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, after successfully proving that a private placement of a minimum of $3 million was feasible. Medinotec Capital Proprietary Limited acquired DISA Medinotec (therefore establishing the Medinotec Group of Companies), a South African based medical device manufacturing and distribution company. In 2018, DISA Medinotec 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 the Company’s 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. In management’s opinion, the Company is currently 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 the Company’s 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 the Company could be regarded as a global leader in this technology. 4 Table of Contents Other products manufactured by the Company include: • The “Cape Cross PTCA Catheter”: The Company 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 OUTFLO: 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 may cement in our opinion a 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 and provide the surgeon with additional treatment options for complicated Airway Stenosis cases. The Epistaxis: an inflatable non-occlusive balloon nasal catheter has been designed for fast control of intranasal bleeding. The preliminary clinical trials conducted were in the Company’s opinion satisfactory. The following distinct and finite developmental phases / stages are applicable to all the Company’s product pipeline, namely: 1) R&D 2) Pre-production prototyping 3) Testing 4) Production 5) Clinical trials 6) MDR/CE Mark accreditation 7) Local marketing & selling 8) International sales outside the United States 9) FDA 510 (k) approval 10) Sales to the United States 5 Table of Contents The products described have reached the following stages: Trachealator: From humble beginnings, the Company is pleased to report that it has supplied over 400 Trachealators, both in private and academic hospitals throughout the United States of America. FDA listing registration for Medinotec Inc was obtained. Cape Cross PTCA Catheter: FDA 510(k) clearance pending. Cape Cross NC Catheter: FDA 510(k) clearance pending OUTFLO Aortic Perfusion Dilatation Catheter R&D, Testing, Pre-Production Prototyping, Testing, Production, Clinical Trials, Application or MDR CE Mark Accreditation has been submitted. FDA 510 (K) clearance in progress. Micro CTO Catheter: R&D, Testing, Pre-Production Prototyping, Clinical Trials MDR/CE Mark accreditation application has been submitted. Tracheal Stent: R&D Epistaxis Catheter R&D, Testing, Pre-Production Prototyping, Testing, Production, Clinical Trials. Results of Operations for the Three and Nine Months ended November 30, 2023, and 2022 Medinotec Inc. was formed in Nevada and is a holding company and is currently facilitating the sales of all products in the United States directly. 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 Group of Companies and the South African DISA Medinotec will be the manufacturing platform for the operations in the United States of America and other countries. Revenue The Company’s revenue for the quarter ended November 30, 2023, was $2,002,547, compared to $387,989 in revenue being recorded in the comparative quarter for the prior year. The Company’s revenue for the nine months ended November 30, 2023, was $2,769,547, compared to $720,339 in revenue being recorded in the comparative nine months in the prior year. This table indicates the sales per revenue stream as a breakdown of the total revenue balance: Three months ended (unaudited) Nine months ended (unaudited) November 30, 2023 November 30, 2022 November 30, 2023 November 30, 2022 $ $ $ $ Outside of United States of America Internally Designed/Manufactured Sales 526,519 387,989 1,009,226 720,339 Distribution Agreement Sales 1,344,803 — 1,344,803 — 1,871,322 387,989 2,354,029 720,339 Sales Generated inside the United States of America Internally Designed/Manufactured Sales 131,225 — 415,518 — Total 2,002,547 387,989 2,769,547 720,339 6 Table of Contents Revenue increased in comparison to the prior year by $1,614,558 for the quarter and by $2,049,208 for the nine months. The reason for the higher sales growth was due to new distribution agreements the Company entered into. This led to increased revenues in South Africa. In addition, the Company realized sales for its Trachealator in the United States for the three and nine months ended November 30, 2023, with no such sales inside the United States for the prior year periods. The increase for the sales category “Internally Designed/Manufactured ” which includes the Trachealator 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 and the increase in its popularity and use within these territories. No revenue was generated by affiliations to related parties during the three or nine months ending November 30,2023. Cost of Goods The Company recorded cost of goods of $1,138,628 for the quarter ending November 30, 2023, up from $164,685 for the quarter ending November 30, 2022. For the nine months ending November 30, 2023, the consolidated entities recorded cost of goods sold of $1,298,116, up from $300,142 for the nine months ending November 30, 2022. The most material change in the increase in the cost of goods, is that it functions in a direct correlation to sales and therefore the cost of goods followed the same upward trend as sales. Due to the fact that distribution revenues are distributed at lower gross profit margins than internally designed products, there has been a substantial increase in the cost of goods, which has a direct correlation to the amount of distribution sales generated. The Rand weakened from an average conversion rate of 1$: 17.9 (2022) to 1$: 18.81 (2023) a 5% decline against the US Dollar. Therefore, even though on the face value it seems like cost of sales per unit decreased on a three- and nine-month basis from FY 2022 to 2023 it includes a positive conversion adjustment of approximately $61,435 for the quarter ending November 30, 2023, and a foreign exchange conversion of $69,410 for the nine months ending November 30, 2023. The Rand was very volatile against the US Dollar in the past two fiscal reporting periods. No related party transactions are recorded in cost of sales for both quarters and nine months ending November 30, 2023 and 2022. Operating Expenses The Company’s operating expenses were $606,009 for the quarter ended November 30, 2023, up from $197,805 for the quarter ended November 30, 2022. The Company’s operating expenses were $1,116,936 for the nine months ended November 30, 2023, up from $615,288 for the nine months ended November 30, 2022. The South African Rand weakened from an average conversion rate of 1$: 17.9 (2022) to 1$: 18.81 (2023) a 5% decline against the US Dollar. Therefore, this will cause an expense decrease/improvement of 5% on the operating expenses due to dollar strength within the conversion rate applied. This is estimated at a value of $30,300 for the quarter ending November 30,2023 and $47,800 for the nine months ending November 30,2023. After considering the effects of the foreign currency exchange, the remaining changes are mainly attributable to the General and administrative expenses that, together with the Compliance cost, showed a step cost increase to support the higher sales figure mainly due to the new revenue stream of the cardiology distribution business in South Africa for the nine months ended November 30, 2023. 7 Table of Contents Three months ended (Unaudited) Nine months ended (Unaudited) November 30, 2023 November 30, 2022 Value Change November 30, 2023 November 30, 2022 Value Change $ $ $ % Change $ $ $ % Change Operating expenses Depreciation and amortization expense 11,604 10,329 1,275 12 % 36,449 52,860 (16,411) (31) % General and administrative expenses 552,342 159,822 392,520 246 % 951,786 461,794 489,992 106 % Research and development expenses 2,728 6,405 (3,677 ) (57 )% 16,846 62,356 (45,510 ) (73 )% Selling expenses 39,335 21,249 18,086 85 % 111,855 38,278 73,577 192 % Total operating expenses 606,009 197,805 408,204 206 % 1,116,936 615,288 501,648 82 % Due to the number 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. 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 mainly due to increases in independent contractor fees in the United States and higher staff compliment of 25 sales representatives in for the new Cardiology distribution Revenues. Other costs included but not as material: indemnity insurance and payments made to service providers as part of obtaining our quotation on the OTCQX markets and costs relating to the quotation on the OTC markets that will not be non-recurring in the future are estimated at $30,000 and all other costs will be repeated in the future. A future expected major component 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 are 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) Nine months ended (unaudited) November November November November 30 30 30 30 2023 2022 2023 2022 $ $ $ $ Compliance cost 56,212 67,693 122,174 72,519 *Compliance costs are included in the General and Admin expenses line item. Sales and Marketing expenses are becoming more significant to support the new Cardiology Distribution business in South Africa and to support the roll out of the Trachealator, an internally designed and manufactured product in the United States. 8 Table of Contents Related party expenses include $7,797 to Minoan Capital for rental expenses in the quarter ending November 30, 2023. The related party rental expenses in the quarter ending November 30, 2022, amounted to $13,957. 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 Company showed net losses of $429,371 and $503,248 for the three and nine months ended November 30, 2023, respectively, as compared with net losses of $36,341 and $289,077 for the three and nine months ended November 30, 2022, respectively. The change is mainly attributable to the higher sales of the new cardiology distribution business in South Africa and increased sales of the Trachealator, an internally designed and manufactured product sold in the United States. Also under non-operating expenses, a 1% movement in the interest rates constitutes a value of $1,606 on a quarterly basis and $14,454 for the nine months ending November 30, 2023. The interest charged for the three and nine months ending November 30, 2023, was $56,645 and $172,889, respectively. The interest charged for the three and nine months ending November 30, 2022, was $51,545 and $128,740, respectively. This change is attributable to an increase in the prime lending rate and additional drawdowns on the loan. The company utilizes a trade finance facility with a reputable third-party trade finance company in South Africa, the effect of this is recorded in trade receivables and interest is incurred at prime plus 1% which is market related. This facility is unsecured, and this facility accounts for the difference in interest reported as related party and external interest paid within the Interest Expense line item. 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 As of November 30, 2023, the Company had total current assets of $3,594,093 and total assets in the amount of $3,991,950. Total current liabilities as of November 30, 2023, were $336,190. The Company had working capital of $3,257,903 as of November 30, 2023. In comparison, as of February 28, 2023 , the Company had total current assets of $3,369,487 and total assets in the amount of $4,490,432. Total current liabilities as of February 28, 2023, was $71,311. Consolidated, we had working capital of $3,298,167 as of February 28, 2023. The research and development phase of the internally designed product lines have largely concluded. Therefore, we expect to see an increase in sales and marketing expenses, to build out of the territory of the United States. Combined with the Cardiology distribution contract business in South Africa. 9 Table of Contents A private placement was completed in the wake of the successful research and development 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 including new research and development activities and Marketing and Sales functions . The Company has obtained a significant distribution revenue stream in South Africa. These distribution products currently and in the future are expected to add to the product basket of the business and ensure more revenues are generated in the Company, which consists of more mature but also profitable products that will complement our in house developed products. The Company appointed DISA Lifesciences, a South African based sub-distributor, which already distributes the in house manufactured brands of Medinotec within the market territory of South Africa. This sub-distributor will facilitate sales into the territory of South Africa while the main focus of the business unit still remains development of products for which it owns the IP, while the distributor will perform the sales and marketing functions in this territory. Sales contributed for the quarter ending November 30, 2023, is $1,344,803. The Trachealator product obtained FDA approval in November 2022, which allowed the Company to sell this product into the United States of America. Since the Company had no prior sales channels or infrastructure in the United States, management found it prudent to plan a roll out of the product with a distributor that had an established network and infrastructure. For this business, the Company partnered with a company called Innovative Outcomes and entered into a revolving credit facility to a maximum of $750,000. Innovative Outcomes would use this to grow both their own distribution network and infrastructure and also allow for the Company to utilize this network and infrastructure. However, during quarter ending November 30, 2023, there was a material change in strategic focus where the Company would require its products to be marketed to niche surgical units, Innovative Outcomes would be servicing the wound care clinic market only which meant that the future growth of the combined network and infrastructure would not be a strategic match between the two entities. It was therefore decided to separate the network and infrastructure developed and for each company to pursue its strategic focus. The note receivable will continue on the same terms and become payable later in the 2024 financial year, but the Company decided to provide full impairment against this receivable on November 30, 2023. This decision was made in prudence due to the fact that the receivable is not backed by any Trachealator revenue streams anymore and does not change that Innovative Outcomes will still be liable for payment of this in the future Interest will accrue as normal until maturity date. Should payments be received this provision will be reversed with the same amount of cashflow received. 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. During the quarter ending November 30, 2023, the Company also obtained cardiology distribution revenues in South Africa, which significantly contributed to the overall profitability of the Company. With the research and development phase of most products completed, we expect to see an increase in sales being realized against the sales expenditure incurred. 10 Table of Contents Cash Flow movements Operating activities provided cash of $101,232 for the nine months ending November 30, 2023, whereas operating activities used cash $848,140 for the nine months ending November 30, 2022. This is mainly due to an increase in sales and profitability with the incorporation of the new Cardiology distribution revenues in South Africa and the growth of the Trachealator sales in the United States since sales significantly increased year on year and quarter on quarter. Financing activities used cash of $282,552 during the nine months ended November 30, 2023, and provided cash of $4,229,838 for the same quarter in the prior year. 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 were incurred. The outflow year to date is due to the part settlement of the related party borrowing from Minoan Medical. The loan account in favor of Minoan Medical decreased by $282,552 during the nine months ended November 30, 2023. In the prior year the loan account increased by $931,713 in the nine months ended November 30, 2022. The loan account is used to fund operational requirements. Off Balance Sheet Arrangements As of November 30, 2023, there were no off-balance sheet arrangements. Critical Accounting Policies 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 has 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