ATLANTIC INTERNATIONAL CORP. (ATLN)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion relates to Atlantic International Corp. (Atlantic or the Company) and its consolidated subsidiaries and should be read together with the Company’s Consolidated Financial Statements and accompanying notes included in Part IV, Item 8.— Financial Statements and Supplementary Data.

Overview

Atlantic, through its subsidiaries, is a national strategic staffing firm servicing the commercial, professional, finance, direct placement, and managed service provider verticals. Lyneer was formed under the principles of honesty and integrity, and with the view of becoming the preferred outside employer of choice. Since its formation, the Company has grown from a regional operation to a national staffing firm with offices and geographic reach across the United States. The Company primarily places individuals in accounting and finance, administrative and clerical, information technology, legal, light industrial, and medical roles. The Company is also a leading provider of productivity consulting and workforce management solutions. Atlantic is headquartered in Englewood Cliffs, New Jersey and has more than 100 locations in the USA.

The Company’s management believes, based on their knowledge of the industry, that it is one of the prominent and leading staffing firms in the ever-evolving staffing industry. Its management also believes that it is an industry leader in permanent, temporary and temp-to-perm placement services in a wide variety of areas, including, but not limited to, accounting & finance, administrative & clerical, hospitality, IT, legal, light industrial and medical fields. Its deep expertise and extensive experience have helped world class companies revolutionize their operations, resulting in greater efficiency and streamlined processes. Its comprehensive suite of solutions covers all aspects of workforce management, from recruitment and hiring to time and attendance tracking, scheduling, performance management, and predictive analytics. Atlantic takes a personalized approach to each client, working closely with them to understand their unique needs and develop a tailored roadmap for success. In addition, Atlantic offers a comprehensive range of recruiting services, including temporary and permanent staffing, within the light industrial, administrative, and financial sectors. Its services are designed to meet each client’s needs, including payroll services and vendor management services/managed service provider solutions. Its extensive network of offices and onsite operations provide local support for its clients, while its national presence gives Atlantic the resources to tackle even the most complex staffing needs. With a focus on integrity, transparency and customer service and a commitment to results over a 25-year period, management believes it has earned a reputation as one of the premier workforce solutions partners in the United States.

At Atlantic, management understands that finding the perfect candidate starts before the job requisition even comes in. The Company employs the strategy of proactive recruitment to build a pipeline of pre-vetted candidates for order fulfillment. Atlantic’s client mix consists of both small- and medium-size businesses, and large national and multinational client relationships. Client relationships with small- and medium-size businesses are based on a local or regional relationship, and tend to rely less on longer-term contracts, and the competitors for this business are primarily locally owned businesses. Comprising over 60% of the Company’s revenue base, the large national and multinational clients, on the other hand, will frequently enter into non-exclusive arrangements with several firms, with the ultimate choice among them being left to local managers. As a result, employment services firms with a large network of offices compete most effectively for this business, which generally has agreed-upon pricing or mark-up on services performed.

Results of Operations

The following discussion summarizes the key factors Atlantic’s management team believes are necessary for an understanding of Atlantic’s financial statements.

Comparison of the Years Ended December 31, 2024 and 2023:

Certain related party and non-related party financial statement line-item amounts have been aggregated for purposes of analysis below, which is consistent with management’s evaluation of its business results.

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The following table summarizes our results of operations for the periods presented:

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+ -    change greater than ± 100%

Service Revenue, Net

Service revenue, net of discounts, for years ended December 31, 2024 and 2023 consisted of the following:

Service revenue, net was $442,609,814 and $401,374,701 for the years ended December 31, 2024 and 2023, respectively, an increase of $41,235,113, or 10.3%. This increase was predominately due to the higher revenues from Lyneer’s temporary placement services business, which increased $42,081,342 or 10.6% in the year ended December 31, 2024 as compared to the same period in 2023 due primarily to a strong sales initiative by the Company. Permanent placement and other services decreased $846,229 or 18.3% due to lower permanent job demand as companies cut back on hiring permanent positions.

Cost of Revenue and Gross Profit

Gross profit reflects the difference between realized service revenue, net and cost of revenues for providing temporary and permanent placement solutions. Cost of revenue consists primarily of fixed and variable directs costs, including

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payroll, payroll taxes and employee benefit costs. Cost of revenue and gross profit for the years ended December 31, 2024 and 2023 consisted of the following:

Cost of revenue for the years ended December 31, 2024 and 2023 was $395,431,491 and $354,496,441, respectively, an increase of $40,935,050 or 11.5%. The increase in cost of revenue was due primarily to higher service revenue, net driven primarily by higher temporary placement services revenue, net which increased $42,081,342 or 10.6%.

Gross profit for the years ended December 31, 2024 and 2023 was $47,178,323 and $46,878,260, respectively, an increase of $300,063 or 0.6%. As a percentage of service revenue, net, gross profit was 10.7% and 11.7% for the years ended December 31, 2024 and 2023, respectively, which decreased due to increasing labor costs and reduced permanent placements.

Total Operating Expenses

Total operating expenses for the years ended December 31, 2024 and 2023 consisted of the following:

The changes in each financial statement line item for the respective periods are described below.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the years ended December 31, 2024 and 2023 were $64,021,052 and $45,441,659, respectively, an increase of $18,579,393, or 40.9%, due primarily to higher transaction costs related to the Merger, stock compensation expense and bad debt expense of $957,031 and $1,526,985 during the years ended December 31, 2024 and 2023, respectively, partially offset by cost cutting measures.

As a percentage of service revenue, net, selling, general and administrative costs were 14.5% in the year ended December 31, 2024 as compared to 11.3% in the year ended December 31, 2023. The increase in selling, general and administrative costs as a percentage of service revenue, net was due primarily to higher transactions costs related to the Merger in the year ended December 31, 2024 compared to the year ended December 31, 2023.

Changes in Fair Value of Contingent Consideration Liabilities

Changes in the fair value of contingent consideration liabilities for the years ended December 31, 2024 and 2023 were $0 and $(150,093), respectively. The change of $150,093 reflects the change in fair value of the liability balance. The measurement period for the contingent consideration arrangements expired on August 31, 2023, at which time amounts owed Lyneer to its former owners were computed and represent fixed amounts.

Depreciation and Amortization

Depreciation and amortization expense for the years ended December 31, 2024 and 2023 was $4,991,863 and $5,038,218, respectively, a decrease of $46,355 or 0.9%, a slight decrease on a year-over year basis.

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Loss on Debt Extinguishment

Loss on debt extinguishment, for the years ended December 31, 2024 and 2023 were as follows:

Loss on debt extinguishment during the year ended December 31, 2024 relates to the Seventh Amendment and Forbearance Agreement to the Revolver being treated as a debt extinguishment after the Company’s analysis of Accounting Standards Codification (“ASC”) Topic 470 – Debt.

Loss on debt extinguishment during the year ended December 31, 2023 relates to the Fourth Amendment and Forbearance Agreement to the Revolver being treated as a debt extinguishment after the Company’s analysis of ASC Topic 470 – Debt.

Advisory Fees Paid in the Merger

Advisory fees paid in the Merger for the years ended December 31, 2024 and 2023 were as follows:

The stockholders of Atlantic Acquisition Corp. were issued an aggregate of 18,220,338 shares of Company’s common stock at a market value of $2.36 per share, or $43,000,000 in the aggregate, on the date of the Merger.

Interest Expense

Interest expense for the years ended December 31, 2024 and 2023 were as follows:

Interest expense for years December 31, 2024 and 2023 was $12,004,860 and $17,538,816, respectively. The decrease of $5,533,956, or 31.6%, in year ended December 31, 2024 compared to year ended December 31, 2023 was attributed to the Company deconsolidating the joint and several debt obligations as of the Merger date, partially offset by higher interest rates on the revolving credit facility on a year-over-year basis, an increase in the rates on the term, seller and earnout notes due to amendments in May 2023 and August 2023, and, new earnout notes issued in January 2024.

Other Expense

Other expense for the years ended December 31, 2024 and 2023 were as follows:

Other expense for the year ended December 31, 2024 related to accrued amounts pertaining to a potential settlement for legacy stockholders and stock compensation expense for third parties as advisors to the Company for RSUs.

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Income Tax (Expense) Benefit

Provision for income taxes for the years ended December 31, 2024 and 2023 were as follows:

Income tax expense was $5,379,102 for the year ended December 31, 2024 and an income tax benefit of $5,928,271 for the year ended December 31, 2023, an increase of $11,307,373, was primarily due to the establishment of a valuation allowance on the Company’s deferred tax assets.

Liquidity & Capital Resources

Atlantic’s working capital requirements are primarily driven by personnel payments and client accounts receivable receipts. As receipts from client partners lag behind payments to personnel, working capital requirements increase substantially in periods of growth.

Atlantic’s primary sources of liquidity have historically been cash generated from operations and borrowings under its revolving credit agreement (the “Revolver”). Atlantic’s primary uses of cash are payments to engagement personnel, corporate personnel, related payroll costs and liabilities, operating expenses, capital expenditures, cash interest, cash taxes, and contingent consideration and debt payments. If Atlantic is able to refinance its existing indebtedness as described below, Atlantic believes that the cash generated from operations, together with the borrowing availability under its portion of the Revolver or under any revolving credit facility that Lyneer may enter into to replace the Revolver, would be sufficient to meet its normal working capital needs for at least the 12-month period following the issue date of its financial statements, including investments made, and expenses incurred, in connection with opening new markets throughout the next year. Atlantic’s ability to continue to fund these items may be affected by general economic, competitive and other factors, many of which are outside of Atlantic’s control. If Atlantic’s future cash flow from operations and other capital resources are insufficient to fund its liquidity needs, Atlantic may be forced to obtain additional debt or equity capital or refinance all or a portion of its debt.

