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

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included under ITEM 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those described under Part I – FORWARD LOOKING STATEMENTS and elsewhere in this Annual Report.

OVERVIEW

The Company designs, manufactures and markets proprietary portable and innovative medical devices primarily for the ambulatory infusion market as governed by the United States Food and Drug Administration (the “FDA”) quality and regulatory system and international standards for quality system management.

The Company had several significant accomplishments in 2020 including (i) record net sales; (ii)

entering into an agreement with Command Medical Products, Inc. (“Command”) to manufacture and supply the

Company’s subassemblies, needle sets and tubing products for supply continuity and cost savings; (iii) a non-cash no

fault litigation settlement, which eliminates the associated distraction and litigation expenses related to that litigation

going forward and (iv) the completion of a capital raise of net $26.6 million.

The Company remains committed to growth over the long-term, as we

make short-term investments to execute on our strategic initiatives. In February 2019, the Company’s Board of Directors approved

a strategic plan through 2022, including certain financial goals. While those financial goals have not changed, given the results

of the past year, the likely timing of attaining those goals has been pushed out. The Board plans to revisit the strategic plan

with the Company’s new Chief Executive Officer, to align the plan with her growth strategies and will update shareholders

accordingly. Any strategic plan and related financial goals should not be relied upon as a predictor of future results. The

Company’s primary areas of focus for 2021 are expected to include (i) continued focus on improving the customer experience;

(ii) continued research and development efforts to introduce compelling products into the markets we serve; (iii) expansion of

sales into other drug therapies, both existing and new and expanded presence in international markets; (iv) the implementation

of secondary sourcing of our needle and tubing sets to Command and (v) completion of our search for a new manufacturing facility

and corporate headquarters.

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KORU Medical continues to monitor its operations and government recommendations and has made modifications to its normal operations because of the COVID-19 pandemic, including requiring most of its non-production related team members to work remotely or on a staggered work shift. The Company has continued to maintain a manufacturing operational capacity at its manufacturing facility located in Chester, New York, and has instituted heightened cleaning and sanitization standards and several health and safety protocols and procedures to safeguard its team members who do continue to report in person. Until the duration of the pandemic is known, we cannot predict the effects the pandemic may have on our business, in particular with respect to demand for our products, our strategy, and our prospects, the effects on our customers, or the impact on our financial results. For example, our future net sales growth may continue to be impacted due to fewer new prescriptions for individuals with Primary Immune Deficiency Disease (“PIDD”) and Chronic Inflammatory Demyelinating Polyneuropathy (“CIDP”) as a result of patients not seeking care during the pandemic.

Our revenues derive from three business sources: (i) domestic core, (ii) international core, and (iii) novel therapies. Our core revenues include sales of our products for the delivery of SCIg to treat PIDD, CIDP, and other disease states that are not included in novel therapies. Novel therapies currently include revenues from clinical trials.

Total net sales increased $1.0 million or 4.4% for the year ended

December 31, 2020 as compared to the prior year period. The increase was due principally to an increase in domestic core

product sales volume, as well as higher domestic novel therapies of $0.8 million. We believe the increase in domestic core

product sales volume reflects growth in diagnosis of PIDD and CIDP (pre any COVID-19 impact to patient starts). Offsetting the

favorable impact on net sales from the domestic core product sales volume increases in 2020 were higher allowances, which include

(i) rebates resulting from the net impact of pricing increases at our largest distributor in the second half of 2019, and (ii)

pricing decreases and growth rebates to secure our contractual position with several large customers in 2020. Further increasing

allowances were payment discounts and distribution fees at our largest distributor under new contract terms entered into in the

fourth quarter of 2019.

Our inventory position grew from $2.4 million at December 31, 2019 to $6.8 million at December 31, 2020 mostly to ensure timely order fulfillment as we transition manufacturing of our needle sets and tubing products for supply continuity to Command. As transition is completed, this inventory is expected to convert to a source of cash in the future.

RESULTS OF OPERATIONS

Year Ended December 31, 2020 compared to Year Ended December 31, 2019

Net Sales

The following table summarizes our net sales for the years ended December 31, 2020 and 2019:

Years Ended December 31, Change from Prior Year % of Net Sales

Net Sales

Total net sales increased $1.0 million or 4.4% for the year ended December 31, 2020 as compared to the

prior year period. The increase was due principally to an increase in domestic core product sales volume, as well as

higher domestic novel therapies of $0.8 million. We believe the increase in domestic core product sales volume reflects

growth in diagnosis of PIDD and CIDP (pre any COVID-19 impact to patient starts). Offsetting the favorable impact on net

sales from the domestic core product sales volume increases in 2020 were higher allowances, which include (i) rebates

resulting from the net impact of pricing increases at our largest distributor in the second half of 2019, and (ii) pricing

decreases and growth rebates to secure our contractual position with several large customers in 2020. Further

increasing allowances were payment discounts and distribution fees at our largest distributor under new contract terms

entered into in the fourth quarter of 2019.

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Gross Profit

Our gross profit for the years ended December 31, 2020 and 2019 is as follows:

Years Ended December 31, Change from Prior Year

Stated as a Percentage of Net Sales 61.8% 64.1%

Gross profit increased $0.1 million or 0.6% for the year ended December 31, 2020, compared to the same period last year reflecting net sales growth described above as well as favorable production variances. Gross profit percentage of 61.8% for the year ended December 31, 2020 was negatively impacted by higher allowances as described above, overtime costs related to COVID-19 absenteeism and an obsolescence reserve resulting from a discontinued product line, compared to the year ended December 31, 2019 of 64.1%.

Selling, general and administrative, Litigation, and Research and development

Our selling, general and administrative, litigation and research and development costs for the years ended December 31, 2020 and 2019 are as follows:

Years Ended December 31, Change from Prior Year

Stated as a Percentage of Net Sales 65.2% 60.1%

Selling, general and administrative expenses increased $2.3 million, or 23.1%, for the year ended December 31, 2020 compared to the same period last year, due to an increase of $1.2 million of higher salary and related benefits, and recruiting fees. Also contributing to the increase were consulting fees of $0.8 million related to marketing, regulatory and strategic initiatives, as well as increased director fees and higher insurance premiums related to our directors’ and officers’ insurance policy of $0.5 million and other miscellaneous expenses of $0.3 million. Offsetting the increase were lower trade show and travel expenses of $0.5 million as a result of COVID-19 related travel restrictions.

Litigation fees decreased approximately $1.0 million compared to the same period last year due primarily to the negotiation of and entry into a litigation settlement agreement reached with EMED Technologies Corporation (“EMED”) in May 2020 resulting in a non-cash expense of $2.2 million.

