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Item 7. Management’s Discussion and Analysis

2022-03-28 compared with 2021-03-19 · 144 added, 316 removed, 11 unchanged (98% of the section changed)

DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion

and analysis of the results of operations and financial condition of KULR Technology Group, Inc.

("KULR") and its wholly-owned

subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”)

as of and for the years ended December 31, 2020 and 2019 should be read in conjunction with our consolidated financial statements

and the notes to those consolidated financial statements that are included elsewhere in this Annual Report.

References in this

Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”,

“our” and similar terms refer to the Company.

This Management’s Discussion and Analysis of Financial Condition

and Results of Operations contains statements that are forward-looking.

These statements are based on current expectations and

assumptions that are subject to risk, uncertainties and other factors.

These statements are often identified by the use of words

such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,”

“could,” “estimate,” or “continue,” and similar expressions or variations.

Actual results

could differ materially because of the factors discussed in “Risk Factors” elsewhere in this Annual Report, and other

factors that we may not know.

KULR Technology Group, Inc.,

through our wholly-owned subsidiary KULR Technology Corporation, develops and commercializes high-performance thermal management

technologies for batteries, electronics, and other components across an array of battery-powered applications.

For aerospace and

Department of Defense (“DOD”) applications, our solutions target high performance applications in direct energy, hypersonic

vehicles and satellite communications.

For commercial applications, our main focus is a total solution to battery safety and sustainability

by which we aim to mitigate the effects of thermal runaway propagation which has been known to cause random fires in lithium-ion

(“Li-ion”) batteries.

This total battery safety solution can be used for electric vehicles, energy storage, battery

recycling transportation, cloud computing and 5G communication devices.

Our proprietary core technology is a carbon fiber material

that provides what we believe to be superior thermal conductivity and heat dissipation for an ultra-lightweight and pliable material.

By leveraging our proprietary cooling solutions that have been developed through longstanding partnerships with advanced technology

users like NASA, the Jet Propulsion Lab and others, our products and services make commercial battery powered products safer and

electronics systems cooler and lighter.

KULR’s business

model continues to evolve from being a component supplier, to providing more design and testing services to our customers.

next step of evolution is to provide total system solutions to address market needs.

In order to scale up as a systems provider

more quickly and efficiently in (i) the Li-ion battery energy storage and recycling markets, (ii) battery cell design and safety

testing, and (iii) advanced thermal management systems, such as hypersonic vehicles, KULR will actively seek partners for joint

venture, technology licensing and other strategic partnership models.

The goal is to leverage the Company’s thermal design

technology expertise to create market leading products, which KULR will take to market directly to capture more value for KULR

shareholders.

We have not yet achieved

profitability and expect to continue to incur cash outflows from operations, as a result, we will eventually need to generate

significant revenues to achieve profitability.

Until that time we shall have to continue to raise cash as and when required through

the sale of stock.

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis of the results of operations and financial condition of KULR Technology Group, Inc.

("KULR") and its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”) as of and for the years ended December 31, 2021 and 2020 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report.

References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking.

These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors.

These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations.

Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this Annual Report, and other factors that we may not know.

KULR Technology Group, Inc., through our wholly-owned subsidiary KULR Technology Corporation, develops and commercializes high-performance thermal management technologies for batteries, electronics, and other components across an array of battery-powered applications.

For aerospace and Department of Defense (“DOD”) applications, our solutions target high performance applications in direct energy, hypersonic vehicles and satellite communications.

For commercial applications, our main focus is a total solution to battery safety and sustainability by which we aim to mitigate the effects of thermal runaway propagation which has been known to cause random fires in lithium-ion (“Li-ion”) batteries.

This total battery safety solution can be used for electric vehicles, energy storage, battery recycling transportation, cloud computing and 5G communication devices.

Our proprietary core technology is a carbon fiber material that provides what we believe to be superior thermal conductivity and heat dissipation for an ultra-lightweight and pliable material.

By leveraging our proprietary cooling solutions that have been developed through longstanding partnerships with advanced technology users like NASA, the Jet Propulsion Lab and others, our products and services make commercial battery powered products safer and electronics systems cooler and lighter.

KULR’s business model continues to evolve from being a component supplier, to providing more design and testing services to our customers.

The next step of evolution is to provide total system solutions to address market needs.