In accordance with ASC Topic 205-40, Going Concern, Atlantic evaluates whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern for one year from the date the financials are issued. This evaluation includes considerations related to financial and other covenants contained in Atlantic’s credit facilities, as well as Atlantic’s forecasted liquidity. Atlantic has concluded that there is no substantial doubt about its ability to continue as a going concern for at least one year from the date of issuance of its consolidated financial statements. The Company has received conditional approval and a preliminary term sheet by a new ABL lender and expects to close on the new credit facility by the end of April 2025.

IDC, Lyneer and Prateek Gattani, IDC’s Chief Executive Officer and our Chairman of the Board following the Merger, have entered into an Allocation Agreement dated as of December 31, 2023, pursuant to which IDC agreed that, subject to subordination to the taxes as between IDC and Lyneer, in connection with the Merger, the Term Note and the Seller Notes, will either be paid in full or assumed by IDC, and all but $35 million of the Revolver will be paid in full or assumed by IDC, and Lyneer will have no further liability or responsibility for such indebtedness. However, as IDC and Lyneer were unable to obtain the release of Lyneer from the holders of such indebtedness for accounting purposes, with respect to any of such indebtedness that was not repaid by IDC with the Allocation Agreement not being given effect for accounting purposes and Lyneer will remain jointly and severally liable with IDC to such lenders until such time as such joint and several indebtedness is restructured, at which time IDC will be obligated to repay in full all remaining amounts payable under the Term Note and the Seller Notes and will repay or assume all but approximately $35 million under Revolver. In the event IDC does not repay any of this debt and the Company is required to make payments, IDC will be obligated to repay the Company for the amounts paid on IDC’s behalf. Upon the consummation of the Merger, the Company determined that it was no longer probable that IDC would default on its portion of the joint and several obligations and deconsolidated the joint and several debt obligations in the accompanying financial statements.

In the Allocation Agreement, IDC and Mr. Gattani have agreed to implement a plan to refinance or otherwise satisfy the joint and several indebtedness. IDC and Mr. Gattani are currently exploring refinancing opportunities with several lenders to address the assumed debt, as well as the IDC portion of the Revolver. However, it is expected that the Company will not be legally released from its joint and several obligations with respect to the indebtedness to be assumed by IDC until payment in full of the Merger Note, which originally matured on September 30, 2024. The maturity date of the

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Merger Note has been extended to March 31, 2026. The Company has received conditional approval by a new ABL lender and expects to close on a new credit facility by the end of April 2025.

Cash flows for the years ended December 31, 2024 and 2023 consisted of the following:

Cash flows used in operating activities for the year ended December 31, 2024 compared to the year ended December 31, 2023 was higher due to an increase in accounts receivable and accrued expenses.

Investing Activities

Cash used in investing activities for the year ended December 31, 2024 decreased compared to December 31, 2023 and consisted entirely of purchases of property and equipment.

Financing Activities

Cash provided by financing activities decreased for the year ended December 31, 2024 compared to the year ended December 31, 2023 and consisted of borrowings and payments under the Company’s debt arrangements of the Revolver and Seller Notes (as described below). Additionally, during the year ended December 31, 2024, the Company issued shares, entered into additional debt obligations, and had a deemed contribution as a result of the Merger.

Revolver

The Company currently maintains the Revolver as a co-borrower with IDC with an available borrowing capacity of up to $60,000,000. The facility was partially used to finance the acquisition of Lyneer by IDC in August 2021, with additional borrowing capacity available under the Revolver to finance Lyneer’s working capital. All of Lyneer’s cash collections and disbursements are currently linked with bank accounts associated with the lender and funded using the Revolver. These borrowings are determined by Lyneer’s availability based on a formula of billed and unbilled accounts receivable as defined in the loan agreement.

As of December 31, 2024 and December 31, 2023, the total balance on the Revolver was $53,983,962 and $90,906,217, respectively. As of December 31, 2024 and December 31, 2023, the Company recorded a liability of $42,508,379 and $85,092,695, respectively, and IDC owed the remaining $11,475,583 and $5,813,522, respectively. Total available borrowing capacity on the Revolver as of December 31, 2024 was over-advanced by $1,299,463, net of a $5,000,000 reserve required on the Revolver. The borrowing base calculation is based on Lyneer’s eligible assets.

On August 12, 2024 the Company entered into the Ninth Amendment and with its lender, under which the lender, waived all existing events of default as of the date of the agreement and agreed to forbear from exercising its rights and remedies with respect to such events of default under the Revolver through September 30, 2024. The maximum aggregate principal amount of $60,000,000 will be reduced by $500,000 on each Thursday starting August 15, 2024 and continuing through and including September 26, 2024. The Initial Capital Raise milestone was extended to September 15, 2024 with additional milestones including an uplisting milestone date of September 15, 2024.

The Company has received conditional approval to extend the current milestone for the Company’s Initial Capital Raise to a future date that has not been determined. The Company has received conditional approval and a preliminary term sheet by a new ABL lender and expects to close on a new credit facility by the end of April 2025. The Company will continue to borrow under the existing facility in its normal course of business.

IDC is expected to use a portion of the cash proceeds it receives in the Merger to pay down the Revolver following the closing of the Merger.

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Term Note

On August 31, 2021, Lyneer and IDC as co-borrowers entered into a Term Note in the amount of $30,300,000. The proceeds of this loan were primarily used to finance the acquisition of Lyneer by IDC in August 2021. The Term Note matures on February 28, 2026, at which time all outstanding balances are due and payable. There are no scheduled principal payments on the Term Note prior to its maturity date. The Term Note is subordinated to the Revolver and initially bore interest at the stated interest rate of 14% per annum.

As of December 31, 2024 and December 31, 2023, Lyneer had recognized liability balances on the Term Note of $0, and $34,223,489, respectively.

On August 12, 2024 the Company entered into the Tenth Amendment and with its lender, under which the lender, waived all existing events of default as of the date of the agreement and agreed to forbear from exercising its rights and remedies with respect to such events of default under the Term Note through September 30, 2024. The Initial Capital Raise milestone was extended to September 15, 2024 with additional milestones including an uplisting milestone date of September 15, 2024.

The Company has received conditional approval to extend the current milestone for the Company’s Initial Capital Raise to a future date that has not been determined. Additionally, the Term Note is covered by the Allocation Agreement discussed above.

Seller Notes

As part of the purchase price consideration for the Transaction, Lyneer and IDC as co-borrowers issued various Seller Notes to former owners in the aggregate principal amount of $15,750,000. Principal payments on the Seller Notes are due in quarterly installments of $1,575,000, and $3,150,000 is due at their amended maturity dates of April 30, 2024. The Seller Notes bear interest at an amended fixed rate of 11.25% per annum. The Seller Notes represent unsecured borrowings and are subordinated to the Revolver and to the Term Note.

Lyneer had recognized Seller Note liability balances of $0 and $7,875,000 as of December 31, 2024 and December 31, 2023, respectively.

Lyneer and IDC did not make the principal and interest payments due July 31, 2023 and October 31, 2023 on the Seller Notes as payments to any other debt holders was prohibited by the administrative agent of the lender under the Revolver.

Earnout Notes

As contingent consideration milestones are met in connection with the Transaction Agreement, Lyneer and IDC can elect to pay the milestone payments in cash or to issue notes payable. During 2022, Lyneer and IDC as co-borrowers have issued nine promissory notes in the aggregate principal amount of $13,494,133. Payments on each of the Earnout Notes are due in quarterly installments through their amended maturity date of January 31, 2025 and each note bears an amended stated interest rate of 11.25% per annum. On January 16, 2024, Lyneer and IDC as co-borrowers issued six notes payable with an aggregate value of $6,941,521. Payments on each of the Earnout Notes are due in quarterly installments through their maturity date of January 16, 2026 and each note bears interest at a rate of 6.25% per annum. The Company missed the March 31, 2024 principal and interest payment and the interest rate increased to the default rate of 11.25%.

The Earnout Notes are subordinated to the Revolver and the Term Note and represent unsecured borrowings.

The Earnout Note liability was $0 and $13,494,133 at the periods ended December 31, 2024 and December 31, 2023, respectively.

2023 Amendment to Seller and Earnout Notes

Lyneer and IDC did not make the principal and interest payments due on the Seller Notes and the Earnout Notes during 2023 or the first six months of 2024. On May 14, 2023, Lyneer signed an amendment, dated as of May 11, 2023 (the “Omnibus Amendment”), to defer the missed payments under the Seller Notes and Earnout Notes until the amended maturity dates of such notes of April 30, 2024 and January 31, 2025, respectively. The Omnibus Amendment changed the interest rate of the Seller Notes and the Earnout Notes to 11.25% per annum from 6.25% per annum for all remaining payments.

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On January 16, 2024, Lyneer and IDC signed an amendment to the Omnibus Agreement with the holders of the Seller Notes and the Earnout Notes to defer the missed July 31, 2023 and October 31, 2023 principal and interest payments, each in the amount of $1,575,000 plus accrued interest, together with the principal payment in the amount of $1,575,000 plus accrued interest that is payable on January 31, 2024, all of which were payable on February 28, 2024. Lyneer has not refinanced or restricted the credit facility and missed all payments of the Seller Notes and the Earnout Notes during 2024 and is in default of the Seller Notes and Earnout Notes. The Seller Notes and Earnout Notes are covered by the Allocation Agreement discussed above.

