UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

For the fiscal year ended:  December 31, 2019

FORM 10-K☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

For the transition period from:

3101 Grand Oak Drive

Lansing, MI 48911 

(Address of principal executive offices) (zip code)

(517) 703-1110

(Issuer Telephone number)

Securities registered under Section 12(b) of the Act:   None.

Securities registered under Section 12(g) of the Act:   None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   Yes☐  No☒

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   Yes ☒    No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, andan accelerated filer, a non-accelerated filer, or a smaller reporting company, and whether the registrant is an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

Emerging growth company☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☒

As of June 30, 2017,December 31, 2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $13,940,528,$25,359,328, based on the price at which the common equity was last sold (i.e., $8.00 per share).

The number of shares outstanding of the registrant’s Common Stock,common stock, no par value per share, as of April 2, 201829, 2020 was 2,555,275.

4,024,443. 

TABLE OF CONTENTS

PART I

Note Regarding Forward-Looking Statements:

The information in this Annual Report on Form 10-K contains “forward-looking statements” and information within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) relating to XG Sciences, Inc., a Michigan corporation and its subsidiary, XG Sciences IP, LLC, a Michigan corporation (collectively referred to as “we”, “us”, “our”, “XG Sciences”, “XGS”, or the “Company”), which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.

These forward-looking statements involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the risks set forth on beginning on page 13 under the section entitled “Risk Factors” herein.

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 the market for such products will quickly grow to be a significant market opportunity. Our business model is to design, manufacture and sell advanced materials we call xGnP^®graphene nanoplatelets and value-added products incorporating xGnP^® graphene nanoplatelets. We currently have hundreds of customers trialing our products for numerous applications, including, but not limited to lithium ion batteries, lead acid batteries, thermally conductive adhesives, composites, thermal transfer fluids, thermal management and heat transfer, inks and coatings, printed electronics, construction materials, cement, 3-D printing and militaryin a range of other industrial uses. We believe our proprietary processes have enabled us to be a low-cost producer of high quality,high-quality, graphene nanoplatelets and value-added integrated products containing graphene nanoplatelets and that we are well positioned to address a wide range of end-use applications.

Our Customers

We sell products to customers around the world and have sold materials to over 1,0001,300 customers in 47 countries since 2008. Some of these customers are research organizations and some are commercial organizations. Our customers have included well-known automotive and OEM suppliers around the world (Ford, Johnson Controls, Magna, Honda Engineering), world-scale lithium ion battery manufacturers in the US, South Korea and China (Samsung SDI, LG Chemical, Lishen, A123) and, diverse specialty material companies (3M, BASF, Henkel, Dow Chemical, DuPont) as well asand leading research centers such as Lawrence Livermore National Laboratory and Oakridge National Laboratory. The majority of our customers are still ordering in small quantities consistent with their development and qualification work, although others have started to order in 10’s to 100’s of kilograms and some at the metric ton level. 

We have also licensed some of our base manufacturing technology to other companies and we consider technology licensing a component of our business model.companies. Our licensees include POSCO, the fourthfifth largest steel manufacturer in the world by volume of2018 tonnage output, and Cabot Corporation (“Cabot”), a leading global specialty chemicals and performance materials company. These licensees further extend our technology through their customer networks. Ultimately, we expect tobelieve we may benefit fromin terms of royalties on sales of xGnP^® graphene nanoplatelets produced and sold by our licensees. As can be seen in the below bar chart, the cumulative number of customers has steadily grown over the last ten years.

 Cumulative Customers, by Year 

We believe average order size is an indicator of commercial traction. The majority of our customers are still ordering in smaller quantities consistent with their development and engineering qualification work. As can be seen in the chart below, our quarterly average order size was relatively modest until 2017, when a number of customers reached commercial status with different product applications. These data represent orders shipped in the respective quarter and exclude no charge orders targeted mainly for R&D purposes. The data show that the average order size has increased steadily over the last two years, and we believe that it will continue to increase in in 2018 as more customers commercialize products using our materials. As a result of this increasing order size, in 2017 our customer shipments increased by over 600% to almost 18 metric tons of products from the 2.5 metric tons shipped in 2016.

Average Order Size of Fulfilled Orders

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:

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 sp²carbon 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 so long as their aspect ratio may be classified as two-dimension and are thus in the form of platelets. Such a definition implies that the thickness is nanoscale – GNPs having a thickness in the range from generally 0.6 nanometers and up to many 10’s of nanometers. We have chosen to utilize the definitions as set out by the Carbon Journal editorial team (Carbon, volume 65, pp.1-6) and Fullerex (Bulk Graphene Pricing Report, 2019) which provides classification for the various material types which provide meaningful descriptions of commercially available graphene.

Graphene Product Definitions Based on Layer Thickness

Bulk Materials.

We target oursell bulk materials under the trademarked brand name of xGnP^® nanoplateletsgraphene 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. We also have access to other development grades (Grade T, for example), but which are not yet made available commercially and have been used internally for those products containing graphene nanoplatelets. These bulk materials, which normally ship in the form of a dry powder, are especially applicable for use as additives in polymeric or metallic composites, or in coatings or other formulations where particular electrical, thermal or barrier 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:

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 wide range of largeindustrial 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, growingto 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 markets. Ourapplications. 

XG Sciences’ Graphene Nanoplatelet Product Portfolio and Versus Graphite

We believe we are a “platform play” in advanced materials, because our proprietary manufacturing processes allow us to produce varying grades of graphene nanoplatelets with varying performance characteristics that can be tuned to specific end-use applications based on customer requirements. We currently offer four commercial “grades” of bulk graphene nanoplatelet materials, each of which is available in various particle sizes, which allows for surface areas ranging from 50 to 800 square meters per gram of material depending on the product. Other grades may be made available, depending on the needs for specific applications. In addition,mapped to a variety of applications and in many end-use market segments. While we sell oursupply bulk materials consisting of various forms of xGnP^® graphene nanoplatelets and in the form of pre-dispersed mixtures withdispersions of nanoplatelets in liquids such as water, alcohol or other organic solvents, and resins. In addition to selling bulk nanoplatelets, we also offer the following integrated, value-addedproduce 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 various forms.powder form.

Composites.These consist of compositions of specially designed xGnP^® graphene nanoplatelets formulated in pre-dispersed mixtures that can be easily dispersed in various polymers. Our integrated composites, integrated-products portfolio includes pre-compounded resins derived from a range of thermoplastics and thermosets into which our xGnP^® graphene nanoplatelets are compounded. These products are supplied as well as mothermaster batches of resins and xGnP^®with graphene nanoplatelets andpre-dispersed such that their combination with resins and fibersperformance has been optimized for use in various end-use applications that may include industrial, automotive and sporting goods and which have demonstrated efficacy in standard injection molding, compression molding, blow molding and 3-D processes, to name but a few. Our current product portfolio of polymer resins containing various forms of our xGnP^®graphene nanoplatelets and in varying concentration includes polyurethane (XGPU), polypropylene (XGPP), polyethylene terephthalate (XGPET), 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 aqueousaqueous-based or solvent-based dispersions or cakes.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. Our GNP^®Concrete Additive product promotes the formation of more uniform and smaller grainsmaller-grain cement structure, in the cement. This fine-grain and uniform structure gives concrete improvements inimproving both flexural and compressive strength. In addition, the embedded graphene nanoplatelets will stop cracks from forming and retard crack propagation, should any cracks form – the combination of which will further improve cement lifetime and durability of cement.

Energy Storage Materials. These consist of specialty advanced materials that have been formulated for specific applications in the energy storage segment. Chief among these is our proprietary, specially formulated silicon-graphene composite material (also referred to as “SiG” or “XG SiG^®”) for use in lithium-ion battery anodes. XG SiG^® targets the never-ending need for higher battery capacity and longer life. In several customer trials, our SiG material has demonstrated the potential to increase battery energy storage capacity by 3-5x what is currently available with conventional lithium ion batteries today. Additionally, we offer various bulk materials for use as conductive additives for cathodes and anodes in lithium-ion batteries, as an additive to anode slurries for lead-carbon batteries, as a component in coatings for current collectors in lithium-ion batteries and we are investigating the use of our materials as part of other battery components.durability.

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

Energy Storage Materials.  These consist of specialty advanced materials that have been formulated for specific applications in the energy storage segment. We offer various bulk materials for use as conductive additives for cathodes and anodes in lithium-ion batteries, as additives to anode slurries for lead-carbon 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 two types of products, our XG Leaf^® sheet products and various thermal interface materials (“TIM”TIM’s”) in the form of custom greases or pastes. XG Leaf^® is a family of sheet products ideally suited for use in thermal management in portable electronics, which may include cell phones, tablets and notebook PC’s. As these devices continue to adopt faster electronics, higher data management capabilities, brighter displays with ever increasing definition, they generate more and more heat. Managing that heat is a key requirement for the portable electronics market and our XG Leaf^® product line is well suited to address the need. These sheets are made using special formulations of xGnP^® graphene nanoplatelets as precursors, along with other materials for specific applications. There are several different types of XG Leaf^® available in various thicknesses, depending on the end-use requirements for thermal conductivity, electrical conductivity, or resistive heating. Our custom XG TIM^® greases and pastesthermal 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 believe we are a “platform play” in advanced materials, because our proprietary processes allow us to produce varying grades of graphene nanoplatelets that can be mapped to a variety of applications in many market segments. However, we are prioritizingprioritize 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 high priority areas: Energy Storage, Thermal Managementfour key vertical markets: Automotive, Sporting Goods, Packaging and Composites.Industrial. The following table showsgraphic provides examples of target applications within each of the types of applications we are pursuing, the expecting timing of revenue and the addressable market size of selected market opportunities.four key verticals where XG Sciences has either commercial sales or is in development with one or more customers.

XGS Market/Application Focus Areas & 2018 Market Size

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, and we are expanding our market activities into other geographies. If each water bottle produced in 2019 were to incorporate just 1 milligram of xGnP^®graphene nanoplates, the total revenue available to XG Sciences may range from $200 to $300 million, depending on product form. A second 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 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 Lightweighting Efforts for Sustainable Transportation”,2^nd Lightweighting 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 have to introduce products that incorporateincorporating 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. TheAccording to our respective customers, the following are just some examples of where our products are providing value to our customers at levels that are either in commercial production or we believe will warrant their use on a commercial basis:

The process of “designing-in” new materials is relatively complex and involves the use of relatively small amounts of the new material in laboratory and engineering development for an extended period of time. Following successful development, customers that incorporate our materials into their products will then order much larger quantities of material to support commercial production. Although, our customers are under no obligation to report to us on the usage of our materials, some have indicated that they have introduced or will soon introduce commercial products that use our materials. Thus, while many of our customers are currently purchasing our materials in kilogram (one or two pound) quantities, some are now orderinghave begun to purchase at multiple ton quantities and we believe many will require tens of tons or even hundreds of tons of material whenas 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 with theirnew customers. For example, we shipped a 1 metric ton order in the fourth quarter of 2016 to a customer who is currently moving into larger scale production and had previously used smaller quantities. In the first half of 2017 we shipped 3.4 metric tons of product for various end-use customers and in the second half of 2017 we shipped just shy of 14 metric tons and we received orders in the fourth quarter that exceeded capacity. This demand profile is further evidence that we are transitioning into higher-volume production. Based on customer forecasts and management estimates, we expect to ship from 100 to 200 metric tons in 2018.

