Resource item

PART I AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains, and our officers and
representatives may from time to time make, certain "forward-looking" statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995) and information relating to us that are based on the beliefs of the
management, as well as assumptions made and information currently available.
Forward-looking statements are neither historical facts nor assurances of future
performance. Instead, they are based only on our current beliefs, expectations
and assumptions regarding the future of our business, future plans and
strategies, projections, anticipated events and trends, the economy and other
future conditions. Because forward-looking statements relate to the future, they
are subject to uncertainties, risks and changes in circumstances that are
difficult to predict and many of which are outside of our control.



Our actual results may vary materially from the forward-looking statements made
in this report due to important factors such as uncertainties associated with
COVID-19, inflation, war and other geopolitical conflicts, customer ordering
patterns, availability and costs of raw materials and labor and our ability to
recover such costs, our ability to convert inventory to a source of cash, future
operating results, growth of new patient starts and the SCIg market, our ability
to partner with biopharmaceutical companies in our novel therapies business,
Food and Drug Administration and foreign authority regulations and the outcome
of regulatory audits, introduction of competitive products, acceptance of and
demand for new and existing products, ability to penetrate new markets, success
in enforcing and obtaining patents, reimbursement related risks, government
regulation of the home health care industry, success of our research and
development effort, expanding the market of FREEDOM system demand in the SCIg
market, availability of sufficient capital if or when needed, dependence on key
personnel, and the impact of recent accounting pronouncements, as well as those
risks and uncertainties described in Part II.- Item IA. "Risk Factors" in this
report and from time to time in our past and future reports filed with the
Securities and Exchange Commission, including in our Annual Report on Form 10-K
for the year ended December 31, 2021 in addition to others. When used in this
report, the words "estimate," "project," "believe," "may," "will," "anticipate,"
"intend," "expect" and similar expressions are intended to identify
forward-looking statements, which include, without limitation, statements
regarding transition to our secondary manufacturing source, reduction of
inventory, move of our manufacturing facility, need for additional financing,
and 2022 expenses and capital expenditures.  Such statements reflect current
views with respect to future events based on currently available information and
are subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements.  Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof.  The Company does not undertake any
obligation to release publicly any revision to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.



Throughout this report, the “Company”, “KORU Medical,” “we”, “us” or “our” refers to KORU Medical Systems, Inc.


OVERVIEW



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



Our revenues derive from three business sources: (i) domestic core, (ii)
international core, and (iii) novel therapies.  Our domestic core and
international core revenues consist of sales of our products for the delivery of
subcutaneous drugs that are FDA cleared for use with the KORU Medical infusion
system, with the primary use being for the delivery for immunoglobulin to treat
PIDD and CIDP. Novel therapies consist of product revenues from our infusion
system (syringe drivers, tubing and needles) for feasibility/clinical trials
(pre-clinical studies, Phase I, Phase II, Phase III) of biopharmaceutical
companies in the drug development process as well as non-recurring engineering
services revenues ("NRE") received from biopharmaceutical companies to ready or
customize the FREEDOM System for clinical and commercial use.



We have experienced and continue to experience supply chain issues and inflationary impacts on raw materials and labor resulting from the COVID-19 pandemic. We cannot predict whether current trends will continue and what impact they may have on our business, customers or financial results.

The company continued its transition from finished product manufacturing of our needle and tubing sets to Command Medical Products, a third-party contract manufacturing organization, which began in 2021 and expects to complete implementation before end of the first quarter of 2023. This decision is intended to create a dual source of manufacturing and improve costs.

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The Company entered into a lease commencing March 1, 2022 for a new corporate
headquarters and manufacturing facility located in Mahwah, NJ. During the
quarter ended June 30, 2022, the Company completed the first phase of the move,
the headquarters and office staff to the new location, and expects to complete
the move of manufacturing before the end of the first quarter 2023.



The Company ended the 2022 third fiscal quarter with $7.8 million in net sales,
a 28.5% increase, compared with $6.0 million in the same period last year driven
by growth in all three of our business sources.



Gross profit, for the three months ended September 30, 2022, was $4.3 million,
an increase of 23.7% from the same period last year, and stated as a percentage
of net sales was 55.7%, a decline from 57.9% in the prior year period.



Operating expenses for the three months ended September 30, 2022, were $5.9
million, up from $4.8 million for the same period last year, driven primarily by
research and development, and for selling, general and administrative for new
hires to support commercialization, business development, quality, and
regulatory capabilities.



