Medinotec Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 61 Table of Contents Results of Operations for the Years February 28, 2023 and 2022 Revenue The Consolidated Medinotec Group of Companies’ revenue for the year ended February 28, 2023 was $999,579 compared to $1,215,905 (Pro-forma Full Year FY 2022)_ in revenue being recorded in the year ended February 28, 2022. The revenue was down in comparison to the prior year with $216,326 for the year.. The sales presented includes the following economic and internal issues: • DISA Medinotec trades out of South Africa and its functional currency is the South African Rand, The Rand weakened from an average conversion rate of 1$: 14.9 (2022) to 1$: 17.37( for the last three quarters of 2023) against the US Dollar. This translated to a decrease of 17% due to dollar strength when the Rand was converted for reporting purposes, which means a decrease of approx. $69,928 for the year in sales when converted to dollars from Rands. The Rand was very volatile against the US Dollar especially in the year ended February 28, 2023. Most of the year-to-date differences discussed here are attributable to the second,third and fourth quarters during which the Rand experienced the most volatility. • There was a machine breakdown that occurred in the last week of April and the repair process lasted three weeks, therefore leaving a back log in production and invoicing of products volume losses in this period accounted for an estimated $62,983 for the year ended 2023 and all of this can be attributed to the first quarter, since the breakdown lasted from April to May. An increased number of sales were made in the third quarter due to most of the backlogs being addressed, therefore a significant increase in sales volumes were experienced over and above the negative impact of the Rand conversion rate on sales. There was a once off sale of $483,381 from DISA Medinotec Proprietary Limited to Minoan Medical Proprietary Limited in the Feb 2022 financial year this is not to be repeated and is because Minoan Medical found a buyer for short dated expiring stock for DISA Medinotec, the raw materials aged due to the slower sales during covid. This is therefore an extraordinary event which is not to be repeated. When ignoring this extraordinary revenue event, the actual sales growth for the period was $250,695 which represents a 36.5% growth in normal sales figures excluding extraordinary events. This table indicates the sales per prod uct as a breakdown of the total revenue balance: Medinotec Inc Group Consolidated Years Ended Proforma Medinotec Inc Group Product Type Feb 23 For the period April 26, 2021 to February 28 2022 Feb 23 Cape Cross NC Catheter 230,359 227,665 135,272 Cape Cross PTCA Catheter 287,089 111,076 291,215 Trachealator Catheter 446,864 218,161 306,037 Components 35,267 438,381 483,381 999,579 1,040,283 1,215,905 Revenue generated by affiliations to related parties were as follows: Sales to Minoan Medical stopped during Q1 of the 2023 financial year due to the fact that DISA Medinotec now employs its own international sales and marketing manager, which was outsourced in the past. Minoan primarily facilitated export business on behalf of DISA Medinotec the total sales for the financial year ending February 2022 was $483,381. For the year ended February 28, 2023, we generated revenue through sales to DISA Lifesciences Proprietary Limited of $335,786 and $525,558 for the year ended February 28, 2022. Pieter van Niekerk ceased to be a director on DISA Lifesciences on October 14, 2022 after which the business will not be a related party to the Medinotec Group anymore, but due to the extensive sales reach of DISA Lifesiences it will remain a material distributor for the Medinotec Group in South Africa which generates 68% of the sales for the Medinotec Inc Group of Companies. 62 Table of Contents The profit percentage on these related party transactions was determined by a benchmark study that was completed by an external firm who compared the profit margins of a distribution/wholesale business. The allowed profit margin was concluded as being within the appropriate benchmark and therefore arm’s length. The data base used to determine the market related margin is the Worldwide Private Company Data Base from Thomson Reuters. Therefore, this agreement is deemed to be market related and at arm’s length and compliant with. ASC 850-10-50-6 and ASC 850-10-50-5. Cost of Goods The Consolidated Medinotec Group of Companies recorded cost of goods of $417,757 constituting a gross profit percentage of 58.2% for the year ending February 28, 2023 down from $668,832 (Pro-forma Full Year FY 2022) constituting a constituting a gross profit percentage of 44.9% for the year ending February 28, 2022. The most material change in the increase of cost of goods is the function that it is directly relatable to sales and therefore the cost of goods followed the same upward trend as sales. This increase in Cost of sales over time follows the sales trend but also indicates a shift in production to include the sale of more complex products into the product mix, therefore the production facility is approaching its fuller capacity and the allocations of labor and machine time to product costing per unit manufactured is expected to decrease the average cost of these items allocated to cost of goods due to the production facility becoming more productive . The Rand weakened from an average conversion rate of 1$: 14.9 (2022) to 1$: 17.37( for the last three quarters of 