2018 Expected RevenueCommercialization Trends

We are tracking the commercial and development status of more than 75 different customer applications using our materials with some customers pursuing multiple applications. As of December 31, 2017,2019, we had sixteentwenty-two (22) specific customer applications where our materials are incorporated into our customers’ products and such customers are actively promoting or selling these products to their own customers. In addition, we have another nineseventeen (17) customer applications where our customers have indicated that they expect to begin shipping product incorporating our materials in the next 3 – 6 months and we have another twentytwenty-six (26) customer applications where our customers have indicated an intent to commercialize in the next 6 – 9 months. We are also working with numerous additional customers that have not yet indicated an exact date for commercialization, but we believe have the potential to contribute to meaningful revenue in 2018.2020 and 2021. The following graphic demonstrates the trendcommercialization trends over the past 78 fiscal quarters as an increasing number of customers indicate their intent to commercialize applications and move into actively selling or promoting products for future sales. We anticipate that the average order size for these customers will increase throughout 2018 as their demand grows. As a result, we believe we will begin shipping significantly greater quantities of our products, and thus continue scaling revenue in 2018. Based on the status of current discussions with customers and their feedback on the performance of our materials in their products, we believe we will be able to recognize approximately $10 – $20 million of revenue in 2018, although this cannot be assured.

Addressable Markets

The markets that we serve are large and rapidly growing. For example, as shown in the figure below, Avicenne Energy (The Battery Show, Novi MI, September 2017) estimates that the market for materials used in lithium ion batteries is currently approximately $10.4 billion and with a double-digit compound annual growth rate. We believe our ability to address next generation battery materials represents a significant opportunity for us.

According to Prismark Partners, LLC, a leading electronics industry consulting firm specializing in advanced materials, the 2018 market for finished graphitic heat spreaders as sold to the OEM and EMS companies with adhesive, PET, and/or copper backing for selected portable applications is expected to reach $900 million in 2018. The market has been in a significant expansion period driven by the demand for portable devices. In a press release dated October 17, 2017, Gartner, Inc., a leading research organization, estimated the 2018 global smartphone market at more than 1.6 billion units and worldwide combined shipments of devices (PC’s, tablets, ultraphones and mobile devices were expected to exceed 2.35 billion units in 2018). Every cell phone has some form of thermal management system, and we believe many of the new smart phones and other portable devices being developed can benefit from the thermal management properties of our XG Leaf^® product line. In November 2017, International Data Corporation (IDC) in their Worldwide Quarterly Tablet Tracker estimated the global shipment of tablets in the third quarter at 40 million units (Q1 at 36.2 million units and Q2 at 37.9 million units). Thus, we believe our XG Leaf^® product line is well positioned to address a very large and rapidly growing market.

Our Intellectual Property

Some of our proprietary manufacturing processes were developed at Michigan State University (MSU) and licensed to us in 2006. We license twothree U.S. patents and patent applications from MSU. 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-ownedjointly owned foreground technology where the end use is known to be any graphite additive dispersed in concrete mixtures. On April 25, 2019 we signed an Intellectual Property License, Joint Development and Commercialization Agreement with Niagara Bottling acquiring exclusive license to certain of Niagara’s patents and applications relating to the use of graphene nanoplatelets in packaging applications.  For purposes of the agreement, Niagara’s IP relates to five (5) U.S. patents and patent applications and two (2) international applications. Over time, our scientists and engineers have made many further discoveries and inventions that, as of December 31, 2019, are embodied in the form of (as of December 31, 2017): eightseventeen (17) additional U.S. patents, 10twenty-three (23) foreign patents, 16twelve (12) additional U.S. patent applications and numerous trade secrets. For each patent application filed in the U.S., we make a determination on the nature and value of the patent. 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, 2017,2019, we maintained 35twenty-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 the MSU license,various licenses, our patents and patent applications, and our trade secrets create a strongrobust intellectual property position.

Our Manufacturing Capacity

We have developedcompleted the first phase of expansion in our 64,000 square-foot facility located in Mason, MI in the first half of 2018. The expansion has added 90 metric tons of graphene nanoplatelet production capacity, bringing the total capacity of the facility up to approximately 180 metric tons of dry powder. Phase two of the expansion was partially complete by year-end 2018 and scaled-up capacity for two proprietary manufacturing processes — one based on chemical intercalationresulted in up to ~270 metric tons of graphite and subsequent exfoliation and classification; and the second based on a high-shear mechanical process which also employs graphite as the starting material. In March 2012, we took possession of a production facility under terms of a long-term lease and moved our headquarters to this new location. Initial production commenced in this facility in September 2012. Currently, this facility is capable of producing approximately 30 – 50 tons per year of intercalated materials (depending on product mix) if operated on a continuous basis We expect to streamline certain process steps in 2018 to roughly double the capacitytotal graphene nanoplatelet output for our chemical intercalation processes. We also operate a separate production facility in leased manufacturing space which is used for the production of certain graphene nanoplatelets derived from a high-shear mechanical process and also other specialty materials. This facility is capable of producing approximately 30 – 60 tons per year of materials (depending on product mix) if operated on a continuous basis. In October 2017, we signed a lease for a new 64,000 square foot manufacturing facility which will be the site for expansion of our mechanical exfoliation capacity. It is our intent to consolidate equipment into the new facility and to add next-generation tooling to meet our estimated 2018 demand. Following consolidation, we will close the older facility. We expect to increase capacity in 2018 to four times that of our capacity at the endfacility. We completed the last portion of 2017.the Phase two expansion in the first half of 2019, resulting in up to ~400 metric tons of total graphene nanoplatelet output capacity. Manufacturing capacity is a function of product mix within a given facility. We believe thesemake a range of products in our facilities that vary in their manufacturing time. It is therefore practical to consider capacity as an output range in order to reflect product mix. Our annual graphene nanoplatelet output capacity across both of our manufacturing facilities, as of December 31, 2019, ranged from approximately 225 metric tons up to approximately 450 metric tons. XG’s increasing graphene nanoplatelet capacity will be sufficientsupport the growing demand for our products over the next several fiscal quarters and will serve as input materials to meet demands for the majority ofintegrated products containing our bulk materials for a number of years, with suitable additions of capital equipment as warranted.graphene nanoplatelets. However, additional manufacturing capabilities for certain value-added products and certain bulk materials remain to be developed and may require the acquisition of additional facilities. In particular, the production processes for XG Leaf^®, XG SiG^® and our conductive inkscertain integrated products will require additional capital and may require additional facilities to meet expected future customer demand.

ManySome of the Company’s products are new products that have not yet been fully developed and for which manufacturing operations have not yet been fully scaled. Although we believe we will continue to scale our production capability and revenue rapidly in 2018,2020, for some target products we have not yet demonstrated the capability to produce sufficient materials to generate the ongoing revenues necessary to sustain our operations in the long-term.  For other target products, we have demonstrated sufficient scale to reach revenue and profits resulting in cash positive status, however, the impact of COVID-19 on our customer’s production plans and the ability for those customer with whom we are in development to introduce new products, may impact our ability to meet our commercial targets for the foreseeable future. For additional information please see “Risk Factors” herein.

Our Lead Investors

Since inception and through December 31, 2017,2019, we have raised approximately $40$50 million of capital through the issuance of equity and equity-linked securities, $4 million through licensing fees and $6$10 million through the issuance of certain lease and 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 include:are included in the funding history of the Company summarized below.

OurOur 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 have extensive knowledge of how to tailor our products to deliver performance as composite products in various applications and we also have knowledge of how to tailor other components of a composite to adjust the performance of the composite for use in various applications. We also 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, thermal coatings and sporting goods equipment.

The strength of our intellectual property. Because of our focus on manufacturing process development, we believe we have one of the world’s strongest 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 28 USthirty-three (33) U.S. patents and patent applications that we are currently managing (including those under license from MSU and Metna) and 45thirty-seven (37) international patents and patent applications add value by protecting specific equipment, or high-value end-user product applications. The fact that two global companies have evaluated and licensed certain aspects of our production technology provides independent evidence of our technology’s effectiveness.

The breadth of our product offering.  To our knowledge, we have the broadest product offering in our industry. In addition to offering four standard grades of bulk graphene nanoplatelet materials in a range of diameters and surface areas, we offer four different grades of XG Leaf^® in multiple thicknesses, two different grades of silicon-graphene composite materials, three standard ink formulations, resistive heating formulations and optional custom dispersions and formulations of our bulk materials. We also offer an XG TIM™TIM^® thermal interface material and a newly introduced GNP^®Cement Additive product. We also offer polymer resins containing various forms of our xGnP^®graphene nanoplatelets and in varying concentration and including 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.

The low-cost nature of our manufacturing processes.  We believe our manufacturing processes are among the lowest-cost approaches to the manufacturing graphene nanoplatelets (subject to economies of scale) based on our internal modelling of competitive processes as well as our analysis of alternative technologies.

Our corporate partners. ThreeFour global corporations (Samsung, POSCO, Soulbrain and Hanwha Chemical) have invested over $11$14 million in XGS, giving us a significant global reach as well as the ability to leverage the assets of our partners. In addition, The Dow Chemical Company, or Dow, has extended $10 million in senior debt financing, of which we have drawn down $5 million.$9 million as of December 31, 2019.

Our licensees willshould accelerate our entry into large markets. Cab3otCabot Corporation, the largest U.S.-based manufacturer of carbon particles, and POSCO, one of the world’s largest steel producers, have licensed parts of our production technology. We believe these licensees will help us distribute our products and value-added products made with our xGnP^®nanoplatelets more rapidly than we could do on our own.

The number of development partners that are working with our materials. As of December 31, 2017,2019, we had supplied materials to 280303 universities or government laboratories in 41 different countries around the world. A recent searchWe also supply our products to a number of other organizations for the U.S. patent database revealed 574 citationspurposes of XG Sciences in patents filed by other organizations.commercial design and manufacture. These other organizations include Goodrich Corporation,3M, Amazon, BASF, Callaway Golf, Dow Chemical, Ford Motor Company, LG Chem, Michelin, Niagara Bottling, PPG, Industries, ExxonMobil Research & Engineering, Toray, Solvay, Honda, Eastman Kodak, Baker Hughes, GM, RohmRaytheon, Samsung, Sherwin-Williams and Haas and Sekisui Chemical.The Boeing Company.

