Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - XG SCIENCES INCs111969_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - XG SCIENCES INCs111969_ex31-1.htm

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: June 30, 2018

or

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

 

For the transition period from ______to______.

 

    XG SCIENCES, INC.    
    (Exact name of registrant as
specified in its
charter)
 

 

 

 

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

 

3101 Grand Oak Drive

Lansing, MI 48911

 

(Address of principal executive offices) (zip code)

 

(517) 703-1110

(Issuer Telephone number)

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
(Do not check if a smaller
reporting company)
  Emerging growth company

 

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

 

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

 

As of August 10, 2018, there were 2,921,025 shares outstanding of the registrant’s common stock.

 

1 

 

 

XG SCIENCES, INC.

 FORM 10-Q

 June 30, 2018

INDEX

 

PART I    
       
ITEM 1. FINANCIAL STATEMENTS   4
       
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   16
       
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   27
       
ITEM 4. CONTROLS AND PROCEDURES   27
       
PART II  
       
ITEM 1. LEGAL PROCEEDINGS   28
       
ITEM 1A. RISK FACTORS   28
       
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS   28
       
ITEM 3. DEFAULTS UPON SENIOR SECURITIES   28
       
ITEM 4. MINE SAFETY DISCLOSURES   28
       
ITEM 5. OTHER INFORMATION   28
       
ITEM 6. EXHIBITS   29
       
SIGNATURES   30

 

2 

 

 

FORWARD-LOOKING STATEMENTS

 

The information in this Quarterly Report on Form 10-Q contains “forward-looking statements” and information within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) relating to XG Sciences, Inc., a Michigan corporation and its subsidiary, XG Sciences IP, LLC, a Michigan limited liability company (collectively referred to as “we”, “us”, “our”, “XG Sciences”, “XGS”, or the “Company”), which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenue, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the risks set forth on beginning on page 19 under the section entitled “Risk Factors” in Post-Effective Amendment No. 6 (declared effective June 26, 2018) to our registration statement on Form S-1 (File No. 333-209131) as filed with the Securities and Exchange Commission (the “SEC”) on June 1, 2018, and declared effective on June 26, 2018 (the “Registration Statement”), and the risks set forth on beginning on page 13 under the section entitled “Risk Factors” in our annual report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on April 2, 2018. 

 

3 

 

 

XG SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS 

         
   June 30,
2018
   December 31,
 2017
 
ASSETS  (unaudited)      
CURRENT ASSETS          
Cash  $2,584,661   $2,845,798 
Accounts receivable, less allowance for doubtful accounts of $45,000 at June 30, 2018 and $40,000 at December 31, 2017   671,243    468,623 
Inventories   244,037    171,864 
Other current assets   117,030    15,781 
Total current assets   3,616,971    3,502,066 
           
PROPERTY, PLANT AND EQUIPMENT, NET   3,866,704    2,601,571 
           
RESTRICTED CASH FOR LETTER OF CREDIT   195,938    195,792 
           
LEASE DEPOSIT   20,156    20,156 
           
INTANGIBLE ASSETS, NET   618,236    571,938 
           
TOTAL ASSETS  $8,318,005   $6,891,523 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
Accounts payable and other current liabilities  $1,616,836   $858,077 
Deferred revenue   4,045    7,298 
Current portion of capital lease obligations   63,396    118,553 
Total current liabilities   1,684,277    983,928 
           
LONG-TERM LIABILITIES          
Long-term portion of capital lease obligations   13,741    15,527 
Long term debt   4,946,011    4,794,596 
Total long-term liabilities   4,959,752    4,810,123 
           
TOTAL LIABILITIES   6,644,029    5,794,051 
           
STOCKHOLDERS’ EQUITY          
Series A convertible preferred stock, 3,000,000 shares authorized, 1,872,096 and 1,857,816 shares issued and outstanding, liquidation value of $22,465,152 and $22,293,792 at June 30, 2018 and December 31, 2017, respectively   22,088,389    21,917,046 
Common stock, no par value, 25,000,000 shares authorized, 2,846,525 and 2,353,350 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively   23,034,814    19,116,012 
Additional paid-in capital   7,966,189    7,831,958 
Accumulated deficit   (51,415,416)   (47,767,544)
Total stockholders’ equity   1,673,976    1,097,472 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $8,318,005   $6,891,523 

 

See notes to unaudited condensed consolidated financial statements

 

4 

 

 

XG SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)  

 

   For the Three Months ended
June 30,
   For the Six Months ended
 June 30,
 
   2018   2017   2018   2017 
       (Restated)       (Restated) 
                 
REVENUE                    
Product sales  $850,854   $259,079   $1,737,191   $416,779 
Grants               99,489 
Licensing revenue       25,000        50,000 
Total revenue   850,854    284,079    1,737,191    566,268 
                     
COST OF GOODS SOLD                    
Direct costs   563,260    93,542    1,031,451    210,312 
Unallocated manufacturing expenses   542,689    415,152    1,289,272    786,302 
Total cost of goods sold   1,105,949    508,694    2,320,723    996,614 
                     
GROSS LOSS   (255,095)   (224,615)   (583,532)   (430,346)
                     
OPERATING EXPENSES                    
Research and development   287,082    227,062    564,146    490,626 
Sales, general and administrative   1,147,794    923,765    2,334,473    1,920,352 
Total operating expenses   1,434,876    1,150,827    2,898,619    2,410,978 
                     
OPERATING LOSS   (1,689,971)   (1,375,442)   (3,482,151)   (2,841,324)
                     
OTHER INCOME (EXPENSE)                    
Interest expense, net   (83,805)   (54,445)   (168,974)   (113,533)
Loss from change in fair value of derivative liability – warrants       (32,629)       (3,458)
Government incentives, net       (74,000)   3,253    (74,024)
Total other expense   (83,805)   (161,074)   (165,721)   (191,015)
                     
NET LOSS  $(1,773,776)  $(1,536,516)  $(3,647,872)  $(3,032,339)
                     

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – Basic and diluted

   2,644,522    2,054,193    2,549,943    1,986,834 
                     
NET LOSS PER SHARE – Basic and diluted  $(.67)  $(0.75)  $(1.43)  $(1.53)

 

See notes to unaudited condensed consolidated financial statements

 

5 

 

   

XG SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

    Preferred stock (A)   Common stock     Additional
paid-in
    Accumulated        
    Shares     Amount   Shares     Amount     capital     deficit     Total  
Balances, December 31, 2017     1,857,816     $ 21,917,046     2,353,350     $ 19,116,012     $ 7,831,958     $ (47,767,544)     $ 1,097,472  
Stock issued for cash               493,175       3,945,400                   3,945,400  
Stock issuance fees and expenses                     (66,598 )                 (66,598 )
Preferred stock issued to pay capital lease obligations     14,280       171,343                             171,343  
Stock-based compensation                     40,000       134,231             174,231  
Net loss                                 (3,647,872 )     (3,647,872 )
                                                       
Balances, June 30, 2018     1,872,096     $ 22,088,389     2,846,525     $ 23,034,814     $ 7,966,189     $ (51,415,416 )   $ 1,673,976  

