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 commercializes innovative patient-centric

large volume subcutaneous solutions 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 (which

consists of US and Canada), (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 delivery for immunoglobulin to treat Primary Immunodeficiency Diseases (“PIDD”) and Chronic Inflammatory

Demyelinating Polyneuropathy (“CIDP”). Novel therapies revenues 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.

The Company completed 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 also

provides subassemblies for all of the Company’s products, in 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 completed the move of its manufacturing facility at the

end of the first quarter 2023.

The Company ended the 2023 fiscal year with $28.5 million in net revenues,

a 2.2% increase compared with $27.9 million in the same period last year driven by volume growth in our core domestic and international

business of 5.9% and 10.4% respectively, offset by a 41.6% decline in our novel therapies business.

Gross profit, for the year ended December 31, 2023, was $16.7 million,

an increase of 8.7% or $1.3 million from the same period last year, and stated as a percentage of net revenues was 58.6%, an increase

from 55.1% in the prior year.

Operating expenses for the year ended December 31, 2023, were $27 million,

up from $26.1 million for the same period last year, the increase was driven primarily by research and development and depreciation, partially

offset by selling, general and administrative expenses.

RESULTS OF OPERATIONS

Year Ended December 31, 2023 compared to Year Ended December 31, 2022

Net Revenues

The following table summarizes our net revenues for the years ended December

31, 2023 and 2022:

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

Net Revenues

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Total net revenues increased $0.6 million, or 2.2%, for the year ended

December 31, 2023, as compared with the same period last year.

Domestic core growth of 5.9% was primarily driven

by volume growth in pumps and consumables attributed to overall SCIG market growth and new account share gains. International core growth

of 10.4% was driven by increased volume across several EU markets and the entry into multiple new geographic markets. Novel therapies

net revenues declined by 41.6% driven primarily by lower NRE revenue of $0.9 million and fewer clinical trial supply shipments of $0.2

million than in the prior year.

Gross Profit

Our gross profit for the years ended December 31, 2023, and 2022 is as

follows:

Years Ended December 31, Change from Prior Year

Stated as a Percentage of Net Revenues 58.6% 55.1%

Gross profit increased $1.3 million or 8.7% in the year ended December

31, 2023, compared to the same period in 2022 driven by the increase in net revenues of $0.6 million coupled with a favorable cost of

goods sold impact of $0.7 million. Gross profit as a percentage of net revenues increased to 58.6% in the year ended 2023 compared to

55.1% for the year ended 2022 primarily driven by increased manufacturing productivity and product mix versus the prior year.

Operating Expenses

Our selling, general and administrative, research and development and depreciation

and amortization costs for the years ended December 31, 2023, and 2022 are as follows:

Years Ended December 31, Change from Prior Year

Selling, general and administrative expenses decreased $0.2 million, or

1.2%, during the year ended December 31, 2023 compared with the same period last year, primarily due to a $0.4 million decrease in compensation

and benefits related to executive management restructuring costs that took place in the prior year, and a decrease in stock compensation

costs of $0.2 million, partially offset by $0.4 million increase in compensation costs related to business development and medical affairs

new hires.

Research and development expenses increased $0.8 million, or 15.9% during

the year ended December 31, 2023 compared with the same period last year, primarily due to $0.5 million in compensation and benefits,

$0.1 million in stock compensation and $0.1 million in expenses, to support acceleration and insourcing of our innovation efforts.

Depreciation and amortization expense increased by 48.2% to $0.9 million

in the year ended December 31, 2023 compared with $0.6 million in the year ended December 31, 2022 resulting from prior year investments

in our Mahwah, NJ facility which includes our corporate office, in-house manufacturing, and research and development labs and the associated

annualized depreciation impact.

Net Loss

Years Ended December 31, Change from Prior Year

Stated as a Percentage of Net Revenues (48.2% ) (31.0% )

Our net loss increased $5.1 million in the year ended December 31, 2023

compared with the same period last year mostly driven by the establishment of an allowance for the nonrealization of deferred tax assets

of $6.0 million offset by a higher gross profit of $1.3 million, an increase in other income of $0.4 million due to higher interest and

dividend income from our treasury bill investments, which was partially offset by higher operating expenses of $0.8 million.

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LIQUIDITY AND CAPITAL RESOURCES

Our principal source of liquidity is our cash on hand of $11.5 million

as of December 31, 2023. 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, innovation, and equipment. Operating expenses for the 2023 fiscal year were $27.0

million.

