fees and expenses		$ (16,000)			(16,000)
Transition adjustment for adoption of ASC 842				(116,319)	(116,319)
Stock-based compensation expense		20,000	88,288		108,288
Warrants issued with Dow financing			0		0
Net loss				(2,200,176)	(2,200,176)
Balances at ending at Mar. 31, 2019	$ 22,307,480	$ 30,682,476	8,190,211	(58,003,655)	3,176,512
Balances at ending (in shares) at Mar. 31, 2019	1,890,354	3,811,518
Balances at beginning at Dec. 31, 2019	$ 22,307,480	$ 32,351,876	8,774,975	(65,581,128)	(2,146,797)
Balances at beginning (in shares) at Dec. 31, 2019	1,890,354	4,024,443
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock issued for cash					0
Stock issuance fees and expenses		$ 0			0
Stock-based compensation expense		25,000	85,276		110,276
Warrants issued with Dow financing			0		71,276
Net loss				(2,200,176)	(2,351,291)
Balances at ending at Mar. 31, 2020	$ 22,307,480	$ 30,682,476	$ 8,190,211	$ (58,003,655)	$ (4,316,536)
Balances at ending (in shares) at Mar. 31, 2020	1,890,354	4,024,443

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FINANCING AGREEMENTS

3 Months Ended

Mar. 31, 2020

Warrants And Financing Agreements

FINANCING AGREEMENTS

NOTE 3 –FINANCING AGREEMENT

Dow Facility

In December 2016, we entered into the Dow Facility which provided us with up to $10 million of secured debt financing at an interest rate of 5% per year, drawable at our request under certain conditions. We received $2 million at closing and an additional $1 million on each of July 18, 2017, September 22, 2017 and December 4, 2017. After December 1, 2017, an additional $5 million became available under the Dow Facility as a result of the Company having raised $10 million of equity capital after October 31, 2016. We drew $2 million on July 8, 2019, an additional $2 million on November 19, 2019 and, on February 12,2020, we drew the remaining $1 million and issued warrants to purchase up to 25,000 more of our shares of Common Stock.

The Dow Facility is senior to our other debt and is secured by all of our assets (Dow was subordinate only to the capital leases with AAOF which was paid off and closed December 31, 2018).

Under the original terms, the loan matured on December 1, 2021 (subject to certain mandatory prepayments based on our equity financing activities). In addition, after we raised a cumulative amount of equity capital exceeding $15 million, we were required to prepay an amount equal to 30% of the amount raised over $15 million, but less than $25 million.

We began these prepayments on equity raised as of September 10, 2018. Interest was payable beginning January 1, 2017 although we elected, per the loan documents, to capitalize the interest as part of the outstanding debt through January 1, 2019. Beginning April 1, 2019, current interest was payable in cash on the first day of following the quarter.   

Dow received warrant coverage of one share of common stock for each $40 in loans received by us, equating to 20% warrant coverage, with an exercise price of $8.00 per share for the warrants issued at closing of the initial $2 million draw. After the initial closing, the strike price of future warrants issued is subject to adjustment if we sell shares of common stock at a lower price. As of March 31, 2020, we have issued 250,000 warrants to Dow, which are exercisable on or before the expiration date of December 1, 2023. 

On April 23, 2020, we entered into an amended and restated Draw Loan Note and Agreement and related transaction documents (collectively, the “Amended Dow Facility”) whereby the Company and Dow agreed to 1) extend the term of such loan facility by two years to December 1, 2023, 2) significantly reduce any required prepayment to Dow from the proceeds of new equity or equity-linked financings from the current 30-50% prepayment requirement on the pre-existing Dow Facility to a 10% prepayment requirement in the Amended Dow Facility, which does not begin until after we have raised an additional $7 million in equity or equity-linked capital from the date of the amendment, 3) capitalize all interest payable until such time as we have recorded GAAP revenue of at least $2 million for two consecutive calendar quarters, 4) increase the rate of interest to 6.5% per annum from 5% in the pre-existing Dow Facility, and 5) allow for a subordinated security interest to be granted to new investors in the Unit Offering.

The aforementioned warrants meet the criteria for classification within stockholders’ equity. Proceeds were allocated between the debt and the warrants at their relative fair value on the date of issue. The total debt discount on the Dow Facility was approximately $676,000. This debt discount is being amortized to interest expense using the effective interest method over the term of the loans using an average effective interest rate of 8.2%. During the three months ended March 31, 2020, we recognized $179,085 of amortization expense consisting of $115,318 of interest expense accrued and $63,767 of amortization from debt discount accretion related to the Dow Facility warrants. We borrowed an additional $1,000,000 in the three months ended March 31, 2020, resulting in a carrying value of $9,219,420 for the Dow Facility as of March 31, 2020.    

