Kindly MD Inc

KINDLY MD, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2024 (UNAUDITED)

NOTE 1—BASIS OF PRESENTATION AND OTHER INFORMATION

The accompanying unaudited condensed financial statements of Kindly MD, Inc. (the “Company,” “Kindly MD,” “we,” “us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. They do not include all the information and footnotes required by GAAP for complete financial statements. The December 31, 2023 balance sheet data was derived from audited financial statements but do not include all disclosures required by GAAP. The interim unaudited condensed financial statements should be read in conjunction with those financial statements included in the Form S-1/A, as filed with the Securities and Exchange Commission on May 9, 2024. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

Reclassifications

Certain reclassifications within operating expenses have been made to the prior period’s financial statements to conform to the current period financial statement presentation. There is no impact in total to the results of operations and cash flows in all periods presented.

***Recently Issued Accounting Pronouncements ***

The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the FASB. The Company has evaluated all recent accounting pronouncements and determined that the adoption of pronouncements applicable to the Company has not had or is not expected to have a material impact on the Company’s financial statements.

NOTE 2—LIQUIDITY AND GOING CONCERN ASSESSMENT

Management assesses liquidity and going concern uncertainty in the Company’s condensed financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the financial statements are issued, which is referred to as the “look-forward period,” as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management considered various scenarios, forecasts, projections, estimates and made certain key assumptions, including the timing and nature of projected cash expenditures or programs, its ability to delay or curtail expenditures or programs and its ability to raise additional capital, if necessary, among other factors. Based on this assessment, management made certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent it deems probable those implementations can be achieved and management has the proper authority to execute them within the look-forward period.

As of September 30, 2024, we had cash and cash equivalents of $3,642,944 and total working capital of $3,215,466. For the nine months ended September 30, 2024, the Company incurred an operating loss of $2,324,138 and used cash flows in operating activities of $2,172,361.

As further disclosed in Note 8, on June 3, 2024, the Company completed an initial public offering (“IPO”) through the issuance of common stock and warrants for total net proceeds of $5,860,650. The IPO provided the Company with adequate liquidity and cash reserves to meet its obligations for at least the 12-month period following the date of this report, and to assist us in implementing our strategic operational business plans to create sustained cash flow generation thereafter.

In addition to cash and net working capital, management has prepared estimates of operations and believes that sufficient funds will be generated from operations to fund its operations, and to service its debt obligations for one year from the date of the filing of these financial statements. The accompanying condensed financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business. Management believes that based on relevant conditions and events that are known and reasonably knowable that its forecasts, for one year from the date of the filing of these financial statements, indicate improved operations and the Company’s ability to continue operations as a going concern.

NOTE 3—DISAGGREGATION OF REVENUES

Revenue Recognition. The Company records revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers.” Revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the Company applies the following five-step approach: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as a performance obligation is satisfied.

The Company primarily recognizes revenue from: (i) patient care services related to medical evaluation and treatment and (ii) product retail sales, (iii) service affiliate agreements

Revenue from patient care services, which relates to medical evaluation and treatment, is reported at the amount reflecting the consideration to which the Company expects to be entitled in exchange for providing these services. These amounts are due from patients, third-party payors (including Medicare, Medicaid, and commercial insurance payers), and others. The patient is considered the Company’s customer, and a signed patient treatment consent typically constitutes a written contract between the Company and the patient. Patient care services are considered discrete and are initiated and concluded at the patient’s discretion, which occurs each individual appointment. Generally, the Company satisfies its performance obligations at a point in time, specifically when it has the right to invoice the customer for the work completed, which usually occurs on an interaction basis for the work performed during any given billable interaction. The Company has determined that the underlying nature of the services provided remains consistent across different payor types. Consequently, the Company utilizes a portfolio approach to assess price concessions in its contracts with patients. The Company recognizes revenue for patient care services net of price concessions, which include contractual adjustments provided to third-party payors, discounts offered to uninsured patients in accordance with the Company’s policy, and/or implicit price concessions extended to patients. Implicit price concessions, representing differences between the amount the Company expects to receive from patients and standard billing rates, are accounted for as contractual adjustments or discounts, deducted from gross revenue to calculate net revenues. The Company bases its estimates of contractual adjustments and discounts on contractual agreements, its discount policies, and historical experience.

