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 28, 2025 and February 29, 2024 Revenue For the fiscal year ended February 28, 2025, the Consolidated Medinotec Group of Companies reported revenue of $9,113,607, an increase of $4,093,216 or 81.5% compared to $5,020,391 in the prior year. This growth was primarily driven by the full-year impact of newly established distribution agreements, the initial commercialization of a key product in the U.S. market, and continued expansion of our global sales footprint. 59 Table of Contents Key Drivers of Revenue Growth • First Full Year Under New Distribution Agreements During the third quarter of fiscal 2024, the Company entered into multiple new distribution agreements in the surgical cardiology segment, primarily concentrated in South Africa. Fiscal 2025 represents the first full year of revenue contribution under these agreements. The performance-based nature of these short-term contracts, while beneficial for flexibility, also introduces potential variability depending on distributor execution and market dynamics. • Geographic Concentration and Relationship-Driven Wins The revenue increase was concentrated in South Africa, where our distribution partners brought strong reputations and existing market presence. These contract awards were, in part, the result of long-standing relationships between distributor principals and current executive management. While this contributed to accelerated growth, the geographic concentration poses a potential risk in the event of contract changes, local disruptions, or economic volatility. • U.S. Market Commercialization of Trachealator In fiscal 2024, we began generating revenue in the United States through sales of our Trachealator device. This represents the first year of U.S. commercialization for the product, which serves the non-occlusive tracheal dilation market. The rollout has been positively received and forms a key component of our growth strategy going forward. • Expanded Product Portfolio The Company also secured several new distribution agreements with international principals late in the fiscal year to broaden its product offerings. These agreements are expected to support future revenue diversification, reduced concentration risk, and additional entry points into both existing and new markets. Seasonality and Operating Patterns While our business is not subject to pronounced seasonality, we typically observe modest declines in sales during periods that coincide with regional holidays or extended breaks—particularly in markets like South Africa. These trends are known and budgeted for as part of our operating planning cycle. Related Party Transactions No revenue was generated from related party affiliations during the fiscal year ended February 28, 2025. This table indicates the sales per revenue stream as a breakdown of the total revenue balance: Medinotec Inc Group Consolidated Years Ended Feb 28, 2025 $ Feb 29, 2024 $ Outside of United States of America Internally Designed/Manufactured Sales 863,337 976,291 Distribution Agreement Sales 7,572,165 3,490,133 Sales Generated inside the United States of America Internally Designed/Manufactured Sales 678,105 553,967 9,113,607 5,020,391 60 Table of Contents The following table sets forth financial information by reportable segment for the years ending February 28, 2025 and February 29, 2024: 1. Income/(loss) from operations Inside the United States Outside the United States Total 2025 2024 2025 2024 2025 2024 Revenue $678,105 $553,967 $8,435,502 $4,466,424 $9,113,607 $5,020,391 Cost of goods sold (87,826) (47,708) (4,164,995) (2,530,214) (4,252,821) (2,577,922) Gross profit 590,279 506,259 4,270,507 1,936,210 4,860,786 2,442,469 Selling expenses (65,646) (30,611) (47,548) (53,953) (113,194) (84,564) Depreciation expense - - (73,846) (63,948) (73,846) (63,948) General and administrative expenses (725,834) (477,226) (665,280) (1,193,802) (1,391,114) (1,671,028) Research and development expenses (50,000) - (41,133) (22,351) (91,133) (22,351) Income/(loss) from operations $(251,201) $(1,578) $3,442,700 $602,156 $3,191,499 $600,578 Provision for impairment of note receivable - (642,012) - - - (642,012) 2. Total Assets Inside the United States Outside the United States Total 2025 2024 2025 2024 2025 2024 Total assets $2,181,184 $2,697,502 $4,627,789 $2,106,777 $6,808,973 $4,804,279 The major component of total assets is "Cash" of $2,769,686 for the year ending February 28, 2025 and $2,808,910 for the year ending February 29, 2024. A significant portion of this is maintained inside the United States in USD of $2,019,628 for the year ending February 28, 2025 and $2,478,434 for the year ending February 29, 2024. Cost of Goods For the fiscal year ended February 28, 2025, the Consolidated Medinotec Group of Companies recorded cost of goods sold (COGS) of $4,252,821, compared to $2,577,922 for the year ended February 29, 2024. This represents a year-over-year increase of $1,674,899, in line with the significant growth in sales. Gross profit for fiscal 2025 was $4,860,786, representing a gross margin of 53%, compared to a gross margin of 49% in fiscal 2024. The increase in gross margin is primarily attributable to increased sales, together with manufacturing and sales processes becoming more efficient as time progresses, as well as an improved sales mix favoring higher-margin products. The effect of exchange rate differences on imports and exports