Credit Agreement

The Lenders’ consent to IDC’s transfer of ownership of the equity of Lyneer was conditioned upon substantially the same terms stated above under the Revolver, as well as issuance of a secured bridge loan (“Credit Agreement”), which was entered into on June 18, 2024, the Company entered into a secured bridge loan (“Credit Agreement”) in the principal amount of $1,950,000 at an interest rate of 5% per annum. The maturity date of the Credit Agreement was originally September 30, 2024. However, mandatory prepayments shall be made from the Initial Capital Raise, on the issuance of new debt or new equity interests, or upon a change of control.

On July 22, 2024, the Company entered into an amendment to extend the maturity date of the Credit Agreement to June 18, 2026.

Promissory Note

From April 29, 2019 to April 29, 2020, the Company entered into a series of non-convertible promissory notes (the “Promissory Notes”) with St. Laurent Investments LLC amounting to $1,375,000. The Promissory Notes had a one-year term, most recently extended through July 31, 2025 or a later date to be mutually agreed upon. The Promissory Notes bear interest accruing at the rate of 5% per annum, and increased to 10% for the period from August 1, 2024 through July 31, 2025.

Merger Note

In connection with the closing of the Merger, we issued to IDC the Merger Note in the principal amount of $35,000,000 that originally matured on September 30, 2024. The Merger Note does not bear interest and is not convertible prior to an event of default under the Merger Note. If an event of default should occur under the Merger Note, the Merger Note will bear interest at the rate of 7% per annum commencing upon the date of such event of default and will be convertible into shares of our common stock at a price per share that equals the lowest daily volume weighted average price per share (VWAP) during the five trading days immediately preceding the date on which the applicable conversion notice is delivered to us, but not less than 80% of the price per share in our Initial Capital Raise, provided, however, that the number of shares of our common stock issuable upon conversion of the Merger Note will not exceed 19.99% of the number of our outstanding shares of common stock without shareholder approval. As we do not believe we will have sufficient liquidity and capital resources to pay the Merger Note in full when due, as well as to restructure our joint and several debt obligations, we believe we will have to sell additional equity or debt securities prior to the maturity date of the Merger Note to pay or refinance the Merger Note when due. However, as Prateek Gattani, our Chairman of the Board following the Merger, is also the Chief Executive Officer and controlling stockholder of IDC, we also believe we will be able to negotiate an extension of the Merger Note if we are unable to pay it in full at maturity. An event of default under the Merger Note may result in an additional event of default under the Revolver and our other indebtedness for borrowed funds.

On September 12, 2024 the Company entered into Amendment No 1 to the Convertible Promissory Note (“Amendment 1 to the Merger Note”) which extended the maturity date to the earlier of March 31, 2026 or the completion of at least a $40 million capital raise. Amendment 1 to the Merger Note was treated as a modification after the Company’s analysis according to ASC 470 and as such, the Company is deferring the $300,000 amendment fee and will amortize as an adjustment to interest expense over the remaining term using the effective interest method.

Interest Expense

Total interest expense is comprised of a cash and non-cash component as described in the debt arrangements described above.

For the years ended December 31, 2024 and December 31, 2023 total interest expense totaled $12,004,860 and $17,538,816, respectively. Total cash paid for interest for the years ended December 31, 2024 and December 31, 2023

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totaled $6,926,853 and $9,150,636, respectively, with the remaining portion of the interest expense as non-cash due to the PIK interest and change in values of the accrued interest liability and amortization of deferred financing costs.

Assessment of Liquidity Position

The Company has assessed its liquidity position as of December 31, 2024 and December 31, 2023. As of December 31, 2024 and December 31, 2023, the total committed resources available were as follows:

As noted above, pursuant to the Forbearance Agreement, following the payment of the Merger Note, Lyneer intends to replace its obligations under the Revolver with a new revolving credit facility with a borrowing capacity of up to $60,000,000. Lyneer believes the borrowing capacity under such new credit facility, its cash flow from operations and the available net proceeds from the Merger will provide sufficient liquidity and capital resources to conduct its planned operations for at least one year.

Refer To Note 3: Summary of Significant Accounting Policies, Liquidity.

Related Party Transactions

Transactions with Lyneer Management Holdings LLC (“LMH”)

LMH was a non-controlling member of the Company with a 10% ownership interest at December 31, 2023, prior to the Merger. The remaining 90% was owned by Lyneer’s Chief Financial Officer, James Radvany, and its Chief Executive Officer, Todd McNulty, each of whom owned 44.5% of LMH. On November 15, 2022, Lyneer and IDC as co-borrowers issued Year 1 Earnout Notes to LMH with total balances of November 15, 2022. The balance of the Year 1 Earnout Notes payable to LMH was $0 and $5,127,218 as of December 31, 2024 and December 31, 2023, respectively. On January 16, 2024, Lyneer and IDC as co-borrowers issued Year 2 Earnout Notes to LMH with total balances of $2,013,041. The balance of the Year 2 Earnout Notes payable to LMH was $0 for both December 31, 2024 and December 31, 2023.

LMH had the right, but not the obligation to require IDC to purchase LMH’s interest in the Company (the “LMH Put”). On February 28, 2024, LMH exercised its right to put the LMH Units to IDC and entered into a Put-Call Option Note on April 17, 2024, in the amount of $10,796,912. While not formalized until April 17, 2024, the terms of the Put-Call Option Note were agreed to by all parties prior to March 31, 2024 and as such, the Company gave effect to the transaction as of March 31, 2024. The Put-Call Option Note provides that IDC owned one hundred percent (100%) of all the membership interests in Lyneer Investments and requires IDC to pay 50% of outstanding principal six months after issuance with the remaining 50% payable in six equal quarterly payments beginning on December 31, 2024 and continuing until the maturity date of June 30, 2026. The Put-Call Option Note provides for the acceleration of payment principal under certain conditions, including upon a change of control, as defined. The Put-Call Option Note bears interest at a stated annual interest rate of 5.25% which is payable quarterly in arrears commending December 31, 2024. IDC may prepay the Put-Call Option Note at any time without premium or penalty. The Put-Call Option Note contains customary covenants.

As part of the consummation of the Merger on June 18, 2024, IDC paid $2,000,000 to LMH as a partial payment on the Put-Call Option Note.

The principal balance of the combined Earnout Notes payable to LMH was $0 and $5,127,218 as of December 31, 2024 and December 31, 2023, respectively, and is included in “notes payable, current” on the accompanying consolidated balance sheets. Interest expense incurred on the Earnout Notes to LMH totaled $292,996 and $526,156 for the years ended December 31, 2024 and 2023, respectively.

Transactions with IDC

Lyneer and IDC are co-borrowers and are jointly and severally liable for principal and interest payments under the Revolver, the Term Note, the Seller Notes and the Earnout Notes. In the case of certain of those obligations, IDC generally

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makes certain interest and principal payments to the lenders and collects reimbursement from Lyneer. When interest or principal payments of that nature are made by IDC, Lyneer recognizes interest expense and a payable to IDC, which is removed from Lyneer’s balance sheet upon remittance of the funds to IDC.

As a result of the Merger, the Company is required to file short-term income tax returns for the periods of January 1, 2024 to June 18, 2024 and June 19, 2024 to December 31, 2024. For the first short-period, Lyneer and IDC will file consolidated income tax returns in certain states. In connection with this arrangement the Lyneer has recorded a liability payable to IDC for taxes payable by IDC which represent taxes attributable to Lyneer’s operations included on consolidated state and local income tax returns filed by IDC. These amounts are calculated by determining Lyneer’s taxable income multiplied by the applicable tax rate. Amounts payable to IDC of this nature amounted to $548,432 and $522,472 as of December 31, 2024 and December 31, 2023, respectively, and are included in “accrued expenses and other current liabilities” and “due to related parties” on the accompanying consolidated balance sheets as of December 31, 2024, and December 31, 2023, respectively. For the second short-period ended December 31, 2024, Lyneer will file consolidated income tax returns with Atlantic International Corp.

Total amounts payable to IDC, including the above taxes payable to IDC, amounted to $2,091,035 and $4,384,178 as of December 31, 2024, and December 31, 2023, respectively and are included in “accrued expenses and other current liabilities” and “due to related parties” on the accompanying consolidated balance sheets as of December 31, 2024, and December 31, 2023, respectively. There are no formalized repayment terms.

Advance to Officer

The Company advanced $400,000 to Lyneer’s Chief Executive Officer in 2022. The advance was settled from a portion of the recapitalization proceeds at the closing of the Merger. This advance is recorded in “other assets” on the accompanying consolidated balance sheets as of December 31, 2023.

Off Balance Sheet Arrangements

The Company has not entered into any off-balance sheet arrangements and does not have any holdings in variable interest entities.

Critical Accounting Policies and Estimates

The preparation of Atlantic’s consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accounts receivable, allowance for doubtful accounts, unbilled accounts receivable and intangible assets valuation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition

The Company derives its revenues from two service lines: temporary placement services and permanent placement and other services. Revenues are recognized when promised goods or services are delivered to customers in an amount that reflects the consideration with which Lyneer expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC Topic 606 — “Revenue From Contracts with Customers” (“ASC 606”), the Company performs the following five steps: (i) it identifies the contracts with a customer; (ii) it identifies the performance obligations in the contract; (iii) it determines the transaction price; (iv) it allocates the transaction price to the performance obligations in the contract; and (v) it recognizes revenue when (or as) the Company satisfies a performance obligation.