The Dow Facility entitles Dow to appoint an observer to our Board. Dow will maintain this observation right until the amount of principal and interest outstanding under the Dow Facility is less than $5 million. 

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SUBSEQUENT EVENTS (Details Narrative) - USD ($)		2 Months Ended	3 Months Ended
	Apr. 01, 2020	Jun. 15, 2020	Mar. 31, 2020	Mar. 31, 2019
Interest expense			$ 178,009	$ 76,665
Proceeds from loan			$ 1,000,000
Subsequent Event [Member]
Proceeds from loan		$ 825,200
Subsequent Event [Member] | Board of Directors [Member]
Interest expense	$ 115,318
Value of units purchased		$ 550,000

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EQUITY INCENTIVE PLAN

3 Months Ended

Mar. 31, 2020

Share-based Payment Arrangement [Abstract]

EQUITY INCENTIVE PLAN

NOTE 6 – EQUITY INCENTIVE PLAN  

On September 30, 2019 and September 30, 2018, the Company granted each Board member 2,500 stock options and 2,500 shares of restricted stock for their Board services. The options were granted at a price of $8.00 per share and vest ratably over a four-year period beginning on the one-year anniversary. The options had an aggregate grant date fair value of $38,295 and $29,580 on September 30, 2019 and September 30, 2018, respectively. The restricted stock issued to the Board members has an aggregate fair value of $260,000 and vests ratably in arrears over four quarters on the last day of each fiscal quarter following the grant date. As of March 31, 2020, and 2019, 29,375 and 17,500 of the 32,500 shares of restricted stock issued had vested, resulting in compensation expense of $25,000 and $20,000 for the three months ended March 31, 2020 and March 31, 2019 and 2018, respectively.    

The following table shows the stock options activity as of March 31, 2020 is as follows:

				Weighted
	Number			Average
	Of			Exercise
	Options			Price
Options outstanding at December 31, 2019		839,625		$	8.00
Changes during the period:
Expired		(65,000	)		8.00
New Options Granted – at market price					8.00
Options outstanding at March 31, 2020		774,625		$	8.00
Options exercisable at March 31, 2020		514,011		$	8.00

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

Liquidity

Liquidity 

We have historically incurred losses from operations and we may continue to generate negative cash flows as we implement our business plan. Our consolidated financial statements are prepared using US GAAP as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

In December 2016, we entered into a Draw Loan Note and Agreement with The Dow Chemical Company (the “Dow Facility”) to provide up to $10 million of secured debt financing at an interest rate of 5% per year, drawable at our request under certain conditions. We drew $2 million at closing, $1 million on each of July 18, 2017, September 22, 2017 and December 4, 2017. After December 1, 2017, an additional $5 million became available under the Dow Facility as a result of the Company having raised $10 million of equity capital after October 31, 2016. We drew $2 million on July 8, 2019, an additional $2 million on November 19, 2019 and, on February 12,2020, we drew the remaining $1 million.

As of June 10, 2020, we had cash on hand of $969,716.   Due to lower than expected revenue in 2019 and the current COVID-19 global pandemic impacting both our operations and that of our customers, Management has taken several steps to ensure we are able to fund our operations from existing cash on hand, operating cash flows, additional borrowings and restructured debt obligations.

In March of 2020, we restructured our organization by reducing headcount by 45%, by furloughing substantially all manufacturing employees, and by implementing temporary salary reductions ranging from 15-20% which has resulted in a 58% reduction in annual payroll and related costs. In April 2020, we furloughed additional employees in our R&D and Engineering departments. We also reduced our annual cash run rate for all other expenses by 17%. Salary reductions will be in place until the Company has recorded quarterly revenue of at least $1 million for two consecutive quarters, at which time salaries will return to their previous levels. 

In late March / early April   of 2020, we applied for relief under the Coronavirus Aid, Relief and Economic Security Act (CARES) by submitting an application with the Small Business Administration (SBA) for an Economic Injury Disaster Loan (“EIDL”) and by submitting an application to an SBA lender bank, PNC, for a Paycheck Protection Plan (“PPP”) loan. On April 18, 2020, we received an approved and fully executed PPP Term Note for $825,200 with a term of two years, a six-month repayment deferral period, and an annual rate of interest of 1%, with a potential for some or all of the loan to be forgiven, dependent upon use of the loan proceeds. On April 20, 2020, we received the $825,200 of proceeds under the PPP loan. On May 17, 2020, the SBA issued us a decline letter for the EIDL for which we have requested reconsideration.

