Medinotec Inc. 10-Q

Item 1. Financial Statements Our condensed consolidated financial statements included in this Form 10-Q are as follows: Page Number 2 Unaudited Condensed Consolidated Balance Sheets as of August 31, 2023 and February 28, 2023; 3 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) for the three and six months ended August 31, 2023 and 2022; 4 Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the three and six months ended August 31, 2023 and 2022; 5 Unaudited Condensed Consolidated Statements of Cash Flows for the three and six months ended August 31, 2023 and 2022; and 6 Notes to the Unaudited Condensed Consolidated Financial Statements. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended August 31, 2023 are not necessarily indicative of the results that can be expected for the full year. 3 Table of Contents Condensed Consolidated Balance Sheets (Unaudited) (in US$) August 31 February 28 2023 2023 $ $ Assets Current Assets Cash 2,838,554 2,827,457 Accounts receivable, net of allowances 180,132 21,074 Inventory 635,994 354,304 Other current assets 179,527 166,643 Total Current Assets 3,834,207 3,369,478 Loans and notes receivable 617,069 605,130 Property, plant and equipment, net of accumulated depreciation 360,132 406,873 Deferred tax asset 118,881 108,951 Total Assets 4,930,289 4,490,432 Liabilities and Stockholders' Equity Current Liabilities Accounts payable and accrued liabilities 110,004 71,311 Taxes payable 12,300 — Due to stockholders/directors 1,588 — Total Current Liabilities 123,892 71,311 Long Term Liabilities Related party loans payable 2,239,240 1,863,066 Total Liabilities 2,363,132 1,934,377 Commitments and Contingencies Stockholders’ Equity Common stock 11,734 11,734 Common stock additional paid in capital 3,296,391 3,296,391 Retained Earnings (Deficit) ( 752,760 ) ( 836,637 ) Accumulated comprehensive income 11,792 84,567 Total Stockholders’ Equity 2,567,157 2,556,055 Total Liabilities and Stockholders’ Equity 4,930,289 4,490,432 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. F- 1 Table of Contents Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) (Unaudited) Three months ended Six months ended August 31, 2023 $ August 31, 2022 $ August 31, 2023 $ August 31, 2022 $ Revenue Goods sold 350,792 135,879 766,999 332,350 Cost of goods sold 60,988 49,436 159,486 135,457 Gross profit 289,804 86,443 607,513 196,893 Operating expenses Depreciation and amortization expense 12,402 19,503 24,845 42,531 General and administrative expenses 183,329 213,334 399,444 301,972 Research and development expenses 11,857 21,892 14,119 55,951 Sales and marketing expenses 26,481 4,301 72,519 17,029 Total operating expenses 234,069 259,030 510,927 417,483 Income (loss) from operations 55,735 ( 172,587 ) 96,586 ( 220,590 ) Non operating income and expenses Interest income 13,371 52 27,704 114 Other revenue/(expense) ( 30,007 ) 6,653 701 13,108 Interest expense ( 70,833 ) ( 53,412 ) ( 136,406 ) ( 95,833 ) Total non-operating income and expenses ( 87,469 ) ( 46,707 ) ( 108,001 ) ( 82,611 ) Income (loss) before income taxes ( 31,734 ) ( 219,294 ) ( 11,415 ) ( 303,201 ) Income taxes Current income taxes 12,300 — 12,300 — Deferred income taxes ( 10,870 ) ( 29,648 ) ( 12,839 ) ( 50,465 ) Net income (loss) ( 33,164 ) ( 189,646 ) ( 10,876 ) ( 252,736 ) Other comprehensive income (loss) from operations ( 22,625 ) 42,586 21,978 51,114 Total comprehensive income (loss) ( 55,789 ) ( 147,060 ) 11,102 ( 201,622 ) Earnings Per Share: Basic $ 0.00 $ ( 0.01 ) $ 0.00 $ ( 0.02 ) The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. F- 2 Table of Contents Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Common Stock Shares Amount Common Stock Additional Paid in Capital Retained Earnings (Deficit) Accumulated Comprehensive Income Total Balance, May 31,2022 11,733,750 11,734 3,296,391.00 ( 546,915 ) 12,368 2,773,578 Net income (loss) for the period — — — ( 189,646 ) — ( 189,646 ) Net foreign currency translation Reserve — — — — 42,586 42,586 Balance, August 31,2022 11,733,750 11,734 3,296,391 ( 736,561 ) 54,954 2,626,518 Balance, February 28,2022 10,000,000 10,000 — ( 477,090 ) ( 2,895 ) ( 469,985 ) Stock issued Stock issued pursuant to acquisitions @ $2 per share 1,733,750 1,734 3,465,766 — — 3,467,500 Net income (loss) for the period — — — ( 252,736 ) — ( 252,736 ) Other comprehensive income Net foreign currency translation adjustment — — — ( 6,735 ) 57,849 51,114 Other increase/decrease in stock Raising fees capitalized — — ( 169,375 ) — — ( 169,375 ) Balance, August 31, 2022 11,733,750 11,734 3,296,391 ( 736,561 ) 54,954 2,626,518 Common Stock Shares Amount Common Stock Additional Paid in Capital Retained Earnings (Deficit) Accumulated Comprehensive Income Total Balance, May 31,2023 11,733,750 11,734 3,296,391.00 ( 814,349 ) 129,170 2,622,946 Net income (loss) for the period — — — ( 33,164 ) — ( 33,164 ) Net foreign currency translation Reserve — — — — ( 22,625 ) ( 22,625 ) Foreign