Temporary Placement Services Revenue

Temporary placement services revenue from contracts with customers are recognized in the amount which the Company has a right to invoice when the services are rendered by its engagement professionals. The Company invoices its

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Table of Contents

customers for temporary placement services concurrently with each periodic payroll which coincides with the services provided. While all customers are invoiced weekly and payment terms vary, the majority of our customers have payments terms of 30 days; however the Company may extend to 150 days from the invoice date. Customers are assessed for credit worthiness upfront through a credit review, which is considered in establishing credit terms for individual customers. Revenues that have been recognized but not invoiced for temporary staffing customers are included in “unbilled accounts receivable” on the accompanying consolidated balance sheets and represent a contract asset under ASC 606. Terms of collection vary based on the customer; however, payment generally is due within 30 days.

Most engagement professionals placed on assignment by the Company are legally our employees while they are working on assignments. The Company pays all related costs of employment, including workers’ compensation insurance, state and federal unemployment taxes, social security, and certain fringe benefits. The Company assumes the risk of acceptability of its employees to its customers.

The Company records temporary placement services revenue on a gross basis as a principal, rather than on a net basis as an agent in the presentation of revenues and expenses. The Company has concluded that gross reporting is appropriate because it (i) has the risk of identifying and hiring qualified employees, (ii) has the discretion to select the employees and establish their price and duties, and (iii) bears the risk for services that are not fully paid for by customers.

Permanent Placement and Other Services Revenue

Permanent placement and other services revenue from contracts with customers are primarily recognized when employment candidates accept offers of permanent employment and begin work for the Company’s customers. Certain of the Company’s permanent placement contracts contain a 30-day guarantee period. The Company has a substantial history of estimating the financial impact of permanent placement candidates who do not remain with its clients through the 30-day guarantee period. In the event that a candidate voluntarily leaves or is terminated for cause prior to the completion of 30 days of employment, we will provide a replacement candidate at no additional cost, as long as the placement fee is paid within 30 days of the candidate’s start date. When required, the Company defers the recognition of revenue until a replacement candidate is found and hired, and any associated collected amount is recorded as a contract liability. Fees to clients are generally calculated as a percentage of the new employee’s annual compensation. No fees for permanent placement talent solutions services are charged to employment candidates, regardless of whether the candidate is placed.

Contract liabilities are recorded when cash payments are received or due in advance of performance and are reflected in accounts payable and accrued expenses on the accompanying consolidated balance sheets.

Intangible Assets

The Company’s identifiable intangible assets as of December 31, 2024 and December 31, 2023 consisted of customer relationships and tradenames and were initially recognized as a result of the Transaction and represent definite lived intangible assets. The Company does not currently have any indefinite lived intangible assets. Intangible assets are amortized using the straight-line method over their estimated useful lives.

In accordance with the accounting standard for the impairment or disposal of long-lived assets under ASC 360, our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable (i.e., information indicates that an impairment might exist).

For long-lived assets to be held and used, the Company recognizes an impairment loss only if the carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value. For the years ended December 31, 2024 and December 31, 2023 no impairments were recognized on our intangible assets.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

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Table of Contents

The Company assesses, on a quarterly basis, the likelihood that deferred tax assets will be realized in accordance with the provisions of ASC Topic 740 — “Income Taxes” (“ASC 740”). ASC 740 requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized. The assessment considers all available positive or negative evidence, including the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion of our financial condition
and results of operations in conjunction with our audited consolidated financial statements for the year ended December 31, 2023, and
related notes included elsewhere in this report. This discussion and analysis and other parts of this report contain forward-looking statements
based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing
of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors,
including those set forth under “Risk Factors” and elsewhere in this report. You should carefully read the “Risk Factors”
section of this report to gain an understanding of the important factors that could cause actual results to differ materially from our
forward-looking statements. Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements and Industry
and Market Data” in this report.

Overview

This overview and outlook provide a high-level discussion of our operating
results and significant known trends that affect our business. We believe that an understanding of these trends is important to understanding
our financial results for the periods being reported herein as well as our future financial performance. 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 report.

About SeqLL

We are an early commercial-stage life sciences instrumentation and
research services company engaged in the development of scientific assets and novel intellectual property across multiple “omics”
fields. We leverage our expertise with True Single Molecule Sequencing (tSMS) technology enabling researchers and clinicians to contribute
major advancements to scientific research and development.

43

Our customers are primarily the early adopters of genomics technology
and tSMS in academic research, biomarker discovery, and molecular diagnostic product development.

Our financial results have been, and will continue to be, impacted
by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial
results, this discussion should be read in conjunction with our consolidated financial statements and the notes thereto within the Consolidated
Financial Statements section of this report, and trends discussed in “Risk Factors” within the Business section of this report.

Proposed Merger Agreement

Terms used and not defined in the following discussion
have the respective meanings set forth in Note 1 to our consolidated financial statements included in Part IV to this report.

On May 29, 2023, we entered into the Merger Agreement
with Atlantic, Atlantic Merger Sub, SeqLL Merger Sub, Lyneer, and the Sellers subject to the approval of our stockholders at a special
meeting, which approval has been obtained. Pursuant to the Merger Agreement and subject to the terms and conditions set forth therein,
Atlantic Merger Sub will initially be merged into Lyneer, and SeqLL Merger Sub will then be merged into Lyneer, with Lyneer continuing
as the surviving entity and as our wholly-owned subsidiary. In connection with the consummation of the Merger, we will be renamed “Atlantic
International Corp.”

Lyneer, through its subsidiaries, specializes
in the placement of temporary and temporary-to-permanent labor across various industries within the United States. Lyneer primarily places
individuals in accounting and finance, administrative and clerical, information technology, legal, light industrial, and medical roles.
It is also a leading provider of productivity consulting and workforce management solutions. Lyneer is headquartered in Lawrenceville,
New Jersey and has more than 100 locations in the U.S.

For further description of the terms of the Merger
Agreement, please refer to Note 1 to the consolidated financial statements.

Results of operations

We incurred net losses of $5,627,591 and $4,094,833 for the year ended
December 31, 2023 and 2022, respectively. We had negative cash flow from operating activities of $5,004,558 and $3,662,568 for the year
ended December 31, 2023 and 2022, respectively, and had an accumulated deficit of $24,136,275 as of December 31, 2023.

Results of operations may be adversely affected
by various factors that could cause economic uncertainty and volatility in the financial markets, many of which are beyond our control.
Our business could be impacted by, among other things, downturns in the financial markets or in economic conditions, inflation, increases
in interest rates, and geopolitical instability, such as the military conflict in Ukraine and the Israel-Hamas war. We cannot at this
time fully predict the likelihood of one or more of the above events, their duration or magnitude or the extent to which they may negatively
impact our business.

Our financial results have been, and will continue to be, impacted
by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial
results, this discussion should be read in conjunction with our consolidated financial statements and the notes thereto within the Consolidated
Financial Statements section of this report, and trends discussed in “Risk Factors” in Item 1-A of Part I of this report.

44

Results of Operations

Comparison of the Years Ended December 31, 2023 and 2022

The following table summarizes our results of operations for the years
ended December 31, 2023 and 2022:

Revenues

Our revenues
during the year ended December 31, 2023, were $0 as compared to revenues of $78,659 during the year ended December 31, 2022, representing
a decrease of $78,659, or 100%. During the year ended December 31, 2022, revenue included grant revenue of $77,482 and $1,177 from product
sales. The decrease in revenue was due to the fact that we do not currently have any active grants under which we are providing services,
nor have we sold any of our products to customers. We do not expect to recognize revenues until a market for our sequencing technology
further develops.

Gross Profit

Gross profit for the year ended December 31, 2023 was $0, as compared
to gross profit of $77,969 for the year ended December 31, 2022, which represented a decrease of $77,969, or 100%, primarily due to the
fact that we do not currently have any active grants under which we are providing services, nor have we sold any of our products to customers.

45

Research and Development Expenses

Research and development expenses increased by $685,088, or 44%, from
$1,568,266 for the year ended December 31, 2022 compared to $2,253,354 for the year ended December 31, 2023. The increase in expenses
was a result of our progressive return to research and development activities in relation to applications for our tSMS technology to pre-COVID-19
levels prior to entering into the Merger agreement with Lyneer. Going forward, we expect to reduce our research and development expenses
until after the closing of the Merger with Lyneer as we continue to preserve our cash resources to effect the Merger.

General and Administrative Expenses

General and administrative expenses increased by $972,304, or 39%,
from $2,506,851 for the year ended December 31, 2022 compared to $3,479,155 for the year ended December 31, 2023. The increase was primarily
attributable to approximately $705,000 in additional legal and professional fees related to the Merger in order to facilitate SEC filings,
increased operating expenses of approximately $105,000 related to accounting, legal, insurance and audit related services, and approximately
$96,000 of additional incremental expenses incurred in connection with the Merger. General and administrative expenditures will continue
to increase until the closing of the Merger with Lyneer.

Interest and Other Income/Loss

We recognized $188,716 of investment income, of which $106,051 related
to marketable debt securities and $82,665 related to cash invested in money market accounts and cash that was held in investments that
have a maturity date of less than three months during the year ended December 31, 2023. We recognized $0 of investment income related
to marketable securities and $44,879 of income earned from money market accounts during the year ended December 31, 2022.