The number of commercial customers purchasing and working with our materials. As of December 31, 2017,2019, we have supplied materials to 9831,237 commercial companies around the world (in addition to universities and research laboratories) who are assessing their performance and potentially designing them into products. We have more than 75 active development relationships where we are working with end-use customers to design products for commercial use. We believe that these relationships will continue to expand.

As a result of these factors, we believe XGSXG Sciences is a leader in the emerging global market for graphene nanoplatelets. Other independent observers have agreed with this assessment. For example, Lux Research, in a July 2015 release listed XGSJanuary 2019 summary stated “XG Sciences, while still in the red, now has a clear path to profitability; it is a leader in high quality graphene, and clients looking to develop novel graphene-containing products should consider it as a leading player in its review of the graphene industry. Further, Lux analysts wrote: “XG’s march of strategic relationship announcements — Hanwha Chemical in December 2010, POSCO in June 2011, and Cabot in November 2011 — arguably give it the strongest partnership portfolio in the space, and its recent expansion (see the May 7, 2012 LRMJ) makes it one of the low cost and capacity leaders.partner.”

Our Financing HistorySelf-Underwritten Offering

Since our inception, we have incurred annual losses every year and have accumulated a deficit from operations of $(47,692,116) through December 31, 2017 and $(41,188,851) through December 31, 2016. As of December 31, 2017, and December 31, 2016, our total stockholder’s equity was $1,172,900 and $2,523,578, respectively.

From December 31, 2015 through April 7, 2016, we entered into private placement bridge financings with 15 investors, seven of whom are members or affiliates of members of our board of directors (“Board of Directors” or “Board”), totaling $1,124,750 (the “Bridge Financings”). The investors in the Bridge Financings received common stock warrant coverage of 30% for investments made prior to December 31, 2015 with an exercise price of $8.00 per share, and 20% coverage thereafter with an exercise price of $10.00 per share. In June of 2016, we repaid outstanding principal of $750,000 plus accrued interest of $27,032 to the Bridge Financing Investors. In December of 2016, we repaid the remaining $374,750 of outstanding principal plus accrued interest of $21,253. Members of the Board and their affiliates provided $800,000 of the principal for such Bridge Financings and re-invested all the principal plus additional funds of $1,013,032 to purchase 226,629 shares of the Company’s common stock during 2016.

In December 2016, we entered into a draw loan note and agreement (the “Dow Facility”) with The Dow Chemical Company (“Dow”) which provides us with up to $10 million of secured debt financing at an interest rate of 5% per year, drawable at our request under certain conditions. We received $2 million at closing and an additional $1 million on each of July 18, 2017, September 22, 2017 and December 4, 2017, respectively. After December 1, 2017, an additional $5 million becomes available if we have raised $10 million of equity capital after October 31, 2016.  

The Dow Facility is senior to most of our other debt and is secured by all of our assets (Dow is subordinate only to the capital leases with AAOF, see Note 13 to the financial statements). The loan matures on December 1, 2021 (subject to certain mandatory prepayments based on our equity financing activities). Interest is payable beginning January 1, 2017 although we elected to capitalize interest through January 1, 2019. 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 are subject to adjustment if we sell shares of common stock at a lower price. As of December 31, 2017, we had issued 125,000 warrants to Dow, all with an exercise price of $8.00 per share, which are exercisable on or before the expiration date of December 1, 2023. 

The Dow warrants meet the criteria for classification within stockholders’ equity. Proceeds were allocated between the debt and the warrants at their relative fair value. During the year ended December 31, 2017, amortization expense of $161,702 was recognized resulting in a carrying value of $4,794,596 for the Dow Loan as of December 31, 2017.

During each of the years ended December 31, 2017 and 2016, we issued 28,560 shares of Series A Preferred Stock to Aspen Advanced Opportunity Fund as payment under the terms of a Master Leasing Agreement for lease financing obligations.

We filed a Registration Statement on Form S-1 (File No. 333-209131) with the SEC on April 11, 2016 which was declared effective by the SEC on April 13, 2016 (the(as amended, the “Registration Statement”). The Registration Statement registered up to 3,000,000 shares of common stock at a fixed price of $8.00 per share to the general public in a self-underwritten offering (the “Offering” or our “IPO”). Post-Effective Amendment No. 1 to the Registration Statement was declared effective August 26, 2016, Post-Effective Amendment No. 2 was declared effective August 31, 2016, Post-Effective Amendment No. 3 was declared effective January 17, 2017, and Post-Effective Amendments No. 4 and No. 5 were dated April 12, 2017.Post-Effective Amendment No. 5 was2017 and were declared effective April 14, 2017. Post-Effective Amendment No. 6 was declared effective June 26, 2018. The Offering terminated upon expiration of the Registration Statement on April 12, 2019. Although we are currently sellinghave sold shares of our common stock in our IPO pursuant to an effective Registration Statement, we have not yet listed the companyany of our capital stock for trading or quotation on any exchanges.exchanges or the over-the-counter bulletin board.

As of December 31, 2017,2019, the Company has sold 966,8322,615,425 shares under the Registration Statement at a price of $8.00 per share for proceeds of $7,734,656.

As of December 31, 2017, we had cash on hand of $2,845,798 and at March 30, 2018 cash on hand of $2,285,182. We believe our cash is sufficient to fund our operations through March 2019 when taking into account various sources of funding and cash received from continued commercial sales transactions. We intend that the primary means for raising funds will be through our Offering of common stock and the additional $5 million of proceeds from the Dow Facility available to us after we have raised $10 million of equity capital as measured in the period beginning on November 1, 2016, however we can make no assurances that we will raise $10 million of equity capital and access the additional $5 million under the Dow Facility. At March 30, 2018 we have raised $6,149,024 towards this $10,000,000 requirement. Taking into account the cash position at March 30, noted above, an additional $3.85 million in proceeds from the Offering, which would allow us to draw up to $5 million from the Dow Facility, we believe that we can fund our operations including planned capital expenditures through March 31, 2019. In addition, two of our shareholders have committed to provide up to $4.5 million in funding for the twelve-month period ended March 31, 2019 to the extent the Company has been unable to raise such funds from other third parties.

As a result of the Bridge Financings and the IPO, the conversion price of our Series A Preferred Stock was adjusted to $6.40 per share.$20,923,400.

Pursuant to the Certificate of Designation for theour Series A Preferred Stock, as amended (“Series A Stock”), and our Series B Preferred Stock, as amended (“Series B Stock”), all then-outstanding shares of Series A Stock and Series B Stock will automatically convert into shares of common stock upon (i) the listing of the Company’s common stock on a Qualified National Exchange (a securities exchange registered with the SEC under Section 6(a) of the Securities Exchange Act of 1934, as amended (“Exchange“Exchange Act”), such as the NASDAQ Capital Market or the New York Stock Exchange, or (ii) the quotation of our common stock on the OTCQB or OTCQX marketplaces operated by OTC Markets Group, Inc. (“OTC Markets”), and the act of achieving such listing or quotation is referred to hereafter as a “Public Listing” in this report).report. As a result, there will only be one class of equity securities outstanding — common stock — after we achieve a Public Listing.Listing, because there will be no other series of preferred stock issued and outstanding at such time. Prior to any such listing, the Series A Stock and Series B Stock may be voluntarily converted into shares of common stock at the then-current conversion rate for each series of Preferred Stock (current rate is 1.875 shares of common stock for the1 share of Series A Preferred Stock is 1.875and 1 share of common stock for 1)1 share of Series B Stock). While there are no definitive plans to do a Public Listing as of the date of this report, the Company targets achieving a Public Listing in the next 24 months, market conditions permitting. 

Public Listing

In order to achieve 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. Although we intend to seek a Public Listing, in 2018, we cannot make any assurances 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.

Employees

As of December 31, 2017,2019, we had 4139 full-time employees and 12 part-time employee. 16employees. 3 of these employees were contract employees who may generally be hired as permanent employees after 3 – 6 months. Employees include the following four senior managers that report to the CEO: Chief Financial Officer, Chief Commercial Officer, Vice President of Operations Vice President of Research & Development, and Controller.Chief Technologist. The Company employs a total of 67 full-time scientists and technicians in its R&D group, including the Vice President of Research & Development.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 ishttp://www.xgsciences.com, although the information contained in, or that can be accessed through, our website is not part of this filing. You may also contact Dr. Philip L. Rose, our Chief Executive Officer via email atp.rose@xgsciences.com. 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.

ITEM 1A.    RISK FACTORS

Risks Relating to Our Business and Industry

We will need to raise substantial additional capital in the future to fund our operations and we may be unable to raise such funds when needed and on acceptable terms, which could have a materially adverse effect on our business.

Developing, manufacturing and selling nanomaterials in commercially-viable quantities requires substantial funding. As of December 31, 2019, we had cash, cash equivalents and restricted cash on hand of $1,129,702. We believe our cash is sufficient to fund our operations for the next twelve months (through April 2021) when taking into account various sources of funding and cash received from continued commercial sales transactions. We intend that the primary means for raising funds will be through equity 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 future with terms that are acceptable, or adjust our business model accordingly, we may be forced to curtail or cease operations and investors could lose all or a significant part of their investment, or we could be prevented from making our periodic filings under the Exchange Act.

A pandemic, epidemic or outbreak of an infectious disease 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 including the recent outbreak of respiratory illness caused by the novel COVID-19 virus first identified in Wuhan, Hubei Province, China (“COVID-19) will continue to affect our markets, facilities, customers and employees, and our business could continue to be adversely affected in the future. Consequences of the coronavirus outbreak are resulting in disruptions in or restrictions on our ability to travel and the ability of manufacturers, including many of our customers, to maintain normal operations. If such an infectious disease broke out at our facilities, or if, due to governmental or other restrictions, our facilities are unable to operate for an extended period of time, 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 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 COVID-19, orders for our products may be delayed or cancelled, and our financial position may suffer. Further, infectious outbreak 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 is developing and evolving, 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 1 customer whose purchases accounted for 41% and 72% of revenue in the twelve months ended December 31, 2019 and 2018, respectively. In 2019, we had 4 customers whose purchases accounted for 79% 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 profitability.

Downturns in general economic conditions such as the economic conditions that have coincided with COVID 19 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 profitability 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.

If we are unable to continue as a going concern, our securities will have little or no value.

The report of our independent registered public accounting firm that accompanies our consolidated financial statements for the year ended December 31, 2019 contains a going concern qualification in which such firm expressed substantial doubt about our ability to continue as a going concern. We currently anticipate that our cash and cash equivalents will be sufficient to fund our operations through April 2021, without raising additional capital. We believe that we will need to raise approximately $500,000 to $1,000,000 of additional capital in order to continue our operations for the next twelve months in a minimal to no revenue growth environment. 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 have a limited operating history, an accumulated deficit and a stockholders’ deficit, making it difficult for you to evaluate our business and your investment.

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 our products, it is difficult to evaluate whether our products will ultimately 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. This means that investors are subject to all of the risks incident to the creation and development of multiple new products and their associated manufacturing processes.