RESULTS OF OPERATIONS


Three months completed September 30, 2022compared to September 30, 2021


Net Sales


The following table summarizes our net sales for the three months ended
September 30, 2022and 2021:



                        Three Months Ended September 30,       Change from Prior Year      % of Net Sales
                           2022                 2021                 $             %       2022      2021
Net Sales
Domestic Core        $       5,900,042    $       5,076,294   $       823,748     16.2%     76.0%    84.0%
International Core           1,096,746              747,281           349,465     46.8%     14.1%    12.4%
Novel Therapies                763,610              216,969           546,641    251.9%      9.9%     3.6%
Total                $       7,760,398    $       6,040,544   $     1,719,854     28.5%




Total net sales increased $1.7 million, or 28.5%, for the three months ended
September 30, 2022, as compared with the same period last year as we saw double
digit growth across all businesses. Domestic core growth was primarily driven by
increased volume attributed to SCIg market growth and label expansions including
prefill syringes, as well as clearing of $0.3 million in backorders from the
second quarter of 2022. Novel therapies sales grew by 252% in the third quarter
of 2022 related to services performed on an NRE innovation development agreement
for a pharmaceutical customer and increases in clinical trial product sales for
several pharmaceutical customers. Sales growth in our international core
business was driven by volume growth in certain EU markets compared with prior
year.



Gross Profit



Our gross profit for the three months ended September 30, 2022 and 2021 is as
follows:



                          Three Months Ended September 30,        Change from Prior Year
                             2022                 2021                $                %
Gross Profit           $       4,322,362    $       3,495,750   $      826,612       23.7%
Stated as a
Percentage of Net
Sales                              55.7%                57.9%




Gross profit increased $0.8 million or 23.7% in the three months ended September
30, 2022, compared to the same period in 2021. This increase in the 2022 third
quarter was driven by volume increase in net sales of $1.7 million as described
above. Gross profit as a percent of sales decreased to 55.7% compared to 57.9%
from the third quarter of 2021.  The decline in the gross profit percent was
primarily caused by higher manufacturing costs associated with labor and
materials, and production rework completed in the current quarter. Product mix
had a negative impact as we saw increased consumable sales across our core
domestic business, and NRE service revenue mix contributed to a lower gross
profit as a percentage of sales. Partially offsetting these declines was an
increase in average selling prices.



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Sales, General and Administrative and Research and Development

Our selling, general and administrative and research and development expenses for the three months ended September 30, 2022 and 2021 are as follows:


                         Three Months Ended September 30,        Change from Prior Year
                            2022                 2021                $              %
Selling, general              4,825,349            3,901,830          923,519       23.7%
and administrative    $                    $                   $
Research and                    862,148              800,020           62,128        7.8%
development
                      $       5,687,497    $       4,701,850   $      985,647       21.1%
Stated as a
Percentage of Net                 73.3%                77.8%
Sales




Selling, general and administrative expenses increased $0.9 million, or 23.7%,
during the three months ended September 30, 2022 compared to the same period
last year, primarily due to $0.7 million in compensation and benefits associated
with new hires, $0.2 million in severance relating to the employment termination
of the Chief Operating Officer, $0.2 million in building expenses related to our
manufacturing move, $0.1 million in stock compensation partially offset by lower
consulting costs of $0.1 million and lower recruitment costs of $0.2 million.



Research and development expenses increased $0.1 million during the three months
ended September 30, 2022 compared with the same period last year, primarily due
to $0.3 million in new hires to support our innovation efforts, which was
partially offset by lower testing material costs of $0.2 million and lower
recruiting costs of $0.1 million.



Depreciation and amortization



Depreciation and amortization expense increased by 41.8% to $164,344 in the
three months ended September 30, 2022 compared with $115,934 in the three months
ended September 30, 2021 resulting from investment in our corporate office and
manufacturing site move.



Net Loss



                        Three Months Ended September 30,        Change from Prior Year
                           2022                 2021                 $              %
Net Loss             $      (1,225,560 )  $      (1,093,778 ) $      (131,782 )     12.1%
Stated as a
Percentage of Net
Sales                           (15.8% )             (18.1% )




Our net loss increased $0.1 million in the three months ended September 30, 2022
compared with the same period last year mostly driven by higher operating
expenses due to higher selling, general and administrative and research and
development expenses related to our strategy to build our novel therapies
business and innovation. A tax benefit of $0.3 million resulting from the loss
was also recorded during the period.