Interest expense incurred on the promissory notes was $68,370 and $90,748
for the years ended December 31, 2023 and 2022, respectively. During the year ended December 31, 2023, we also incurred $15,428 of
interest expense related to our finance lease.

Net Loss

Overall, the net loss increased by $1,532,758, or 37%, to $5,627,591
as compared to $4,094,833 for the year ended December 31, 2022. This increase in net loss was primarily attributable to increased expenses
associated with the Merger.

Liquidity and Capital
Resources

The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal
course of business. We experienced negative cash flows from operations of $5,004,558 for the year ended December 31, 2023, which included
our costs and expenses related to the transactions contemplated by the Merger Agreement. As a result of our recent common stock offerings
in August 2021 and February of 2023 and the maturity of our marketable debt securities, we had cash and cash equivalents of we had cash
and cash equivalents of $2,693,991 at December 31, 2023.

The Company estimates cash resources will be sufficient
to fund its operations into the first quarter of 2025. The Company will need additional capital to fund its planned operations for the
next 12 months, if the Merger is not completed. These conditions raise substantial doubt about the Company’s ability to continue
as a going concern.

The consolidated financial statements for the years
ended December 31, 2023 and 2022 were prepared under the assumption that the Company will continue as a going concern, which contemplates
that the Company will be able to realize assets and discharge liabilities in the normal course of business.

46

Since inception, we have funded our operations primarily through equity
and debt financings, as well as from modest sales of products and research services. As of December 31, 2023, and we had an accumulated
deficit of $24,136,275.

On February 15, 2023, we issued 50,000 shares of common stock to investors
at a price of $36.00 per share (after the Reverse Stock Split). The gross proceeds of the issuance were $1.8 million. We incurred offering
expenses of approximately $0.3 million, which were paid with proceeds from the common stock issuance.

The Company expects that it will seek to raise additional capital
through equity offerings, grant financing, and convertible debt. Additional funds may not be available when it needs them on terms that
are acceptable to them, or at all. If adequate funds are not available, it may be required to delay its operational strategies, and to
delay or reduce the scope of its research or development programs.

Cash Flows

The following table sets forth the primary sources and uses of cash
and cash equivalents for each of the periods presented.

Net cash used in operating activities

Net cash used in operating activities was approximately $5.0 million
and $3.7 million for the year ended December 31, 2023 and 2022, respectively. The increase in operating spending was a result of our progressive
return to research and development activities to levels of pre-COVID-19 pandemic, prior to the announcement of the proposed Merger. In
addition, we experienced an increase in our general and administrative spending associated with legal, accounting, and consulting fees
in connection with the proposed Merger with Lyneer.

Net cash provided by investing activities

Net cash provided by investing activities was approximately $4.1 million
for the year ended December 31, 2023 as compared to approximately $1.8 million for the year ended December 31, 2022. The cash from the
investing activities is primarily attributable to the sales and maturities of marketable securities during the years ended December 31,
2023 and 2022.

Net cash provided by financing activities

Net cash provided by financing activities was approximately $1.5 million,
and $0, for the year ended December 31, 2023 and 2022, respectively. We issued 50,000 shares of common stock to investors at a price of
$36.00 per share during the year ended December 31, 2023 (after the effect of the Reverse Stock Split). The gross proceeds of the issuance
was $1.8 million. We incurred offering costs of approximately $0.3 million, which were paid with proceeds from the common stock issuance.
No such transaction occurred during the year ended December 31, 2022.

47

Recent Accounting Pronouncements

In June 2016,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial
Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires measurement and recognition of
expected credit losses for financial assets. In April 2019, the FASB issued clarification to ASU 2016-13 within ASU 2019-04, Codification
Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,
or ASU 2016-13. The guidance is effective for fiscal years beginning after December 15, 2022. We adopted this standard on January 1,
2023, which had no material impact on the our consolidated financial statements.

We do not believe that any other recently issued but not yet effective
accounting pronouncements are expected to have a material effect on our consolidated financial statements.

Critical Accounting Policies and Estimates

We prepare our financial statements and accompanying
notes in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates
and assumptions about future events that affect reported amounts. Estimations are considered critical accounting estimates based on, among
other things, its impact on the portrayal of our financial condition, results of operations, or liquidity, as well as the degree of difficulty,
subjectivity, and complexity in its deployment. Critical accounting estimates address accounting matters that are inherently uncertain
due to unknown future resolution of such matters. Management routinely discusses the development, selection, and disclosure of each critical
accounting estimates.

Stock-based Compensation

Our stock-based compensation program awards include stock options and
restricted stock awards. The fair value of stock option grants is estimated as of the date of the grant using the Black-Scholes option
pricing model. The fair value of restricted stock units is based on the fair value of our common stock on the date of the grant. The fair
value of the awards is then expensed over the requisite service period, generally the vesting period, for each award as compensation expense.

Our expected stock price volatility assumption is based on the volatility
of comparable public companies. The expected term of a stock option granted to employees and directors (including non-employee directors)
is based on the average of the contractual term (generally 10 years) and the vesting period. For non-employee options, the expected term
is the contractual term. The risk-free interest rate is based on the yield of U.S. Treasury securities consistent with the life of the
option. The expected dividend yield was set to zero as wedo not pay dividends on our common stock and there was no expectation of doing
so as of the respective grant dates. We recognize forfeitures related to stock-based awards as they occur.

We have periodically granted stock options and restricted stock units
to non-employees for services pursuant to ourstock plans at the fair market value on the respective dates of grant. Should we terminate
any of our consulting agreements, the unvested options underlying the agreements would be cancelled. For awards granted to non-employees,
compensation expense is recognized over the service period.

We granted stock options to purchase an aggregate of 13,550 and 27,125
shares of common stock in the years ended December 31, 2023 and 2022, respectively.

We granted restricted stock units to purchase an aggregate of 13,825
for the year ended December 31, 2023. No such restricted stock units were granted during the year ended December 31, 2022.

48

JOBS Act

Section 107 of the JOBS Act provides that an “emerging growth
company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying
with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of new or revised accounting
standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this exemption
from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other
public companies that are not emerging growth companies.

For as long as we remain an emerging growth company under the recently-enacted
JOBS Act, we will, among other things:

We currently intend to take advantage of some or all of the reduced
regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company.”
Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report
on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase
the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected.

Likewise, so long as we qualify as an emerging growth company, we may
elect not to provide certain information, including certain financial information and certain information regarding compensation of our
executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult
for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of
our common stock may be materially and adversely affected.

49

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion of our financial condition
and results of operations in conjunction with our audited consolidated financial statements for the year ended December 31, 2022, and
related notes included elsewhere in this report. This discussion and analysis and other parts of this report contain forward-looking statements
based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing
of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors,
including those set forth under “Risk Factors” and elsewhere in this report. You should carefully read the “Risk Factors”
section of this report to gain an understanding of the important factors that could cause actual results to differ materially from our
forward-looking statements. Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements and Industry
and Market Data” in this report.

Overview

This overview and outlook provide a high-level discussion of our operating
results and significant known trends that affect our business. We believe that an understanding of these trends is important to understanding
our financial results for the periods being reported herein as well as our future financial performance. 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 report.

About SeqLL

We are an early commercial-stage life sciences instrumentation and
research services company engaged in the development of scientific assets and novel intellectual property across multiple “omics”
fields. We leverage our expertise with True Single Molecule Sequencing (tSMS) technology enabling researchers and clinicians to contribute
major advancements to scientific research and development.

Our customers are primarily the early adopters of genomics technology
and tSMS in academic research, biomarker discovery, and molecular diagnostic product development.

Our financial results have been, and will continue to be, impacted
by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial
results, this discussion should be read in conjunction with our consolidated financial statements and the notes thereto within the Consolidated
Financial Statements section of this report, and trends discussed in “Risk Factors” within the Business& Market Information
section of this report.

We incurred net losses of $4,094,833 and $3,703,558 for the year ended
December 31, 2022 and 2021, respectively. We had negative cash flow from operating activities of $3,662,568 and $1,989,877 for the year
ended December 31, 2022 and 2021, respectively, and had an accumulated deficit of $18,508,684 as of December 31, 2022.

Results of operations may be adversely affected by various factors
that could cause economic uncertainty and volatility in the financial markets, many of which are beyond our control. Our business could
be impacted by, among other things, downturns in the financial markets or in economic conditions, inflation, increases in interest rates,
the ongoing effects of the COVID-19 pandemic, including resurgences and the emergence of new variants, and geopolitical instability, such
as the military conflict in the Ukraine. We cannot at this time fully predict the likelihood of one or more of the above events, their
duration or magnitude or the extent to which they may negatively impact our business.

Our financial results have been, and will continue to be, impacted
by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial
results, this discussion should be read in conjunction with our consolidated financial statements and the notes thereto within the Consolidated
Financial Statements section of this report, and trends discussed in “Risk Factors” in Item 1-A of Part I of this report.

39

Results of Operations

Comparison of the Years Ended December 31, 2022 and 2021

The following table summarizes our results of operations for the years
ended December 31, 2022 and 2021:

SeqLL Inc.

Consolidated Statements of Operations and Comprehensive
Loss

Revenues

Our revenues during the year ended December 31, 2022, were $78,659
as compared to revenues of $209,995 during the year ended December 31, 2021, representing a decrease of $131,336, or 63%. During the year
ended December 31, 2022, revenue included grant revenue of $77,482 and $1,177 from product sales, and no sales from research services
as compared to the revenue during the year ended December 31, 2021 from product sales of $31,537, grants of $161,974 and $16,484 in sequencing
services. The decrease in revenue was due to the reduction in research services and revenue generating activities due to our relocation
to Billerica, Massachusetts. This relocation, which was finalized in September of 2022, resulted in the Company temporarily not having
facilities that were sufficient to perform our research services and business activities. We expect to resume normal operations in 2023.