As of December 31, 2017,2019, and December 31, 2016,2018, we have an accumulated deficit from operations of $(47,767,544)$(65,581,128) and $(41,188,851)$(55,687,160), respectively. As of December 31, 2017,2019, and December 31, 2016,2018, our total stockholder’s equity was $1,097,472$(2,146,797) and $2,523,578,$4,990,719, respectively. The deficit reflects net losses in each period since our inception incurred through development of nanomaterials without the presence of a large-scale marketadoption 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 and you may have a difficult time evaluating our business and your investment in our Company. 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 cease or curtail operations. In such case, you would likely lose all or a significant part of your investments.

We will need to raise substantial additional capital in the future to fund our operations and we may be unable to raise such funds when needed and on acceptable terms, which could have a materially adverse effect on our business.

Developing, manufacturing and selling nanomaterials in commercially-viable quantities requires substantial funding. As of December 31, 2017, and March 30, 2018, we had cash on hand of $2,845,798 and $2,285,182, respectively. We believe our cash is sufficient to fund our operations for the next twelve months (through March 2019) when taking into account various sources of funding and cash received from continued commercial sales transactions. We intend that the primary means for raising funds will be through our Offering and the additional $5 million of proceeds from the Dow Facility available to us after we have raised $10 million of equity capital as measured in the period beginning on November 1, 2016, however we can make no assurances that we will raise $10 million of equity capital and access the additional $5 million under the Dow Facility. There can be no assurance that we will be able to raise additional equity capital 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 future on terms that are acceptable or adjust our business model accordingly, we may be forced to curtail or cease operations and you could lose all or a significant part of your investment.

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.

We have limited experience manufacturing our products. We have established small-scaleinitial commercial or pilot-scale production facilities for our bulk powders thermal interface materials (“XG TIM^®” or TIM), XG Leaf^®and SiG materials.certain integrated products. In order 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.

We are inhave completed the processinitial phases of building out a newour 64,000 square foot manufacturing facility in Mason, MI, but there can be no assurance that this new facility will continue to be openedexpanded in the future on time or as planned. ThereIn addition, due to recent events 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 has resulted in a 58% reduction in annual payroll and related costs. In April 2020, we furloughed additional employees in our R&D and Engineering departments. We 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 curtail or cease operations and youinvestors could lose all or a significant part of yourtheir investment.

Projection of fixed monthly expenses and operating losses for the near future means that investors may not earn a return on their investment or may lose their investment.

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 they do, are maintained for a sustainable period of time. 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 beyond levels that investors find tolerable, we may not be able to raise additional funds and may be forced to curtail or cease operations and youinvestors could lose all or a significant part of yourtheir investment.

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 electronicsproducts toward the shorter end. We have a limited track record of success in completing customer development projects, which makes it difficult for investors to fully evaluate the likelihood of our future success. 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 curtail or cease operations and youinvestors could lose all or a significant part of yourtheir investment.

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 a relatively small number of customers for a significant portion of our revenues. In 2017 we had one customer (a commercial customer) whose purchases accounted for 53% of product revenue and in 2016 we had one customer (one of our licensees) whose purchases accounted for 24% of total product revenues. 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 several years. It is possible that only one or two customers could place orders sufficient to utilize most or all of our existing manufacturing capacity. In this case, there would be a risk of significant loss of future revenues if one or more of these customers were to stop ordering our materials, which could in turn have a material adverse effect on our business and on your investment.

Our revenues often fluctuate significantly based on one-off orders from customers or from the recognition of grantnon-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 noonly 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. Such an occurrence may have severe consequences, including the potential for our investors to lose all or a significant part of their investment.

Competitors that are larger and better funded may cause us to be unsuccessful in selling our products.

The Company operatesWe 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 ouror curtail operations and investors may lose all or a significant part of their investment.

We are dependent on key employees.

Our operations and product development are dependent upon the experience and knowledge of Philip L. Rose, our Chief Executive Officer. If he was to resign or be terminated, our business would be adversely affected in the short term, and his departure could disrupt the business enough to endanger your investment. We also depend on Jacqueline Lemke, Chief Financial Officer, Dr. Liya Wang, Vice President of Research & Development, Bamidele Ali,Leroy Magwood, Chief Commercial Officer,Technologist, and Scott Murray, Vice President of Operations, and Dr. Hiroyuki Fukushima, Technical Director.Operations. If the services of any of these individuals should become unavailable, our business operations might be adversely affected. We hold “Key Person” insurance of $5 million on our CEO, Philip Rose, but do not hold any other “Key Person” insurance, and, if several of these individuals became unavailable at the same time, our ability to continue normal business operations might be adversely affected, to the extent that revenue or profits could be diminished and you could lose all or a significant part of your investment.

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 generally 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.

If we are unable to implement and maintain effective internal control over financial reporting, our stock could be less attractive to potential investors.

We are required to establish and maintain appropriate internal controls over financial reporting, subject to exemptions that we avail ourselves toof under the JOBS Act discussed below. Failure to establish such controls, or any failure of such controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of our controls could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds. Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and the standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. In November 2018, the year ended December 31, 2017, we identified material weaknesses in our internal controls over financialCompany hired a CFO to oversee the finance and reporting relatedfunction, modify processes to a limited number of accounting personnel which does not provide for an adequatemitigate segregation of duties issues and the lack of a chief financial officer. We plan to create positions to segregate duties consistent with control objectives in our accounting department.increase supervisory and review controls. 

In addition, management’s assessment of internal controls over financial reporting may identify material weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors in the future. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting, or at such time as we are no longer subject to exemptions under the JOBS Act, disclosure of our independent registered public accounting firm’s report on management’s assessment of our internal controls over financial reporting, may have an adverse impact on our ability to sell our common stock.

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 for our H, M, R and C grade materials.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 nano-materials 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 nano-materials 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 nano-materials 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, causing investors to lose all or a significant part of their investment.

Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses and will divert time and attention away from revenue generating activities.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities, which could have an adverse effect on our business.

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, thus resulting in a lower quoted price of our common stock.

Downturns in general economic conditions could adversely affect our profitability.

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 profitability 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.

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 maintain our existing profit margins. Our major cost components include items such as graphite, sulfuric acid,acids and bases, and electricity, which items are normally readily available industrial commodities. During our history as a business, we have not seen any material impact (as defined by GAAP) on our cost structure from fluctuations in raw material or energy costs, but this could change in the future.future, especially given the impact of COVID-19 and its impact on the global economy.

Our results of operations could deteriorate if our manufacturing operations were substantially disrupted for an extended period.

OurIn 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 nano-materials such as graphene nanoplatelets, but some scientists believe that certain nano-materials 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 present 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 personnel from our product development 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 do not have limited product liability insurance. If we chooseexisting coverage is insufficient to obtain product liability insurance butcover 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 [current and] 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 ourfuture 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.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.

Risks Relating Toto Our Common Stock

There is a risk of dilution of your percentage ownership of common stock in the Company.

In addition to the shares which we may sell pursuant to our Registration Statement, weWe have the right to raise additional capital or incur borrowings from third parties to finance itsthe business. We may also implement public or private mergers, business combinations, business acquisitions and similar transactions pursuant to which we would issue substantial additional capital stock to outside parties, causing substantial dilution in the ownership of the Company by our existing stockholders. Subject to certain exceptions, (See “Management — Shareholder Side Letter”), our Board of Directors has the authority, without the consent of any of the stockholders, to cause the Company to issue more shares of common stock and/or preferred stock at such price and on such terms and conditions as are determined by the Board in its sole discretion.

The sale of the shares being offered by us in our past Registration Statement, as well as the shares of common stock issuable upon the exercise of options, convertible notes and warrants, the shares issuable upon conversion of Series A Preferred Stock (including the shares of Series A Preferred Stock issuable upon the exercise of warrants), the shares issuable upon Conversion of any Series B Preferred Stock that we issue and the issuance of additional shares of capital stock by us will dilute youran investor’s ownership percentage in the Company and could impair our ability to raise capital in the future through the sale of equity securities.

Certain stockholders who are also officers and directors of the Company may have significant control over our management, which may not be in your best interests.

As of December 31, 2017,2019, the directors, or the entities they represent, and executive officers of the Company owned approximately 64.5%44.9% of the voting stock of the Company. Certain of these executives and directors, or the companies they represent, converted secured convertible notes into an additional 1,383,900 shares of Series A Preferred Stock on December 31, 2015.2015 and have made commitments to purchase additional convertible notes in the near future.

Additionally, ourcertain existing stockholdersshareholders are party to a certain Shareholder Agreement, as amended on March 18, 2013 and amended on February 24, 2016, effective as of April 13, 2016, and amended on May 30, 2018 (the “Shareholder Agreement”). Although shareholders purchasinghaving purchased shares under our Registration Statement will not be subject to the Shareholder Agreement, certain provisions of such Shareholder Agreement may impact the governance of the Company. Pursuant to the Shareholder Agreement, (a) so long as Aspen Advance Opportunity Fund, LP, or “AAOF” or its affiliates own 10% of more of the aggregate outstanding Shareholder Stock (as defined in the Shareholder Agreement), (i) the size of the Board of Directors shall be set at seven individuals (provided, however, that the number of directors on the Board of Directors may be increased or decreased with the prior written consent of AAOF and shareholders (including AAOF) who in the aggregate then own Shareholder Stock representing a majority of the then issued and outstanding voting stock of the Company), (ii) one person nominated by AAOF shall be elected to the Board of Directors, (iii) two members of the Board of Directors, other than those nominated by AAOF, POSCO or Hanwha Chemical, shall qualify as independent Directors; (b) 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 10% or more of the aggregate outstanding Shareholder Stock and therefore does not maintain a seat on our Board of Directors); and (c) 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 10% or more of the aggregate outstanding Shareholder Stock and therefore does not maintain a seat on our Board of Directors).Directors. 

The Shareholder Agreement will continue in effect, unless the Shareholder Agreement is earlier terminated in accordance with its terms, until (i) the date of the closing of a public offering of common stock pursuant to a registration statement filed with the SEC that is declared effective in which the Company receives gross proceeds of at least $10,000,000, or (ii) 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, in the event that we are unable to raise at least $10,000,000 under our Registration Statement, 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 statementRegistration Statement filed in connection with our current offering willlast Offering are not be required to adopt the Shareholder Agreement.

As a result, such entities have a significant influence on the affairs and management of the Company, as well as on all matters requiring stockholder approval, including electing and removing members of our Board of Directors, causing us to engage in transactions with affiliated entities, causing or restricting the sale or merger of the Company, and certain other matters. Such concentration of ownership and control could have the effect of delaying, deferring or preventing a change in control of the Company even when such a change of control would be in the best interests of our stockholders.shareholders.

We may, in the future, issue additional shares of common stock, which would reduce investors’ percent of ownership and may dilute our share value.