Revenue from retail sales is recognized when control of the goods is transferred to the customer. This occurs when the customer can direct the use of, and obtain substantially all benefits from, the Company’s products, generally at the time of shipment or customer pickup. Revenue is recorded at the net sales price, which includes estimates of variable consideration such as product returns, rebates, discounts, and other adjustments. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues.

Revenue from service affiliate agreements is recognized when control of the promised goods or services is transferred to our customers, or when services are rendered to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and the collectability of consideration is probable. The company recognizes revenue after the service price has been allocated and when it satisfies the performance obligation. Usually, there is only a single performance obligation in the sale and service, and therefore the entire transaction price is allocated to the single performance obligation. This typically occurs at a point in time when products and or services are rendered, delivered, or shipped. The transaction price for contracts is set per the contract language. The transaction price for services is set by the company for the various service options, less current discounts or coupons offered, where those discounts are set and approved by management from time to time.

Our revenue is disaggregated based on revenue type, including (i) patient care services related to medical evaluation and treatment, (ii) product retail sales, and (iii) service affiliate agreements.

The Company’s revenues for the three and nine months ended September 30, 2024 and 2023 are disaggregated as follows:

The Company earned $106,567 in reimbursements from insurance payers during the three months ended September 30, 2024, representing a 16.4% increase compared to the $91,553 earned during the three months ended June 30, 2024. The Company earned $232,842 in reimbursements from insurance payers during the nine months ended September 30, 2024, and $0 during the three and nine months ended September 30, 2023.

NOTE 4—INVENTORY

Inventory consisted of the following at September 30, 2024, and December 31, 2023:

NOTE 5—PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at September 30, 2024, and December 31, 2023:

Depreciation expense for the three and nine months ended September 30, 2024, was $25,576 and $76,210, respectively.

Depreciation expense for the three and nine months ended September 30, 2023, was $26,004 and $77,670, respectively.

NOTE 6—LEASES

Operating Leases

The following was included in our balance sheets at September 30, 2024, and December 31, 2023:

The components of lease expense consisted of the following for the three and nine months ended September 30, 2024 and 2023:

Cash payments included in the measurement of our operating lease liabilities were $32,969 and $105,094 for the three and nine months ended September 30, 2024, respectively. Cash payments included in the measurement of our operating lease liabilities were $33,214 and $100,237 for the three and nine months ended September 30, 2023, respectively.

Maturities of operating lease liabilities at September 30, 2024, were as follows:

Finance Leases

On April 22, 2024, the Company entered into an equipment financing lease to purchase equipment for $10,976, which matures in July 2029.

The following was included in our balance sheets at September 30, 2024, and December 31, 2023:

Maturities of finance lease liabilities at September 30, 2024, were as follows:

NOTE 7—NOTES PAYABLE

10% OID Promissory Notes

On January 24, 2024, the Company entered into a securities purchase agreement in a private placement transaction with a certain accredited investor, pursuant to which the Company issued and sold to the investor a 10% original issue discount (“OID”) promissory note in the principal amount of $55,556 for total cash proceeds of $45,000. The note bears interest at a rate of 10% per annum and matures on January 24, 2025. The promissory note included terms that. should the Company undertake an IPO before the maturity date, the note holder is to receive (i) equity shares equal to the principal amount at the IPO share price, and (ii) repayment of the principal and accrued interest in cash. The note contains customary covenants and events of default for a loan of this type.

The Company evaluated whether this promissory note contains embedded features that qualify as derivatives pursuant to ASC 815. The Company determined that the notes embedded features, specifically should the Company undertake an IPO before the maturity date, the note holder will receive (i) equity shares equal to the principal amount at the IPO share price, and (ii) repayment of the principal and accrued interest in cash. These embedded features constitute deemed redemption features as a result of the substantial premium received by the note holder. The Company concluded that these redemption features require bifurcation from the note and subsequent accounting in the same manner as a freestanding derivative.