Gross Profit

Gross profit for the year ended December 31, 2022 was $77,969, as compared
to gross profit of $152,305 for the year ended December 31, 2021, which represented a decrease of $74,336, or 49%, primarily due to the
fact that we had lower product and services sales in 2022 due to our relocation to Billerica, Massachusetts as well as there was a decrease
in grant revenue for the year ended December 31, 2022.

40

Research and Development Expenses

Research and development expenses increased by $1,038,190, or 196%,
from $530,076 for the year ended December 31, 2021 compared to $1,568,266 for the year ended December 31, 2022. The increase in expenses
was a result of our progressive return to research and development activities to levels of pre-COVID-19 pandemic. We expect these expenditures
to increase in 2023 and beyond as we increase our research and development efforts to pre-pandemic levels.

General and Administrative Expenses

General and administrative expenses increased by $335,994, or 15%,
from $2,170,857 for the year ended December 31, 2021 compared to $2,506,851 for the year ended December 31, 2022. The increase was primarily
attributable to increased operating expenses as a public company, including the addition of accounting, legal, insurance and audit related
expenses. General and administrative expenditures will continue to increase to support ongoing financial reporting and compliance activities.

Interest and Other Income/Loss

We recognized $44,879 of interest and dividend income in the year ended
December 31, 2022 as compared to $36,463 for the year ended December 31, 2021. This primarily relates to the dividend income earned on
the Company’s investments in equity securities. The Company expects to see increases in interest income over the next twelve months
based on the current interest rates and market conditions.

We recognized zero other income in the year ended December 31, 2022
as compared to $190,193 of other income in the year ended December 31, 2021 related to forgiveness of Paycheck Protection Program loans.

We recognized $51,816 in net realized and unrealized losses on the
marketable equity securities during the year ended December 31, 2022 as compared to $43,078 for the year ended December 31, 2021.

We recognized $195,962 related to the change in fair value of our convertible
notes in the year ended December 31, 2021. No such convertible notes were in existence for the year ended December 31, 2022. Additionally,
we recognized a loss on extinguishment of debt totaling $934,257 in the year ended December 31, 2021 related to certain convertible notes.
The loss on the extinguishment of debt represented the excess of the fair value of these convertible notes totaling $3,075,987 over their
carrying value of $2,141,730 at their amendment date in the first quarter of 2021. We did not incur such losses during the year ended
December 31, 2022.

We recognized interest expense of $90,748 and $208,289 in the year
ended December 31, 2022 and 2021, respectively, representing a decrease of $117,541, or 56%. The decrease in interest expense was due
to a decrease in our outstanding indebtedness as a result of the conversion of $2.1 million in notes to equity concurrently with the consummation
of our initial public offering on August 31, 2021.

Net Loss

Overall, the net loss increased by $391,275, or 11%, to $4,094,833
as compared to $3,703,558 for the year ended December 31, 2022. This increase in net loss is primarily attributable to increased operating
expenses as a public company and our progressive return to research and development activities to levels of pre-COVID-19 pandemic. This
increase in operating expenses was partially offset by the decrease in the interest expense for the year ended December 31, 2022 as compared
to the year ended December 31, 2021 and the loss on extinguishment of the convertible notes in the year ended December 31, 2021 in the
amount of $934,257.

41

Liquidity and Capital Resources

The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
Even though we experienced negative cash flows from operations of $3,662,568 for the year ended December 31, 2022, we had cash and cash
equivalents of $2,180,525 and short-term investments in marketable securities of $4,036,014 at December 31, 2022.

Cash and cash equivalents decreased $1,834,603 at December 31, 2022
as compared to December 31, 2021 due to cash spending for operating activities for the year period ended December 31, 2022, partially
offset by the net sale of $1,867,985 in marketable securities.

Since inception, we have funded our operations primarily through equity
and debt financings, as well as from modest sales of products and research services. As of December 31, 2022, and we had an accumulated
deficit of $18,508,684.

On February 15, 2023, we sold
to institutional investors, in a registered direct offering, an aggregate of 2,000,000 shares of common stock for aggregate gross proceeds
of $1,800,000 before deducting placement agent fees and other offering expenses payable by the Company.

We believe our cash on hand, together with our cash generated
from commercial sales and research activity, will enable us to fund our operations for at least one year from the date of this
Report. However, our forecast of the period of time through which our financial resources will be adequate to support our operations
is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this
estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect.

Our future capital requirements will depend on many factors, including:

We plan to continue seeking additional financing sources from time
to time to meet our working capital requirements, make continued investment in research and development and make capital expenditures
needed for us to maintain and expand our business. We may not be able to obtain additional financing on terms favorable to us, if at all.
If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on
projects that are not successful, our ability to continue to support our business growth and to respond to business challenges could be
significantly limited. In addition, if we raise additional funds through further issuances of equity or debt securities, our existing
stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior
to those of holders of our common stock.

42

Cash Flows

The following table sets forth the primary sources and uses of cash
and cash equivalents for each of the periods presented.

Net cash used in operating activities

Net cash used in operating activities was approximately $3.7 million
and $2.0 million for the year ended December 31, 2022 and 2021, respectively. The increase in operating spending was a result of our progressive
return to research and development activities to levels of pre-COVID-19 pandemic. In addition, we experienced an increase in our general
and administrative spending since we became a public company in August 2021.

We anticipate our research and development efforts and on-going general
and administrative costs will generate negative cash flows from operating activities for the foreseeable future.

Net cash used provided by/used in investing activities

Net cash provided by investing activities was approximately $1.8 million
for the year ended December 31, 2022 as compared to cash used in investing activities of approximately $6.0 million for the year ended
December 31, 2021. The net inflow of funds is related to the disposition of the marketable securities during the year ended December 31,
2022 as compared to the investment of the proceeds from our initial public offering, which occurred in August 2021, into marketable securities
during the year ended December 31, 2021.

Net cash provided by financing activities

Net cash provided by financing activities was $0 and approximately
$12.0 million for the years ended December 31, 2022 and 2021, respectively. This decrease was primarily attributable to the proceeds raised
in our initial public offering on August 31, 2021, with no equity or debt proceeds raised during the year ended December 31, 2022.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses:
Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires measurement and recognition of expected credit losses
for financial assets. In April 2019, the FASB issued clarification to ASU 2016-13 within ASU 2019-04, Codification Improvements to
Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, or ASU
2016-13. The guidance is effective for fiscal years beginning after December 15, 2022. The Company is currently assessing the
potential impact of adopting ASU 2016-13 on its financial statements and financial statement disclosures.

43

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU
2016-02”) which establishes new accounting and disclosure requirements for leases. ASU No. 2016-02 requires recognition in the statement
of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line
basis. ASU 2016-02 requires classification of all cash payments within operating activities in the statement of cash flows. Disclosures
are required to provide the amount, timing and uncertainty of cash flows arising from leases. We will adopt the provisions of ASU 2016-02
in the quarter beginning January 1, 2022, using the modified retrospective approach and will record right of use assets and lease liabilities
on its consolidated balance sheet for the leases with terms in excess of one year. A modified retrospective transition approach is required
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. At the date of adoption on January 1, 2022, this guidance had
no impact to our consolidated financial statements.

We do not believe that any other recently issued but not yet effective
accounting pronouncements are expected to have a material effect on our consolidated financial statements.

Critical Accounting Policies and Estimates

Stock-based Compensation

Our share-based compensation program grant awards include stock options
and restricted stock awards to employees, directors and consultants. The fair value of stock option grants is estimated as of the date
of the grant using the Black-Scholes option pricing model. The fair value of restricted stock awards is based on the fair value of our
common stock on the date of the grant. The fair value of the stock-based awards is then expensed over the requisite service period, generally
the vesting period, for each award.

Our expected stock price volatility assumption is based on the volatility
of comparable public companies. The expected term of a stock option granted to employees and directors (including non-employee directors)
is based on the average of the contractual term (generally 10 years) and the vesting period. For non-employee options, the expected term
is the contractual term. The risk-free interest rate is based on the yield of U.S. Treasury securities consistent with the life of the
option. No dividend yield was assumed as we do not pay dividends on our common stock. We recognize forfeitures related to stock-based
awards as they occur.

We have periodically granted stock options and restricted stock awards
to consultants for services, pursuant to our stock plans at the fair market value on the respective dates of grant. Should we terminate
any of our consulting agreements, the unvested options underlying the agreements would be cancelled. For awards granted to consultants
and non-employees, compensation expense is recognized over the vesting period of the awards, which is generally the period services are
rendered by such consultants and non-employees.

We granted stock options to purchase an aggregate of 1,085,000 and
100,000 shares of common stock in the years ended December 31, 2022 and 2021, respectively.

Revenue Recognition

Our revenue is generated primarily from the sale of products and gene
sequencing services. Product revenue primarily consists of sales of genetic sequencing equipment and sequencing reagent kits.

We recognize revenue in accordance with Accounting Standards Codification
(“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, we recognize revenue when
control of our products and services is transferred to our customers in an amount that reflects the consideration we expect to receive
from our customers in exchange for those products and services. To determine the appropriate amount of revenue to be recognized for arrangements
determined to be within the scope of ASC 606, we follow the five-step process. This process involves identifying the contract with a customer,
determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct
performance obligations in the contract, and recognizing revenue when (or as) the performance obligations have been satisfied. A performance
obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or
together with other resources that are readily available to the customer and is separately identified in the contract. We only apply the
five-step process to contracts when it is probable that we will collect consideration we expect to be entitled to in exchange for the
goods or services we transfer to the customer.