Research and development expenses increased $0.6 million for the year ended December 31, 2020 compared with the same period last year mostly due to increased salary and related benefits due to higher headcount and additional testing as we continue our development initiatives.

Depreciation and amortization

For the year ended December 31, 2020, depreciation and amortization expense increased approximately $0.1 million, or 23.0%, to $0.4 million compared with the same period last year. We continued to invest in capital assets, mostly related to manufacturing and computer equipment.

Net (Loss)/Income

Years Ended December 31, Change from Prior Year

Stated as a Percentage of Net Sales (5.0% ) 2.4%

Our net loss for the year ended December 31, 2020 was $1.2 million, as compared to net income of $0.6 million for the year ended December 31, 2019, driven by the EMED settlement charge of $2.2 million and higher selling, general and administrative expenses of $2.3 million.

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NON-GAAP FINANCIAL MEASURES

Management of the Company believes that investors’ understanding of the Company’s performance is enhanced by disclosing non-GAAP financial measures as a reasonable basis for comparison of the Company’s ongoing results of operations. These non-GAAP measures should not be considered a substitute for GAAP-basis measures and results. Our non-GAAP measures may not be comparable to non-GAAP measures of other companies. The table below provides a disclosure of these non-GAAP financial measures to the most closely analogous measure determined in accordance with GAAP.

Non-GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. They are limited in value because they exclude charges that have a material effect on our reported results and, therefore, should not be relied upon as the sole financial measures to evaluate our financial results. The non-GAAP financial measures are meant to supplement, and to be viewed in conjunction with, GAAP financial results.

We disclose and discuss Adjusted EBITDA as a non-GAAP financial measure in our public releases, including quarterly earnings releases, and other filings with the Securities and Exchange Commission. We define Adjusted EBITDA as earnings (net (loss)/ income) before interest, income tax expense, depreciation and amortization, discontinued product expense, reorganization charges, litigation expenses including stock-based settlement expense, manufacturing initiative and stock-based compensation expenses. Prior to January 1, 2020, discontinued product expense and manufacturing initiative expenses were not included in our definition of Adjusted EBITDA. We believe that Adjusted EBITDA is used by investors and other users of our financial statements as a supplemental financial measure that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business. We also believe the disclosure of Adjusted EBITDA helps investors meaningfully evaluate and compare our cash flow generating capacity from quarter to quarter and year to year. Adjusted EBITDA is used by management as a supplemental internal measure for planning and forecasting overall expectations and for evaluating actual results against such expectations. Because management uses Adjusted EBITDA for such purposes, the Company uses Adjusted EBITDA as a significant criterion for determining the amount of annual cash incentive compensation paid to our executive officers and employees. We have historically found that Adjusted EBITDA is superior to other metrics for our company-wide cash incentive program, as it is more easily explained and understood by our typical employee.

A reconciliation of our non-GAAP measures is below:

Reconciliation of GAAP Net Income Years Ended December 31,

Discontinued Product Expense 70,859 —

Reorganization Charges. We have excluded the effect of reorganization charges in calculating our non-GAAP Adjusted EBITDA measure. We incurred significant expenses in connection with the termination and replacement of C-suite executives, senior management and changes to the Board of Directors which we would not otherwise incur in periods presented as part of our continuing operations. Reorganization charges include costs related to the replacement of C-suite executives including a transition bonus and recruiting fees, prior to March 31, 2019.

Discontinued Product Expense. We have excluded the effect of expenses related to a discontinued product line in calculating our non-GAAP Adjusted EBITDA measure. We expected to retire our Res-Q-Vac product line towards the end of 2020, but due to the failure of equipment used to manufacture the product, the discontinuation and resulting expense was accelerated into the first quarter of 2020 which we would not otherwise incur in periods presented as part of our continuing operations. Subsequently, in the rest of 2020, we sold off a portion of the discontinued inventory previously reserved. We do not expect to incur any significant related expenses in the future.

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Litigation. We have excluded litigation expenses in calculating our non-GAAP Adjusted EBITDA measure. Litigation expenses include stock-based litigation settlement expense of $2.2 million related to the settlement agreement entered into with EMED on May 20, 2020. We continue to evaluate our business performance excluding litigation fees; however, expenses related to the EMED litigation have discontinued as a result of the settlement.

Manufacturing Initiative Expenses. We have excluded the effect of expenses related to the implementation of those portions of our strategic plan related to creating manufacturing efficiencies, in calculating our non-GAAP Adjusted EBITDA measure. We incurred expenses in connection with executing on these initiatives which we would not otherwise incur in periods presented as part of our continuing operations. We expect to incur related expenses for the next twelve to eighteen months.

Stock-based Compensation Expense. We have excluded the effect of stock-based compensation expense in calculating our non-GAAP Adjusted EBITDA measure. We record non-cash compensation expense related to grants of options for executives, employees and consultants, and grants of restricted shares to our board. Depending upon the size, timing and the terms of the grants, the non-cash compensation expense may vary significantly but will recur in future periods.

LIQUIDITY AND CAPITAL RESOURCES

Our principal source of liquidity is our cash of $27.3 million as of December 31, 2020, which includes the net proceeds from the 2020 capital raise totaling $26.6 million. In response to concerns about the potential impact of COVID-19, the Company elected to draw $3.5 million during the three months ended June 30, 2020, the full amount available on its line of credit, and paid it back during the three months ended September 30, 2020. Our principal source of operating cash inflows is from sales of our products to customers. Our principal cash outflows relate to the purchase and production of inventory, related costs, selling, general and administrative expenses. In 2020, the Company also purchased 683,271 shares of its common stock outstanding for $3.5 million under its stock repurchase program, pursuant to which the Company may purchase up to $10.0 million of its outstanding common stock through December 31, 2021.

Cash Flows

The following table summarizes our cash flows:

Net cash (used in)/provided by operating activities $ (743,323 ) $ 320,620

Net cash (used in)/provided by investing activities $ (1,036,152 ) $ 1,310,209

Operating Activities

Net cash used in operating activities of $0.7 million for the year ended December 31, 2020 was mostly attributable to non-cash charges for stock-based compensation and litigation settlement expense of $2.9 million, and an increase in accrued expenses and accrued payroll of $1.4 million, driven by the litigation settlement with EMED and customer rebates. Further adding to the increase was an increase in depreciation and amortization of $0.4 million and a decrease in accounts receivable of $0.7 million due to timing of collections. Offsetting these were primarily working capital changes which include an increase in inventory of $4.4 million as we built inventory to keep pace with sales growth and to ensure timely order fulfillment as we transition manufacturing to Command, an increase in prepaid expenses and other assets of $0.4 million relating to increased insurance premiums, and a decrease in accrued tax liability of $0.2 million resulting from book to tax differences related to stock option expense.