On April 23, 2020, we entered into an amended and restated Draw Loan Note and Agreement and related transaction documents (collectively, the “Amended Dow Facility”) with the Dow Chemical Company to amend the terms of our current loan facility to allow us to structure a private placement of units (“Units”) comprised (in part) of subordinated, secured convertible notes (“Convertible Notes” and such offering, the “Unit Offering”), to support ongoing cash needs.  In the Amended Dow Facility, the Company and Dow agreed to 1) extend the term of such loan facility by two years to December 1, 2023, 2) significantly reduce any required prepayment to Dow from the proceeds of new equity or equity-linked financings from the current 30-50% prepayment requirement on the pre-existing Dow Facility to a 10% prepayment requirement in the Amended Dow Facility, which does not begin until after we have raised an additional $7 million in equity or equity-linked capital from the date of the amendment, 3) capitalize all interest payable until such time as we have recorded GAAP revenue of at least $2 million for two consecutive calendar quarters 4) increase the rate of interest to 6.5% per annum from 5% in the pre-existing Dow Facility, and 5) allow for a subordinated security interest to be granted to new investors in the Unit Offering.

Immediately after the execution of the transaction documents related to the Amended Dow Facility, we commenced the Unit Offering in a private placement to accredited investors. The Unit Offering is comprised of the Convertible Notes and a right to exchange two shares of previously issued Common Stock of the Company for two shares of Series B Convertible Preferred Stock of the Company (“Series B Preferred Stock”) for every $8.00 invested in the Unit Offering (the “Exchange Rights”). The Convertible Notes are secured by a junior security interest in all the assets of the Company, bear an interest rate of 7.5% per annum and mature on December 31, 2024. Each investor’s Exchange Rights are exercisable for a period of thirty (30) days after acceptance by the Company of a fully executed subscription agreement.

At the option of each holder, the Convertible Notes are convertible into either i) Series B Preferred Stock at a conversion price of $8.00/share; or ii) any other form of preferred or common stock (“Subsequent Stock”) issued by the Company at a conversion price per share equal to 80% of the purchase price per share at which such Subsequent Stock is sold (or if the value per share is fixed, 120% of the number of shares that might otherwise be issuable).

If and when we raise at least $15 million of equity capital (excluding capital raised in this Unit Offering), the Convertible Notes will be automatically converted into whichever of the following equity securities would result in the greatest number of shares of Common Stock being issued to the holders on an “as-if-converted” basis at such time: (i) Series B Preferred Stock at a note conversion price of $8.00/share; or (ii) Subsequent Stock at a note conversion price per share equal to 80% of the purchase price per share at which such Subsequent Stock is sold (or if the value per share is fixed, 120% of the number of shares that might otherwise be issuable); provided, however, in the event the Company raises at least $15 million of equity capital within one hundred and twenty (120) days after the first issue date of Convertible Notes, such percentages will be changed to 90% of the purchase price per share at which such Subsequent Stock is sold (or, if the value per share is fixed, 110% of the number of shares that might otherwise be issuable).

Each share of Series B Preferred Stock has an original issue price of $8.00 per share (the “Series B Original Issue Price”) and a liquidation preference of $8.00 per share, with both the Series B Original Issue Price and the liquidation preference per share subject to adjustment for stock splits, recapitalizations, and the like. The Series B Preferred Stock will be senior to the Company’s Common Stock and pari-passu with the Series A Preferred Stock in terms of right of repayment in a liquidation.

The Series B Preferred Stock has full ratchet antidilution protection that provides that each share of Series B Preferred Stock outstanding may be converted by an Investor at any time into that number of shares of Common Stock determined by dividing the then current Series B Original Issue Price by the applicable Conversion Price (as defined below) with the resulting fraction equal to the “Series B Conversion Rate”. The total number of shares of Common Stock issuable will be equal to the number of shares of Series B Preferred Stock being converted multiplied by the Series B Conversion Rate. The “Conversion Price” is, at any time, the price per share equal to the lesser of a) the Series B Original Issue Price per share and b) the lowest price per share at which the Company has sold equity or equity-linked securities (other than customary exclusions) at any future date while any shares of the Series B Preferred Stock remain outstanding. The Series B Original Issue Price and Conversion Price in effect at any time are also subject to proportional adjustment for share splits, share dividends, recapitalizations and the like.

On April 23, 2020, certain members of our Board of Directors and their affiliates purchased $550,000 of Units. In additions, these Board members and their affiliates have made additional commitments to the Company to match any purchases of Units by disinterested third parties on a dollar for dollar basis up to an additional $1.5 million of Units purchased by such disinterested parties.