Our Articles of Incorporation, as amended, authorize the issuance of up to 25,000,000 shares of common stock and up to 8,000,000 shares of preferred stock. As of December 31, 2017,2019, the Company had 2,353,3504,024,443 shares of common stock and 1,857,8161,890,354 shares of Series A Preferred Stock issued and outstanding.

Upon a Public Listing on a Qualified National Exchange, all Series A Preferred Stock then currently outstanding will automatically convert into shares of common stock at the then-current Series A Conversion Rate (current ratio is 1.875 shares of common for 1)1 share of Series A), which would result in the issuance of 3,483,4053,544,408 shares of common stock assuming the conversion of all 1,857,8161,890,354 shares of Series A Preferred Stock. Series A Preferred Stockholders may also voluntarily convert at the then-current rate at any time prior to any such Public Listing on a Qualified National Exchange.

As of December 31, 2017,2019, the Company had also granted options to purchase up to 677,125839,625 shares of common stock and had issued warrants to purchase up to (i) 393,017487,017 shares of common stock, (including the warrants for 125,000225,000 shares issued under the Dow Facility) and (ii) 1,072,720972,720 shares of Series A Preferred Stock which, if exercised, would be convertible into 2,011,3451,823,845 shares of common stock at the then-current Series A Conversion Rate (currently of 1.875 shares of common for each1 share of Series A Preferred Stock)A). Therefore, we have committed to issue up to an additional 6,564,8866,694,895 shares of common stock, which includes the issuance of (a) 3,483,3993,544,408 shares upon conversion of all 1,857,8161,890,354 shares Series A Preferred Stock currently outstanding at the Series A Conversion Rate, (b) 2,011,3451,823,845 shares upon the conversion of 1,072,720972,720 shares of Series A Preferred Stock (at the current Series A Conversion Rate) which are issuable upon exercise of 1,072,720972,720 Series A warrants, (c) 677,125839,625 shares upon the exercise of options and (d) the issuance of 393,017487,017 shares upon the exercise of warrants. If we issued all 6,564,8866,694,895 shares, we would have, including the 2,352,3504,024,443 shares currently outstanding, 8,917,23610,719,338 shares issued and outstanding, with 16,082,764 authorized shares available for future issuance, and if we assume the sale of all 2,034,168 shares being offered pursuant to our Registration Statement, we would have 14,078,59614,280,662 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 then existing stockholders. Weshareholders. 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.

The Dow Facility obligates us to issue a warrant to purchase a share of our common stock for each $40 in debt drawn. IfSubsequent to the 2019 year-end, on February 12, 2020, we are able to and choose to draw further fundingdrew the remaining $1 million from the Dow Facility we will become obligated to issueand issued warrants to purchase up to 125,00025,000 more of our shares depending onshares. With the amount drawn. If we issue of these warrants, further dilution could occur.

has occurred. 

We are considered a smaller reporting company and are exempt from certain disclosure requirements, which could make our stock less attractive to potential investors.investors.

Rule 12b-2 of the Exchange Act, as amended and effective September 10, 2018, defines a “smaller reporting company” as an issuer that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that:

As a “smaller reporting company” (in addition to and without regard to our status as an “emerging growth company”) (i) we are not required and may not include a “Discussion and Analysis” section in our proxy statements; (ii) we provide only 3 years of business development information; (iii) we provide fewer years of selected financial data in certain tables; and (iv) we have other “scaled” disclosure requirements that are less comprehensive than issuers that are not “smaller reporting companies” which may make our stock less attractive to potential investors, which could make it even more difficult for you to sell your shares.

We are subject to the periodic reporting requirements of the Exchange Act, which will require us to incur audit fees, legal fees and valuation fees in connection with the preparation of such reports. These additional costs will negatively affect our ability to earn a profit.

We are required to file periodic reports with the Securities and Exchange CommissionSEC pursuant to the Exchange Act and the rules and regulations thereunder by virtue of our effective Registration Statement and our status as a smaller reporting company. In order to comply with such requirements, our independent registered auditors have to review our financial statements on a quarterly basis and audit our financial statements on an annual basis. Moreover, our legal counsel will have to review and assist in the preparation of such reports. Factors such as the number and type of transactions that we engage in and the complexity of our reports cannot accurately be determined at this time and may have a major negative effect on the cost and amount of time to be spent by our auditors and attorneys. However, the incurrence of such costs will be an expense to our operations and thus have a negative effect on our ability to meet our overhead requirements and earn a profit.profit, in the event that we are unable to raise additional capital and do not have sufficient funds to pay these costs. 

However, for as long as we remain an “emerging growth company” we intend to take advantage of certain exemptions from various reporting requirements until we are no longer an “emerging growth company.”

For so long as we remain a smaller reporting company, we benefit from many of the same exemptions and exclusions as an emerging growth company. In the event that we cease to be an emerging growth company as a result of a lapse of the five-year period, but continue to be a smaller reporting company, we would continue to be subject to the exemptions available to emerging growth companies until such time as we were no longer a smaller reporting company.

After, and if ever, we are no longer an “emerging growth company,” we expect to incur significant additional expenses and devote substantial management effort toward ensuring compliance with those requirements applicable to companies that are not “emerging growth companies,” including Section 404 of the Sarbanes-Oxley Act.

For so long as we are an emerging growth company, we may rely on certain exemptions provided in the JOBS Act, which could make our common stock less attractive to investors due to the nature of the reduced disclosure.

We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company for up to five years.the last day of the fiscal year following the fifth anniversary of the date of the completion of our Offering. For so long as we remain an emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX Section 404, not being required to comply with 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, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In this Annual Report on Form 10-K, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to 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 exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, the price and trading volume of our common stock could decline.

Upon a Public Listing, the trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of us, the trading price for our common stock and other securities would be negatively affected. In the event that we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our securities, the price of our securities would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of our common stock and other securities and their trading volume to decline.

If our common stock becomes a “penny stock,” you may have greater difficulty selling your shares.

Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or quotation system. After a Public Listing, our common stock may become a “penny stock” within the meaning of the rules, the rules apply to us and to our securities if we are not listed on a national securities exchange. These rules may further affect the ability of owners of shares to sell our securities in any market that might develop for them. As long as the trading price of our common stock is less than $5.00 per share, even if our common stock is quoted on either the OTCQX or OTCQB market place operated by the OTC Markets, our common stock will be subject to Rule 15g-9 under the Exchange Act (the “Penny Stock Rules”). The Penny Stock Rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that:

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with: (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules;rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitablysuitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our stock if it becomes designated as a Penny Stock.

Because we do not intend to pay any cash dividends on our common stock, our stockholders will not be able to receive a return on their shares unless they sell them.

We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. There is no assurance that stockholders will be able to sell shares when desired.

Risks Related to our Ongoing OfferingEquity Offerings

Because the offering price for the primary shares has been arbitrarily set by us, you may not realize a return on your investment upon the resale of your shares.

The offering price of each share and other terms and conditions relative to the shares being sold in our ongoing Offeringpast IPO and potential future offerings not a part of an underwritten offering have been arbitrarily determined by us and do not bear any relationship to assets, earnings, book value or any other objective financial criteria. Additionally, as the Company was formed on May 23, 2006, and has only a limited operating history with no earnings, the price of the offered shares under our Registration Statementin future offerings is not based on its past earnings, and no investment banker, appraiser, or other independent third party, has been consulted concerning the offering price for the shares or the fairness of the offering price used for the shares, as such our stockholders may not be able to receive a return on their investment when they sell shares of common stock purchased historically.Additionally, our last offering terminated on April 12, 2019, and we no longer have the ability to utilize this method for the sale of our equity to investors, unless we were to seek registration under a new S-1 filing, which could hamper our Registration Statement.overall ability to raise capital which could have a material adverse effect on our operations.

Our officers and directors have limited prior experience offering and selling securities to the public, and as a result, we may not be able to raise sufficient funds to sustain our business.

Certain of our officers and directors areparticipated in selling shares in our ongoing Offering,IPO, where allowed to do so under applicable state blue sky laws, on our behalf. We are conductingconducted a “best efforts” offering under our Registration Statement which does not require a minimum amount to be raised, and there is no guarantee sufficient funds will be raised to sustain our business. Also, the Offering terminated on April 12, 2019.

Our officers and directors have limited experience conducting a publicly registered securities Offering and we may not be able to successfully raise any funds.Offerings. If we are not able to raise sufficient funds in the future, we may not be able to fund our operations as planned, and we may be forced to curtail or cease operations and investors could lose all or a significant part of their investment. Our inability to successfully conduct the Offeringan offering could be the basis offor investors losing all or a significant part of their investment in us.

Due to the lack of any quotation or trading market for our securities, you may have difficulty selling any shares you purchase in our initial public offering.IPO.

We are not registered on any market or public stock exchange. There is presently no demand for our common stock and no public market exists for the shares being offered in our Registration Statement.shares. In the future, we intend to seek a listing or a quotation on a Qualified National Exchange or the OTC Markets,Markets. However, we cannot make any assurance that our common stock will ever be quoted or traded on a Qualified National Exchange or the OTC Markets or that any public market for our stock will develop. In order to achieve 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. As of the date of this Annual Report on Form 10-K, there have beenare no discussionsassurances 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. If we are successful in achieving a Public Listing for our common stock, we will also need to remain current in our quarterly and annual filings with the SEC to achieve and maintain such Public Listing. Market makers are not permitted to begin quotation of a security whose issuer does not meet these filing requirements. Furthermore, if we are not able to pay the expenses associated with our ongoing reporting obligations, we will not be able to achieve or maintain a Public Listing. If no public market is ever developed for our common stock, it will be difficult for investors to sell any shares they purchase underof our Registration Statement.shares. In such a case, investors may find that they are unable to achieve any benefit from their investment or liquidate their shares without considerable delay, if at all. In addition, if we fail to have our common stock quoted on a public trading market, any common stock purchased by investors will not have a quantifiable value and it may be difficult, if not impossible, to ever resell their shares, resulting in an inability to realize any value from their investment.

ITEM 1B.     UNRESOLVED STAFF COMMENTS

None.

ITEM 2.      PROPERTIES

We lease fourthree separate facilities. Administrative offices and a manufacturing operation are in a 25,000 square foot building with an operating lease that expires in MarchDecember 2022.   Research and development laboratories are in a 14,300 square foot space with an operating lease that extends to December 2022. A second manufacturing operation occupies 6,600 square foot on a month-to-month lease. In October 2017, we signed a lease for a new 64,000 square foot manufacturing facility, which will be the site for expansion ofon which we expanded our mechanical exfoliation capacity. This facility will replacereplaced the 6,600 square foot facility when the existing and new equipment are installed in the early part of 2018. The term of the operating lease for the new facility is 5 years expiring December 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.

ITEM 3.      LEGAL PROCEEDINGS

None.

ITEM 4.      MINE SAFETY DISCLOSURES

Not applicable.

PART II

Market for Common Equity

As of February 28, 2018, we are offering up to 1,897,168 shares of our common stock at $8.00 per share pursuant to our Registration Statement. 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.