Net cash provided by operating activities of $0.3 million for the year ended December 31, 2019 resulted from non-cash charges for stock-based compensation of $1.2 million, depreciation and amortization of long-lived tangible and intangible assets of $0.3 million, as well as increases in accrued expenses of $0.6 million primarily due to bonus, rebate and legal accruals and an increase in accrued taxes of $0.2 million. Partially offsetting these were higher accounts receivable of $1.8 million, increased inventory of $0.3 million as we build stock to keep pace with sales growth, as well as severance payments paid this year against last year’s accrual and increases in prepaids of $0.1 million related to directors’ and officers’ insurance.

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Investing Activities

Our net cash used in investing activities of $1.0 million for the year ended December 31, 2020, was primarily for capital expenditures for research and development and strategic initiatives. Our net cash provided by investing activities of $1.3 million for the year ended December 31, 2019, was mostly the result of the maturation of a certificate of deposit for $1.5 million and the sale of the house the Company owned for $0.2 million, offset by capital expenditures of $0.2 million and patent applications and maintenance of existing applications of $0.2 million.

Financing Activities

The $23.2 million provided by financing activities for the year ended December 31, 2020 is from the $26.6 million capital raise, net of expenses, and $0.1 million from options exercised, offset against the repurchase of the Company’s common stock outstanding of $3.5 million. The $0.5 million provided by financing activities for the year ended December 31, 2019 was a result of warrants and options exercised during the period.

See “NOTE 11 — DEBT OBLIGATIONS” for further detail regarding the promissory note and loan agreement, and “NOTE 12 — EQUITY” regarding the equity offering in the accompanying “Notes to Financial Statements” appearing in this Annual Report on Form 10-K. Also, see “NOTE 5 — STOCK-BASED COMPENSATION” for further detail regarding the EMED settlement.

We believe that as of December 31, 2020, cash on hand and cash expected to be generated from future operating activities will be sufficient to fund our operations, including further research and development and capital expenditures, for the next 12 months.

Debt and Borrowing Capacity

Refer to “NOTE 11 — DEBT OBLIGATIONS” in the accompanying “Notes to Financial Statements” appearing in this Annual Report on Form 10-K for further details regarding debt.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

Lease Commitments

We currently rent a masonry and steel frame building erected on 3.27 acres of land located at 24 Carpenter Road, Chester, New York 10918. This facility is used as our headquarters and for our general operations.

On February 28, 2019, we completed year twenty of a twenty-year lease. On November 14, 2017, we executed a lease extension, which calls for six-month extensions beginning March 1, 2019 with the option to renew six times. The Company has exercised four of the six additional renewal options through August 31, 2021. In January 2021, the Company exercised the remaining two renewal options, extending the lease through August 31, 2022.

We believe our current facilities are suitable and adequate for our current business operations. We continue to seek another location with more square footage to provide us room for growth. In addition to the increased costs of occupying a larger space, we expect to incur additional costs in connection with construction and FDA compliance with respect to the new location.

Refer to “NOTE 6 – LEASES” in the accompanying “Notes to Financial Statements” appearing in this Annual Report on Form 10-K for further details regarding our operating and finance leases.

SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles of the United States (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified some of our more critical accounting estimates below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see “NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the accompanying “Notes to Financial Statements” appearing in this

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Annual Report on Form 10-K. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.

Revenue Recognition

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We adopted this ASU effective January 1, 2018 on a full retrospective basis. Adoption of this standard did not result in significant changes to our accounting policies, business processes, systems or controls, or have a material impact on our financial position, results of operations and cash flows or related disclosures. As such, prior period financial statements were not recast.

The Company’s revenues result from the sale of assembled products. 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 sales.

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.

Provisions for distributor pricing and annual 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 annual growth target will be achieved. Rebates are provided to distributors for the difference in selling price to distributor and pricing specified to select customers.

The Company established an allowance for charging off uncollectible trade accounts receivable that have both of the following characteristics: (a) They have a contractual maturity of one year or less, (b) They arose from the sale of goods or services.

Inventory

Inventories of raw materials are stated at the lower of standard cost, which approximates average cost, or market value including allocable overhead. Work-in-process and finished goods are stated at the lower of standard cost or market value and include direct labor and allocable overhead.

We maintain reserves for excess and obsolete inventory resulting from the potential inability to sell certain products at prices in excess of current carrying costs. We make estimates regarding the future recoverability of the costs of these products and record provisions based on historical experience, expiration of sterilization dates and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write downs may be required, which could unfavorably affect future operating results.

ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED

Refer to “NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the accompanying “Notes to Financial Statements” appearing in this Annual Report on Form 10-K.

ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

Refer to “NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the accompanying “Notes to Financial Statements” appearing in this Annual Report on Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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REPRO MED SYSTEMS, INC.

INDEX TO FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm 34

Financial Statements 35

Statements of Operations for the years ended December 31, 2020 and 2019 37

Statements of Stockholders’ Equity as of December 31, 2020 and 2019 38

Statements of Cash Flows for the years ended December 31, 2020 and 2019 39

Notes to Financial Statements 40

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Repro Med Systems, Inc.

Chester, New York

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Repro Med Systems, Inc. (the “Company”) as of December 31, 2020 and 2019, the related statements of operations, stockholders’ equity, and cash flows for years then ended, and the related notes (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ McGrail Merkel Quinn & Associates, P.C.

We have served as the Company’s auditor since 2014.

Scranton, Pennsylvania

March 23, 2021

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REPRO MED SYSTEMS, INC.

BALANCE SHEETS

December 31, December 31,

ASSETS

CURRENT ASSETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES

Accrued tax liability — 204,572

Finance lease liability – current 2,646 5,296

Finance lease liability, net of current portion — 2,646

Operating lease liability, net of current portion 95,553 236,846

Commitments and contingencies (Refer to Note 9)

STOCKHOLDERS’ EQUITY

See accompanying Notes to Financial Statements.

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REPRO MED SYSTEMS, INC.

STATEMENTS OF OPERATIONS

For the Years Ended December 31,

OPERATING EXPENSES

Non-Operating Income

Gain/(Loss) on foreign currency exchange 1,536 (17,754 )

NET (LOSS)/INCOME PER SHARE

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

See accompanying Notes to Financial Statements.