End of nine months September 30, 2022 compared to September 30, 2021


Net Sales



The following table summarizes our net sales for the nine months ended September
30, 2022 and 2021:



                        Nine Months Ended September 30,        Change from Prior Year      % of Net Sales
                           2022                 2021                 $             %       2022      2021
Net Sales
Domestic Core        $      15,890,369    $      14,084,552   $     1,805,817     12.8%     77.3%    82.9%
International Core           2,943,173            2,585,881           357,292     13.8%     14.3%    15.2%
Novel Therapies              1,717,814              329,236         1,388,578    421.8%      8.4%     1.9%
Total                $      20,551,356    $      16,999,669   $     3,551,687     20.9%




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Total net sales increased $3.6 million or 20.9% for the nine months ended
September 30, 2022, as compared to the prior year period, driven primarily by
higher domestic core net sales of $1.8 million driven by volume growth in our
consumables and pump business resulting from our label expansions including
prefills, existing customers, and an overall SCIg market growth. Further
contributing were higher novel therapies sales of $1.4 million compared with
last year due to completion of two NRE product innovation milestones and
clinical product sales for an expanded pharmaceutical pipeline. International
core net sales were higher by $0.4 million in the first nine months of 2022,
driven by volume growth in our consumables and pump business.



Gross Profit



Our gross profit for the nine months ended September 30, 2022 and 2021 is as
follows:



                          Nine Months Ended September 30,        Change from Prior Year
                              2022                 2021                $              %
Gross Profit           $       11,290,840    $      9,937,788   $      1,353,052    13.6%
Stated as a
Percentage of Net
Sales                               54.9%               58.5%




Gross profit increased $1.4 million or 13.6% in the nine months ended September
30, 2022, compared to the same period last year. This increase in the first nine
months of 2022 was mostly driven by the increase in net sales of $3.5 million as
described above. Gross profit, stated as a percentage of net sales, was impacted
by higher manufacturing costs due to supply chain issues, labor and material
costs, and higher NRE revenue at lower margins recorded in the nine months of
2022, partially offset by increased average selling prices.



Sales, General and Administrative and Research and Development

Our selling, general and administrative expenses and our research and development expenses for the nine months ended September 30, 2022 and 2021 are as follows:

                          Nine Months Ended September 30,        Change from Prior Year
                             2022                 2021                 $             %
Selling, general and          15,846,584           12,980,604         2,865,980     22.1%
administrative         $                    $                   $
Research and                   3,314,233            1,523,739         1,790,494    117.5%
development
                       $      19,160,817    $      14,504,343   $     4,656,474     32.1%
Stated as a
Percentage of Net                  93.2%                85.3%
Sales




Selling, general and administrative expenses increased $2.9 million, or 22.1%,
during the nine months ended September 30, 2022 compared to the same period last
year, primarily due to $2.1 million in compensation and benefits related mostly
to new hires in sales, quality and regulatory to support our strategic growth
initiatives, $0.3 million in recruitment fees, $0.3 million in stock
compensation, $0.3 million in building related expense, $0.2 million in travel
related costs and $0.1 million in liability insurance, which was partially
offset by lower restructuring costs of $0.4 million.



Research and development expenses increased $1.8 million during the nine months
ended September 30, 2022 compared with the same period last year primarily due
to $1.0 million in consulting fees and $0.8 million in compensation and benefits
for new hires to support product development for novel therapies, and $0.1
million in stock compensation, which was partially offset by $0.1 million in
reduced testing material expense.



Depreciation and amortization



Depreciation and amortization expense increased by 14.2% to $399,479 the nine
months ended September 30, 2022 compared with $349,822 in the nine months ended
September 30, 2021 due to investment in our corporate office and manufacturing
site move.



Net Loss

                          Nine Months Ended September 30,        Change from Prior Year
                             2022                 2021                 $              %
Net Loss               $      (6,684,415 )  $      (3,494,465 ) $     (3,189,950 )  91.3%
Stated as a
Percentage of Net
Sales                             (32.5% )             (20.6% )



Our net loss for the nine months ended September 30, 2022 has been $6.7 million
compared to the net loss of $3.5 million for the nine months ended September 30, 2021due to higher selling, general and administrative and research and development expenses.



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CASH AND CAPITAL RESOURCES



Our principal source of liquidity is our cash on hand of $16.4 million as of
September 30, 2022.  Our principal source of operating cash inflows is from
sales of our products and NRE services to customers. Our principal cash outflows
relate to the purchase and production of inventory, funding of research and
development, 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 manufacturing technologies,
facilities and equipment, and research and development. We estimate operating
expenses to be between $26.5 million and $27.5 million in 2022.



Our 2022 capital investments for manufacturing and leasehold improvements for
our new facility is expected to be in the aggregate between $1.5 million and
$2.0 million, net of pre-approved financing arrangements and leasehold
improvement credits totaling $0.9 million and $0.2 million respectively, which
are expected to be fully executed in the fourth quarter of 2022.



Our accounts receivable balance was $5.1 million at September 30, 2022, which
reflected a $1.5 million increase since the beginning of the year. Supply chain
issues which caused back-orders in the second quarter of 2022 that were cleared
at the end of the third quarter of 2022, resulted in higher receivable balances
due to end of quarter shipments.