 

See notes to unaudited condensed consolidated financial statements

 

6 

 

 

XG SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the Six Months Ended
June 30,
 
   2018   2017 
      (Restated) 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(3,647,872)  $(3,032,339)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   442,231    439,078 
Amortization of intangible assets   26,434    21,180 
Provision for bad debts   5,000      
Stock-based compensation expense   174,231    176,742 
Non-cash interest expense   170,311    114,295 
Non-cash equipment rent expense   106,164      
Gain from change in fair value of derivative liability – warrants       3,458 
Changes in current assets and liabilities:          
Accounts receivable   (207,620)   (32,529)
Inventory   (72,173)   12,864 
Other current and non-current assets   (101,249)   126,341 
Accounts payable and other liabilities   755,506    (213,705)
NET CASH USED IN OPERATING ACTIVITIES   (2,349,037)   (2,384,615)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of property and equipment   (1,707,364)   (352,003)
Purchases of intangible assets   (72,731)   (94,623)
NET CASH USED IN INVESTING ACTIVITIES   (1,780,095)   (446,626)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Repayments of capital lease obligations   (10,661)   (9,750)
Proceeds from issuance of common stock   3,945,400    1,720,400 
Common stock issuance fees and expenses   (66,598)   (233,500)
NET CASH PROVIDED BY FINANCING ACTIVITIES   3,868,141    1,477,150 
           
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH   (260,991)   (1,354,091)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD   3,041,590    1,980,842 
           
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD  $2,780,599   $626,751 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for interest  $430   $ 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Value of preferred stock issued for AAOF capital lease obligations  $171,343   $171,342 
Reclassification of derivative liability warrants to equity – ASU 2017-11 (see note 2)  $   $105,054 

 

See notes to unaudited condensed consolidated financial statements 

 

7 

 

 

XG SCIENCES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

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

 

Basis of Presentation

 

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

 

Certain information and footnote disclosures normally included in our annual audited consolidated financial statements and accompanying notes have been condensed or omitted in these interim condensed consolidated financial statements. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2017, as filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on April 2, 2018.

 

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

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Liquidity

 

We have historically incurred losses from operations and we may continue to generate negative cash flows as we implement our business plan. Our 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.

 

We originally 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 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 was declared effective April 14, 2017. Post-Effective Amendment No. 6 was declared effective June 26, 2018. Although we are currently selling shares of our common stock in our IPO pursuant to the Registration Statement, we have not yet listed the company for trading on any exchanges.

 

In December 2016, we entered into a draw loan note and agreement (the “Dow Facility”) with The Dow Chemical Company (“Dow”) 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. As of August 10, 2018, we had drawn $5.0 million under the Dow Facility. The remaining $5 million will become available to us once we have raised $10 million of equity capital after October 31, 2016.  As of August 10, 2018, we have sold 1,534,507 shares of common stock pursuant to our IPO at a price of $8.00 per share for gross proceeds of $12,276,056. However, only $9,075,024 of this amount has been raised during the measurement period beginning November 1, 2016. Thus, we still need to raise $924,976 of additional equity capital prior to the remaining $5.0 million under the Dow Facility becoming available to us.

 

As of August 10, 2018, we had cash on hand of $1,549,219. We believe our cash from increasing commercial sales activity and various financing sources will fund our operations for at least the next 12 months. We intend that the primary means for raising funds will be through our IPO and the additional $5 million of proceeds from the Dow Facility that becomes available to us after we have raised another $924,976 of equity capital as noted above; however, we can make no assurances that we will raise such equity capital and be able to access the additional $5 million under the Dow Facility. Taking into account our current cash position as noted above, an additional $924,976 in proceeds from our IPO, 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 for at least the next 12 months. If needed, two of our shareholders have committed to provide the additional $924,976 million of equity capital needed to open up to the remaining $5 million of availability under the Dow Facility to the extent such funding is not provided by other third parties. This commitment is good through March 31, 2019.

 

8 

 

 

XG SCIENCES, INC. 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

Use of Estimates

 

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

 

Inventory

 

Inventory consists of raw materials, work-in-process and finished goods, all of which are stated at the lower of cost or market. Cost is determined on a first in, first out basis.

 

The following amounts were included in inventory at the end of the period:    
   June 30,   December 31, 
   2018   2017 
Raw materials  $90,307   $39,841 
Finished goods   153,730    132,023 
Total  $244,037   $171,864 

 

Derivative Financial Instruments

 

We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. The terms of convertible preferred stock and convertible notes that we issue are reviewed to determine whether or not they contain embedded derivative instruments that are required by ASC 815: “Derivatives and Hedging” to be accounted for separately from the host contract and recorded at fair value. In addition, freestanding warrants are also reviewed to determine if they achieve equity classification. Certain stock warrants that we issued did not meet the conditions for equity classification at inception and were classified as derivative instrument liabilities measured at fair value.

 

In July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), Derivatives and Hedging (Topic 815) (“ASU 2017-11”). This update changes the classification analysis of certain equity-linked financial instruments with down-round features. We elected to early adopt ASU 2017-11 at 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. 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 warrants to be recorded as equity rather than derivative liabilities. The impact to the financial statements is as follows:

 

   For the three months ended June 30, 2017 
   As previously   As 
   reported   Adjusted 
Operating loss  $(1,375,442)  $(1,375,442)
           
Other income (expense):          
Interest expense, net   (54,445)   (54,445)
Loss from change in fair value of derivative liability- warrants   (53,056)   (32,629)
Government incentives, net   (74,000)   (74,000)
Total other income (expense)   (181,501)   (161,074)
           
Net loss  $(1,556,943)  $(1,536,516)

 

9 

 

 

XG SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

   For the six months ended June 30, 2017 
   As previously   As 
   reported   Adjusted 
Operating loss  $(2,841,324)  $(2,841,324)
           
Other income (expense):          
Interest expense, net   (113,533)   (113,533)
Gain (Loss) from change in fair value of derivative liability-warrants   101,596    (3,458)
Government incentives, net   (74,024)   (74,024)
Total other income (expense)   (85,961)   (191,015)
           
Net loss  $(2,927,285)  $(3,032,339)

 

Fair Value Measurements

 

The Company utilizes a valuation hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques related to its financial assets and financial liabilities in accordance to Accounting Standards Codification (“ASC”) Topic 820 Fair Value Measurements and Disclosures.

 

For financial instruments such as cash, accounts payable and other current liabilities, the Company considers the recorded value of such financial instruments approximate to the current fair value because of their short-term nature.

 

Recent Accounting Pronouncements

 

ASU No. 2014-09 (ASC 606), Revenue from Contracts with Customers became effective for us beginning with the first quarter of 2018, and we adopted the new accounting standard using the modified retrospective transition approach. The modified retrospective transition approach recognized any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods. We 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, we have determined that the adoption of the new standard presents no material impact on our consolidated financial statements. Application of the transition requirements of the new standard did not have a material impact on opening retained earnings.

