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 develops, manufactures and markets proprietary portable and
innovative medical devices primarily for the subcutaneous drug delivery market as governed by the United States Food and Drug Administration
(the “FDA”) quality and regulatory system and international standards for quality system management.
Our revenues derive from three business sources: (i) domestic core, (ii)
international core, and (iii) novel therapies. Our domestic core and international core revenues consist of sales of our products
for the delivery of subcutaneous drugs that are FDA cleared for use with the Freedom Infusion System, with the primary use being for the
delivery for immunoglobulin to treat Primary Immunodeficiency Diseases (“PIDD”) and Chronic Inflammatory Demyelinating Polyneuropathy
(“CIDP”). Novel therapies consist of product revenues from our infusion system (syringe drivers, tubing and needles) for feasibility/clinical
trials (pre-clinical studies, Phase I, Phase II, Phase III) of biopharmaceutical companies in the drug development process as well as
non-recurring engineering services revenues (“NRE”) received from biopharmaceutical companies to ready or customize the FREEDOM
System for clinical and commercial use.
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The Company continued its transition of substantially all finished goods
manufacturing of its needle and tubing sets to Command Medical Products, a third-party contract manufacturing organization, which began
in 2021, and expects to complete the transition no later than the second quarter of 2023.
The Company entered into a lease commencing March 1, 2022 for a new corporate
headquarters and manufacturing facility located in Mahwah, NJ. During the quarter ended June 30, 2022, the Company completed the first
phase of the move, the headquarters and office staff to the new location, and expects to complete the move of manufacturing before the
end of the first quarter 2023.
The Company ended the 2022 fiscal year with $27.9 million in net revenues,
a 18.8% increase compared with $23.5 million in the same period last year driven by growth in all three of our business sources.
Gross profit, for the year ended December 31, 2022, was $15.4 million,
an increase of 11.6% from the same period last year, and stated as a percentage of net revenues was 55.1%, a decline from 58.6% in the prior
year period.
Operating expenses for the year ended December 31, 2022, were $26.2 million,
up from $20.8 million for the same period last year, driven primarily by research and development, and selling, general and administrative
for new hires to support commercialization, business development, quality, and regulatory capabilities.
RESULTS OF OPERATIONS
Year Ended December 31, 2022 compared to Year Ended December 31, 2021
Net Revenues
The following table summarizes our net revenues for the years ended December
31, 2022 and 2021:
Years Ended December 31, Change from Prior Year % of Net Revenues
Net Revenues
Total net revenues increased $4.4 million, or 18.8%, for the year
ended December 31, 2022, as compared with the same period last year. Double digit sales growth was achieved in our domestic core and
novel therapies businesses. Domestic core growth was primarily driven by increased volume attributed to SCIg market growth and new
label indications including prefill syringes and increases in average selling prices. Novel therapies sales grew by 329.8% for the
year ended 2022 related to services performed on an NRE innovation development agreement for a pharmaceutical customer and increases
in clinical trial product sales for several pharmaceutical customers. Sales growth in our international core business was driven by
volume growth in several EU markets compared with prior year.
Gross Profit
Our gross profit for the years ended December 31, 2022, and 2021 is as
follows:
Years Ended December 31, Change from Prior Year
Stated as a Percentage of Net Revenues 55.1% 58.6%
Gross profit increased $1.6 million or 11.6% for the year ended December
31, 2022, compared to the same period in 2021. This increase was driven by increased volume and an increased average selling price in
net revenues of $4.4 million as described above. Gross profit as a percent of sales decreased to 55.1% compared to 58.6% from the prior year.
The decline in the gross profit percent was primarily caused by higher manufacturing costs associated with labor and materials,
production rework, and scrap related to our manufacturing transition. Product mix had a negative impact in our domestic core business
and NRE service revenue mix contributed to a lower gross profit percent. Partially offsetting these declines was an increase in average
selling prices.
