EDGAR 10-K Filing

Company CIK: 1435375
Filing Year: 2021
Filename: 1435375_10-K_2021_0001731122-21-001620.json

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ITEM 1. BUSINESS
ITEM 1. 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 we expect the market for such products to 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® graphene nanoplatelets. Since our inception, customers have trialed our products for numerous applications, including, but not limited to solid state batteries, thermally conductive adhesives, composites, thermal management and heat transfer, inks and coatings, printed electronics, construction materials, cement, 3-D printing and in a range of other industrial uses. We believe our proprietary processes have enabled us to be a manufacturer 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 or sampled materials to over 1,300 customers in over 45 countries since 2008. In the twelve months ended December 31, 2020 and December 31, 2019, we had one customer whose purchases accounted for 52% and 41% of total product revenues, respectively. On December 31, 2020 and December 31, 2019, there were two customers who had an accounts receivable balance greater than 20% and 10% of our outstanding receivable balance, respectively.
Our Products
XG Sciences is a manufacturer of graphene nanoplatelets 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: 200 times stronger than 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 basal planes of carbon atoms packed in a hexagonal array (i.e., graphene) as graphene nanoplatelets as 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. 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 providing meaningful descriptions of commercially available graphene.
Graphene Product Definitions Based on Layer Thickness
Number of Layers
Product Description
Graphene (monolayer)
1-3
Very Few Layers Graphene (vFLG)
2-5
Few Layers Graphene (FLG)
2-10
Multilayer Graphene (MLG)
>10
Graphene Nanoplatelets (GNPs)
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 platelet thickness, and average platelet diameters. There are three commercial grades (Grades H, M & R), each of which is offered in three standard platelet diameters and a fourth, C Grade, which is offered in three standard surface areas. 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 performance 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 materials are produced through chemical intercalation of natural graphite followed by thermal exfoliation using a proprietary process developed by XGS. The “grade” designates the thickness and surface characteristics of the material, and each grade is available in various average particle/platelet 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. As the market need emerges for this class of materials, we anticipate scaling them. For example, in 2017, 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 since scaled R-Grade to metric-ton quantities . We have started a review to rationalize our product offerings to optimize manufacturing efficiency and focused customer needs.
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 platelet diameters 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 C-Grade materials having 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. The performance of graphene nanoplatelets in a specific application is primarily a function of the platelet’s diameter, thickness, planarity (or more broadly - morphology), and, to some extent, the nature and concentration of any chemical groups on the platelets. There are other factors that may impact performance, such as optimized dispersion, product form delivered to the customer (powder vs. slurry), and so on. However, for the most part, performance in an application is related to the physical characteristics of the nanoplatelets. XG Sciences is skilled in the design and manufacture of graphene nanoplatelets, and our two proprietary manufacturing processes allow for the production of a broad product portfolio varying across a broad range of both thickness and diameter, the two variables most likely related to performance in a range of end-use applications. We have recently started the review of all of our manufacturing processes and the optimization of the molecules that we produce. Our objective is targeted upon being able to scale production, per manufacturing cell, at 1,000 metric tons per annum, with costs that will allow market acceptance and good margin production.
XG Sciences’ Graphene Nanoplatelet Product Portfolio and Versus Graphite
We believe we are a platform play in advanced materials, because our proprietary processes allow us to produce varying grades of graphene nanoplatelets that may be mapped to a variety of applications and in many end-use market segments. While we supply bulk materials consisting of various forms of xGnP® graphene nanoplatelets and in the form of dispersions of nanoplatelets in liquids such as water, alcohol or organic solvents, we also produce products that contain graphene nanoplatelets which we refer to as integrated products. We have done this to further differentiate our products from those potential suppliers offering only graphene nanoplatelets in powder form. We are studying and rationalizing our offerings based upon servicing a limited number of markets that we believe we are positioned to capitalize upon.
Composites. Our composites, integrated-products portfolio includes resins derived from a range of thermoplastics and thermosets into which our xGnP® graphene nanoplatelets are compounded. These products are supplied as master batches of resins with graphene nanoplatelets pre-dispersed such that their performance has been optimized for use in various end-use applications that may include industrial, automotive and packaging applications 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), vinyl ester (XGVE), polyetherimide (XGPEI) and high-density polyethylene (XGHDPE). Other 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-based or solvent-based dispersions or cakes, as described previously. 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. We believe our GNP Concrete Additive product promotes the formation of more uniform and smaller-grain cement structure, improving both flexural and compressive strength. In addition, we believe the embedded graphene nanoplatelets will stop cracks from forming and retard crack propagation, should any cracks form - the combination of which will further improve cement lifetime and durability.
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.
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 in lithium-ion batteries, as a component in coatings for current collectors used in lithium-ion batteries and we are investigating the use of our materials as part of other energy-storage components.
Thermal Management Materials. These consist mainly of various thermal interface materials (“TIM’s”) in the form of custom greases or pastes. Our custom thermal interface materials 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 prioritize 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 three key vertical markets: Automotive, Packaging and Industrial. The following graphic provides examples of target applications within each of the three key verticals where XG Sciences has either commercial sales or is in development with one or more customers. We expect to focus our sales, research, and production resources on these verticals as the market for graphene further develops.
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 was estimated to be more than $34 billion (Mordor Intelligence). Further, Mordor estimated the 2019 global market for PET water bottles at 543.8 billion units. XG Sciences is engaged with customers in North America targeting the use of xGnP® graphene nanoplatelets in a range of packaging applications, including water bottles. Another example is for use in tires where graphene-based products may bring significant advancements. A typical tire is a composite of several parts: sidewalls, inner liner and the tire tread - which itself is a rubber component comprising a steel chord reinforcement of a particulate-reinforced rubber network. If one considers that the tire tread is the only part of the vehicle’s contact with the road, it becomes apparent that all sources of energy dissipation are via the tread material and will have a major influence on total performance such as handling, fuel efficiency and braking performance. Data are starting to show that incorporation of graphene nanoplatelets into the production of a tire tread can significantly impact the rolling resistance and abrasion resistance, both of which will result in improved fuel efficiency and tire lifetime. These performance attributes also seem to come with improvements in such properties as tear strength and tensile performance, allowing formulators to target a wide range of passenger vehicle, truck and off-road applications. Based on data from the European Rubber Journal (January 9, 2019, and according to the International Rubber Study Group), the 2019 global rubber market used in tires is estimated at 30 million metric tons. If graphene is used in only 20% of tires and adopted at 1 weight percent based on the rubber content, then the demand could easily exceed 60,000 metric tons for graphene-related materials.
In a third example, there is an industry-wide need to continue to drive light weighting in vehicles. The primary objective is to save on fuel consumption for cars still using internal combustion engines, but also to extend drive time for emerging electrical vehicles. Data from the Department of Energy (“Materials Technologies: Goals, Strategies, and Top Accomplishments”, Department of Energy, Vehicle Technologies Program, August 2010) indicate that in 1977, conventional steel comprised 75% of the materials used in the manufacture of an auto. By 2010, that number was reduced to about 65% with a significant increase in high-strength steel, aluminum and polymer composites. In order to meet the industry light-weighting targets, it is estimated that by 2035, polymer composite usage will increase to 20% of all materials. Improvements to today’s composite materials are needed for this to occur and graphene nanoplatelets are a good candidate to enable the broad adoption of polymer composites for use in automotive manufacture. In 2018, 71 million cars were produced globally (Estimated Worldwide automobile production, Statista.com). If we assume an average car weights 1500 kilograms (DOE Light weighting Efforts for Sustainable Transportation”, 2nd Light weighting summit, March 5, 2015) and based on DOE estimates (“Materials Technologies: Goals, Strategies, and Top Accomplishments”, Department of Energy, Vehicle Technologies Program, August 2010), approximately 100 kilograms is comprised of polymers/composites (and certainly the potential for more in the future), and if graphene-related products were to be adopted at just 1 weight percent, then there is the potential demand of over 71,000 metric tons for graphene-related materials.
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 introduce products incorporating our materials to their own customers to further 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.
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. 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 quantities, some have begun to purchase 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.
Our Intellectual Property
We have acquired a non-exclusive license for certain inventions from Michigan State University. These rights are embodied in a Technology Licensing Agreement between XGS and Michigan State University dated July 27, 2007, amended on May 24, 2010, and May 27, 2011, and amended and restated on June 23, 2020 which provides us the non-exclusive worldwide rights to the patents as defined in the Agreement for application in the Composite, Energy Storage, Specialty Liquids, and other fields which may be applicable. In exchange for the rights to the technology covered by this Agreement, we paid MSU an initial fee and agreed to pay ongoing royalties on material sold by us in future years. Under a previous version of the Licensing Agreement, we also awarded a small amount of common stock to MSU. As of December 30, 2020, the following technologies were included in the MSU License Agreements with XGS: U.S. Patent 7,550,529, U.S. Patent 8,501,858, U.S. Patent 8,834,959, U.S. Patent 9,080,122, and U.S. Patent 9,776,874.
On August 8, 2016, we signed an agreement acquiring an exclusive license with Metna Co. (Metna) 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.
Over time, our scientists and engineers have made many further discoveries and inventions that, as of December 31, 2020, are embodied in the form of nineteen (19) additional U.S. patents, twenty-five (25) foreign patents, twelve (12) 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 December 31, 2020, we maintained twenty-three (23) 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 robust intellectual property position.
Our Lead Investors	
Since inception and through January 29, 2021, we have raised approximately $50 million of capital through the issuance of equity and equity-linked securities, $4 million through licensing fees and $16.5 million through the issuance of certain senior debt obligations. Each of the entities below, after considerable due diligence, decided to take an equity position, license some of our technology or provided funding in the form of a secured loan. Notable investors and licensees in the Company are included in the funding history of the Company summarized below.
Timing
Investor Class
Amount
2006-2009
Angel Groups, HNW Individuals
$2 million
Hanwha Chemical
$3 million
ASC-XGS, LLC
$1.6 million
POSCO
$4 million
Cabot Corp
$4 million license agreement
Samsung Ventures
$3 million
POSCO pre-emptive rights
$1.2 million
2014/15
Aspen/XGS II
$10 million + $1 million lease
Series B
$4.3 million
Dow Chemical
$10 million senior credit facility
2016-2019
Public Offering
$21 million (including $3 million from Soulbrain)
Convertible Debt
$3.9 million
January 2021
Convertible Debt
$2.5 million
Our Competitive Strengths
We believe that we are a leader in the emerging global market for graphene nanoplatelets. The following competitive strengths distinguish us in our industry:
Our know-how and ability to tailor our products for use in multiple applications. Many of our products and product-development activities target use of our xGnP® graphene nanoplatelets in various matrices to form composite products that are then used by our customers. We believe we have extensive knowledge of how to tailor our products to deliver performance as composite products in various applications. We also believe that we have knowledge of how to tailor our products for a range of other end-use markets and applications that may include: 3-D printing, anti-corrosive coatings, automotive coatings, thermally conductive adhesives, thermal interface materials/compounds, tires and thermal coatings.
The breadth of our intellectual property. Because of our focus on manufacturing process development, we believe we have one of the most extensive internal knowledge bases in graphene nanoplatelet manufacturing, with most of our proprietary knowledge maintained as trade secrets to avoid the disclosures required by patenting. The forty-one (41) U.S. patents and patent applications that we are currently managing (including those under license from MSU and Metna) and twenty-eight (28) international patents and patent applications add value by protecting specific equipment, or high-value end-user product applications.
The low-cost nature of our manufacturing processes. We believe our manufacturing processes will be among the lowest-cost approaches to the manufacturing of graphene nanoplatelets once we achieve economies of scale based on our internal modelling of competitive processes as well as our analysis of alternative technologies.
Our corporate partners. The Dow Chemical Company, or Dow, has extended $10 million in senior debt financing, of which we have drawn down $10 million as of December 31, 2020.
The number of development partners working with our materials. As of December 31, 2020, we had supplied materials to hundreds of universities or government laboratories in over 45 different countries around the world. We have also supplied our products to several other organizations for the purposes of commercial design and manufacture. These other organizations include, but are not limited to, Callaway Golf and DuPont Specialty Electronic Materials.
Employees
As of December 31, 2020, we had 24 full-time employees and 2 contract employees. Employees include the following three senior managers who report to the CEO: the Chief Financial Officer, the Chief Commercial Officer and the Chief Technologist. The Company employs a total of 7 full-time scientists and technicians in its R&D group, including the Chief Technologist.
Corporate Information
XG Sciences, Inc. was incorporated on May 23, 2006, in the State of Michigan and is organized as a “C” corporation under the applicable laws of the United States and State of Michigan. We do not currently have any affiliated companies or joint venture partners, and we have one wholly owned subsidiary called XG Sciences IP, LLC. This subsidiary was created in 2014 for the purpose of holding our intellectual property. Our headquarters and principal executive offices are located at 3101 Grand Oak Drive, Lansing, Michigan, 48911 and our telephone number is (517) 703-1110. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the SEC and are available in print to any stockholder who requests a copy.
Our website address is http://www.xgsciences.com, although the information contained in, or that can be accessed through, our website is not part of this filing. Additionally, the SEC maintains a website that contains reports, proxy statements, information statements and other information regarding issuers, including us, that file electronically with the SEC at www.sec.gov.

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ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS
Risks Relating to Our Business and Industry
If we are unable to continue as a going concern, we may be forced to curtail or cease operations.
The report of our independent registered public accounting firm that accompanies our consolidated financial statements for the year ended December 31, 2020, contains a going concern qualification in which such firm expressed substantial doubt about our ability to continue as a going concern. We believe that we will need to raise at least $4,000,000 - $6,000,000 of additional capital to continue our operations for the next twelve months in a minimal to no revenue growth environment. Our continuation as a going concern is dependent upon continued financial support from our shareholders, our ability to obtain necessary equity and/or debt financing to continue operations, and growth in revenue from operations. These factors raise substantial doubt regarding our ability to continue as a going concern. We cannot make any assurances that additional financings will be available to us and, if available, completed on a timely basis, on acceptable terms or at all. If we are unable to complete an equity or debt offering, or otherwise obtain sufficient financing when and if needed, it would negatively impact our business and operations. It could also lead to the reduction or suspension of our operations and ultimately force us to cease our operations.
We will need to raise substantial additional capital in the near future to fund our operations and we may be unable to raise such funds when needed and on acceptable terms. Failure to raise such additional funding would have a materially adverse effect on our business.
Developing, manufacturing and selling nanomaterials in commercially viable quantities requires substantial funding. We intend that the primary means for raising funds will be through equity and debt offerings that may include private placement with one or more strategic investors, offering of shares of common stock to the public through a self-underwritten offering or through an underwritten offering with a bank in parallel with a listing on a Qualified National Exchange. There can be no assurance that we will be able to raise additional equity capital in subsequent equity offerings or that the terms and conditions of any future financings will be workable or acceptable to us and our stockholders. Our continuation as a going concern is dependent upon continued financial support from our shareholders, our ability to obtain necessary equity and/or debt financing to continue operations, and the attainment of profitable operations. In the event that we are not able to raise substantial additional funds in the near future with terms that are acceptable, or adjust our business model accordingly, we may be forced to curtail or cease operations.
A pandemic, epidemic or outbreak of an infectious disease, including COVID-19 in the markets in which we operate or that otherwise impacts our facilities or suppliers could adversely impact our business.
We expect that a pandemic, epidemic, or outbreak of an infectious disease could affect our markets, facilities, customers and employees, and our business could be adversely affected in the future. Consequences of the current COVID-19 pandemic are resulting in disruptions in or restrictions on our employees’ ability to travel and the ability of manufacturers, including many of our customers, to maintain normal operations. If an infectious disease or COVID-19 broke out at our facilities, or if, due to governmental or other restrictions, our facilities are unable to operate for an extended period, our operations may be affected significantly, our productivity may be affected, our ability to complete projects in accordance with our contractual obligations may be affected, and our ability to manufacture and sell our graphene nanoplatelets may be hindered. If the suppliers that we rely on for raw materials and other supplies to conduct operations are affected by an infectious disease or COVID-19, we may not be able to fill orders that are received or our cost of sales may increase, and our financial position may suffer. If our customers are affected by an infectious disease or COVID-19, orders for our products may be delayed or cancelled, and our financial position may suffer. Further, COVID-19 may continue to cause disruption to the U.S. economy, or the economies of the markets in which we operate such as China and South Korea, and cause shortages of materials, labor and transportation which could affect our customers’ ability to produce finished products utilizing our graphene nanoplatelets, affect production capacity and business confidence, or cause economic changes that we cannot anticipate. Overall, the potential impact of a pandemic, epidemic or outbreak of an infectious disease with respect to our markets or our facilities is difficult to predict and could continue to adversely impact our business for an indefinite period of time. In response to the COVID-19 situation, federal, state and local governments (or other governments or bodies in markets in which we operate) have placed restrictions on travel and conducting or operating business activities. At this time, those restrictions are very fluid and evolving, and when such restrictions will be lifted is unknown. We have been and will continue to be impacted by those restrictions. Given that the type, degree and length of such restrictions are not known at this time, we cannot predict the overall impact of such restrictions on us, our customers, our employees, our supply and distribution chains, others that we work with or the overall economic environment. As such, the impact these restrictions may have on our financial position, operating results and liquidity cannot be reasonably estimated at this time, but we expect the impact to be material. In addition, due to the speed with which the COVID-19 situation developed and continues to evolve, there is uncertainty around its ultimate impact on public health, business operations and the overall economy; therefore, the negative impact on our financial position, operating results and liquidity cannot be reasonably estimated at this time, but we expect the impact to be material.
We could be adversely affected by our exposure to customer concentration risk.
We are subject to customer concentration risk as a result of our reliance on relatively few customers for a significant portion of our revenues. We had one customer whose purchases accounted for 52% and 41% of revenue in the twelve months ended December 31, 2020, and 2019, respectively. In 2020, we had two customers whose purchases accounted for 75% of revenue. Due to the nature of our business and the relatively large size of many of the applications our customers are developing, we anticipate that we will be dependent on a relatively small number of customers for the majority of our revenues for the next few years, and if one or more of these customers does not place orders, there would be a risk of significant loss of future revenues, which could in turn have a material adverse effect on our business and on your investment.
Downturns in general economic conditions could adversely affect our results from operations.
Downturns in general economic conditions can cause fluctuations in demand for our products, product prices, volumes, and gross margins. Future economic conditions may not be favorable to our industry. A decline in the demand for our products or a shift to lower-margin products due to deteriorating economic conditions could adversely affect sales of our products and our results of operations and could also result in impairments of certain of our assets.
Furthermore, any uncertainty in economic conditions may result in a slowdown to the global economy that could affect our business by reducing the prices that our customers may be able or willing to pay for our products or by reducing the demand for our products. Due to our customer concentration risk, the loss of one or more of our large customers could significantly affect our business, operating results and financial condition.
We have a limited operating history, an accumulated deficit and a stockholders’ deficit, and we may never become profitable which could cause us to cease operations.
XG Sciences, Inc. was incorporated on May 23, 2006, and is an advanced materials company. We sell bulk nanomaterials or products made with these materials to other companies for incorporation into their products. To date, there has been limited incorporation of our materials or products into customer products that are released for commercial sale. Because there is a limited demonstrated history of commercial success for products containing graphene, our products may never be successful in the market. It is possible that larger and or extended commercial success may never happen and that we will never achieve the level of revenues necessary to sustain our business or continue to attract additional financing. Many of our products represent new products that have not yet been fully developed and for which manufacturing operations have not yet been fully scaled.
As of December 31, 2020, and December 31, 2019, we have an accumulated deficit from operations of $72,682,876 and $65,581,128, respectively. As of December 31, 2020, and December 31, 2019, our total stockholder’s equity was $(7,682,537) and $(2,146,797), respectively. The deficit reflects net losses in each period since our inception incurred through development of nanomaterials without the presence of large-scale adoption to generate substantial revenues to cover development costs and generate a profit. We have never paid a dividend. Also, since inception, we have not generated sufficient revenues to cover our fixed expenses or sustain our business in any financial reporting period. Nor have we demonstrated the capability to produce sufficient materials to generate the ongoing revenues necessary to sustain our operations in the long-term. There can be no assurance that we will ever produce a profit.
Because we are subject to these uncertainties, there may be risks that management has failed to anticipate. Our ability to become profitable depends primarily on our ability to successfully commercialize our products in the future. Even if we successfully develop and market our products, we may not generate sufficient or sustainable revenue to achieve or sustain profitability, which could cause us to further curtail or cease operations.
We have limited experience in the higher volume manufacturing that will be required to support profitable operations, and the risks associated with scaling to larger production quantities may be substantial and our business and results of operations could be negatively impacted.
We have limited experience manufacturing our products. We have established initial commercial or pilot-scale production facilities for our bulk powders and certain integrated products. To develop the capacity to produce much higher volumes, it will be necessary to produce multiples of existing processes or engineer new production processes in some cases. If we are unable to expand our manufacturing processes, our business, and results of operations could be negatively impacted.
We have significantly reduced our headcount, which could have a negative impact on our ability to scale up our production process and we may have to further curtail or cease operations.
Due to events in 2020 surrounding our business and the COVID-19 pandemic, 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 resulted in a 38% 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 remained in place until February 1, 2021. We expect that these actions could have a material impact on our ability to scale up our production processes, and there is no guarantee that we will be able to economically scale-up our production processes to the levels required. If we are unable to scale-up our production processes and facilities to support sustainable sales levels, the Company may be forced to further curtail or cease operations.