In order to scale up as a systems provider more quickly and efficiently in (i) the Li-ion battery energy storage and recycling markets, (ii) battery cell design and safety testing, and (iii) advanced thermal management systems, such as hypersonic vehicles, KULR will actively seek partners for joint venture, technology licensing and other strategic partnership models.

The goal is to leverage the Company’s thermal design technology expertise to create market leading products, which KULR will take to market directly to capture more value for KULR shareholders.

We have not yet achieved profitability and expect to continue to incur cash outflows from operations, as a result, we will eventually need to generate significant revenues to achieve profitability.

Until that time, we shall have to continue to raise cash, as and when required, through equity or debt financings.

Recent Developments

Paycheck Protection Program Loan

On April 27, 2020, we

received the proceeds of a $155,226 loan in connection with the CARES Act Paycheck Protection Program (PPP) being administered

by the Small Business Administration.

The Company believes that it will qualify for loan forgiveness under the terms of the PPP

In January 2020,

an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China.

Through the first quarter of 2020, the disease

became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic.

is dependent on developing new markets and new products to be used on a global basis, thus restrictions on travel led to reduced

demand for our products and interruptions to supply chains.

Also, the local regulations such as “Shelter in Place”

affected our ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands

in a timely manner.

Given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus

and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results

of operations, cash flows, or financial condition.

Standby Equity Distribution Agreement

and Notes Payable

On February 27, 2020,

we entered into a Standby Equity Distribution Agreement (“SEDA”) with YAII PN, Ltd., a Cayman Island exempt limited

partnership (“YAII”).

Under the terms of this Agreement, the Company raised an aggregate of $2,292,695 from the facility.

As of December 31, 2020, the Company had approximately $5,707,305 available in connection with the SEDA, however, so long as warrants

issued on December 31, 2020 in an unrelated transaction remain outstanding, the Company may not issue shares in connection with

variable rate transactions.

During the year ended December 31, 2020, the Company issued notes to YAII in the aggregate amount

of $4,000,000, of which the Company repaid principal on the notes in the aggregate amount of $1,550,000 ($791,000 was repaid from

proceeds from the SEDA).

Subsequent to December 31, 2020, the Company repaid principal on the notes in the aggregate amount of

Registered Direct Offering

On December 31, 2020, we closed a registered

direct offering conducted pursuant to a securities purchase agreement (“Purchase Agreement”) with the purchasers set

forth on the signature page thereto (the “Purchasers”) for the purchase and sale of an aggregate of 6,400,001 shares

of our common stock (the “Shares”), and warrants to purchase an aggregate of up to 6,400,001 shares of common stock

(“Warrants”), at a combined purchase price of $1.25 per Share and Warrant.

The aggregate gross proceeds to us were

equal to approximately $8 million.

The Warrants are immediately exercisable and may be exercised at any time until December 31,

2025, at an exercise price of $1.25 per share.

Lake Street Capital Markets, LLC and Maxim Group LLC acted as co-placement agents

in connection with the registered direct offering.

We paid the co-placement agents a cash fee of 7.0% of the gross proceeds we

received under the Purchase Agreement.

We also reimbursed the co-placement agents for certain out-of-pocket accountable expenses

incurred by them in connection with this offering of $50,000.

We paid total approximate offering expenses, other than the placement

agent fees, of approximately $170,000, which includes the co-placement agents’ reimbursable expenses, legal, financial advisory

fees, accounting, printing costs, listing fees, and various other expenses associated with registering and issuing the shares.

We intend to use the net proceeds from this offering for capital expenditures, as well as for working capital and general corporate

The Shares and Warrants (and underlying shares)

were offered, and will be issued, pursuant to the Prospectus Supplement, dated December 29, 2020, to the Prospectus included in

our Registration Statement on Form S-3 (Registration No.

333- 232614) filed with the Securities and Exchange Commission on July

11, 2019 and declared effective on August 1, 2019.

Appointment of Keith Cochran

On March 8, 2021, our

Board of Directors (the “Board”) appointed Keith Cochran as President and Chief Operating Officer of the Company,

to hold office until the earlier of the expiration of the term of office, a successor is duly elected and qualified, or the earlier

of such officer’s death, resignation, disqualification, or removal.

As compensation for his

services as President and Chief Operating Officer of the Company, Mr.

Cochran will receive:

(1) a salary of $250,000 per annum

and commensurate benefits;

(2) 2,000,000 restricted shares of the Company’s common stock, which shares shall vest, so long

Cochran remains employed by the Company, in four (4) equal yearly installments, with the first installment amount to vest

on March 1, 2022 and annually thereafter;

and (3) eligibility, also subject to Mr.

