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 ended the 2024 fiscal year with $33.6 million in net revenues,

an 18.0% increase compared with $28.5 million in the same period last year driven by growth in our core domestic and international business

of 12.3% and 31.5% respectively, and further driven by a 61.9% increase in our novel therapies business.

Gross profit, for the year ended December 31, 2024, was $21.3 million,

an increase of 27.7% or $4.6 million from the same period last year. Gross margin was 63.4% for the year ended December 31, 2024, an increase

from 58.6% from the prior year. We define gross margin as gross profit stated as a percentage of net revenues.

Operating expenses for the year ended December 31, 2024, were $27.8 million,

up from $27.0 million for the same period last year.

RESULTS OF OPERATIONS

Year Ended December 31, 2024 compared to Year Ended December 31, 2023

Net Revenues

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

31, 2024 and 2023:

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Table of Contents

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

Net Revenues

Total net revenues increased $5.1 million, or 18.0%, to $33.6 million,

for the year ended December 31, 2024, as compared with the same period last year. Domestic core growth of 12.3% 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 31.5% was driven by overall SCIg market growth, increased penetration in several established EU markets, and the entry into multiple

new geographic markets. Novel therapies net revenues increased $0.9 million, or 61.9%, driven primarily by an increase in NRE collaborations

and an increase in clinical trial supply shipments when compared to the prior year.

Gross Profit

Our gross profit for the years ended December 31, 2024, and 2023 is as

follows:

Years Ended December 31, Change from Prior Year

Gross profit increased $4.6 million, or 27.7%, to $21.3 million, in the

year ended December 31, 2024, compared to the same period in 2023 driven by the increase in net revenues of $5.1 million coupled with

significant gross margin improvement. Gross margin increased to 63.4% in the year ended 2024 compared to 58.6% for the year ended 2023,

primarily driven by increased manufacturing productivity, improved margin on product revenue mix, and increases in average selling prices

versus the prior year.

Operating Expenses

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

and amortization expenses for the years ended December 31, 2024, and 2023 are as follows:

Years Ended December 31, Change from Prior Year

Selling, general and administrative expenses increased $1.3 million, or

6.2%, to $21.6 million, during the year ended December 31, 2024 compared with the same period last year, primarily due to a $1.7 million

increase in compensation and benefits-related bonus accrual and sales commission related to year over year company performance, partially

offset by lower recruiting expenses and liability insurance costs.

Research and development expenses decreased $0.5 million, or 8.4%, to $5.3

million, during the year ended December 31, 2024 compared with the same period last year, primarily due to lower overall project spend

driven by timing, partially offset by CTO severance costs and an increase in compensation and benefits-related bonus accrual related to

year over year company performance.

Depreciation and amortization expense remained flat at $0.9 million during

the year ended December 31, 2024, as compared to $0.9 million during the same period in 2023, primarily driven by capital spending related

to projects.

Net Loss

Years Ended December 31, Change from Prior Year

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Our net loss decreased $7.7 million in the year ended December 31, 2024

compared with the same period last year, mostly driven by lower net operating losses of $3.8 million as a result of our gross profit improvement

of 27.7%, and an operating expense increase of 3%. In the prior year we established an allowance for the non-realization of deferred tax

assets which reversed a tax benefit of $4.0 million, partially offsetting in the current year was lower interest income of $0.1 million

driven by a lower cash balance coupled with lower yields.

LIQUIDITY AND CAPITAL RESOURCES

Our principal source of liquidity is our cash on hand of $9.6 million as

of December 31, 2024. Our principal source of operating cash inflows is from sales of our products in our core business, NRE services,

and clinical trial products to our 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 2024 fiscal year were $27.8 million.

Our inventory position was $2.8 million at December 31, 2024, which reflects

a decrease of $0.7 million from December 31, 2023.

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 credit facility, take on additional debt, raise capital through issuance of equity, or a

combination. 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 new credit facility or 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 financing activities $ (248,533 ) $ (218,867 )

Operating Activities

Net cash used in operating activities was $0.3 million for the year ended

December 31, 2024. This net cash usage was primarily due to the net loss of $6.1 million, offset by a $2.6 million increase in accrued

expenses for 2024 bonuses and payroll, $0.7 million in lower inventories, and $0.7 million in increased accounts payable, partially offset

by a higher accounts receivable balance of $1.7 million, and $0.2 million of changes in other liabilities, prepaids, and other assets.

Further contributing to this change were non-cash items of $3.8 million

including stock-based compensation expense of $2.6 million, depreciation and amortization expense of $0.9 million, and $0.3 million for

non-cash leasing charges and losses on disposals of fixed assets.

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

December 31, 2023 was primarily due to the net loss of $13.7 million, 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 other changes

in working capital of $0.4 million.

Further contributing to this change were the establishment of an allowance

for non-realization of deferred tax assets of $4.0 million, stock-based compensation of $2.8 million, depreciation and amortization of

$0.9 million, and a loss on disposal of fixed assets of $0.1 million.

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Table of Contents

Investing Activities

Net cash used in investing activities of $1.3 million for the year ended

December 31, 2024, was driven by capital expenditures for manufacturing equipment related to our production line for our next generation

consumables.

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

Financing Activities

Net cash used in financing activities of $0.2 million for the year ended

December 31, 2024 was primarily due to payments on our note payable for insurance premium financing, partially offset by new borrowings

for a subsequent insurance premium financing agreement. In addition, we had payments for taxes related to net share settlement of equity

awards of $0.1 million.