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REPRO MED SYSTEMS, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

Additional Total

Common Stock Paid-in Retained Treasury Stockholders’

Shares Amount Capital Earnings Stock Equity

Compensation expense related to stock options — — 888,319 — — 888,319

Compensation expense related to stock options — — 1,377,772 — — 1,377,772

See accompanying Notes to Financial Statements.

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REPRO MED SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

For the Years Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES

Stock-based litigation settlement expense 1,285,102 —

Gain on disposal of fixed assets (16,591 ) (47,830 )

Deferred capital gain – building lease — (3,763 )

Provision for doubtful accounts (8,176 ) (4,855 )

Abandonment of intangible assets 41,919 —

Changes in operating assets and liabilities:

Increase in prepaid expenses and other assets (420,614 ) (140,805 )

Increase/(Decrease) in accrued payroll and related taxes 96,865 (231,449 )

(Decrease)/Increase in accrued tax liability (204,572 ) 187,964

NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES (743,323 ) 320,620

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from certificates of deposit — 1,517,927

Proceeds from disposal of property and equipment 25,000 217,821

NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (1,036,152 ) 1,310,209

CASH FLOWS FROM FINANCING ACTIVITIES

Purchase of treasury stock (3,499,358 ) —

Borrowings from indebtedness 4,976,508 —

Payments on indebtedness (4,976,508 ) —

Payments on finance lease liability (5,296 ) (4,783 )

Payment for cancelled shares — (2,820 )

Supplemental Information

Cash paid during the years for:

Schedule of Non-Cash Investing and Financing Activities:

Non-cash equity issuance for the EMED Settlement $ 938,094 $ —

See accompanying Notes to Financial Statements.

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REPRO MED SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

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

NATURE OF OPERATIONS

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

BASIS OF PRESENTATION

We prepare our financial statements and accompanying notes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain prior year amounts have been reclassified to conform to the current year presentation in our Financial Statements.

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. The Company holds cash in excess of $250,000 at its depository, which exceeds the FDIC insurance limits and is, therefore, uninsured.

CERTIFICATES OF DEPOSIT

The certificate of deposit was recorded at cost plus accrued interest. The certificate of deposit earned interest at a rate of 1.73% and matured in May 2019.

INVENTORY

INTANGIBLE ASSETS

Certain of our identifiable intangible assets, including patents and trademarks, are amortized using the straight-line method over their estimated useful lives which range from 6 to 20 years. All of our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Our management is responsible for determining if impairment exists and considers various factors when making these determinations. Amortization expense related to intangible assets for the years ended December 31, 2020 and 2019 was $62,177 and $49,388, respectively.

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The estimated amortization expense for the succeeding years for the intangible assets is approximately:

Year Ending December 31,

Total amortization expense $ 843,587

INCOME TAXES

Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences.

The Company believes that it has no uncertain tax positions requiring disclosure or adjustment.

PROPERTY AND EQUIPMENT

Property and equipment are stated at original acquisition cost less accumulated depreciation. Additions and improvements are capitalized which increase the value or extend the life of an asset, while maintenance and repair costs are expensed as incurred. When assets are retired or otherwise disposed, the cost and related accumulated depreciation or amortization is removed from the respective accounts and any resulting gain or loss is included in income. Depreciation and amortization are calculated on the straight-line basis over the estimated useful lives of the assets which generally range from 3-10 years for furniture and office equipment, 3-12 years for manufacturing equipment and tooling and shorter of the lease term or their estimated useful lives for leasehold improvements. Depreciation and amortization expense related to property and equipment for the years ended December 31, 2020 and 2019 was $356,418 and $290,841, respectively.

STOCK-BASED COMPENSATION

The Company maintains a stock option plan under which it grants stock options to certain executives, key employees and consultants. The fair value of each 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.

NET INCOME PER COMMON SHARE

Basic earnings per share are computed on the weighted average of common shares outstanding during each year. Diluted earnings per share includes only an increase in the weighted average shares by the common shares issuable upon exercise of stock options. See “NOTE 5 — STOCK-BASED COMPENSATION” for further detail.

Years Ended

Weighted Average Outstanding Shares:

Option shares includable — (a) 283,236

Net (loss)/income per share

__________

(a) Option shares of 239,935 were not included as the impact is anti-dilutive.

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USE OF ESTIMATES IN THE FINANCIAL STATEMENTS

The preparation of financial statements in conformity with 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, valuation allowances, inventory valuation, and accruals.

REVENUE RECOGNITION

The following table summarizes net sales by geography for the years ended December 31, 2020 and 2019:

Years Ended December 31,

Sales

LEASES

In February 2016, the FASB issued a standard related to leases to increase transparency and comparability

among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance

sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by the Company

for those leases classified as operating leases under current GAAP, while our accounting for capital leases remains substantially

unchanged. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to

assess the amount, timing, and uncertainty of cash flows arising from leases. The standard became effective for us on January

1, 2019. The standard had a material impact on our balance sheets but did not have a material impact on our statements of

operations. See “NOTE 6 — LEASES” for further detail.

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ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820 based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this ASU. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company adopted this standard on January 1, 2020 and it had no impact on our financial statement disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, for all entities. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this new accounting guidance on January 1, 2020, on a prospective basis. The implementation of this standard did not have a material impact on the Company’s operating results, cash flows, financial condition or related disclosures.

ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing several exceptions including the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The implementation of this standard is not expected to have a material impact on the Company’s operating results, cash flows, financial condition or related disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform, which provided elective amendments for entities that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments may be applied to impacted contracts and hedges prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance will have on its financial statements.

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.

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FAIR VALUE MEASUREMENTS

Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:

• Level 1 – Quoted prices in active markets for identical assets or liabilities.

The carrying amounts of cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses are considered to be representative of their fair values because of the short-term nature of those instruments. There were no transfers between levels in the fair value hierarchy during the year ended December 31, 2020.

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. No impairment losses have been recorded through December 31, 2020.

NOTE 2 — INVENTORY

Inventory consists of:

Less: reserve for obsolete inventory (11,597 ) (28,490 )

NOTE 3 — PROPERTY AND EQUIPMENT

Property and equipment consists of the following at:

Less: accumulated depreciation and amortization (1,985,618 ) (1,819,239 )

On May 21, 2019, the Company sold the house it owned for $0.2 million.

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NOTE 4 — RELATED PARTY TRANSACTIONS

BUILDING LEASE

Mark Pastreich, a former director through April 2019, is a principal in the entity that owns the building leased by us for our corporate headquarters and manufacturing facility at 24 Carpenter Road, Chester, New York 10918. On February 28, 2019, we completed year twenty of a twenty-year lease with monthly lease payments of $11,042. On November 14, 2017, we executed a lease extension, which calls for six-month extensions beginning March 1, 2019 with the option to renew six times at a monthly lease amount of $12,088. The Company exercised four of the six additional renewal options for September 1, 2019 through August 31, 2021.