The fair value of the embedded redemption derivative liability within this promissory note was calculated using a Probability Weighted Expected Return valuation methodology, considering the likelihood of occurrence. The model used a discount rate of 15% and assumptions of an 80% probability related to likelihood of the Company completing an IPO. Subsequent changes in the fair value of the redemption features are measured at each reporting period and recognized in the condensed statement of operations. The OID and issuance costs for the promissory note, along with the fair value of the embedded redemption derivative liability, were collectively recorded as a debt discount. This discount will be amortized to interest expense over the respective term of the convertible notes using the effective interest method.

As further disclosed in Note 8, the IPO was completed on June 3, 2024. In accordance with the terms of the 10% OID promissory note agreements, the Company repaid the outstanding notes totaling $463,534 (including both principal and accrued interest) and issued each note holder common stock equal to the principal amount of the notes at the IPO price of $5.50, totaling 80,808 shares of restricted common stock, with a fair value of $214,949 or $2.66 per share. Consequently, the corresponding derivative liability was extinguished and we recognized a loss on extinguishment of debt of $38,889.

Derivative Liabilities

The following table provides a roll-forward of the derivative liability for the nine months ended September 30, 2024:

Estimated maturities of principal payments for notes payable at September 30, 2024, were as follows:

NOTE 8—STOCKHOLDERS’ DEFICIT

Preferred Stock

As of September 30, 2024, and December 31, 2023, the Company was authorized to issue 10,000,000 preferred shares. As of September 30, 2024, and December 31, 2023, the Company hadno preferred shares issued and outstanding.

Common Stock

As of September 30, 2024, and December 31, 2023, the Company was authorized to issue 100,000,000 common shares. As of September 30, 2024, and December 31, 2023, the Company had 5,977,476 and 4,617,798 common shares issued and outstanding, respectively.

During the three and nine months ended September 30, 2024, the Company issued 25,778 shares of common stock for compensation valued at $30,854.

During the three and nine months ended September 30, 2024, the Company issued 12,182 shares of common stock for services valued at $14,132.

Initial Public Offering

On May 31, 2024, Kindly MD entered into an underwriting agreement with WallachBeth Capital, LLC, as representative (the “Representative”) of the underwriters in connection with the initial public offering for sale of an aggregate of 1,240,910 units at a price to the public of $5.50 per share. Each unit offered under the underwriting agreement consists of one share of common stock, one tradeable warrant to purchase one share of common stock with an exercise price of $6.33 and afive-year exercise term; and one non-tradeable warrant to purchase one-half of one share of common stock with an exercise price of $6.33 and afive-year exercise term.

The underwriting agreement also provides for the issuance of 83,639 warrants to the Representative with an exercise price of $6.33 and afive-year exercise term. In addition, the underwriters have a 45-day option to purchase, at the public offering price, up to an additional 186,136 shares of common stock and/or tradeable warrants, and/or non-tradeable warrants, or any combination thereof, less, in each case, underwriting discounts and commissions to cover over-allotments.

On June 3, 2024, the IPO was completed, resulting in the issuance of 1,240,910 units. In addition, the underwriters partially exercised its over-allotment option, resulting in the issuance of 76,538 tradeable warrants and 76,538 non-tradeable warrants. As a result of the IPO, the Company received gross proceeds of approximately $6.8 million before deducting underwriting discounts and offering expenses. After deducting these and other offering expenses, the Company received net proceeds of approximately $5.9 million.

As further disclosed in Note 7, the IPO was completed on June 3, 2024. In accordance with the terms of the 10% OID promissory note agreements, the Company repaid the outstanding notes and issued each note holder common stock equal to the principal amount of the notes at the IPO price of $5.50, totaling 80,808 shares of restricted common stock. These shares are subject to a 90-day lock-up agreement from the date of issuance. Consequently, the corresponding derivative liability was extinguished.

On June 3, 2024, the Company repaid all outstanding 10% OID promissory notes totaling $463,534 (including both principal and accrued interest) and issued each note holder common stock equal to the principal amount of the notes at the IPO price of $5.50 per share, totaling 80,808 shares of restricted common stock, with a fair value of $214,949 or $2.66 per share. These shares are subject to a 90-day lock-up agreement from the date of issuance.

The common stock and tradeable warrants are trading on the Nasdaq Capital Market, under the symbols “KDLY” and “KDLYW,” respectively.