were also more stable during the year. Key Factors Affecting COGS and Gross Margin • Sales-Driven Increase in COGS: The rise in COGS is consistent with higher product sales, particularly under third-party distribution agreements, which resulted in a proportional increase in associated costs. • Operational Efficiencies: As the Group matures operationally, efficiencies in manufacturing and sales processes have improved. This ongoing operational refinement has contributed positively to gross margins through reduced unit costs and optimized workflows. • Stabilization of Exchange Rates: The Group is exposed to foreign exchange fluctuations related to both imports and exports, which can materially affect margins due to timing differences between procurement and sales. During fiscal 2025, exchange rates remained relatively stable, with the South African Rand appreciating by approximately 4.6% against the U.S. Dollar. This stability helped mitigate currency-related margin volatility. Related Party Transactions No related party transactions were recorded in cost of sales for the fiscal year ended February 28, 2025. Operating Expenses For the fiscal year ended February 28, 2025, operating expenses totaled $1,669,287, a decrease from $1,841,891 for the fiscal year ended February 29, 2024. This decrease was primarily due to reclassification adjustments, offsetting the increased costs related to business expansion and product rollout. One of the major components that affect 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 28, 2025 $ Feb 29, 2024 $ Compliance cost 526,603 186,338 Medinotec Inc Group Consolidated Years Ended Feb 28, 2025 $ Feb 29, 2024 $ Depreciation and amortization expense 73,846 63,948 General and administrative expenses 1,391,114 1,671,028 Research and development expenses 91,133 22,351 Selling expenses 113,194 84,564 Total operating expenses 1,669,287 1,841,891 61 Table of Contents Key Drivers of Operating Expense Trends General and Administrative Expenses : General and administrative (G&A) expenses decreased significantly, although this was partially due to the reclassification of $327,950 in expenses to revenue in the first quarter of fiscal 2025, relating to activities outside the United States. Excluding this reclassification, G&A expenses increased by $48,036, mainly driven by the addition of payroll costs related to new distribution agreements and higher compliance costs as the Company expanded its market presence. Research and Development (R&D) : The Company recorded R&D expenses of $91,133 for the year ended February 28, 2025, up from $22,351 in the prior year. However, R&D spending remains a relatively small portion of our overall operating expenses. This increase was primarily focused on perfecting existing manufacturing processes to support the scaling of our Trachealator product and other potential product integrations. Given the nature of our operations, the majority of our R&D efforts are directed toward refining production methods and ensuring that products can be efficiently manufactured within our current infrastructure. We only engage in R&D for products where a working prototype and proof of concept are already in hand, and we focus exclusively on products that align with our existing capabilities. This approach significantly reduces our R&D costs compared to companies engaged in speculative or early-stage development. Compliance Costs : A substantial portion of our operating expenses relates to compliance activities required to maintain international standards, including ISO certifications and CE/FDA product registrations. These compliance costs are essential for ensuring that our products meet regulatory requirements in the markets where we operate. Additionally, we incur costs for maintaining distribution licenses and product registrations with local health authorities in each country, such as the South African Health Products Regulatory Authority (SAHPRA) in South Africa. While some of these compliance costs are one-time in nature, many will be recurring as the Company enters new territories and ensures ongoing regulatory compliance. As we expand into more markets, particularly within the medical device industry, these compliance costs will likely increase. Future Operating Expense Growth Looking forward, we anticipate that future operating expenses will grow primarily in two areas: 1. Regulatory Compliance: As we expand into additional territories, we expect ongoing costs related to maintaining and obtaining product registrations, as well as adhering to the evolving regulatory standards in different jurisdictions. This includes the maintenance of certifications such as ISO, CE, and FDA approvals, as well as local health authority requirements in each market. 2. Sales and Marketing: As we increase our global footprint, particularly with the Trachealator and other products, we expect to allocate more resources toward sales and marketing efforts. These costs will be essential to drive product adoption, support new distribution agreements, and build brand awareness in new regions. In addition, while R&D expenses will remain relatively modest, the Company's focus will remain on optimizing manufacturing processes, ensuring that production capabilities are aligned with increased product demand and the scalability of our operations. 