currency apportionment reclassification — — — 94,753 ( 94,753 ) — Balance, August 31,2023 11,733,750 11,734 3,296,391 ( 752,760 ) 11,792 2,567,157 Balance, February 28,2023 11,733,750 11,734 3,296,391 ( 836,637 ) 84,567 2,556,055 Stock issued Net income (loss) for the period — — — ( 10,876 ) — ( 10,876 ) Net foreign currency translation Reserve — — — 94,753 ( 94,753 ) — Other comprehensive income Net foreign currency translation adjustment — — — — 21,978 21,978 Other increase/decrease in stock Raising fees capitalized — — — — — — Balance, August 31, 2023 11,733,750 11,734 3,296,391 ( 752,760 ) 11,792 2,567,157 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. F- 3 Table of Contents Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended August 31, 2023 $ August 31, 2022 $ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) for the period ( 10,876 ) ( 252,736 ) Depreciation 37,268 44,344 Interest paid 104,921 — Deferred income taxes and tax credits ( 9,930 ) ( 54,777 ) (Increase) decrease in receivables ( 95,238 ) 7,925 (Increase) decrease in inventories ( 281,690 ) ( 436,767 ) (Increase) decrease in prepaid expense and other assets ( 12,884 ) ( 2,423 ) Increase (decrease) in accounts payable and accrued expenses ( 12,827 ) 94,374 TOTAL CASH FLOWS FROM OPERATING ACTIVITIES ( 281,256 ) ( 600,060 ) CASH FLOWS FROM INVESTING ACTIVITIES: Payments to acquire property, plant, and equipment — ( 29,560 ) NET CASH USED BY INVESTING ACTIVITIES — ( 29,500 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from assuming long-term debt 260,901 — Proceeds from issuance of long-term debt — 603,499 Capital raising fee paid in equity — ( 169,375 ) Proceeds from issuance of common stock — 3,467,500 NET CASH PRODUCED BY FINANCING ACTIVITIES 260,901 3,901,624 OTHER ACTIVITIES: Effect of exchange rate on cash and cash equivalents 31,452 ( 17,864 ) Net cash (decrease) increase in cash and cash equivalents 11,097 3,254,140 Cash and cash equivalents at beginning of the period 2,827,457 131,577 Cash and cash equivalents at end of period 2,838,554 3,385,717 Supplemental disclosure of cash flow information: Cash paid for: Interest 21,454 21,526 Income taxes — — Cash received for: Interest 14,979 233 Income taxes — — The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. F- 4 Table of Contents Medinotec Incorporated Notes to the Condensed Consolidated Entities Financial Statements For the period ended August 31, 2023 Description of Business Medinotec Inc. is a US-based company with a primary investment in DISA Medinotec ("Medinotec"), a South African medical device manufacturing and distribution company, which in management’s opinion is a global leader in tracheal non-occlusive airway dilation technology and medical device design. “The Company” (consists of Medinotec Incorporated in Nevada, Medinotec Capital Proprietary Limited and DISA Medinotec Proprietary Limited incorporated in South Africa) has experience in establishing facilities for the manufacturing and design of niche medical devices and establishing international distribution networks to commercialize these devices. Medinotec Inc. is seeking to expand sales and distribution operations into the United States of America and other markets. Further the impact of the Ukraine military action and related sanctions on the world economy are not determinable as of the date of these financial statements and the specific impact on the Company’s financial condition, results of operations, and cash flows is also not determinable and remains unknown as of the date of these Unaudited Condensed Consolidated Financial Statements. The Company’s Unaudited Condensed Consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company 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. A private placement was completed in the wake of the successful research and development (R&D) and subsequent regulatory approval in the prior financial year for $ 3,467,500 . Significant Accounting Policies a. Nature of business/basis of preparation The Unaudited Condensed Consolidated Financial Statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations of the SEC for interim financial reporting. The Company’s management believes that the disclosures are adequate to make the information presented not misleading. These Company’s Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2023. Emerging Growth Company (EGC) status The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. F- 5 Table of Contents b. Foreign currency translation i. Translation of foreign subsidiary The accounts of the foreign subsidiaries are translated into U.S. dollars. Assets and liabilities are translated at year end exchange rates and income and expense accounts are translated at average exchange rates in effect during the year. Translation adjustments resulting from fluctuations in the exchange rates are recorded in accumulated other comprehensive income, a separate component of stockholders' equity. ii. Exposed