Cochran’s continued employment with the

Company, for incentive based grants of up to 1,500,000 shares, which shall be earned upon the Company achieving certain market

capitalization milestones.

Appointment of Independent Directors

On February 20, 2021,

the Board, contingent upon the Company’s common stock being approved for uplisting to a national exchange, approved the

appointment of Morio Kurosaki as an independent member of the Board.

Kurosaki will also serve as chair of the Audit Committee.

As such, the Board has determined that Mr.

Kurosaki is a financial expert within the meaning of SEC regulations.

Additionally,

Kurosaki will serve as a member of both the Compensation Committee and the Nominating and Governance Committee.

In connection with his

appointments, Mr.

Kurosaki will be compensated (1) $10,000 per quarter, beginning on and subject to approval for uplisting, and

(2) 20,000 restricted shares of the Company’s common stock, which shares shall vest equally in 5,000 share increments per

quarter beginning on and subject to approval for uplisting.

On February 20, 2021,

the Board, contingent upon the Company’s common stock being approved for uplisting to a national exchange, approved the

appointment of Stayce D.

Harris as an independent member of the Board.

Harris will also serve as chair of the Compensation

Additionally, Ms.

Harris will serve as a member of both the Audit Committee and the Nominating and Governance Committee.

In connection with her

appointments, Ms.

Harris will be compensated (1) $10,000 per quarter, beginning on and subject to approval for uplisting, and

(2) 20,000 restricted shares of the Company’s common stock, which shares shall vest equally in 5,000 share increments per

quarter beginning on and subject to approval for uplisting.

On February 20, 2021,

the Board, contingent upon the Company’s common stock being approved for uplisting to a national exchange, approved the

appointment of Joanna D.

Massey as an independent member of the Board.

Massey will also serve as chair of the Nominating and

Governance Committee.

Additionally, Ms.

Massey will serve as a member of both the Audit Committee and the Compensation Committee.

In connection with her

appointments, and subject to the receipt of her acknowledgment of the same, Ms.

Massey will be compensated (1) $10,000 per quarter,

beginning on and subject to approval for uplisting, and (2) 20,000 restricted shares of the Company’s common stock, which

shares shall vest equally in 5,000 share increments per quarter beginning on and subject to approval for uplisting.

Conversion of Series C Preferred Stock

During the year ended

December 31, 2020, KULR issued an aggregate of 56,778 shares of our common stock upon voluntary conversions of 5.11 shares of

our Series C Preferred Stock.

Effective as of December

31, 2020, KULR issued an aggregate of 177,885 shares of our common stock and warrants to purchase an aggregate of 177,885 shares

of our common stock at an exercise price of $1.25 per share, upon a deemed automatic conversion of 18.90 shares of our Series

C Preferred Stock, after which there remained no further Series C Preferred Stock outstanding.

Although the conversion shares

were issued subsequent to the deemed automatic conversion, in connection with a registered direct offering that closed on December

31, 2020, the conversions were made effective as of December 31, 2020 pursuant to an automatic conversion feature of the Series

C Preferred Stock under which the stated value of each share was converted into the same securities issued in the registered direct

offering at an effective conversion price of 85% of the aggregate purchase price of such securities.

Conversion of Series B Preferred Stock

During the year ended

December 31, 2020, KULR issued an aggregate of 25,758 shares of our common stock upon conversion of 515 shares of our Series B

Preferred Stock.

Subsequent to the year

ended December 31, 2020, KULR issued an aggregate of 698,600 shares of our common stock upon conversion of 13,972 shares of our

Series B Preferred Stock, after which there remained no further Series B Preferred Stock outstanding.

In March 2020, the World Health Organization declared COVID-19, a novel strain coronavirus, a pandemic.

During 2020 and continuing into 2022, the global economy has been, and continues to be, affected by COVID-19.

While the Company continues to see signs of economic recovery as certain governments begin to gradually ease restrictions, provide economic stimulus and accelerate vaccine distribution, the rate of recovery on a global basis has been affected by resurgence of the virus or its variants in certain jurisdictions.

The Company continues to monitor the impact of COVID-19 on its business and operational assumptions and estimates and has determined there were no material adverse impacts on the Company’s results of operations and financial position at December 31, 2021.