 

ASU No. 2016-18, Restricted Cash Flows provides guidance on the presentation of restricted cash and restricted cash equivalents, which are now included with cash and cash equivalents when reconciling the beginning and ending cash amounts shown on the statements of cash flows. Using the retrospective transition method required under the standard, the Company has adjusted the presentation of its Condensed Consolidated Statements of Cash Flows for all periods presented. The adoption of ASU No. 2016-18 did not have any other impact on the Company’s Condensed Consolidated Financial Statements.

 

The following table provides additional detail by financial statement line item of the ASU 2016-18 impact on our Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2018 and 2017:

 

(In thousands)  As Reported
(Pre-Adoption)
   ASU 2016-18
Impact
   Reported (Post Adoption) 
Six Months Ended June 30, 2018               
Cash, cash equivalents and restricted cash, beginning of period  $2,845,798   $195,792   $3,041,590 
                
Six Months Ended June 30, 2017               
Net change in cash, cash equivalents and restricted cash   (1,354,236)   145    (1,354,091)
Cash, cash equivalents and restricted cash, beginning of period   1,785,343    195,499    1,980,842 
                
Cash, cash equivalents and restricted cash, end of period  $431,107   $195,644   $626,751 

 

10 

 

 

ASU No. 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments applies to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted the new standard on January 1, 2018. The adoption of this standard for the year ending December 31, 2018 did not have a significant effect on the Company’s Condensed Consolidated Financial Statements.

 

ASU No. 2016-02, Leases requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, this new ASU will require both types of leases to be recognized on the balance sheet. This standard will be effective for the Company on December 31, 2018. The Company is in the process of evaluating how significant the impact of the adoption of this standard will be on its balance sheet as it recognizes lease assets and lease liabilities related to its operating leases and whether there will be any significant impact on its results of operations and cash flows.

 

NOTE 3 — WARRANTS AND FINANCING AGREEMENTS

 

Dow Facility

 

In December 2016, we entered into the Dow Facility, 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. An additional $5 million becomes available once we have raised $10 million of equity capital after October 31, 2016; however, we can make no assurances that we will raise such equity capital and be able to access the additional $5 million under the Dow Facility.  As of August 10, 2018, we have sold 1,534,507 shares of common stock pursuant to our IPO at a price of $8.00 per share for gross proceeds of $12,276,056. However, only $9,075,024 of this amount has been raised during the measurement period beginning November 1, 2016. Thus, we still need to raise $924,976 of additional equity capital prior to the remaining $5.0 million under the Dow Facility becoming available to us.

 

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 Aspen Advanced Opportunity Fund, LP (“AAOF”)). 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 may elect 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 is subject to adjustment if we sell shares of common stock at a lower price. As of June 30, 2018, we had issued 125,000 warrants to Dow, which are exercisable on or before the expiration date of December 1, 2023. 

 

The aforementioned warrants meet the criteria for classification within stockholders’ equity. Proceeds were allocated between the debt and the warrants at their relative fair value. During the fiscal year ended December 31, 2017, we recognized amortization expense of $161,702, and the resulting carrying value of the Dow Facility on our balance sheet as of December 31, 2017 was $4,794,596. During the six months ended June 30, 2018, we recognized amortization expense of $151,415, and the resulting carrying value of the Dow Facility on our balance sheet as of June 30, 2018 was $4,946,011.

 

11 

 

 

XG SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 – STOCK WARRANTS ACCOUNTED FOR AS EQUITY INSTRUMENTS

 

The following table summarizes the warrants (including the warrants previously accounted for as derivatives) outstanding at June 30, 2018, which are accounted for as equity instruments, all of which are exercisable: 

 

Date Issued  Expiration Date  Indexed 
Stock
  Exercise Price   Number of 
Warrants
 
               
07/01/2009  07/01/2019  Common  $8.00    6,000 
10/08/2012  10/08/2027  Common  $12.00    5,000 
01/15/2014 - 12/31/2014  01/15/2024  Series A Convertible Preferred  $6.40    972,720 
04/30/2015- 05/26/2015  04/30/2022  Common  $16.00    218,334 
06/30/2015  06/30/2022  Common  $16.00    6,563 
12/31/2015  12/31/2020  Common  $8.00    20,625 
03/31/2016  03/31/2021  Common  $10.00    10,600 
04/30/2016  04/30/2021  Common  $10.00    895 
12/14/2016  12/01/2023  Common  $8.00    50,000 
07/18/2017  12/01/2023  Common  $8.00    25,000 
09/22/2017  12/01/2023  Common  $8.00    25,000 
12/04/2017  12/01/2023  Common  $8.00    25,000 
               1,365,737 

  

Each warrant indexed to Series A Convertible Preferred Stock is currently exercisable and exchangeable into 1.875 shares of common stock.

 

NOTE 5 — STOCKHOLDERS’ EQUITY (DEFICIT)

 

Common Stock

 

The Company is authorized to issue 25,000,000 shares of common stock, no par value per share of which 2,846,525 and 2,353,350 shares were issued and outstanding as of June 30, 2018 and December 31, 2017, respectively.

 

During the six months ended June 30, 2018 the Company issued 493,175 shares of common stock pursuant to the Offering. As of June 30, 2018 the Company had sold 1,460,007 shares of common stock in its IPO at a price of $8.00 per share for gross proceeds of $11,680,056.

 

Series A Convertible Preferred Stock

 

The Company is authorized to issue up to 3,000,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred”). Each share of the Series A Preferred, which has a liquidation preference of $12.00 per share, is convertible at any time, at the option of the holder, into one share of common stock at the lower of: (a) $12.00 per share, or (b) 80% of the price at which the Company sells any equity or equity-linked securities in the future. The Series A Preferred also contains typical anti-dilution provisions that provide for adjustment of the conversion price to reflect stock splits, stock dividends, or similar events. The Series A Preferred is subject to mandatory conversion into common stock upon the listing of the Company’s common stock on a Qualified National Exchange. However, the Series A Preferred is not subject to the mandatory conversion until all outstanding convertible securities are also converted into common stock. The Series A Preferred ranks senior to all other equity or equity equivalent securities of the Company other than those securities which are explicitly senior or pari passu in rights and liquidation preference to the Series A Preferred and pari passu with the Company’s Series B Preferred Stock.

 

The Company issued 1,456,126 shares of Series A Preferred in connection with the conversion of certain convertible notes on December 31, 2015.

 

In December 2015, the conversion price of the Series A Preferred was reduced from $12.00 to $6.40 (80% of $8.00), and thus, each share of Series A Preferred Stock is convertible into 1.875 shares of common stock.

 

As of June 30, 2018 and December 31, 2017, the Company had 1,872,096 and 1,857,816 shares of Series A Preferred Stock issued and outstanding, respectively.

 

During the six months ended June 30, 2018, the Company issued 14,280 shares of Series A Preferred to AAOF as payment under the terms of their Master Leasing Agreement.