After

Following our Offering is completed,which terminated on April 12, 2019, we now 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. In order 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 have beenare no discussionsassurances 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 February 28, 2018,April 29, 2020, we had 307385 record holders of our common stock, and a total of 2,489,3504,024,443 shares of common stock issued and outstanding. We had 13 record holders of Series A Preferred Stock and a total of 1,857,8161,890,354 shares of Series A Preferred Stock issued and outstanding. In total, we had 313390 shareholders of record of all classes of our capital stock as of February 28, 2018.April 29, 2020.

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 stock for each1 share of Series A Preferred Stock.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 3,483,3993,544,408 shares of common stock to satisfy the conversion.such conversions.

As of December 31, 2017,2019, the Company had also granted options to purchase up to 677,125839,625 shares of common stock and had issued warrants to purchase up to (i) 393,017487,017 shares of common stock (including the warrants for 175,000225,000 shares issued under the Dow Facility) and (ii) 1,072,720972,720 shares of Series A Preferred Stock which, if exercised, would be convertible into 2,011,3451,823,845 shares of common stock at the then-current Series A Conversion Rate (currently of 1.875 shares of common stock for each1 share of Series A Preferred Stock)A). Therefore, we have committed to issue up to an additional 6,564,8866,694,895 shares of common stock, which includes the issuance of (a) 3,483,3993,544,408 shares upon conversion of all 1,857,8161,890,354 shares Series A Preferred Stock currently outstanding at the Series A Conversion Rate, (b) 2,011,3451,823,845 shares upon the conversion of 1,072,720972,720 shares of Series A Preferred Stock (at the current Series A Conversion Rate) which are issuable upon exercise of 1,072,720972,720 Series A warrants, (c) 677,125839,625 shares upon the exercise of options and (d) the issuance of 393,017487,017 shares upon the exercise of warrants. If we issued all 6,564,8866,694,895 shares, we would have, including the 2,353,3504,024,443 shares currently outstanding, 8,918,23610,719,338 shares issued and outstanding, with 16,081,764 authorized shares available for future issuance, and if we assume the sale of all 2,033,168 shares being offered hereunder, we would have 14,048,59614,280,662 authorized shares available for future issuance. The future issuance of common stock may result in substantial dilution in the percentage of our common stock held by our then existing stockholders. WeExcept with respect to the IPO (which was priced at $8.00 per share), 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 future 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, 2017,2019, and December 31, 2016,2018, the Company had outstanding stock options to purchase up to 677,125839,625 and 369,750797,875 shares of common stock, respectively.

In 2007,On September 30, 2019 and September 30, 2018, the Company implemented a Stock Option Plan (the “2007 Plan”) and initially reserved 75,000 shares of common stock to cover stock options that might be issued under the 2007 Plan. However, in March 2016, shareholders holding a majority of the outstanding capital stock voted to increase the number shares reserved for issuance under the Stock Option Plan to 1,200,000.

As of December 30, 2016, stock options to purchase a total of 369,750 shares at prices ranging from $8.00 to $12.00 per share had been granted to Company employees and Directors, with expiration dates ranging from December 2017 to October 2023, with a weighted average purchase price of $11.89 per share.

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, theeach 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 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, as amended.   

On July 24, 2017, certain stock options from the 2007 Plan were cancelled and replacement stock options were awarded. The replacement stock option awards have an exercise price of $8.00 per share, a seven-year term, are vested 50% on date of grant with the remaining vesting over a 4-year period from the date issued and are subject to certain other terms. Each option holder received options equal to 150% of the number of cancelled stock options. The cancellation and reissuance of the stock options were treated as a modification under ASC 718, Compensation-Stock Compensation. Incremental compensation cost of approximately $1,015,758 was measured as the excess of the fair value of the modified award over the fair value of the original award immediately before the terms were modified. Compensation cost of approximately $501,071 was recorded on the date of cancellation for awards that were vested on the date of the modification. For unvested awards, compensation cost of approximately $514,687 will be recorded over the remaining requisite service period.

We also granted stock options and restricted stock to each of our Board members as part of their compensation package. Each of the 4 independent Board members receivedmember 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 had an aggregate grant date fair value of $26,120. The options vest ratably over a four-year period beginning on the one-year anniversary. The options had an aggregate grant date fair value of $38,295 and $29,580 on September 30, 2019 and, September 30, 2018, respectively. The restricted stock issued to the Board members in 2019 and 2018 has an aggregate fair value of $80,000$180,000 and vestvests ratably in arrears over four quarters on the last day of each fiscal quarter following the grant date. As of December 31, 2017, 5,0002019 and December 31, 2018, 26,250 and 15,000 of the shares of restricted stock issued had vested, resulting in compensation expense of $40,000.$90,000 and $80,000 for the years ended December 31, 2019 and December 31, 2018, respectively. 

On November 1, 2017,During the year ended December 31, 2019 and December 31, 2018, we granted 32,50070,000 and 138,250 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 $88,946$177,111 and they$408,237, respectively, as of December 31, 2019 and December 31, 2018. The stock options vest equally over four years beginning on the first anniversary of the date of grant.

As of December 30, 2017,31, 2019, stock options to purchase a total of 677,125839,625 shares at a price of $8.00 per share had been granted to Company employees and Directors, with expiration dates ranging from July 2024 to November 2024.December 2026.

Equity Compensation PlansPlan as of December 31, 20172019

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

On March 9, 2016, we commenced a private placement of promissory notes and warrants to purchase common stock to existing stockholders. The notes are non-convertible and mature on December 31, 2016. The warrants have a five-year maturity date with a strike price of $10.00 per share. During the period from March 9 through April 7, 2016, we issued promissory notes in an aggregate amount of $574,750 and issued warrants to purchase 11,495 shares of common stock.

On May 17, 2016 through December 31, 2018 we issued 14,280 shares of Series A Preferred Stock to AAOF, on August 17, 2016, we issued 4,760 shares of Series A Preferred Stock to AAOF, on September 30, 2016, we issued 2,380 shares of Series A Preferred Stock to AAOF, and on October 1, 2016, we issued 7,140 shares of Series A Preferred Stock to AAOF as payment for lease financing obligations under the terms of a Master Leasing Agreement.Agreement as detailed below.

With the final issuance of Series A Preferred Stock to AAOF on December 31, 2018, all obligations under the terms of the Master Lease have been fulfilled and the Master Lease has expired.

On December 14, 2016, we issued a promissory note in the amount of $2,000,000 and warrants to purchase 50,000 shares of common stock of the Company to Dow pursuant to the Dow Facility. The notes are non-convertible and mature on December 1, 2021. The warrants have a seven yearseven-year maturity date with a strike price of $8.00 per share.

On each of the following dates: January 18, 2017, April 3, 2017, July 3, 2017, and October 3, 2017 we issued 7,140 shares of Series A Preferred Stock to AAOF as payment under the terms of a Master Leasing Agreement (28,560 shares in total were issued).

On July 18, 2017, September 22, 2017, and December 4, 2017 we issued promissory notes in the amount of $1,000,000 and warrants to purchase 25,000 shares of common stock, respectively for each date ($3,000,000 in total for the notes and 75,000 for the warrants) to Dow pursuant to the Dow Facility. The notes are non-convertible and mature on December 1, 2021. The warrants have a seven-year maturity date with a strike price of $8.00 per share.

On July 8, 2019 and November 11, 2019, we issued promissory notes in the amounts of $2,000,000 each and warrants to purchase 50,000 shares of common stock, respectively for each date ($4,000,000 in total for the notes and 100,000 for the warrants) to Dow pursuant to the Dow Facility. The notes are non-convertible and mature on December 1, 2021. The warrants have a seven-year maturity date with a strike price of $8.00 per share.

ITEM 6.     SELECTED FINANCIAL DATA

Not applicable.

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 the market for such products will quickly grow to be a significant market opportunity. Our business model is to design, manufacture and sell advanced materials we call xGnP^®graphene nanoplatelets and value-added products based on these nanoplatelets. We currently have hundreds of customers trialing our products for numerous applications, including, but not limited to lithium ion batteries, supercapacitors,lead acid batteries, thermally conductive adhesives, composites, thermal shieldingmanagement and heat transfer, inks and coatings, printed electronics, construction materials, composites,cement, and militaryin a range of other industrial uses. We believe our proprietary processes have enabled us to be aamong the low-cost producerproducers 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 materials to over 1,0001,300 customers in 47 countries since 2008. Some of these customers are research organizations and some are commercial organizations. Our customers have included well-known automotive and OEM suppliers around the world (Ford, Johnson Controls, Magna, Honda Engineering), world-scale lithium ion battery manufacturers in the US, South Korea and China (Samsung SDI, LG Chemical, Lishen, A123) and, diverse specialty material companies (3M, BASF, Henkel, Dow, DuPont, Callaway) as well as, and leading research centers such as Lawrence Livermore National Laboratory and Oakridge National Laboratory. We have also licensed some aspects of our base manufacturing technology to other companies and we consider technology licensing a component of our business model.companies. Our licensees include POSCO, the thirdfifth largest steel manufacturer in the world by volumetonnage of output (as reported by thebalance.com on October 13, 2017)Worldsteel Associates in “World Steel in Figures 2018”), and Cabot Corporation (“Cabot”), a leading global specialty chemicals and performance materials company. These licensees further extend our technology through their customer networks. Ultimately, we expect to benefit from royalties on sales of xGnP^® nanoplatelets produced and sold by our licensees.

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. We manage our business with five major product lines at this time:

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.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 of time.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.

We are tracking the commercial and development status of more than 75 different customer applications using our materials with some customers pursuing multiple applications. As of December 31, 2017,2019, we had sixteentwenty-two (22) specific customer applications where our materials are incorporated into our customers’ products and such customers are actively promoting or selling these products to their own customers. In addition, we have another nineseventeen (17) customer applications where our customers have indicated that they expect to begin shipping product incorporating our materials in the next 3 – 6 months and we have another twentytwenty-six (26) customer applications where our customers have indicated an intent to commercialize in the next 6 – 9 months. We are also working with numerous additional customers that have not yet indicated an exact date for commercialization, but we believe have the potential to contribute to meaningful revenue in 2018.2020 and 2021. The following graphic demonstrates the trendcommercialization trends over the past 78 fiscal quarters as an increasing number of customers indicate their intent to commercialize applications and move into actively selling or promoting products for future sales. We anticipate that the average order size for these customers will increase throughout 2018 as their demand grows. As a result, we believe we will begin shipping significantly greater quantities of our products, and thus continue scaling revenue in 2018. Based on the status of current discussions with customers and their feedback on the performance of our materials in their products, we believe we will be able to recognize approximately $10 – $20 million of revenue in 2018, although this cannot be assured.

Operating Segment

We have one reportable operating segment that manufactures xGnP^® graphene nanoplatelets and value-added products produced therefrom, we conduct research on graphene nanoplatelets and related products, and licenseswe license our technology, as appropriate. As of December 31, 2017,2019, we shipped products on a worldwide basis, but all of our assets were located within the United States.