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Selling, general and administrative and Research and development
Our selling, general and administrative and research and development costs
for the years ended December 31, 2022, and 2021 are as follows:
Years Ended December 31, Change from Prior Year
Stated as a Percentage of Net Revenues 91.6% 86.6%
Selling, general and administrative expenses increased $2.7 million,
or 15.4%, during the year ended December 31, 2022 compared to the same period last year, primarily due to $2.5 million in
compensation and benefits related mostly to new hires in sales, quality and regulatory to support our strategic growth initiatives,
$0.8 million in executive severance, $0.4 million in building related expense, $0.3 million in travel related costs and $0.2 million
in stock compensation, which was partially offset by lower restructuring costs of $1.2 million, marketing research of $0.3 million,
and recruiting costs of $0.2 million.
Research and development expenses increased $2.5 million, or 100.4%, during
the year ended December 31, 2022 compared with the same period last year primarily due to $1.4 million in consulting spend primarily related
to new product development, $1.1 million in compensation and benefits for new hires to support product development for novel therapies
and $0.2 million in stock compensation, which was partially offset by $0.2 million in testing material expense.
Depreciation and amortization
For the year ended December 31, 2022, depreciation and amortization expense
increased $0.1 million, or 26.8%, compared with the same period last year due to investment in our new corporate office and manufacturing
site.
Net Loss
Years Ended December 31, Change from Prior Year
Stated as a Percentage of Net Revenues (31.0% ) (19.4% )
Our net loss for the year ended December 31, 2022 was $8.7 million compared
to net loss of $4.6 million for the same period last year driven by higher selling, general and administrative and research and development
expenses. The current year loss includes an income tax benefit of approximately $2.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is our cash on hand of $17.4 million
as of December 31, 2022. Our principal source of operating cash inflows is from sales of our products and NRE services to customers.
Our principal cash outflows relate to the purchase and production of inventory, funding of research and development, and selling, general
and administrative expenses. To develop new products, support future growth, achieve operating efficiencies, and maintain product quality,
we are continuing to invest in research and development, manufacturing technologies, facilities and equipment. Operating expenses for
the 2022 fiscal year were $26.1 million.
Our 2022 capital investments for manufacturing and leasehold improvements
for our new facility in Mahwah, NJ were $2.0 million, net of pre-approved financing arrangements and leasehold improvement credits totaling
$0.5 million and $0.2 million, respectively.
Our inventory position was $6.4 million at December 31, 2022, which reflected
an increase of $0.3 million from December 31, 2021. We expect to reduce our inventory position in 2023 following completion of the transition
of substantially all our manufacturing operations to Command, which we expect to be completed no later than the second quarter of 2023.
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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act
(the “CARES Act”) was signed into law. The CARES Act contains a provision known as the Employee Retention Credit (“ERC”),
a refundable payroll tax credit for qualified wages paid to retained full-time employees between March 13, 2020, and December 31, 2020.
The Consolidations Appropriations Act (CAA), signed into law on December 27, 2020, significantly modified and expanded the provisions
of the ERC to include wages paid in 2021. For 2021, the ERC provides employers a refundable federal tax credit equal to 70% of the first
$10,000 of qualified wages and benefits paid to retained employees between January 1, 2021, and December 31, 2021. Credits may be claimed
immediately by reducing payroll taxes sent to the Internal Revenue Service. To the extent that the credit exceeds employment withholdings,
the employer may request a refund of prior taxes paid. The Company determined that it qualified for this credit and anticipated utilizing
benefits under this act to aid its liquidity position and as a result recorded a receivable of $0.7 million as of December 31, 2021. As
of December 31, 2022, the credit has not been received.
We expect that our cash on hand, cash flows from operations and available
financing sources will be sufficient to meet our requirements at least through December 31, 2023. Continued execution on our longer-term
strategic plan may require the Company to take on additional debt or raise capital through issuance of equity, or a combination of both.