The full extent of the future impact of COVID-19 on the Company’s operations and financial condition is uncertain.

Accordingly, COVID-19 could have a material adverse effect on the Company’s business, results of operations, financial condition and prospects during 2022 and beyond, including the demand for its products, interruptions to supply chains, ability to maintain regular research and development and manufacturing schedules as well as the capability to meet customer demands in a timely manner.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

New Officer Hires

During 2021, the Company hired the following officers:

● On March 8, 2021, Keith Cochran joined KULR as President and Chief Operating Officer.

● On April 19, 2021, Antonio Martinez joined the Company as its new Vice President of Operations.

● On June 10, 2021, Greg Provenzano joined the Company as its new Vice President of Sales and Marketing.

Appointment and Resignation of Independent Directors

On June 7, 2021, the following new independent director appointments became effective:

● Morio Kurosaki (Chair of Audit Committee)

● Stayce Harris (Chair of Compensation Committee)

● Joanna Massey (Chair of Nominating and Governance Committee)

Effective as of December 13, 2021, Stayce Harris resigned as an independent member of the Board.

Operating Lease

On April 5, 2021, we entered into an agreement to lease office space for a thirty-six-month period, commencing June 1, 2021 with the option to renew for an additional 5 years.

Monthly rental payments under the new lease total $23,787, which are comprised of $18,518 of base rent plus $5,269 for common area costs, with annual escalation of 3.5%.

Conversion of Series D Preferred Stock

During the year ended December 31, 2021, we sold an aggregate of 650 shares of Series D Preferred pursuant to a new designation of preferred stock, and one-year warrants to purchase 2,600,000 shares of common stock at a price of $2.50 per share, for aggregate gross proceeds of $6,500,000.

The Series D Preferred shares were convertible into an aggregate of 3,170,730 shares of common stock at a fixed conversion price of $2.05 and had the right to vote on an as-converted basis.

We also paid the investor a commitment fee of 1,300,000 shares of common stock in connection with the sale of the Series D Preferred.

Notes payable obligations in the aggregate amount of $1,540,000, were paid in full upon the closing of the sale of the Series D Preferred.

As of December 31, 2021, we issued an aggregate of 3,170,730 shares of our common stock upon conversion of 650 shares of our Series D Preferred Stock, after which no Series D Preferred shares remained outstanding.

Exercise of Warrants

During the year ended December 31, 2021, we issued 6,793,358 shares of common stock upon the exercise of warrants for proceeds of $11,719,204.

NYSE American Exchange Listing

On June 7, 2021, our common stock was up listed and now trades on the NYSE American LLC Exchange.

Consolidated Results of Operations

Year Ended December 31, 2020 Compared

With Year Ended December 31, 2019

Our revenues consisted

of the following types:

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Our revenues consisted of the following types:

For the Years Ended

2 unchanged sentences

Total revenue

For the years ended December

31, 2020 and 2019, we generated $623,965 and $830,398 of revenues from 25 and 27 customers, respectively, representing a decrease

of $206,433, or 25%.

Revenue from product sales during the year ended December 31, 2020 decreased by 45% compared to the year

ended December 31, 2019, primarily due to a large DOD contract of about $355,000 received during the year ended December 31, 2019.

The customer has pushed its next shipment of product to 2021.

Product sales during these periods included sales of our component

products, CFV thermal management solutions, ISC battery cells and devices, patented technology, and thermal FTI materials.

from services increased by 131% for the year ended December 31, 2020 as compared to the year ended December 31, 2019, due to increased

project requirements from some of our new and existing customers.

Our service revenues, which include certain research and development

contracts and onsite engineering services, were not hampered by restrictions arising from working under COVID-19 shelter-in-place

We are still in the early

stages of business growth and development of customer relationships which typically begin on a project-by-project basis, leading

to limited volume trials and eventually, product sales.

As a result, in the absence of a large installed customer base, our sales

can be lumpy and vary from one period to another.

Cost of Revenue and Gross Margin

Cost of revenues consisted

of the cost of our products as well as labor expenses directly related to product sales or research contract services.

Generally, we earn greater

margins on revenue from products as compared to revenue from services, so product mix plays an important part in our reported

average margins for any period.

Also, we are introducing new products at an early stage in our development cycle and the margins

earned can vary significantly between periods, customers and products due to the learning process, customer negotiating strengths,

and product mix.