to currency variations in subsidiary The primary operations and functional currency of a subsidiary's business is in South African Rand. Due to the emerging market nature of this currency the spread volatility of the currency low and high can be material during a year. The conversion of the currency from Rand to reporting currency US Dollar can cause significant up or downward trends that is recorded in reserves under the heading accumulated comprehensive income. c. Accounts Receivables Allowance based on a review and management evaluation Accounts receivables are presented on the condensed consolidated balance sheets, net of estimated uncollectible amounts. The carrying amounts of trade accounts receivable and unbilled accounts receivable represent the maximum credit risk exposure of these assets. On a quarterly basis, in accordance with FASB ASC 326, Measurement of Credit Losses on Financial Instruments ("ASC 326"), the Company evaluates the collectability of outstanding accounts receivable balances to determine an allowance for credit losses that reflects its best estimate of the lifetime expected credit losses. The allowance for credit loss is based on an assessment of past events, current economic conditions, and forecasts of future events. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. d. Revenue recognition The Company generate its revenues from the sale of high-quality medical devices which are self- manufactured through in-depth research and development. The products developed are sold via a network of distributors in many parts of the world and through a direct sales force in South Africa. Our clients are billed based on a pricelist that are agreed upon in each customer contract, orders are shipped on a per order basis from our warehouse with Free-on-Board Inco terms, therefore our client assumes the risk of the sale at point of invoice. The Company has two operating segments, Inside the United States of America and Outside the United States of America, these sales are split by these territories and further segregated into the specific line of product sold into these territories. The Company has no contract assets or liabilities representing accrued revenues that have not yet been billed to the customers due to certain contractual terms, because of the fact that orders are placed, invoiced and shipped on a per order basis and when our clients require additional inventory. All revenue is recognized at a specific point and time. F- 6 Table of Contents Revenues are recognized when control of the promised goods or services are transferred to a customer in an amount that reflects the consideration that the Company expects to receive in exchange for those products. The Company apply the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its arrangements: • identify the contract with a customer, • identify the performance obligations in the contract, • determine the transaction price, • allocate the transaction price to performance obligations in the contract, and • recognize revenue as the performance obligation is satisfied. Under ASC Topic 606, the Company estimate the transaction price, including variable consideration, at the commencement of the contract and recognizes revenue at point of sale when risks and rewards are transferred to the customer. There are no contract revenue agreements that would need to be recognized over time and the point of risks and rewards being transferred is very clear. Payment Terms Our payment terms vary per segments; export sales made from within South Africa are subject to prepayment, where accounts are granted, they generally have payment terms of 30 days from statement and sales made inside the United States of America are 45 to 60 days The time between a customer’s payment and the receipt of funds is not significant. Our contracts with customers do not result in significant obligations associated with returns, refunds or warranties. Our payment terms are generally fixed and do not include variable revenues. e. Research and development All research and development expenses are expensed as incurred and are included in operating expenses. f. Earnings per share Basic earnings per share Basic earnings (loss) per share are computed based on the weighted average number of ordinary shares outstanding during each year. g. New accounting pronouncements In November 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses which amends ("ASU") No. 2016-13 Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") and modifies or replaces existing models for impairment of trade and other receivables, debt securities, loans, beneficial interests held as assets, purchased-credit impaired financial assets and other instruments. The new standard requires entities to measure expected losses over the life of the asset and recognize an allowance for estimated credit losses upon recognition of the financial instrument. For the Company, this standard is effective December 15, 2022, with early adoption permitted. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The impact of this was assessed on accounts receivable and loans receivable, and the impact was not material for this reporting period. F- 7 Table of Contents Allowance for Credit Losses – Accounts Receivable The allowance for credit losses required under ASC 326 is a valuation account that is deducted from the accounts receivables’ amortized cost basis on the Company’s Unaudited Co ndensed consolidated balance sheets. Our accounts receivables are generated from the sales revenue. The Company elected to estimate expected losses using an analytical model based on methods that utilize the accounts receivable aging schedule. This analytical model incorporates historical loss activity, geographic location, customer-specific information, collection terms and customer amounts. The Company evaluates the estimated allowance on an aggregate basis as each individual account receivable shares similar risk characteristics. Upon adoption of ASC 326 using the modified retrospective transition method and as of August 31, 2023, the Company determined that the allowance for credit losses, if any, is immaterial as of adoption date and the Company will continue to evaluate the accounts receivable portfolio on an on-going basis. The Company sells a significant amount to DISA Vascular Distribution trading as DISA Life Sciences. For the quarter ending August 31, 2023 33 % (August 31, 2022: 64 % ) and for the six months ended August 31, 2023 29 % (August 31,2022: 66 % ) of the Company's total revenue is derived from this single customer in the distribution environment in South Africa. No allowance for doubtful accounts was recognized as of August 31, 2023 and February 28, 2023, respectively. Exports out of South Africa is done on a pre-payment basis with exception of one customer whose account was settled in full post quarter end. Sales inside South Africa is conducted through DISA Lifesciences whose account was settled in full after the end of the quarter. All sales in the United States of America were made for the first time during the first quarter and fully collected post quarter within terms. All other ASUs issued and not yet effective for the three months ended August 31, 2023, and through the date of this report, were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s financial position or results of operations. h. Reporting segments The Company has two main reportable segments that comprise the structure used by the Company executive committee (Exco) to make key operating decisions and assess performance. The Company’s reportable segments are operating segments that are differentiated by the activities that each undertakes and the products they manufacture and market (referred to as business segments). Each business utilizes the same technology, manufacturing and marketing strategies, and differ by geographical region only. The Company evaluates the performance of its reportable segments based on operating profit after re- measurement items. The Company accounts for inter-segment sales and transfers as if the sales and transfers were entered into under the same terms and conditions as would have been entered into in a market-related transaction. The financial information of the Company’s reportable segments is reported to the Exco for the purpose of making decisions about allocating resources to the segment and assessing its performance. Operating segments are reported in a manner consistent with the internal reporting provided to the Exco who is responsible for allocating resources and assessing the performance of the operating segments. Medinotec Inc's qualitative application of the segmental accounting policy The Exco is the Company’s chief operating decision-maker. Management has determined the operating segments based on the information reviewed by the Exco for the purposes of allocating resources and assessing performance. The Exco considers the business from a mainly a geographic perspective since products sold in all territories are the same. Geographically, management considers the performance within the United States of America and Outside the United States of America. From a product sales perspective, management separately considers the activities in these geographies on a segmental basis. The Company manufactures and sells medical devices in two divisions namely Sales inside the United States of America (Domestic) and Sales outside the United States of America (International). F- 8 Table of Contents Fair Value Measurements The Company reports all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the Unaudited Cond ensed Consolidated financial statements on a recurring basis. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 — Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Level 3 — Inputs are unobservable inputs for the asset or liability. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest-level input that is significant to the fair value measurement in its entirety. At August 31, 2023 and February 28, 2023, all of the Company’s cash and cash equivalents, trade accounts receivable and trade accounts payable were short term in nature, and their carrying amounts approximate fair value. Our current and long-term debt arrangements are classified as level 2 financial instruments. Property, plant and equipment Property, plant and equipment consist of the following: August 31 February 28 2023 2023 $ $ Leasehold improvement 18,660 19,134 Computer equipment 148,950 152,731 Computer software 57,101 58,551 Office equipment 7,093 7,273 Furniture and fixtures 101,014 103,578 Motor vehicles 12,138 12,446 Small assets 13,796 14,146 Plant and machinery 1,076,849 1,104,182 Laboratory equipment 243,806 249,995 Total cost 1,679,407 1,722,036 Foreign currency adjustment 60,268 90,379 Total accumulated depreciation ( 1,379,543 ) ( 1,405,542 ) Total 360,132 406,873 Depreciation expense totaled $ 37,268 for the six months ending August 31, 2023 and $ 44,344 for the six months ending August 31, 2022. No additions were made to Plant and machinery for the three months ending August 31, 2022. There were no additions for the three months ending August 31, 2023. There were no disposals in either of these periods. The movement in property, plant and equipment from February 28, 2023 to August 31, 2023 is due to foreign currency adjustments only. F- 9 Table of Contents Other current assets August 31 February 28 2023 2023 $ $ Tax and statutory refunds 126,798 166,643 Prepayments 51,170 — Other receivable 1,559 — Total 179,527 166,643 Inventories Accounts by period Inventory consists of the following: August 31 February 28 2023 2023 $ $ Finished goods 80,320 59,004 Raw material 498,654 288,030 Work in progress 59,479 34,356 Less provisions for obsolescence ( 2,459 ) ( 27,086 ) Total 635,994 354,304 Loans and notes receivable August 31 February 28 2023 2023 $ $ Innovative outcomes 629,596 605,130 In furtherance of our efforts to expand into the United States of America, on September 16, 2022, we entered into an unsecured revolving line of credit to lend Innovative Outcomes, Inc. up to $ 750,000 , of which $ 585,000 has been drawn as of August 31,2023. Innovative Outcomes is a company in Little Rock, Arkansas, and we plan to enter into an arrangement with the entity for the marketing and distribution of various products. The funds from our line of credit will be used by Innovative Outcomes for setting up infrastructure for the products, including a headquarters for sales representatives, an administrative hub and customer services to handle all back-office items, setting up a sales system and marketing program, warehousing of inventory in a licensed warehouse, setting up distribution capabilities, marketing activities and training activities. • Maximum allowed according to Revolving Credit Agreement: $ 750,000 • Amounts advanced shall bear interest at a per annum rate equal to eight percent ( 8.0 % ), compounded monthly. In the event of a default, any amounts advanced will bear interest at (12%) per annum . • Maturity: September 30, 2024 • Unsecured • Amount drawn: $ 585,000 F- 10 Table of Contents The entity considers the performance of the loan to Innovative Outcomes against the development of the related infrastructure to support sales into the inside the United States of America Sales segment and then determines the allowance for credit loan losses. Since the segment showed significant growth over the past quarter and the growth is expected to continue in the United States of America sales territory management deems this loan made for the intention of building the United States of America market as being fully performing at the moment. There has also not been any material breach in the contract for the quarter under review and therefore the loan is classified as fully performing at the moment and no credit loss is provided against it. Management conducts this assessment once a quarter. Loans payable Loans from related parties Loans payable consist of a $ 2,238,974 unsecured loan from the prior parent entity of DISA Medinotec Proprietary Limited incorporated in South Africa called Minoan Medical Proprietary Limited. This loan originated to fund working capital and capex expansions of DISA Medinotec Proprietary Limited during the developmental and startup phase. After the acquisition of DISA Medinotec Proprietary Limited Company assumed this liability. The Company has a period of 3 years after the IPO date or a date at which the company starts trading on a recognizable exchange to repay the loan . During these 3 years the loan will carry interest at the prevailing prime lending rate of the time. The prevailing prime lending rate on the quarter ending August 31, 2023 in South Africa is 11.75 % . The interest charged for the quarter was $ 61,054 and a 1% movement in the interest rates constitutes a value of $5,598 on a quarterly basis . 