Projection of fixed monthly expenses and operating losses for the near future may lead us to further curtail or cease operations.
Because of the nature of our business, we project considerable fixed expenses that will lead to projected monthly deficits for the near future. Fixed manufacturing expenses to maintain production facilities, compensation expenses for scientists and other critical personnel, and ongoing rent and utilities amount to several hundred thousand dollars per month, and we believe that such expenses are required as a precursor to significant customer sales. However, there can be no assurance that monthly sales will ever reach a sufficient level to cover the cost of ongoing monthly expenses and if such revenue increases are achieved, they will be maintained for a sustainable period. If sufficient regular monthly sales are not generated to cover these fixed expenses, we will continue to experience monthly cash flow deficits which, if not eliminated, will require continuing new investment in the Company. If monthly cash flow deficits continue, we may not be able to raise additional funds and may be forced to further curtail or cease operations
We have a long and complex sales cycle and have not demonstrated the ability to operate successfully in this environment.
It has been our experience since our inception that the average sales cycle for our products can range from one to seven years from the time a customer begins testing our products until the time that they could be successfully used in a commercial product. The product introduction timing will vary based on the target market, with automotive uses typically being toward the long end and consumer products toward the shorter end. We have a limited track record of success in completing customer development projects. The sales and development cycle for our products is subject to customer budgetary constraints, internal acceptance procedures, competitive product assessments, scientific and development resource allocations, and other factors beyond our control. If we are not able to successfully accommodate these factors to enable customer development success, we will be unable to achieve sufficient sales to reach profitability. In this case, we may not be able to raise additional funds and may be forced to further curtail or cease operations.
Our revenues often fluctuate significantly based on one-off orders from customers or from the recognition of non-product revenues which vary from period-to-period, which may materially impact our financial results from period to period.
Because of the potential for large revenue swings from one-time, large orders or grants (or other such non-product revenue), it may be difficult to accurately forecast the needs for inventory, working capital, and other financial resources from period-to-period. Such orders would require a significant short-term increase in our production capacity and would require the financial resources to add staff and support the associated working capital. If such large, one-time orders were not handled smoothly, customer confidence in us as a viable supplier could be reduced and we might not succeed in capturing the additional larger orders that may be reflected in our business plan.
We operate in an advanced technology arena where hypothesized properties and benefits of our products may not be achieved in practice, or in which technological change may alter the attractiveness of our products.
Because there is only limited sustained history of successful use of our products in commercial applications, there is no assurance that broad successful commercial applications may be broadly technically feasible. Many of the scientific and engineering data related to our products has been generated in our own laboratories or in laboratory environments at our customers or third parties, like universities and national laboratories. It is well known that laboratory data is not always representative of commercial applications.
Likewise, we operate in a market that is subject to rapid technological change. Part of our business strategy is to monitor such change and take steps to remain technologically current, but there is no assurance that such strategy will be successful. If we are not able to adapt to new advances in materials sciences, or if unforeseen technologies or materials emerge that are not compatible with our products and services or that could replace our products and services, our revenues and business prospects would likely be adversely affected.
Competitors that are larger and better funded may cause us to be unsuccessful in selling our products.
We operate in a market in which there are competitors. Global research is being conducted by substantially larger companies who have greater financial, personnel, technical, and marketing resources. There can be no assurance that our strategy of offering better materials based on our proprietary graphene nanoplatelets will be able to compete with other companies, many of whom will have significantly greater resources, on a continuing basis. In the event that we cannot compete successfully, we may be forced to cease or curtail operations.
We are dependent on key employees.
Our operations and product development are dependent upon the experience and knowledge of our key employees. We depend on Robert Blinstrub, our Chief Executive Officer, Jacqueline Lemke, our Chief Financial Officer, AJ Boechler, our Chief Commercial Officer and Dr. Leroy Magwood, our Chief Technologist. If the services of any of these individuals should become unavailable, our business operations might be adversely affected in the short term, and this departure could materially disrupt the business and our results of operations.
Our success depends in part on our ability to protect our intellectual property rights, and our inability to enforce these rights could have a material adverse effect on our competitive position.
We rely on the patent, trademark, copyright and trade-secret laws of the United States and the countries where we do business to protect our intellectual property rights. We may be unable to prevent third parties from using our intellectual property without our authorization. The unauthorized use of our intellectual property could reduce any competitive advantage we have developed, reduce our market share or otherwise harm our business. In the event of unauthorized use of our intellectual property, litigation to protect or enforce our rights could be costly, and we may not prevail.
Many of our technologies are not covered by any patent or patent application, and our issued and pending U.S. and non-U.S. patents may not provide us with any competitive advantage and could be challenged by third parties. Our inability to secure issuance of our pending patent applications may limit our ability to protect the intellectual property rights these pending patent applications were intended to cover. Our competitors may attempt to design around our patents to avoid liability for infringement and, if successful, our competitors could adversely affect our market share. Furthermore, the expiration of our patents may lead to increased competition.
Our pending trademark applications may not be approved by the responsible governmental authorities and, even if these trademark applications are granted, third parties may seek to oppose or otherwise challenge these trademark applications. A failure to obtain trademark registrations in the United States and in other countries could limit our ability to protect our products and their associated trademarks and impede our marketing efforts in those jurisdictions.
In addition, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in some foreign countries. In some countries, we do not apply for patent, trademark or copyright protection. We also rely on unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. Although we enter into confidentiality agreements with our employees and generally with third parties to protect our intellectual property, these confidentiality agreements are limited in duration and could be breached and may not provide meaningful protection of our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available if there is an unauthorized use or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain knowledge about our trade secrets through independent development or by legal means. The failure to protect our processes, apparatuses, technology, trade secrets and proprietary manufacturing expertise, methods and compounds could have a material adverse effect on our business by jeopardizing critical intellectual property.
Where a product formulation or process is kept as a trade secret, third parties may independently develop or invent and patent products or processes identical to our trade-secret products or processes. This could have an adverse impact on our ability to make and sell products or use such processes and could potentially result in costly litigation in which we might not prevail.
We could face intellectual property infringement claims that could result in significant legal costs and damages and impede our ability to produce key products, which could have a material adverse effect on our business, financial condition, and results of operations.
Future adverse regulations could affect the viability of the business.
Our bulk products have been approved for sale in the United States by the U.S. Environmental Protection Agency after a detailed review of our products and production processes. In most cases, as far as we are aware, there are no current regulations elsewhere in the world that prevent or prohibit the sale of our products. Nevertheless, the sale of nanomaterials is a subject of regulatory discussion and review in many countries around the world. In some cases, there is a discussion of potential testing requirements for toxicity or other health effects of nanomaterials before they can be sold in certain jurisdictions. If such regulations are enacted in the future, our business could be adversely affected because of the requirement for expensive and time-consuming tests or other regulatory compliance. If our nanomaterials are found to be toxic, such finding could have a material impact on our business and on the production and sale of our products. There can be no assurance that future regulations might not severely limit or even prevent the sale of our products in major markets, in which case our financial prospects might be severely limited.
Given our limited resources, we may not effectively manage our growth.
There is no guarantee that we have the resources, financial or operational, required to manage our growth. This is particularly true as we expand facilities and manufacture our products on a greater commercial scale. Furthermore, rapid growth in our operations may place a significant strain on our management, administrative, operational and financial infrastructure. The inability to adequately manage our growth could have a material and adverse effect on our business, financial condition or results of operations.
An increase in the cost of raw materials or electricity might affect our profits.
Any increase in the prices of our raw materials or energy might affect the overall cost of our products. If we are not able to raise our prices to pass on increased costs to our customers, we would be unable to achieve sustainable profit margins. Our major cost components include items such as graphite, acids and bases, and electricity, which items are normally readily available industrial commodities.
Our results of operations could deteriorate if our manufacturing operations were substantially disrupted for an extended period.
In addition to the disruptions to our manufacturing operations caused by COVID-19, our manufacturing operations are subject to disruption due to extreme weather conditions, floods and similar events, major industrial accidents, strikes and lockouts, adoption of new laws or regulations, changes in interpretations of existing laws or regulations or changes in governmental enforcement policies, civil disruption, riots, terrorist attacks, war, and other events. We cannot assure you that no such events will occur. If such an event occurs, it could have a material adverse effect on us.
Some health effects of nanotechnology are unknown.
There is scientific debate on the health effects of nanomaterials such as graphene nanoplatelets, but some scientists believe that certain nanomaterials may be hazardous to human health, including the respiratory system if inhaled. Although there is no conclusive evidence of any danger associated with the handling of the Company’s products, there is a theoretical risk of danger to health if an individual is exposed to and/or inhales/ingests some of the Company’s products. The specific health effects of nanoplatelets are unknown and can depend on how they are incorporated and/or bonded to other materials. We carefully evaluate potential health effects of our products and the effects of handling materials on our employees and those who manufacture for us, but as any specific health risks are unknown, we cannot be certain our products are free of danger to our employees and customers. If graphene nanoplatelets are found to be hazardous to human health, this may adversely affect market acceptance of our products, subject us to additional regulation and have an adverse effect on our business.
Defects in our products or poor performance of our customers’ products could result in lost sales and subject us to substantial liability.
We have limited experience with large scale commercialization by our customers of products incorporating our nanoplatelets, and the chance of variability in the performance of our products as shipped may impact the performance of our customers’ products. If our customers’ products incorporating nanoplatelets perform poorly, whether due to design, engineering, production or other reasons, our customers may scale back or cancel orders. In certain cases, if our nanoplatelets are found to be the component that leads to failure or a failure to meet the performance specifications of a customer, we could be required to pay monetary damages. Real or perceived defects in our products could result in claims by our customers for losses they sustain. If our customers make such claims, we may be required, or may choose, for customer relations or other reasons, to expend additional resources to help correct any real or perceived defects.
Liability provisions in our terms and conditions of sale may not be enforceable under some circumstances or may not fully or effectively protect us from claims and related liabilities and costs. In addition, regardless of the party at fault, errors of these kinds divert the attention of our engineering and management personnel from our product development and sales efforts, damage our reputation and the reputation of our products, cause significant customer relations problems and can result in product liability claims. In addition, even claims that ultimately are unsuccessful could result in expenditures of funds in connection with litigation and divert management’s time and other resources. We also may incur costs and expenses relating to a recall of one or more of our products, and the occurrence of such claims could result in the delay or loss of market acceptance of our products and could adversely affect our business, operating results and financial condition.
If product liability lawsuits are brought against us, we may incur substantial liabilities.
We have limited experience with the large-scale manufacturing and distribution of our products. The commercialization of our products and the sale of our products in significant quantities involves exposure to product liability claims. We have limited product liability insurance. If existing coverage is insufficient to cover claims or we cannot obtain sufficient insurance coverage at an acceptable cost or otherwise protect against potential product liability claims, the commercialization of products that we develop may be prevented or inhibited. We cannot predict all of the adverse health events that our products or use of our products in our customer’s products may cause. As a result, our future coverages may not be adequate to protect us from all of the liabilities that we may incur. If losses from product liability claims exceed any insurance coverage, we may incur substantial liabilities that exceed our financial resources. In addition, we may not be able to maintain future product liability insurance at an acceptable cost, if at all, and this insurance may not provide adequate coverage against potential claims or losses. If we are required to pay a product liability claim, we may not have sufficient financial resources and our business and results of operations may be harmed. Whether or not we are ultimately successful in product liability litigation, such litigation could also consume substantial amounts of our financial and managerial resources, and might result in adverse publicity, all of which could have a material adverse effect on our business.
Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.
Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company, its plants and operations, its products, its customers and/or its third-party service providers. We rely on third party service providers to protect information technology systems, a breach of which could expose our confidential intellectual property, including trade secrets. The failure to protect such intellectual property could create a diminution in the value of our investment in research, development and engineering, and increased cybersecurity protection and remediation costs, which in turn could adversely affect our competitiveness and results of operations. We cannot be sure that our information technology infrastructure is safe from cybersecurity threats or other forms of intellectual property appropriation. Cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident or other such intellectual property appropriation include reputational damage, claims from and litigation with third parties, fines levied by governmental authorities, and competitive disadvantages in our business.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
We lease three separate facilities. Administrative offices and a manufacturing operation are in a 25,000 square foot building with an operating lease that expires in December 2022. Research and development laboratories are in a 14,300 square foot space with an operating lease that expires in December 2022. We also have mechanical exfoliation manufacturing operations in a 64,000 square foot facility with an operating lease that expires in October 2022. All of the physical assets of the Company are contained within these facilities. XG Sciences has achieved and maintains an ISO9001:2015 quality certification for all of its locations.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
None.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Equity
No public market currently exists for our shares and a public market may never develop, or, if any market does develop, it may not be sustained.
Following our Offering which terminated on April 12, 2019, we intend to seek either (i) a listing of our common stock on a securities exchange registered with the SEC under Section 6(a) of the Exchange Act, such as the NASDAQ Capital Market or the NYSE, or (ii) the quotation of our common stock on the OTCQB or OTCQX marketplaces operated by OTC Markets Group, Inc., market conditions permitting. To achieve such a Public Listing, we will have to meet certain initial listing qualifications of the Qualified National Exchange or the OTC Markets on which we are seeking the Public Listing. In addition, we will need to have market makers agree to make a market in our common stock and file a FINRA Form 15c211 with the SEC on our behalf before we can achieve a Public Listing, and we will also need to remain current in our quarterly and annual filings with the SEC. As of the date of this report, there are no assurances or understandings between the Company and anyone acting on our behalf, with any market maker regarding participation in a future trading market for our securities. There can be no assurance that our common stock will ever be quoted or traded on a Qualified National Exchange or the OTC Markets or that any market for our common stock will develop.
Holders of Equity
As of August 30, 2021, we had 261 record holders of our common stock, and a total of 2,490,488 shares of common stock issued and outstanding. We had 13 record holders of Series A Preferred Stock and a total of 1,890,354 shares of Series A Preferred Stock issued and outstanding. We had 145 holders of Series B Preferred Stock and a total of 1,542,080 shares of Series B Preferred Stock issued and outstanding. In total, we had 407 shareholders of record of all classes of our capital stock as of August 30, 2021.
Each share of Series A Preferred Stock is voluntarily convertible, at the option of the holder thereof, at any time after the date of issuance and prior to any Public Listing of common stock on a Qualified National Exchange, into that number of fully paid, non-assessable shares of common stock determined by dividing the Original Issue Price by the Conversion Price then in effect, as such terms are defined in the Series A Designations. The current Series A Conversion Rate is 1.875 shares of common for 1 share of Series A. The Conversion Price of the Series A Preferred Stock is subject to adjustments pursuant to the occurrence of stock splits and certain other specified events, and therefore the respective conversion rates are subject to change.
Furthermore, under the terms of the Series A Designations (as amended), all outstanding shares of Series A Preferred Stock will automatically convert into shares of common stock upon a Public Listing on a Qualified National Exchange at the then-current Series A Conversion Rate. At the current Series A Conversion Rate, if all outstanding shares of Series A Preferred Stock were voluntarily converted or automatically converted, we would issue 3,544,414 shares of common stock to satisfy such conversions.
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.
As of December 31, 2020, the Company had also granted options to purchase up to 504,110 shares of common stock, had issued warrants to purchase up to (i) 491,392 shares of common stock, (including the warrants for 250,000 shares issued under the Dow Facility) and (ii) 972,720 shares of Series A Preferred Stock which, if exercised, would be convertible into 1,823,850 shares of common stock at the then-current Series A Conversion Rate (currently 1.875 shares of common for 1 share of Series A) and, sold 481,458 Units with the Convertible Notes Offering which can be converted into 481,458 shares of Series B stock with a conversion factor of 1 into common shares. Therefore, we have committed to issue up to an additional 7,492,264 shares of common stock, which includes the issuance of (a) 3,544,414 shares upon conversion of all 1,890,354 shares Series A Preferred Stock currently outstanding at the Series A Conversion Rate, (b) 1,823,850 shares upon the conversion of 972,720 shares of Series A Preferred Stock (at the current Series A Conversion Rate) which are issuable upon exercise of 972,720 Series A warrants, (c) 647,040 shares of Series B Preferred Stock, (d) 504,110 shares upon the exercise of options, (e) the issuance of 491,392 shares upon the exercise of warrants and (f) the issuance of 481,458 common shares upon the conversion of the units purchased with the Convertible Debt . If we issued all 7,492,264 shares, we would have, including the 3,387,403 shares currently outstanding, 10,879,667 shares issued and outstanding, with 14,120,333 authorized shares available for future issuance. The future issuance of common stock or other securities convertible into our common stock may result in substantial dilution in the percentage of our common stock held by our existing shareholders. Other than in our past IPO, we may value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, might have an adverse effect on any trading market for our common stock and could impair our ability to raise capital in the future through the sale of equity securities.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2020, and 2019, the Company had outstanding stock options to purchase up to 504,110 and 839,625 shares of common stock, respectively.
On September 30, 2020, and September 30, 2019, 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 $24,300 and $38,295 on September 30, 2020, and, September 30, 2019, respectively.
The restricted stock issued to the Board members from September 30, 2017, through September 30, 2020 has an aggregate fair value of $320,000 and vests ratably in arrears over four quarters on the last day of each fiscal quarter following the grant date. As of December 31, 2020, and 2019, 35,000 and 23,125 of the 42,500 shares of restricted stock issued had vested, resulting in compensation expense of $84,600 and $90,000 for the years ended December 31, 2020 and December 31, 2019, respectively.
On April 1, 2020, we granted 138,734 stock options to employees who had received a reduction in pay due to cost controls. These options have an exercise price of $8.00, vesting 1/3 upon the grant date and 1/3 on the anniversary of the grant for the next two years. During the year ended December 31, 2020, and December 31, 2019, we granted 138,734 and 70,000 stock options, respectively, to employees with an exercise price of $8.00 and a seven-year term. The aggregate fair value of the awards on the date of grant was $329,850 and $177,111, respectively, as of December 31, 2020, and December 31, 2019. Except for the stock options granted on April 1, 2020, all other stock options vest equally over four years beginning on the first anniversary of the date of grant.
As of December 31, 2020, stock options to purchase a total of 504,110 shares at a price of $8.00 per share had been granted to Company employees and Directors and remained outstanding, with expiration dates ranging from July 2024 to September 2027.
Equity Compensation Plan as of December 31, 2020
Equity Compensation Plan Information
Plan category Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants
and rights
(a) Weighted-
average exercise
price of
outstanding
options,
warrants
and rights
(b) Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a)
(c)
Equity compensation plans approved by security holders (1) 504,110 $ 8.00 695,890
Equity compensation plans not approved by security holders - - -
Total 504,110 $ 8.00 695,890
(1) Reflects our 2017 Plan, for the benefit of our directors, officers, employees and consultants as of December 31, 2020. As of December 31, 2020, we had reserved 1,200,000 shares of common stock for such persons pursuant to that plan and had granted stock options to purchase 504,110 shares at a price of $8.00 with 695,890 shares remaining available for future issuance.
DIVIDEND POLICY
Since inception, we have not paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock, because we intend to retain our earnings, if any, to finance the growth of our business. Our Board of Directors will have the discretion to declare and pay dividends in the future. Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our Board of Directors may deem relevant.
UNREGISTERED SALES OF EQUITY SECURITIES
For the years ended December 31, 2020 and 2019, we issued promissory notes and warrants to purchase shares of common stock of the Company to Dow pursuant to the Dow Facility. The notes are non-convertible and mature on December 1, 2023. The warrants have a seven-year maturity date with a strike price of $8.00 per share. Details of the Promissory Notes and Warrants Issued for the years ended December 31, 2020 and 2019 are listed below.
Date Issued Amount of Promissory Note Warrants
Issued Note Maturity Date Warrant Strike Price Warrant Maturity Date
7/8/2019 $ 2,000,000 50,000 12/1/2023 $ 8.00 7/8/2026
11/11/2019 $ 2,000,000 50,000 12/1/2023 $ 8.00 11/11/2026
2/12/2020 $ 1,000,000 25,000 12/1/2023 $ 8.00 2/12/2027
Total $ 5,000,000 125,000

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, as defined in Rule 10(f)(1) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide the information required by this item.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like “believe”, “expect”, “estimate”, “anticipate”, “intend”, “project” and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.
Overview of our Business
XG Sciences was formed in May 2006 for the purpose of commercializing certain technology to produce graphene nanoplatelets and 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 strength when incorporated into plastics or other matrices.
We believe the unique properties of graphene and graphene nanoplatelets will enable numerous new product applications and we expect the market for such products to 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 based on these nanoplatelets. Since our inceptions, customers have trialed 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 manufacturer of high quality, graphene nanoplatelets and value-added products containing graphene nanoplatelets and that we are well positioned to address a wide range of end-use applications.
We sell products to customers around the world and have sold or sampled materials to over 1,300 customers in over 45 countries since 2008. Some of these customers are research organizations and some are commercial organizations.
We target our xGnP® nanoplatelets for use in a range of large and growing end-use markets. Our proprietary manufacturing processes allow us to produce nanoplatelets with varying performance characteristics that can be tuned to specific end-use applications based on customer requirements.