Our customers and prospective

customers are large organizations with multiple levels of management, controls/procedures, and contract evaluation/authorization.

For the years ended December 31, 2021 and 2020, we generated $2,412,868 and $623,965 of revenues from 20 and 25 customers, respectively, representing an increase of $1,788,903, or 287%.

Revenue from product sales during the year ended December 31, 2021 increased by $1,090,861 or 270% compared to the year ended December 31, 2020.

Three large contracts received during 2021 for the sales of our component product, carbon fiber velvet (“CFV”) thermal management solution, internal short circuit (“ISC”) battery cells and devices, patented TRS technology, and thermal fiber thermal interface (“FTI”) materials generated $1,197,368 of revenues.

Revenue from contract services during the year ended December 31, 2021 increased by $698,042 or 318% compared to the year ended December 31, 2020.

Four large DOD contracts received during 2021 generated $905,504 of revenues.

Our service revenues, which include certain research and development contracts and onsite engineering services, have not been hampered by restrictions arising from working under COVID-19 shelter-in-place regulations.

Our customers and prospective customers are large organizations with multiple levels of management, controls/procedures, and contract evaluation/authorization.

Furthermore, our solutions are new and do not necessarily fit into pre-existing patterns of purchase commitment.

the business activity cycle between expression of initial customer interest to shipping, acceptance and billing can be lengthy,

unpredictable and lumpy, which can influence the timing, consistency and reporting of sales growth.

For the years ended December

31, 2020 and 2019, cost of revenues was $169,016 and $226,505, respectively, representing a decrease of $57,489, or 25%.

was primarily due to reduced costs as a result of reduced revenues.

The gross margin percentage was 73% for both of the years

ended December 31, 2020 and 2019.

Research and Development

Accordingly, the business activity cycle between expression of initial customer interest to shipping, acceptance and billing can be lengthy, unpredictable, and lumpy, which can influence the timing, consistency and reporting of sales growth.

Cost of Revenues

Cost of revenues consisted of the cost of our products as well as labor expenses directly related to product sales or research contract services.

Generally, we earn greater margins on revenue from products as compared to revenue from services, so product mix plays an important part in our reported average margins for any period.

Also, we are introducing new products at an early stage in our development cycle and the margins earned can vary significantly between periods, customers and products due to the learning process, customer negotiating strengths, and product mix.

For the years ended December 31, 2021 and 2020, cost of revenues was $1,102,038 and $187,903, respectively, representing an increase of $914,135, or 486%.

The increase was primarily due to increased costs as a result of increased revenues.

The gross margin percentage was 54% and 70% for the years ended December 31, 2021 and 2020, respectively.

The decrease in margins realized during the year ended December 31, 2021 is primarily attributable to two service contracts that resulted in a gross margin of 15% and 13% during the first and second quarters of 2021, respectively.

Research and Development

(“R&D”) included expenses incurred in connection with the R&D of our CFV thermal management solution and non-cash

stock-based compensation expenses.

R&D expenses are expensed as they are incurred.

For the years ended December

31, 2020 and 2019, R&D expenses were $289,772 and $502,225, respectively, representing a decrease of $212,453 or 42%.

decrease is attributable to reductions in salaries and other salary related costs, such as payroll taxes and other benefits, implemented

during the end of the first quarter of 2020 due to COVID-19, as well as a reduction in head count between the comparable periods.

We expect that our R&D

expenses will increase as we expand our future operations.

Selling, General and Administrative

Research and development includes expenses incurred in connection with the R&D of our CFV thermal management solution, high-areal-capacity battery electrodes, 3D engineering for a rechargeable battery and non-cash stock-based compensation expenses.

Research and development expenses are charged to operations as incurred.

For the years ended December 31, 2021 and 2020, R&D expenses were $1,662,183 and $289,772, respectively, representing an increase of $1,372,411 or 474%.

The increase during 2021 was comprised of the following:

a) $464,000 related to an increase in employee headcount spent on R&D and three new projects for automation, battery and drone design initiated during 2021.

b) $341,000 related to product development for high-areal capacity battery electrodes and 3D-engineering for solid state rechargeable batteries due to University of Colorado-Boulder.

c) $286,000 related to software engineering services due to Key Software Services.

d) $116,000 related to drone and engineering services due to International Vibration Technology.

e) $75,000 related to engineering design services due to Rapid Composites.

We expect that our R&D expenses will increase as we expand our future operations.

