Medinotec Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. Business Overview Medinotec Inc. established Medinotec Capital Proprietary Limited in South Africa as a wholly owned subsidiary, which in turn acquired DISA Medinotec Proprietary Limited, after successfully proving that a private placement of a minimum of $3 Million was feasible. Medinotec Capital Proprietary Limited acquired DISA Medinotec Proprietary Limited (therefore establishing the Medinotec Company of Companies), a South African based medical device manufacturing and distribution company. In 2018, DISA Medinotec Proprietary Limited developed its most innovative product to date – the Trachealator. This award-winning (Medical Design Excellence Awards – Gold Winner 2021) balloon catheter was developed to address an as-yet unmet supply need in the specialty of advanced airway management, more specifically tracheal dilation. That makes this innovative product in our opinion a world first in its ability to dilate a patient’s airway while maintaining ventilation to the patient without obstructing his/her airway. This life-saving device has quite literally changed the way that tracheal and, to a degree, bronchial stenosis, is managed in extremely ill patients. This is especially true in a post Covid-19 world where tracheal stenosis due to extended tracheal intubation is becoming an ever more frequent pathology encountered by surgeons. The Medinotec Company of Companies is currently in management’s opinion considered a global leader in tracheal non-occlusive airway dilation technology. This belief of management was formed on the fact that there are a number of airway dilation balloons that are offered for the management of tracheal stenosis, but to our knowledge all of them are occlusive in nature. The fact that the Trachealator is a non-occlusive airway solution, allowing for continuous ventilation during dilation, results in management believing that we could be regarded as a global leader in this technology. 4 Table of Contents Other products manufactured by The Medinotec Company of Companies include: • The “Cape Cross PTCA Catheter” The Medinotec Company of Companies also designed and developed a range of semi-compliant coronary PTCA balloon catheters known as the Cape Cross, which attained a CE Mark and are marketed around the world and in South Africa, becoming a widely used interventional balloons in the market. A PTCA balloon catheter (also known as a Plain Old Balloon Angioplasty [“POBA”] catheter) is inserted either from the groin or the arm and threaded through the blood vessels, through the aorta into the heart. The cardiac surgeon and/or interventional cardiologist will move the catheter to the blocked artery (plaque). The balloon part of the catheter is inflated to open the blockage in the artery, after which the balloon is deflated, and the entire catheter withdrawn and removed. If this procedure is not effective enough to open the artery, a coronary stent will be placed inside the diseased area of the artery. • Cape “ Cross Non-Compliant (“NC”) ” Catheter On the back of the Cape Cross, the Cape Cross NC Catheter was developed for post dilation purposes. The product has become a mainstay of our cardiology range. It is CE Marked and widely used in South Africa. After a stent is placed in an artery, it is followed up by moving a NC catheter to the site where the stent was placed. The NC catheter balloon part is then inflated inside the stent. This is done to “seat” the stent inside the artery wall. In other words, if the stent was not optimally placed, the NC Catheter can be used to make the stent fit “snugly” against the artery wall to avoid dislodgement and movement of the stent after placement. • The “Lamprey” Suction Dissector, a surgical tool used in the fields of neurosurgery, ear, nose and throat (“ENT”) surgery and general surgery to combine the processes of suctioning blood out of the surgeon’s field of view while allowing him/her to dissect sensitive structures without having to change instruments. • The Aortic Perfusion and Dilation Catheter, a non-occlusive perfusion balloon to allow the expansion of the aortic valve (“BAV” or Balloon Aortic Valvuloplasty) without impeding the cardiac output, which is currently in the mid stages of research and development and could potentially be used to post-dilate the artificial valve in Transcatheter Aortic Valve Implantation (“TAVI”), a rapidly growing market, without the need for pacing. • A highly specific, niche Chronic Total Occlusion (“CTO”) Catheter of 1mm in diameter. This micro balloon catheter addresses an extremely specific market need for difficult coronary cases and will cement our position as one of the leading specialized coronary balloon catheter manufacturers in the world. • A new self-expanding, temporary, silicone Tracheal Stent to be used in conjunction with the Trachealator in the treatment of tracheal stenosis. The complimentary nature of this product will build on our current expertise in the field of advanced airway management. The following distinct and finite developmental phases / stages are applicable to all our product pipeline, namely: 1) R&D 2) Pre-production prototyping 3) Testing 4) Production 5) Clinical trials 5 Table of Contents 6) MDR/CE Mark accreditation 7) Local marketing & selling 8) International sales outside the US 9) FDA 510 (k) approval 10) Sales to the United States. The products described have reached the following stages: Trachealator: The only outstanding phase is the commencement of material sales into the United States. All the necessary preparations have been made (e.g., renting offices, hiring sales and admin staff) and it is therefore envisaged that sales will begin once all paperwork and compliance matters are addressed. While unlocking the United States of America as a commercial market for the product various Compliance documents and customer registration were completed, these customers are performing their own in-house clinical overviews of the product. The first order for $10,000 was placed during December, 2022 which means commercialization in the United States of America has started. Cape Cross PTCA Catheter: FDA 510(k) approval still needs to be obtained. Cape Cross NC Catheter: FDA 510(k) approval still needs to be obtained. Lamprey Suction Dissector: R&D, Testing, Pre-Production Prototyping, Production, Clinical Trials, and CE Marking have all been completed. Commercialization of this product have been paused in order to prioritize other products with better commercial prospects. Aortic Perfusion & Dilatation Catheter: R&D, Testing, Pre-Production Prototyping, Testing, Production, Clinical Trials, Application for MDR CE Mark Accreditation has been submitted. Micro CTO Catheter: R&D, Testing, Pre-Production Prototyping Tracheal Stent: R&D 6 Table of Contents Results of Operations for the Three and Six Months ended August 31, 2023 and 2022 Medinotec Inc. was formed in Nevada and is at the moment a holding company, but it is expected to facilitate the sales of all products in the United States directly in the near future. Therefore, over time, as we implement our business plan and realize commercial operations in the United States, we believe Medinotec Inc. will become the primary operating company within the Medinotec Company of Companies and the South African DISA Medinotec Proprietary Limited will be the manufacturing platform for the operations in the United States and other countries. Revenue The Consolidated Medinotec Company of Companies’ revenue for the quarter ended August 31, 2023 was $350,792 compared to $135,879 in revenue being recorded in the comparative quarter for the prior year. The Consolidated Medinotec Company of Companies’ revenue for the six months ended August 31, 2023 was $766,999 compared to $332,350 revenue being recorded in the comparative six months in the prior year. The revenue was up in comparison to the prior year with $214,913 for the quarter and up by $434,649 for the six months. The reason for the higher sales growth in quarter two was due to demand in the South African region and replenishing of inventory levels by hospitals as well as increased interest and demand in the products of the Medinotec Company of Companies. This table indicates the sales per product as a breakdown of the total revenue balance: 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 Revenue generated by affiliations to related parties were as follows: The increase overall for the tracheal or product in both the Outside and Inside United States territories, is substantiated by the roll out of this product as our lead product in the non-occlusive tracheal dilation market. Cost of Goods The Company’s operating expenses were $234,069 for the quarter ended August 31, 2023, down from $259,032 for the quarter ended August 31, 2022. The Company’s operating expenses were $510,927 for the six months ended August 31, 2023, up from $417,483 for the six months ended August 31, 2022. The Rand weakened from an average conversion rate of 1$: 16.67 (Q2: 2022) to 1$: 18.50 (Q2: 2023) against the US Dollar. Therefore, this will cause an expense decrease/improvement of 11% on the operating expenses due to dollar strength within the conversion rate applied. This is estimated at a value of $25,748. 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 for the six months ended August 31, 2023. 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. 7 Table of Contents Limited R&D activities were conducted in this quarter due to the focus on rolling out the Trachealator in the United States which consumed all production and testing resources. R&D activities have resumed, and are expected to increase for the rest of the year. General and administrative expenses showed significant growth due increases in payroll costs in the United States, indemnity insurance and payments made to service providers as part of obtaining our quotation on the OTCQX markets. Costs relating to the quotation on the OTC markets that will not be non-recurring in the future is estimated at $30,000 and all other costs will be repeated in the future. 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 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 have been entered and all regulatory requirements met. Three months ended (unaudited) Six months ended (unaudited) August 31, August 31, August 31, August 31, 2023 $ 2022 $ 2023 $ 2022 $ Compliance cost 5,699 79,699 65,962 95,112 *Compliance costs are included in the General and Admin expenses line item. 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 the company is in the process of expanding its sales footprint in the United States of America, the dedicated sales force will continue to grow as new territories pass the compliance hurdles. Three months ended (unaudited) Six months ended (unaudited) August 31, August 31, August 31, August 31, 2023 $ 2022 $ 2023 $ 2022 $ Sales and Marketing 26,481 4,301 72,519 17,029 Related party expenses included in operating expenses include Minoan Capital Proprietary Limited for Rental expenses in the third quarter ending was $7,970. The related party rental expenses in the same quarter preceding year ending August 31, 2022 amounted to $8,800. 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 Profit / Loss The Consolidated Medinotec Company of Companies for the quarter ending August 31, 2023 showed total net loss of $33,164, down from a loss of $189,648 from the prior quarter ending August 31, 2022. The Consolidated Medinotec Company of Companies for the six months ending August 31, 2023 showed total net loss of $10,876, down from a loss of $252,736 from the six months ending August 31, 2022. 8 Table of Contents The change is mainly attributable to the higher sales in the Unites States of America, Currency fluctuations, general and Administrative 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. Related party expenses included in operating expenses include Minoan Capital Proprietary Limited for Rental expenses in the first quarter ending August 31, 2023 was $7,970. The related party rental expenses in the same quarter preceding year ending August 31, 2022 amounted to $8,800. 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. Interest charged on the loan account for the quarter ended in favor of related party Minoan Medical Proprietary Limited was $61,054 for the quarter ended August 31, 2023, up from $41,953 in the same quarter ending August 31, 2022. This change is attributable to an increase in the prime lending rate and additional draw downs on the loan. 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 Company, as of August 31, 2023, had total current assets of $3,834,207 and total assets in the amount of $4,930,289. Total current liabilities as of August 31, 2023 was $123,892. The Company had working capital of $3,710,315 as of August 31, 2023. 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, the build out of the United States of America market is evident from the six month loss of $10,876 for the six month period ended August 31,2023 versus the loss of $252,736 for the comparative period ending August 31,2022. 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 and therefore the Company has enough cash reserves and working capital to fund the roll out in the market of the United States of America (USA) including new R&D activities and Marketing and Sales functions . The Company also embarked on obtaining additional distribution contracts in the cardiology field which will further complement its basket of products within the territory of South Africa, these distribution rights are expected to be granted and transitioned by Sept 2023. We further expect to grow distribution revenues in the future which will add to the product basket and ensure more revenue streams with mature profitable products that will complement our in house developed products. 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 Condensed Consolidated 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. Our 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. 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, the build out of the United States of America market is evident from the small loss of $10,876 for the six months ended August 31, 2023 versus the loss of 252,736 for the comparative period ending August 31, 2022. 9 Table of Contents Cash Flow Movements Operating activities used cash of $17,131 during the quarter ended August 31, 2023 compared to $480,779 for the same quarter ended August 31, 2022. For the six months ending August 31, 2023 operating cash requirements was 281,256 in comparison to $600,000 the 6 months ending August 31, 2022. This is mainly due to an increase in investment for accounts receivables and inventory combined for the 2022 period and investment in inventory for the current year these outflows are directly related to supporting the sales initiative in the United States of America. Since sales significantly increased quarter on quarter. As the business continues to grow the terms of customers will continue to affect the growth in accounts receivables while sales grow. Investing activities was insignificant with a total spend of $18,011 during the quarter ending August 31, 2023 and consumed $1,047 for the prior quarter ending August 31, 2022. No investing activities took place for the six months ending August 31,2023 and for the comparative six months ending August 31, 2022 the group invested $ 29,500 into property plant and equipment. 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 quarter ending August 31, 2023. Any current outflows for new plant will be purely to maintain operating levels and to replace outdated items. Financing activities provided cash of $168,110 during the quarter ended August 31, 2023 and $318,608 for the same quarter in the prior year. For the six months ending August 31, 2023 financing activities provided funding of $260,901 compared to $3,901,564 in the prior period ending August 31, 2022. The increase in the prior 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 increases in the current quarter and prior quarter is due to an additional drawdown on the related party borrowing from Minoan Medical Proprietary Limited. The loan account in favor of Minoan Medical Proprietary Limited increased by $476,171 during the quarter ended August 31, 2023. In the prior year the loan account increased by $318,561 in the quarter ended August 31, 2022. The loan account is used to fund operational requirements. The loan account in favor of Minoan Medical Proprietary Limited increased to $260,901 for the six months ended August 31, 2023. Off Balance Sheet Arrangements As of August 31, 2023, there were no off-balance sheet arrangements. Critical Accounting Estimates Our critical accounting estimates are set forth in Note 2 to the Unaudited Condensed Consolidated Financial Statements. We are classified as an emerging growth company for our first five fiscal years after obtaining an IPO since our gross revenues does not exceed $1.07 billion, we have not issued over $1 billion in non-convertible debt over three years, and have not elected to become a large accelerated filer. We also qualify as a small reporting company since our public float is below $250 Million and less than $100 million in revenue. If a company qualifies as a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K, it may choose to prepare its disclosure relying on scaled disclosure requirements for smaller reporting companies in Regulation S-K. With the current information available the company expects to remain an Emerging Growth Company for at least five years. 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 Consolidated results of operation, financial position or cash flow. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable 10 Table of Contents