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. The loan can be settled in cash or any other form of equivalent, it’s important to note that the South African Reserve Bank would need to approve any settlement made by Medinotec Inc on behalf of its subsidiary DISA Medinotec Proprietary Limited. Minoan Medical Proprietary Limited’s ultimate beneficial owner is the CEO of the Company Dr. Gregory Vizirgianakis and is used to hold his medical investments and exports of which DISA Medinotec Proprietary Limited was one of these investments before it got transferred into the Company. Pieter van Niekerk (CFO) also serves as a director on Minoan Medical Proprietary Limited. Operational charges are charged to the Minoan Medical loan account. August 31 February 28 2023 2023 $ $ Minoan Medical Proprietary Limited 2,238,974 1,862,793 Minoan Capital Proprietary Limited 266 273 Total loans payable 2,239,240 1,863,066 F- 11 Table of Contents Minoan Medical Proprietary Limited: This is an unsecured loan entered into during the 2016 fiscal year which is repayable at the end of 3 years after any Initial Public Offering (IPO). This note will become due in full on March 31, 2026. The loan carries interest at the prevailing prime lending rate of the time. The prevailing prime lending rate on the quarter ending August 31, 2023 in South Africa is 11.75 % . The interest charged for the quarter ending August 31, 2023 was $ 61,054 . Interest charged for the quarter ending August 31, 2022 was $ 41,953 at the then prevailing interest rate of 9 % . The Company has the option to settlement in cash or equivalents, and any settlements of this loan account by Medinotec Inc on behalf of its wholly owned subsidiary would require South African Reserve Bank Approval. It will be treated as a liability until such approval has been granted, the Company is in the process of applying for approval. Accounts payable and accrued expenses Accounts payable by period Accounts payable consist of the following: August 31 February 28 2023 2023 $ $ Trade accounts payable 57,446 53,615 Accrued payroll, payroll taxes and vacation 27,550 6,995 Royalties payable 25,008 10,701 Total 110,004 71,311 Commitments a. Leases and deferred rent The Company leases office and warehouse spaces under noncancelable operating lease agreements, which became effective on August 1, 2023 for a period of 3 years, terminating July 31, 2026. The Company is required to pay property taxes, insurance, and normal maintenance costs for certain of these facilities and will be required to pay any increases over the base year of these expenses on the remainder of the Consolidated entities facilities. Certain of the Company’s operating leases contain predetermined fixed escalations of minimum rentals during the lease term. For these leases, the Company recognize the related rental expense on a straight- line basis over the life of the lease from the date the Company takes possession of the office and records the difference between amounts charged to operations and amounts paid as deferred rent. As of August 31, 2023 $ 0 had been accrued. F- 12 Table of Contents The Company leases office and warehouse spaces under operating lease agreements. Rent expense under the agreement was $ 2,642 for the quarter ending August 31, 2023. Rent commitments, before considering renewal options that generally are present, were as follows: Financial year ending February 28 $ 2024 15,853 2025 31,705 2026 31,705 2027 13,210 2028 — Total 92,473 b. Litigation From time to time, the Company may become involved in various legal proceedings in the ordinary course of its business and may be subject to third-party infringement claims. In the normal course of business, the Company may agree to indemnify third parties with whom they enter into contractual relationships, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third-party claims that the Company’s products, when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each claim. From time to time, the Company is subject to various claims that arise in the ordinary course of business. Management believes that any liability of the Condensed Consolidated entities that may arise out of or with respect to these matters will not materially adversely affect the financial position, results of operations, or cash flows of the Company. At reporting date there is no known material litigation or claims against the Company. Stockholders' equity a. Authorized and issued stock by period Authorized: As of August 31, 2023, Medinotec Inc., the parent Company, had 188,266,250 shares of common stock authorized and available to issue for purposes of satisfying conversion of preferred stock, the exercise of warrants, the exercise and future grant of common stock options, and for purposes of any future business acquisitions and transactions. As of August 31, 2023, Medinotec Inc., the parent Company, had 20,000,000 shares of preferred stock authorized and available