Our future capital requirements may vary from those currently planned and will depend on many factors, including our rate of sales growth,
the timing and extent of spending on various strategic initiatives including research and development, our international expansion, the
timing of new product introductions, market acceptance of our solutions, and overall economic conditions including inflation and the potential
impact of global supply imbalances on the global financial markets. To the extent that current and anticipated future sources of liquidity
are or are expected to be insufficient to fund our future business activities and requirements, we may be required to seek additional
equity or debt financing sooner. There can be no assurance the Company will be able to obtain the financing or raise the capital required
to fund its operations or planned expansion.
Cash Flows
The following table summarizes our cash flows:
Operating Activities
Net cash used in operating activities of $5.4 million for the year ended
December 31, 2022 was primarily due to the net loss of $8.7 million, working capital changes which included an increase in inventory of
$0.3 million, an increase in accrued expenses of $0.2 million, an increase in accrued payroll of $0.4 million and an increase in accounts
payable and other liabilities of $1.3 million. Further contributing were deferred tax assets of $2.0 million increased for book
to tax differences related to stock option expense. Offsetting these were primarily non-cash charges for stock-based compensation
of $3.1 million, and depreciation and amortization of $0.6 million.
Operating cash outflows were $4.3 million for the year ended December 31,
2021 and were mostly attributable to net loss adjusted for non-cash charges of $3.2 million, an increase in accounts receivable of $1.0
million due to higher sales in the fourth quarter of 2022 compared with prior year, an increase in other receivables of $0.7 million for
the ERC refund and an increase in prepaids of $0.8 million related to raw materials in transit, all partially offset by a decrease in
inventory of $0.7 million and an increase in accounts payable of $0.6 million.
Investing Activities
Net cash used in investing activities of $2.8 million for the year ending
December 31, 2022, was for capital expenditures for manufacturing and office equipment for our corporate office and manufacturing facilities
move.
Our net cash used in investing activities of $0.4 million for the year
ended December 31, 2021, was primarily for capital expenditures for manufacturing equipment and computers for new hires and replacement
of retired computers.
Financing Activities
The $0.3 million provided by financing activities for the year ended December
31, 2022, is from $0.4 million in option exercises offset by $0.08 million in net borrowings on our indebtedness for a note payable for
insurance premium financing and $0.05 million in net equipment financing.
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The $2.7 million provided by financing activities for the year ended December
31, 2021 is attributed to cash received for options exercised of $1.3 million, the issuance of common stock as settlement for litigation
of $0.9 million, and $0.5 million on borrowings from indebtedness.
We expect that our cash on hand, cash flows from operations, and our fully
available credit facility will be sufficient to meet our requirements at least through the next 12 months
See “NOTE 10 — DEBT OBLIGATIONS” for further detail regarding
the promissory note and loan agreement in the accompanying “Notes to Financial Statements” appearing in this Annual Report
on Form 10-K.
Debt and Borrowing Capacity
Refer to “NOTE 10 — 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 have finance and operating leases for our corporate office and certain
office and computer equipment. Our two operating leases have remaining lease terms of 9.7 years and 3 months, respectively. On September
29, 2022, we extended our existing lease at 24 Carpenter Road, in Chester NY, through March 31, 2023 with the same payment terms. We moved
our administrative offices in June 2022 from this building into 43,975 square feet of a building located at 100 Corporate Drive, Mahwah,
New Jersey. The new lease commenced on March 1, 2022 and expires August 31, 2032. Our two finance leases, one commenced in June and the
other in October, have remaining lease terms of 4.4 and 4.8 years, respectively.