Selling, General and Administrative

expenses consisted primarily of salaries, payroll taxes and other benefits, legal and professional fees, stock-based compensation,

marketing, travel, rent and office expenses.

For the years ended December

31, 2020 and 2019, selling, general and administrative expenses were $2,505,609 and $2,080,941, respectively, an increase of $424,668,

The increase is primarily due to increases of approximately $529,000 for marketing and advertising expense and $262,000

for stock-based compensation related to consultants and employees, partially offset by decreases of approximately $116,000 of

travel, meals, and entertainment expense due to COVID-19 restrictions, $99,000 of rent expense due to the termination of an operating

lease during the end of the fourth quarter of 2019, $30,000 of professional fees, $98,000 of payroll and benefits due to salary

reductions implemented during the end of the first quarter of 2020 as a result of COVID-19, and $17,000 of conference and seminar

expenses due to the travel restrictions and stay-at-home orders as a result of COVID-19.

Other (Expenses) Income

For the years ended December

31, 2020 and 2019, other expenses were $509,664 and $480, respectively, representing an increase of $509,184.

The increase is

primarily attributable to the amortization of debt discount recorded in connection with notes payable issued in 2020.

Selling, general and administrative expenses consisted primarily of stock-based compensation, marketing and advertising, salaries, payroll taxes and other benefits, accounting and tax, consulting fees, travel and entertainment, rent expense, office expenses, and legal and professional fees.

For the years ended December 31, 2021 and 2020, selling, general and administrative expenses were $11,162,062 and $2,486,722, respectively, an increase of $8,675,340, or 349%.

The increase is primarily due to increases of approximately $3,858,000 for stock-based compensation related market-based awards and restricted common stock issued to employees and consultants in 2021, $1,727,000 for expanded marketing and advertising expenses, $1,145,000 in labor costs as a result of 19 new hires during the period, $431,000 for consulting contractor services, $403,000 for office expenses and supplies, $321,000 for legal and professional fees, $207,000 for travel and entertainment due to the lifting of COVID-19 dining and travel restrictions, $160,000 for rent expense due to the execution of a new operating lease agreement during the period, $139,000 for a fraudulent transaction due to an information technology related breach in security, and $100,000 for directors and officers insurance.

Other (Expense) Income

For the years ended December 31, 2021 and 2020, other expenses were $397,736 and $509,664, respectively, representing a decrease of $111,928 or 22%.

The decrease is primarily attributable to the decrease in the amortization of debt discount recorded in connection with notes payable issued in 2020 of $374,000, and partially offset by a $140,000 increase of debt redemption costs in connection with the repayment of notes payable issued in 2020 and the $123,000 increase in the change in fair value of accrued issuable equity.

Liquidity and Capital Resources

As of December 31, 2020

and 2019, we had cash balances of $8,880,140 and $108,857, respectively, and working capital (deficit) of $6,202,985 and $(824,481),

respectively.

For the years ended December

31, 2020 and 2019, cash used in operating activities was $2,730,253 and $1,188,339, respectively.

Our cash used in operations

for the year ended December 31, 2020 was primarily attributable to our net loss of $2,850,096, adjusted for non-cash expenses

in the aggregate amount of $864,929, as well as $754,086 of net cash used to fund changes in the levels of operating assets and

Our cash used in operations for the year ended December 31, 2019 was primarily attributable to our net loss of $1,979,753,

adjusted for non-cash expenses in the aggregate amount of $237,990, as well as $553,424 of net cash provided by changes in the

levels of operating assets and liabilities.

For the years ended December

31, 2020 and 2019, cash used in investing activities was $46,087 and $0, respectively.

Cash used in investing activities during

the year ended December 31, 2020 was related to the purchases of equipment.

For the years ended December

31, 2020 and 2019, cash provided by financing activities was $11,547,623 and $1,067,300, respectively.

Cash provided by financing

activities during the year ended December 31, 2020 was due to the net proceeds from notes payable of $3,710,000, proceeds from

the Paycheck Protection Program loan of $155,226, proceeds from the sale of our common stock pursuant to the SEDA agreement of

$1,501,696, and proceeds from the sale of common stock and warrants received in a public offering of $8,000,001.

These amounts

were partially offset by $340,000 for the payment of debt issuance costs, $759,000 for the repayments on notes and $720,300 of

cash paid in offering costs related to sale of our equity securities.