Taking into consideration our current cash on hand, we estimate that we will need to raise approximately $500,000- $1,000,000 of additional capital in order to continue our operations for the next twelve months in a minimal to no revenue growth environment. If we are able to raise $1.5 million of capital from disinterested third parties, the commitments from our Board members to match this amount would result in $3.0 million of total capital to the Company, which we estimate would allow the Company to continue operating for 24 months in a minimal to no revenue growth environment.

There has been no public market for our securities and a public market may never develop, or, if any market does develop, it may not be sustained. Our Common Stock is not currently quoted on or traded on any exchange or on any over-the-counter market. In the event we are unable to fund our operations from existing cash on hand, operating cash flows, additional borrowings or raising equity capital, we may be forced to reduce our expenses, slow down our growth rate, or discontinue operations. Our condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.  

Inventory

Inventory    

 The following amounts were included in inventory at the end of the period:

	March 31,		December 31,
	2020		2019
Raw Materials	$	57,779	$	68,784
Consumables		70,103		70,103
Finished Goods		746,828		752,700
Total	$	874,710	$	891,587

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for us for annual periods beginning January 1, 2021. We are currently reviewing the provisions of this new pronouncement, and the impact, if any, the adoption of this guidance has on our financial position and results of operations.

In January 2020, the FASB issued ASU 2020-01, "Investments—Equity Securities (Topic 321)", "Investments—Equity Method and Joint Ventures (Topic 323)", and "Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815", which clarifies that an entity should consider observable transactions when either applying or discontinuing the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321. ASU 2020-01 clarifies that for certain forward contracts or purchased options to acquire investments, an entity should not consider whether, upon settlement of the forward contract or exercise of the purchased option, the underlying securities would be accounted for under the equity method or the fair value option. ASU 2020-01 is effective for us for annual periods beginning January 1, 2021. Early adoption is permitted. We are currently reviewing the provisions of this new pronouncement and the impact, if any, the adoption of this guidance has on our financial position and results of operations.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional guidance and expedients for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are intended to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update are elective and are effective upon issuance. We are currently assessing whether and how we will elect to apply ASU 2020-04.

With the exception of the standards discussed above, we believe there have been no new accounting pronouncements effective or not yet effective that have significance, or potential significance, to our Consolidated Financial Statements.

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LEASES (Tables)

3 Months Ended

Mar. 31, 2020

Capital Leases of Lessee [Abstract]

Right of Use Asset and Leased Liability

Estimated Lease Life – Lease term through December 2022

	Three Months Ended March 31, 2019			Three Months Ended March 31, 2020
Right-of-use lease assets- operating as of January 1, 2019 and 2020, respectively	$	1,982,739		$	1,606,443
Less: Accumulated amortization		(111,373	)		(120,332	)
Right-of-use lease assets- operating as of current qtr-end	$	1,871,366		$	1,486,112
Lease liability-operating as of January 1, 2019 and 2020, respectively	$	2,094,958		$	1,704,068
Less: Accumulated Amortization		(113,163	)		(124,538	)
Lease liability operating-as of current qtr-end	$	1,981,795		$	1,579,531
Operating lease expense for the twelve months ended March 31	$	150,557		$	159,958
Actual remaining lease payments	$	2,369,312		$	1,800,209
Present value of remaining payments	$	1,981,795		$	1,579,531

Schedule of Future Minimum Rental Payments

Supplemental cash flow information related to leases:
		Leases Three Months Ended March 31, 2019			Leases Three Months Ended March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	152,347		$	164,164
The undiscounted annual future lease payments summarized by year in the table below:
Maturities of leases liabilities were as follows:
Year ending December 31, 2019 (excluding the three months ended March 31, 2019)	$	464,708
Year ending December 31, 2020		622,878		$	496,223
Year ending December 31, 2021		638,178			660,438
Year ending December 31, 2022		643,548			643,548
Total Lease payments	$	2,369,312		$	1,800,209
Less imputed interest		(387,517	)		(220,678	)
Total	$	1,981,795		$	1,579,531
Weighted average remaining lease term- operating leases ( in months)		41.2			28.5
Weighted average discount rate- operating leases (annual)		9.98	%		9.98	%