Our inventory position was $3.5 million at December 31, 2023, which reflected

a decrease of $2.9 million from December 31, 2022.

In October 2023, the Company received a payroll tax credit under the Coronavirus

Aid, Relief, and Economic Security Act (the “CARES Act”) of $0.7 million. This credit was previously recorded as a receivable..

We expect that our cash on hand and cash flows from operations will be

sufficient to meet our requirements at least through the next twelve months. Continued execution on our longer-term strategic plan may

require the Company to draw on our new credit facility, 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 draw on our existing credit facility, 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:

Net cash (used in) investing activities $ (814,597 ) $ (2,801,568 )

Net cash (used in)/ provided by financing activities $ (218,867 ) $ 279,485

Operating Activities

Net cash used in operating activities was $4.9 million for the year ended

December 31, 2023. This net cash usage was primarily due to the net loss of $13.7, plus cash flows used to reduce accrued expenses of

$1.2 million primarily from the payment of 2023 employee bonuses, and a decrease in accounts payable of $1.4 million. Partially offsetting

these increases were cash flows generated from a decrease in inventory of $2.9 million, a decrease in accounts receivable of $0.5 million,

and changes in working capital of $0.4 million.

Further contributing to this change were non-cash items including a deferred

tax asset increase of $2.0 million partially offset by the establishment of an allowance for non-realization of deferred tax assets of

$6.0 million, stock-based compensation expense of $2.8 million, depreciation and amortization expense of $0.9 million and a loss on disposal

of fixed assets of $0.1 million.

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 accounts payable

and other liabilities of $1.3 million, an increase in accrued payroll of $0.4 million increase in inventory of $0.3 million, an increase

in accrued expenses of $0.2 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.

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Table of Contents

Investing Activities

Net cash used in investing activities of $0.8 million for the year ended

December 31, 2023, was for capital expenditures for research and development and manufacturing equipment.

Net cash used in investing activities of $2.8 million for the year ended

December 31, 2022, was for capital expenditures for manufacturing space, research and development laboratories and office equipment for

our corporate office and manufacturing facilities move.

Financing Activities

Net cash used in financing activities for the year ended December 31, 2023

of $0.2 million, was from a net between borrowings and payments on our note payable for insurance premium financing of $0.1 million, and

$0.1 million for payments on our finance leases.

The $0.3 million provided by financing activities

for the year ended December 31, 2022, was 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 equipment

financing.

Debt and Borrowing Capacity

Refer to “NOTE 10 — DEBT OBLIGATIONS” and “NOTE

11 — SUBSEQUENT EVENT” in the accompanying “Notes to Financial Statements” appearing in this Annual Report on

Form 10-K for further details regarding debt and borrowing capacity.

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 8.6 years and 5 years, respectively. Our three

finance leases have remaining lease terms of 3.4 years, 3 years, and 4.75 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.

Subsequent Event

In March 2024, the Company received an assessment report from its notified

body in the EU, BSI, stating that, following BSI’s review of technical documentation submitted by the Company in connection with

a prior audit nonconformance, a recommendation for continued certification cannot be made. The Company has filed an appeal to this

determination. If the Company’s appeal is denied, then its EU certification may be suspended with respect to some or all of

the Company’s products as determined by a BSI review panel. Management believes that the Company’s appeal will be successful

in limiting the scope of the suspension to have minimal impact on the Company’s revenues, if any.

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.

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Table of Contents

Revenue Recognition

Our revenues are derived from three business sources: (i) domestic core

(which consists of US and Canada), (ii) international core, and (iii) novel therapies. Our 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 KORU Medical infusion system, with the primary delivery for immunoglobulin to treat Primary Immunodeficiency

Diseases (“PIDD”) and Chronic Inflammatory Demyelinating Polyneuropathy (“CIDP”). Novel therapies consist of Product

Revenue for feasibility/clinical trials (pre-clinical studies, Phase I, Phase II, Phase III) of biopharmaceutical companies in the drug

development process as well as non-recurring engineering services (“NRE”) revenues (including testing and registration services)

received from biopharmaceutical companies to ready or customize the FREEDOM System for clinical and commercial use across multiple drug

categories.

For Product Revenue, we recognize revenues when shipment occurs, and at

which point the customer obtains control and ownership of the goods. Shipping costs generally are billed to customers and are included

in Product Revenue.