Our Critical Accounting Policies

US 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 values of stock-based compensation, derivative financial instrument liabilities, 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

We recognize revenuesOn 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 (a) the price is fixed or determinable, (b) persuasive evidence of a sales arrangement exists, (c) the service is performed, or delivery has occurred and (d) collectabilitycontrol of the resulting receivablepromised goods is reasonably assured.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.

We recognize product revenuesCustomer deposits, deferred revenue and other receipts are deferred and recognized when products are shipped to customers. At that time, product ownershipthe revenue is realized and risk have transferred to the customer and we have no further obligations. We record product sales at net selling prices that are reflective of discounts and allowances. Shipping and handling costs are recorded as a component of direct costs, as are shipping and handling costs billed to customers.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.

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 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 havehad 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.

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. Our derivative liabilities are classified as Level 3 within the fair value hierarchy because they were valued using other unobservable inputs. The valuation technique used to measure fair value of the derivative liabilities is based on a lattice model with significant assumptions and inputs determined by the Company. A lattice model was used to estimate the fair value of the derivative liabilities because management believes it reflects all of the assumptions that market participants would likely consider including early exercise of the warrants. The fair value of the derivative liabilities will be significantly influenced by the fair value of our common stock, stock price volatility and the risk-free interest components of the lattice technique.

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 in the past 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 are also reviewed to determine if they achieve equity classification. Certain warrants that we have issued did not meet the conditions for equity classification and are classified as derivative instrument liabilities measured at fair value. The fair values of these derivative liabilities are revalued at each reporting date, with the change in fair value recognized in earnings. See Note 9 of the consolidated financial statements for additional information.

Liquidity

We have historically incurred recurring losses from operations and we may continue to generate negative cash flows as we implement our business plan. Our consolidated financial statements are prepared using 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 December 31, 2017, we had cash on hand of $2,845,798 and at March 30, 2018 cash on hand of $2,285,182. We believe our cash is sufficient to fund our operations through March 2019 when taking into account various sources of funding and cash received from continued commercial sales transactions. We intend that the primary means for raising funds will be through our Offering of common stock and the additional $5 million of proceeds from the Dow Facility available to us after we have raised $10 million of equity capital as measured in the period beginning on November 1, 2016, however we can make no assurances that we will raise $10 million of equity capital and access the additional $5 million under the Dow Facility. At March 30, 2018 we have raised $6,149,024 towards this $10,000,000 requirement. Taking into account the cash position at March 30, noted above, an additional $3.85 million in proceeds from the Offering, which would allow us to draw up to $5 million from the Dow Facility, we believe that we can fund our operations including planned capital expenditures through March 31, 2019. In addition, two of our shareholders have committed to provide up to $4.5 million in funding for the twelve-month period ended March 31, 2019 to the extent the Company has been unable to raise such funds from other third parties.

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

Recent Accounting Pronouncements

In May 2014,December of 2019, the FASB issued ASU No. 2014-09 (ASC 606), Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitledAccounting Standards Update (ASU) 2019-12, Accounting for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.Income Taxes. The new standard is effective for us on January 1, 2018. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We performed an analysis and concluded that the amendment will not have a material impact on our financial condition or results of operations.

ASC 606 will become effective for us beginning with the first quarter of 2018, and we plan to adopt the new accounting standard using the modified retrospective transition approach. The modified retrospective transition approach will recognize any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods. We will record revenue under ASC 606 at a single point in time, when control is transferred to the customer, which is consistent with past practice. We will continue to apply our current business processes, policies, systems and controls to support recognition and disclosure under the new standard. Based on the results of the evaluation, nothing has come to our attention that would indicate that adoption of the new standard will have a material impact on our consolidated financial statements. Application of the transition requirements of the new standard will not have a material impact on opening retained earnings.

In April 2015, the FASB issued ASU No. 2015-03,Simplifying the Presentation of Debt Issuance Costs, or ASU 2015-03. ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The standard also aligns the GAAP presentation with International Financial Reporting Standards and will remedy the long-standing conflict with the guidance in FASB Concepts Statement No. 6, Elements of Financial Statements, which indicates that debt issuance costs do not meet the definition of an asset, because they provide no future economic benefit. ASU No. 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis. The adoption of this guidance during the year ended December 31, 2016 did not have a material impact on our consolidated statements of financial position, results of operations, or cash flows.

On February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

On March 30, 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies various aspects related to the accounting and presentation of share-based payments. The amendments require entities to record all tax effects related to share-based payments at settlement or expiration through thefor income statementtaxes and the windfall tax benefit to be recorded when it arises, subject to normal valuation allowance considerations. All tax-related cash flows resulting from share-based payments are required to be reported as operating activities in the statement of cash flows. The updates relating to the income tax effects of the share-based payments including the cash flow presentation must be adopted either prospectively or retrospectively. Further, the amendments allow the entities to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. If an election is made, the change to recognize forfeitures as they occur must be adopted using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard during December 31, 2017 did not have a material effect on our consolidated statements of financial position, results of operations, or cash flows.

In July 2015, the FASB issued ASU No. 2015-11, (“ASU 2015-11”), Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 requires an entity to measure in scope inventory at the lower of cost and net realizable value. The amendment does not apply to inventory that is measured using last-in, first-out or the retail inventory method. For public entities, ASU 2015-11 is effective for fiscal years beginning after December 15, 2016,2020..

Adoption of Lease Accounting Policy

We applied ASU 2016-02 and interim periods within those fiscal years,all related amendments (“ASC 842”) using the modified retrospective method by recognizing the cumulative effect of adoption as an adjustment to the opening balance of retained earnings at January 1, 2019. Therefore, the comparative information has not been adjusted and iscontinues to be applied prospectively.reported under prior leasing guidance. As a result, in the first quarter of 2019 we recorded ROU assets of $1,871,366. We also recorded lease liabilities of $1,981,795. The adoptiondecrease to retained earnings was $116,319, reflecting the cumulative impact of thisthe accounting change. The standard during the year ended December 31, 2017 did not have a material effect on our consolidated statements of financial position, results of operations,net income or cash flows.

In August 2016,Right-of-use assets represent our right to use an underlying asset for the FASB issued ASU 2016-15, Statementlease term and lease liabilities represent our obligation to make lease payments arising from the lease. As our leases do not provide an implicit rate, we used our incremental borrowing rate based on the information available at the commencement date in determining the present value of Cash Flows (Topic 230). This update provides clarification regarding how certain cash receipts and cashlease payments. Lease expense for lease payments are presented and classified inis recognized on a straight-line basis over the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2018 using a retrospective approach. Early adoption is permitted. lease term.

We do not expect the adoptionrecord a ROU asset or lease liability for leases with an expected term of this guidance to have a material impact on our consolidated financial statements.

In July 2017, the FASB issued Accounting Standards Update No. 2017-11,Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), Derivatives12 months or less. The comparative information has not been adjusted and Hedging (Topic 815) (“ASU 2017-11”). This update changes the classification analysis of certain equity-linked financial instruments with down-round features. When determining whether certain financial instruments should be classified as liabilities or equity instrument, securities with anti-dilution features no longer preclude equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a result, freestanding equity-linked financial instruments (or embedded conversion features) would no longer be accounted for as derivative liabilities at fair value because of the existence of an anti-dilution feature. For freestanding equity classified financial instruments, ASU 2017-11 requires entities that present earnings per share in accordance with ASC Topic 260 to recognize the effect of the anti-dilution feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. The guidance in this Update is effective for fiscal years, and interim period within those fiscal years, beginning after December 15, 2018, with earlier adoption permitted. When adopted in an interim period, any adjustments are reflected as of the beginning of the fiscal year that includes that interim period. We elected to early adopt ASU 2017-11 during September 30, 2017 by applying the standard retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the Company’s beginning accumulated deficit as of January 1, 2017 (see Note 9 to the Financial Statements). There were 972,720, warrants indexed to Series A Preferred Stock which were originally recorded as derivative liabilities because of their anti-dilution features. We chose to early adopt ASU 2017-11 because it permitted these warrantscontinues to be recorded as equity rather than derivative liabilities.reported under prior leasing guidance.

With the exception of the standards discussed above, we believe there have been no new accounting pronouncements effective or not yet effective which have significance, or potential significance, to our 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 of these 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 $1.0$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, 20172019 Compared with the Year Ended December 31, 20162018

The following table summarizes the results of our operations for the years ended December 31, 20172019 and 2016.2018.

Revenues

Revenues for the years ended December 31, 20172019 and 2016,2018, by category, are shown below.

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, 2017,2019, product sales increaseddecreased by $1,248,448$2,756,011 or 350%67% from the comparable period in the prior year. The main reasondecrease in revenue for the increaseyear ended December 31, 2019 is due to our largest customer suspending orders during the period. The customer has not stopped using our products, but rather, is working down material ordered and delivered in product sales wasthe second half of 2018 and currently held in inventory and being used to produce their products. This customer continues to ship their products incorporating our material and we expect that will continue working down existing inventory and will resume purchasing our products at historical levels in the coming year. In addition, other customers have been moving through development programs towards commercialization, requiring larger quantities of our materials for advanced testing, pilot production and commercial-scale production activities. We believe that those customers already in production will increase their order volume as demand increases and other customersothers will begin to move into commercial volume production as they gain more experience in working with our materials and engage their own customers.

We ship our products from our Lansing, MI manufacturing facilities to customers around the world. During the year ended December 31, 2019, we shipped materials to customers in 29 countries, as compared to 23 countries during the same period in 2018. For the year ended December 31, 2019, sales to two foreign countries, South Korea and Switzerland, accounted for more than 10% of revenue. For the year ended December 31, 2018, no product sales to any one country 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, but that the order size is increasing as more customers approach commercial status with products using our materials. The average order size for the product revenue during the year ended December 31, 2017 increased2019 decreased by 337%56% as compared to the same period in 2016. Although the average size of these2018 primarily due to a 2019 decrease in orders is still relatively small, we have begun shipping in metric ton quantities to multiple customers.from one customer while working down their inventory.

Grant Revenue

Grant revenues of $124,955$176,253 in 20172018 consisted of proceeds from sources as shown in the table below. The largest of these sources in both 2017 and 20162018 came from the DepartmentState of Energy or DOE.Michigan. In June 2016,2018, an agreement was initiated with the Michigan Strategic Fund relating to our new manufacturing facility in Mason, Michigan. Grant contract revenue was recognized at a $150,000, nine-month DOE Phase I Small Business Innovation Research (SBIR)point in time when the first increment of qualified new jobs over the base employment level as defined by the grant was awarded to developmet in 2018 and demonstrate a composite anode material that delivers improved capacity retention during full lithium-ion battery charge to furtherrecorded as grant revenue in the nation’s energy strategy to reduce reliance on fossil fuels and improve the environment. Asamount of the grant expiration date of March 14, 2017, $149,979 had been billed against it. The grant is considered billed in full and completed. The table below shows the components of grant revenue.$173,000.