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STOCK WARRANTS ACCOUNTED FOR AS EQUITY INSTRUMENTS (Details)	3 Months Ended
	Mar. 31, 2020 $ / shares shares
Number of Warrants	1,484,737
Warrant [Member]
Date Issued	Oct. 08, 2012
Expiration Date	Oct. 08, 2027
Indexed stock	Common
Exercise Price | $ / shares	$ 12.00
Number of Warrants	5,000
Warrant 2 [Member]
Expiration Date	Jan. 15, 2024
Indexed stock	Series A Convertible Preferred
Exercise Price | $ / shares	$ 12.00
Number of Warrants	972,720
Warrant 2 [Member] | Minimum [Member]
Date Issued	Jan. 15, 2014
Warrant 2 [Member] | Maximum [Member]
Date Issued	Dec. 31, 2014
Warrant 3 [Member]
Expiration Date	Apr. 30, 2022
Indexed stock	Common
Exercise Price | $ / shares	$ 16.00
Number of Warrants	218,334
Warrant 3 [Member] | Minimum [Member]
Date Issued	Apr. 30, 2015
Warrant 3 [Member] | Maximum [Member]
Date Issued	May 26, 2015
Warrant 4 [Member]
Date Issued	Jun. 30, 2015
Expiration Date	Jun. 30, 2022
Indexed stock	Common
Exercise Price | $ / shares	$ 16.00
Number of Warrants	6,563
Warrant 5 [Member]
Date Issued	Dec. 31, 2015
Expiration Date	Dec. 31, 2020
Indexed stock	Common
Exercise Price | $ / shares	$ 8.00
Number of Warrants	20,625
Warrant 6 [Member]
Date Issued	Mar. 31, 2016
Expiration Date	Mar. 31, 2021
Indexed stock	Common
Exercise Price | $ / shares	$ 10.00
Number of Warrants	10,600
Warrant 7 [Member]
Date Issued	Apr. 30, 2016
Expiration Date	Apr. 30, 2021
Indexed stock	Common
Exercise Price | $ / shares	$ 10.00
Number of Warrants	895
Warrant 8 [Member]
Date Issued	Dec. 14, 2016
Expiration Date	Dec. 01, 2023
Indexed stock	Common
Exercise Price | $ / shares	$ 8.00
Number of Warrants	50,000
Warrant 9 [Member]
Date Issued	Jul. 18, 2017
Expiration Date	Dec. 01, 2023
Indexed stock	Common
Exercise Price | $ / shares	$ 8.00
Number of Warrants	25,000
Warrant 10 [Member]
Date Issued	Sep. 22, 2017
Expiration Date	Dec. 01, 2023
Indexed stock	Common
Exercise Price | $ / shares	$ 8.00
Number of Warrants	25,000
Warrant 11 [Member]
Date Issued	Dec. 04, 2017
Expiration Date	Dec. 01, 2023
Indexed stock	Common
Exercise Price | $ / shares	$ 8.00
Number of Warrants	25,000
Warrant 12 [Member]
Date Issued	Jul. 08, 2019
Expiration Date	Dec. 01, 2023
Indexed stock	Common
Exercise Price | $ / shares	$ 8.00
Number of Warrants	50,000
Warrant 13 [Member]
Date Issued	Nov. 01, 2019
Expiration Date	Dec. 01, 2023
Indexed stock	Common
Exercise Price | $ / shares	$ 8.00
Number of Warrants	50,000
Warrant 14 [Member]
Date Issued	Feb. 12, 2020
Expiration Date	Dec. 01, 2023
Indexed stock	Common
Exercise Price | $ / shares	$ 8.00
Number of Warrants	25,000

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LEASES (Details) - USD ($)	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Capital Leases of Lessee [Abstract]
Right-of-use lease assets- operating at beginning	$ 1,606,443	$ 1,982,739
Less: Accumulated amortization	(120,332)	(111,373)
Right-of-use lease assets- operating at end	1,486,112	1,871,366
Lease liability-operating at beginning	1,704,068	2,094,958
Less: Accumulated Amortization	(124,538)	(113,163)
Lease liability operating at end	1,579,531	1,981,795
Operating lease expense	159,958	150,557
Actual remaining lease payments	1,800,209	2,369,312
Present value of remaining payments	$ 1,579,531	$ 1,981,795

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LEASES (Details 1) - USD ($)	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$ 164,164	$ 152,347
Maturities of leases liabilities
Year ending December 31, 2019 (excluding the three months ended March 31, 2019)		464,708
Year ending December 31, 2020	496,223	622,878
Year ending December 31, 2021	660,438	638,178
Year ending December 31, 2022	643,548	643,548
Total Lease payments	1,800,209	2,369,312
Less imputed interest	(220,678)	(387,517)
Total	$ 1,579,531	$ 1,981,795
Weighted average remaining lease term- operating leases ( in months)	28 months 15 days	41 months 6 days
Weighted average discount rate- operating leases (annual)	9.98%	9.98%