Refer to “NOTE 5 – 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 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
Our revenues are derived from three business sources: (i) domestic core,
(ii) international core, and (iii) novel therapies. Our core domestic and international revenues consist of sales of our syringe
drivers, tubing and needles (“Product Revenue”) for the delivery of subcutaneous drugs that are FDA cleared for use with the
FREEDOM Infusion System, with the primary delivery for immunoglobulin to treat PIDD and CIDP. Novel therapies consist of Product Revenue
for feasibility/clinical trials (pre-clinical studies, Phase I, Phase II, Phase III) of biopharmaceutical companies in the drug development
process as well as non-recurring engineering services (“NRE”) revenues (including testing and registration services) received
from biopharmaceutical companies to ready or customize the FREEDOM System for clinical and commercial use.
For Product Revenues, 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.
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Rebates are provided to distributors for the difference in selling price
to distributor and pricing specified to select customers. In addition, rebates are provided to customers for meeting growth targets.
Provisions for both distributor pricing and customer growth rebates are variable consideration and are recorded as a reduction of
revenue in the same period the related sales are recorded or when it is probable the growth target will be achieved.
Our novel therapies revenues can fluctuate and may not be consistent from
period to period. Engineering work performed on our product may be specialized and tailored to the specific needs of each independent
clinical trial and not uniform in nature. The clinical trial size and scope of protocols may also range greatly from customer to customer,
and there is no expectation of repeat customers on a consistent basis compared to our core business. We recognize NRE revenue under an
input method, which recognizes revenue on the basis of our efforts or inputs (for example, resources consumed, labor hours expended, costs
incurred, or time elapsed) to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of
that performance obligation (ie completion milestone). The input method that we use is based on costs incurred.
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
KORU MEDICAL SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 256) 30
Financial Statements
Statements of Operations for the years ended December 31, 2022 and 2021 32
Statements of Stockholders’ Equity as of December 31, 2022 and 2021 33
Statements of Cash Flows for the years ended December 31, 2022 and 2021 34
Notes to Financial Statements 35
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Index to Financial Statements
Report of Independent Registered Public Accounting
Firm
To the Shareholders and the Board of Directors of
KORU Medical Systems, Inc.
Mahwah, New Jersey
Opinion on the Financial Statements
We have audited the accompanying balance sheets of
KORU Medical Systems, Inc. (the Company) as of December 31, 2022 and 2021, the related statements of operations, stockholders’ equity
and cash flows for the years then ended, and the related notes to the financial statements (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,
2022 and 2021, 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 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.
Critical Audit Matters
The critical audit matters communicated below are
matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the
audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions
on the critical audit matters or on the accounts or disclosures to which they relate.
Grant of Stock Options
Description of the Matter:
As discussed in Note 4 to the financial statements,
the Company granted 920,000 options to purchase shares of its common stock with 10-year terms and a grant-date fair value of $1,826,643
to employees and consultants during the year ended December 31, 2022. Management is required to analyze the fair value of each option
granted and amortize it over its vesting period.
We identified the grant of the stock options as a
critical audit matter. Management’s estimates regarding the fair value of options result in the application of a high degree of
auditor judgment.
How We Addressed the Matter in Our Audit:
We obtained an understanding of the Company’s
processes and controls in place for determining the fair value of each granted option. We evaluated the option price model management
selected to determine the fair value, and analyzed the underlying data used to estimate the fair value of the awards. We also recalculated
the fair value of each option granted during the year.
/s/ McGrail Merkel Quinn & Associates, P.C.
We have served as the Company's auditor since 2014.
Scranton, Pennsylvania
March 8, 2023
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Index to Financial Statements
KORU MEDICAL SYSTEMS, INC.
BALANCE SHEETS
December 31, December 31,
ASSETS
CURRENT ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Finance lease liability – current 98,335 —
Finance lease liability, net current portion 394,283 —
Operating lease liability, net of current portion 3,653,257 —
Commitments and contingencies (Refer to Note 8)
STOCKHOLDERS’ EQUITY
See accompanying Notes to Financial Statements.
