KORU Medical Systems Inc

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

NOTE 1 —NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

KORU MEDICAL SYSTEMS, INC. (the “Company,” “KORU Medical,” “we,” “us” or “our”) designs, manufactures and markets proprietary portable and innovative medical devices primarily for the subcutaneous drug delivery market as governed by the United States Food and Drug Administration (the “FDA”) quality and regulatory system and international regulations and standards for quality system management. The Company operates asone segment.

BASIS OF PRESENTATION

The accompanying financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2023 (“Annual Report”). In accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the audited financial statements of the Company. The accompanying interim financial statements are unaudited and reflect all adjustments which are in the opinion of management necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for the periods presented. All such adjustments are of a normal, recurring nature. The Company’s results of operations and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. As of September 30, 2024 the Company held cash and cash-equivalents of $8.8 million, the majority of which was held in a secured US-treasury money market mutual fund.

PATENTS

Costs incurred in obtaining patents have been capitalized and are being amortized over the legal life of the patents.

STOCK-BASED COMPENSATION

The Company maintains an omnibus equity incentive plan under which it grants options and other equity incentive awards to certain executives, key employees and consultants, as well as shares of common stock to non-employee directors.

The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. All options are charged against income at their fair value. The entire compensation expense of the award is recognized over the vesting period.

Shares of stock granted for director fees are recorded at the fair value of the shares at the grant date.

Restricted stock awards are equity classified and measured at the fair market value of the underlying stock at the grant date. The fair value of restricted stock awards vesting at certain market capitalization thresholds were estimated on the date of grant using the Brownian Motion Monte Carlo lattice model. The fair value of restricted stock awards with time-based vesting were estimated on the date of grant at the current stock price. The fair value of restricted stock awards vesting at certain annual sales growth thresholds were estimated as of the date of Board acknowledgement of the achievement, at the current stock price. We recognize restricted stock expense using the straight-line attribution method over the requisite service period and account for forfeitures as they occur.

Performance share units (“PSUs”) are equity classified and measured at the fair market value of the underlying stock at the grant date.

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NET LOSS PER SHARE

The Company computes net loss per share using the weighted-average number of common shares outstanding during the period. Basic and diluted net loss per share are the same because the conversion, exercise or issuance of all potential common stock equivalents, which comprise the Company’s outstanding common stock options, unvested restricted stock units, performance stock units and warrants, would be anti-dilutive, due to the reporting of a net loss for each of the periods in the accompanying statements of operations.

USE OF ESTIMATES IN THE FINANCIAL STATEMENTS

The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Important estimates include but are not limited to asset lives, deferred tax valuation allowances, inventory valuation, expected credit losses, and customer rebate and incentive accruals. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the entire 2024 fiscal year.

REVENUE RECOGNITION

Our revenues are derived from three business sources: (i) domestic core (which consists of US and Canada), (ii) international core, and (iii) novel therapies. Our domestic and international core revenues consist of sales of our syringe drivers, tubing and needles (“Product Revenue”) for the delivery of subcutaneous drugs that are FDA cleared for use with the KORU Medical infusion system, with the primary delivery for immunoglobulin to treat Primary Immunodeficiency Diseases (“PIDD”) and Chronic Inflammatory Demyelinating Polyneuropathy (“CIDP”). Novel therapies consist of Product Revenue for feasibility/clinical trials (pre-clinical studies, Phase I, Phase II, Phase III) of biopharmaceutical companies in the drug development process as well as non-recurring engineering services (“NRE”) revenues (including testing and registration services) received from biopharmaceutical companies to ready or customize the FREEDOMTM System for clinical and commercial use across multiple drug categories.

For Product Revenue, we recognize revenues when shipment occurs, and at which point the customer obtains control and ownership of the goods. Shipping costs generally are billed to customers and are included in Product Revenue.

The Company generally does not accept return of goods shipped unless it is a Company error. The only credits provided to customers are for defective merchandise. The Company warrants the syringe driver from defects in materials and workmanship under normal use and the warranty does not include a performance obligation. The costs under the warranty are expensed as incurred.

Rebates are provided to distributors for the difference in selling price to distributor and pricing specified to select customers. In addition, rebates are provided to customers for meeting growth targets. Provisions for both distributor pricing and customer growth rebates are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded or when it is probable the growth target will be achieved.

We recognize NRE revenue under an input method, which recognizes revenue on the basis of our efforts or inputs (for example, resources consumed, labor hours expended, costs incurred, or time elapsed) to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation (i.e. completion milestone). The input method that we use is based on costs incurred.

Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes existing, enforceable rights and obligations. Generally, when contract modifications create new performance obligations, the modification is considered to be a separate contract and revenue is recognized prospectively. When contract modifications change existing performance obligations, the impact on the existing transaction price and measure of progress for the performance obligation to which it relates is generally recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. Contract assets primarily represent revenue earnings over time that are not yet billable based on the terms of the contracts. Contract liabilities (i.e., deferred revenue) consist of fees invoiced or paid by the Company’s customers for which the associated performance obligations have not been satisfied and revenue has not been recognized based on the Company’s revenue recognition criteria described above. As of September 30, 2024, the Company has recognized a contract asset of $74,312 which is included in other receivables and does not have a contract liability in the accompanying balance sheet.

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The following table summarizes net revenues by geography for the three and nine months ended September 30, 2024, and 2023.

ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED

The Company considers the applicability and impact of all recently issued accounting pronouncements. Recent accounting pronouncements not specifically identified in our disclosures are either not applicable to the Company or are not expected to have a material effect on our financial condition or results of operations.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. The Company did not record any impairment losses through September 30, 2024.

RECLASSIFICATION

Certain liability balances within the accompanying December 31, 2023 balance sheet have been reclassified to conform to current period presentation. There were no changes to the Company’s results of operations as a result of the reclassification.

NOTE 2 —PROPERTY AND EQUIPMENT

Property and equipment consists of the following at:

Depreciation and amortization expense was $227,785 and $199,880 for the three months ended September 30, 2024 and 2023, respectively, and $677,019 and $593,979 for the nine months ended September 30, 2024 and 2023, respectively.

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NOTE 3 —STOCK-BASED COMPENSATION

Prior to May 9, 2024, the Company maintained a stock option plan and an omnibus equity incentive plan under which it granted options and other equity incentive awards to certain executives, key employees and consultants, as well as a non-employee director compensation plan under which it granted shares of common stock to non-employee directors. As of May 9, 2024, a new omnibus equity incentive plan replaced these plans with respect to awards made after that date to employees, consultants and non-employee directors. The Company has also made inducement awards of equity-based compensation outside of the plans. The Company issued warrants to purchase common stock in connection with our loan financing agreement with our lender.

The fair value of each option and warrant grant is estimated on the date of the grant using the Black-Scholes option-pricing model. All options and warrants are charged against income at their fair value. The entire compensation expense of the grant is recognized over the vesting period.

Restricted stock units (“RSUs”) and performance share units (“PSUs”) are equity classified and measured at the fair value of the underlying stock at the grant date.

Shares of stock granted for non-employee director fees are recorded at the fair value of the shares at the grant date.

Restricted stock awards are equity classified and measured at the fair value of the underlying stock at the grant date. The fair value of restricted stock awards vesting at certain market capitalization thresholds were estimated on the date of grant using the Brownian Motion Monte Carlo lattice model. The fair value of other restricted stock awards were estimated on the date of grant at the current stock price. We recognize restricted stock expense using the straight-line attribution method over the requisite service period and account for forfeitures as they occur.

The Company has three equity incentive plans: the 2015 Stock Option Plan, as amended (the “2015 Plan”), the 2021 Omnibus Equity Incentive Plan (the “2021 Plan”), the 2024 Omnibus Equity Incentive Plan (the “2024 Plan”), and had the Non-Employee Director Compensation Plan (the “Director Plan”) prior to May 9, 2024. No new awards have been or will be issued pursuant to the 2015 Plan, the 2021 Plan or the Director Plan from and after May 9, 2024. The Company has also issued employment inducement awards to certain key executives.

The 2015 Plan provides for the grant of incentive stock options and nonqualified stock options. As of September 30, 2024, there were 2,237,500 shares reserved for outstanding awards under the 2015 Plan.

The 2021 Plan provides for the grant of incentive stock options, nonqualified stock options, stock awards, restricted stock awards, restricted stock units and/or stock appreciation rights to employees, consultants and directors. As of September 30, 2024, there were 419,244 shares reserved for outstanding awards under the 2021 Plan.

The 2024 Plan provides for the grant of incentive stock options, nonqualified stock options, stock awards, restricted stock awards, restricted stock units and/or stock appreciation rights to employees, consultants and directors. As of September 30, 2024, there were 769,257 shares reserved for outstanding awards and 2,407,804 shares available for issuance under the 2024 Plan. In addition, awards previously made under the 2015 Plan and the 2021 Plan that are forfeited or cancelled after May 9, 2024 will be available for issuance under the 2024 Plan.

Each non-employee director of the Company (other than the Chairman of the Board) is eligible to receive $110,000 annually, to be paid quarterly $12,500 in cash and $15,000 in common stock. The Chairman of the Board is eligible to receive $140,000 annually, to be paid quarterly $12,500 in cash and $22,500 in common stock. Prior to May 9, 2024 in the periods presented in this report, non-employee director compensation was paid pursuant to the Non-Employee Director Compensation Plan. From and after May 9, 2024 non-employee director compensation is paid pursuant to the 2024 Plan. All payments were and are pro-rated for partial service.