 

12 

 

 

XG SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Series B Convertible Preferred Stock

 

As of June 30, 2018 and December 31, 2017, 1,500,000 shares have been designated as Series B Convertible Preferred Stock (“Series B Preferred”), of which no shares were issued and outstanding. Each share of the Series B Preferred, which has a liquidation preference of $16.00 per share, is convertible at any time, at the option of the holder, into one share of common stock at $16.00 per share. The Series B Preferred also contains typical anti-dilution provisions that provide for adjustment of the conversion price to reflect stock splits, stock dividends, or similar events. Each share of Series B Preferred is subject to mandatory conversion into common stock at the then-effective Series B conversion rate upon the public listing by the Company of its common stock on a Qualified National Exchange. However, the Series B Preferred is not subject to the mandatory conversion until all outstanding convertible securities are also converted into common stock. The Series B Preferred ranks senior to all other equity or equity equivalent securities of the Company other than those securities which are explicitly senior or pari passu in rights and liquidation preference to the Series B Preferred and pari passu with the Company’s Series A Preferred.

 

NOTE 6 – EQUITY INCENTIVE PLAN

 

We previously established the 2007 Stock Option Plan (the “2007 Plan”), which was scheduled to expire on October 30, 2017 and under which we granted key employees and directors options to purchase shares of our common stock at not less than fair market value as of the grant date. On May 4, 2017, the Board approved the 2017 Equity Incentive Plan (the “2017 Plan”) to replace the 2007 Plan, which became effective upon the approval of the stockholders holding a majority of the voting power in the Company on July 18, 2017. The 2017 Plan replaced the 2007 Plan and authorizes us to grant awards (stock options and restricted stock) up to a maximum of 1,200,000 shares of our common stock.   

 

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 and a seven-year term. Fifty percent of such awards vested on the date of grant with the remaining vesting over a 4-year period, subject to certain other terms. Each option holder received options equal to 150% of the number of cancelled stock options.

 

On August 10, 2017, the Company granted stock options and restricted stock to each of its Board members as part of its Board compensation package. Each of the 4 independent Board members received 2,500 stock options and 2,500 shares of restricted stock for 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 restricted stock issued to the Board members has an aggregate fair value of $80,000 and vest ratably in arrears over four quarters on the last day of each fiscal quarter following the grant date. As of June 30, 2018, 10,000 shares of restricted stock had vested, resulting in total compensation expense of $80,000.

 

A summary of the stock option activity for the six months ended June 30, 2018 is as follows:

     
       Weighted 
   Number   Average 
   Of   Exercise 
   Options   Price 
         
Options outstanding at December 31, 2017   677,125   $8.00 
Changes during the period:          
Expired   (27,500)   8.00 
New Options Granted – at market price   16,250    8.00 
           
Options outstanding at June 30, 2018   665,875   $8.00 
           
Options exercisable at June 30, 2018   312,158   $8.00 

 

All options granted thus far under the 2017 Plan have an exercise price of $8.00 per share and vesting of the options ranges from immediate to 25% per year, with most options vesting on a straight-line basis over a four-year period from the date of grant. The options expire in seven years from the date of grant.

 

During the three months ended June 30, 2018, the Company granted 6,250 employee stock options with an aggregate grant date fair value of $18,236. During the six months ended June 30, 2018, the Company granted 16,250 employee stock options with an aggregate grant date fair value of $46,991. The fair value of the options granted was estimated on the date of grant using the Black Scholes option-pricing model using the following assumptions: Stock price: $8.00, Exercise Price: $8.00, Expected Term: 4.75 years, Volatility: 37.34%-38.09%, Risk free rate: 2.65%-2.73%, Dividend rate: 0%. As of June 30, 2018, 665,875 stock options and 10,000 shares of restricted stock awards were outstanding under our 2017 Plan.

 

13 

 

 

XG SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Stock-based compensation expense was $86,467 and $174,231 for the three and six months ended June 30, 2018, respectively, compared to $88,371 and $176,742 for the three and six months ended June 30, 2017, respectively. As of June 30, 2018, there was approximately $828,400 in unrecognized compensation cost related to the options granted under the 2017 plan. We expect to recognize these costs over the remaining vesting terms, ranging from 3 to 4 years.

 

NOTE 7 – CAPITAL LEASES

 

As of June 30, 2018 and December 31, 2017, we have capital lease obligations as follows:

 

   June 30, 2018   December 31, 2017 
         
Capital lease obligations  $80,522   $149,120 
Unamortized warrant discount   (3,385)   (15,040)
Net obligations   77,137    134,080 
Short-term portion of obligations   (63,396)   (118,553)
Long-term portion of obligations  $13,741   $15,527 

 

NOTE 8 — Customer, Supplier, country, and Product Concentrations

 

Grants and Licensing Revenue Concentration

 

There was no grant revenue for the three and six months ended June 30, 2018. There was no grant revenue for the three months ended June 30, 2017, one grantor accounted for 94% total grant revenue for the six months ended June 30, 2017. There was no licensing revenue for the three and six months ended June 30, 2018, one licensor accounted for the licensing revenue reported for the three and six months ended June 30, 2017.

 

Product Concentration

 

Concentrations of product sales greater than 10% of total product sales are shown in the table below. We attempt to minimize the risk associated with product concentrations by continuing to develop new products to add to our portfolio.

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
         
   2018   2017   2018   2017 
Graphene nanoplatelets –powders   73%   98%   72%   99%
Graphene nanoplatelets – cakes/slurries/integrated products   27%   2%   28%   1%

 

Customer Concentration

 

During the three months ended June 30, 2018, we had one customer whose purchases accounted for 85% of product sales.  During the three months ended June 30, 2017, we had two customers whose purchases accounted for 58% of product sales.

 

For the six months ended June 30, 2018, we had one customer whose purchases accounted for 84% of product sales. During the six months ended June 30, 2017, we had two customers whose purchases accounted for 26% of product sales.

 

At June 30, 2018, there were two customers who each had an accounts receivable balance greater than 10% of our total outstanding receivable balance. At June 30, 2017, there were two customers who each had an accounts receivable balance greater than 10% of our total outstanding receivable balance.

 

14 

 

 

XG SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Country Concentration

 

We sell our products on a worldwide basis. All sales are denominated in U.S. dollars.

 

International sales for the three months ended June 30, 2018 were 7% of product sales as compared with 50% for the three months ended June 30, 2017. No foreign countries accounted for greater than 10% of total product sales for the three months ended June 30, 2018, and one country, China, accounted for 25% of product sales for the three months ended June 30, 2017.

 

International sales for the six months ended June 30, 2018 were 5% of product sales as compared with 60% for the six months ended June 30, 2017. No foreign countries accounted for greater than 10% of total product sales for the six months ended June 30, 2018, and three countries, China, South Korea, and the United Kingdom that accounted for approximately 15%, 16%, and 14%, respectively, of product sales for the six months ended June 30, 2017.

 

Suppliers

 

We buy raw materials used in manufacturing from several sources. These materials are available from a large number of sources. Thus, we believe a change in suppliers would have no material effect on our operations. We did not have purchases from one supplier that were more than 10% of total purchases for the three months and six months ended June 30, 2018 and 2017.