44

We evaluate contingent payments to estimate the amount which is not
probable of a material reversal to include in the transaction price using the most likely amount method. Future payments that are not
within our control and are not considered probable of being achieved until the contingencies are resolved.

Revenue from product sales, including customized sequencing instruments
and sequencing reagent kits and off-the-shelf consumables, is recognized generally upon delivery, which is when control of the product
is deemed to be transferred.

Revenue from gene sequencing services, using the tSMS platform, is
recognized generally as the services are provided to the customer. The components of the sequencing process, including reagent kits and
off-the-shelf consumables, sample loader and sequencer, are not distinct within the context of the genetic sequencing service contract.
This is because in a gene sequencing service contract the reagent kits and other components, such as off-the-shelf consumables, used in
the sequencing process become required inputs to achieve the specified gene sequencing analysis, and the components in the sequencing
process are sequential in nature and highly interrelated as they work together to generate sample-specific data.

As our standard payment terms are less than one year, we have elected
the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component.

We have elected to exclude sales tax from revenue. We generally have
no obligations for returns, refunds and other similar obligations and do not provide separate equipment warranties. We recognized $0 and
$16,484 in revenue from gene sequencing services for the years ended December 31, 2022 and 2021, respectively. We recognized $1,177 and
$31,537 in revenue from product sales for the years ended December 31, 2022 and 2021, respectively.

Grant Revenue

Our grant revenues are derived from research programs by various departments
of the National Institute of Health (“NIH”).

Grants awarded to us for research and development by government entities
are outside the scope of the contracts with customers and contributions guidance. This is because these granting entities are not considered
to be customers and are not receiving reciprocal value for their grant support provided to us. These grants provide us with payments for
certain types of expenditures in return for research and development activities over a contractually defined period.

We recognize NIH grant revenue as reimbursable grant costs that are
incurred up to pre-approved award limits within the budget period. The costs associated with these reimbursements are reflected as a component
of research and development expense in the accompanying consolidated statements of operations and comprehensive loss. In the years ended
December 31, 2022, and 2021, we recognized grant revenue of $77,482 and $161,974, respectively.

Investments in marketable securities

We account for our investments in debt securities in accordance with
Accounting Standards Codification (“ASC”) 320, Investments — Debt Securities (“ASC 320”).
Debt securities, which are comprised of investments in U.S. Treasury Securities, are measured at fair value, based on quoted market prices.
As we have classified our investments in debt securities as available-for-sale, we recognize all unrealized gains and losses in other
comprehensive income, net of tax, and recognize all realized gains and losses in our consolidated statement of operations and comprehensive
loss.

45

We account for our investments in equity securities in accordance with
ASC 321, Investments — Equity Securities (“ASC 321”). Equity securities, which are comprised of investments
in mutual funds shares, are measured at fair value, based on quoted market prices, with all gains and losses reported in our consolidated
statement of operations and comprehensive loss.

We may sell our debt or equity securities in response to changes in
interest rates, risk/reward characteristics, liquidity needs or other factors.

JOBS Act

Section 107 of the JOBS Act provides that an “emerging growth
company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying
with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of new or revised accounting
standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this exemption
from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other
public companies that are not emerging growth companies.

For as long as we remain an emerging growth company under the recently-enacted
JOBS Act, we will, among other things:

We currently intend to take advantage of some or all of the reduced
regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company.”
Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report
on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase
the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected.

Likewise, so long as we qualify as an emerging growth company, we may
elect not to provide certain information, including certain financial information and certain information regarding compensation of our
executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult
for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of
our common stock may be materially and adversely affected.

46

ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion of
our financial condition and results of operations in conjunction with our audited consolidated financial statements for the year ended
December 31, 2021, and related notes included elsewhere in this report. This discussion and analysis and other parts of this report contain
forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual
results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result
of several factors, including those set forth under “Risk Factors” and elsewhere in this report. You should carefully read
the “Risk Factors” section of this report to gain an understanding of the important factors that could cause actual results
to differ materially from our forward-looking statements. Please also see the section entitled “Cautionary Note Regarding Forward-Looking
Statements and Industry and Market Data” in this report.

Overview

This overview and outlook provide a high-level
discussion of our operating results and significant known trends that affect our business. We believe that an understanding of these trends
is important to understanding our financial results for the periods being reported herein as well as our future financial performance.
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 report.

About SeqLL

We are a development-stage life sciences instrumentation
and research services company engaged in the development of scientific assets and novel intellectual property across multiple “omics”
fields. We leverage our expertise with True Single Molecule Sequencing (tSMS) technology enabling researchers and clinicians to contribute
major advancements to scientific research and development.

Our customers are primarily the early adopters
of genomics technology and tSMS in academic research, biomarker discovery, and molecular diagnostic product development.

Our financial results have been, and will continue
to be, impacted by several significant trends, which are described below. While these trends are important to understanding and evaluating
our financial results, this discussion should be read in conjunction with our consolidated financial statements and the notes thereto
within the Consolidated Financial Statements section of this report, and trends discussed in “Risk Factors” within the Business
& Market Information section of this report.

Financial Overview

Beginning in 2020, the COVID-19 pandemic and international
efforts to control its spread have significantly curtailed the movement of people, goods, services and research worldwide, including in
the areas in which we conduct our business and collaborations. We expect the COVID-19 pandemic to continue to impact our business and
collaborations in 2022, the size and duration of which is significantly uncertain.

Consolidated financial highlights for 2021 included
the following:

39

Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

The following table summarizes our results of operations for the years
ended December 31, 2021 and 2020:

Revenues

Our revenues during the year ended December 31,
2021, were $209,995 as compared to revenues of $329,495 during the year ended December 31, 2020, representing a decrease of $119,500,
or 36%. During 2021, revenue included product sales of $31,537, grants of $161,974 and $16,484 from research services as compared to revenue
in the same period of 2020 from product sales of $0, grants of $278,907 and $50,588 in research services. The change in revenue was primarily
a result of the reduction in research services and business activities due to the COVID-19 pandemic, as well as the reduction of the NIH
grant revenue.

40

Gross Profit

Gross profit for the year ended December 31, 2021, was $152,305, as
compared to gross profit of $158,692 for the year ended December 31, 2020, resulting in a decrease of $6,387, or 4%. The gross profit
as the percentage of revenues was 72% as compared to 48% in 2020 as a result of the reduction in cost of sales attributed to the decrease
in the sales of products and services, including significantly reduced salaries, due to the COVID-19 pandemic.

Research and Development Expenses

Research and development expenses increased by $199,097, or 60%, for
the year ended December 31, 2021, as compared to the prior year. The increase in expenses was a result of the ramp up in our research
and development activities to levels of pre-COVID-19 pandemic.

We expect these expenditures to increase over the
first half of 2022 and beyond as we grow our research and development efforts to advance certain projects that were on hold during the
COVID-19 pandemic.

General and Administrative Expenses

General and administrative expenses increased $1,393,422, or 179%, for
the year ended December 31, 2021 as compared to the prior year. The increase was primarily attributable to increased operating expenses
related to the preparation for our initial public offering in August 2021, including professional fees for accounting and legal of approximately
$870,000, increased personnel expenses of approximately $275,000 (inclusive of $215,000 of one-time bonuses), increase rent expense of
approximately $55,000 due to higher rent prices, as well as increase of approximately $90,000 in Directors and Officers pro-rated insurance
premiums.

General and administrative expenditures should not increase, and possibly
decrease, during 2022, in comparison to 2021. This is due to no recurrence of the one-time professional fees related to the IPO. However,
this reduction will be mitigated somewhat due to the additional costs to support ongoing financial reporting and compliance activities.

Interest and Other Income/Loss

We recognized interest expense of $208,289 and $287,197 in the years
ended December 31, 2021, and 2020, respectively, representing a decrease of $78,908, or 27%, in 2021 over 2020. The decrease in interest
expense was due to a decrease in our outstanding indebtedness as a result of the conversion of $2.1 million in notes to equity concurrently
with the consumption of our initial public offering on August 31, 2021.

We recognized Other Income of $190,193 and $191,566 related to the
PPP loan forgiveness in the years ended December 31, 2021, and 2020, respectively, resulting in a decrease of $1,373, or 1%.

We recognized $36,463 and $43,078 of investment
income and unrealized losses on marketable securities for the year ended December 31, 2021, which was attributable to our
short-term investments held in mutual funds. We did not hold such investments during the year ended December 31, 2020.

We recognized a loss on extinguishment of
debt totaling $934,257 and a change of $195,962 in the fair value of convertible notes for the year ended December 31, 2021. The loss on the extinguishment of debt represented the excess of the fair value of certain
convertible notes totaling $3,075,987 over their carrying value of $2,141,730 at their amendment date in the first quarter of 2021.
The accounting loss of $195,962 was due to the change in fair value of the convertible notes carried at fair value between the
amendment date and their conversion at the IPO date.

Net Loss

Our net loss for the year ended December 31, 2021, increased by $2,658,205,
or 254%, to $3,703,558 as compared to $1,045,353 for the year ended December 31, 2020 due primarily to the extinguishment loss of $934,257
for the conversion features added to $2.1 million aggregate principal amount of promissory notes, and the increase in general and administrative
expenses as a result of our becoming a public company.