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Index to Financial Statements
KORU MEDICAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
OPERATING EXPENSES
Non-Operating Income
Loss on foreign currency exchange (39,874) (28,905 )
Gain on disposal of fixed assets — 1,009
NET LOSS PER SHARE
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
See accompanying Notes to Financial Statements.
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Index to Financial Statements
KORU MEDICAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
Additional Retained Total
Common Stock Paid-in Earnings Treasury Stockholders’
Shares Amount Capital /(Deficit) Stock Equity
Compensation expense related to stock options — — 2,049,041 — — 2,049,041
Compensation expense related to stock options — — 2,083,396 — — 2,083,396
See accompanying Notes to Financial Statements.
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Index to Financial Statements
KORU MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of fixed assets — (1,009 )
Changes in operating assets and liabilities:
Decrease/(Increase) in accounts receivable 34,002 (1,019,932 )
Decrease/(Increase) in prepaid expenses and other assets 28,776 (761,041 )
Increase/(Decrease) in accrued payroll and related taxes 381,796 (126,527 )
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property and equipment — 9,065
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issuance settlement of litigation — 938,094
Payments on finance lease liability (51,850 ) (2,646 )
Supplemental Information
Cash paid during the years for:
Income taxes $ — $ 1,903
Schedule of Non-Cash Operating, Investing and Financing Activities:
Issuance of common stock as settlement for litigation $ — $ 938,094
See accompanying Notes to Financial Statements.
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Index to Financial Statements
KORU MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF OPERATIONS
KORU MEDICAL SYSTEMS, INC. (the “Company,” “KORU Medical,”
“KORU,” “we,” “us” or “our”) develops, 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.
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.
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, 2022 and 2021 was $62,143 and
$63,830, respectively.
The estimated amortization expense for the succeeding
years for the intangible assets is approximately:
Schedule of amortization expense
Year Ending December 31,
Total amortization expense $ 787,182
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Index to Financial Statements
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, 2022
and 2021 was $524,994 and $399,300, respectively.
STOCK-BASED COMPENSATION
The Company maintains a stock option plan and omnibus equity incentive
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 under the non-employee director
compensation plan are recorded at the fair value of the shares at the grant date.
The Company has also issued shares of stock for director fees under its
omnibus equity incentive plan. Those shares of stock granted are recorded at the fair value of the shares at the grant date.
The Company issues restricted stock awards. Restricted stock awards are
equity classified and measured at the fair market value of the underlying stock at the grant date. The fair value of restricted stock
awards vesting at certain market capitalization thresholds were estimated on the date of grant using the Brownian Motion Monte Carlo lattice
model. The fair value of restricted stock awards with time-based vesting were estimated on the date of grant at the current stock price.
We recognize restricted stock expense using the straight-line attribution method over the requisite service period and account for forfeitures
as they occur.
NET LOSS 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 4 — STOCK-BASED COMPENSATION” for further detail.
Schedule of net income per common share
Years Ended
Weighted Average Outstanding Shares:
Option shares includable — (a) — (a)
Restricted stock includable — (b) — (b)
Net loss per share
__________
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Index to Financial Statements
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 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.
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.
The following table summarizes net revenues by geography for the years ended
December 31, 2022 and 2021:
Schedule of net revenues by geography
Years Ended December 31,
Net Revenues
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 5 — LEASES” for further detail.
ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED
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 Company adopted this standard on January 1, 2021,
and it had no impact on our financial statement disclosures.
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Index to Financial Statements
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.
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.
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,
2022.
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, 2022.
NOTE 2 — INVENTORY
Inventory consists of:
Less: reserve for obsolete inventory (60,118 ) (68,305 )
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Index to Financial Statements
NOTE 3 — PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
Schedule of property and equipment
Less: accumulated depreciation and amortization (2,794,403 ) (2,312,034 )
NOTE 4 — STOCK-BASED COMPENSATION
The Company has three equity incentive plans: the 2015 Stock Option Plan,
as amended (the “2015 Plan”), the 2021 Omnibus Equity Incentive Plan (the “2021 Plan”), and the Non-Employee Director
Compensation Plan. The Company has also issued restricted stock as employment inducement awards to its Chief Executive Officer.