The lease payments were $145,056 and $142,964 for the years ended December 31, 2020 and 2019, respectively. The Company also paid property taxes in the amount of $52,092 and $52,195 for years ended December 31, 2020 and 2019, respectively.

NOTE 5 — STOCK-BASED COMPENSATION

On June 29, 2016, the Board of Directors amended the Company’s 2015 Stock Option Plan (as amended, the “Plan”) authorizing the Company to grant awards to certain executives, key employees, and consultants under the Plan, which was approved by shareholders at the Annual Meeting of Shareholders held on September 6, 2016. The total number of shares of Common Stock, with respect to which awards may be granted pursuant to the Plan, may not exceed 6,000,000 pursuant to an amendment to the Plan approved by shareholders on April 23, 2019, at the 2019 Annual Meeting of Shareholders.

On May 20, 2020, the Company entered into a Settlement Agreement with EMED Technologies Corporation (“EMED”) to settle all claims in connection with all pending litigation matters between them (the “Claims”) as described in “NOTE 9 — COMMITMENTS AND CONTINGENCIES.” Pursuant to the Settlement Agreement, the Company issued to EMED (i) 95,238 restricted stock units, which vested on May 21, 2020 and 95,238 restricted stock units vesting on January 1, 2021, and (ii) an option to purchase up to 400,000 shares of the Company’s common stock at an exercise price of $11.21 per share prior to February 1, 2021, which can be settled in cash in lieu of common stock at the Company’s sole discretion, provided that the number of shares of common stock and/or amount of cash paid by the Company upon exercise will be capped at a value of $16.21 per share. The option was recorded at $347,008, the estimated fair value of the option using the Black-Scholes option pricing model with a volatility rate of 52.68% and a risk-free rate of 0.17%. The Settlement Agreement includes mutual releases and covenants not to sue for any claim arising before May 20, 2020 and the Company covenants not to challenge any EMED patents that were the subject of the Claims unless EMED asserts them in the future against Company products. This was a non-cash settlement from which we recognized expense in the amount of $2.2 million in the second quarter of 2020.

Effective January 1, 2021, each non-employee director of the Company (other than the Chairman of the Board) and Board advisor are eligible to receive of $75,000 annually, to be paid quarterly $12,500 in cash and $6,250 in common stock. In addition, for chairing the Audit Committee, Compensation Committee and the Nominating and Corporate Governance Committee, each non-employee director is eligible to receive annually $15,000, $11,500 and $7,500 respectively, to be paid quarterly in cash and subject to proration for partial quarter service. The Chairman of the Board is eligible to receive $100,000 annually, to be paid quarterly $12,500 in cash and $12,500 in common stock.

Prior to January 1, 2021, each non-employee director of the Company was eligible to receive $50,000

annually (effective January 1, 2019), plus $10,000 for chairing a Board committee (effective February 20, 2019), all to be

paid quarterly half in cash and half in common stock. The Chairman of the Board was eligible to receive an additional

$50,000 annually (effective October 1, 2019), all to be paid in common stock. All payments were pro-rated for partial

service. The Company issued an aggregate 32,181 shares of common stock to its non-employee directors during the year

ended December 31, 2020, respectively.

Pursuant to Daniel S. Goldberger’s employment agreement dated October 12, 2018, on February 1, 2019, when Donald B. Pettigrew was appointed to President and Chief Executive Officer, Mr. Goldberger was awarded a performance bonus in the amount of $270,000 to be paid half in cash and half in stock. The number of shares that were issued totaled 90,604 and was based upon the closing price of the common stock of the Company on February 1, 2019, as reported by the OTCQX. These shares were issued on April 3, 2019.

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2015 STOCK OPTION PLAN, as amended

Time-Based Stock Options

The per share weighted average fair value of stock options granted during the years ended December 31, 2020 and December 31, 2019 was $6.53 and $1.33, respectively. The fair value of each award is estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the years ended December 31, 2020 and December 31, 2019. Historical information was the primary basis for the selection of the expected volatility, expected dividend yield and the expected lives of the options. The risk-free interest rate was selected based upon yields of the U.S. Treasury issues with a term equal to the expected life of the option being valued. These assumptions are subjective and generally require significant analysis and judgment to develop. We have recognized tax benefits associated with stock-based compensation of $62,393 and $61,333 for the years ended December 31, 2020 and 2019, respectively.

Weighted-average volatility — —

Expected dividends — —

Expected term (in years) 10 Years 10 Years

The following table summarizes the status of the Company’s stock option plan:

Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price

Total stock-based compensation expense, net of forfeitures, for stock option awards totaled $874,869 and $594,956 for the years ended December 31, 2020 and 2019, respectively. Cash received from option exercises for the years ended December 31, 2020 and 2019 was $95,880 and $58,900, respectively.

The weighted-average grant-date fair value of options granted during the years ended December 31, 2020, and 2019, was $2,350,264 and $2,202,678, respectively. The total intrinsic value of options exercised during the years ended December 31, 2020 and 2019, was $397,962 and $58,900, respectively.

The following table presents information pertaining to options outstanding as of December 31, 2020:

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As of December 31, 2020, there was $3,376,990 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 48 months. The total fair value of shares vested was $803,171 and $539,553 at December 31, 2020, and December 31, 2019, respectively.

Performance-Based Stock Options

The per share weighted average fair value of stock options granted during the years ended December 31, 2020, and 2019, was zero and $1.16, respectively. The fair value of each award is estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the years ended December 31, 2020 and December 31, 2019. Historical information was the primary basis for the selection of the expected volatility, expected dividend yield and the expected lives of the options. The risk-free interest rate was selected based upon yields of the U.S. Treasury issues with a term equal to the expected life of the option being valued.

December 31,

Dividend yield — 0.00%

Expected Volatility — 58.9%

Weighted-average volatility — —

Expected dividends — —

Expected term (in years) — 10 Years

Risk-free rate — 2.07%

The following table summarizes the status of the Plan with respect to performance-based stock options:

December 31,

Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price

Exercised — $ — — $ —

Forfeited — $ — — $ —

Weighted average fair value of options granted during the period — $ — — $ 1.16

Total performance stock-based compensation expense totaled $502,904 and $293,363 for the years ended December 2020 and 2019, respectively.

The weighted-average grant-date fair value of options granted during the years ended December 31, 2020 and 2019 was zero and $1,162,561, respectively.