Because graphene is a new material, many of our customers are still developing applications that use our products, and thus historically those customers have purchased products in quantities consistent with development purposes, although some are now purchasing in quantities consistent with larger volume commercial production. The process of “designing-in” new materials is a relatively complex one and involves the use of relatively small amounts of the new material in laboratory and engineering development for an extended period. Following successful development, we believe customers that incorporate our materials into their products will then order much larger quantities of material to support commercial production. Thus, while many of our customers are currently purchasing our materials in kilogram (one or two pound) quantities, and some have begun to purchase in metric tons, we believe many will require tens of tons or even hundreds of tons of material when they commercialize products that incorporate our materials. 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.
Operating Segment
We have one operating segment that manufactures xGnP® graphene nanoplatelets and value-added products produced therefrom, we conduct research on graphene nanoplatelets and related products, and we license our technology, as appropriate. As of December 31, 2020, we shipped products on a worldwide basis, but all of our assets were located within the United States.
Our Critical Accounting Policies
U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the consolidated financial statements. Actual results and outcomes may differ from management’s estimates, judgments and assumptions. Significant estimates, judgments and assumptions used in our consolidated financial statements include, but are not limited to, those related to revenues, the fair value of stock-based compensation, accounting for complex debt and equity instruments, and liquidity. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in estimates are reflected in the consolidated financial statements prospectively from the date of the change in estimate.
Revenue Recognition
On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all previous revenue recognition guidance.
Revenues are recognized at a point in time, typically when control of the promised goods is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods. The Company does not recognize revenue in cases where collectability is not probable and defers the recognition until collection is probable or payment is received.
Customer deposits, deferred revenue and other receipts are deferred and recognized when the revenue is realized and earned.
Revenue related to licensing agreements is recorded upon substantial performance of the terms of the licensing contract. In the case of licensing arrangements that involve up-front payments, revenue is recorded when management determines that the appropriate terms of the contract have been fulfilled. For example, this may occur when technology has been transferred via written documents or, if training is involved, whenever all contracted training has occurred. In the case of licenses where product delivery is also embedded in the deliverable, a portion of revenue would be recognized when products are delivered.
In the case of licensing arrangements that involve ongoing royalties based on sales of products produced with our technology, royalty income is recorded when received or, in the case of minimum royalties due, in the period when due.
Grant contract revenue is recognized over the life of the contracts as the services are performed.
Amounts received in excess of revenues earned are recorded as deferred revenue.
Fair Value Measurements
FASB ASC 820: “Fair Value Measurements and Disclosures” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 which are either directly or indirectly observable.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Stock-Based Compensation
We recognize compensation expense in our statement of operations for all share-based option and stock awards, based on estimated grant-date fair values. We estimate the grant-date fair value of stock-based compensation awards using the Black-Scholes option valuation model. This model is affected by the estimated value of our common stock on the date of the grant as well as assumptions regarding a number of complex and subjective variables. These variables include the expected term of the option, the exercise price, expected risk-free rates of return, the expected volatility of our common stock, and expected dividend yield, each of which is more fully described below. The assumptions for the estimated value of our common stock, expected term and expected volatility are the assumptions that most significantly affect the grant date fair value.
Expected Term:  Because we have limited experience related to the exercise of employee stock options, we use the simplified method permitted by SEC Staff Accounting Bulletin Topic 14 to estimate the expected term of the options. The expected term of an option is estimated to be equal to the mid-point between the vesting and expiration dates of the option.
Risk-free Interest Rate: We base the risk-free interest rate used on the implied yield at the grant date of U.S. Treasury zero-coupon issues with a term approximately equal to the expected term of the stock-based award being valued.
Expected Stock Price Volatility: Because we are a company with very limited stock sales history (we had an Offering whereby we are selling stock directly to investors without the assistance of an investment bank nor are we registered on any market or public exchange), we use a blended average weekly volatility of certain publicly traded peer companies. We believe that the use of this blended average peer volatility is reflective of market conditions and a reasonable indicator of our expected future volatility.
Dividend Yield: Because we have never paid a dividend and do not expect to begin doing so in the foreseeable future, we have assumed a 0% dividend yield in valuing our stock-based awards.
The grant-date fair value of the award is recognized as expense over the requisite service period using the straight-line method.
Derivative Financial Instruments
We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. The terms of convertible preferred stock and convertible notes that we have issued were reviewed to determine whether or not they contain embedded derivative instruments that are required by ASC 815: “Derivatives and Hedging” to be accounted for separately from the host contract and recorded at fair value. In addition, freestanding warrants were also reviewed to determine if they achieve equity classification.
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 have reviewed the provisions of this new pronouncement and have determined that the adoption of this guidance has no material impact 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 have reviewed the provisions of this new pronouncement and have determined that the adoption of this guidance has no material impact on our financial position and results of operations.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which addresses the complexity of its guidance for certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 removes the accounting models that require beneficial conversion features or cash conversion features associated with convertible instruments to be recognized as a separate component of equity, adds certain disclosure requirements for convertible instruments, amends the guidance for the derivatives scope exception for contracts in an entity’s own equity and simplifies the diluted earnings per share calculation for certain situations. This guidance is effective for SEC filers, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements.
JOBS Act
In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company,” or EGC, can take advantage of the extended transition period for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an EGC, we intend to rely on certain exemptions, including exemptions from the requirement to provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an EGC until the earlier of: the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; the last day of the fiscal year following the fifth anniversary of the date of the completion of our Offering; the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
Results of Operations for the Year Ended December 31, 2020, compared with the Year Ended December 31, 2019
The following table summarizes the results of our operations for the years ended December 31, 2020, and 2019.
Year Ended December 31, Change 2020 to 2019
$ %
Total Revenues $ 782,692 $ 1,369,556 $ (586,864 ) (42.9 )
Cost of Goods Sold 2,663,924 3,763,473 (1,099,549 ) (29.2 )
Gross Loss $ (1,881,232 ) $ (2,393,917 ) $ 512,685 21.4
Research & Development Expense 896,840 1,506,716 (609,876 ) (40.5 )
Sales, General & Administrative Expense 4,218,361 5,467,698 (1,249,337 ) (22.8 )
Total Operating Expenses $ 5,115,201 $ 6,974,414 $ (1,859,213 ) (26.7 )
Operating Loss $ (6,996,433 ) $ (9,368,331 ) $ 2,371,898 25.3
Other Expense (105,315 ) (409,318 ) 304,003 74.3
Net Loss $ (7,101,748 ) $ (9,777,649 ) $ 2,675,901 27.4
Revenues
Revenues for the years ended December 31, 2020 and 2019, were $782,692 and $1,369,556, respectively. 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. For the year ended December 31, 2020, sales decreased by $586,864 or 43% from the prior year. The decrease in revenue for the year ended December 31, 2020, is due to our largest customer suspending orders due to their shutdown and then supply delays which in turn impacted orders from them. This customer restarted ordering in late 2020 and continued to order in 2021, but there can be no assurance they will continue to place orders with us in coming years. We believe that several customers 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, Michigan manufacturing facilities to customers around the world. During the year ended December 31, 2020, we shipped materials to customers in 28 countries, as compared to 27 countries during the same period in 2019. For the year ended December 31, 2020, sales to three foreign countries, South Korea, Switzerland, and the United Kingdom accounted for 40% of revenue. For the year ended December 31, 2019, sales shipped to two foreign countries, South Korea, and Switzerland, accounted for more than 10% of product sales.
Order Summary
The table below shows a comparison of domestic and international orders fulfilled (note that this does not include orders for free samples). The table also includes the average order size for product sales. These numbers indicate that our customer base remains active with research and development projects that use our materials. The average order size for product revenue during the year ended December 31, 2020 decreased by 44.8% as compared to the same period in 2019 primarily due to a 2020 decrease in orders from one customer while it is working down its inventory.
Year Ended December 31 Change 2020 to 2019
# Of Orders %
Number of orders - domestic 10.0
Number of orders - international 11.1
Number of orders - Total 10.5
Average order size - $s $ 3,465 $ 6,282 $ (2,817 ) (44.8 )
Grant Revenue
In 2018, an agreement was initiated with the Michigan Strategic Fund (MSF) with regard to the Michigan Business Development Program Grant Agreement dated November 6, 2017, relating to our new manufacturing facility in Mason, Michigan. Grant contract revenue is recognized using the milestone method as milestones are achieved. Milestone 1 of the agreement was met in late 2018 and recorded as grant revenue in the amount of $173,000 in the year ended December 31, 2018. This milestone was reached at the point in time when the first increment of qualified new jobs over the base employment level, as defined by the grant, was met. Per the agreement, it is defined as a default if the Company does not maintain the base level of jobs through the term of the Grant. Due to low demand and staffing reductions as a result of the Covid-19 pandemic, the Company was in default and signed a Repayment, Release and Termination Agreement with the MSF dated October 2, 2020. The repayment amount was determined to be $62,400 with equal payments of $7,800 per quarter starting September 30, 2021 and ending September 30, 2023. We recognized the entire $62,400 as a reduction to Revenue for the year ended December 31, 2020.
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 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.
Gross Profit Summary
The following table shows the relationship of direct costs to product sales for the years ended December 31, 2020 and 2019:
Year Ended December 31,
Change 2020 to 2019
$
%
Revenue
$ 782,692
$ 1,369,556
$ (586,864 )
(42.9 )
Direct Costs
495,229
1,006,594
(511,365 )
(50.8 )
Direct Cost Margin
$ 287,463
$ 362,962
$ (75,499 )
(20.8 )
% of Sales
36.7 %
26.5 %
Unallocated Manufacturing Expense
2,168,695
2,756,879
(588,184 )
(21.3 )
Gross Loss
$ (1,881,232 )
$ (2,393,917 )
$ 512,685
21.4
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 direct product costs if we were operating our factory at full capacity.
For the year ended December 31, 2020, unallocated manufacturing expenses decreased by 21% to $2,168,695 as compared to $2,756,879 in 2019. The decrease of $588,184 is largely due to expense reductions made in reaction to the falloff in business and regulatory shutdown of our sites by the state of Michigan due to the COVID-19 pandemic.
Research and Development Expenses
For the year ended December 31, 2020, research and development expenses decreased by 40% to $896,840 as compared to $1,506,716 for the year ended December 31, 2019. The decrease of $609,876 was largely due to decreased personnel costs as the Company took measures in anticipation of slower demand due to COVID-19.
Sales, General and Administrative Expenses
During 2020, we incurred selling, general and administrative expenses (SG&A) of $4,218,361. This is a decrease of $1,249,337 or 23% from 2019, This decrease in SG&A expense is primarily related to decreased personnel costs as the Company began took measures in anticipation of slower demand and delays in customer adoption caused by COVID-19.
Other Income (Expense)
Interest expense, net of interest income in the year ended December 31, 2020, increased by $465,959 compared to 2019. The net increase in expense reflects interest due on the increased Dow Facility balance as well as the addition in 2020 of the interest expense accrued on the Convertible Notes. Nonoperating income in the year ended December 31,2020, increased by $796,089 with the recording of the forgiveness of the PPP loan which had been received in April of 2020 and included $790,795 of principal and $5,294 of interest accrued through December 31,2020. SBA forgiveness of this PPP loan including accrued interest was received in July of 2021. Nonoperating expense in the year ended December 31,2020, increased by $26,127 which represents the difference between the fair value of the Exchange Right and the relative fair value assigned to the Exchange Right recognized immediately as nonoperating expense. See Note 9 Derivative Liability.
Cash Flow Summary
The following condensed cash flow statement compares cash flow from operating, investing, and financing activities for the years ended December 31, 2020 and 2019.
Year Ended December 31, Change 2020 to 2019
$ %
Cash, cash equivalents and restricted cash at beginning of period 1,129,702 4,893,974 (3,764,272 ) (76.9 )
Net Cash provided (used by):
Operating activities (4,782,423 ) (8,589,598 ) 3,807,175 44.3
Investing activities (123,940 ) (514,327 ) 390,387 75.9
Financing activities 5,551,027 5,339,653 211,374 3.9
Net increase (decrease) in cash 644,664 (3,764,272 ) 4,408,936 117.1
Cash, end of period 1,774,366 1,129,702 644,664 57.1
Net cash used in operating activities for the year ended December 31, 2020 and 2019 was $4,782,423 and $8,589,598, respectively. Net cash used by operating activities decreased 44% during 2020 as compared to 2019 primarily due to a reduction in operating expenses due to headcount reductions and commercial interruptions brought on by the Covid-19 pandemic as well as a lower volume of commercial orders in 2020 than 2019.
Investing activities for the year ended December 31, 2020 included net capital expenditures for the purchase of leasehold improvements and equipment of $47,526 and $76,414 for intellectual property as compared with $383,070 for leasehold improvements and equipment and $131,257 for intellectual property during the same period in 2019. The 2020 levels of capital expenditures are $390,387 lower than 2019 due to tight capital spend control in response to the commercial interruptions brought on by Covid-19 beginning in quarter 1 of 2020.
Financing activities provided a net increase in cash of $5,551,027 and $5,339,653 for the year ended December 31, 2020 and 2019, respectively. For the year ended December 31, 2020, there were no gross proceeds from the issuance of common stock nor stock issuance expenses as compared to proceeds from the issuance of common stock for the year ended December 31, 2019 of $2,013,400 and stock issuance expenses of $20,000. Financing activities from the Dow Facility included $1,000,000 and $4,000,000, respectively, for the years ended December 31, 2020 and 2019. For the year ended December 31, 2020, we had proceeds from the Unit offering of $3,867,810 less $117,578 of Unit offering issuance fees and expenses as compared to no Unit offering activity for the year ended December 31, 2019. We received proceeds from a PPP SBA loan of $790,795 and a grant from the EIDL of $10,000 for the year ended December 31, 2020 with no such activity in the year ended December 31, 2019.
Liquidity and Capital Expenditures
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 GAAP as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
As of August 30, 2021, we had cash on hand of $1,666,543. Due to lower-than-expected revenue in 2020 and the current COVID-19 global pandemic impacting both our operations and that of our customers, Management took 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 resulted in a 38% 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 remained in place until February 1, 2021.
In early April of 2020, we applied for relief under the Coronavirus Aid, Relief and Economic Security Act (CARES) by applying 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 which was subsequently reduced by $34,405 to $790,795 due to additional SBA guidance regarding 1099 income paid. On October 6, 2020, the Paycheck Protection Flexibility Act of 2020 extended the deferral expiration period for loan repayments to either the date that the SBA remits the borrower’s loan forgiveness or to 24 weeks after the receipt of proceeds plus 10 months or July 3, 2021. We applied for PPP loan forgiveness in May of 2021 and, in July of 2021, received SBA approval for forgiveness of 100 % of the PPP loan and accrued interest. On May 17, 2020, the SBA issued us a decline letter for the EIDL for which reconsideration has not been granted.
In December 2016, we entered into 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. On February 12, 2020, we drew the remaining $1 million of the Dow Facility.
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”). The Unit Offering was comprised of the Convertible Notes and a fully assignable or transferrable right to exchange two shares of previously issued Common Stock of the Company for two shares of Series B Preferred Stock of the Company 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 Convertible Preferred Stock (“Series B Preferred Stock”) at a note conversion price of $8.00/share; or ii) any other form of preferred or common stock (“Subsequent Stock”) issued by the Company 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, 125% 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 the 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, 125% 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). The first issue date of Convertible Notes was April 23, 2020. The Company did not raise at least $15 million of equity capital within one hundred and twenty (120) days after the first issue date of Convertible Notes.
Each share of Series B Preferred Stock will have 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 will have 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
For the year ended December 31, 2020, certain members of our Board of Directors and its affiliates purchased $3,213,664 of Convertible Notes. Subsequent to 2020, the Board members and their affiliates purchased $772,856 of Convertible Notes. In total, the Board members and their affiliates purchased $3,986,520 of Convertible Notes from the Company. For the year ended December 31, 2020, non-Board affiliated third parties purchased $638,000 of Convertible Notes and, subsequent to 2020, purchased $1,815,760 from the Company for a total purchase of $2,453,760. Total proceeds from the sale of Convertible Notes were $6,440,280.
Taking into consideration our current cash on hand, we estimate that we will need to raise approximately $4,000,000 - $6,000,000 of additional capital in order to continue our operations for the next twelve months in a minimal to no revenue growth environment. 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 GAAP as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
We believe our cash on hand when combined with operating cash flows and the expected net proceeds from additional borrowings or through the sales of equity securities will be sufficient to fund our operations through September of 2022 when considering various sources of funding and cash received from continued commercial sales transactions. However, the ultimate outcome is uncertain, therefore, there is substantial doubt with regard to continuing as a going concern one year beyond the issuance date.
In the event we are unable to fund our operations from existing cash on hand, operating cash flows, additional borrowings, or through the sales of equity securities, we may be forced to reduce our expenses, slow down our growth rate, or discontinue operations.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As a smaller reporting company, as defined in Rule 10(f)(1) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide the information required by this item.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
XG SCIENCES, INC.
Consolidated Financial Statements
Consolidated Financial Statements as of and for the years ended December 31, 2020 and 2019
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
XG Sciences, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying balance sheet of XG Sciences, Inc. (the Company) as of December 31, 2020 and 2019, the related statements of operations, stockholders’ equity (deficit) and cash flows, for the years then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Emphasis of Matter - Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and negative cash flows. The Company’s existing cash on hand, operating cash flows, additional borrowings and restructured debt obligations may not support the operations of the business over the next twelve months. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company’s auditor since 2019.
Detroit, Michigan
September 30, 2021
XG SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
December 31, 2020
December 31, 2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$ 1,774,366
$ 1,129,702
Accounts receivable, less allowance for doubtful accounts of $152,000 at December 31, 2020 and $179,600 at December 31, 2019
119,234
72,227
Inventories
514,652
891,587
Other current assets
219,997
334,493
Total current assets
2,628,249
2,428,009
LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET
2,852,519
3,676,142
LEASE DEPOSIT
59,650
77,544
INTANGIBLE ASSETS, NET
755,544
753,862
RIGHT OF USE ASSET
1,057,614
1,606,443
TOTAL ASSETS
7,353,576
8,542,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
686,812
634,564
Other current liabilities
280,950
238,554
Deferred revenue
1,820
-
Current portion of long-term debt
7,800
-
Current portion of lease liabilities
641,663
520,197
Total current liabilities
1,619,045
1,393,315
LONG-TERM LIABILITIES
Long-term portion of lease liabilities
640,093
1,183,872
Long term debt
12,776,975
8,111,610
Total long-term liabilities
13,417,068
9,295,482
TOTAL LIABILITIES
15,036,113
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 $22,684,248 at December 31, 2020 and December 31, 2019
22,307,480
22,307,480
Series B convertible preferred stock, 1,500,000 shares authorized, 647,040 and zero shares issued and outstanding at December 31, 2020 and December 31, 2019
5,151,850
-
Common stock, no par value, 25,000,000 shares authorized, 3,387,403 and 4,024,443 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively
27,260,156
32,351,876
Additional paid-in capital
10,280,853
8,774,975
Accumulated deficit
(72,682,876 )
(65,581,128 )
Total stockholders’ equity
(7,682,537 )
(2,146,797 )
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
7,353,576
8,542,000
See notes to consolidated financial statements
XG SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
REVENUE
Total Revenues $ 782,692 $ 1,369,556
COST OF GOODS SOLD
Direct costs 495,229 1,006,594
Unallocated manufacturing expenses 2,168,695 2,756,879
Cost of Goods Sold 2,663,924 3,763,473
GROSS LOSS (1,881,232 ) (2,393,917 )
OPERATING EXPENSES
Research & Development Expense 896,840 1,506,716
Sales, General & Administrative Expense 4,218,361 5,467,698
Total Operating Expenses 5,115,201 6,974,414
OPERATING LOSS (6,996,433 ) (9,368,331 )
OTHER INCOME (EXPENSE)
Interest expense, net (875,277 ) (409,318 )
Nonoperating income - SBA PPP Loan Forgiveness 796,089 -
Nonoperating expense - Exchange Rights Expense (26,127 ) -
Total Other Expense (105,315 ) (409,318 )
Net Loss $ (7,101,748 ) $ (9,777,649 )
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - Basic and diluted (in shares) 3,853,681 3,951,178
NET LOSS PER SHARE - Basic and diluted (in dollars per share) $ (1.84 ) $ (2.47 )
See notes to consolidated financial statements
XG SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Preferred stock A Preferred stock B Common stock Additional paid-in capital Accumulated deficit Total
Shares Amount Shares Amount Shares Amount Amount Amount
Balances, December 31, 2018 1,890,364 $ 22,307,480
3,760,268 $ 30,268,476 $ 8,101,923 $ (55,687,160 ) $ 4,990,719
Stock issued for cash
251,675 2,013,400
$ 2,013,400
Stock issuance fees and expenses
(20,000 )
$ (20,000 )
Transition adjustment for adoption of new lease standard
$ (116,319 ) $ (116,319 )
Stock-based compensation expense
90,000 369,885
$ 459,885
Restricted Stock Units issued to BOD
12,500
-
Warrants issued with Dow financing
303,168
$ 303,168
Net loss
$ (9,777,649 ) $ (9,777,649 )
Balances, December 31, 2019 1,890,364 $ 22,307,480
4,024,443 $ 32,351,876 $ 8,774,976 $ (65,581,128 ) $ (2,146,796 )
Common stock exchange for Series B stock
647,040 5,176,320 (647,040 ) (5,176,320 )
-
Stock issuance fees and expenses
(24,470 )
$ (24,470 )
Value of exchange rights
989,811
$ 989,811
Stock-based compensation expense
84,600 444,790
$ 529,390
Restricted Stock Units issued to BOD
10,000
-
Warrants issued with Dow financing
71,276
$ 71,276
Net loss
$ (7,101,748 ) $ (7,101,748 )
Balances, December 31, 2020 1,890,364 $ 22,307,480 647,040 $ 5,151,850 3,387,403 $ 27,260,156 $ 10,280,853 $ (72,682,876 ) $ (7,682,537 )
See notes to consolidated financial statements
XG SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Twelve Months Ended
December 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net loss to net cash used in operating activities:
Net loss
$ (7,101,748 )
$ (9,777,649 )
Depreciation
865,026
927,974
Amortization of intangible assets
74,733
68,040
Loss on disposal of equipment and intangibles
6,122
2,605
Provision for bad debts
-
181,679
Stock-based compensation expense
529,390
459,885
Non-cash interest expense
902,445
130,410
Non-cash SBA PPP loan forgiveness
(796,089 )
-
Changes in current assets and liabilities:
Accounts receivable
(47,006 )
605,148
Inventory
376,935
(231,370 )
Other current and non-current assets
258,905
(296,123 )
Accounts payable and other liabilities
148,864
(660,197 )
NET CASH USED IN OPERATING ACTIVITIES
(4,782,423 )
(8,589,598 )
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of leasehold improvements and equipment
(47,526 )
(383,070 )
Patents
(76,414 )
(131,257 )
NET CASH USED IN INVESTING ACTIVITIES
(123,940 )
(514,327 )
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of capital lease obligations
-
(15,527 )
Repayments of long-term loan debt
-
(638,220 )
Proceeds from issuance of common stock
-
2,013,400
Common stock issuance fees and expenses
-
(20,000 )
Proceeds from long-term loan
1,000,000
4,000,000
Proceeds of Unit Offering
3,867,810
-
Unit Offering issuance fees and expenses
(117,578 )
-
Proceeds from SBA Loans / EIDL
800,795
-
NET CASH PROVIDED BY FINANCING ACTIVITIES
5,551,027
5,339,653
NET CHANGE IN CASH AND CASH EQUIVALENTS
644,664
(3,764,272 )
CASH, AND CASH EQUIVALENTS, BEGINNING OF PERIOD
1,129,702
4,893,974
CASH, AND CASH EQUIVALENTS, END OF PERIOD
1,774,366
1,129,702
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest
-
208,286
Warrants issued with Dow financing
71,276
303,168
See notes to 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 nanoparticles in the form of bulk powders or dispersions to other companies for use as additives to make composite and other materials with specially 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 license our technology to other companies in exchange for royalties and other fees.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with GAAP.