As of December 31, 2022, there were options to purchase 2,560,000 shares
of the Company’s common stock outstanding to certain executives, key employees and consultants under the 2015 Plan, of which 445,000
were issued during the twelve months ended December 31, 2022. Additional options may be issued under the 2015 Plan as outstanding options
are forfeited, subject to a maximum 6,000,000 available for issuance under the 2015 Plan.
The 2021 Plan provides for the grant of up to 1,000,000 incentive stock
options, nonqualified stock options, stock awards, restricted stock awards, restricted stock units and/or stock appreciation rights to
employees, consultants and directors. During the twelve months ended December 31, 2022, there were issued 97,100 shares of common stock, as director compensation and 475,000 options to purchase shares of common stock as executive compensation under the 2021 Plan.
Effective January 1, 2021, each non-employee director of the Company (other
than the Chairman of the Board) and Board advisor were eligible to receive of $75,000 annually, to be paid quarterly $12,500 in cash and
$6,250 in common stock. 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. Effective May 18, 2021, each non-employee director of the Company (other than the Chairman of the Board)
and Board advisor are eligible to receive of $110,000 annually, to be paid quarterly $12,500 in cash and $15,000 in common stock. The
Chairman of the Board is eligible to receive $140,000 annually, to be paid quarterly $12,500 in cash and $22,500 in common stock. From
May 18, 2021 to May 6, 2022, non-employee director compensation was paid pursuant to the 2021 Plan. Since May 6, 2022, non-employee director
compensation has been paid pursuant to the Non-Employee Director Compensation Plan. All payments were and are pro-rated for partial service.
On April 12, 2021, pursuant to an employment agreement entered into on
March 15, 2021, with Linda Tharby, the Company’s President and Chief Executive Officer, the Company issued three restricted stock
awards for an aggregate 1,000,000 shares of common stock for an aggregate stock price of $3,310,000 and each vesting subject to employment
on the respective vesting date. These awards were issued as an inducement employment.
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, 2022, and December 31, 2021 was $1.98 and $2.85, 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, 2022, and December 31, 2021. 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. The following table summarizes the
assumptions used in determining fair value. These assumptions are subjective and generally require significant analysis and judgment to
develop. We have recognized tax benefits associated with stock-based compensation of $198,258 and $175,257 for the years ended December
31, 2022 and 2021, respectively.
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Index to Financial Statements
Schedule of time based stock options
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:
Schedule of status of time based stock options
Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price
Total stock-based compensation expense, net of forfeitures, for stock
option awards totaled $1,925,861
and $2,457,788
for the years ended December 31, 2022, and 2021, respectively. Net cash received from option exercises for the years ended
December 31, 2022, and 2021 was $406,623
and $1,261,251,
respectively. We have recognized tax benefits associated with options exercised of 103,319
and $665,700
for the years ended December 31, 2022 and 2021, respectively.
The weighted-average grant-date fair value of options granted during the
years ended December 31, 2022, and 2021, was $881,428 and $5,699,986, respectively. The total intrinsic value of options exercised
during the years ended December 31, 2022, and 2021, was $1,150,203 and $697,920, respectively.
The following table presents information pertaining to options outstanding
as of December 31, 2022:
Schedule of information pertaining to options outstanding
As of December 31, 2022, there was $4,299,070 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under the 2015 Plan. That cost is expected to be recognized
over a weighted-average period of 45 months. The total fair value of shares vested was $2,703,002 and $1,923,179 at December 31,
2022, and December 31, 2021, respectively.
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Index to Financial Statements
2021 STOCK OPTION PLAN, as amended
Time Based Stock Options
The per share weighted average fair value of stock options granted during