The following table presents information pertaining to performance-based options outstanding as of December 31, 2020:

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As of December 31, 2020, there was $366,294 of total unrecognized compensation cost related to

non-vested performance share option-based compensation arrangements granted under the Plan. That cost is expected to be

recognized over a weighted-average period of 25 months. The total fair value of shares vested as of December 31, 2020 and

2019 was $387,520 and zero, respectively.

NOTE 6 — LEASES

We have finance and operating leases for our corporate office and certain office and computer equipment. Our leases have remaining lease terms of 1 to 3 years, some of which include options to extend the leases annually and some with options to terminate the leases within 1 year.

At contract inception, we evaluate whether an arrangement is or contains a lease for which we are the lessee (that is, arrangements which provide us with the right to control a physical asset for a period of time). Operating leases are accounted for on the balance sheets with ROU assets being recognized in “Operating lease right-of-use assets” and lease liabilities recognized in “Operating lease liability – current” and “Operating lease liability, net of current portion.” Finance leases are accounted for on the balance sheets recognized in “Property and equipment, net” and lease liabilities recognized in “Finance lease liability – current” and “Finance lease liability, net of current portion.”

Operating lease expenses are recognized on a straight-line basis over the lease term. With respect to finance leases, amortization of the ROU asset is presented separately from interest expense related to the finance lease liability.

We have elected to combine lease and non-lease components for all lease contracts where we are the lessee. Additionally, for arrangements with lease terms of 12 months or less, we do not recognize ROU assets and lease liabilities and lease payments are recognized on a straight-line basis over the lease term with variable lease payments recognized in the period in which the obligation is incurred. ROU assets are measured for impairment when a triggering event occurs.

The components of lease expense were as follows:

Years Ended

December 31,

Finance lease cost:

Amortization of right-of-use assets $ 5,302 $ 4,837

Interest on lease liabilities 237 239

Supplemental cash flow information related to leases was as follows:

Years Ended

December 31,

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 136,888 $ 110,120

Financing cash flows from finance leases $ 5,296 $ 4,783

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Supplemental balance sheet information related to leases was as follows:

Operating Leases

Operating lease liability, net of current portion 95,553 236,846

Finance Leases

Property and equipment, net $ 2,586 $ 7,888

Finance lease liability – current 2,646 5,296

Finance lease liability, net of current portion — 2,646

Total finance lease liabilities $ 2,646 $ 7,942

Weighted Average Remaining Lease Term

Operating leases 1.4 Years 2.4 Years

Finance leases 0.7 Years 1.3 Years

Weighted Average Discount Rate

Maturities of lease liabilities are as follows:

Year Ending December 31, Operating Leases Finance Leases

Thereafter — —

Less: imputed interest (9,886 ) (59 )

NOTE 7 — FEDERAL AND STATE INCOME TAXES

Income tax expense consisted of the following:

State income tax:

Federal income tax:

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The reconciliation of income taxes shown in the financial statements and amounts computed by applying the Federal expected tax rate of 21% for year 2020 and 2019 is as follows:

Income taxes computed at the federal statutory rate $ (250,795 ) $ 146,248

The significant components of deferred income tax assets, net are as follows:

Allowance for bad debts and other 21,330 504

Our U.S. federal and state income tax returns remain open to examination for the tax years 2017 through 2020.

NOTE 8 — MAJOR CUSTOMERS

For the years ended December 31, 2020 and December 31, 2019, approximately 51% and 53%, respectively, of the Company’s net product revenues were derived from one major customer. As of December 31, 2020 and December 31, 2019, accounts receivable due from this customer was $1.4 million and $1.9 million, respectively.

The largest customer in both years is a domestic medical products and supplies distributor. Although, a number of larger infusion customers have elected to consolidate their purchases through one or more distributors in recent years, we continue to maintain strong direct relationships with them. We do not believe that their continued purchase of FREEDOM System products and related supplies is contingent upon the distributor.

NOTE 9 — 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. Except as described below, KORU Medical is not presently a party to any litigation or other legal proceeding that is believed to be material to its financial condition.

Litigation

From 2013 until May 2020, we were involved in several lawsuits with our principal competitor, EMED. EMED alleged that our needle sets infringed various patents controlled by EMED. Certain of these lawsuits also alleged antitrust violations, unfair business practices, and various other business tort claims. On May 26, 2020, the parties announced the settlement of all of the litigation between KORU Medical and EMED. The settlement agreement provides KORU Medical with freedom to operate under EMED’s existing patent portfolio, dismissal of all litigation with prejudice (including the claims against Andrew Sealfon, our former President and Chief Executive Officer), and an equity payment by KORU Medical to EMED.

Refer to Form 10-Q for the quarterly period ended June 30, 2020 regarding the dismissed case with our principal competitor, EMED.

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OTHER

On November 11, 2020, the Company entered into a Manufacturing and Supply Agreement with Command Medical Products, Inc. (“Command”), pursuant to which Command has agreed to manufacture and supply the Company’s subassemblies, needle sets and tubing products pursuant to the Company’s specifications and purchase orders. The first binding purchase order pursuant to the Manufacturing and Supply Agreement was made on November 17, 2020 (the “Effective Date”).

The Manufacturing and Supply Agreement provides for a term of five years from the Effective Date. Either party may terminate the Manufacturing and Supply Agreement upon a material breach by the other Party that has not been cured within 90 days, upon the bankruptcy or insolvency of the other Party or as expressly set forth elsewhere in the Agreement. If the Company terminates the Manufacturing and Supply Agreement other than for those reasons within the first three years from the Effective Date, the Company is obligated to pay an early termination fee to Command.

The Manufacturing and Supply Agreement also includes customary provisions relating to, among other things, delivery, inspection procedures, warranties, quality management, business continuity plans, handling and transport, intellectual property, confidentiality and indemnification.

NOTE 10 — EMPLOYEE BENEFITS

We provide a safe harbor 401(k) plan for our employees that allows for employee elective contributions, Company matching contributions and discretionary profit-sharing contributions. Employee elective contributions are funded through voluntary payroll deductions. The Company makes safe harbor matching contributions in an amount equal to 100% of the employee’s contribution, not to exceed 3% of employee’s compensation plus 50% of employee’s pay contributed between 3% and 5% of employee’s compensation. Company matching expense for the years ended December 31, 2020 and December 31, 2019 was $156,789 and $118,632, respectively. The Company has not provided for a discretionary profit-sharing contribution.

NOTE 11 — DEBT OBLIGATIONS

On February 8, 2018, the Company issued a promissory note (the “Original Note”) to KeyBank National Association (“KeyBank”) in the amount of $1.5 million as a variable rate revolving line of credit loan due on demand with an interest rate of LIBOR plus 2.25%, collateralized with a certificate of deposit in the amount of $1.5 million. On September 25, 2018, KeyBank released the certificate of deposit as collateral for the loan and the Company executed a Commercial Security Agreement as collateral for the loan.