The consolidated financial statements include the accounts of XG Sciences, Inc. and our wholly owned subsidiary, XGS IP, LLC. We operate as one operating segment. All intercompany accounts, transactions and profits have been eliminated in consolidation.
Going Concern and 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 GAAP as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
As of August 30, 2021, we had cash on hand of $1,666,543. Due to lower-than-expected revenue in 2020 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 53%, by furloughing substantially all manufacturing employees, and by implementing temporary salary reductions ranging from 15-20%. Although we have re-employed key employees since the reductions and furloughs, annual payroll and related costs have been reduced by 38%. 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 remained in place until February 1, 2021.
In early April of 2020, we applied for relief under the Coronavirus Aid, Relief and Economic Security Act (“CARES”) by applying with the Small Business Administration (“SBA”) for an Economic Injury Disaster Loan (“EIDL”) and by applying to an SBA lender bank, PNC, for a Paycheck Protection Plan (“PPP”) loan. Based upon the various criteria outlined by the SBA, including meeting certain employee thresholds and demonstrating liquidity needs, the Company believed that it was eligible to receive the 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 which was subsequently reduced by $34,405 to $790,795 due to additional SBA guidance regarding 1099 income paid. On October 6, 2020, the Paycheck Protection Flexibility Act of 2020 extended the deferral expiration period for loan repayments to either the date that the SBA remits the borrower’s loan forgiveness or to 24 weeks after the receipt of proceeds plus 10 months or July 3, 2021.
In May of 2021, we applied for loan forgiveness for the PPP loan received in April of 2020 and, in July of 2021, we received SBA approval for forgiveness of 100 % of the PPP loan and accrued interest. As a result, the Company believes that it has met the PPP eligibility criteria for forgiveness and has concluded that the loan represents, in substance, a government grant that is expected to be forgiven. As such, in accordance with IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance”, the Company has recognized the entire loan amount as Other Income as of December 31, 2020. If, despite the Company’s good-faith belief that given its circumstances the Company satisfied all eligible requirements for the PPP Loan, the Company is later determined to have not been in compliance with these requirements or it is otherwise determined that it was ineligible to receive the PPP Loan, the Company may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties. Should the Company be audited or reviewed by federal or state regulatory authorities as a result of filing an application for forgiveness of the PPP Loan or otherwise, such audit or review could result in a change in the Company’s amount of forgiveness recorded in the condensed consolidated financial statements.
In December 2016, we entered into 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. On February 12, 2020, we drew the remaining $1 million of the Dow Facility.
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 began the Unit Offering in a private placement to accredited investors. The Unit Offering is comprised of the Convertible Notes and a fully assignable or transferrable right to exchange two shares of previously issued Common Stock of the Company for two shares of Series B Preferred Stock of the Company 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 Convertible Preferred Stock (“Series B Preferred Stock”) at a note conversion price of $8.00/share; or ii) any other form of preferred or common stock (“Subsequent Stock”) issued by the Company 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, 125% 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, 125% 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). The first issue date of Convertible Notes was April 23, 2020. The Company did not raise at least $15 million of equity capital within one hundred and twenty (120) days after the first issue date of Convertible Notes.
Each share of Series B Preferred Stock will have 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 will have 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.
For the year ended December 31, 2020, certain members of our Board of Directors and its affiliates purchased $3,213,664 of Convertible Notes. Subsequent to 2020, the Board members and their affiliates purchased $772,856 of Convertible Notes. In total, the Board members and their affiliates purchased $3,986,520 of Convertible Notes from the Company. For the year ended December 31, 2020, non-Board affiliated third parties purchased $638,000 of Convertible Notes and, subsequent to 2020, purchased $1,815,760 from the Company for a total purchase of $2,453,760. Total proceeds from the sale of Convertible Notes were $6,440,280.
Taking into consideration our current cash on hand, we estimate that we will need to raise approximately $4,00,000 - $6,000,000 of additional capital in order to continue our operations for the next twelve months in a minimal to no revenue growth environment. 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 GAAP as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
We believe our cash on hand when combined with operating cash flows and the expected net proceeds from additional borrowings or through the sales of equity securities will be sufficient to fund our operations through September of 2022. However, the ultimate outcome is uncertain, therefore, there is substantial doubt with regard to continuing as a going concern one year beyond the issuance date.
In the event we are unable to fund our operations from existing cash on hand, operating cash flows, or additional borrowings, we may be forced to reduce our expenses, slow down our growth rate, or discontinue operations
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the consolidated financial statements. Actual results and outcomes may differ from management’s estimates, judgments, and assumptions. Significant estimates, judgments and assumptions used in these consolidated financial statements include, but are not limited to, those related to revenues, accounts receivable and related allowances, contingencies, useful lives and recovery of long-term assets, income taxes, and the fair values of stock-based compensation, warrants, and derivative financial instrument liabilities. 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.
Revenue Recognition
On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all previous revenue recognition guidance.
Revenues are recognized at a point in time, typically when control of the promised goods is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods. The Company does not recognize revenue in cases where collectability is not probable and defers the recognition until collection is probable or payment is received.
Customer deposits, deferred revenue and other receipts are deferred and recognized when the revenue is realized and earned. Grant contract revenue is recognized over the life of the contracts as the services are performed.
Amounts received in excess of revenues earned are recorded as deferred revenue.
Cost of Products 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 capitalized to the inventories and expensed to the 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.
The remaining costs of operating the Company’s manufacturing facilities are recorded as Unallocated Manufacturing Expenses. Manufacturing expense includes the costs of operating our manufacturing facilities including personnel costs, rent, utilities, indirect supplies, depreciation, and related indirect expenses. Manufacturing expenses are expensed as incurred.
Research and Development
Research and development expenses include the compensation costs of research personnel, laboratory rent and utilities, depreciation of laboratory equipment, travel and laboratory supplies and are expensed as incurred.
Sales, General and Administrative Expense
Sales, General and Administrative expenses include the compensation costs of personnel, rent, utilities, supplies, travel, depreciation of office equipment, and related expenses not included in other expense categories. Sales and marketing costs include compensation, travel, and business development expenses including free samples provided to customers. These costs are expensed as incurred. Product marketing allowances are recorded at the estimated out of pocket cost necessary to produce the product in the period the allowance is granted. General and administrative expenses also include non-cash compensation expenses related to the Company’s deferred compensation, management incentive bonus, and employee stock option programs.
Income Taxes
It is our policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent that the probable tax outcome of these uncertain tax position changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. As of December 31, 2020, we believe we have appropriately accounted for any unrecognized tax benefits. We are not aware of any uncertain tax positions. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or we are required to pay amounts more than the liability, our effective tax rate in a given financial statement period may be affected.
We account for income taxes using an asset and liability approach. The difference between the financial statement and tax basis of assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed for those differences that have future tax consequences using the currently enacted tax laws and rates that apply to the periods in which they are expected to affect taxable income. Income tax expense is the current tax payable or refundable for the period plus or minus the net change in the deferred tax assets and liabilities. The deferred tax effects of local income taxes are considered immaterial and have not been recorded. Valuation allowances are established, if necessary, to reduce deferred tax assets to the amount that is estimated to be realized. Because of the uncertainty related to future realization of deferred tax assets (see Note 14), we have established a valuation allowance equal to one hundred percent of the deferred tax assets.
The Company will continue to assess its provision for income taxes as future guidance is issued but does not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.
Net Income (Loss) Per Common Share
We compute net income or (loss) per share in accordance with Financial Accounting Standards Board (“FASB”) Accountings Standards Codification (“ASC”) Topic 260: Earnings Per Share. Under the provisions of ASC 260, basic net income (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of shares outstanding during the applicable period, plus the effect of potentially dilutive securities. Potentially dilutive securities consist of shares potentially issuable pursuant to stock options and warrants as well as shares that would result from full conversion of all outstanding convertible securities. These potentially dilutive securities were 3,466,392 and 3,150,487 as of December 31, 2020 and 2019 and are excluded from diluted net loss per share calculations because they are anti-dilutive. As a result, for the years ended December 31, 2020 and 2019, basic and diluted net loss per share was the same.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivables are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a provision for bad debt expense and an adjustment to a valuation allowance based on their assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance account and a credit to accounts receivable.
Statements of Cash Flows
For the purposes of the statements of cash flows, we consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments and Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and accounts receivable. The Company places its cash with FDIC insured financial institutions. Although such balances may exceed the federally insured limits at certain times, in the opinion of management they are subject to minimal risk.
The Company has established policies for extending credit to customers based upon factors including the customers’ credit worthiness, historical trends and other information. Nonetheless the collectability of accounts receivable is affected by regional economic conditions and other factors.
Inventory
Inventory consists of raw materials, consumables inventory and finished goods, all of which are stated at the lower of cost or net realizable value. Cost is determined on a first in, first out basis. We inventory media used in the production process of our facilities as a Consumables inventory.
Leasehold Improvements and Equipment
Leasehold improvements and equipment are recorded at cost, net of accumulated depreciation and amortization. Equipment generally include purchases of items with a cost greater than $3,000 and a useful life greater than one year. Depreciation and amortization are computed on the straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the related lease terms or their estimated useful lives.
We periodically review the estimated useful lives of property, plant, and equipment. Changes to the estimated useful lives are recorded prospectively from the date of the change. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statement of operations. Repairs and maintenance costs are expensed as incurred.
Intangible Assets
We have entered into a license agreement with Michigan State University under which we have licensed certain intellectual property in the form of patents and patent applications and invention disclosures. We are responsible for managing the patent process and ongoing filings for this licensed intellectual property and for bearing the cost thereof. We capitalize all costs related to the acquisition and ongoing administration of this license agreement and we amortize these costs over 15 years or the remaining life of the license agreement, whichever is shorter.
In addition to the costs of managing in-licensed intellectual property, we also file for patent protection for inventions and other intellectual property generated by our employees. All patents are evaluated for filing in international markets on a case-by-case basis and are filed in the United States and in selected international markets as considered appropriate. All external legal and filing costs related to patent applications, patent filings, ongoing registrations, overseas filings, and legal opinions related thereto are capitalized as intangible assets at cost and amortized over a period of 15 years from the date incurred, or the remaining useful life of the associated patent, whichever is shorter.
The cost of royalties or minimum payments specified under the license agreement for in-licensed technology is expensed as incurred.
Recoverability and Impairment of Long-Lived Assets
Land, buildings and equipment and certain other assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The judgments we make related to the expected useful lives of long-lived assets, definitions of lease terms and our ability to realize undiscounted cash flows in excess of the carrying amounts of these assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, changes in usage or operating performance, and other factors, such as our ability to sell our assets held for sale. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, significant adverse changes in these factors could cause us to realize an impairment loss. Based on a review of operating results, we believe the carrying values of our long-lived assets are recoverable at December 31, 2020 and 2019.
Fair Value Measurements
FASB ASC 820: “Fair Value Measurements and Disclosures” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 which are either directly or indirectly observable.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Stock-Based Compensation
We recognize compensation expense in our statement of operations for all share-based option and stock awards, based on estimated grant-date fair values.
We estimate the grant-date fair value of stock option awards using the Black-Scholes option valuation model. This model is affected by the estimated value of our common stock on the date of the grant as well as assumptions regarding a number of highly complex and subjective variables. These variables include the expected term of the option, the exercise price, expected risk-free rates of return, the expected volatility of our common stock, and expected dividend yield, each of which is more fully described below. The assumptions for the estimated value of our common stock, expected term and expected volatility are the assumptions that most significantly affect the grant date fair value.
Expected Term: Because we have limited experience related to the exercise of employee stock options, we use the simplified method permitted by SEC Staff Accounting Bulletin Topic 14 to estimate the expected term of the options. The expected term of an option is estimated to be equal to the mid-point between the vesting and expiration dates of the option.
Risk-free Interest Rate: We base the risk-free interest rate used on the implied yield at the grant date of U.S. Treasury zero-coupon issues with a term approximately equal to the expected term of the stock-based award being valued.
Expected Stock Price Volatility: Because we are a company with very limited stock sales history (we have an Offering whereby we are selling stock directly to investors without the assistance of an investment bank nor are we registered on any market or public exchange), we use a blended average weekly volatility of certain publicly traded peer companies. We believe that the use of this blended average peer volatility is reflective of market conditions and a reasonable indicator of our expected future volatility.
Dividend Yield: Because we have never paid a dividend and do not expect to begin doing so in the foreseeable future, we have assumed a 0% dividend yield in valuing our stock-based awards.
The grant-date fair value of the award is recognized as expense over the requisite service period using the straight-line method.
Derivative Financial Instruments
We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. The terms of convertible preferred stock and convertible notes that we issue are reviewed to determine whether or not they contain embedded derivative instruments that are required by ASC 815: “Derivatives and Hedging” to be accounted for separately from the host contract and recorded at fair value. The Company’s freestanding warrants are classified as equity.
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.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which addresses the complexity of its guidance for certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 removes the accounting models that require beneficial conversion features or cash conversion features associated with convertible instruments to be recognized as a separate component of equity, adds certain disclosure requirements for convertible instruments, amends the guidance for the derivatives scope exception for contracts in an entity’s own equity and simplifies the diluted earnings per share calculation for certain situations. This guidance is effective for SEC filers, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements.
NOTE 3 - INVENTORY
The following amounts were included in inventory at the end of the period:
Year Ended December 31,
Raw Materials
56,135
68,784
Consumables
70,103
70,103
Finished Goods
388,414
752,700
Total
514,652
891,587
NOTE 4 - LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment as of December 31 consist of the following:
Depreciable
Life (Years)
Leasehold improvements and equipment 5-10 804,460 804,460
Lab equipment 3-7 1,075,500 1,134,129
Production and other equipment 3-7 8,885,354 8,857,169
Software 14,177 14,177
Total Cost
10,779,491 10,809,935
Less accumulated depreciation and amortization
(7,926,972 ) (7,133,793 )
Net leasehold improvements and equipment
2,852,519 3,676,142
Depreciation expense on leasehold improvements and equipment, including leased assets, for the years ended December 31, 2020 and 2019, was $865,026 and $927,974, respectively. These amounts are included as part of our statement of operations in Cost of Goods Sold, Research and Development, and Sales, General and Administrative Expenses. For the year ended December 31, 2020, $743,350 was recorded in Cost of Goods Sold, $97,218 in Research and Development, and $24,458 in Sales, General and Administrative Expenses. For the year ended December 31, 2019, $805,114 was recorded in Cost of Goods Sold, $96,065 in Research and Development, and $26,795 in Sales, General and Administrative Expenses.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets and related accumulated amortization as of December 31, 2020 and 2019 are as follows:
Year Ended December 31
Licenses
159,868
159,868
Patents
964,480
888,066
Trademarks, other intangibles
24,728
24,728
Total Carrying Amount
1,149,076
1,072,662
Less: Accumulated Amortization - Licenses
(121,419 )
(110,312 )
Less: Accumulated Amortization - Patents
(264,299 )
(202,328 )
Less: Accumulated Amortization - Trademarks, other intangibles
(7,814 )
(6,159 )
Total Accumulated Amortization
(393,532 )
(318,799 )
Net Carrying Amount - Licenses
38,450
49,556
Net Carrying Amount - Patents
700,181
685,737
Net Carrying Amount - Trademarks, other intangibles
16,913
18,569
Total Net Carrying Amount
755,544
753,862
Amortization expense of $74,733 and $68,040 was recorded for the years ended December 31, 2020 and 2019, respectively. Amortization expense for the next five years is estimated to be approximately $74,000 annually.
NOTE 6 - OTHER CURRENT LIABILITIES
As of December 31, 2020, and 2019, our other current liabilities on our balance sheet consisted of the following:
Accrued Compensation 57,770 47,453
Accrued Expenses 220,280 188,360
401 (k) Employer Contribution Expense 2,900 2,741
Total Other Current Liabilities 280,950 238,554
NOTE 7 -WARRANTS AND FINANCING AGREEMENTS
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. Under the original terms, the loan matured on December 1, 2021. 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 December 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) reduce 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 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 $747,000. 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 7.9%. During the year ended December 31, 2020, we recognized $740,369 of amortization expense consisting of $595,176 of interest expense accrued and $145,193 of amortization from debt discount accretion related to the Dow Facility warrants. As of December 31, 2020, the Dow Facility has a carrying value of $9,780,703.
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.
NOTE 8 - PRIVATE PLACEMENT
In connection with the private placement of Series B Preferred Stock issued in 2015, warrants to purchase 222,262 shares of common stock and preemptive rights warrants to purchase 2,635 shares of common stock, remain outstanding at December 31, 2020. Such warrants have an exercise price of $16.00 per share and expire between April 21 and June 30, 2022.
NOTE 9 - DERIVATIVE LIABILITY
On April 23, 2020, the Company entered into an Amended and Restated Draw Notice and Agreement with the Dow Chemical Company (“Amended Dow Facility”) to allow us to structure an offering of secured, subordinated convertible notes to support ongoing cash needs (the “Unit Offering”). In the Amended Dow Facility, the Company and Dow agreed to 1) extend the term of the 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 and 5) allow for a subordinated security interest to be granted to new investors in the Unit Offering.
We evaluated the accounting for the amendment and concluded it met the conditions to be a troubled debt restructure. The future cash flows on the restructured debt were approximately $2.7 million greater than the carrying value of the debt which was accounted for prospectively through the effective interest rate.
Immediately after executing the Amended Dow Facility, we commenced a Unit Offering in a private placement to accredited investors. The Unit Offering consists of (i) an offering of up to $10 million in Convertible Notes (“Notes”) in $8 units, and (ii) an assignable or transferrable right to exchange two shares of previously issued common stock for two shares of Series B Convertible Preferred Stock for every $8.00 invested in the Unit Offering (“Exchange Rights”). As of December 31, 2020, we have raised $3,851,664 in the Unit Offering through the sale of 481,458 Units and 647,040 shares of Common Stock have been exchanged for 647,040 shares of Preferred Series B stock.
The Convertible Notes pay interest at 7.5% per year, compounded quarterly, which is payable on the maturity date unless the Company has recorded GAAP revenue of at least $4.0 million for two consecutive quarters at which time the holder may elect to receive all accrued interest in cash on a quarterly basis. The maturity date of the Notes is December 31, 2024. The Notes are convertible at the holder’s option 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 Equity is sold, or if the value per share is fixed, 125% of the number of shares that might otherwise be issuable, provided that if a Qualified Capital Event occurs within 120 days after the initial funding, then the conversion price will be 90% of the purchase price per share at which the Subsequent Equity is sold, or if the value per share is fixed, 110% of the number of shares that would otherwise be issuable. No Qualified Capital Event has occurred within 120 days after the initial funding on April 23, 2020.
If we raise at least $15 million of equity capital, excluding equity raised in this offering, we may choose to convert the outstanding amount due and payable under the Note into whichever form of conversion shares would result in the greatest number of shares of Common Stock being issued to the holder in an “as-if-converted” into Common Stock basis at the conversion price then in effect.