41

Liquidity and Capital Resources

As of December 31, 2021, we had approximately $9.9 million in cash
and cash equivalents and marketable securities. Cash and cash equivalents increased significantly from prior year due to the “Financing
Activities” described in the “Cash Flow Summary” below. Since inception, we have funded our operations primarily through
equity and debt financings, as well as from modest sales of products and research services. As of December 31, 2021, we had an accumulated
deficit of $14,413,851.

From January to March 2021, we issued senior secured
convertible promissory notes to investors totaling $250,000 which were converted into shares of common stock upon our initial public offering
in August 2021.

In July and August of 2021, Daniel Jones our CEO
loaned us $90,000 and $50,000, respectively, of which both loans were repaid in full with proceeds from the IPO.

In August 2021, we issued 3,060,000 shares of common stock to investors
in our initial public offering. The gross proceeds from our initial public offering was $13.0 million. We incurred offering expenses of
$1.6 million in cash. We also converted $2.1 million of debt into 641,895 shares of common stock at our initial public offering.

On September 29, 2021, we issued 189,000 shares of common stock to
the underwriters at a price of $4.24 per share from the partial exercise of the overallotment option, increasing the net proceeds by approximately
$730,000, net of offering costs.

We
believe the net proceeds from our initial public offering, together with our cash generated from commercial sales and research
activity, will enable us to fund our operations for at least one year from the date this Annual Report on Form 10-K is
filed with the SEC. However, our forecast of the period of time through which our financial resources will be adequate to support
our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We
have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we
expect.

Our future capital requirements will depend on many factors, including:

We plan to continue seeking additional
financing sources from time to time to meet our working capital requirements, make continued investment in research and development
and make capital expenditures needed for us to maintain and expand our business. We may not be able to obtain additional financing
on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we
require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and
to respond to business challenges could be significantly limited. In addition, if we raise additional funds through further
issuances of equity or debt securities, our existing stockholders could suffer significant dilution, and any new equity securities
we issue could have rights, preferences and privileges superior to those of holders of our common stock.

42

Cash Flows

The following table sets forth the primary sources
and uses of cash and cash equivalents for each of the periods presented.

Net cash used in operating activities

Net cash used in operating activities was approximately
$2.0 million and $0.8 million for the years ended December 31, 2021 and 2020, respectively. The decreases in 2020 were primarily attributable
to reduced research and development and operating expenses as a result of the COVID-19 pandemic-related slowdown, including salary reductions,
furloughs and reduced spending. The increase in 2021 was primarily attributable to the significant expenses related to our operating as
a public company starting in the third quarter of 2021.

We anticipate our research and development efforts
and on-going general and administrative costs will generate negative cash flows from operating activities for the foreseeable future.

Net cash used in investing activities

Net cash used in investing activities was $6.0 million for the year
ended December 31, 2021, and none in the year ended December 31, 2020. The investing activities are related to the acquisition of highly
liquid short-term investments with the proceeds from our initial public offering.

Net cash provided by financing activities

Net cash provided by financing activities was approximately
$12.0 million and $0.75 million for the years ended December 31, 2021 and 2020, respectively. The increase was primarily attributable
to the proceeds raised in our initial public offering on August 31, 2021.

Recent Accounting Pronouncements

In August 2020, Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2020-06, Debt—Debt with Conversion and Other
Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity, which, among other things, provides guidance on how to account for contracts
on an entity’s own equity. This ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments.
It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because
of specific settlement provisions. In addition, this ASU modifies how particular convertible instruments and certain contracts that may
be settled in cash or shares impact the diluted EPS computation. The amendments in this ASU are effective for the public companies for
fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.   Early adoption is permitted,
but no earlier than fiscal years beginning after December 15, 2020. We adopted this standard on January 1, 2022, for which, there was
no material impact to our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU
2016-02”) which establishes new accounting and disclosure requirements for leases. ASU No. 2016-02 requires recognition in the statement
of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line
basis. ASU 2016-02 requires classification of all cash payments within operating activities in the statement of cash flows. Disclosures
are required to provide the amount, timing and uncertainty of cash flows arising from leases. We will adopt the provisions of ASU 2016-02
in the quarter beginning January 1, 2022, using the modified retrospective approach and will record right of use assets and lease liabilities
on its consolidated balance sheet for the leases with terms in excess of one year. A modified retrospective transition approach is required
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. We adopted this standard on January 1, 2022.

We do not believe that any other recently
issued but not yet effective accounting pronouncements will have a material effect on the accompanying consolidated financial statements.

43

Critical Accounting Policies and Estimates

Stock-based Compensation

Our share-based compensation program grants awards
including stock options and restricted stock awards. The fair value of stock option grants is estimated as of the date of the grant using
the Black-Scholes option pricing model. The fair value of restricted stock awards is based on the fair value of our common stock on the
date of the grant. The fair value of the stock-based awards are expensed over the requisite service period, generally the vesting period,
for each award.

Our expected stock price volatility assumption
is based on the volatility of comparable public companies. The expected term of a stock option granted to employees and directors (including
non-employee directors) is based on the average of the contractual term (generally 10 years) and the vesting period. For non-employee
options, the expected term is the contractual term. The risk-free interest rate is based on the yield of U.S. Treasury securities consistent
with the life of the option. No dividend yield was assumed as we do not pay dividends on common stock. We recognize forfeitures related
to stock-based awards as they occur.

We have periodically granted stock options and
restricted stock awards to consultants for services, pursuant to our stock plans at the fair market value on the respective dates of grant.
Should we terminate any of our consulting agreements, the unvested options underlying the agreements would be cancelled. For awards granted
to consultants and non-employees, compensation expense is recognized over the vesting period of the awards, which is generally the period
services are rendered by such consultants and non-employees.

We granted stock options to purchase an aggregate of 100,000 shares
of common stock in the year ended December 31, 2021, and did not grant any stock options during the year ended December 31, 2020.

Revenue Recognition

Our revenue is generated primarily from the sale
of products and research services. Product revenue primarily consists of sales of genetic sequencing equipment and sequencing reagent
kits. Research service revenue primarily consists of revenue generated from gene sequencing services and grants.

We recognize revenue in accordance with Accounting
Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, we
recognize revenue when control of our products and services is transferred to our customers in an amount that reflects the consideration
we expect to receive from our customers in exchange for those products and services. To determine the appropriate amount of revenue to
be recognized for arrangements determined to be within the scope of ASC 606, we perform a five-step process. This process involves identifying
the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the
contract price to the distinct performance obligations in the contract, and recognizing revenue when (or as) the performance obligations
have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to
the customer either on its own or together with other resources that are readily available to the customer and is separately identified
in the contract. We only apply the five-step process to contracts when it is probable that we will collect consideration we expect to
be entitled to in exchange for the goods or services we transfer to the customer.

We evaluate contingent payments to estimate the
amount which is not probable of a material reversal to include in the transaction price using the most likely amount method. Future payments
that are not within our control and are not considered probable of being achieved until the contingencies are resolved.

Revenue from product sales, including customized
sequencing instruments and sequencing reagent kits and off-the-shelf consumables, is recognized generally upon delivery, which is when
control of the product is deemed to be transferred.

44

Revenue from gene sequencing services, using the tSMS platform, is
recognized generally as the services are provided to the customer. The components of the sequencing process, including reagent kits and
off-the-shelf consumables, sample loader and sequencer, are not distinct within the context of the genetic sequencing service contract.
This is because in a gene sequencing service contract the reagent kits and other components, such as off-the-shelf consumables, used in
the sequencing process become required inputs to achieve the specified gene sequencing analysis, and the components in the sequencing
process are sequential in nature and highly interrelated as they work together to generate sample-specific data.

As our standard payment terms are less than one
year, we have elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component.

We have elected to exclude sales tax from revenue.
We generally have no obligations for returns, refunds and other similar obligations and do not provide separate equipment warranties.
We recognized $16,484 and $50,588 in revenue from gene sequencing services for the years ended December 31, 2021 and 2020, respectively.
We recognized $31,537 and $0 in revenue from product sales for the years ended December 31, 2021 and 2020, respectively.

Grant Revenue

Our grant revenues are derived from research programs
by various departments of the National Institute of Health (“NIH”).

Grants awarded to us for research and development
by government entities are outside the scope of the contracts with customers and contributions guidance. This is because these granting
entities are not considered to be customers and are not receiving reciprocal value for their grant support provided to us. These grants
provide us with payments for certain types of expenditures in return for research and development activities over a contractually defined
period.

We recognize NIH grant revenue as reimbursable grant costs that are
incurred up to pre-approved award limits within the budget period. The costs associated with these reimbursements are reflected as a component
of research and development expense in the accompanying consolidated statements of operations. In the years ended December 31, 2021, and
2020, we recognized grant revenue of $161,974 and $278,907, respectively.

JOBS Act

Section 107 of the JOBS Act provides that
an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the
Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption
of new or revised accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to
avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised
accounting standards as other public companies that are not emerging growth companies.

For as long as we remain an emerging growth
company under the recently-enacted JOBS Act, we will, among other things:

45

Although we are still evaluating the JOBS Act,
we currently intend to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us
so long as we qualify as an “emerging growth company.” Among other things, this means that our independent registered public
accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting
so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control
over financial reporting go undetected.

Likewise, so long as we qualify as an emerging
growth company, we may elect not to provide certain information, including certain financial information and certain information regarding
compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may
make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company
and the market price of our common stock may be materially and adversely affected.