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Time-Vesting Stock Options

The following table summarizes the inputs into the Black-Scholes model for all time-vesting stock options granted during the nine months ended September 30, 2024:

The following table summarizes the status of the stock options outstanding at September 30, 2024:

Total stock-based compensation expense for time-vested stock options was $1,122,128 for the nine months ended September 30, 2024. No cash was received from option exercises for the nine months ended September 30, 2024.

The following table presents information pertaining to options outstanding at September 30, 2024:

As of September 30, 2024, there was $1,958,795 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 42 months.

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Performance-Vesting Stock Options

The following table summarizes the activities for our unvested performance-vesting stock option awards for the nine months ended September 30, 2024:

Total stock-based compensation expense for performance-vesting stock options was $24,366 for the nine months ended September 30, 2024.

As of September 30, 2024, there was $151,979 of unrecognized compensation cost related to unvested employee performance-vesting options. This amount is expected to be recognized over a weighted-average period of 26 months.

Restricted Stock Awards, RSUs, and PSUs

The following table summarizes the activities for our restricted stock awards, RSUs, and PSUs for the nine months ended September 30, 2024:

Total stock-based compensation expense for restricted stock awards, RSUs, and PSUs was $399,082 for the nine months ended September 30, 2024.

As of September 30, 2024, there was $1,175,828 of unrecognized compensation cost related to unvested employee restricted stock awards, RSUs, and PSUs. This amount is expected to be recognized over a weighted-average period of 23 months.

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Common Stock Warrants

The following table summarizes the activities for our common stock warrants issued in connection with our loan financing agreement with our lender for the nine months ended September 30, 2024:

As of September 30, 2024, there was $26,064 of unrecognized cost related to unvested warrants.

NOTE 4 —DEBT OBLIGATIONS

On March 8, 2024, the Company entered into a loan and security agreement with a large domestic banking institution, as lender, providing for a $5,000,000 revolving credit facility and a $5,000,000 term loan facility. Borrowings are secured by a first-priority lien on substantially all of the assets of the Company, subject to customary exceptions. The revolving credit facility matures on December 31, 2025 and the term loan matures on December 1, 2028. As of September 30, 2024, there were no outstanding borrowings under the term loan nor the revolving credit facility.

On August 1, 2024, the Company renewed its commercial insurance premium finance and security agreement with its insurance provider for the insurance period covering July 1, 2024 through June 30, 2025. As of September 30, 2024, the aggregate principal amount of the note was $401,993. The note bears an annual interest rate of 9.5%. The Company retains the right to terminate the agreement at any time and pay the remaining balance in full along with a minimal penalty.

NOTE 5 —LEASES

We have finance and operating leases for our corporate office, vehicles, and certain office and computer equipment. Our three operating leases have remaining lease terms of 7.92 years,4.33 years, and 3.67 years, respectively. Our three finance leases have remaining lease terms of 2.67 years,2.25 years, and 4.00 years, respectively, as of September 30, 2024.

The components of lease expense were as follows:

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Supplemental cash flow information related to leases was as follows:

Supplemental balance sheet information related to leases was as follows:

Maturities of lease liabilities are as follows:

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NOTE 6 —INCOME TAXES

For interim income tax reporting, the Company estimates its annual effective tax rate and applies it to fiscal year-to-date pretax loss, excluding unusual or infrequently occurring discrete items. Tax jurisdictions with losses for which tax benefits cannot be realized are excluded. The Company reported an income tax expense ofzero and income tax benefit of $300,247 for the three months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024 and 2023, the Company reported income tax expense ofzero and income tax benefit of $1,477,642, respectively.

We evaluate our deferred tax assets to determine if they are more likely than not to be realized by assessing both positive and negative evidence in accordance with ASC Topic 740, Income Taxes. After considering our cumulative pretax loss (the three-year period ending with the current year), as well as analyzing all available evidence, we recorded a valuation allowance of $6,002,777 against our net deferred tax assets during the year ended December 31, 2023. As of September 30, 2024, the valuation allowance is $6,895,301. As we continue to assess the realizability of our deferred tax assets, reported pretax income and new evidence may result in a partial or full reduction of the valuation allowance in future periods.

Recurring items cause our effective tax rate to differ from the U.S. federal statutory rate of 21%, including U.S. federal R&D credits, U.S. state tax rates, and stock-based compensation.

The Company files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. Income tax returns for years prior to fiscal 2020 are no longer subject to examination by tax authorities.

NOTE 7 —COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

The Company has been and may again become involved in legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not presently a party to any litigation or other legal proceeding that is believed to be material to its financial condition.

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