In the event the Notes are outstanding on the date our shares of Common Stock are listed on a Qualified National Exchange, then the Notes will automatically be converted first into Series B Preferred Stock at a price of $8.00 per share and then into shares of Common Stock at the Series B Conversion Rate in effect at the time. If there is a change in control, all principal and accrued interest will be paid in cash or can be converted according to the terms of the Note, at the holder’s option.
The Notes are secured by a junior security interest in all the assets of the Company. The Notes may not be prepaid prior to the maturity date, but they may be transferred at any time to i) any entity controlled by the holder, ii) any investors in the holder or iii) any other accredited investor only in compliance with the Securities Act of 1933 and other state laws.
After the original issue date but prior to the date we raise $15 million of cumulative equity capital, excluding capital raised in this Offering, if we consummate a financing transaction with a third-party using any other form of convertible debt security, then the holder has the right to exchange their outstanding obligations for a new security with the same terms as the new convertible debt security offered to the third party. This provision is viewed as a redemption option.
Embedded features in the Notes were analyzed under ASC 815 to determine if they required bifurcation as derivative instruments. To be a derivative, one of the criteria is that the embedded component must be net settleable. The Company’s common stock is not publicly traded, there is no mechanism outside the notes that would permit the holder to achieve net settlement and the underlying shares are not readily convertible to cash. Accordingly, the embedded derivatives, including the embedded conversion feature, do not meet the definition of a derivative, and therefore, do not require bifurcation from the host instrument. Certain default put provisions, the change in control repayment provision and the redemption option were not considered to be clearly and closely related to the host instrument but we concluded that the value of these provisions was de minim us at inception. We reconsider the value of these provisions each reporting period to determine if the value becomes material to the financial statements.
For every $8.00 invested in the Unit Offering, we provided investors in the Unit Offering, the one-time right to exchange two shares of previously issued Common Stock for two shares of Series B Preferred Stock of the Company within 30 days of the closing (the “Exchange Right”). The Exchange Right is fully transferable and assignable to any other party during the 30-day period if they are an accredited investor and executed a joinder to become bound by the terms of the Agreement. The Exchange Right is a freestanding financial instrument, and its fair value is estimated based on the incremental fair value between the exchanged Common Stock and the issued Preferred Stock. In this instance, the Exchange Right was included as part of the Unit Financing in conjunction with the issuance of the Notes, therefore, the proceeds from the financing were allocated between the Notes and the Exchange Right based on their relative fair values. The difference between the fair value of the Exchange Right and the relative fair value assigned to the Exchange Right is recognized immediately as nonoperating expense. As of December 31,2020, Nonoperating expense of $26,127 had been recorded related to the Exchange Rights.
A convertible financial instrument includes a beneficial conversion feature (“BCF”) if the effective conversion price is less than the company’s market price of their stock on the commitment date. The BCF for the year ended December 31, 2020 was $263,537.
For the year ended December 31, 2020, we sold Convertible Notes with total proceeds of $3,851,664. Subsequent to 2020, we sold additional Convertible Notes with total proceeds of $2,588,616. The sale of Convertible Notes through the quarter ended March 31, 2021, raised total proceeds of $6,440,280.
The proceeds received in the April 23, 2020 Unit Offering for the year ended December 31, 2020 were allocated as follows:
From inception through December 31, 2020
Convertible Notes 3,151,516
Additional Paid In Capital - Exchange Rights 700,148
Proceeds 3,851,664
Convertible Notes 3,151,516
Additional Paid In Capital - BCF (263,537 )
Convertible Notes - Accrued Interest 130,655
Convertible Notes - Cost of Debt Offering (76,962 )
Convertible Notes Balance 2,941,672
The value of exchange rights, the BCF and the debt issuance costs are being amortized using the effective interest method over the term of the Note. The Company recognized interest expense of $130,655 associated with the Note for the year ended December 31, 2020. As of December 31, 2020, the carrying value of the Convertible Notes was $2,941,672.
NOTE 10 - STOCK WARRANTS ACCOUNTED FOR AS EQUITY INSTRUMENTS
The following table summarizes the warrants (including the warrants previously accounted for as derivatives) outstanding at December 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
10/8/2012 10/8/2027 Common $ 12.00 5,000
01/15/2014-12/31/2014 1/15/2024 Series A Convertible Preferred $ 6.40 972,720
04/30/2015-05/26/2015 4/30/2022 Common $ 16.00 218,334
6/30/2015 6/30/2022 Common $ 16.00 6,563
3/31/2016 3/31/2021 Common $ 10.00 10,600
4/30/2016 4/30/2021 Common $ 10.00
12/14/2016 12/1/2023 Common $ 8.00 50,000
7/18/2017 12/1/2023 Common $ 8.00 25,000
9/22/2017 12/1/2023 Common $ 8.00 25,000
12/4/2017 12/1/2023 Common $ 8.00 25,000
7/8/2019 12/1/2023 Common $ 8.00 50,000
11/11/2019 12/1/2023 Common $ 8.00 50,000
2/12/2020 12/1/2023 Common $ 8.00 25,000
Total
1,464,112
The warrants indexed to Series A Convertible Preferred Stock are currently exercisable and are exchangeable into 1.875 shares of common stock for each share of Series A Preferred.
NOTE 11 - STOCKHOLDERS’ EQUITY (DEFICIT)
Series A Convertible Preferred Stock
As of December 31, 2020, the Company is authorized to issue up to 3,000,000 shares of Series A Convertible Preferred Stock, or Series A Preferred. Each share of the Series A Preferred, which has a liquidation preference of $12.00 per share, is convertible at any time, at the option of the holder, into one share of Common Stock at the lower of: (a) $12.00 per share, or (b) 80% of the price at which the Company sells any equity or equity-linked securities in the future. The Series A Preferred also contains typical anti-dilution provisions that provide for adjustment of the conversion price to reflect stock splits, stock dividends, or similar events. The Series A Preferred is subject to mandatory conversion into Common Stock upon the listing of the Company’s Common Stock on a Qualified National Exchange. However, the Series A Preferred is not subject to the mandatory conversion until all outstanding Convertible Securities are also converted into common stock. Each holder of outstanding shares of Series A Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock info which the shares of Series A Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. The Series A 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 A Preferred.
There were 1,890,354 shares of Series A Convertible Preferred Stock outstanding as of both December 31, 2020 and 2019.
Series B Convertible Preferred Stock
As of December 31, 2020, and December 31, 2019, the Company was authorized to issue up to 1,500,000 shares of Series B Preferred Stock, of which 647,040 and zero were issued and outstanding as of December 31, 2020 and December 31, 2019Exchange rights received with the purchase of each unit of the Convertible Notes Unit offering dated April 23, 2020, allow for an exchange of two shares of Common Stock for two shares of Series B Preferred Stock. Exchange rights exercised resulted in the issuance of 647,040 Series B Preferred stock for the year ended December 31, 2020 and 854,354 of Series B Preferred stock issued for the quarter ended March 31, 2021. A total of 1,501,394 shares of Common Stock has been exchanged for Series B Preferred stock as a result of the exercised of exchange rights received with the purchase of each unit of the Convertible Notes Unit offering.
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 Stock with the rights in the Series A Certificate of Designations.
On December 28, 2020, the Board of Directors and a majority of the holders of Series A and Series B Preferred Stock consented to Amendments to the Second Amended and Restated Certificate of Designation of the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock by adapting the Third Amended and Restated Certificate of Designations of Series A and of Series B Convertible Preferred Stock. The Third Amended and Restated Certificate of Designations continue to allow for liquidation preference prior and in preference to any distribution of any of the assets of the Corporation to the holders of junior securities and, as amended, after the payment of all preferential amounts required to be paid to the holders of the Series A Preferred Stock, Series B Preferred Stock and other senior securities, the remaining assets of the corporation available for distribution to its stockholders shall be distributed among the holders of junior securities, including the Common Stock.
On March 31, 2021, after consent by the Board of Directors and a majority of the holders of Series B Preferred Stock, the Company filed the Fourth Amended and Restated Certificate of Designation of the Series B Convertible Preferred Stock increasing the number of authorized shares from 1,500,000 to 3,750,000.
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.
Common Stock
The Company is authorized to issue 25,000,000 shares of common stock, no par value per share. During the years ended December 31, 2020 and 2019, the Company issued 10,000 and 264,175 shares of common stock and exchanged 647,040 and zero shares of common stock for Series B Preferred stock, respectively. There were 3,387,403 and 4,024,443 shares of common stock issued and outstanding at December 31, 2020 and 2019, respectively.
Each outstanding share of common stock is entitled to one vote on each matter submitted to a vote, unless provided in our Articles of Incorporation, as amended. Each common stockholder is entitled to receive dividends, if declared. Holders of the common stock have no other preemptive or preferential rights to purchase additional shares of any class of the Company’s capital stock in subsequent stock offerings.
NOTE 12 - EQUITY INCENTIVE PLAN
We previously established the 2007 Stock Option Plan (the “2007 Plan”), which was scheduled to expire on October 30, 2017 and under which we granted key employees and directors options to purchase shares of our common stock at not less than fair market value as of the grant date. On May 4, 2017, the Board approved the 2017 Equity Incentive Plan (the “2017 Plan”) to replace the 2007 Plan, which became effective upon the approval of the stockholders holding a majority of the voting power in the Company on July 18, 2017. The 2017 Plan replaced the 2007 Plan and authorizes us to issue awards (stock options and restricted stock) with respect of a maximum of 1,200,000 shares of our common stock, which equals the number of shares authorized under the 2007 Plan.
As of December 31, 2020, and 2019, the Company had outstanding stock options to purchase up to 504,110 and 839,625 shares of common stock, respectively.
On September 30, 2020, and September 30, 2019, 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 $24,300 and $38,295 on September 30, 2020, and, September 30, 2019, respectively. The restricted stock issued to the Board members from September 30, 2017, through September 30, 2020 has an aggregate fair value of $320,000 and vests ratably in arrears over four quarters on the last day of each fiscal quarter following the grant date. As of December 31, 2020, and 2019, 35,000 and 23,125 of the 42,500 shares of restricted stock issued had vested, resulting in compensation expense of $84,600 and $90,000 for the years ended December 31, 2020 and December 31, 2019, respectively.
During the year ended December 31,2020, we granted 138,734 stock options to employees who had received a reduction in pay due to cost controls. These options have an exercise price of $8.00, vesting 1/3 upon the grant date and 1/3 on the anniversary of the grant for the next two years and a term of seven years. During the year ended December 31, 2019, we granted 70,000 stock options to employees, vesting equally over four years beginning on the first anniversary of the date of grant with an exercise price of $8.00 and a seven-year term. The aggregate fair value of the awards on the date of grant was $329,850 and $177,111, respectively, as of December 31, 2020, and December 31, 2019. Except for the stock options granted on April 1, 2020, all other stock options vest equally over four years beginning on the first anniversary of the date of grant.
The following table shows the stock option activity during the years ended December 31, 2020 and 2019:
Number of Options Number of Options
Options outstanding at beginning of year 839,625 797,875
Changes during the year:
Cancelled
(28,250 )
New options granted- at market price 148,734 70,000
Expired (484,249 )
Options outstanding at end of year 504,110 839,625
Options exercisable at end of year 271,502 498,393
Weighted average remaining contractual term (in months) 52.7 57.8
The weighted average exercise price of all stock options is $8.00 per share.
Stock-based compensation expense for employees and directors, for the years ended December 31, 2020 and 2019 was $529,390 and $459,885, respectively. Unrecognized compensation cost as of December 31, 2020 and 2019 was $510,515 and $854,405 respectively. Unrecognized compensation expense includes options which have not yet vested and is expected to be recognized over the next four years.
As of December 31, 2020, none of the currently exercisable stock options had intrinsic value. The intrinsic value of each option share is the difference between the fair value of our common stock and the exercise price of such option share to the extent it is “in-the-money”. Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the year and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the assumed market value of our common stock on December 31, 2020 of $8.00 per share, which is the price per share at which we have been selling shares of common stock to third parties in our Offering. There were no in-the-money options outstanding and exercisable as of December 31, 2020, since the exercise prices of the stock options outstanding and expected to vest were all equal to the fair value of our common stock. The following table presents changes in the number of non-exercisable options during 2020
Total- non-exercisable options outstanding- December 31, 2019 341,232
Options granted 148,734
Options vested (105,234 )
Options cancelled/forfeited (152,124 )
Outstanding non-exercisable options outstanding as of December 31, 2020 232,608
Weighted average grant date fair value $ 8.00
Weighted average remaining vested period (in months)
The fair value of options granted during the year ended December 31, 2020, totaled $354,150. The total fair value of options granted during the year ended December 31, 2019 was $215,406.
The fair value of the options granted during the years ended December 31, 2020 and 2019 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
Fair value of underlying stock $ 8.00 $ 8.00
Expected option life 4.51 - 4.75 years 4.75 years
Expected stock price volatility 35.36% 41.07% - 42.95%
Risk free interest rate 0.22% - 0.29% 1.51% - 2.23%
Expected dividend yield 0.00% 0.00%
Information with respect to restricted stock awards outstanding was as follows:
Outstanding non-vested restricted stock at beginning of year: 6,250 5,000
Granted 10,000 12,500
Vested (10,575 ) (11,250 )
Cancelled/forfeited (2,025 ) -
Outstanding non-vested restricted stock 3,800 6,250
Weighted average grant date fair value $ 8.00 $ 8.00
Weighted average remaining vested period (in months) 4.5 4.5
NOTE 13 - LEASES
Right of Use Asset and Leased Liability:
Estimated Lease Life - Lease term through December 2022
Right-of-use lease assets- operating as of January 1, 2020 $ 1,606,443
Less: Accumulated amortization (548,829 )
Right-of-use lease assets- operating as of December 31, 2020 $ 1,057,614
Lease liability-operating as of January 1, 2020 $ 1,704,069
Less: Accumulated Amortization (422,313 )
Lease liability operating-as of December 31, 2020 $ 1,281,756
Operating lease expense for the twelve months ended December 31, 2020 $ 639,903
Actual remaining lease payments, December 31, 2020 $ 1,407,885
Present value of remaining payments, December 31, 2020 $ 1,281,756
Supplemental cash flow information related to leases: Operating Leases Twelve months ended December 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 512,645
Weighted average remaining lease term- operating leases (in months) 21.2
Weighted average discount rate- operating leases (annual) 9.98 %
Maturities of leases liabilities were as follows:
Year ending December 31, 2021 736,027
Year ending December 31, 2022 671,858
Total Lease payments $ 1,407,885
Less imputed interest (126,129 )
Total $ 1,281,756
NOTE 14 - INCOME TAXES 	
The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rates due to a valuation allowance which has been established against the entire deferred tax asset as of December 31, 2020 and 2019. Below is the income tax determined by applying the U.S. federal and state income tax rates as well as the corresponding Valuation Allowance.
Deferred tax assets:
Net operating loss carry forwards $ 15,190,000 $ 13,315,000
Miscellaneous temporary differences 42,000 50,000
Research and development credits 870,000 760,000
Deferred tax liabilities:
Leasehold improvements and equipment
(64,000 ) (20,000 )
Miscellaneous temporary differences
Net deferred tax asset $ 16,038,000 $ 14,105,000
Valuation Allowance $ (16,038,000 ) $ (14,105,000 )
Federal net operating loss carry forwards of $68,000,000 and $60,400,000 exist as of December 31, 2020 and 2019, respectively. State net operating loss carry forwards of $13,100,000 and $9,000,000 exist as of December 31, 2020 and 2019, respectively.
The primary difference between the net operating loss carry forwards and the accumulated deficit arises from certain stock option, warrants and other debt and equity transactions that are considered permanent differences. These losses were incurred in the years 2006 through 2020 and will expire between 2026 and 2040 and their utilization may be limited if we experience significant ownership changes. The Company has not conducted a full IRC Section 382 analysis to determine if a reduction in net operating loss carry forwards is required due to ownership changes. The analysis has not been undertaken due to the financial burden it would cause and changes, if any, resulting in a reduction to the deferred tax asset and related valuation would have no impact on the net deferred tax asset or expense recognized. The research and development credits will expire between 2028 and 2039. A rate of 28% has been used to calculate the deferred tax assets and liabilities based on the expected effective tax rates, net of applicable credits, upon reversal of the differences above.
There were no uncertain tax positions in either 2020 or 2019.
NOTE 15 - Customer, Supplier, country and Product Concentrations
Product Concentration
For 2020, we had a concentration of product revenue from one product that was greater than 10% of total product revenues. Revenue from one of the Company’s graphene nanoplatelets materials, Grade C 500 m²/g, was 60%. For 2019, we had a concentration of product revenue from one product that was greater than 10% of total product revenues. Revenue from one of the Company’s graphene nanoplatelets materials, Grade C 500 m²/g, was 62%. We attempt to minimize the risk associated with product concentrations by continuing to develop new markets and products to add to our portfolio.
Customer Concentration
We had one customer whose purchases accounted for 52% and 41% of total product revenues in the twelve months ended December 31, 2020 and December 31, 2019, respectively. At December 31, 2020 and December 31, 2019, there were two customers who had an accounts receivable balance greater than 20% and 10% of our outstanding receivable balance, respectively.
Country Concentration
We sell our products on a worldwide basis. International revenues in 2020 and 2019, as a percentage of total product revenue, were 47% and 49%, respectively. All of these sales are denominated in U.S. dollars.
For 2020, revenue from three countries, Korea, Switzerland and the UK, other than in the United States accounted for 40% of total product revenue. For 2019, revenue from three countries, Korea, Switzerland and the UK, other than in the United States accounted for 47% of total product revenue.
Suppliers
We buy raw materials used in manufacturing from several sources. These materials are available from a large number of sources. A change in suppliers has no material effect on the Company’s operations. We did not have any purchases from one supplier that were more than 10% of total purchases in either 2020 or 2019.
NOTE 16 - RELATED PARTY TRANSACTIONS AND COMMITMENTS
For the twelve months ended December 31, 2020, the Company Directors, Management and affiliates purchased 401,708 Units (See Note 1) with total proceeds of $3,213,664. Interest accrued on the Convertible Notes which were a part of this Unit offering during the twelve months ended December 31, 2020, was $64,612. With the Unit purchases, the purchaser was entitled to the rights to exchange 803,416 shares of Common stock for Series B Preferred stock. The Company Directors, Management and affiliates exchanged 589,290 shares of Common stock for Series B Preferred stock for the twelve months ended December 31, 2020.
Related Parties (1) Units Purchased in 2020 Proceeds Interest Expense Accrued Rights to Exchange Common Stock for Series B Preferred Stock (2) Shares of Common Stock exchanged for Shares of Series B Preferred Stock
Arnold A. Allemang & Affiliates 192,063 $ 1,536,504 $ 31,580 384,126 250,000
Robert M. Blinstrub 7,770 $ 62,160 $ 181 15,540 15,540
Steven J. Jones & Affiliates 187,500 $ 1,500,000 $ 29,703 375,000 295,000
David G. Pendell & Affiliates 14,375 $ 115,000 $ 2,698 28,750 28,750
Total 401,708 $ 3,213,664 $ 64,162 803,416 589,290
(1) Related parties include relatives as well as purchasers for whom the Director or Management has management or control responsibilities. For Mr. Jones, AAOF and ASOF are affiliates, although Mr. Jones disclaims beneficial ownership of the shares of AAOF and ASOF. For Mr. Pendell, ASC-XGS, LLC and XGS II, LLC are affiliates, although Mr. Pendell disclaims beneficial ownership of the shares of ASC-XGS, LLC and XGS II, LLC.
(2) Unit purchasers received the right to assign the rights to exchange Common Stock for Series B Preferred Stock to other holders of Common Stock
During 2019, affiliates of Mr. Pendell, our director, purchased 3,125 shares of common stock with an investment of $25,000. During 2019, Ms. Jacqueline Lemke, the Chief Financial Officer, purchased 5,000 shares of common stock with an investment value of $40,000.
Among other things, the Shareholder Agreement provides for certain voting and nomination rights to be calculated on the basis of “Full Conversion” stock ownership (under which calculation, all convertible notes, preferred shares, or other convertible equity securities are deemed converted into common stock) as follows:
● So long as AAOF or its affiliates own 10% of more of the aggregate outstanding Shareholder Stock (as defined in the Shareholder Agreement):
● the size of the Board of Directors shall be set at seven individuals.
● one person nominated by AAOF shall be elected to the Board of Directors.
● two members of the Board of Directors, other than those nominated by AAOF, POSCO or Hanwha Chemical, shall qualify as independent Directors.
● So long as POSCO owns 10% of more of the aggregate outstanding Shareholder Stock, one person nominated by POSCO shall be elected to the Board of Directors. POSCO does not currently own at least 10% of the aggregate outstanding Shareholder Stock and therefore, there is no POSCO representative on the Board of Directors.
● So long as Hanwha Chemical owns 10% of more of the aggregate outstanding Shareholder Stock, one person nominated by Hanwha Chemical shall be elected to the Board of Directors. Hanwha does not currently own at least 10% of the aggregate outstanding Shareholder Stock and therefore, there is no Hanwha representative on the Board of Directors.
As of December 31, 2016, the ownership percentage of AAOF, as calculated for purposes of director voting, required the shareholders bound by the Shareholder Agreement to vote for a director nominated by AAOF. Mr. Jones is the AAOF representative to the Board pursuant to the terms of the Shareholder Agreement.