On April 14, 2020, the Company issued a promissory note to KeyBank in the aggregate principal amount of $3.5 million (the “Note”) as an extension of its line of credit, replacing its current line of credit agreement and Original Note. In response to concerns about the potential impact of COVID-19, the Company elected to draw the additional $2.0 million on April 23, 2020 available under the line, drawing the full amount available of $3.5 million on its line of credit. The Original Note was in the form of a variable rate revolving line of credit with an interest rate of LIBOR plus 2.25%. The $3.5 million Note is in the form of a variable rate non-disclosable revolving line of credit with an interest rate of Prime Rate announced by the Bank minus 0.75%. Interest is due monthly, and all principal and unpaid interest is due on June 1, 2021. The $3.5 million Note may be prepaid at any time prior to maturity with no prepayment penalties. The $3.5 million Note contains events of default and other provisions customary for a loan of this type. On July 29, 2020, the Company paid the balance of $3.5 million in full.

In connection with the Note, the Company entered into a Commercial Security Agreement with the Bank dated April 14, 2020 (the “Security Agreement”), pursuant to which the Company granted a security interest in substantially all assets of the Company to secure the obligations of the Company under the Note. The Security Agreement contains terms and conditions typical for the granting of security interests of this kind.

The Company had no amount outstanding against the line of credit as of December 31, 2020.

On April 20, 2020, the Company entered into a Loan Agreement with the Bank (the “PPP Loan Agreement”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), providing for a loan in the principal amount of $1,476,508 (the “PPP Loan”). The PPP Loan was funded on April 27, 2020. On May 13, 2020, the Company returned the funds it received.

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On April 27, 2020, the Company entered into a Progress Payment Loan and Security Agreement (“PPLSA”) and a Master Security Agreement (the “MSA”), each dated as of April 20, 2020, with Key Equipment Finance, a division of the Bank (“KEF”), to provide up to $2.5 million in financing for equipment purchases from third party vendors. The PPLSA allows the Company to make draws with KEF to make certain payments to the equipment suppliers prior to the commencement of periodic payments under a term loan. Each draw under the PPLSA will bear interest at a variable rate equal to the then-current Prime Rate and will be secured by the financed equipment under the MSA. At the end of each calendar quarter or year, the advances made under the PPLSA will be converted to term loans, subject to KEF’s approval of the equipment and certain other closing conditions being met. Once the draws under the PPLSA are converted into a term loan, each promissory note will bear interest at a fixed rate of 4.07% per annum, subject to adjustment based on KEF’s cost of funds, with principal and interest payable in 84 equal consecutive monthly installments. Each fixed rate installment promissory note may be prepaid, subject to a penalty if prepaid before the fifth anniversary of its issuance. As of December 31, 2020, the Company had no amount outstanding against the PPLSA.

NOTE 12 — EQUITY

On June 18, 2020, the Company entered into a Purchase Agreement with Piper Sandler & Co. and Canaccord Genuity LLC, as representatives of the several underwriters named therein (the “Underwriters”), pursuant to which the Company agreed to issue and sell 3,125,000 shares of its common stock. Under the terms of the Purchase Agreement, the Company granted to the Underwriters an option, exercisable for a period of 30 days, to purchase up to an additional 468,750 shares of the Company’s common stock, which the Underwriters exercised in full on June 19, 2020. The Underwriters purchased the shares pursuant to the Purchase Agreement, including the shares subject to the option, at a price of $7.52 per share. Proceeds to the Company, net of discounts, commissions, fees and expenses, were $26.6 million.

On November 16, 2020, the Company announced that its Board of Directors had authorized a stock repurchase program under which the Company may purchase up to $10.0 million of its outstanding common stock through December 31, 2021. As of December 31, 2020, the Company had purchased 683,271shares since inception of this plan.

NOTE 13 — SUBSEQUENT EVENT

On January 22, 2021, Donald B. Pettigrew, President and Chief Executive

Officer, resigned his employment effective immediately. Also, on January 22, 2021, James M. Beck, currently serving as a director,

was appointed as Chief Executive Officer on an interim basis. Mr. Beck has remained a director, and Robert Allen, also currently

a director, replaced Mr. Beck as Chairman of the Compensation Committee.

In connection with Mr. Pettigrew’s resignation, he entered into a Separation and General Release Agreement with the Company wherein the parties agreed that the Company will continue to pay Mr. Pettigrew his base salary and healthcare benefits for twelve months, and Mr. Pettigrew has forfeited all right to exercise his vested performance-based stock options. Mr. Pettigrew will have the right to exercise 1,000,000 of his non-qualified stock options for a period of 90 days. On February 16, 2021, Mr. Pettigrew exercised 1,000,000 shares of vested options at a strike price of $1.23 totaling $1,230,000 pursuant to his option agreements dated September 4, 2018 and January 22, 2021.

On February 5, 2021, the Company entered into an employment agreement dated as of January 22, 2021 with Mr. Beck, the Company’s interim Chief Executive Officer. The following is a summary of Mr. Beck’s employment agreement.

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On March 15, 2021, Linda Tharby entered into an employment agreement

with the Company providing for her appointment as President and Chief Executive Officer of KORU Medical Systems, effective April

12, 2021. Mr. Beck will resign from that position upon the appointment of Ms. Tharby, and will continue as a member of the Board

of Directors.

Pursuant to this agreement, Ms. Tharby will receive an annual base salary of $550,000 and be eligible to earn an annual bonus, paid 70% in cash and 30% in shares of the Company’s common stock, with a target of 80% of her base salary, based on achievement of objectives set in accordance with the Company’s management incentive compensation plan for executives, payable by March 15 of the following year.

Under the agreement, Ms. Tharby received non-qualified stock options pursuant to the Company’s 2015 Stock Option Plan, as amended, to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price of $3.875 per share, subject to vesting as follows, provided she is then employed by the Company: 25% on March 15, 2021 and 25% each twelve months thereafter.