Net cash used in financings activities of $0.2 million for the year ended

December 31, 2023, due to payments on our note payable for insurance premium financings, partially offset by the borrowings for the insurance

premium financing, and $0.1 million for payments on our finance leases.

Debt and Borrowing Capacity

Refer to “NOTE 5 — DEBT OBLIGATIONS” 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 three operating leases have remaining lease terms of 7.7 years, 4.1 years, and 3.4 years, respectively.

Our three finance leases have remaining lease terms of 2.4 years, 2.0 years, and 3.8 years, respectively.

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 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.

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.

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Table of Contents

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 00677) 32

Report of Independent Registered Public Accounting Firm (PCAOB ID 00256) 34

Financial Statements

Statements of Operations for the years ended December 31, 2024 and 2023 36

Statements of Cash Flows for the years ended December 31, 2024 and 2023 38

Notes to Financial Statements 39

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Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING

FIRM

To the Board of Directors and

Stockholders of KORU Medical Systems, Inc.

Mahwah, New Jersey

Opinion on the Financial Statements

We have audited the accompanying balance sheet of

KORU Medical Systems, Inc (the “Company”) as of December 31, 2024, and the related statements of operations, stockholders’

equity, and cash flows for the year ended December 31, 2024, and the related notes. In our opinion, the financial statements present fairly,

in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash

flows for the year ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

Prior Period Financial Statements

The financial statements of the Company as of and

for the year ended December 31, 2023 were audited by other auditors whose report dated March 13, 2024 expressed an unqualified opinion

on those statements.

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

audit. 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 audit 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 audit, 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters 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 judgements. We determined that there were no critical audit matters.

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Index to Financial Statements

Emphasis of Matter

We also have audited the adjustments to the 2023 financial

statements to retrospectively apply the change due to the adoption of Accounting Standards Update 2023-07, Segment Reporting, described

in Note 1. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply

any procedures to the 2023 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not

express an opinion or any other form of assurance on the 2023 financial statements taken as a whole.

We have served as the Company’s auditor since 2024.

Cherry Bekaert LLP

Tampa, Florida

March 12, 2025

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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 sheet of

KORU Medical Systems, Inc. (the Company) as of December 31, 2023, the related statement of operations, stockholders’ equity and

cash flows for the year 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 the results of its operations and its cash flows for the year 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

audit. 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 audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.

We served as the Company's auditor from 2014 through

2023.

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, net

Loss on foreign currency exchange (45,991 ) (5,124 )

Loss on disposal of fixed assets (16,160 ) (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 — — 1,940,720 — — 1,940,720

Issuance upon options exercised — — — — — —

Compensation expense related to stock options — — 1,509,544 — — 1,509,544

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:

Stock-based compensation expense and warrant expense 2,623,920 2,768,870

Changes in operating assets and liabilities:

Decrease in other receivables — 943,507

Decrease in prepaid expenses and other assets 220,133 242,599

Increase in accrued payroll and related taxes 348,460 (79,458 )

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds on disposals of property and equipment 8,500 —

CASH FLOWS FROM FINANCING ACTIVITIES

Borrowings from insurance finance indebtedness 487,516 565,172

Payments on insurance finance indebtedness (530,707 ) (684,123 )

Payments for taxes related to net share settlement of equity awards (97,379 ) —

Payments on finance lease liability (107,963 ) (99,916 )

Supplemental Information

Cash paid during the years for:

Income taxes $ — $ 3,160

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

liability balances within the accompanying December 31, 2023 balance sheet have been reclassified to conform to current period presentation.

There were no changes to the Company’s results of operations as a result of the reclassification.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the

Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. As of December

31, 2024 the Company held cash and cash-equivalents of $9.6 million, the majority of which was held in a secured US-treasury money market

mutual fund.

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, 2024 and 2023 was $68,197 and

$64,469, respectively.

The estimated amortization expense for the succeeding years for the intangible

assets is approximately:

Year Ending December 31,

Total amortization expense $ 730,279

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Index to Financial Statements

INCOME TAXES

The Company accounts for deferred income taxes using the asset and liability

method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and

their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. Temporary differences

are then measured using the enacted tax rates and laws. Determining the appropriate amount of valuation allowance requires management

exercise judgement about future operations.

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

a recorded valuation allowance of $7.1 million against our net deferred tax assets as of the year ended December 31, 2024. 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, stock-based compensation and changes in our valuation

allowance.

We account for uncertain tax positions in accordance with authoritative

guidance which prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial

statements. Our evaluations of tax positions consider various factors including, but not limited to, changes in tax law, the measurement

of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained

during in-process audit activities and changes in facts or circumstances related to a tax position. We accrue interest and penalties related

to unrecognized tax benefits as a component of income tax expense recorded in continuing operations.

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 2021 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, 2024

and 2023 was $704,690 and $805,921, 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 recognized as compensation expense at their grant date 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 restricted stock awards with

time-based vesting were estimated on the date of grant at the current stock price. The fair value of restricted stock awards vesting at

certain annual sales growth thresholds were estimated as of the date of Board acknowledgement of the achievement, at the current stock

price. We recognize restricted stock expense using the straight-line attribution method over the requisite service period and account

for forfeitures as they occur.

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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