2023) a 17% decline against the US Dollar. Therefore, this contributed positively to the balance of the costs when converted from Rands to dollars. The Rand was very volatile against the US Dollar especially second, third and fourth quarters. Most of the differences discussed here are attributable to these three quarters the portion of the movement that can be allocated to the exchange difference is estimated at $ 71,018. Due to the once off sales transaction of $483,381 in Q4 for the prior fiscal for DISA Medinotec Proprietary Limited there is no obsolete stock for the period ending February 28, 2023. This transaction was concluded to sell components that was close to expiration date due to sales declining during the covid pandemic. No other related party transactions are recorded in cost of sales for both years in 2023 and 2022. Operating Expenses The Consolidated Medinotec Group of Companies operating expenses were $1,047,216 for the year ended February 28, 2023, up from $759,394 (Pro-forma Full Year FY 2022) for the year ended February 28, 2022. The Rand weakened from an average conversion rate of 1$: 14.9 (2022) to 1$: 17.37( for the last three quarters of 2023) against the US Dollar. Therefore, this will cause an expense decrease/improvement of 17% on the operating expenses due to dollar strength within the conversion rate applied. The currency effect is a decrease in operating expenses of $136,138related to the year ended February 28, 2023. The Rand was very volatile against the US Dollar especially in the second to fourth quarter ended February 28, 2023. Most of the differences discussed here are attributable to this period and is estimated at an amount of $121,783. After taking into account the effects of the foreign currency exchange, the remaining changes are mainly attributable to the Sales and Marketing expenses that, together with the Compliance cost, showed a step cost increase to support the higher sales figure. Due to the amount of territories entered during the year, there was also an increase in general compliance costs to list products in these countries and to provide initial training and marketing into these countries. 63 Table of Contents One of the major components that affects the operating expenses is the costs of compliance for the business. These costs increased significantly as we started to grow our product portfolio in FY2022 and is expected to rise as we enter new sales territories. Certain costs are once off in nature and others will be recurring this will be determined after the markets were entered and all regulatory requirements met. The Consolidated Medinotec Group of Companies for the Years Ended February Proforma Medinotec Inc Group Consolidated Feb 23 For the period April 26, 2021 to February 28, 2022 12 months ending Feb 22 Compliance cost 218,694 161,168 161,168 For the period ending February, 28 2022, consolidated figures are presented from April, 26. Proforma figures are presented from March, 1 to February, 28. This was done to demonstrate a full comparative period compared to the same period in the current reporting period. Once off costs of obtaining a quotation resulted in non recurring expenses of $70,000 in 2023. Sales and Marketing expenses was insignificant due to Covid restrictions stopping travel and conferences, this started to normalize in FY 2022 and is expected to grow significantly in the later end of FY 2023 since most trade shows and conferences happen in the final two quarters of our financial year, the dedicated sales force will continue to grow as new territories pass the compliance hurdles. Medinotec Inc Group Consolidated Years Ended (Audited) Proforma Medinotec Group Consolidated Feb 23 For the period April 26, 2021 to February 28, 2022 Feb 22 Sales and Marketing 53,652 17,271 17,271 For the period ending February, 28 2022, consolidated figures are presented from April, 26. Proforma figures are presented from March, 1 to February, 28. This was done to demonstrate a full comparative period compared to the same period in the current reporting period. Related party expenses included in operating expenses include Minoan Capital Proprietary Limited for Rental expenses in the twelve months ending February 28, 2023 was $39,984. The related party rental expenses in the same twelve months in the preceding year ending February 28, 2022 amounted to $38,157. The rent charge is comparable to rent charged for similar properties in the same relative area. The company does market research of a Minimum and a Maximum rental value within the area at every renewal of the rental agreement to ensure this is market related, this exercise is undertaken together with a registered property agent who has the appropriate knowledge of the area. ASC 850-10-50-6. Net Loss The Consolidated Medinotec Group of Companies for the year ending February 28, 2023 showed total net loss of $352,728 up from a loss of $254,005\(Pro-forma Full Year FY 2022) for the year ended February 28, 2022. The change is mainly attributable to the currency fluctuations, general and Admin expenses and sales and marketing expenses which showed a step cost increase to support the higher sales figure, which includes the compliance costs discussed in operating expenses above which is expected to continue to rise as new planned roll territories become active. 