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) - USD ($)	Mar. 31, 2020	Dec. 31, 2019
Accounting Policies [Abstract]
Raw materials	$ 57,779	$ 68,784
Consumables	70,103	70,103
Finished goods	746,828	752,700
Total	$ 874,710	$ 891,587

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STOCKHOLDERS' EQUITY (DEFICIT) (Details Narrative) - $ / shares	Mar. 31, 2020	Dec. 31, 2019
Preferred stock, authorized	3,000,000	3,000,000
Preferred stock, issued	1,890,354	1,890,354
Preferred stock, outstanding	1,890,354	1,890,354
Series B Preferred Stock [Member]
Preferred stock, authorized	1,500,000	1,500,000
Preferred stock, issued	0	0
Preferred stock, outstanding	0	0
Liquidation (in dollars per share)	$ 8.00	$ 16.00
Conversion price (in dollars per share)	$ 8.00	$ 16.00

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

Liquidity 

We have historically incurred losses from operations and we may continue to generate negative cash flows as we implement our business plan. Our consolidated financial statements are prepared using US GAAP as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

In December 2016, we entered into a Draw Loan Note and Agreement with The Dow Chemical Company (the “Dow Facility”) to provide up to $10 million of secured debt financing at an interest rate of 5% per year, drawable at our request under certain conditions. We drew $2 million at closing, $1 million on each of July 18, 2017, September 22, 2017 and December 4, 2017. After December 1, 2017, an additional $5 million became available under the Dow Facility as a result of the Company having raised $10 million of equity capital after October 31, 2016. We drew $2 million on July 8, 2019, an additional $2 million on November 19, 2019 and, on February 12,2020, we drew the remaining $1 million.

As of June 10, 2020, we had cash on hand of $969,716.   Due to lower than expected revenue in 2019 and the current COVID-19 global pandemic impacting both our operations and that of our customers, Management has taken several steps to ensure we are able to fund our operations from existing cash on hand, operating cash flows, additional borrowings and restructured debt obligations.

In March of 2020, we restructured our organization by reducing headcount by 45%, by furloughing substantially all manufacturing employees, and by implementing temporary salary reductions ranging from 15-20% which has resulted in a 58% reduction in annual payroll and related costs. In April 2020, we furloughed additional employees in our R&D and Engineering departments. We also reduced our annual cash run rate for all other expenses by 17%. Salary reductions will be in place until the Company has recorded quarterly revenue of at least $1 million for two consecutive quarters, at which time salaries will return to their previous levels. 

In late March / early April   of 2020, we applied for relief under the Coronavirus Aid, Relief and Economic Security Act (CARES) by submitting an application with the Small Business Administration (SBA) for an Economic Injury Disaster Loan (“EIDL”) and by submitting an application to an SBA lender bank, PNC, for a Paycheck Protection Plan (“PPP”) loan. On April 18, 2020, we received an approved and fully executed PPP Term Note for $825,200 with a term of two years, a six-month repayment deferral period, and an annual rate of interest of 1%, with a potential for some or all of the loan to be forgiven, dependent upon use of the loan proceeds. On April 20, 2020, we received the $825,200 of proceeds under the PPP loan. On May 17, 2020, the SBA issued us a decline letter for the EIDL for which we have requested reconsideration.

On April 23, 2020, we entered into an amended and restated Draw Loan Note and Agreement and related transaction documents (collectively, the “Amended Dow Facility”) with the Dow Chemical Company to amend the terms of our current loan facility to allow us to structure a private placement of units (“Units”) comprised (in part) of subordinated, secured convertible notes (“Convertible Notes” and such offering, the “Unit Offering”), to support ongoing cash needs.  In the Amended Dow Facility, the Company and Dow agreed to 1) extend the term of such loan facility by two years to December 1, 2023, 2) significantly reduce any required prepayment to Dow from the proceeds of new equity or equity-linked financings from the current 30-50% prepayment requirement on the pre-existing Dow Facility to a 10% prepayment requirement in the Amended Dow Facility, which does not begin until after we have raised an additional $7 million in equity or equity-linked capital from the date of the amendment, 3) capitalize all interest payable until such time as we have recorded GAAP revenue of at least $2 million for two consecutive calendar quarters 4) increase the rate of interest to 6.5% per annum from 5% in the pre-existing Dow Facility, and 5) allow for a subordinated security interest to be granted to new investors in the Unit Offering.