62 Table of Contents Non-operating income and expenses Non-operating income and expenses for the fiscal year ended February 28, 2025, primarily consist of interest earned on free cash and the management of liquid assets. These amounts are immaterial relative to our core operating results and do not significantly affect the business’s overall financial performance. However, there were some key non-operating transactions that impacted both the balance sheet and income statement during the prior fiscal year. Note Receivable On November 30, 2023, the Company fully impaired its note receivable from Innovative Outcomes, which amounted to $642,012. This decision was made prudently, as the receivable was no longer supported by any ongoing Trachealator revenue streams. While the receivable was impaired, it does not eliminate the future liability of Innovative Outcomes to repay the amount. No interest income is recognized on the note while it remains impaired. The full recoverability of the receivable has not yet been definitively tested. Interest Expense Interest expense primarily relates to the interest on the related party loan of $141,748 and the interest paid to our logistics service provider of $28,126. These expenses are recorded in line with the terms of the respective agreements and are consistent with prior periods. Interest Income Interest income for the fiscal year was earned from two main sources: the note receivable which was impaired and a tax refund receivable. No interest income is recognized on the impaired note receivable, although interest continues to accrue contractually in accordance with the terms of the agreement, while interest on the tax refund receivable was earned during the prior fiscal year, contributing to the total interest income recognized. During the fiscal year ended February 28, 2025, no interest was recognized in respect of the note receivable; while an amount of $8,668 was earned on tax refund receivable, representing a total of $8,668 interest income for the year. Net Income The Consolidated Medinotec Group of Companies reported a net profit of $2,159,473 for the year ending February 28, 2025, compared to a net loss of $404,688 for the year ended February 29, 2024. This increase in net income is primarily driven by the higher sales generated from the new cardiology distribution business in South Africa, as well as the increased sales of the Trachealator, an internally designed and manufactured product, in the United States. The growth in both distribution revenues and the Trachealator's success in new markets were key factors in driving this positive shift in profitability. Liquidity and Capital Resources As of February 28, 2025, the Company had total current assets of $6,423,186 and total assets of $6,808,973. Total current liabilities as of February 28, 2025, were $1,505,047. The Company had working capital of $4,918,139 as of February 28, 2025. In comparison, as of February 29, 2024, the Company had total current assets of $4,379,297 and total assets of $4,804,279. Total current liabilities as of February 29, 2024, were $827,453. Consolidated, we had working capital of $3,551,844 as of February 29, 2024. The research and development phase of the internally designed product lines has largely concluded. Therefore, we expect to see an increase in sales and marketing expenses, primarily for the rollout in the United States and the expansion of the cardiology distribution contract business in South Africa. 63 Table of Contents The Company has sufficient cash reserves and working capital to fund the roll-out in the market of the United States, including new research and development activities, as well as 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 our 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 achieve profitable operations. As of February 28, 2025, we have no material capital expenditure commitments. All planned capital projects have been completed, and there are no additional contractual obligations for plant expansion or equipment purchases. Our manufacturing facility currently operates below its maximum capacity, which allows us to absorb modest increases in production without significant additional investment. This available capacity enables us to respond efficiently to changes in customer demand with minimal incremental capital outlay. We fund our operations and working capital needs primarily from cash generated by our ongoing business activities. Over the past two fiscal years, our operating cash flows have been positive and sufficient to meet our cash requirements, and we expect this trend to continue in the near future. We maintain strong operational controls that allow us to manage our working capital effectively, ensuring liquidity is available for daily operations and short-term commitments. In the longer term, we may require additional capital to support strategic initiatives, including select product enhancements and potential expansion efforts. While we do not currently anticipate large-scale capital expenditures, the need for future funding to support ongoing business growth or research and development (R&D) efforts may arise. As a smaller reporting company with limited R&D activities, we continue to focus our research investments on incremental product refinements rather than early-stage or speculative development. These expenditures remain modest, as previously disclosed, and are primarily directed toward refining existing production processes. However, any significant future R&D initiatives or product development would