64 Table of Contents Interest charged on the loan account for the twelve months ended in favor of related party Minoan Medical Proprietary Limited was $178,584 for the period ended February 28, 2023, up from $0 (2022: interest free) in the year ending February 28, 2022. This change is attributable to the fact that there was an interest waiver in place from the main shareholder at the time to support the company through Covid 19 the interest charges resumed in 2022 at the prime lending rate of South Africa. Interest charged on the loan account for the twelve months ended in favor of related party Minoan Medical Proprietary Limited was $125,966 for the twelve months ended February 28, 2023, up from $0 in the same nine months ending November 30, 2021. This change is attributable to the fact that there was an interest waiver in place from the main shareholder at the time to support the company through Covid 19 the interest charges resumed in 2022 at the prime lending rate of South Africa. The interest rate chargeable is a guideline determined by the South African Reserve Bank and gets utilized by financial institutions to determine the financial gain they may derive from a loan. The Prime rate is therefore an arm’s length transaction and justifiable rate that can be applied to a loan within the borders of the Republic of South Africa and therefore complies with the arm’s length definitions in ASC 850-10-50-6 Liquidity and Capital Resources The Consolidated Medinotec Group of Companies as of February 28, 2023, had total current assets of $3,369,478 and total assets in the amount of $4,490,432. Total current liabilities as of February 28, 2023 were $71,311. Consolidated we had working capital of $3,298,167 as of February 28, 2023 as compared with $512,683 as of February 28 , 2022. Investing activities used $529,723 during the year ended February 28, 2023 and $90,556 for the prior year ended February 28, 2022. The investment into property, plant and equipment peaked in the 2021 Fiscal period as the plant reached maximum potential production its current form. The new focus will be on sales and compliance activities as described in the operating expenses section during the third quarter ending February 28, 2023. $585,000 was invested into a revolving credit facility with a company called Innovative Outcomes Inc. Innovative outcomes will utilize this facility to build a sales and infrastructure for Medinotec Inc Group in the United States. The maximum draw down allowed for this facility is $750,000 and this facility constitutes the only planned major capital commitments that existed at February 28, 3023. Operating activities used cash of $(490,549) during the quarter ended February 28, 2023 compared to $130,201 for the year ended February 28, 2022. This is mainly due to the net loss and operating expenses described above and an increase in investment for accounts receivables, and a decrease of accounts payable. As the business continues to grow the terms of customers will continue to affect the growth in accounts receivables. Financing activities provided cash of $3,577,194 during the period ended February 28, 2023 and $277,149 for the year ended February 28, 2022. The increase in the current year is mainly due to the private placement being concluded during which $3,467,500 was raised and capital raising fees of $ 169,375 was incurred, the remaining balance is due to additional draw down on the related party borrowing from Minoan Medical Proprietary Limited. The loan account in favor of Minoan Medical Proprietary Limited increased by $279,069 during the year ending February 28, 2023. In the prior year the loan account increased by $267,149 in the year ending February 28, 2022. The loan account is used to fund operational requirements. We expect to incur future additional losses as the Medinotec Group of Companies builds out the territory of the United States and expects to return to profitability once this territory establishes a sales force. We have cash available on hand and believe that this cash will be sufficient to fund operations and meet our obligations as they come due within one year from the date these financial statements are issued. In the event that we do not achieve the revenue anticipated in its current operating plan, management has the ability and commitment to reduce operating expenses as necessary. Our long-term success is dependent upon our ability to successfully raise additional capital, market our existing services, increase revenues, and, ultimately, to achieve profitable operations. 65 Table of Contents Our financial statements have been prepared on a going-concern basis, which contemplate s the realization of assets and the satisfaction of liabilities in the normal course of business. We received FDA 510(k) approval through the substantially equivalence process for Class II medical devices for our main product being the Trachealator in November 2021. As the research and development phase of this product has been completed, we expect to see an increase in sales being realized against expenditure incurred. A private placement was done in the wake of the successful research and development and subsequent regulatory approval. Off Balance Sheet Arrangements As of February 28, 2023, there were no off-balance sheet arrangements. Critical Accounting Policies In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are set forth in Note 3 to the financial statements. Recently Issued Accounting Pronouncements The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operation, financial position or cash flow. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are not required to provide the information required by this Item because we are a smaller reporting company.