Immediately after the execution of the transaction documents related to the Amended Dow Facility, we commenced the Unit Offering in a private placement to accredited investors. The Unit Offering is comprised of the Convertible Notes and a right to exchange two shares of previously issued Common Stock of the Company for two shares of Series B Convertible Preferred Stock of the Company (“Series B Preferred Stock”) for every $8.00 invested in the Unit Offering (the “Exchange Rights”). The Convertible Notes are secured by a junior security interest in all the assets of the Company, bear an interest rate of 7.5% per annum and mature on December 31, 2024. Each investor’s Exchange Rights are exercisable for a period of thirty (30) days after acceptance by the Company of a fully executed subscription agreement.

At the option of each holder, the Convertible Notes are convertible into either i) Series B Preferred Stock at a conversion price of $8.00/share; or ii) any other form of preferred or common stock (“Subsequent Stock”) issued by the Company at a conversion price per share equal to 80% of the purchase price per share at which such Subsequent Stock is sold (or if the value per share is fixed, 120% of the number of shares that might otherwise be issuable).

If and when we raise at least $15 million of equity capital (excluding capital raised in this Unit Offering), the Convertible Notes will be automatically converted into whichever of the following equity securities would result in the greatest number of shares of Common Stock being issued to the holders on an “as-if-converted” basis at such time: (i) Series B Preferred Stock at a note conversion price of $8.00/share; or (ii) Subsequent Stock at a note conversion price per share equal to 80% of the purchase price per share at which such Subsequent Stock is sold (or if the value per share is fixed, 120% of the number of shares that might otherwise be issuable); provided, however, in the event the Company raises at least $15 million of equity capital within one hundred and twenty (120) days after the first issue date of Convertible Notes, such percentages will be changed to 90% of the purchase price per share at which such Subsequent Stock is sold (or, if the value per share is fixed, 110% of the number of shares that might otherwise be issuable).

Each share of Series B Preferred Stock has an original issue price of $8.00 per share (the “Series B Original Issue Price”) and a liquidation preference of $8.00 per share, with both the Series B Original Issue Price and the liquidation preference per share subject to adjustment for stock splits, recapitalizations, and the like. The Series B Preferred Stock will be senior to the Company’s Common Stock and pari-passu with the Series A Preferred Stock in terms of right of repayment in a liquidation.

The Series B Preferred Stock has full ratchet antidilution protection that provides that each share of Series B Preferred Stock outstanding may be converted by an Investor at any time into that number of shares of Common Stock determined by dividing the then current Series B Original Issue Price by the applicable Conversion Price (as defined below) with the resulting fraction equal to the “Series B Conversion Rate”. The total number of shares of Common Stock issuable will be equal to the number of shares of Series B Preferred Stock being converted multiplied by the Series B Conversion Rate. The “Conversion Price” is, at any time, the price per share equal to the lesser of a) the Series B Original Issue Price per share and b) the lowest price per share at which the Company has sold equity or equity-linked securities (other than customary exclusions) at any future date while any shares of the Series B Preferred Stock remain outstanding. The Series B Original Issue Price and Conversion Price in effect at any time are also subject to proportional adjustment for share splits, share dividends, recapitalizations and the like.

On April 23, 2020, certain members of our Board of Directors and their affiliates purchased $550,000 of Units. In additions, these Board members and their affiliates have made additional commitments to the Company to match any purchases of Units by disinterested third parties on a dollar for dollar basis up to an additional $1.5 million of Units purchased by such disinterested parties.

Taking into consideration our current cash on hand, we estimate that we will need to raise approximately $500,000- $1,000,000 of additional capital in order to continue our operations for the next twelve months in a minimal to no revenue growth environment. If we are able to raise $1.5 million of capital from disinterested third parties, the commitments from our Board members to match this amount would result in $3.0 million of total capital to the Company, which we estimate would allow the Company to continue operating for 24 months in a minimal to no revenue growth environment.

There has been no public market for our securities and a public market may never develop, or, if any market does develop, it may not be sustained. Our Common Stock is not currently quoted on or traded on any exchange or on any over-the-counter market. In the event we are unable to fund our operations from existing cash on hand, operating cash flows, additional borrowings or raising equity capital, we may be forced to reduce our expenses, slow down our growth rate, or discontinue operations. Our condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Inventory    

 The following amounts were included in inventory at the end of the period:

	March 31,		December 31,
	2020		2019
Raw Materials	$	57,779	$	68,784
Consumables		70,103		70,103
Finished Goods		746,828		752,700
Total	$	874,710	$	891,587
		874,710		891,587

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for us for annual periods beginning January 1, 2021. We are currently reviewing the provisions of this new pronouncement, and the impact, if any, the adoption of this guidance has on our financial position and results of operations.