The Shareholder Agreement grants preemptive rights to shareholders and holders of convertible notes who are parties to the Shareholder Agreement. Pursuant to the terms therein, such shareholders and noteholders have the right to purchase their pro rata share of all shareholder stock that the Company may, from time to time, propose to sell, issue, or exchange after the date of the Shareholder Agreement, other than certain excluded stock which includes stock granted to employees or as merger consideration. Each shareholder’s pro rata shares shall be equal to the ratio of (i) the aggregate number of shares of the Company’s common stock on a fully diluted basis, owned by the shareholder at the time of the delivery of a preemptive rights notice to (ii) the aggregate number of shares of Company’s common stock on a fully diluted basis owned by all of the Company’s shareholders at the time of the delivery of a preemptive rights notice.
The Shareholder Agreement may be amended or terminated by agreement (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of (i) a majority of the Board, and (ii) persons holding, in the aggregate, shares of Shareholder Stock representing at least sixty percent (60%) of the voting power of all shares of Shareholder Stock then held by Shareholders and their permitted assignees.
The February 26, 2016 amendment provides that holders of Excluded Stock are not subject to the terms of the Shareholders Agreement. Excluded Stock means shares of common stock that are subject to a registration statement that has been filed with the SEC and has been declared effective, and, for the avoidance of any doubt, includes the 3,000,000 shares being offered under the Registration Statement. This amendment took effect upon the effectiveness of our Registration Statement.
The Amendment to the Shareholder Agreement further clarifies that preemptive rights shall not apply to Excluded Stock (including, without limitation, the 3,000,000 shares being offered under the Registration Statement) and amends the termination date of the Shareholders Agreement. The Shareholder Agreement will continue in effect, unless the Shareholder Agreement is earlier terminated in accordance with its terms until the date on which the Company’s common stock is listed on the NASDAQ Stock Market of the New York Stock Exchange. As a result, the Shareholder Agreement will continue to remain in effect and certain of our larger shareholders will be entitled to continue to exercise their rights under such Shareholder Agreement, but purchasers of shares of common stock under the registration statement filed in connection with our current offering are not required to adopt the Shareholder Agreement.
On April 23, 2020, the Dow Chemical Company amended and restated certain terms of our current loan facility to allow the Company to structure an offering of subordinated, secured convertible notes (“Convertible Notes”) and such offering, the “Unit Offering”, instrument to support ongoing cash needs. In the Amended Dow Facility, Dow has agreed to 1) extend the term of our current loan for two years December 1, 2023, 2) significantly reduce any pre-payment requirements from the proceeds of new equity or equity-linked investments from the current 30-50% repayment requirement on the pre-existing Dow Facility to a 10% repayment requirement in the Amended Dow after we have raised an additional $7 million in 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 year and 5) allow for a subordinated security interest for a Convertible Note offering.
Immediately after the execution of the transaction documents related to the Amended Dow Facility, we began the Unit Offering in a private placement to accredited investors. The Unit Offering is comprised of the Convertible Notes and a fully assignable or transferrable right to exchange two shares of previously issued Common Stock of the Company for two shares of Series B Preferred Stock of the Company 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 the Company has received a completed subscription agreement. At the option of each holder, the Convertible Notes are convertible into either i) Series B Convertible Preferred Stock (“Series B Preferred Stock”) at a note conversion price of $8.00/share; or ii) any other form of preferred or common stock (“Subsequent Stock”) issued by the Company 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).
If and when we raise at least $15 million of equity capital (excluding capital raised in this Unit Offering), the Convertible Notes will be mandatorily 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 will have 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 will have 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” will be 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.
NOTE 17 - RETIREMENT PLAN
We maintain a defined-contribution 401(k) retirement plan covering substantially all employees (as defined by our plan document). Employees may make voluntary contributions to the plan, subject to limitations based on IRS regulations and compensation. The plan allows for an employer match contribution. The employer match expense was $77,766 and $110,743 for the years ended December 31, 2020 and 2019, respectively.
NOTE 18 - LETTER OF CREDIT
In April of 2019, we were relieved of the requirement by one of our lease agreements to maintain a letter of credit of approximately $190,000 in exchange for placing one month rent on deposit with the lessee. Through April of 2019, to support this letter of credit, we were required to maintain an equivalent cash deposit. As of December 31, 2020, and 2019, there was no outstanding letters of credit nor supporting cash deposits.
NOTE 19 - SUBSEQUENT EVENTS
Financing
We continued sales of the Unit Offering throughout the first quarter of 2021. See Derivatives Liability write-up in Note 2.
In February of 2021, we applied for continued relief under the Coronavirus Aid, Relief and Economic Security Act (CARES) by applying to an SBA lender bank, PNC, for a second Paycheck Protection Plan (“PPP”) loan. On February 16, 2021, we received an approved and fully executed PPP Term Note for $536,700 with a term of five years, a repayment deferral period which is 10 months plus 24 weeks from the date that the funds were disbursed or the date any forgiven amount of the Facility is remitted by the SBA to the Bank, 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. Funds were disbursed to us on February 17, 2021.
In May of 2021, we applied for loan forgiveness for the first PPP loan, with proceeds of $790,795, as received in April of 2020. In July of 2021, the SBA granted 100 % forgiveness of this PPP loan and its accrued interest.
Related Party Transactions
As of March 31, 2021, the Board of Directors and their affiliates, including Management of the Company, had purchased $3,986,520 of Convertible Notes.
Other
On September 27, 2021, Steven Jones resigned as a member of our Board of Directors. There was no disagreement with XG Sciences management nor any matter relating to XG’s operations, policies or practices.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
At the conclusion of the period ended December 31, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2020, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our Principal Executive Officer and Principal Financial Officer, in a manner that allowed for timely decisions regarding required disclosure.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework published in 2013. Based on this assessment, and on those criteria, management concluded that the Company has two material weaknesses in its internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We consider the lack of proper segregation of duties and reviews as well as the lack of timely filings to be material weaknesses: The Company operates with a small finance and accounting team where there is, at times, a lack of segregation of duties and limited review controls in place. The Company was unable to timely file the report for the year ending December 31, 2020, due to the time required by a valuation study needed to properly analyze and account for the April 23, 2020, Convertible Notes Unit Offering.
This report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers of the Company
The following table sets forth the name and age of the Company’s executive officers, Directors and significant employees as of the date of this filing. There are no family relationships among any of our executive officers or directors.
Name
Age
Position(s)
Robert M. Blinstrub
Chief Executive Officer, President, & Director
Arnold A. Allemang
Chairman of the Board, Chairman of the Executive Committee, and member of the Audit and Compensation Committees
David G. Pendell
Director, member of the Nominating and Corporate Governance Committee
Jacqueline M. Lemke
Chief Financial Officer
Leroy Magwood
Chief Technologist of Research & Development
Biographies of Officers and Directors
Robert M. Blinstrub
Mr. Blinstrub was appointed to serve as Chief Executive Officer on August 27, 2020. He was a founder and President and CEO of AGM Automotive (“AGM”), a global designer, innovator and producer of engineered solutions for light vehicles, including lighting, overhead consoles, electronics and textiles headquartered in Troy, Michigan with 9 locations globally including the United States, Costa Rica, Mexico, Austria, and China, from 2001 to 2017. AGM leveraged a global footprint underpinned by world-class engineering, production, assembly and supply chain management functions. As an original founder of AGM, Mr. Blinstrub oversaw its development into a global automotive supplier with OEM customers representing the largest American, European, and Asian OEM’s. AGM historically doubled its revenue base every 18 months (profitably). During the latter part of his tenure, AGM acquired and successfully integrated two competitors in the North American and European markets. AGM accumulated countless supplier awards from its customers for World Class Quality, Product Design, Engineering, Innovations, and Service. Prior to AGM, Mr. Blinstrub led multiple startups and operational turnarounds in his career. Mr. Blinstrub studied Finance and Marketing at the Broad College of Business at Michigan State University. In light of the aforementioned experience qualifications, attributes and skills, we believe Mr. Blinstrub is qualified to serve as a director.
Arnold A. Allemang
Mr. Allemang has served as a Director of XG Sciences since March 2010 and Chairman of the Board since January 2016. Mr. Allemang was employed by Dow, headquartered in Midland, Michigan for 43 years. Mr. Allemang joined Dow in 1965 in Freeport, Texas. After five years in the Solvents Development Lab, he transferred to Stade, Germany. In 1972, he returned to the United States for various technical and managerial assignments. Mr. Allemang was named unit manager for Freeport’s Chlorinated Ethanes in 1981, and two years later assumed the same role for Light Hydrocarbons and Acetylene. He transferred to Terneuzen, The Netherlands, in 1984 to become production manager for Light Hydrocarbons I, and in 1986 became responsible for process control and engineering functions. In 1988, he returned to Freeport to manage the site’s hydrocarbons production and moved to Midland in 1989 as Director of Technology Centers. Mr. Allemang was named Manufacturing General Manager for Dow Benelux in 1992, and in early 1993 was named regional vice president, Manufacturing and Administration, Dow Benelux. He was named vice president, Manufacturing Operations Dow Europe in late 1993. In August 1995, Mr. Allemang was named vice president, Operations, which included global manufacturing and engineering activities. He then became executive vice president of Dow in 2000 and was named senior advisor in 2004. In March 2008, he retired as a Dow employee. Mr. Allemang was elected to the Dow Board of Directors in July 1996 and served until May 2015. Mr. Allemang received a bachelor’s degree in chemistry from Sam Houston State University in Huntsville, Texas. In light of the aforementioned experience qualifications, attributes and skills, we believe Mr. Allemang is qualified to serve as a director.
David G. Pendell
Mr. Pendell is a principal of the Aspen Advanced Opportunity Fund. From June 2009, Mr. Pendell has served as General Partner and Officer of Advanced Stage Capital LLC, which he owns and operates. Since January 2011 Mr. Pendell has served as General Partner and Officer of ASC Lease Income LLC. From May of 2013 until February 2016, Mr. Pendell served as a Board Observer of the Company until he was appointed to the Board in February 2016. In addition, Mr. Pendell has served and continues to serve on the board of directors of ERP Maestro (since June of 2013) and the board of directors of Strategic Health Services Inc. (since April of 2015) and has worked with Aspen Advanced Opportunity Fund and Veterans Capital Fund. Mr. Pendell was responsible for the successful launch and subsequent profitable sale of five start-up entities in which he was the lead entrepreneur and numerous other investments where he served as a lead investor/mentor/coach. Predominantly, Mr. Pendell led the growth of Pendell Printing, Inc. from a small print firm of less than $1MM in sales in 1971 to over $85MM in 1998 when the sale of the business was completed. Past management roles include Chairman of the Board/President of Pendell Printing Inc.; co-founder of Envision Inc., a graphic solutions enterprise; President and CEO of Baustert Engineering, Inc., a software business; co-founder of Ecoland, a timber/real estate development company; founder of The Earth Generation, an environmental education publisher; and co- Founder of Fuel Oil News, a publication for the home heating industry. Mr. Pendell also actively participates in the Michigan Angel Fund and Tamiami Angel Fund I and II. He received his BS in Psychology from Central Michigan University in 1969. In light of the aforementioned experience qualifications, attributes and skills, we believe Mr. Pendell is qualified to serve as a director.
Jacqueline M. Lemke
Ms. Lemke joined the Company in November 2018 and currently serves as our Chief Financial Officer. Ms. Lemke’s career as a senior leader in billion dollar revenue manufacturing organizations includes Global Vice-President of Finance and CFO of: Remy, Inc.; Connected Home Solutions at Motorola, Inc.; DuPont Global Flooring; DuPont Global Polyester Resins; DuPont, Principal of Mergers & Acquisitions; CFO, Global Strategic Planning Director Invista, a $7 billion division of the DuPont Company; Americas Controller for ICI Polyester; Strategic Planning Analyst at Sunoco and Tax Analyst at Deloitte & Touche. From 2012 to 2016, Ms. Lemke served as President and CEO of Bioanalytical Systems, Inc., a Nasdaq listed contract biopharmaceutical research organization, where she successfully refinanced and modernized the company’s capabilities while positioning the business for sustainable value creation. Ms. Lemke’s experience includes managing cyclical, global businesses, negotiating and implementing mergers, acquisitions and joint ventures and building an infrastructure to execute refinancing as well as change in business strategies. Ms. Lemke is a Certified Public Accountant (CPA) who has earned a Bachelor of Science degree in Finance and Accounting from Drexel University, graduating first in the class, and a Master’s Degree in Management from Northwestern University. Ms. Lemke has also served on the Board of Directors of the American Brain Tumor Association since January of 2017.
Leroy Magwood, Ph.D.
Dr. Magwood joined the Company in January 2019 and currently serves as Chief Technology Officer. Prior to joining XG Sciences, Dr. Magwood served as Principal Engineer at Savannah River National Laboratory where he was involved in the development of organic dichromic compounds for use in sensors as well as energetic abatement of noxious gases from nuclear waste tanks. Before joining Savannah River National Laboratory, he spent 5 years in various technical roles at PPG Fiberglass Industries, Surmasis Pharmaceuticals and DSM Functional Materials contributing in such diverse areas as fiber glass sizing, drug delivery, UV Coatings and 3D Printing materials and processes. He earned his Ph.D. in Chemical and Biochemical Engineering from the University of Iowa and holds a B.S. in Physics from Benedict College.
Legal Proceedings
To our knowledge, neither we nor any of our officers or directors is a party to any material legal proceeding or litigation and such persons know of no material legal proceeding or contemplated or threatened litigation. There are no judgments against us or our officers or directors. None of our officers or directors, promoters or control persons has been convicted of a felony or misdemeanor relating to securities or performance in corporate office.
Corporate Governance
Audit Committee
Our Board has established an Audit Committee, which is composed of Arnold A. Allemang, Steven C. Jones and chaired by Steven C. Jones until his resignation on September 27, 2021. Pursuant to our Audit Committee charter, the Audit Committee was established for the primary purpose of assisting the Board in its oversight of the Company’s tax, legal regulatory and ethical compliance. The Audit Committee assists the Board in certain areas, including, but not limited to:
● Oversight and monitoring of the Company’s financial statements, accounting and financial reporting processes, financial statement audits, and other financial information provided by the Company to its shareholders and others;
● Overseeing the Company’s compliance with legal, regulatory, and public disclosure requirements;
● Oversight of the Company’s registered public accounting firm’s (“independent auditor”) qualifications and independence;
● Overseeing the performance of the Company’s independent auditor and the internal audit function;
● Overseeing the Company’s systems of disclosure controls and procedures, internal controls over financial reporting, and compliance with ethical standards adopted by the Company;
● Oversight of treasury and finance matters;
● Oversight and monitoring of enterprise risk management, privacy, and data security;
● Oversight of the auditing, accounting, and financial reporting process generally;
● Preparation of a report of the Committee to be included in the Company’s annual proxy statement in accordance with any applicable rules of the SEC; and
● Review and approval of related-party transactions (as defined by any applicable rules of the SEC and any applicable listing standards of the NASDAQ).
The members of the Committee are appointed by the Board at its annual meeting from among the Company’s directors. Members are appointed to serve until their successors are duly elected and qualified by the Board, or until their resignation or removal. The Board determines the number of members on the Committee from time to time, but in any event the Committee is to be composed of at least three Board members or any greater minimum number as required by applicable law, the Company’s Bylaws, or the Company’s contractual obligations. The Board may appoint a chairperson and secretary for the Committee. If the Board does not appoint a chairperson or a secretary, the members of the Committee may elect a chairperson or secretary, respectively, by majority vote.
Each member of the Committee is and must be “independent” in accordance with the Company’s contractual obligations and any applicable SEC and NASDAQ rules. The Board determines the standards that are currently applicable to determining whether a member is “independent” and whether each member or nominee member of the Committee satisfies those standards.
The members of the Committee must also satisfy other applicable qualification rules of NASDAQ and the SEC. Generally, each member of the Committee must have a strong level of accounting or financial acumen and must be able to read and understand fundamental financial statements. A member of the Committee may not have participated in the preparation of financial statements of the Company or any current subsidiary of it at any time during the past three years. To the extent required by applicable rules of the SEC, at least one member of the Committee must be a “financial expert” as defined by the applicable rules of the SEC. In general, to be considered a “financial expert,” an audit committee member must have the following attributes:
● An understanding of generally accepted accounting principles and financial statements.
● The ability to assess the general application of generally accepted accounting principles in connection with the accounting for estimates, accruals, and reserves.
● Experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements, or experience actively supervising one or more persons engaged in such activities.
● An understanding of internal controls and procedures for financial reporting.
● An understanding of audit committee functions.
Steven Jones qualified and Arnold Allemang qualify as “audit committee financial experts” as the term is defined under the SEC rules.
The Audit Committee has established its pre-approval policies and procedures, pursuant to which the Audit Committee approved the foregoing audit services, provided by RSM for the years ended December 31, 2020 and 2019 (See Item 9). Consistent with the Audit Committee’s responsibility for engaging the Company’s independent auditors, all audit and permitted non-audit services require pre-approval by the Audit Committee. The Audit Committee approves proposed services and fee estimates for these services. The Audit Committee chairperson or his designee has been designated by the Audit Committee to approve any services arising during the year that were not pre-approved by the Audit Committee.
The Audit Committee assists the Board in its general oversight of our financial reporting, internal controls, and audit functions, and is directly responsible for the appointment, compensation, and oversight of the work of our independent registered public accounting firm. The Audit Committee reviews and discusses with management and our independent accountants the annual audited and quarterly financial statements (including the disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), reviews the integrity of the financial reporting processes, both internal and external, reviews the qualifications, performance and independence of our independent accountants, and prepares the Audit Committee Report included in this Annual Report on Form 10-K in accordance with rules and regulations of the Securities and Exchange Commission. The Audit Committee has the power to investigate any matter brought to its attention within the scope of its duties. It also has the authority to retain counsel and advisors to fulfill its responsibilities and duties.
Nominating and Corporate Governance Committee
Our Board has established and adopted a charter for a Nominating and Corporate Governance Committee (“NGC”). The Committee is composed of Arnold A. Allemang, David G. Pendell, and, until his resignation on September 27, 2021, Steven C. Jones, and chaired by Steven C. Jones. As provided in its charter, the Nomination and Corporate Governance Committee was established for the primary purposes of considering and reporting to the Board on matters relating to the identification, selection, and qualification of Board members and candidates nominated to the Board as well as assisting the Board with respect to corporate governance matters. The NGC is responsible for providing support to the Board in certain areas, including:
● Assisting the Board by identifying individuals qualified to become Board members.
● Recommending to the Board the director nominees for the next annual meeting of shareholders.
● Leading the Board in an annual review of the Board’s performance.
● Recommending to the Board director nominees for each committee.
● Developing, maintaining, and overseeing the Company’s corporate governance guidelines.
● Making recommendations to the Board with respect to corporate governance matters.
The members of the NGC are appointed by the Board at its annual meeting from among the Company directors and are appointed to serve until their successors are duly elected and qualified by the Board, or until their resignation or removal. The Board determines the number of members on the NGC from time to time, but in any event the NGC must be composed of at least three Board members or any greater minimum number as required by applicable law, the Company’s Bylaws, or the Company’s contractual obligations. The Board may appoint a chairperson and secretary for the NGC. If the Board does not appoint a chairperson or a secretary, the members of the NGC may elect a chairperson or secretary, respectively, by majority vote..
Each member of the NGC is and must be “independent” in accordance with the Company’s contractual obligations and any applicable SEC and NASDAQ rules. The Board determines the standards that are currently applicable to determining whether a member is “independent” and whether each member or nominee member of the NGC satisfies those standards.
Compensation Committee
Our Board has established a Compensation Committee, which is composed of Steven C. Jones, until his resignation on September 27, 2021 and Arnold A. Allemang and chaired by Arnold A. Allemang. The Compensation Committee was established for the primary purpose of assisting the Board with the review and determination of executive compensation and the oversight, review, and approval of significant employee benefits programs, policies, and plans. The Board has adopted a Compensation Committee charter.
The members of the Compensation Committee are appointed by the Board at its annual meeting from among the Company’s directors and are appointed to serve until their successors are duly elected and qualified by the Board, or until their resignation or removal. The Board will determine the number of members on the Compensation Committee from time to time, but in any event the Compensation Committee must be composed of at least three Board members, or any greater minimum number as required by applicable law, the Company’s Bylaws, or the Company’s contractual obligations.
Each member of the Compensation Committee must be “independent” in accordance with the Company’s contractual obligations and any applicable SEC and NASDAQ rules. Each member of the Compensation Committee must also qualify as an “outside director” for purposes of 162(m) of the Internal Revenue Code of 1986, as amended. The Board shall determine the standards that are currently applicable to determining whether a member is “independent” and whether each member or nominee member of the Compensation Committee satisfies those standards.
Executive Committee
Our Board has established an Executive Committee, which is composed of Arnold A. Allemang and, until his resignation on September 27, 2021, Steven C. Jones. Pursuant to our Executive Committee charter, the Executive Committee was established for the primary purpose of exercising the powers and duties of the Board between Board Meetings and while the Board is not in session and to implement policy decisions of the Board.
