You should read the following discussion and analysis together with the consolidated financial statements and the related notes to those statements included in "Item 8 - Consolidated Financial Statements and Supplementary Data." The discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under "Risk Factors" and elsewhere in this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.





Overview

The following is a high-level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important to understand our financial results for the years ended December 31, 2021, and 2020. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Annual Report, and our audited and unaudited consolidated financial statements and accompanying notes included in this Annual Report.

On May 30, 2006, our company was formed as a Nevada corporation under the name Nevada Processing Solutions, Inc. Currently, through our wholly owned subsidiary, Basanite Industries, LLC, a Delaware limited liability company ("BI"), we manufacture a range of "green" (environmentally friendly), sustainable, non-corrosive, lightweight, composite products used in concrete reinforcement by the construction industry. Our core product is BasaFlex™, a basalt fiber reinforced polymer reinforcing bar ("rebar") which we believe is a stronger, lighter, sustainable, non-conductive, and corrosion-proof alternative to traditional steel.

Our two other main product lines are BasaMix™, which are fine denier basalt fibers available in various chopped sizes, and BasaMesh™, a line of Basalt Geogrid Mesh Rolls, intended to replace welded wire mesh (made of steel) and other fiber reinforced polymer grids and mesh.

While we believe our products have great market potential and have begun to gain some acceptance in the market (as evidenced by the beginning of revenue growth which occurred in 2021 as discussed below), we are currently conducting relatively limited operations due to a lack of adequate funding. We are working to secure additional funding to increase our manufacturing capacity to meet what we believe will be increasing demand for our products, but until such funding is obtained, there will remain substantial doubt regarding our ability to continue as a going concern.

Material Factors Impacting Our Operations





COVID-19

The pandemic caused by the novel coronavirus (known as "COVID-19") and governmental and other efforts to curb the spread of the pandemic has caused great disruption to the U.S. national and international economies. We have been adversely impacted by COVID-19 in that we have been required to temporarily suspend operations during 2020 due to necessary quarantines, and the impact of COVID-19 on the construction industry we service has been significant. Government mandated shutdowns and other measures held less of an impact on our business during 2021, although we did have personnel absent for periods during the year due to COVID-19. Moreover, the continued prevalence of COVID-19 or outbreaks of new variants thereof could disrupt our supply chain, as well as our own operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who elect not to come to work due to illness affecting others in our office or plant, or due to additional necessary quarantines. COVID-19 could also impact members of our Board of Directors as well as key providers of services to us, which could adversely impact the management of our affairs. Additionally, as the COVID-19 pandemic continues to develop, we may be required to continue to spend time and resources in monitoring and adhering to government regulations that impact both our company and our customers and potential customers as necessary, which could also adversely impact our business and results of operations. We continue to monitor our operations and applicable government recommendations and requirements.







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Inflation & Interest Rate Sensitivity

In the past two fiscal years, inflation has not had a significant impact on our business. However, during the second half of 2021 and into 2022, the U.S. economy has entered into a period of increasing inflation. Should inflation persist or increase, interest rates rise and could have a significant effect on the economy in general and, thereby, could affect prices for raw materials we use, demand for our products, our ability to attract and retain skilled labor and our future operating results.





Supply Chain

In the past year, supply chain shortages or delays have had an immaterial impact on our operations. Relationships with our raw materials suppliers have maintained a consistent flow of goods received monthly. Domestic suppliers have increased their in-stock flows to maintain adequate levels with our manufacturing needs. However, we might experience supply chain challenges in the future, which could harm our business and our results of operations.





War in Ukraine

The recent war in Ukraine has led the world to issue sanctions on the government of Russia. This has shut down our ability to procure basalt fiber material from our secondary supplier, UWF/Kamenny Vek. However, our primary supplier Mafic is US based, and has ample capacity to support our current and anticipated future needs with 100% domestic source of raw materials. Nonetheless, we are currently qualifying alternate material from other suppliers to preserve our options.

Government Approvals and Specifying of our Products

We continue to pursue additional product and facility qualifications and approvals, and these qualifications and approvals are critical to the market acceptance of our products. BI is currently testing products at two independent laboratories in the pursuit of ICC-ES certification, which is expected during the second quarter of 2022, and a Florida Department of Transportation ("FDOT") production facility approval, which is expected in the third quarter of 2023 (we are already selling to FDOT projects on an individual basis through exemptions or specs). The FDOT approval will allow us to bid on any project approved for BFRP. Until we have obtained these additional approvals, our opportunities to bid on certain projects will be limited.