to issue. Issued and outstanding shares August 31 February 28 2023 2023 $ $ Common stock 11,734 11,734 Common stock additional paid in capital 3,296,391 3,296,391 Total 3,308,125 3,308,125 F- 13 Table of Contents Income taxes a. Provision for income taxes The components of income tax expense are as follows: Three months ended (unaudited) Six months ended (unaudited) August 31 2023 $ August 31 2022 $ August 31, 2023 $ August 31, 2022 $ Tax from operations Current 12,300 — 12,300 — Deferred/future Foreign ( 10,870 ) ( 29,648 ) ( 12,839 ) ( 50,465 ) Total $ ( 1,430 ) ( 29,648 ) ( 539 ) ( 50,465 ) The reconciliation of income tax expense (benefit) computed at the Federal statutory tax rates to income tax expense (benefit) is as follows: Three months ended (unaudited) Six months ended (unaudited) August 31 2023 % August 31, 2022 % August 31 2023 % August 31, 2022 % Tax at federal statutory rates 21 21 21 21 Deferred taxes and timing differences ( 16 ) ( 7 ) ( 16 ) ( 4 ) Effective tax rate 5 14 5 17 No uncertain tax positions have been identified for the current or comparative period. b. Deferred taxes/Future income tax assets and valuation allowance Significant components of the Company's future tax assets are as follows: August 31 February 28 2023 2023 $ $ Leave pay provision 3,390 3,102 Tax credits assessed by tax authorities 108,739 105,849 Provision for Royalties 6,752 — Total 118,881 108,951 Net deferred/future tax asset 118,881 108,951 Deferred tax assets refer to assets that are attributable to differences between the Condensed Consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets in essence represent future savings of taxes that would otherwise be paid in cash. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income, including capital gains. If it is determined that the deferred tax assets cannot be realized, a valuation allowance must be established, with a corresponding charge to net income. The current six months ending August 31, 2023 the Company is approaching its breakeven point with marginal profitability. The on boarding of various planned new products as discussed in the post balance sheet events note is expected to change the profitability of the Company materially into the future and therefore the deferred tax assets on the tax losses will be utilized as these profits build up over time. F- 14 Table of Contents Related party transactions Related Party Summary Name Relationship with the Medinotec Company of Companies Related transactions with the Medinotec Company of Companies Related Directors with the Medinotec Company of Companies Related Owners with the Medinotec Company of Companies Minoan Medical Proprietary Limited Medical investment company controlled by Dr Gregory Vizirgianakis Related Party Loan and Sales Dr Gregory Vizirgianakis Pieter van Niekerk Dr Gregory Vizirgianakis is the ultimate beneficial owner Minoan Capital Proprietary Limited Property investment company controlled by Dr Gregory Vizirgianakis Related party loan Rental Expenses Dr Gregory Vizirgianakis is the ultimate beneficial owner DISA Vascular Distribution Proprietary Limited trading as DISA Lifesciences Distributor appointed by DISA Medinotec Proprietary Limited for Africa Sales Income Pieter van Niekerk – Serves as independent non-executive according to distribution agreement. n/a external third party Pieter van Niekerk resigned as a non-executive director on October 14, 2022 and therefore the related party relationship ceased to exist on the same date. Medinotec Capital Proprietary Limited The African holding company of the Medinotec Company of Companies Related party loan payable to Minoan Capital Dr Gregory Vizirgianakis Pieter van Niekerk Medinotec Incorporated in Nevada is the 100% ultimate parent entity DISA Medinotec Proprietary Limited The African operating and manufacturing company Related party loan with Minoan medical Operational income and expenses with Minoan Medical Dr Gregory Vizirgianakis Pieter van Niekerk Medinotec Incorporated in Nevada is the 100% ultimate parent entity Medinotec Incorporated Nevada Ultimate parent of Medinotec Capital and DISA Medinotec All of the above for its related subsidiaries Dr Gregory Vizirgianakis Pieter van Niekerk Joseph P Dwyer Stavros Vizirgianakis This is the entity owned by the shareholders and primarily controlled by Dr Gregory Vizirgianakis and his Brother Stavros Vizirgianakis F- 15 Table of Contents Medinotec Company of Companies The Consolidated Company name of Medinotec Incorporated, Medinotec Capital Proprietary Limited and DISA Medinotec Proprietary Limited above for its related subsidiaries Dr Gregory Vizirgianakis Pieter van Niekerk Joseph P Dwyer Stavros Vizirgianakis This is the entity owned by the shareholders and primarily controlled by Dr Gregory Vizirgianakis and his Brother Stavros Vizirgianakis Pieter van Niekerk Chief financial officer of the Medinotec Company of Companies Transactions relating to mutual entities disclosed above