During the intervals between meetings of the Board, the Executive Committee may exercise all of the powers and authority of the Board of Directors for the purpose of acting upon matters that should not be postponed until the next scheduled meeting of the Board. The members of the Executive Committee are to exercise their business judgment to act in what they reasonably believe to be in the best interests of the Corporation and its shareholders. The Executive Committee will have all powers and authority of the Board enumerated in the Bylaws of the Corporation, except to:
1. Take action specifically reserved for another committee of the Board;
2. Amend the Corporation’s Articles of Incorporation or Bylaws;
3. Adopt an agreement of merger, conversion, or share exchange;
4. Recommend to shareholders the sale, lease, or exchange of all or substantially all of the Corporation’s property and assets;
5. Recommend to shareholders a dissolution of the Corporation or a revocation of a dissolution;
6. Fill vacancies in the Board;
7. Declare a distribution or dividend or to authorize the issuance of shares; or
Take action with respect to any other matter that the Board may not delegate to the Committee under the Michigan Business Corporation Act, the Corporation’s Articles of Incorporation, the Corporation’s Bylaws, or the Corporation’s contractual commitments.
Notwithstanding the foregoing, the Board may, by resolution or an amendment to this Charter, restrict the powers and authority of the Executive Committee, in its sole discretion. In addition, the Executive Committee shall comply with all directions of the Board and shall discharge all duties and responsibilities expressly delegated by the Board to the Executive Committee.
The Executive Committee may delegate any of its responsibilities, along with the authority to take action in relation to such responsibilities, to one or more subcommittees as the Committee may determine to be appropriate. The Board may appoint a chairperson and secretary for the Compensation Committee. If the Board does not appoint a chairperson or a secretary, the members of the Compensation Committee may elect a chairperson or secretary, respectively, by majority vote. Arnold Allemang currently serves as the Chairperson of the Compensation Committee.
Conflicts of Interest
Certain potential conflicts of interest are inherent in the relationships between our officers and directors and us.
From time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that we own and operate. These persons expect to continue to form or hold ownership interests in and/or manage additional businesses which may compete with our business with respect to operations, including financing and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among the interests of us and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking such activities, and neither we nor our stockholders will have any right to require participation in such other activities.
Further, because we have transacted business and intend to continue to do so with some of our officers, directors and affiliates, as well as with firms in which some of our officers, directors or affiliates have a material interest, including, without limitation, Samsung Ventures, ASC XGS, LLC, XGS II, LLC and AAOF, LP, potential conflicts may arise between the respective interests of us and these related persons or entities. We believe that such transactions will be affected on terms at least as favorable to us as those available from unrelated third-parties.
With respect to transactions involving real or apparent conflicts of interest, we have adopted policies and procedures which require that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval; and (ii) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.
Risk Oversight
The Board of Directors is actively involved in the oversight of risks, including strategic, operational and other risks, which could affect our business. The Board of Directors does not have a standing risk management committee but administers this oversight function directly through the Audit Committee and the Board of Directors as a whole. The Board of Directors considers strategic risks and opportunities and administers its respective risk oversight function by evaluating management’s monitoring, assessment and management of risks, including steps taken to limit our exposure to known risks, through regular interaction with our senior management and in Board and committee deliberations that are closed to members of management. The interaction with management occurs not only at formal Board and committee meetings but also through periodic and other written and oral communications.
Meetings of the Board and Committees
The Board met 6 times in 2020. The Board of Directors also acted at times by unanimous written consent, as authorized by our Bylaws and the Michigan Business Corporation Act. The Audit Committee met 4 times in 2020. The Compensation Committee met 3 times in 2020. The Nominating and Governance Committee did not meet in 2020.
Director Independence
Our Board of Directors has determined that we currently have two independent directors on our Board of Directors: Arnold A. Allemang and David G. Pendell and, until his resignation on September 27, 2021, we had a third independent director on our Board of Directors, Steven C. Jones. Robert Blinstrub is not considered independent. Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of the NASDAQ Stock Market to make this determination.
NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the Company or any other individual, having a relationship that, in the opinion of the Company’s Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
● the director is, or at any time during the past three years was, an employee of the Company;
● the director or a family member of the director accepted any compensation from the Company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for Board or Board committee service);
● a family member of the director is, or at any time during the past three years was, an executive officer of the Company;
● the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the Company made, or from which the Company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
● the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the Company served on the compensation committee of such other entity; or
● the director or a family member of the director is a current partner of the Company’s outside auditor, or at any time during the past three years was a partner or employee of the Company’s outside auditor, and who worked on the Company’s audit.
The following is a summary of certain of the experience, qualifications, attributes, and skills that led the Company’s Board of Directors to conclude that such person should serve as a director or officer. This information supplements the biographical information provided above.
Robert Blinstrub, Chief Executive Officer, President, & Director. Mr. Blinstrub’s experience founding, running and selling a successful global supply company of innovative engineered products for light vehicles will enable him to assist the Board and management as they endeavor to expand the Company globally and on matters of supplier relations in the key field of automotives.
Arnold A. Allemang, Chairman of the Board. Mr. Allemang’s previous board service for several corporations and substantial managerial and operational history at The Dow Chemical Company will prove valuable to the Board as it seeks to implement and maintain growth strategies that will enable the Company to succeed.
David G. Pendell, Director. Mr. Pendell’s experience in successfully building businesses in a range of end-use markets will prove very useful to the Board.
Code of Ethics
We have a Code of Ethics applicable to our principal executive, financial and accounting officers, a copy of which is referenced as Exhibit 14 to this report and can be found on our website at xgsciences.com

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth all compensation earned and accrued, in all capacities, during the fiscal years ended December 31, 2020, and 2019 by our named executive officers and former named executive officers:
Name and Position Year Salary Bonus Restricted Stock Option Expense(1) Total
Robert M. Blinstrub, (2) 125,113 - 10,000 1,919 137,032
Chief Executive Officer 10,000 - 10,000 20,482
Jacqueline M. Lemke, 209,150 - - 120,463 329,613
Chief Financial Officer 235,000 - - 88,772 323,772
Leroy Magwood, 161,550 - - 52,998 214,548
Chief Technology Officer 140,192 - - 8,251 148,443
Philip L. Rose, (3) 257,802 - - 94,848 352,650
former Chief Executive Officer 287,404 35,000 - 132,760 455,164
(1) Option expense is calculated using the fair value of options that vested during the period. See Note 11 to our financial statements included in this report.
(2) With regard to Mr. Blinstrub’s compensation, all of 2019 compensation was earned as a Director of the Company; $8,000 of salary, and all restricted stock and stock option expense earned in 2020 was earned as a Director of the Company. All other reported compensation was earned as the Chief Executive Officer of the Company, effective August 27, 2020.
(3) Mr. Rose resigned as Chief Executive Officer of the Company effective August 26, 2020.
Outstanding Equity Awards at Fiscal Year-End
The Board of Directors of the Company occasionally awards stock options and restricted common stock under the Company’s 2017 Plan. Additionally, stock warrants have been issued to certain officers and directors of the Company in conjunction with financing agreements. The following table sets forth information regarding outstanding stock option and stock warrant awards as of December 31, 2020:
Name and Position (s) Number of Securities Underlying Unexercised Options and Warrants that are currently Exercisable Number of Securities Underlying Unexercised Options and Warrants that are currently Unexercisable Exercise Price Expiration Date
Robert M. Blinstrub, Chief Executive Officer 1,875 $ 8.00 9/30/2026
Jacqueline M. Lemke, 60,000 60,000 $ 8.00 12/31/2025
Chief Financial Officer 7,833 15,667 $ 8.00 4/1/2027
3,750 3,750 $ 8.00 3/31/2026
Leroy Magwood, 2,500 7,500 $ 8.00 6/28/2026
Chief Technology Officer 5,000 15,000 $ 8.00 12/31/2026
6,000 12,000 $ 8.00 4/1/2027
Director Compensation
Each of our non-employee Directors who was not appointed as a representative of a corporate investor in XG Sciences is entitled to receive compensation in accordance with director compensation plans as amended by the full Board of Directors from time to time. The following table sets forth information concerning the compensation of eligible Directors for the years ended December 31, 2020 and 2019:
Name Period Cash Compensation Restricted Stock Option Expense Total
Arnold Allemang $ 12,000 $ 20,000 $ 13,402 $ 45,402
$ 12,000 $ 20,000 $ 11,553 $ 43,553
Steven Jones (2) $ 60,000 $ 20,000 $ 12,580 $ 92,580
$ 60,000 $ 20,000 $ 10,733 $ 90,733
David G Pendell $ 12,000 $ 20,000 $ 15,656 $ 47,656
$ 12,000 $ 20,000 $ 13,801 $ 45,801
Molly P. Zhang (3) $ 12,000 $ 14,600 $ 4,048 $ 30,648
$ 12,000 $ 20,000 $ 3,961 $ 35,961
(1) On September 30, 2020, and September 30, 2019, 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 $24,300 and $38,295 on September 30, 2020, and, September 30, 2019, respectively. Option expense is calculated using the fair value of options that vested during the period. See Note 12. The restricted stock issued to the Board members from September 30, 2017, through September 30, 2020 has an aggregate fair value of $320,000 and vests ratably in arrears over four quarters on the last day of each fiscal quarter following the grant date. As of December 31, 2020, and 2019, 35,000 and 23,125 of the 42,500 shares of restricted stock issued had vested, resulting in compensation expense of $84,600 and $90,000 for the years ended December 31, 2020 and December 31, 2019, respectively.
(2) Mr. Jones resigned from the Board of Directors on September 27, 2021.
(3) Ms. Zhang resigned from the Board of Directors on December 31, 2020. 6,250 unvested stock options expired on December 31, 2020. An additional 3,750 unexercised vested stock options expired on March 31, 2021, 90 days after the resignation date. 1,875 shares of unvested restricted stock expired on December 31, 2020.
2017 Stock Option Plan
The previously established 2007 Plan, which was scheduled to expire on October 30, 2017, and under which we granted key employees and directors options to purchase shares of our common stock at not less than fair market value as of the grant date. On May 4, 2017, the Board approved the 2017 Plan to replace the 2007 Plan, which became effective upon the approval of the stockholders holding a majority of the voting power in the Company on July 18, 2017. The 2017 Plan replaces the 2007 Plan and authorizes us to issue awards (stock options and restricted stock) with respect of a maximum of 1,200,000 shares of our common stock, which equals the number of shares authorized under the 2007 Plan.
The fair value of the options granted was estimated on the date of grant using the Black Scholes option-pricing model. As of December 31, 2020, and 2019, respectively, 504,110 and 839,625 options were outstanding. Vesting of the option shares with the employees range from immediately to 25% per year. Rights to exercise the options vest immediately upon a change in control of the Company or termination of the employee’s continuous service due to death or disability. The options expire at various dates through 2027.
Employment Agreements and Potential Payments Upon Termination
Employment Agreements in place December 31, 2020
The Company is party to three employment agreements with its named executive officers. The following descriptions summarize the commitments in these arrangements.
On August 26, 2020, the Company entered into an employment agreement with Robert M. Blinstrub to serve as the Company’s Chief Executive Officer commencing on August 27, 2020, and continuing indefinitely, subject to termination by the Company for cause or without cause, or resignation by Mr. Blinstrub with or without cause. The employment agreement: (i) establishes an annual base salary of $350,000 per year, payable 40% in Cash and 60% in Convertible Notes during the first two (2) years, with a 10% increase after the Company achieves each of three specified revenue goals, (ii) grants the employee eligibility to participate in the Company’s Management Incentive Plan with a target annual bonus of 66 2/3 % of the employee’s annual base salary and (iii) provides for other fringe benefits, including a stock option grant of 5 % of the Company’s fully diluted, as converted shares of common stock at a strike price equal to the greater of a.) the Fair Market Value (FMV) per share of common stock determined in the Section 409A valuation analysis, or b.) $4.80 per share, unless the Company determines after consulting with Executive that a greater strike price is required to prevent the Options from becoming subject to Section 40A of the Internal Revenue Code of 1986, as amended, and with a life of ten years from the award date. These stock option vest 40% on a time-based schedule and 60% on a performance-based schedule. The employment agreement creates an “at will” employment relationship. However, if the Company terminates the employee’s employment without cause (as defined in the employment agreement), then the Company must pay as severance for a period of 6 months from the date of notice of termination, base salary, 100% of COBRA premiums and a pro-rata portion of any annual bonus that would be due for the year in which termination occurs.
On October 29, 2018, the Company entered into an employment agreement with Jacqueline Lemke to serve as the Company’s Chief Financial Officer. The employment agreement: (i) establishes an annual base salary of $235,000, (ii) grants the employee eligibility to participate in the Company’s Management Incentive Plan with a target annual bonus of 30% of the employee’s annual base salary and (iii) provides for other fringe benefits, including a stock option grant of 120,000 shares of the Company’s common stock at a strike price of $8.00 per share and with a life of seven years from the award date. These stock option vest ratably over a four-year period, beginning on the grant date, December 31, 2018; 30,000 on December 31, 2019, and 30,000 each of the three years after until 2022. The employment agreement creates an “at will” employment relationship. However, if the Company terminates the employee’s employment without cause (as defined in the employment agreement), then the Company must pay as severance for a period of 3 months from the date of notice of termination, base salary, 100% of COBRA premiums and a pro-rata portion of any annual bonus that would be due for the year in which termination occurs. On April 1, 2020, and through January 31, 2021, Ms. Lemke’s salary was reduced by 20% as part of expense reductions to control cash during the business slow down brought on by the COVID-19 pandemic.
On June 30, 2019, the Company entered into an employment agreement with Leroy Magwood, PhD to serve as the Company’s Chief Technologist. The employment agreement: (i) establishes an annual base salary of $180,000, (ii) grants the employee eligibility to participate in the Company’s Management Incentive Plan with a target annual bonus of 20% of the employee’s annual base salary and (iii) provide for other fringe benefits, including a stock option grant of 10,000 shares of the Company’s common stock at a strike price of $8.00 per share and with a life of seven years from the award date. These stock option vest ratably over a four-year period, beginning on the grant date (June 30, 2019); 2,500 on June 30, 2020, and 2,500 each of the three years after until 2022. The employment agreement creates an “at will” employment relationship. However, if the Company terminates the employee’s employment without cause (as defined in the employment agreement), then the Company must pay as severance for a period of 3 months from the date of notice of termination 100% of COBRA premiums and a pro-rata portion of any annual bonus that would be due for the year in which termination occurs. Effective January 13, 2020, the Company appointed Dr. Magwood as the Company’s Chief Technology Officer and Dr. Magwood was granted an additional 20,000 shares of the Company’s common stock at a strike price of $8.00 per share and with a life of seven years from the award date. These stock option vest ratably over a four-year period, beginning on the grant date (December 31, 2019); 5,000 on December 31, 2020, and 5,000 each of the three years after until 2022. On April 1, 2020, and through January 31, 2021, Dr. Magwood’s salary was reduced by 20% as part of expense reductions to control cash during the business slow down brought on by the COVID-19 pandemic.
Employment Agreements Terminated in 2020
On December 16, 2013, the Company entered into an employment agreement with Philip L. Rose to serve as the Company’s Chief Executive Officer commencing on January 6, 2014, and continuing indefinitely, subject to termination by the Company for cause or without cause, or resignation by Dr. Rose with or without cause. If the Company terminates Dr. Rose without cause, or if Dr. Rose resigns with cause, the Company has agreed to pay Dr. Rose’s base salary for a period of six months, any permitted COBRA health insurance premiums for Dr. Rose and his family, and any pro-rata bonus amounts that are deemed to have been earned during Dr. Rose’s employment period prior to termination. If the Company terminates Dr. Rose with cause, or if Dr. Rose resigns without cause, the Company has no further obligations beyond the severance date. The Agreement provides that Dr. Rose will be paid an initial base salary of $275,000 annually, with an annual Target Bonus opportunity of 30% of base salary, which may be earned up to a level of 150% of the Target Bonus under certain conditions. Additionally, Dr. Rose was awarded an option to purchase a total of 330,000 shares of common stock at $8.00 per share and with a life of seven years from the award date. These stock options have vested or will vest as follows: 171,658 on July 24, 2017, 39,586 on July 24, 2018, July 24, 2019, July 24, 2020, and 39,584 on July 24, 2021.
Effective August 26, 2020, Dr. Rose resigned as an officer and director of the Company without cause. In consideration of certain covenants and agreements, Dr. Rose received a severance benefit of four (4) months of salary continuation and four (4) months of COBRA premium payments for a total of $87,579 which the Company recorded as severance expense for the year ended December 31, 2020. All unvested stock options expired on August 26, 2020. All vested stock options expired on November 24, 2020, 90 days after Dr. Rose’s resignation date. The 330,000 stock options issued July 24, 2017, and the 29,000 stock options issued April 1, 2020 have been terminated, the unvested portion immediately upon Dr. Rose’s resignation on August 26, 2020 and the vested portion 90 days after the termination date due to nonexercised.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of August 30, 2021, (the “Ownership Date”), the following table sets forth certain information with respect to the beneficial ownership of our common stock, Series A Preferred Stock and Series B Preferred Stock by (i) by each of our directors and executive officers at such time, (ii) by all of our director and executive officers as a group, and (iii) by each person or entity known by us to beneficially own more than 5% of any class of our outstanding shares. We have determined the number and percentage of shares beneficially owned by such person in accordance with Rule 13d-3 under the Exchange Act.
Name and Address of Beneficial Owner(1)(2)
Shares of Common Stock Beneficially Owned (3)
Percentage of Shares of Common Stock Beneficially Owned (4)
Shares of Common Stock Underlying shares of Series A Preferred Stock Beneficially Owned (5)
Shares of Common Stock Underlying shares of Series B Preferred Stock Beneficially Owned (6)
Percentage of Shares of Common Stock Underlying Shares of Preferred Stock Beneficially Owned (7)
Total Percentage of Outstanding Shares of Fully Converted Voting Common Stock Beneficially Owned (8)
Directors, Executive Officers, and Significant Employees
Arnold A. Allemang (9)
678,344
6.6 %
628,938
8.2 %
12.7 %
Robert M. Blinstrub (10)
48,750
*
45,000
*
*
Steven C. Jones (11)
433,324
4.2 %
393,293
5.1 %
8.0 %
Jacqueline M. Lemke(12)
80,667
*
5,000
*
*
Leroy Magwood (13)
25,750
*
-
*
*
David G. Pendell (14)
86,706
*
5,919
45,756
*
1.3 %
Philip Rose
15,156
*
-
*
*
Directors & Executive Officers as a Group (7 persons)
1,368,697
13.3 %
5,919
1,117,987
14.6 %
24.2 %
Certain Other Beneficial Owners - Over 5% Ownership or Affiliate of Director or Officer
Aspen Advanced Opportunity Fund, LP (15)
3,638,886
35.4 %
3,638,886
-
47.2 %
35.4 %
SVIC No. 15 New Technology Business Investment LLP (Samsung) (16)
590,079
5.7 %
590,079
-
7.6 %
5.7 %
(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. In accordance with SEC rules, shares of stock issuable upon the exercise of options, warrants and other convertible securities which are currently exercisable and convertible, or which become exercisable or convertible within sixty (60) days following the date of the information in this table are deemed to be beneficially owned by, and outstanding with respect to, the holder of such option, warrant or other convertible security. Subject to community property laws where applicable, and unless otherwise specified, to our knowledge, each person listed is believed to have sole voting and investment power with respect to all shares owned by such person.
(2) Unless otherwise specified, the address of the beneficial owner shall be the business address of the Company, c/o XG Sciences, Inc., 3101 Grand Oak Drive, Lansing, MI.
(3) Number of shares of common stock beneficially owned includes, as of the Ownership Date: (i) shares of common stock registered in the name of the respective stockholder; (ii) shares of common stock which are issuable upon the conversion of Series A Preferred Stock registered in the name of the respective stockholder that are immediately convertible at the current Series A Conversion Rate; (iii) shares of common stock underlying common stock options and/or common stock warrants of the respective stockholder and which are exercisable within sixty (60) days of the Ownership Date; (iv) shares of common stock which are issuable upon the exercise of warrants to purchase Series A Preferred Stock currently exercisable within sixty (60) days of the Ownership Date that are registered in the name of the respective stockholder and the conversion of such Series A Preferred Stock into common stock at the current Series A Conversion Rate; (v) shares of common stock which are issuable upon the conversion of Series B Preferred Stock registered in the name of the respective stockholder that are immediately convertible at the current Series B Conversion Rate currently exercisable within sixty (60) days of the Ownership Date; and (vi) shares of common stock which are issuable upon the conversion of the Convertible Notes into Series B Preferred Stock which are immediately convertible at the current Series B Conversion Rate currently exercisable within sixty (60) days of the Ownership Date.
(4) Applicable percentage of ownership of common stock beneficially owned includes, as of the Ownership Date: (i) 2,490,488 shares of common stock registered in the name of the respective stockholder; (ii) 3,544,414 shares of common stock which are issuable upon the conversion of 1,890,354 shares of Series A Preferred Stock registered in the name of the respective stockholder that are immediately convertible at the current Series A Conversion Rate; (iii) 852,481 shares of common stock underlying common stock options and/or common stock warrants, excluding Series A Preferred warrants, of the respective stockholder and which are exercisable within sixty (60) days of the Ownership Date; (iv) 1,823,850 shares of common stock which are issuable upon the exercise of 972,790 warrants to purchase Series A Preferred Stock currently exercisable within sixty (60) days of the Ownership Date that are registered in the name of the respective stockholder and the conversion of such Series A Preferred Stock into common stock at the current Series A Conversion Rate; (v) 1,542,080 shares of common stock which are issuable upon the conversion of Series B Preferred Stock registered in the name of the respective stockholder that are immediately convertible at the current Series B Conversion Rate currently exercisable within sixty (60) days of the Ownership Date; and (vi) 805,035 shares of common stock which are issuable upon the conversion of the Convertible Notes into Series B Preferred Stock which are immediately convertible at the current Series B Conversion Rate currently exercisable within sixty (60) days of the Ownership Date.