Results of Operations

Revenue - We had $193,194 of revenues as a result of sales of finished goods sold for the year ended December 31, 2022, compared to $193,194 in the prior year. While the increase in revenue in the year over year periods was material due to our ability to sell some BasaFlex™ product in 2022, overall revenues have been minimal due to our lack of funding and as a result our continuing shift in focus to the scaling of production and inventory during both periods.

Cost of goods sold - During the year ended December 31, 2022, we had cost of sales of $1,970,194 compared to $1,970,194 in the prior year. During 2022 we began our production activities -- first activities were to build test articles for two sets of independent lab tests, and then the commencement of building finished goods inventory. Most of the cost of goods sold is related to inventory valuation, not to sales. However, we lost money on a gross margin basis due to normal inefficiencies in the start-up and ramping and scaling process, including limited initial sales volume, and further due to extremely narrow margins on the initial sales of our products as we began introducing them to the marketplace.





Operating Expenses

Selling, general, and administrative expenses - During the year ended December 31, 2022, selling, general, and administrative were $8,018,152 compared to $8,018,152in the prior year. The primary components of selling, general, and administrative expenses were as follows:

· Stock based compensation - During the year ended December 31, 2022, stock based

compensation was $5,043,112 compared to $5,043,112 in the prior year. During

the year ended December 31,2022, we also issued warrants with an aggregate fair

value of $900,960 to consultants, and options to directors with a fair value of

$263,780.






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· Payroll and payroll taxes - During the year ended December 31, 2022, payroll


   and payroll taxes were $1,153,540 compared to $1,153,540 in the prior year. We
   retained a total of 4 employees at the period end December 31, 2022, as
   compared to 23 employees at the close of the December 31, 2021 period.

· Professional fees - During the year ended December 31, 2022, professional fees


   were $775,004 compared to $775,004 in the prior year. The increase was
   primarily due to legal fees incurred with regard to our fundraising activities.

· Consulting Fees - During the year ended December 31, 2022, consulting fees were

$544,560 compared to $544,560 in the prior year. The increase was due to
   consulting agreements connection with our fundraising activities and to an
   increase in compensation to our current Chief Executive Officer and President
   and acting interim Chief Financial Officer.

· Facilities and related costs - During the year ended December 31, 2022, costs


   related to our facilities were $36,852 compared to $36,852. These costs
   consisted primarily of rent in the amount of $25,696 and utilities in the
   amount of $10,431. The decrease was because the majority of rent and utilities
   expense was charged to cost of goods sold in the current year.

· Investor relations - During the year ended December 31, 2022, investor


   relations costs were $148,517 compared to $148,517 in the prior year. The
   increase was due to increased capital markets communications.

· Depreciation and amortization - During the year ended December 31, 2022,


   depreciation and amortization was $8,560 compared to $8,560 in the prior year.
   The decrease was because the majority of depreciation expense was charged to
   cost of goods sold in the current year.




Other Income (Expenses)

Gain on settlement of legal contingency - During year ended December 31, 2022, we had a gain of $409,127 on the settlement of legal contingencies. There were no comparable transactions in the prior year.

Gain on sale of asset - We recorded a gain on the sale of assets in the amount of $40,838 in the prior period; there was no comparable transaction during year ended December 31, 2021.

Gain on settlement of payables - During year ended December 31, 2022, we had a gain of $39,902 compared to $39,902 in the prior year. The gain in the current year is due to the settlement of various accounts payable amounts. The gain in the prior year is due to the forgiveness by prior management of accrued wages.

Miscellaneous income - During the year ended December 31, 2022, miscellaneous income was $0 compared to $0 in the prior year. The decrease is due to the net settlement of $125,000 less the contingency fee and expenses paid to the attorney for litigation which occurred in the prior year.

Loss on extinguishment of debt - During the year ended December 31, 2022, we had a loss of $6,743,015 compared to $6,743,015 in the prior year. The increase in loss is due to the settlement of various long-standing debts for warrants which exceeded the value of the debt. For more information about these transactions refer to footnote 6 of the financial statements included in this Annual Report.

Loan forgiveness - During the year ended December 31, 2022, we had loan forgiveness income of $124,143 compared to $124,143 in the prior year. The increase was due to the forgiveness of a loan from the U.S. Small Business Administration under the Paycheck Protection Program.

Interest expense - During the year ended December 31, 2022, interest expense was $512,418 compared to $512,418 in the prior year. The decrease is primarily due a decrease in the principal amount of debt outstanding during current period.







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Liquidity and Capital Resources

Since inception, we have incurred net operating losses and generated negative cash flows in operations. As of December 31, 2022, we had an accumulated deficit of $46,121,210. At December 31, 2022, we had cash of $109,514 compared to $109,514 at December 31, 2021, and as of the date of this Annual Report, we have minimal cash on hand, and any funds we can presently raise (either from revenue generating operations or through investment) are rapidly consumed.