 

NOTE 9 - RELATED PARTY TRANSACTIONS

 

We have a licensing agreement for exclusive use of patents and pending patents with Michigan State University (“MSU”), a shareholder of the Company via the MSU Foundation. During the three months ended June 30, 2018 and 2017 we recorded licensing expense of $12,500 per quarter. During the six months ended June 30, 2018 and 2017 we recorded licensing expense of $25,000 in each period.

 

We have also entered into product licensing agreements with certain other shareholders. No royalty revenue or expenses have been recognized related to these agreements during the three and six months ended June 30, 2018. For the three and six months ended June 30, 2017, we recorded $25,000 in each quarter of royalty revenue from POSCO, a shareholder.

 

During the three months ended June 30, 2018 and 2017 we issued 7,140 shares per period of Series A Preferred stock to AAOF as payment for lease financing obligations under the terms of the Master Lease Agreement, dated March 18, 2013. For the six months ended June 30, 2018 and 2017 we issued a total of 14,280 shares per period as payment for lease obligations.

 

On April 19, 2018 and June 27, 2018, Arnold Allemang, the Chairman of our Board of Directors, purchased 62,500 and 125,000 shares, respectively, in our IPO through his trust, for a total of $1,500,000 in proceeds to the Company.

 

On June 27, 2018, Steve Jones, our Director, purchased 56,000 shares, respectively, in our IPO through his trust and related affiliates, for a total of $448,000 in proceeds to the Company.

 

NOTE 10 – SUBSEQUENT EVENTS

 

During the period from July 1 through August 10, 2018, we received proceeds of $596,000 for the sale of 74,500 shares of common stock in our IPO.

 

15 

 

 

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

 

Forward-Looking Statements

 

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

 

Introduction

 

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

 

Overview of our Business

 

XG Sciences was formed in May 2006 for the purpose of commercializing certain technology to produce graphene nanoplatelets. 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 or other matrices.

 

We believe the unique properties of graphene and graphene nanoplatelets will enable numerous new product applications and the market for such products will quickly grow to be a significant market opportunity. Our business model is to design, manufacture and sell advanced materials we call xGnP® graphene nanoplatelets and value-added products incorporating xGnP® nanoplatelets. We currently have 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, and military uses. We believe our proprietary processes have enabled us to be a low-cost producer of high quality, graphene nanoplatelets and that we are well positioned to address a wide range of end-use applications.  

 

16 

 

 

Our Customers

 

We sell products to customers around the world and have sold materials to over 1,000 customers in 47 countries since 2008. Some of these customers are research organizations and some are commercial organizations. Our customers have included well-known automotive and OEM suppliers around the world (Ford, Johnson Controls, Magna, Honda Engineering), global-scale lithium ion battery manufacturers in the U.S., South Korea and China (Samsung SDI, LG Chemical, Lishen, A123) and diverse specialty material companies (3M, BASF, Henkel, Dow Chemical, DuPont), as well as leading research centers such as Lawrence Livermore National Laboratory and Oakridge National Laboratory. We have also licensed some of our base manufacturing technology to other companies, and we consider technology licensing a component of our business model. Our licensees include POSCO, the fourth largest steel manufacturer in the world by volume of 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 believe we will benefit in terms of royalties on sales of xGnP® 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 early 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 biannual average order size was relatively modest until the second half of 2017, when a number of customers reached commercial status with different product applications. The data below represents orders shipped in the respective half year and exclude no charge orders targeted mainly for R&D purposes. The data shows that the average order size has increased steadily over the last two years, and we believe that it will continue to increase as more customers commercialize products using our materials. In the three months ending June 30, 2018 the average order size was $11,345, an increase from $3,322 in the three months ending June 30, 2017 and a decrease from $15,827 for the three month ending March 31, 2018, which resulted from changes in customer and product mix in sequential quarters. In 2017 our customer shipments increased by over 600% to almost 18 metric tons (MT) of products from the 2.5 MT shipped in 2016. In the 3 months ending June 30, 2018 we shipped 15.4 MT of product (11.2 MT of graphene nanoplatelets in the form of dry powders and 4.2 MT of slurry, cakes or other integrated products containing graphene nanoplatelets), an increase of 716% over the 3 months ending June 30, 2017 (1.9 MT mostly in the form of dry powder) and an increase of 5% as compared to the 3 months ending March 31, 2018 (10.4 MT of dry powder and 4.4 MT of slurry, cakes or other integrated products containing graphene nanoplatelets).

 

Average Order Size of Fulfilled Orders

 

 

17 

 

 

Our Products

 

Bulk Materials. We target our xGnP® nanoplatelets for use in a wide 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 currently offer four commercial “grades” of bulk materials, each of which is available in various particle sizes and thickness, 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, we sell our xGnP® graphene nanoplatelets in the form of pre-dispersed mixtures with water, alcohol, or other organic solvents and resins. In addition to selling bulk graphene nanoplatelets, we also offer the following integrated, value-added products that contain our graphene nanoplatelets in various forms:

 

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 portfolio includes pre-compounded resins derived from a range of thermoplastics as well as mother batches of resins and xGnP® nanoplatelets and their combination with resins and fibers for use in various end-use applications that may include industrial, automotive 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. In addition, we offer various bulk materials with demonstrated efficacy in plastic composites to impart improved physical performance to such matrices, which may be supplied as dry powders or as aqueous or solvent-based dispersions or cakes. 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 promotes the formation of more uniform and smaller grain structure in cement. This fine-grain and uniform structure gives the concrete improvements in flexural and compressive strength. In addition, the embedded graphene nanoplatelets will stop cracks from forming and retard crack propagation, should any cracks form – the combination of which will improve lifetime and durability of cement.

 

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.

 

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

 

Thermal Management Materials. These consist mainly of two types of products, our XG Leaf® sheet products and various thermal interface materials (“TIM”) 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 pastes are also designed to be used in various high temperature environments. Additionally, we offer various bulk materials for use as active components in 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 prioritizing our efforts in specific areas and with specific customers that we believe represent opportunities for either relatively near-term revenue or especially large and attractive markets. At this time, we are focused on three high priority areas: Composites, Energy Storage, and more broadly, Thermal Management. The following table shows examples of the types of applications we are pursuing, the expecting timing of revenue and the addressable market size of selected market opportunities.

 

18 

 

 

XGS Market/Application Focus Areas & 2018 Market Size

 

 

 

(1)Avicenne Energy, “The Worldwide Rechargeable Battery Market 2014 - 2025”, 24th Edition - V3, July 2015.
(2)Avicenne Energy, The Battery Show; Novi, MI; September, 2017.
(3)Avicenne Energy, The Battery Show; Novi, MI; September, 2017. & Internal Estimates.
(4)ArcActive via Nanalyze, April 3, 2015.
(5)ArcActive via Nanalyze, April 3, 2015 & Internal Estimates.
(6)Future Markets Insights, “Consumer Electronics Market: Global Industry Analysis and opportunity Assessment 2015 –   2020”, May 8, 2015.
(7)Prismark, “Market Assessment:  Thin Carbon-Based Heat Spreaders”, August 2014.
(8)Reporterlink.com, “Semiconductor & IC Packaging Materials Market…”, May 2014.
(9)Prismark, 2015.
(10)Grand View Research, “Global Plastics Market Analysis…”, August 2014.
(11)From (10) and internal estimates: 2018 = 305 million tons of plastic, if 10% of the market adopted xGnP to enhance their   properties, and at only 1% by weight as an additive, then in 2018 305,000 tons or 305,000,000 kilos of xGnP would be   required. At $30 a Kg - the value is $9.1 Bn per year.