(5) Number of shares of Series A Preferred Stock includes, as of the Ownership Date: (i) shares of common stock which are issuable upon the conversion of Series A Preferred Stock registered in the name of the respective stockholder that are immediately convertible at the current Series A Conversion Rate; and (ii) shares of common stock which are issuable upon the exercise of warrants to purchase Series A Preferred Stock currently exercisable within sixty (60) days of the Ownership Date that are registered in the name of the respective stockholder and the conversion of such Series A Preferred Stock into common stock at the current Series A Conversion Rate.
(6) Number of shares of Series B Preferred Stock includes, as of the Ownership Date: (i) shares of common stock which are issuable upon the conversion of Series B Preferred Stock registered in the name of the respective stockholder that are immediately convertible at the current Series B Conversion Rate; and (ii) shares of common stock which are issuable upon the conversion of the Convertible Notes into Series B Preferred Stock currently exercisable within sixty (60) days of the Ownership Date that are registered in the name of the respective stockholder and the conversion of such Series B Preferred Stock into common stock at the current at the current Series B Conversion Rate.
(7) Applicable percentage of ownership of Preferred Stock, as of the Ownership Date, is based on (i) 3,544,414 shares of common stock which are issuable upon conversion of all 1,890,354 shares of Series A Preferred Stock that are immediately convertible; (ii) 1,823,850 shares of common stock underlying 972,720 warrants to purchase Series A Preferred Stock registered in the name of the respective stockholder which are exercisable and convertible into common stock, at the current Series A Conversion Rate, within sixty (60) days of the Ownership Date; (iii) 1,542,080 shares of common stock which are issuable upon conversion of all shares of Series B Preferred Stock that are immediately convertible; and (iv) 805,035 shares of common stock which are issuable upon the conversion of the Convertible Notes into Series B Preferred Stock which are immediately convertible into 805,035 shares of common stock currently exercisable within sixty (60) days of the Ownership Date.
(8) Applicable percentage of ownership of Fully Converted Voted common stock beneficially owned includes, as of the Ownership Date: (i) 2,490,488 shares of common stock registered in the name of the respective stockholder; (ii) 3,544,414 shares of common stock which are issuable upon the conversion of 1,890,354 shares of Series A Preferred Stock registered in the name of the respective stockholder that are immediately convertible at the current Series A Conversion Rate; (iii) 852,481 shares of common stock underlying common stock options and/or common stock warrants, excluding Series A Preferred warrants, of the respective stockholder and which are exercisable within sixty (60) days of the Ownership Date; (iv) 1,823,850 shares of common stock which are issuable upon the exercise of 972,790 warrants to purchase Series A Preferred Stock currently exercisable within sixty (60) days of the Ownership Date that are registered in the name of the respective stockholder and the conversion of such Series A Preferred Stock into common stock at the current Series A Conversion Rate; (v) 1,542,080 shares of common stock which are issuable upon the conversion of Series B Preferred Stock registered in the name of the respective stockholder that are immediately convertible at the current Series B Conversion Rate currently exercisable within sixty (60) days of the Ownership Date; and (vi) 805,035 shares of common stock which are issuable upon the conversion of the Convertible Notes into Series B Preferred Stock which are immediately convertible at the current Series B Conversion Rate currently exercisable within sixty (60) days of the Ownership Date.
(9) Arnold Allemang figures include: (i) 7,500 shares of common stock; (ii) 13,281 shares of common stock underlying currently exercisable warrants; (iii) 28,625 shares of common stock underlying currently exercisable options; 411,875 shares of Series B stock; and (iv) 217,063 Convertible Notes which are convertible into Series B Preferred Stock which are immediately convertible into shares of common stock. The stock options are held in the name of Arnold Avery Allemang and the shares of Series B stock, the Convertible Notes and the warrants are held in the name of the Arnold Avery Allemang Revocable Trust.
(10) Robert Blinstrub figures include: (i) 2,500 shares of common stock and (ii) 57,062 shares of common stock underlying currently exercisable options, both stock and options held in the name of Robert M. Blinstrub; and (iii) 30,000 shares of Series B stock; and (iii) 15,000 Convertible Notes which are convertible into Series B Preferred Stock which are immediately convertible into shares of common stock, both Series B stock and the Convertible Notes are held in the name of B. Legacy, LLC.
(11) Steven C. Jones figures include: (i) 26,750 shares of common stock underlying currently exercisable stock options; (ii) 7,969 shares of common stock underlying currently exercisable warrants, held in the name Jones Network, LP, of which Mr. Jones is the General Partner; (iii) 2,656 shares of common stock underlying currently exercisable warrants, held in the name Steven and Carisa Jones 401K Plan & Trust; (iv) 2,656 shares of common stock underlying currently exercisable warrants, held in the name of Jones Extended Family Trust; 82,500 shares of Series B Preferred Stock held in the name of Jones Network, LP; (v) 50,000 shares of Series B Preferred stock held in the name of Steven C. Jones Spousal Trust; (vi) 50,000 shares of Series B Preferred Stock held in the name of Carisa A. Jones Spousal Trust; (vii) 45,000 shares of Series B Preferred stock held in the name of Steven and Carisa Jones 401K Plan & Trust; (viii) 25,000 shares of Series B Preferred Stock held in the name of Steven and Carisa Jones, JTWROS; (ix) 13,000 shares of Series B Preferred stock held in the name of MadSavAsh Investments, LLC, of which Mr. Jones is a managing member; (x) 12,000 shares of Series B Preferred Stock held in the name of Mainstar Trust, Custodian FBO Steven C. Jones Roth IRA; (xi) 10,000 shares of Series B Preferred stock held in the name of Steven C. Jones; (xii) 6,250 shares of Series B Preferred Stock held in the name of Jones Extended Family Trust; (xiii) 3,000 shares of Series B Preferred stock held in the name of Mainstar Trust, Custodian FBO Carisa A. Jones Roth IRA; (xiv) 43,750 Convertible Notes which are convertible into Series B Preferred Stock which are immediately convertible into shares of common stock, held in the name of Jones Network, LP, of which Mr. Jones is the General Partner; (xv) 25,000 Convertible Notes which are convertible into Series B Preferred Stock which are immediately convertible into shares of common stock, held in the name of Steven C. Jones Spousal Trust; (xvi) 25,000 Convertible Notes which are convertible into Series B Preferred Stock which are immediately convertible into shares of common stock, held in the name of Carisa A. Jones Spousal Trust; (xvii); (xviii) 2,793 shares of common stock held jointly with his 3 children: 931 shares held in the name of Savannah W. Jones & Steven C. Jones JTWROS, 931 shares held in the name of Ashleigh C. Jones and Steven C. Jones JTWROS, and 931 shares held in the name of Madison A. Jones & Steven C. Jones JTWROS. Mr. Jones is an affiliate of Aspen Advanced Opportunity Fund, LP (“AAOF”, which owns 1,107,406 shares of Series A Preferred Stock which are currently convertible into 2,076,286 shares of common stock and currently exercisable warrants to purchase 833,333 shares of Series A Preferred Stock which are currently convertible into 1,562,499 shares of common stock. Mr. Jones disclaims beneficial ownership of the shares owned by Aspen Advanced Opportunity Fund, LP Mr. Jones resigned from our Board of Directors on September 27, 2021.
(12) Jacqueline M. Lemke figures include: (i) 5,000 shares of Series B Preferred stock; and (ii) 75,667 shares of common stock underlying currently exercisable options.
(13) Leroy Magwood figures include 25,750 shares of common stock underlying currently exercisable stock options.
(14) David G. Pendell figures include: (i) 7,500 shares of common stock held in the name of David G. Pendell; (ii) 24,875 shares of common stock underlying currently exercisable options held in the name of David G. Pendell; (iii) 2,656 shares of common stock underlying currently exercisable warrants held in the name of David G. Pendell Revocable Trust; (iv) 5,919 shares of common stock issuable upon the conversion of 3,157 shares of Series A Preferred Stock held with his wife, Vicky Pendell, in the name of Dave and Vicky Pendell, JTWROS; (iv) 12,754 shares of Series B stock held in the name of David G. Pendell Revocable Trust; (v) 6,504 shares of Series B stock held in the name of Shirley G. Pendell Irrevocable Trust, David Pendell Trustee; (vi) 3,125 shares of Series B stock held in the name of Mainstar Trust Custodian FBO David Pendell IRA; (vii) 2,621 shares of Series B stock held in the name of Shirley G. Pendell Revocable Trust, David Pendell Trustee; (viii) 2,500 shares of Series B stock held in the name of David G. Pendell; (ix) 2,000 shares of Series B stock held in the name of Pendell Irrevocable Trust in which David Pendell is the trustee and (x) 14,375 Convertible Notes which are convertible into Series B Preferred Stock which are immediately convertible into shares of common stock held in the name of David G. Pendell Revocable Trust; and (xi) 1,877 Convertible Notes which are convertible into Series B Preferred Stock which are immediately convertible into shares of common stock held in the name of David G. Pendell. Mr. Pendell is also an affiliate of ASC XGS, LLC, which owns 166,023 shares of Series A Preferred Stock which are currently convertible into 311,293 shares of common stock. Mr. Pendell disclaims beneficial ownership of any shares and warrants owned by AAOF, XGS II or ASC XGS, LLC.
(15) Aspen Advanced Opportunity Fund, LP figures include: (i) 2,076,386 shares of common stock underlying 1,107,406 shares of immediately convertible Series A Preferred Stock, and (ii) 1,562,500 shares of common stock issuable upon the exercise and conversion of currently exercisable warrants to purchase 833,333 shares of Series A Preferred Stock.
(16) SVIC No. 15 New Technology Business Investment LLP, an investment vehicle owned by Samsung Group, figures include 590,079 shares of common stock underlying 314,709 shares of immediately convertible Series A Preferred Stock.
Change in Control Arrangements
We are not aware of any arrangements that could result in a change of control.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
For the twelve months ended December 31, 2020, the Company Directors, Management and affiliates purchased 401,708 Units with total proceeds of $3,213,664. Interest accrued on the Convertible Notes which were a part of this Unit offering during the twelve months ended December 31, 2020, was $64,162. With the Unit purchases, the purchaser was entitled to the rights to exchange 803,416 shares of Common stock for Series B Preferred stock. The Company Directors, Management and affiliates exchanged 589,290 shares of Common stock for Series B Preferred stock for the twelve months ended December 31, 2020.
Related Parties (1) Units Purchased in 2020 Proceeds Interest Expense Accrued Rights to Exchange Common Stock for Series B Preferred Stock (2) Shares of Common Stock exchanged for Shares of Series B Preferred Stock
Arnold A. Allemang & Affiliates 192,063 $ 1,536,504 $ 31,580 384,126 250,000
Robert M. Blinstrub 7,770 $ 62,160 $ 181 15,540 15,540
Steven J. Jones & Affiliates 187,500 $ 1,500,000 $ 29,703 375,000 295,000
David G. Pendell & Affiliates 14,375 $ 115,000 $ 2,698 28,750 28,750
Total 401,708 $ 3,213,664 $ 64,162 803,416 589,290
(1) Related parties include relatives as well as purchasers for whom the Director or Management has management or control responsibilities. For Mr. Jones, AAOF and ASOF are affiliates, although Mr. Jones disclaims beneficial ownership of the shares of AAOF and ASOF. For Mr. Pendell, ASC-XGS, LLC and XGS II, LLC are affiliates, although Mr. Pendell disclaims beneficial ownership of the shares of ASC-XGS, LLC and XGS II, LLC.
(2) Unit purchasers received the right to assign the rights to exchange Common Stock for Series B Preferred Stock to other holders of Common Stock
During 2019, affiliates of Mr. Pendell, our director, purchased 3,125 shares of common stock with an investment of $25,000. During 2019, Ms. Jacqueline Lemke, the Chief Financial Officer, purchased 5,000 shares of common stock with an investment value of $40,000.
In conjunction with a financing with AAOF, we and our stockholders listed therein entered into a Shareholder Agreement on March 18, 2013 that contains a number of specific provisions pertaining to the Board of Directors as well as individual Directors. On February 26, 2016, we amended the Shareholder Agreement.
Among other things, the Shareholder Agreement provides for certain voting and nomination rights to be calculated based on “Full Conversion” stock ownership (under which calculation, all convertible notes, preferred shares, or other convertible equity securities are deemed converted into common stock) as follows:
● So long as AAOF or its affiliates own 10% of more of the aggregate outstanding Shareholder Stock (as defined in the Shareholder Agreement):
● the size of the Board of Directors shall be set at seven individuals.
● one person nominated by AAOF shall be elected to the Board of Directors and AAOF shall be entitled to have one non-voting Observer at all Board Proceedings.
● two members of the Board of Directors, other than those nominated by AAOF, POSCO or Hanwha Chemical, shall qualify as independent Directors.
● So long as POSCO owns 10% of more of the aggregate outstanding Shareholder Stock, one person nominated by POSCO shall be elected to the Board of Directors. POSCO does not currently own at least 10% of the aggregate outstanding Shareholder Stock and therefore, there is no POSCO representative on the Board of Directors.
● So long as Hanwha Chemical owns 10% of more of the aggregate outstanding Shareholder Stock, one person nominated by Hanwha Chemical shall be elected to the Board of Directors. Hanwha does not currently own at least 10% of the aggregate outstanding Shareholder Stock and therefore, there is no Hanwha representative on the Board of Directors.
As of December 31, 2016, the ownership percentage of AAOF, as calculated for purposes of Director voting, required the shareholders bound by the Shareholder Agreement to vote for a director nominated by AAOF. Mr. Jones was the AAOF representative to the Board pursuant to the terms of the Shareholder Agreement until his resignation from our Board of Directors on September 27, 2021
The Shareholder Agreement grants preemptive rights to shareholders and holders of convertible notes who are parties to the Shareholder Agreement. Pursuant to the terms therein, such shareholders and noteholders have the right to purchase their pro rata share of all shareholder stock that the Company may, from time to time, propose to sell, issue, or exchange after the date of the Shareholder Agreement, other than certain excluded stock which includes stock granted to employees or as merger consideration. Each shareholder’s pro rata shares shall be equal to the ratio of (i) the aggregate number of shares of the Company’s common stock on a fully diluted basis, owned by such shareholder at the time of the delivery of preemptive rights notice to (ii) the aggregate number of shares of Company’s common stock on a fully diluted basis owned by all of the Company’s shareholders at the time of the delivery of a preemptive rights notice.
The Shareholder Agreement may be amended or terminated by agreement (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of (i) a majority of the Board, and (ii) persons holding, in the aggregate, shares of Shareholder Stock representing at least sixty percent (60%) of the voting power of all shares of Shareholder Stock then held by the parties thereto and their permitted assignees.
The February 26, 2016 amendment provides that holders of Excluded Stock are not subject to the terms of the Shareholder Agreement. Excluded Stock means shares of common stock that are subject to a registration statement that has been filed with the SEC and has been declared effective, and, for the avoidance of any doubt, includes the 3,000,000 shares being offered under the Registration Statement. This amendment took effect upon the effectiveness of our Registration Statement. The Amendment to the Shareholder Agreement further clarifies that preemptive rights shall not apply to Excluded Stock (including, without limitation, the 3,000,000 shares being offered under the Registration Statement), and amends the termination date of the Shareholder Agreement.
Per the amendment on May 30, 2018, the Shareholder Agreement will continue in effect, unless the Shareholder Agreement is earlier terminated in accordance with its terms until the date on which the Company’s common stock is listed on the NASDAQ Stock Market of the New York Stock Exchange. As a result, the Shareholder Agreement will continue to remain in effect and certain of our larger shareholders will be entitled to continue to exercise their rights under such Shareholder Agreement, but purchasers of shares of common stock under the registration statement filed in connection with our current offering are not required to adopt the Shareholder Agreement.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed to us for fiscal years ended December 31, 2020 by our current auditors, RSM US LLP and for the fiscal years ended December 31, 2020 and December 31, 2019 by our former accountants, Frazier & Deeter, LLC (in thousands):
Audit fees - RSM (1) $ 139,951 $ 138,870
Audit fees - Frazier Deeter (1) - 15,000
Non-Audit fees: - -
All other fees (2) 48,720 -
Tax fees - -
Total fees billed $ 188,671 $ 153,870
(1) Audit fees consist of fees billed for professional services rendered for the audit of the Company’s annual consolidated financial statements and reviews of its interim consolidated financial statements included in quarterly reports and other services related to statutory and regulatory filings or engagements.
(2) Audit-related fees principally include assurance and related services by the independent auditors that are reasonably related to financial statement filings that are not captured under “Audit Fees.”
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER
DESCRIPTION
LOCATION
3.1
Articles of Incorporation of XG Sciences, Inc. (formerly known as XG Nano, Inc.) dated May 23, 2006
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
3.2
Certificate of Amendment to Articles of Incorporation of XG Sciences, Inc. dated August 31, 2006 (name change)
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
3.3
Certificate of Amendment to Articles of Incorporation of XG Sciences, Inc. dated March 23, 2009 (increase of authorized common stock)
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
3.4
Certificate of Designations of Series A Convertible Preferred Stock, dated March 18, 2013
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
3.5
Certificate of Amendment to Articles of Incorporation of XG Sciences, Inc. dated June 26, 2013 (increase of authorized common stock and authorization of preferred stock)
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
3.6
Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock, dated June 26, 2013
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
3.7
First Amendment to the Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock, dated November 20, 2013
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
3.8
Third Restated Bylaws dated September 29, 2017
Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on October 5, 2017
3.9
Certificate of Designations of Series B Convertible Preferred Stock, effective September 9, 2015
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
3.10
First Amended and Restated Certificate of Designations of Series B Convertible Preferred Stock, effective August 18, 2016
Incorporated by reference to the Company’s Form S-1, as amended, filed with the SEC on August 24, 2016
4.1
Warrant to Purchase 5,000 Shares of Common Stock, dated October 8, 2012, issued by XG Sciences, Inc. to Michael R. Knox, together with Notice and Certificate of Adjustment to Warrant, dated August 21, 2013
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
4.2
Warrant to Purchase 833,333 Shares of Series A Convertible Preferred Stock, dated January 15, 2014, issued by XG Sciences, Inc. to Aspen Advanced Opportunity Fund, LP
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
4.3
Warrant to Purchase 83,333 Shares of Series A Convertible Preferred Stock, dated January 15, 2014, issued by XG Sciences, Inc. to XGS II, LLC
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
EXHIBIT
NUMBER
DESCRIPTION
LOCATION
4.4
Warrant to Purchase 100,000 Shares of Series A Convertible Preferred Stock, dated January 15, 2014, issued by XG Sciences, Inc. to SVIC No. 15 New Technology Business Investment L.L.P.
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
4.5
Form of Warrant for Series B Unit Offering
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
4.6
Form of December Warrant for December 2015 Private Placement
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
4.7
Form of Warrant to purchase Shares of Common Stock to the Dow Chemical Company
Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on December 9, 2016
10.1
Technology Licensing Agreement between XGS and Michigan State University dated July 27, 2007 and amended on May 24, 2010 and May 27, 2011
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
10.2
Amendment to Technology Licensing Agreement between XGS and Michigan State University dated May 24, 2010
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
10.3
Amendment to Technology Licensing Agreement between XGS and Michigan State University dated May 27, 2011
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
10.4
Shareholder Agreement, dated March 18, 2013, by and among XG Sciences, Inc. and the stockholder signatories thereto.
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
10.5
Employment Agreement dated December 16, 2013, by and between Philip L. Rose and XG Sciences
Incorporated by reference to the Company’s Form S-1, as amended, filed with the SEC on March 22, 2016
10.6
First Amendment to Shareholder Agreement, dated February 26, 2016
Incorporated by reference to the Company’s Form S-1, as amended, filed with the SEC on March 1, 2016
10.7
Draw Loan Note and Agreement, dated as of December 7, 2016, by and between the Company and Dow
Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on December 9, 2016
10.8
XG Sciences, Inc. 2017 Equity Incentive Plan
Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on July 25, 2017
10.9
Lease Agreement, dated October 16, 2017
Incorporated by reference to the Company’s annual report on Form 10-K filed with the SEC on April 2, 2018
10.10
Employment Agreement, dated March 22, 2017, by and between XG Sciences, Inc. and Bamidele Ali
Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on March 28, 2017
10.11
Form of Subscription Agreement for Primary Offering
Incorporated by reference to the Company’s Form S-1, as amended, filed with the SEC on June 1, 2018
EXHIBIT
NUMBER
DESCRIPTION
LOCATION
10.12
Second Amendment to Shareholder Agreement
Incorporated by reference to the Company’s Form S-1, as amended, filed with the SEC on June 1, 2018
10.13
Employment Agreement, dated August 26, 2020, by and between XG Sciences, Inc. and Robert M. Blinstrub
Incorporated by reference to the Company’s Form 10-K filed with the SEC on April 2, 2019
Code of Ethics
Incorporated by reference to the Company’s Form S-1 filed with the SEC on January 26, 2016
Subsidiary
Incorporated by reference to the Company’s Form S-1, as amended, filed with the SEC on March 1, 2016
31.1
Certifications of the Chief Executive Officer to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002*
Filed herewith
32.1
Certification of the Chief Financial Officer to Section 302 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
Financial Statement Schedules
None.