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 7 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) pharma services and clinical trials. 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”). Pharma services and clinical trials 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 Infusion System for clinical and commercial use.

The Company ended the 2025 fiscal year with $41.1 million in net revenues,

a 22.2% increase compared with $33.6 million in the same period last year driven by growth in our domestic core and international core

businesses of 11.0% and 80.0% respectively, partially offset by a 5.6% decrease in our pharma services and clinical trials business net

revenues.

Gross profit for the year ended December 31, 2025, was $25.6 million, an

increase of 20.0% or $4.3 million from the same period last year. Gross margin was 62.3% for the year ended December 31, 2025, a decrease

from 63.4% 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, 2025, were $28.6 million,

up from $27.8 million from the same period last year.

RESULTS OF OPERATIONS

Year Ended December 31, 2025 compared to Year Ended December 31, 2024

Net Revenues

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

31, 2025 and 2024:

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

Net Revenues

Total net revenues increased $7.5 million, or 22.2%, to $41.1 million,

for the year ended December 31, 2025, as compared with the same period last year. Domestic core growth of 11.0% was primarily driven by

volume in consumables and pumps attributed to subcutaneous immunoglobulin (SCIg) market growth and new account share gains. International

core growth of 80.0% was primarily driven by SCIg market growth, increased penetration in several established EU markets, and entry into

multiple new geographic markets. Pharma services and clinical trials net revenues decreased $0.1 million, or 5.6%, driven by lower NRE

collaborations revenues resulting from the timing of project milestones partially offset by higher clinical trial orders when compared

to the prior year.

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Gross Profit

Our gross profit for the years ended December 31, 2025, and 2024 is as

follows:

Years Ended December 31, Change from Prior Year

Gross profit increased $4.3 million, or 20.0%, to $25.6 million, in the

year ended December 31, 2025, compared to the same period in 2024 driven by the increase in net revenues of $7.5 million partially offset

by an increase in manufacturing costs. Gross margin decreased to 62.3% in the year ended 2025 compared to 63.4% for the year ended 2024,

primarily driven by higher materials costs, tariff-related charges, and geographic sales mix from outside the United States, partially

offset by higher average selling prices in the US market.

Operating Expenses

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

and amortization expenses for the years ended December 31, 2025, and 2024 are as follows:

Years Ended December 31, Change from Prior Year

Selling, general and administrative expenses increased $1.7 million, or

8.1%, to $23.4 million, during the year ended December 31, 2025 compared with the same period last year, primarily due to an increase

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

offset by lower consulting expenses.

Research and development expenses decreased $0.9 million, or 16.6%, to

$4.4 million, during the year ended December 31, 2025 compared with the same period last year, primarily due to lower compensation and

benefit expense and CTO severance expenses from the prior year, partially offset by higher temporary labor expenses for product development.

Depreciation and amortization expense decreased $0.1 million, or 8.8%,

to $0.8 million, during the year ended December 31, 2025, as compared with the same period last year, primarily driven by asset retirement

and decreased capital spending.

Net Loss

Years Ended December 31, Change from Prior Year

Our net loss decreased $3.4 million or 56.5% in the year ended December

31, 2025 compared with the same period last year, driven by higher gross profit of $4.3 million, partially offset by an increase in operating

expense of $0.8 million.

LIQUIDITY AND CAPITAL RESOURCES

Our principal source of liquidity is our cash on hand of $8.9 million as

of December 31, 2025. Our principal source of operating cash inflows is from sales of our products in our core business, clinical

trial products, and NRE services to our customers. Our principal cash outflows relate to the purchase and production of inventory, selling,

general and administrative expenses, and funding of research and development, 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 2025 fiscal year were $28.6 million.

Our inventory position was $3.7 million at December 31, 2025, which reflects

an increase of $0.9 million from December 31, 2024.

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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 utilize a combination

of the above. 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,

tariffs, 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 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 growth opportunities.

Cash Flows

The following table summarizes our cash flows:

Net cash used in financing activities $ (221,350 ) $ (248,533 )

Operating Activities

Net cash produced from operating activities was $0.5 million for the year

ended December 31, 2025. This net cash produced was primarily due to the net loss of $2.6 million, an increase in inventory of $0.9 million,

an increase in accounts receivable of $0.5 million, and an increase in prepaids and other assets of $0.2 million, offset by an increase

in accrued expenses for 2025 bonuses and payroll of $0.6 million, and an increase in accounts payable of $0.6 million.

Further contributing to this change were non-cash items of $3.4 million

including stock-based compensation expense of $2.7 million, depreciation and amortization expense of $0.8 million, and partially offset

by a $0.1 million decrease in non-cash leasing liabilities.

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.

Investing Activities

Net cash used in investing activities of $0.9 million for the year ended

December 31, 2025, was driven by capital expenditures for manufacturing equipment related to our production line for our next generation

consumables and infusion pumps.

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.

Financing Activities

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

December 31, 2025 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. The insurance premium financing note was also paid off early, without penalty,

during the period.

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.

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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 6.7 years, 3.1 years, and 2.4 years, respectively.

Our three finance leases have remaining lease terms of 1.4 years, 1.0 years, and 2.8 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.

Revenue Recognition

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

(which consists of US and Canada), (ii) international core, and (iii) pharma services and clinical trials. 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”).

Pharma services and clinical trials 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.

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Table of Contents

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, 2025, the Company has recognized

a contract asset of $319,955 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.

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) 33

Financial Statements

Statements of Operations for the years ended December 31, 2025 and 2024 35

Statements of Cash Flows for the years ended December 31, 2025 and 2024 37

Notes to Financial Statements 38

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Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING

FIRM

To the Board of Directors and Stockholders

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, 2025 and 2024, and the related statements of operations,

stockholders’ equity, and cash flows for the years ended December 31, 2025 and 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, 2025

and 2024, and the results of its operations and its cash flows for the years ended December 31, 2025 and 2024, in conformity with

accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on

our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)

(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities

laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the

standards of the PCAOB. Those standards require that we plan and perform the audits 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

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.

/s/ Cherry Bekaert LLP

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

Tampa, Florida

March 12, 2026

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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, net current portion 78,675 202,613

Commitments and contingencies (Refer to Note 9) — —

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/(Expense)

Income/(loss) on foreign currency exchange 53,097 (45,991 )

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 — — 1,509,544 — — 1,509,544

Compensation expense related to stock options — — 988,427 — — 988,427

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 2,713,539 2,623,920

Loss/(Gain) on disposal of fixed assets (6,700 ) 16,160

Changes in operating assets and liabilities:

Decrease/(Increase) in prepaid expenses and other assets (196,682 ) 220,133

Increase/(Increase) in accrued payroll and related taxes (279,429 ) 348,460

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 462,405 (319,718 )

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds on disposals of property and equipment 6,700 8,500

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from exercise of employee stock options 186,165 —

Borrowings from insurance finance indebtedness 406,751 487,516

Payments on insurance finance indebtedness (677,903 ) (530,707 )

Payments on finance lease liability, net of asset (108,827 ) (107,963 )

Supplemental Information

Cash paid during the years for:

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”).

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, 2025 the Company held cash and cash-equivalents of $8.9 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, 2025 and 2024

was $69,411 and $68,197, respectively.

The estimated amortization expense for the succeeding years for the intangible

assets is approximately:

Year Ending December 31,

Total amortization expense $ 684,841

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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 to

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, 2025. 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 2022 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, 2025 and 2024 was $639,908 and $704,690, 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 previously granted for director fees under the non-employee

director compensation plan, as well as shares of stock granted 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