Cash provided by financing activities during the year ended

December 31, 2019 was due to the gross proceeds of common stock offering of $898,300 and proceeds from the issuance of our Series

C Convertible Preferred Stock of $184,000, partially offset by cash offering costs paid of $15,000.

Subsequent to December

31, 2020, we made cash payments totaling $1,050,000 to pay down a portion of the outstanding principal due under our notes payable.

We have not yet achieved

profitability and expect to continue to incur cash outflows from operations.

It is expected that our research and development

and general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant

revenues and/or raise additional capital to fund our operations.

Although our management believes our current cash on hand is

sufficient to meet our operating and capital requirements for at least the next twelve months from the date these financial statements

are issued, there is no assurance that we will be able to obtain funds on commercially acceptable terms, if at all, on a go-forward

If we are unable to obtain adequate funds on reasonable terms, we may be required to significantly curtail or discontinue

operations or obtain funds by entering into financing agreements on unattractive terms.

Our operating needs include the planned

costs to operate our business, including amounts required to fund working capital and capital expenditures.

Our consolidated financial

statements included elsewhere in this Annual Report on Form 10-K have been prepared in conformity with accounting principles generally

accepted in the United States of America (“U.S.

GAAP”), which contemplate our continuation as a going concern and

the realization of assets and satisfaction of liabilities in the normal course of business.

The carrying amounts of assets and

liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable or settlement

Off-Balance Sheet Arrangements

There are no off-balance

sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on

financial conditions, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures

or capital resources that is material to stockholders.

Critical Accounting Policies

See Note 2 – Summary

of Significant Accounting Policies of our consolidated financial statements included within this Annual Report for our critical

accounting policies.

As of December 31, 2021 and 2020, we had cash balances of $14,863,301 and $8,880,140, respectively, and working capital of $13,302,935 and $6,194,257, respectively.

For the years ended December 31, 2021 and 2020, cash used in operating activities was $6,805,674 and $2,730,253, respectively.

Our cash used in operations for the year ended December 31, 2021 was primarily attributable to our net loss of $11,911,151, adjusted for non-cash expenses in the aggregate amount of $4,670,955, as well as $434,522 of net cash generated from changes in the levels of operating assets and liabilities.

Our cash used in operations for the year ended December 31, 2020 was primarily attributable to our net loss of $2,850,096, adjusted for non-cash expenses in the aggregate amount of $864,929, as well as $745,086 of net cash used from changes in the levels of operating assets and liabilities.

For the years ended December 31, 2021 and 2020, cash used in investing activities was $2,737,235 and $46,087, respectively.

Cash used in investing activities during the year ended December 31, 2021 was related to deposits paid for equipment of $2,153,950, purchases of property and equipment of 383,285, and the purchase of an intangible asset for $200,000.

Cash used in investing activities during the year ended December 31, 2020 was related to the purchases of property and equipment for $46,087.

For the years ended December 31, 2021 and 2020, cash provided by financing activities was $15,526,070 and $11,547,623, respectively.

Cash provided by financing activities during the year ended December 31, 2021 was due to proceeds from the exercise of warrants of $11,719,204, proceeds from the sale of Series D Convertible Preferred Stock of $6,500,000, and proceeds from the exercise of options of $121,866.

These amounts were partially offset by repayments of notes payable of $2,450,000, and payment of financing costs of $365,000.

Cash provided by financing activities during the year ended December 31, 2020 was due to proceeds from the sale of common stock and warrants of $8,000,001, proceeds from notes payable of $3,710,000, proceeds from the sale of common stock issued pursuant to the SEDA agreement of $1,501,696, and proceeds from the Paycheck Protection Program loan of $155,226.

These amounts were partially offset by repayments of notes payable of $759,000, payment of offering costs in connection with the sale of common stock and warrants of $705,300, payment of debt issuance costs of $340,000, and payment of financing costs of $15,000.

As of December 31, 2021 and 2020, we had cash balances of $14,863,301 and $8,880,140, respectively, and working capital of $13,302,935 and $6,194,257, respectively.

Cash requirements for our current liabilities include approximately, $1,880,113 for accounts payable and accrued expenses (including lease liabilities) and $155,226 related to our PPP loan, for which we will apply for forgiveness.

The Company has also committed to spend $1,650,000 in sponsorship fees, capital expenditures of $1,324,251 for automation and testing equipment, and $958,286 for research and development.