Potential Common Stock Equivalents

As of September 30, 2024, there were 2,854,479 potential common share equivalents from stock options and warrants excluded from the diluted loss per share calculations as their effect is anti-dilutive.

Stock Options

On January 2, 2024, the Company granted options to purchase 5,590 shares of common stock to certain individuals. The stock options have an exercise price of $5.50 per share and vest on July 1, 2024. The Company has calculated the estimated fair market value of these options at $15,500 using the Black-Scholes pricing model.

On July 31, 2024, the Company granted options to purchase 15,000 shares of common stock to certain individuals. The stock options have an exercise price of $1.72 per share and vest immediately. The Company has calculated the estimated fair market value of these options at $21,600 using the Black-Scholes pricing model.

On July 31, 2024, the Company granted options to purchase 56,000 shares of common stock to our Chief Executive Officer. The stock options have an exercise price of $1.90 per share and vest 25% immediately, with the remaining options vesting in monthly over atwo-year period. The Company has calculated the estimated fair market value of these options at $75,600 using the Black-Scholes pricing model.

On July 31, 2024, the Company granted options to purchase 2,571 shares of common stock pursuant to a consulting agreement. The stock options have an exercise price of $7.00 per share and vest immediately. The Company has calculated the estimated fair market value of these options at $2,700 using the Black-Scholes pricing model.

On September 30, 2024, the Company granted options to purchase 28,324 shares of common stock to certain executives, employees, and board members. The stock options have an exercise price of $5.50 per share and vest immediately. The Company has calculated the estimated fair market value of these options at $19,900 using the Black-Scholes pricing model.

On September 30, 2024, the Company granted options to purchase 25,459 shares of common stock to certain individuals. The stock options have an exercise price of $3.00 per share and vest 25% immediately, with the remaining options vesting monthly over athree-year period. The Company has calculated the estimated fair market value of these options at $20,500 using the Black-Scholes pricing model.

Below is a table summarizing the changes in stock options outstanding during the nine months ended September 30, 2024:

Stock-based compensation expense of $72,508 and $88,008 was recorded during the three and nine months ended September 30, 2024, respectively. As of September 30, 2024, the remaining unrecognized compensation cost related to non-vested options is $67,196.

As of September 30, 2024, the outstanding stock options have a weighted average remaining contractual life of 6.89 years and a total intrinsic value of $0.

Warrants

As further disclosed above, on June 3, 2024, the IPO was completed, resulting in the issuance of 1,240,910 units. Each unit offered under the underwriting agreement consists of one share of common stock, one tradeable warrant to purchase one share of common stock with an exercise price of $6.33 and afive-year exercise term; and one non-tradeable warrant to purchase one-half of one share of common stock with an exercise price of $6.33 and afive-year exercise term.

The underwriting agreement also provides for the issuance of 83,639 warrants to the Representative with an exercise price of $6.33 and afive-year exercise term. In addition, the underwriters partially exercised its over-allotment option, resulting in the issuance of 76,538 tradeable warrants and 76,538 non-tradeable warrants with an exercise price of $6.33 and afive-year exercise term.

Below is a table summarizing the changes in warrants outstanding during the nine months ended September 30, 2024:

As of September 30, 2024, the outstanding warrants have a weighted average remaining contractual life of 4.68 years and a total intrinsic value of $0.

NOTE 9—SUBSEQUENT EVENTS

Stock Repurchase Program

On October 15, 2024, the members of the Board of Directors of the Company approved the adoption of a Stock Repurchase Program through which the Company may purchase up to $500,000 worth of shares of its common stock from time to time, as market conditions warrant. The Company’s repurchases may be made in the open market, in privately negotiated transactions, or otherwise in accordance with applicable securities laws and other requirements. The amount and timing of any repurchases will be determined at management’s discretion and depend on a variety of factors, including business, economic and market conditions, regulatory requirements, prevailing stock prices and other considerations. The share repurchase program has no time limit, does not obligate the Company to repurchase any dollar amount or number of shares of common stock, and may be amended, suspended or discontinued at any time. The Company has not yet purchased any shares under the Stock Repurchase Program.