Our inventory position was $6.9 million at September 30, 2022, which reflects an
excess of work in process inventory when compared to prior periods that could
not be converted to finished goods as a result of supply chain issues, labor
shortages, and our second quarter 2022 backorder. We expect to reduce this
excess inventory and convert it to a source of cash by the end of 2022. We
further expect to reduce our inventory position when the transition to our
secondary manufacturing source is completed, which we expect by March 31, 2023.



On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the
"CARES Act") was signed into law. The CARES Act contains a provision known as
the Employee Retention Credit ("ERC"), a refundable payroll tax credit for
qualified wages paid to retained full-time employees between March 13, 2020, and
December 31, 2020. The Consolidations Appropriations Act (CAA), signed into law
on December 27, 2020, significantly modified and expanded the provisions of the
ERC to include wages paid in 2021. For 2021, the ERC provides employers a
refundable federal tax credit equal to 70% of the first $10,000 of qualified
wages and benefits paid to retained employees between January 1, 2021, and
December 31, 2021. Credits may be claimed immediately by reducing payroll taxes
sent to the Internal Revenue Service. To the extent that the credit exceeds
employment withholdings, the employer may request a refund of prior taxes paid.
The Company determined that it qualified for this credit and anticipated
utilizing benefits under this act to aid its liquidity position and as a result
recorded a receivable of $0.7 million as of December 31, 2021. As of September
30, 2022, the credit has not been received.



We expect that our cash on hand and cash flows from operations will be
sufficient to meet our requirements at least through the next 12 months.
Continued execution on our longer-term strategic plan may require the Company to
take on additional debt or raise capital through issuance of equity, or a
combination of both in the periods post 12/31/2023. 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, 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 and COVID-19 on the global financial markets. To the extent that
current and anticipated future sources of liquidity are insufficient to fund our
future business activities and requirements, we may be required to seek
additional equity or debt financing sooner. There can be no assurance the
Company will be able to obtain the financing or raise the capital required to
fund its operations or planned expansion.



Cash Flows


The following table summarizes our cash flows:


                                         Nine Months Ended      Nine Months Ended
                                         September 30, 2022     September 30, 2021
Net cash used in operating activities   $         (6,741,013 ) $         (3,602,378 )
Net cash used in investing activities   $         (2,577,696 ) $           (318,493 )
Net cash provided by financing                       425,088              2,838,996
activities                              $                      $




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Operating Activities



Net cash used in operating activities of $6.7 million for the nine months ended
September 30, 2022 was primarily due to the net loss of $6.7 million, working
capital changes which included an increase in accounts receivable of $1.4
million, an increase in inventory of $0.7 million, an increase in prepaid
expense of 0.2 million, and a decrease in accrued expenses of $0.1 million,
offset by an increase in accrued payroll of $0.7 million and an increase in
accounts payable and other liabilities of $0.4 million.  Further contributing
were deferred tax assets of $1.6 million increased for book to tax differences
related to stock option expense.  Offsetting these were primarily non-cash
charges for stock-based compensation of $2.7 million, and depreciation and
amortization of $0.4 million.



Net cash used in operating activities of $3.6 million for the nine months ended
September 30, 2021 was primarily due to the net loss of $3.5 million, working
capital changes which included an increase in accounts receivable of $0.5
million due to timing, an increase in prepaids of $0.5 million due to insurance
renewals, and a decrease in accrued expenses of $0.6 million most of which was
non-cash activity related to the issuance of common stock in settlement of
litigation. Further contributing were deferred tax assets of $1.4 million mostly
increased for book to tax differences related to stock option expense.

These factors were offset by an increase in accounts payable of $0.8 millionnon-cash charges for stock-based compensation for $2.0 millionand amortization of $0.3 million.


Investing Activities



Net cash used in investing activities of $2.6 million for the nine months ending
September 30, 2022, was for capital expenditures for manufacturing and office
equipment for our corporate office and manufacturing facilities move.



Net cash used in investing activities of $0.3 million for the nine months ending
September 30, 2021, was for capital expenditures for manufacturing and office
equipment.



Financing Activities


The $0.4 million provided by financing activities for the nine months ended
September 30, 2022is of $0.3 million in option exercises and $0.1 million
net borrowings against our indebtedness for a note payable for the financing of insurance premiums.



The $2.8 million provided by financing activities for the nine months ended
September 30, 2021, is from options exercised, the non-cash activity related to
the issuance of common stock in settlement of litigation and a note payable for
insurance premium financing.



ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED



Refer to "NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES" in the accompanying financial statements, which is incorporated herein
by reference.

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