Also, we have incurred and continue to incur significant general and administrative and other expenses associated with our product development and the establishment and proposed expansion of our manufacturing facility, beginning revenue generating operations, developing our business model, stock-based compensation and operating as a public company. We expect operating losses to continue for the foreseeable future, and we presently require and expect to continue to require substantial additional financing for continued support of our BFRP manufacturing business until we can generate sufficient revenues to achieve positive cash flow.

Furthermore, we currently owe approximately $1,690,000 plus $338,000 of accrued interest under a 20% Convertible Promissory Note held by The Richard A. LoRicco Sr. and Lucille M. LoRicco Irrevocable Insurance Trust DTD 4/28/95, which is a related party associated with our director Ronald LoRicco. This note matured on February 12, 2022, and as of the date of this Annual Report, no event of default has been called by the note holder. In addition, in April 2021, we entered into six simple Promissory Notes with certain related parties and their associates for total proceeds $595,000. These notes each carried a 12-month term at 18% simple interest, and are now due or about to come due. The accumulated interest under these notes is currently approximately $107,000. Given our limited cash resources at this time, we have been unable to repay this indebtedness. While we may seek to extend the maturity dates of this indebtedness, we may be unsuccessful in doing so. If all or any of these note holders elect to call an event of default under these notes, we may have increased difficulty raising additional funds and we could be forced into bankruptcy.

All of these conditions raise substantial doubt about our ability to continue as a going concern.

We have historically satisfied our working capital requirements through the sale of restricted common stock and the issuance of warrants and promissory notes. We will continue our fundraising efforts until we have obtained positive cash flow to cover our expenses. No assurances can be given that the Company will be successful in raising future capital.

Notwithstanding proceeds from the sale of our common stock in early 2022, current working capital and projected sales revenue are insufficient to maintain our current operations. In order to scale up our manufacturing operations and reach the level of sales revenue sufficient to provide positive cash flow, we require funding of both our expansion plan and our operating deficit through the scaling period. We will attempt to raise this capital through third party financing, including a private placement of our securities as well as bridge loan arrangements. We cannot provide any assurances that required capital will be obtained or that the terms of such required financing may be acceptable to us. If we are unable to obtain adequate financing, we may reduce our operating activities to reduce our cash use until sufficient funding is secured, and our business might fail.





Cash Flows

Net cash used in operating activities amounted to $4,507,418 and $4,507,418 for the years ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, we used $2,346,483 net cash for investing activities compared to $2,346,483 used in the prior fiscal year. The increase is largely due to costs associated with the customization, installation, and verification and validation testing of the first BasaMax™ prototype pultrusion machine, for the modifications and UL listing of the production machinery and the final payments for the enhancements made to our production facility as compared to the deposits made on machinery and equipment.







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During the year ended December 31, 2021, we had $6,703,910 net cash provided by financing activities compared to $3,269,438 in the prior year. Sale of common stock shares for $5,178,163; borrowing of $2,121,247 from the issuance of convertible and short-term notes payable, including from related parties; less $595,500 of principal repayments on notes and convertible notes, including to related parties, provided the net cash during the year ended December 31, 2021. Additionally, a note payable in the amount of $300,000 was exchanged for 6,000,000 five-year warrants on May 21, 2021.

During the year ended December 31, 2022, we had $6,703,910 net cash provided by financing activities compared to $6,703,910 in the prior year. Sale of common stock shares for $5,178,163; borrowing of $2,121,247 from the issuance of convertible and short-term notes payable, including from related parties; less $595,500 of principal repayments on notes and convertible notes, including to related parties, provided the net cash during the year ended December 31, 2022.

Summary of Critical Accounting Policies





Inventory

The Company's inventories consist of raw materials, work in process and finished goods, both purchased and manufactured. Inventories are stated at the lower of cost or net realizable value.





Use of Estimates

The preparation of the accompanying Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Stock-based compensation and stock awards related to convertible debt instruments are recognized based on the fair value of the awards granted. The fair value of each award or conversion feature is estimated on the grant date using the Black-Scholes pricing model. The Black-Scholes pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates and the expected dividend yield of our common stock. The assumptions used to determine the fair value of the stock awards represent management's best estimates. These estimates involve inherent uncertainties and the application of management's judgment.

Recent Accounting Pronouncements

There are several new accounting pronouncements issued or proposed by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by us. Management does not believe any of these accounting pronouncements has had or will have a material impact on our consolidated financial position or operating results. See note 3 to the accompanying audited financial statements for further information.

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