          

Commercialization Process

 

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

 

  Callaway Golf Company incorporated our graphene nanoplatelets into the outer core of their Chrome Soft golf balls, resulting in a new class of golf ball that enables higher driving speeds, greater distance and increased control, which is allowing Calloway to command a premium price for their golf balls in the marketplace, and

 

  Lead acid battery manufacturer demonstrating approximately 90% improvement in measured cycle life, appreciable improvement in capacity and charge acceptance and without any loss in water retention performance, and

 

  Light emitting diode module and product company demonstrated approximately 50% improvement in thermal management capability when compared to existing commercial thermal management products, translating into a 15% improvement in thermal management at the device level, and

 

19 

 

 

  Automotive parts supplier demonstrating improvements in thermal stability for polymer composites incorporating our materials, allowing for approximately 20% higher operating temperatures and a 50% improvement in strength at the elevated temperature, and

 

  Construction company demonstrating less than one weight percent of our product in construction material composites improves flexural strength by more than 30%, and

 

  Plastics composite part manufacturer demonstrating 7-30% improvement in strength and 40% improvement in modulus when used in sheet molding compound, and

 

  Engineering design firm for automotive manufacturers found approximately 20% reduction in operating temperature and in thermal uniformity when XG Leaf® replaces standard cooling fins in lithium ion battery packs, and

 

  Plastic composite parts manufacturer demonstrating 25% increase in tensile strength and 15% improvement in flex modulus for a high-density polyethylene composite.

 

The process of “designing-in” new materials is relatively complex and involves the use of relatively small amounts of the new material in laboratory and engineering development for an extended period of time. Following successful development, customers that incorporate our materials into their products will then order much larger quantities of material to support commercial production. Although, our customers are under no obligation to report to us on the usage of our materials, some have indicated that they have introduced or will soon introduce commercial products that use our materials. Thus, while many of our customers are currently purchasing our materials in kilogram (one or two pound) quantities, some are now ordering at multiple ton quantities and we believe many will require tens of tons or even hundreds of tons of material as they commercialize products that incorporate our materials. We also believe that those customers already in production will increase their order volume as demand increases and others will begin to move into commercial volume production as they gain more experience in working with our materials and engage new customers. For example, 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. In the first quarter of 2018 we shipped 14.8 metric tons of products comprising 10.4 metric tons of dry powders and approximately 4.4 metric tons of additional product in the form of a slurry, cake or other integrated products. In the second quarter of 2018 we shipped 15.4 metric tons of product comprising 11.2 metrics tons of dry powders and approximately 4.2 metric tons of additional product in the form of a slurry, cake or other integrated products. In the second quarter of 2017 we shipped 1.9 metric tons of product, comprised mainly of dry powder. 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.

 

20 

 

 

 2018 Expected Revenue

 

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 June 30, 2018, we had eighteen specific customer applications where our materials are incorporated into our customers’ products and such customers are actively selling these products to their own customers. In addition, we have another fourteen customer applications where our customers have indicated that they expect to begin shipping product incorporating our materials in the next 3 – 6 months and have another sixteen 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 revenue in 2018. The following graphic demonstrates the trend over the past 9 quarters as an increasing number of customers indicate their intent to commercialize applications and move into actively selling products for future sales. As a result, we believe we will begin shipping significantly greater quantities of our products, and thus continue scaling revenue through 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 $8 – $15 million of revenue in 2018, although this cannot be assured.

 

 

 

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

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

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

  

Additional 10’s of customers demonstrating efficacy and moving through qualification process.

 

21 

 

 

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 was 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.

 

2016 Lithium Ion Battery Value Chain – Market Demand

 

 

 

According to Prismark Partners, LLC, a leading electronics industry consulting firm specializing in advanced materials, the 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, ultra phones and mobile devices) are expected to reach 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 three U.S. patents and patent applications from MSU. On August 8, 2016, we signed an agreement acquiring an exclusive license to Metna’s background IP for use of graphene nanoplatelets as additives to concrete mixtures. For purposes of the agreement, Metna’s background IP relates to the U.S. Patent 8,951,343. Also, on August 8, 2016, we entered into a second agreement for an exclusive license related to all Metna’s background technology and foreground technology, including any jointly-owned foreground technology where the end use is known to be any graphite additive dispersed in concrete mixtures. Over time, our scientists and engineers have made many further discoveries and inventions that are embodied in the form of (and as of June 30, 2018): eight additional U.S. patents, ten foreign patents, thirteen additional U.S. patent applications and numerous trade secrets. For many of the applications filed in the U.S., additional filings are made in other countries such as the European Union, Japan, South Korea, China, Taiwan or other applicable countries. As of June 30, 2018, we maintained twenty-eight 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, our patents and patent applications, and our trade secrets create a strong intellectual property position.

 

22 

 

 

Operating Segment

 

We have one reportable operating segment that manufactures xGnP® graphene nanoplatelets and value-added products produced therefrom, conducts research on graphene nanoplatelets and related products, and licenses our technology as appropriate. As of June 30, 2018, we shipped products on a worldwide basis, but all of our assets were located within the United States.

 

Results of Operations for the Three and Six Months Ended June 30, 2018 Compared with the Three and Six Months Ended June 30, 2017

 

Summary Income Statement  For the Three Months Ended 
June 30,
       For the Six Months Ended 
June 30,
     
(unaudited)  2018   2017   Change   2018   2017   Change 
       (restated)           (restated)     
Total Revenue  $850,854   $284,079   $566,775   $1,737,191   $566,268   $1,170,923 
Cost of Goods Sold   1,105,949    508,694    597,255    2,320,723    996,614    1,324,109 
Gross Loss   (255,095)   (224,615)   (30,480)   (583,532)   (430,346)   (153,186)
Research & Development Expense   287,082    227,062    60,020    564,146    490,626    73,520 
Sales, General & Administrative Expense   1,147,794    923,765    224,029    2,334,473    1,920,352    414,121 
Total Operating Expense   1,434,876    1,150,827    284,049    2,898,619    2,410,978    487,641 
Operating Loss   (1,689,971)   (1,375,442)   (314,529)   (3,482,151)   (2,841,324)   (640,827)
Other Income (Expense)   (83,805)   (161,074)   77,269    (165,721)   (191,015)   25,294 
Net Loss  $(1,773,776)  $(1,536,516)  $(237,260)  $(3,647,872)  $(3,032,339)  $(615,533)

 

Revenue

 

Revenue for the three and six months ended June 30, 2018 and 2017, by category, are shown below.