In addition, Ms. Tharby will receive three restricted stock awards on April 12, 2021 as follows, each vesting subject to employment on the respective vesting date:

(1) 600,000 shares of common stock to vest vesting as follows: if

the Company’s Net Sales Growth (defined below) for any of the fiscal years ended December 31, 2022, 2023, 2024 or 2025 (each,

a “Target Year”) is at least the applicable Net Sales Target set forth on the schedule to the restricted stock award

agreement, then, on the applicable Vesting Date, a corresponding portion of the restricted stock award will vest as set forth on

such schedule. Additionally, if Net Sales Growth is less than any of the Net Sales Targets set forth in such schedule in any Target

Year (a “Miss Year”), vesting of the restricted stock award in the following Target Years (each such subsequent Target

Year, a “Catch-up Year”) shall be further subject to the following catch-up vesting provisions: if the Net Sales Growth

in the Miss Year(s) when averaged with the Net Sales in each Catch-up Year(s) equals or exceeds a Net Sales Target in any single

Miss Year that has not previously been obtained, then on the applicable Vesting Date, an additional portion of the Award shall

vest as if the applicable Net Sales Target had been met in the Miss Year(s). Notwithstanding the foregoing, the restricted stock

award shall automatically vest in full upon the Company maintaining, for a period of at least two consecutive fiscal quarters after

January 1, 2022, at least a specified run rate over the previous four fiscal quarters, as reported in the Company’s filings

pursuant to the Securities Exchange Act of 1934, as amended.

(2) 200,000 shares of common stock vesting 25% on April 12, 2022 and 25% on each twelve months thereafter.

(3) 200,000 shares of common stock, vesting as follows: (i) 50,000

shares on the first date on which the Company’s Market Capitalization for a period of 90 consecutive days has been, or there

has been a Change of Control (as defined in the employment agreement) of the Company with an enterprise value of, at least $500,000,000

but less than $600,000,000; (ii) 50,000 shares on the first date on which the Company’s Market Capitalization for a period

of 90 consecutive days has been, or there has been a Change of Control of the Company with an enterprise value of, at least $600,000,000

but less than $750,000,000; and (iii) 100,000 shares on the date on which the Company’s Market Capitalization for a period

of 90 consecutive days has been, or there has been a Change of Control of the Company with an enterprise value of, at least $750,000,000.

“Market Capitalization” shall be determined by (A) multiplying the number of shares reported as outstanding on the

cover of the Company’s most recent Form 10-K or 10-Q, as applicable, as filed with the Securities and Exchange Commission,

by (B) the Fair Market Value of the Common Stock (as defined in the Company’s 2015 Stock Option Plan, as amended) on each

day. Notwithstanding the foregoing, no portion of the restricted stock award shall vest on or following the fifth anniversary of

the award date.

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Upon termination of Ms. Tharby’s employment by the Company without “cause” or by Ms. Tharby for “good reason” (as defined in the employment agreement) within 3 months prior to or 12 months following a “change of control” (as defined in the employment agreement) of the Company, all equity awards pursuant to the employment agreement will become fully vested.

Should the Company terminate Ms. Tharby’s employment without “cause” or should she leave the Company for “good reason,” she will be eligible for a severance package comprised of (i) base salary for 12 months, calculated at the rate of her then base salary, to be paid in accordance with the Company’s normal payroll practices; (ii) her Annual Bonus as if earned for the year of termination; and (iii) if termination occurs on or after January 1, 2022, acceleration of her stock options and restricted stock award set forth under (2) above for the year of termination (i.e., 25% of total award), if not then vested. For the same period, the Company will also cover the cost of health insurance, which is continued by Ms. Tharby through COBRA election.

The employment agreement contains customary confidentiality and assignment of invention provisions and mutual non-disparagement covenant, as well as one-year non-competition and non-solicitation covenants. The Company has agreed to reimburse Ms. Tharby up to $12,500 in legal fees associated with the employment agreement.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of our management, including our principal executive officer or CEO, and principal financial officer or CFO, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2020. Based on that evaluation, our management, including our CEO and CFO, concluded that as of December 31, 2020, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer, and implemented in conjunction with management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles.

There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

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Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. This assessment was based on criteria for effective internal control over financial reporting described in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management determined that, as of December 31, 2020, the Company maintained effective internal control over financial reporting.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the year ended December 31, 2020 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Information regarding our executive officers required by Item 10 of Part III is set forth in Item 1 of Part I “Business — Executive Officers.” Information required by Item 10 of Part III regarding our directors and any material changes to the process by which security holders may recommend nominees to the Board of Directors is included in our Proxy Statement relating to our 2021 Annual Meeting of Shareholders, and is incorporated herein by reference. Information relating to our Code of Ethics and to compliance with Section 16(a) of the 1934 Act is set forth in our Proxy Statement relating to our 2021 Annual Meeting of Shareholders and is incorporated herein by reference. We intend to disclose amendments to our Code of Ethics, as well as waivers of the provisions thereof, on our website under the heading “Investors - Governance” at www.korumedical.com.

ITEM 11. EXECUTIVE COMPENSATION

Information required by Item 11 of Part III is included in our Proxy Statement relating to our 2021 Annual Meeting of Shareholders and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required by Item 12 of Part III is included in our Proxy Statement relating to our 2021 Annual Meeting of Shareholders and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by Item 13 of Part III is included in our Proxy Statement relating to our 2021 Annual Meeting of Shareholders and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by Item 14 of Part III is included in our Proxy Statement relating to our 2021 Annual Meeting of Shareholders and is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

All financial statement schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission of the schedule, or the required information is otherwise included.

The following exhibits are filed herewith or incorporated by reference as part of this Annual Report.

Exhibit No. Description

4.1 Description of Securities, (filed herewith).

10.5 Form of Non-Qualified Stock Option (filed herewith).

10.6 Form of Incentive Stock Option (filed herewith).

continued

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Exhibit No. Description

23.1 Consent of Independent Auditors, (filed herewith).

__________

* Denotes management compensatory agreement or arrangement.

ITEM 16. FORM 10-K SUMMARY

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 23, 2021.

REPRO MED SYSTEMS, INC.

/s/ James M. Beck

James M. Beck, Interim Chief Executive Officer

/s/ Karen Fisher

Karen Fisher, Chief Financial Officer and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 23, 2021.

/s/ R. John Fletcher

R. John Fletcher, Chairman of the Board

/s/ James M. Beck

James M. Beck, Director

/s/ Robert T. Allen

Robert T. Allen, Director

/s/ David Anderson

David Anderson, Director

/s/ Kathy S. Frommer

Kathy S. Frommer, Director

/s/ Daniel S. Goldberger

Daniel S. Goldberger, Director

/s/ Joseph M. Manko, Jr.

Joseph M. Manko, Jr., Director

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KRMD US Equity

KRMD · 10-K · period ended 2020-12-31

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

ITEM 16. FORM 10-K SUMMARY

KRMD US Equity☆

KRMD · 10-K · period ended 2020-12-31

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

ITEM 16. FORM 10-K SUMMARY

KRMD US Equity