Related directorships disclosed above Minority Shareholder in Medinotec Inc Gregory Vizirgianakis Chief Executive officer of the Minoan Company of Companies Transactions relating to mutual entities disclosed above Related directorships disclosed above Shareholder in Medinotec Inc and Kingstyle investments. Brother of Stavros Vizirgianakis Stavros Vizirgianakis Non-Executive director of the Medinotec Company of companies Brother of Gregory Vizirgianakis Transactions relating to mutual entities disclosed above No Related other Directorships in Medinotec Company of Companies n/a Joseph Dwyer Non-Executive director of the Transactions relating No Related n/a Medinotec Company of companies to mutual entities other disclosed above Directorships in Medinotec Company of Companies F- 16 Table of Contents a. Rent DISA Medinotec Propriety Limited leases commercial buildings from Minoan Capital Proprietary Limited (“Minoan Capital”). Minoan Capital is fully owned by the Chief Executive Officer of the Medinotec Company of Companies, Dr. Gregory Vizirgianakis. Pieter van Niekerk, CFO of the Medinotec Company of Companies, also serves as a director on Minoan Medical Proprietary Limited. The lease agreement was renewed, effective August 1, 2023 for a period of 3 years, terminating July 31, 2026. Set forth below is a table showing the Company’s rent paid and accounts payable for the quarters ended August 31, 2023 and 2022, with Minoan Capital: Three months ended (unaudited) Six months ended (unaudited) August 31, August 31, August 31, August 31, 2023 $ 2022 $ 2023 $ 2022 $ Rent expense 7,970 8,800 15,853 18,352 Accounts payable — — — 3,823 Total 7,970 8,800 15,853 22,175 Reporting Segments and Disaggregated Revenue The Company has two reportable segments that comprise the structure used by the Company executive committee (Exco) who are considered Chief Operating Decision Makers, to make key operating decisions and assess performance. The Company’s reportable segments are operating segments that are differentiated by the activities that each undertakes and the products they manufacture and market (referred to as business segments). Each business utilizes the same technology, manufacturing and marketing strategies, but differ by geographical region only. The Exco is considered to be the Chief Operating Decision Makers and considers the business from a geographic perspective since products sold in all territories are the same. Geographically, management considers the performance within the United States of America and Outside the United States of America. From a product sales perspective, management separately considers the activities in these geographies on a segmental basis. The Company manufactures and sells medical devices in two divisions namely Sales inside the United States of America (Domestic) And Sales outside the United States of America (International). Income statement measures applied Three months ended (unaudited) Six months ended (unaudited) August 31, August 31, August 31, August 31, 2023 $ 2022 $ 2023 $ 2022 $ Inside United States of America 109,374 — 284,294 — Outside United States of America 241,418 135,879 482,705 332,350 Total 350,792 135,879 766,999 332,350 F- 17 Table of Contents Three months ended (unaudited) Six months ended (unaudited) August 31, August 31, August 31, August 31, 2023 $ 2022 $ 2023 $ 2022 $ Outside United States of America Cape Cross NC Catheter 60,983 28,170 103,211 56,473 Cape Cross PTCA Catheter 54,109 36,857 99,392 107,142 Trachealator Catheter 120,200 66,205 265,236 148,107 Components 6,126 4,647 14,866 20,628 241,418 135,879 482,705 332,350 Inside United States of America Trachealator Catheter 109,374 — 284,294 — Total Company Sales 350,792 135,879 766,999 332,350 38 % (2022: 68 % ) of the Company's total revenue for the quarter ended August 31, 2023 is derived from a single customer in the distribution environment in South Africa namely DISA Vascular Distribution Proprietary Limited t/a DISA Life Sciences. For the six months ended August 31, 2023, 29% (2022: 66%) of the Company’s total revenue was derived from DISA Life Sciences. Three months ended (unaudited) Six months ended (unaudited) August 31, August 31, August 31, August 31, 2023 $ 2022 $ 2023 $ 2022 $ Depreciation and amortization Inside United States of America — — — — Outside United States of America 18,603 19,503 37,268 42,531 Subsequent events Subsequent to the quarter ended August 31, 2023 the Company signed several sub distribution agreements with principals that supply cardiac devices internationally. These agreements will make the Company one of the primary cardiac product suppliers in South Africa. The Company will be taking over several assets as well as a sales force that is already in existence. Additionally, on October 11, 2023, the Company appointed Mr. Mr. Athanasios Spirakis as a member of its Board of Directors and to serve as a member of the audit committee of the Company. F- 18 Table of Contents