Cash requirements for long term liabilities consist of $423,447 for lease payments, $350,000 for sponsorship fees, and $245,270 for research and development.

The Company intends to meet these cash requirements from its current cash balance and from future revenues.

In March 2020, the World Health Organization declared COVID-19, a novel strain coronavirus, a pandemic.

During 2020 and continuing into 2022, the global economy has been, and continues to be, affected by COVID-19.

The Company continues to monitor the impact of COVID-19 on its business and operational assumptions;

however, given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition.

The short and long-term worldwide implications of Russia’s invasion of Ukraine are difficult to predict at this time.

The imposition of sanctions on Russia by the United States or other countries and possible counter sanctions by Russia, and the resulting economic impacts on oil prices and other materials and goods, could affect the price of materials used in the manufacture of our product candidates.

If the price of materials used in the manufacturing of our product candidates increase, that would adversely affect our business and the results of our operations.

Our consolidated financial statements included elsewhere in this Annual Report on Form 10-K have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S.

GAAP”), which contemplate our continuation as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business.

The carrying amounts of assets and liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable or settlement values.

Critical Accounting Estimates

The preparation of financial statements and related disclosures must be in conformity with U.S.

These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the periods presented.

We believe that the estimates and judgments upon which it relies are reasonably based upon information available to us at the time that it makes these estimates and judgments.

To the extent that there are material differences between these estimates and actual results, our financial results will be

The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described below.

The following is not intended to be a comprehensive list of all of our accounting policies or estimates.

Our accounting policies are more fully described in Note 2 – Summary of Significant Accounting Policies, in our financial statements included at the end of this Annual Report.

Stock-Based Compensation

We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award on the date of grant.

The fair value amount of the shares expected to ultimately vest is then recognized over the period for which services are required to be provided in exchange for the award, usually the vesting period.

The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period that the estimates are revised.

We account for forfeitures as they occur.

Series D Convertible Preferred Stock

On May 19, 2021, the Company entered into a Securities Purchase Agreement (“SPA”) with an investor, pursuant to which the Company agreed to issue to the investor an aggregate of 650 shares of Series D convertible preferred stock (the “Series D Preferred”) pursuant to a new designation of preferred stock, and one-year warrants to purchase 2,600,000 shares of common stock (the “Warrants”) at a price of $2.50 per share, for aggregate gross proceeds of $6,500,000 (the “Offering”).

The Company also agreed to pay the investor a commitment fee of 1,300,000 shares of common stock (the “Commitment Shares”) at the closing of the Offering.

The closing of the Offering occurred on May 20, 2021.

The accounting for the Offering required valuations of each of (a) the Series D Preferred;

(b) the Warrants;

and (c) the Commitment Shares.

Management employed the assistance of a valuation specialist to value the Series D Preferred using the backsolve valuation method.

The backsolve valuation method utilized the Black-Scholes option model to allocate the value of a company between various share classes.

The Warrants were also valued using the Black-Scholes option model.

The Commitment Shares and the common stock value input to the Black-Scholes option model were valued by reference the fair value of our common stock (generally an observable market price, as our common stock is publicly traded).

The remaining inputs to the Black-Scholes option model require assumptions, including the expected term of the financial instrument (judgment is required), the expected volatility of our common stock over the expected term (generally estimated by reference to the historical volatilities of selected peer group companies ), our expected dividend rate over the expected term (currently estimated as zero, given that we are not projecting profits over the intermediate term) and the expected risk-free rate over the expected term (generally estimated by reference to United States treasury instruments with similar remaining terms).

Recently Issued Accounting Pronouncements

See Note 2 – Summary

of Significant Accounting Policies of our consolidated financial statements included within this Annual Report for a summary of

recently issued and adopted accounting pronouncements.

QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting

company, as defined by Rule 229.10(f)(1) and are not required to provide the information required by this Item.

FINANCIAL STATEMENTS AND SUPPLEMENTARY

See “Index to Consolidated

Financial Statements” which appears on page F-1 of this Annual Report on Form 10-K.

CHANGES IN AND DISAGREEMENTS

WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

See Note 2 – Summary of Significant Accounting Policies of our consolidated financial statements included within this Annual Report for a summary of recently issued and adopted accounting pronouncements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company, as defined by Rule 229.10(f)(1) and are not required to provide the information required by this Item.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See “Index to Consolidated Financial Statements” which appears on page F-1 of this Annual Report on Form 10-K.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis