Medinotec Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations for the Years February 29, 2024 and February 28, 2023 Revenue The Consolidated Medinotec Group of Companies’ revenue for the year ended February 29, 2024 was $5,020,391 compared to $999,579 in revenue being recorded in the year ended February 28, 2023, an increase of $4,020,812. The reason for the higher sales growth was due to various new distribution agreements in the surgical specialty of cardiology the Company entered into. These agreements are short term in nature and can be cancelled on non-performance clauses by either party. It has a strong geographical country specific risk which is mainly concentrated to South Africa. This led to increased revenues in South Africa. The rapid sales growth is attributable to the fact that these distributors already have existing business as well as a reputation for quality product in South Africa. Disa Medinotec got awarded these contracts due to years of good relationships between the external third party distributors and the current executive management of Disa Medinotec. In addition, the Company realized sales for its Trachealator in the United States with no such sales inside the United States for the prior year period. 55 Table of Contents The increase for the sales of the Trachealator product, 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. The Company recently embarked on obtaining various distribution contracts from principals to ensure a full sales basket and cash generation to sustain growth and product development in the near future. No revenue was generated by affiliations to related parties during the year ending February 29, 2024. This table indicates the sales per revenue stream as a breakdown of the total revenue balance: Medinotec Inc Group Consolidated Years Ended Feb 29, 2024 $ Feb 28, 2023 $ Outside of United States of America Internally Designed/Manufactured Sales 976,291 978,112 Distribution Agreement Sales 3,490,133 — Sales Generated inside the United States of America Internally Designed/Manufactured Sales 553,967 21,467 5,020,391 999,579 The following table sets forth financial information by reportable segment for the years ending February 29, 2024 and February 28, 2023: 1. Income/(loss) from operations Inside the United States Outside the United States Total 2024 2023 2024 2023 2024 2023 Revenue $553,967 $21,467 $4,466,424 $978,112 $5,020,391 $999,579 Cost of goods sold (47,708) (1,746) (2,530,214) (416,011) (2,577,922) (417,757) Gross profit 506,259 19,721 1,936,210 562,101 2,442,469 581,822 Selling expenses (30,611) (9,644) (53,953) (44,174) (84,564) (53,818) Depreciation expense — — (63,948) (53,553) (63,948) (53,553) General and administrative expenses (477,226) (259,487) (1,193,802) (388,685) (1,671,028) (648,172) Research and development expenses — — (22,351) (64,866) (22,351) (64,866) Income/(loss) from operations $(1,578) $(249,409) $602,156 $10,822 $600,578 $(238,587) Provision for impairment of note receivable (642,012) — — — (642,012) — 56 Table of Contents 2. Total Assets Inside the United States Outside the United States Total 2024 2023 2024 2023 2024 2023 Total assets $2,697,502 $3,248,703 $2,106,777 $1,241,729 $4,804,279 $4,490,432 The major component of total assets is "Cash" of $2,808,910 for the year ending February 29, 2024 and $2,827,457 for the year ending February 28, 2023. A significant portion of this is maintained Inside the United States in USD of $2,478,434 for the year ending February 29, 2024 and $2,582,272 for the year ending February 28, 2023 Cost of Goods The Consolidated Medinotec Group of Companies recorded cost of goods of $2,577,922 constituting a gross profit percentage of 49% for the year ending February 29, 2024 down from $417,757 for the year ending February 28, 2023 with a gross profit percentage of 58%. 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. No related party transactions are recorded in cost of sales for the year ending February 29, 2024. Operating Expenses The Consolidated Medinotec Group of Companies operating expenses were $1,841,891 for the year ended February 29, 2024, up from $820,409 for the year ended February 28, 2023. Due to the consistent growth of the company and the popularity of the product, there was also an increase in general compliance costs. One of the major components that affects the operating expenses is the costs of compliance for the business. Certain costs are once off in nature and others will be recurring. This will be determined after the markets were entered and all regulatory requirements met. The Consolidated Medinotec Group of Companies for the Years Ended Feb 29, 2024 $ Feb 28, 2023 $ Compliance cost 186,338 218,694 Medinotec Inc Group Consolidated Years Ended Feb 29, 2024 $ Feb 28, 2023 $ Depreciation and amortization expense 63,948 53,553 General and administrative expenses 1,671,028 648,172 Research and development expenses 22,351 64,866 Selling expenses 84,564 53,818 Total operating expenses 1,841,891 820,409 57 Table of Contents Limited R&D activities were conducted in 2024 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 in the next financial year. General and administrative expenses showed significant growth mainly due to increases in independent contractor fees in the United States and more staff 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. Non-operating income and expenses Note Receivable The Company decided to provide full impairment against Innovative Outcomes note receivable on November 30, 2023 which totaled S642,012. 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. No impairment was recorded during fiscal 2023. Interest expense Interest expense relates mostly to interest on the related party loan. Another component of interest expense relates to interest paid to our logistics service provider. Interest income Interest income relates to interest earned on notes receivable for the year as well as interest earned on a tax refund receivable during the year. Net Loss The Consolidated Medinotec Group of Companies for the year ending February 29, 2024 showed total net loss of $404,688 compared to a loss of $352,735 for the year ended February 28, 2023. 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. The increased sales positioned the Company in a net profit, however, due to the impairment made on the note receivable, the Company showed an increase in net loss for the year ended February 29, 2024. Liquidity and Capital Resources As of February 29, 2024, the Company had total current assets of $4,379,297 and total assets in the amount of $4,804,279. Total current liabilities as of February 29, 2024, were $827,453. The Company had working capital of $3,551,844 as at February 29, 2024. In comparison, as of February 28, 2023, the Company had total current assets of $3,369,478 and total assets in the amount of $4,490,432. Total current liabilities as of February 28, 2023, 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. 58 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. 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 audited 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. Cash Flows The following table summarizes our cash flows from continuing operations for the periods indicated: 2024 2023 Net cash provided by (used in): Operating Activities 14,242 (490,549 ) Investing Activities 10,125 (529,723 ) Financing Activities (8,092 ) 3,577,194 Cash flows from Operating Activities The increase in net cash provided by operating activities from continuing operations for year ended February 29, 2024 over the prior year comparable period was due to a $51,953 increase in net loss, as well as changes in assets and liabilities that had a current period cash flow impact, such as $500,912 of changes in working capital. The change in non-cash charges compared to the change in the prior year comparable period was primarily driven by a $642,012 impairment provision on notes receivable and a $34,672 increase in depreciation, a $120,598 variance in deferred income taxes, a $139,712 change in provisions and a bad debt write of amounting to $52,133 that was not present in the previous financial year. Cash flows from Investing Activities The increase in net cash provided by investing activities was due to a decrease in the issuance of long-term debt relating to the Innovative Outcomes note receivable in 2023. Cash flow from Financing Activities Cash flow used in financing activities in 2024 consisted of the repayment of the related party loan. Cash flow provided by financing activities in 2023 consisted of a $3,577,194 private placement. Off Balance Sheet Arrangements As of February 29, 2024, there were no off-balance sheet arrangements. 59 Table of Contents Critical Accounting Policies While our significant accounting policies are described in the notes to our consolidated financial statements, we believe that the accounting policies below are most critical to understanding our financial condition and historical and future results of operations. Revenue The Company generates revenues through two distinct revenue sources: • From the sale of high-quality medical devices which are self-manufactured through in-depth research and development; and • Through the distribution of finished products on behalf of other principals around the world into pre-agreed territories which are usually exclusive territories granted by such principal. The Company applies 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. Revenue from the sale of self-manufactured products These products are developed in-house. The Company’s clients are billed based on a pricelist that is agreed on in each customer’s contract. Orders are shipped on a per order basis from the Company’s warehouse with Free-On-Board Inco terms. Revenues relating to the self-manufactured products are recognized when control of the promised goods or services is transferred to a customer in an amount that reflects the consideration that the Company expects to receive in exchange for those products. Revenue from the distribution of products The distribution products are sold via a network, which consists of a mixture of sub-distributors and in some instances a direct sales force. The Company’s clients are billed based on a pricelist that are agreed upon in each customer contract, orders are shipped on a per order basis from the Company’s warehouse with Free-on-Board Inco terms. The Company’s sub-distributors order from the Company on the same basis as its customers and have no preferential return rights on their inventory orders, therefore the client assumes the risk of the sale at point of invoice. Revenues relating to the distribution of products 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. 60 Table of Contents Goods delivered to a consignee pursuant to a consignment arrangement are not considered sales, and do not qualify for revenue recognition. Once it is determined that substantial risk of loss, rewards of ownership, as well as control of the asset have transferred to the consignee, revenue recognition would then be appropriate, assuming all other criteria for revenue recognition have been satisfied. For both revenue streams The Company has two operating segments, inside the United States and outside the United States. These sales are split by these territories and further segregated into the specific revenue streams 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 as and when the clients require additional inventory. All revenue is recognized at a specific point and time. Under ASC Topic 606, the Company estimates 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 are 45 to 60 days. Terms can be extended by the Company when it deems the business case and credit worthiness of the customer is strong enough. The time between a customer’s payment and the receipt of funds is not significant. The Company’s contracts with customers do not result in significant obligations associated with returns, refunds, or warranties. Payment terms are generally fixed and do not include variable revenues. Allowance for note receivable impairment The Company records allowances for loan impairment when it is determined that the Company will be unable to collect all amounts due according to the terms of the underlying agreement. Interest income on impaired loans is recognized only when interest payments are received. Inventories i. Valuation, costing and obsolescence Inventories are stated at the lower of cost (weighted average) or net realizable value and consist of raw materials, work-in process and finished goods and include purchased materials, machine time, direct labor and manufacturing overhead. Management evaluates the need to record adjustments to write down inventory to the lower of cost or net realizable value on an annual basis. The Company’s policy is to assess the valuation of all inventories, including raw materials, work-in-process and finished goods and it writes down its inventory for estimated obsolescence based upon the age of inventory and assumptions about future demand and usage. The provision for stock obsolescence is assessed at the end of every reporting period. Due to the long shelf life of our products as well as the ability the resterilize products to reset the shelf life, this provision, in managements opinion, will never increase significantly. 61 Table of Contents Recently Issued Accounting Pronouncements See Note 2 to our Consolidated Financial Statements included in Part II, Item 15 of this Annual Report on Form 10-K for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are not required to provide the information required by this Item because we are a smaller reporting company.