 

Summary of Revenue  For the Three Months Ended 
June 30,
       For the Six Months Ended 
June 30,
     
(unaudited)  2018   2017   Change   2018   2017   Change 
Product Sales  $850,854   $259,079   $591,775   $1,737,191   $416,779   $1,320,412 
Grants                    99,489    (99,489)
Licensing       25,000    (25,000)       50,000    (50,000)
Net Loss  $850,854   $284,079   $566,775   $1,737,191   $566,268   $1,170,923 

 

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 three months ended June 30, 2018, product sales increased by $591,775, or 228% from the comparable period in the prior year. For the six months ended June 30, 2018, product sales increased by $1,320,412, or 317% from the comparable period in the prior year. The main reason for the increase was customers moving through development programs towards commercialization, requiring larger quantities of our materials for advanced testing, pilot production and commercial-scale production activities. We believe that those customers already in production will increase their order volume as demand increases and others will begin to move into commercial volume production as they gain more experience in working with our materials and engage their own customers. As a result of this movement, we shipped 10.4 metric tons of graphene nanoplatelets in the form of dry powders in the first quarter of 2018 and an additional 4.4 tons of slurries, cakes and other integrated products containing graphene nanoplatelets, 11.2 metric tons of graphene nanoplatelets in the form of dry powders in the second quarter of 2018 and an additional 4.2 metric tons of slurries, cakes and other integrated products containing graphene nanoplatelets. We expect to ship from 70 to 120 metric tons of product in the second half of 2018.

 

We ship our products from our Lansing, MI manufacturing facilities to customers around the world. During the three months ended June 30, 2018, we shipped materials to customers in 17 countries, as compared to 19 countries during the same three-month period in 2017. During the six months ended June 30, 2018, we shipped materials to customers in 22 different countries, versus 25 countries in 2017. For the three months ended, June 30, 2018, no foreign countries accounted for more than 10% of product sales, and during the same period in 2017, shipments to only one country accounted for more than 10% of product sales, China. For the six months ended June 30, 2018, no foreign countries accounted for more than 10% of product sales, and during the same period in 2017, shipments to three countries accounted for more than 10% of product sales. Those countries, China, South Korea and the United Kingdom accounted for approximately 45% of total product sales during the six months ended June 30, 2017.

 

23 

 

 

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 order for production purposes or approach commercial status with products using our materials. The average order size for the product revenue during the six months ended June 30, 2018 increased by 242% as compared to the same period in 2017. Although the average size of these orders is still relatively small, we have begun shipping in metric ton quantities to multiple customers.

 

Order Summary 

For the Three Months Ended 

June 30,

      

For the Six Months Ended 

June 30,

     
(unaudited)  2018   2017   Change   2018   2017   Change 
                         
Number of orders - domestic   47    36    11    82    66    16 
Number of orders - international   28    42    (14)   49    83    (34)
Number of orders - total   75    78    (3)   131    149    (18)
Average order size for product sales recorded in our Statement of Operations  $11,345   $3,322   $8,023   $13,261   $2,797   $10,464 
 % change             242%             374%

 

Grant Revenue

 

We received no grant revenue for the three and six months ended June 30, 2018. Grant revenue for the three and six months ended June 30, 2017 was $0 and $99,489, respectively. The grant revenue for the six months ended June 30, 2017 consisted of $93,747 from the US Department of Energy and $5,742 from Daimler / University of Michigan.

 

Licensing Revenue

 

For the three and six months ended June 30, 2018 we had no licensing revenue. Licensing revenue for the three and six months ended June 30, 2017 was $25,000 and $50,000, respectively. The licensing revenue in 2017 was from POSCO, a shareholder of the Company.

 

Cost of Goods Sold

 

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

 

The following table shows the relationship of direct costs to product sales for the three and six months ended June 30, 2018 and 2017:

 

Direct Margin and Gross Profit Summary  For the Three Months Ended
June 30,
       For the Six Months Ended 
June 30,
     
(unaudited)  2018   2017   Change   2018   2017   Change 
                         
Product Sales  $850,854   $259,079   $591,775   $1,737,191   $416,779   $1,320,412 
Direct Costs   563,260    93,542    469,718    1,031,451    210,312    821,139 
Direct Cost Margin  $287,594   $165,537   $122,057   $705,740   $206,467   $499,273 
     % of Sales   33.8%   63.9%        40.6%   49.5%     
Unallocated Manufacturing Expense   542,689    415,152    127,537    1,289,272    786,302    502,970 
Gross Loss on Product Sales(1)  $(255,095)  $(249,615)  $(5,480)  $(583,532)  $(579,835)  $(3,697)

 

(1) Gross Loss on Product Sales excludes any licensing or grant revenues.

 

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).

 

24 

 

 

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 three months ended June 30, 2018, unallocated manufacturing expenses increased by 31% to $542,689 as compared to $415,152 in 2017. The increase of $127,537 is largely due to higher levels of manufacturing overhead expense as we prepare for and fulfill higher volume commercial orders.

 

For the six months ended June 30, 2018, unallocated manufacturing expenses increased by 64% to $1,289,272 as compared to $786,302 during the same period in 2017. The increase of $502,970 is largely due to higher levels of manufacturing overhead expense as we prepare for and fulfill higher volume commercial orders.

 

Sales, General and Administrative Expenses 

 

During the three months ended June 30, 2018 we incurred selling, general and administrative expenses (SGA) of $1,147,794. This is an increase of approximately $224,029 or 24.3% from the same period in 2017, primarily due to increases in personnel costs as a result of our growth in sales.

 

During the six months ended June 30, 2018 we incurred selling, general and administrative expenses (SGA) of $2,334,473. This is an increase of approximately $414,121 or 21.6% from the same period in 2017, primarily due to increases in personnel costs as a result of our growth in sales. As we continue to grow and gain traction in the marketplace we expect our SGA expenses to fluctuate in the short term, and stabilize and become more fixed in nature as we achieve economies of scale in the long term.

 

Research and Development Expenses

 

Research and development expenses for the three months ended June 30, 2018 were $287,082 as compared to $227,062 for the same period in 2017. The increase of $60,020 or 26.4% is primarily due to increased activities in our research and development area as we continue to commercialize and expand our sales reach.

 

Research and Development expenses for the six months ended June 30, 2018 were $564,146 as compared to $490,626 for the same period ended June 30, 2017. The increase of $73,520 or 15% is primarily due to increased activities in our research and development area as we continue to commercialize and expand our sales reach.

 

Other Income (Expense)

 

The following table shows a comparison of other income and expense by major component for the three and six months ended June 30, 2018 and 2017:

 

Other Income (Expense)  For the Three Months Ended 
June 30,
       For the Six Months Ended 
June 30,
     
(unaudited)  2018   2017   Change   2018   2017   Change 
       (restated)           (restated)     
Interest expense, net  $(83,805)  $(54,445)  $(29,360)  $(168,974)  $(113,533)  $(55,441)
Gain (loss) from change in fair value of derivative liability - warrants       (32,629)   32,629        (3,458)   3,458 
Government incentives, net       (74,000)   74,000    3,253    (74,024)   77,277 
Total  $(83,805)  $(161,074)  $77,269   $(165,721)  $(191,015)  $25,294 

 

Interest expense, net of interest income in the three and six month periods ending June 30, 2018, increased by $29,360 and $55,441, respectively from the comparable periods in the prior year. The increase is due to an increase in the amount of indebtedness outstanding under the Dow Facility, to $5 million as of June 30, 2018, from $2 million as of June 30, 2017.

 

25 

 

 

Gain/(loss) from changes in the fair value of derivative liability warrants from the previous valuation period are characterized as other income (expense) 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. On September 30, 2017, we adopted 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 to the unaudited condensed consolidated financial statements for more information.

 

Government incentives include accruals for incentive awards from state and local government entities, these incentives often relate to new hires or job creation activities. 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. Since 2016 was the final year for this incentive award program, we wrote off this previously accrued award in the three months ended June 30, 2017.

 

Cash Flow Summary

 

The following condensed cash flow statement compares cash flow from operating, investing, and financing activities for the six months ended June 30, 2018 and 2017.

 

Cash Flow Summary  For the Six Months Ended
June 30,
   Change 2018 – 2017 
(unaudited)  2018   2017   $   % 
Cash, cash equivalents and restricted cash, beginning of period(1)  $3,041,590   $1,980,842   $1,060,748    54%
Net Cash provided by (used in):                    
Operating activities   (2,349,037)   (2,384,615)   35,578    (1)%
Investing Activities   (1,780,095)   (446,626)   (1,333,469)   299%
Financing Activities   3,868,141    1,477,150    2,390,991    162%
Net decrease in cash, cash equivalents and restricted cash   (260,991)   (1,354,091)   1,093,100    (81)%
Cash, cash equivalents and restricted cash, end of period(1)  $2,780,599   $626,751   $2,153,552    344%

 

(1)Cash and cash equivalents, beginning of period above were $2,845,798 and $1,785,343 for the six months ended June 30, 2018 and 2017, respectively. Restricted cash for a letter of credit, beginning of period above were $195,792 and $195,499 for the six months ended June 30, 2018 and 2017, respectively. Cash and cash equivalents, end of period above were $2,584,661 and $431,107 for the six months ended June 30, 2018, respectively. Restricted cash for a letter of credit, end of period above were $195,938 and $195,644 for the six months ended June 30, 2018 and 2017, respectively.

 

Investing activities for the six months ended June 30, 2018 included net capital expenditures for the purchase of property and equipment of $1,707,364 and $72,732 for intellectual property as compared with $352,003 for property and equipment and $94,623 for intellectual property during the same period in 2017. These levels of capital expenditures are higher as we have begun to update and install equipment necessary to increase production capacity to meet anticipated customer orders for those customers who are moving into commercialization of products containing our materials. In early June 2018 we began operations at our new manufacturing facility in Mason, Michigan.

 

Financing activities provided a net increase in cash of $3,868,141 and $1,477,150 for the six months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 gross proceeds from the issuance of common stock was $3,945,400 and stock issuance expenses were $66,598 as compared to proceeds from the issuance of common stock for the six months ended June 30, 2017 of $1,720,400 and stock issuance expenses of $233,500.

 

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.

 

We originally filed the 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 (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 was declared effective April 14, 2017. Post-Effective Amendment No. 6 was declared effective June 26, 2018. Although we are currently selling shares of our common stock in our IPO pursuant to the Registration Statement, we have not yet listed the company for trading on any exchanges.

 

26 

 

 

In December 2016, we entered into a draw loan note and agreement (the “Dow Facility”) with The Dow Chemical Company (“Dow”) 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. As of August 10, 2018, we had drawn $5.0 million under the Dow Facility. The remaining $5 million will become available to us once we have raised $10 million of equity capital after October 31, 2016.  As of August 10, 2018, we have sold 1,534,507 shares of common stock pursuant to our IPO at a price of $8.00 per share for gross proceeds of $12,276,056. However, only $9,075,024 of this amount has been raised during the measurement period beginning November 1, 2016. Thus, we still need to raise $924,976 of additional equity capital prior to the remaining $5.0 million under the Dow Facility becoming available to us.

 

As of August 10, 2018, we had cash on hand of $1,549,219. We believe our cash from increasing commercial sales activity and various financing sources will fund our operations for at least the next 12 months. We intend that the primary means for raising funds will be through our IPO and the additional $5 million of proceeds from the Dow Facility that becomes available to us after we have raised another $924,976 of equity capital as noted above; however, we can make no assurances that we will raise such equity capital and be able to access the additional $5 million under the Dow Facility. Taking into account our current cash position as noted above, an additional $924,976 in proceeds from our IPO, 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 for at least the next 12 months. If needed, two of our shareholders have committed to provide the additional $924,976 million of equity capital needed to open up to the remaining $5 million of availability under the Dow Facility to the extent such funding is not provided by other third parties. This commitment is good through March 31, 2019.

 

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.

 

Critical Accounting Policies

 

In preparing the condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our Form 10-K for the year ended December 31, 2017.

 

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to inventories, intangible assets, property, plant and equipment, legal proceedings, research and development, warranty obligations, product liability, fair valued liabilities, sales returns and discounts, going concern, and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various judgements about the reported values of assets, liabilities, revenue and expenses. Actual results may materially differ from these estimates.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Smaller reporting companies are not required to provide this information.

 

Item 4. Controls and Procedures

 

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

 

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

 

27 

 

 

(b) Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

Smaller reporting companies are not required to provide this information.

  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the three months ended June 30, 2018 we issued 7,140 shares per period of Series A Preferred Stock to Aspen Advanced Opportunity Fund, LP as payment for lease financing obligations under the terms of the Master Lease Agreement dated March 18, 2013.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

None

 

28 

 

 

Item 6. Exhibits.

 

EXHIBIT
NUMBER
  DESCRIPTION   LOCATION
         
10.1  

Second Amendment to Shareholders Agreement, dated May 30, 2018

 

  Incorporated by reference to the Company’s Form S-1, as amended, filed with the SEC on June 1, 2018
31.1   Certifications of the Chief Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith
         
32.1   Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002*   Filed herewith
         
101. INS   XBRL Instance Document   Filed herewith
         
101. CAL   XBRL Taxonomy Extension Calculation Link base Document   Filed herewith
         
101. DEF   XBRL Taxonomy Extension Definition Link base Document   Filed herewith
         
101. LAB   XBRL Taxonomy Label Link base Document   Filed herewith
         
101. PRE   XBRL Extension Presentation Link base Document   Filed herewith
         
101. SCH   XBRL Taxonomy Extension Scheme Document   Filed herewith

 

29 

 

 
SIGNATURES

 

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

 

Dated: August 10, 2018 By: /s/ Philip L. Rose
  Name: Philip L. Rose
  Title: Chief Executive Officer, President,
Treasurer, Principal Executive Officer and
Principal Financial Officer
     
Dated: August 10, 2018 By: /s/ Corinne Lyon
  Name: Corinne Lyon
  Title: Controller and Principal Accounting Officer

 

30