likely require external funding, either through equity or debt financing. Liquidity In terms of liquidity, we currently have sufficient cash resources to meet our short-term obligations and continue day-to-day operations. We regularly evaluate cash needs based on forecasted operational demands and have identified no material trends or uncertainties that would cause a significant change in our liquidity position. Any potential changes in liquidity would likely arise from strategic decisions, such as expansion or increased investment in R&D, but we expect that cash flows from ongoing operations will continue to provide the necessary funds. Capital Resources As of the end of the latest fiscal period, our capital requirements are primarily focused on sustaining and optimizing existing operations, rather than large-scale growth or capital expansion. We have no material capital expenditures committed for the near term. However, as our business continues to evolve, we anticipate that we may seek external financing options, such as equity offerings or debt financing, should the need arise for larger investments in new products or significant capacity expansion. While our current capital structure remains primarily equity-based, we are mindful of changing trends in the availability and cost of capital resources, including any shifts in equity or debt market conditions that may affect our financing strategy. We continue to explore opportunities to optimize our capital resources, balancing the need for flexibility with prudent financial management. 64 Table of Contents Currency Fluctuations and Exchange Rate Risks Given the Company’s exposure to various currencies, particularly the South African Rand and the U.S. Dollar, fluctuations in exchange rates could impact our working capital and cash reserves. We monitor foreign exchange risks and may take steps to hedge against significant adverse movements. While we have not implemented any hedging strategy at this time, we will continue to assess the impact of currency fluctuations on our financial position and operations. Funding Strategy for Expansion As part of our growth strategy, the Company continues to explore opportunities for alternative funding sources, including strategic partnerships, grants, and government incentives, to support expansion into new markets and product development initiatives. These options could provide additional capital if needed for larger-scale projects or unforeseen expenditures. Future Plans and Financing Needs Looking ahead, we anticipate that any major strategic initiatives, such as entering new markets or funding larger-scale projects, may require additional capital. We continue to explore all available financing options to ensure that we can access the necessary resources to fund future growth and innovation. This includes potential equity or debt offerings, as well as exploring potential partnerships or other arrangements that could provide non-dilutive funding. 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 in the 2024 fiscal year. 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, as was the result in the current fiscal year. Cash Flows The following table summarizes our cash flows from continuing operations for the periods indicated: 2025 2024 Net cash provided by (used in): Operating Activities 877,834 14,242 Investing Activities (89,013 ) 10,125 Financing Activities (894,482 ) (8,092 ) Cash flows provided by Operating Activities Net cash provided by operating activities from continuing operations increased significantly for the fiscal year ended February 28, 2025. This improvement was primarily due to a $2,564,161 increase in profitability, with the Group reporting net income of $2,159,473, compared to a net loss of $404,688 in the prior year. This turnaround was mainly driven by strong growth in distribution revenue, particularly from the launch of the cardiology distribution business in South Africa and expanded U.S. sales of the Trachealator product. Operational cash flow also benefited from improved working capital management, including better receivables collection and inventory optimization. Operating expenses were carefully controlled, allowing the Group to support growth initiatives—especially in sales and marketing—while maintaining positive cash generation from operations. Management also notes customer concentration risk, with most customers situated within the South African segment, which should be considered in assessing the quality and stability of these cash flows. Management believes that these improvements, alongside efficiencies and sustained revenue momentum, position the Group for continued positive cash flow generation. Non-cash adjustments, including depreciation and share-based compensation, are minimal in our business. 