In January 2020, the FASB issued ASU 2020-01, "Investments—Equity Securities (Topic 321)", "Investments—Equity Method and Joint Ventures (Topic 323)", and "Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815", which clarifies that an entity should consider observable transactions when either applying or discontinuing the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321. ASU 2020-01 clarifies that for certain forward contracts or purchased options to acquire investments, an entity should not consider whether, upon settlement of the forward contract or exercise of the purchased option, the underlying securities would be accounted for under the equity method or the fair value option. ASU 2020-01 is effective for us for annual periods beginning January 1, 2021. Early adoption is permitted. We are currently reviewing the provisions of this new pronouncement and the impact, if any, the adoption of this guidance has on our financial position and results of operations.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional guidance and expedients for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are intended to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update are elective and are effective upon issuance. We are currently assessing whether and how we will elect to apply ASU 2020-04.

With the exception of the standards discussed above, we believe there have been no new accounting pronouncements effective or not yet effective that have significance, or potential significance, to our Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
REVENUE
Total Revenues	$ 167,063	$ 857,278
COST OF GOODS SOLD
Direct costs	103,570	681,153
Unallocated manufacturing expenses	658,913	493,469
Total cost of goods sold	762,483	1,174,622
GROSS LOSS	(595,420)	(317,344)
OPERATING EXPENSES
Research and development	285,727	385,245
Sales, general and administrative	1,292,135	1,420,922
Total operating expenses	1,577,862	1,806,167
OPERATING LOSS	(2,173,282)	(2,123,511)
OTHER INCOME (EXPENSE)
Interest expense, net	(178,009)	(76,665)
Total other expense	(178,009)	(76,665)
NET LOSS	$ (2,351,291)	$ (2,200,176)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - Basic and diluted (in shares)	4,024,443	3,774,879
NET LOSS PER SHARE - Basic and diluted (in dollars per share)	$ (0.58)	$ (0.58)
Product sales [Member]
REVENUE
Total Revenues	$ 167,063	$ 857,278
Grant [Member]
REVENUE
Total Revenues

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RELATED PARTY TRANSACTIONS AND COMMITMENTS (Details Narrative) - USD ($)		3 Months Ended
	Feb. 12, 2020	Mar. 31, 2020	Mar. 31, 2019
Number of shares issued	25,000
Licensing Agreement [Member] | Michigan State University (Patents and Pending Patents) [Member]
Licensing expenses		$ 0	$ 12,500
Master Leasing Agreement [Member] | Aspen Advance Opportunity Fund, LP [Member] | Preferred stock (A) [Member]
Number of shares issued			0

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LEASES

3 Months Ended

Mar. 31, 2020

Capital Leases of Lessee [Abstract]

LEASES

NOTE 7 – LEASES  

Right of Use Asset and Leased Liability:

Estimated Lease Life – Lease term through December 2022

	Three Months Ended March 31, 2019			Three Months Ended March 31, 2020
Right-of-use lease assets- operating as of January 1, 2019 and 2020, respectively	$	1,982,739		$	1,606,443
Less: Accumulated amortization		(111,373	)		(120,332	)
Right-of-use lease assets- operating as of current qtr-end	$	1,871,366		$	1,486,112
Lease liability-operating as of January 1, 2019 and 2020, respectively	$	2,094,958		$	1,704,068
Less: Accumulated Amortization		(113,163	)		(124,538	)
Lease liability operating-as of current qtr-end	$	1,981,795		$	1,579,531
Operating lease expense for the twelve months ended March 31	$	150,557		$	159,958
Actual remaining lease payments	$	2,369,312		$	1,800,209
Present value of remaining payments	$	1,981,795		$	1,579,531
Supplemental cash flow information related to leases:
		Leases Three Months Ended March 31, 2019			Leases Three Months Ended March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	152,347		$	164,164
The undiscounted annual future lease payments summarized by year in the table below:
Maturities of leases liabilities were as follows:
Year ending December 31, 2019 (excluding the three months ended March 31, 2019)	$	464,708
Year ending December 31, 2020		622,878		$	496,223
Year ending December 31, 2021		638,178			660,438
Year ending December 31, 2022		643,548			643,548
Total Lease payments	$	2,369,312		$	1,800,209
Less imputed interest		(387,517	)		(220,678	)
Total	$	1,981,795		$	1,579,531
Weighted average remaining lease term- operating leases ( in months)		41.2			28.5
Weighted average discount rate- operating leases (annual)		9.98	%		9.98	%

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

Schedule of inventory

The following amounts were included in inventory at the end of the period:

	March 31,		December 31,
	2020		2019
Raw Materials	$	57,779	$	68,784
Consumables		70,103		70,103
Finished Goods		746,828		752,700
Total	$	874,710	$	891,587