Licensing Revenue

The Company and POSCO, a shareholder of the Company, entered into a license agreement dated June 8, 2011, pursuant to which POSCO agreed to pay a minimum annual royalty of $100,000 per year if certain circumstances existed, among other things. The Company believed that this minimum annual royalty became due annually beginning on February 28, 2015, and up until June 30, 2017, recorded this royalty revenue at a rate of $25,000 per quarter. POSCO disputed its obligation to pay this minimum annual royalty and did not pay the royalty in any prior year. We filed a demand for arbitration in the International Court of Arbitration on March 9, 2016, in an effort to resolve the dispute. Pursuant to a confidential settlement, on November 3, 2017, the Company and POSCO agreed to settle the dispute and to dismiss the arbitration. Amounts owed to us were paid by POSCO in November 2017. There were no licensing agreements in place nor amounts due and recorded on our balance sheet for Licensing Revenue at December 31, 2017.2019 or December 31,2018.

Cost of Goods Sold

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

Gross Profit Summary

The following table shows the relationship of direct costs to product sales for the years ended December 31, 20172019 and 2016:2018:

Gross Profit Summary

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).

Costs associated with grant revenue tend to be a mixture of facilities use, management time, labor from scientists, technicians and manufacturing personnel, and some supplies. Because of the difficulty of developing and maintaining an administrative system to gather direct costs for grants, together with the relatively small size of grant revenue, we do not track direct costs for grant revenue as a separate cost category. Therefore, we do not calculate direct cost margins associated with grant revenue but, rather, we view this revenue as being supported by indirect corporate expenses.

Costs associated with licensing revenue tend to be a mixture of IP costs as well as management and administrative expenses that are indirect in nature. As such, we do not assign direct costs to licensing revenue. Where revenue from a license agreement can be assigned to specific product revenue, we classify this revenue as product sales and, using our standard cost system, assign direct costs to those sales.

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, 2017,2019, unallocated manufacturing expenses increaseddecreased by 23%13% to $1,741,661$2,756,879 as compared to $1,414,268$3,161,384 in 2016.2018. The increasedecrease of $327,393$404,505 is largely due to higherlower levels of manufacturing overhead expenseexpenses as we prepare for and fulfill higheradjusted to a lower volume of commercial orders.orders versus the prior year.

Research and Development Expenses

Research and development expenses for the year ended December 31, 2017 decreased2019 increased by 18%7% to $923,419$1,506,717 as compared to $1,124,165$1,414,259 for the year ended December 31, 2016.2018. The decreaseincrease of $200,746$92,458 is largely due to the higher expenses incurred in 2016hiring of additional personnel to work on and complete the DOE Phase I SBIR grant discussed above.increase our core ability to deliver improved applications to customers.

Sales, General and Administrative Expenses

During 20172019, we incurred selling, general and administrative expenses (SG&A) of $4,434,322.$5,467,698. This is an increase of $885,717$703,903 or 25%14% from 20162018, which was primarilyrepresents an increase in sales personnel to support increased customer programs as well as the resultaddition of a one-time, non-cash charge of $501,071 recorded in July 2017 to account for the cancellation and replacement of certain stock options. See Note 12 in the financial statements for further discussion of the modifications. In addition, during the third quarter of 2016 we incurred a $182,146 reduction in SG&A expenses associated with reclassifying certain expenses related to the DOE Phase I SBIR grant into our research and development expenses. This resulted in a reduction of SG&A expenses in 2016 that did not occur in 2017. As we continue to grow and gain traction in the marketplace we expect that our SG&A expenses will fluctuate but should stabilize and become more fixed in nature as we achieve economies of scale.Chief Technologist.

Other Income (Expense)

The following table shows a comparison of other income and expense by major expense component for the years ended December 31, 2017 and 2016:

Interest expense, net of interest income in the year ended December 31, 2017, decreased2019, increased by $44,117$81,057 compared to 2016.2018. The net decreaseincrease in expense reflects interest due on the increased Dow Facility balance which was partially offset by principal reductions (pay downs)repayments and the elimination of ourinterest expense on the capital lease commitments.

Gain/(loss) from changes in the fair value of derivative liability warrants from the previous valuation period are characterized as other (expense)/other income on our Statement of Operations as a result of the GAAP requirement to use variable accounting for such instruments. These values fluctuate from period to period as a result of updating inputs used in the trinomial lattice model used to value such warrants, including risk free rate, volatility, remaining term of each warrant, and the underlying stock price assumption used in such calculations. In 2017 we implemented ASU 2017-11 and reclassified 224,897 warrants related to Series B Preferred stock from derivative liabilities to equity and we are no longer required to record the change in fair values for these instruments. See Note 2 and Note 9 for further information.

Government incentives include accruals for incentive awards from state and local government entities relating to new hires during the period indicated, net of any true up of previous accruals to reflect actual payments. In 2016, we accrued $74,000 for expected incentive awards from the Michigan Economic Growth Authority (MEGA), based on our experience in receiving such incentive awards over the previous four years for our hiring practices. Upon review by MEGA in May 2017, our 2016 incentive was declined, because of our failure to meet a baseline assumed hiring threshold, which we missed by two full-time equivalent employees by December 31, 2016. Since 2016 was the final year for this incentive award program, we wrote off this previously accrued award in 2017, and thus we recorded a loss of $74,024 in the year ended December 31, 2017. This loss was offset by a small state incentive, $1,418, received in 2017.2018.

Cash Flow Summary

The following condensed cash flow statement compares cash flow from operating, investing, and financing activities for the year ended 20172019 and 2016. Net cash used by operating activities increased 17% during 2017 as compared to 2016 because of higher levels of manufacturing overhead expense as we prepared for and fulfilled higher volume commercial orders.

2018.

Net cash used in operating activities for the year ended December 31, 20172019 and 20162018 was $4,623,996$8,589,598 and $3,964,206,$5,643,238, respectively. Net cash used by operating activities decreased 52% during 2019 as compared to 2018 primarily due to a lower volume of commercial orders in 2019 than 2018.

Investing activities for the year ended December 31, 20172019 included net capital expenditures for the purchase of property and equipment of $602,237$383,070 and $140,957$131,257 for intellectual property as compared with $93,002$3,209,632 for property and equipment and $123,775$175,482 for intellectual property during the same period in 2016. These2018. The 2019 levels of capital expenditures are higher aslower than 2018 since we have begun to update and install equipment necessary to increasehad completed our expanded production capacity in 2018 to meet anticipated customer orders for those customers who are moving into commercialization of products containing our materials.

Financing activities provided a net increase in cash of $6,427,647$5,339,653 and $4,906,102$10,880,736 for the year ended December 31, 20172019 and 2016,2018, respectively. For the year ended December 31, 20172019 gross proceeds from the issuance of common stock was $3,665,400$2,013,400 and stock issuance expenses were $237,227$20,000 as compared to proceeds from the issuance of common stock for the year ended December 31, 20162018 of $4,069,255$11,175,344 and stock issuance expenses of $638,174.$102,880. Financing activities for the year ended December 31, 2017 also2019 included $3,000,000$4,000,000 of loan proceeds from the Dow Facility. No new loan proceeds were received from the Dow Facility in 2018 (see Note 7 of our financial statements in this report) versus $2,000,000 during the year ending December 31, 2016.

.  

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 condensed consolidated financial statements are prepared using US GAAP as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

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

As of December 31, 2017,April 24, 2020, we had cash on hand of $2,845,798$1,589,468.74   Due to lower than expected revenue in 2019 and at March 30, 2018 cash on hand of $2,285,182. We believe our cash is sufficient to fundthe current COVID-19 global pandemic impacting both our operations through March 2019 when taking into account various sources of funding and cash received from continued commercial sales transactions. We intend that the primary means for raising funds will be through our Offering of common stock and the additional $5 million of proceeds from the Dow Facility available to us after we have raised $10 million of equity capital as measured in the period beginning on November 1, 2016, however we can make no assurances that we will raise $10 million of equity capital and access the additional $5 million under the Dow Facility. At March 30, 2018 we have raised $6,149,024 towards this $10,000,000 requirement. Taking into account the cash position at March 30, noted above, an additional $3.85 million in proceeds from the Offering, which would allow us to draw up to $5 million from the Dow Facility, we believe that we can fund our operations including planned capital expenditures through March 31, 2019. In addition, two of our shareholders have committedcustomers, Management has taken several steps to provide up to $4.5 million in funding for the twelve-month period ended March 31, 2019 to the extent the Company has been unable to raise such funds from other third parties.

In the eventensure we are unableable to fund our operations from existing cash on hand, operating cash flows, additional borrowings and restructured debt obligations.

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

In late March / early April of 2020, we applied for relief under the Coronavirus Aid, Relief and Economic Security Act (CARES) by submitting an application with the Small Business Administration (SBA) for an Economic Injury Disaster Loan (“EIDL”) and by submitting an application to an SBA lender bank, PNC, for a Paycheck Protection Plan (“PPP”) loan. The potential loan amounts under these programs are up to $2,000,000 and $825,200, respectively. An EIDL, if the Company qualifies, is for up to a 30-year term at a 3.75% annual interest rate. 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 raisingall of the loan to be forgiven, dependent upon use of the loan proceeds. On April 20, 2020, we received the $825,200 under the PPP loan.

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

Each share of Series B Preferred Stock 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 forced to reduce our expenses, slow down our growth rate, or discontinue operations. Our condensed consolidated financial statements do not includeconverted by an Investor at any adjustments relatingtime 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 recoverability“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 classificationb) 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 recorded asset amounts or the amountsSeries B Preferred Stock remain outstanding. The Series B Original Issue Price and classificationConversion Price in effect at any time are also subject to proportional adjustment for share splits, share dividends, recapitalizations and the like.

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

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

Not applicable.

XG SCIENCES, INC.

Consolidated Financial Statements

INDEX TO FINANCIAL STATEMENTS

TABLE OF CONTENTS

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 consolidated balance sheetssheet of XG Sciences, Inc. (the “Company”)Company) as of December 31, 20172019 and 2016, and2018, the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows, for the years then ended, and the related notes (collectively, referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016,2018, and the results of theirits 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 consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the 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 consolidated 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 auditsaudit 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.

Emphasis of a Matter

As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for warrants in 2017 due to the adoption of Accounting Standards Update No. 2017-11, Earnings Per Share, Distinguishing Liabilities From Equity, Derivatives and Hedging./s/ RSM US LLP

We have served as the Company’s auditor since 2012.2019.

Frazier & Deeter, LLC

Tampa, FLDetroit, Michigan

April 2, 201829, 2020

XG SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2017 AND 2016

See notes to consolidated financial statements

XG SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 20172019 AND 20162018

See notes to consolidated financial statements

XG SCIENCES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018