The Company generally does not accept return of goods shipped unless it

is a Company error. The only credits provided to customers are for defective merchandise. The Company warrants the syringe

driver from defects in materials and workmanship under normal use and the warranty does not include a performance obligation. The

costs under the warranty are expensed as incurred.

Rebates are provided to distributors for the difference in selling price

to distributor and pricing specified to select customers. In addition, rebates are provided to customers for meeting growth targets.

Provisions for both distributor pricing and customer growth rebates are variable consideration and are recorded as a reduction of

revenue in the same period the related sales are recorded or when it is probable the growth target will be achieved.

We recognize NRE revenue under an input method, which recognizes revenue

on the basis of our efforts or inputs (for example, resources consumed, labor hours expended, costs incurred, or time elapsed) to the

satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation (i.e.

completion milestone). The input method that we use is based on costs incurred.

Contracts are often modified to account for changes in contract specifications

and requirements. Contract modifications exist when the modification either creates new, or changes existing, enforceable rights and obligations.

Generally, when contract modifications create new performance obligations, the modification is considered to be a separate contract and

revenue is recognized prospectively. When contract modifications change existing performance obligations, the impact on the existing transaction

price and measure of progress for the performance obligation to which it relates is generally recognized as an adjustment to revenue (either

as an increase in or a reduction of revenue) on a cumulative catch-up basis. Contract assets primarily represent revenue earnings over

time that are not yet billable based on the terms of the contracts. Contract liabilities (i.e., deferred revenue) consist of fees invoiced

or paid by the Company’s customers for which the associated performance obligations have not been satisfied and revenue has not

been recognized based on the Company’s revenue recognition criteria described above. As of December 31, 2023, the Company has recognized

a contract asset of zero which is included in other accounts receivable in the accompanying balance sheet.

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.

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Table of Contents

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) 31

Financial Statements

Statements of Operations for the years ended December 31, 2023 and 2022 34

Statements of Stockholders’ Equity as of December 31, 2023 and 2022 35

Statements of Cash Flows for the years ended December 31, 2023 and 2022 36

Notes to Financial Statements 37

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Index to Financial Statements

Report of Independent Registered Public Accounting

Firm

To the Shareholders and the Board of Directors

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, 2023 and 2022, 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, 2023 and 2022,

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.

Deferred Tax Valuation Allowance

Description of the Matter:

As discussed in Note 1 to the financial statements, the Company recorded

a $6 million deferred tax valuation allowance during the year ended December 31, 2023. Management is required to evaluate deferred tax

assets to determine if they are more likely than not to be realized.

We identified the valuation allowance as a critical audit matter. Management’s

estimate regarding the valuation allowance results in the application of a high degree of auditor judgment.

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Index to Financial Statements

How We Addressed the Matter in Our Audit:

We applied auditor judgment to determine the nature and extent of procedures

to be performed over the valuation allowance. We obtained an understanding of the Company’s processes and controls in place for

determining the qualitative factors used in the calculation of the allowance. We evaluated the valuation allowance by testing the completeness

and accuracy of the data utilized in the determination of the qualitative factors and the reasonableness of management’s judgments

and significant assumptions used in the development of the qualitative factors.

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

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

Scranton, Pennsylvania

March 13, 2024

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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

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 (5,124 ) (39,874 )

Loss on disposal of fixed assets (59,807 ) —

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 Total

Common Stock Paid-in Retained Treasury Stockholders’

Shares Amount Capital (Deficit) Stock Equity

Compensation expense related to stock options — — 2,083,396 — — 2,083,396

Compensation expense related to stock options — — 1,940,720 — — 1,940,720

Issuance upon options exercised — — — — — —

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 59,807 —

Allowance for non-realization of deferred tax asset 6,002,777 —

Changes in operating assets and liabilities:

(Increase)/Decrease in accounts receivable (486,327 ) 34,002

Decrease in prepaid expenses and other assets 242,599 28,776

(Decrease)/Increase in accrued payroll and related taxes (79,458 ) 381,796

CASH FLOWS FROM INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of equity — 406,623

Finance lease ROU asset (33,461 ) —

Payments on finance lease liability (66,455 ) (51,850 )

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (218,867 ) 279,485

Supplemental Information

Cash paid during the years for:

Income taxes $ 3,160 $ —

Schedule of Non-Cash Operating, Investing and Financing Activities:

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 commercializes innovative and

patient-centric large volume subcutaneous infusion solutions 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. 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 statements 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 has historically held

cash balances in excess of $250,000 at its primary commercial bank, which exceeds FDIC insurance limits. To reduce the risk of uninsured

deposits, the Company entered an insured cash sweep program with KeyBank during the second quarter of 2023 to automatically invest its

uninsured bank cash balances over $250,000 into FDIC insured banks so there is no more than $250,000 maintained at any one bank. Further,

as of December 31, 2023 the Company had invested $10.2 million in a US Treasury bill that matures every 90 days.

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, 2023 and 2022 was $64,469 and

$62,143, respectively.

The estimated amortization expense for the succeeding years for the intangible

assets is approximately:

Year Ending December 31,

Total amortization expense $ 754,361

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Index to Financial Statements

INCOME TAXES

For interim income tax reporting, the Company estimates its annual effective

tax rate and applies it to fiscal year-to-date pretax loss, excluding unusual or infrequently occurring discrete items. Tax jurisdictions

with losses for which tax benefits cannot be realized are excluded. The Company reported an income tax expense of $4.0 million and income

tax benefit of $2.0 million for the years ended December 31, 2023 and 2022, respectively.

We evaluate our deferred tax assets to determine if they are more likely

than not to be realized by assessing both positive and negative evidence in accordance with ASC Topic 740, Income Taxes. After considering

our cumulative pretax loss (the three-year period ending with the current year), as well as analyzing all available evidence, we

have recorded a valuation allowance of $6.0 million against our net deferred tax assets during the year ended December 31, 2023.

As we continue to assess the realizability of our deferred tax assets, reported pretax income and new evidence may result in a partial

or full reduction of the valuation allowance in future periods.

Recurring items cause our effective tax rate to differ from the U.S. federal

statutory rate of 21%, including U.S. federal R&D credits, U.S. state tax rates, and stock-based compensation.

Beginning in 2022, certain research and development costs are required

to be capitalized and amortized over a five-year period under the Tax Cuts and Jobs Act enacted in December 2017. This change will impact

the expected U.S. federal and state income tax expense and cash taxes to be paid for our fiscal 2023.

The Company files income tax returns in the U.S. federal jurisdiction and

in various state jurisdictions. Income tax returns for years prior to fiscal 2019 are no longer subject to examination by tax authorities.

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, 2023

and 2022 was $805,921 and $524,994, 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. It also has granted stock options outside

of the plans as inducement awards. 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 and under its omnibus equity incentive plan are recorded at the fair value of the shares at the grant date.

The Company issues restricted stock awards under its omnibus equity incentive

plan and outside the plan as incentive 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 other restricted stock awards

were estimated on the date of grant at the current stock price. We recognize restricted stock expense using the straight-line attribution

method over the requisite service period and account for forfeitures as they occur.

NET LOSS PER COMMON SHARE

Basic net loss per common share is calculated by dividing net loss by the

weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net

loss by the weighted average number of common and common equivalent shares outstanding during the period. The Company’s potentially

dilutive common shares are those that result from diluted common stock options and unvested restricted stock awards. The calculation of

diluted loss per share excluded stock options of 12,335 and zero in weighted-average shares for each of the years ended

December 31, 2023 and 2022, respectively, as their effect was anti-dilutive as a result of the net loss incurred for those periods.

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Index to Financial Statements

The calculation of diluted loss per share excluded performance-based restricted

stock and time-based restricted stock of 904,496 and 950,000 in weighted-average shares for each of the years ended December

31, 2023 and 2022, respectively, as their effect was anti-dilutive as a result of the net loss incurred for those periods.

The following securities were not included in the computation of diluted

shares outstanding for the years ended December 31, 2023, and 2022 because the effect would be anti-dilutive:

Years Ended December 31,

Stock options $ 12,335 $ —

Schedule of net income per common share

Years Ended

Weighted Average Outstanding Shares:

Dilutive effect of outstanding stock options and unvested restricted stock — —

Net loss per share

Therefore, diluted weighted average number of shares outstanding and diluted

net loss per share were the same as basic weighted average number of shares outstanding and net loss per share for the years ended December

31, 2023 and 2022. See “NOTE 4 — STOCK-BASED COMPENSATION” for further detail.

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.