65 Table of Contents Cash flows used in Investing Activities Net cash used in investing activities increased for the fiscal year ended February 28, 2025. This change was primarily driven by the absence of inflows from a note receivable, which had generated positive cash flows through repayments in the prior year. In contrast, during the current year, the outstanding balance of the note receivable increased and was subsequently impaired, resulting in no corresponding cash inflow. Additionally, the Group increased its investment in property, plant, and equipment (PP&E), reflecting continued expansion and operational scaling. These capital expenditures contributed to higher cash outflows from investing activities compared to the prior year. Cash flows used in Financing Activities Cash flows used in financing activities for the fiscal years ended February 28, 2025, and February 29, 2024, primarily related to the repayment of a related party loan. In fiscal 2025, the Company repaid $895,279, an increase compared to $9,680 in the prior year. This increased repayment reflects the Company’s continued efforts to reduce financial liabilities and strengthen its balance sheet. Looking ahead, the Company may evaluate additional financing options—including potential debt or equity issuances—to support its strategic growth objectives. This may include funding expansion into new markets, increasing production capacity, and scaling marketing and distribution efforts to drive long-term value creation. Off Balance Sheet Arrangements As of February 28, 2025, there were no off-balance sheet arrangements. Critical Accounting Estimates While our significant accounting policies are described in the notes to our consolidated financial statements, we believe that the accounting estimates below are most critical to understanding our financial condition and historical and future results of operations. Allowance for credit losses on loans receivable 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. The Trachealator product obtained FDA approval in November 2021, 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 the 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 became payable in the 2024 fiscal 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 no longer backed by any Trachealator revenue streams. This does not change that Innovative Outcomes will still be liable for payment of this in the future. While impaired, no interest income will be recognized on the receivable. Should payments be received this provision will be reversed with the same amount of cashflow received. Management believes that prior allowances for this note receivable were determined with appropriate assumptions and were as accurate as possible given the information available at the time. We continuously compare actual repayments and write-offs against our allowances and revise our estimate when subsequent events or newly obtained information indicate that adjustments are necessary. There have been no material changes during the current year to the assumptions or methodologies used in estimating expected credit losses on the note receivable. Our approach to incorporating historical loss data, current borrower assessments and forward-looking information remains consistent with prior periods. 66 Table of Contents 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 to re-sterilize products to reset the shelf life, this provision, in management’s opinion, will never increase significantly. Management believes that our historical inventory valuations, including weighted-average cost measurements and obsolescence provisions for raw materials, work-in-process and finished goods,were determined with appropriate assumptions and were as accurate as possible given the information available. There have been no material changes during the current year to the key assumptions or methodologies applied to inventory valuation or obsolescence provisioning. Our approach to calculating weighted-average cost, assessing net realizable value for each inventory category and performing annual age-based obsolescence reviews remains consistent with prior periods. Management does not anticipate any material changes to the methodologies or key assumptions used to determine inventory valuation or obsolescence provisions in future periods. Deferred tax assets and liabilities We identify temporary differences between the financial statement basis and tax basis of our assets and liabilities, as well as available loss and credit carryforwards. We apply the enacted statutory tax rates expected to be in effect when such differences reverse, pursuant to U.S. federal and state tax law and, where applicable, South African Income Tax Act provisions. We then assess positive and negative evidence—such as future taxable income projections, historical earnings patterns, tax-planning strategies and the expiration dates of carryforwards—to conclude whether it is “more likely than not” that DTAs will be realized. A valuation allowance is recorded against DTAs when realization is not deemed more likely than not. Management believes that prior deferred tax asset estimates were prepared with appropriate assumptions and were as accurate as possible given the information available at the time. We continue to perform retrospective evaluations of those estimates against actual outcomes to confirm the reasonability of our methodologies, and we adjust valuation allowances when subsequent events or newly obtained information indicate that revisions are warranted. There have been no material changes to the assumptions or estimates used in determining our deferred tax assets and liabilities during the current year. Our methodologies, including income forecasts, tax-law interpretations and valuation allowance assessments, remain consistent with those applied in prior periods. Recently Issued Accounting Pronouncements See Note 2 to our Consolidated Financial Statements included in Part IV, 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. 67 Table of Contents 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.