Medinotec Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations for the Years Ended February 28, 2026 and February 28, 2025 Revenue For the fiscal year ended February 28, 2026, revenue was $9,729,463, compared to $9,113,607 for the fiscal year ended February 28, 2025, an increase of $615,856, or 7%. This increase was driven primarily by the expansion of the Company’s distribution business outside the United States, particularly through enhanced partnerships in South Africa that contributed to higher sales volumes in the Company’s cardiology and dialysis product lines. Distribution agreement sales outside the United States increased by $569,469 to $8,141,634 for fiscal 2026 from $7,572,165 for fiscal 2025. The increase in these sales reflected, in part, the first full year of revenue generated under the Company’s renal dialysis distribution agreement in the South African market, which was entered into during the third quarter of fiscal 2025. Internally designed and manufactured sales outside the United States also increased by $112,632 to $975,969 for fiscal 2026 from $863,337 for fiscal 2025. 54 Table of Contents These increases were partially offset by lower internally designed and manufactured sales in the United States, which decreased by $66,245 to $611,860 for fiscal 2026 from $678,105 for fiscal 2025. Accordingly, the overall increase in revenue for fiscal 2026 was attributable primarily to stronger sales outside the United States, particularly increased distribution agreement sales in South Africa, partially offset by lower U.S. sales of internally designed and manufactured products, including Trachealator, due in part to the timing of customer orders. Management is closely monitoring performance in the United States segment and has implemented initiatives intended to improve sales performance. The Company expects these efforts, together with the fiscal 2027 launch of OutFlo in the United States market, to support revenue growth in that segment during fiscal 2027, although actual results may differ depending on customer demand, commercialization progress, market acceptance and other factors. The Company continues to derive a substantial portion of its revenue from sales outside the United States, particularly in South Africa, and from a limited number of distribution relationships. While these results reflect improved market penetration in key markets, future performance remains subject to risks and uncertainties, including customer and geographic concentration, variability in distributor execution, the timing of customer orders, changes in market demand, and broader economic conditions. In addition, the Company monitors the effect of foreign currency fluctuations, which may affect both reported revenue and operating results from period to period. Management expects established distribution relationships to remain an important component of revenue generation, while continuing efforts to broaden the Company’s product offering, expand sales of internally designed and manufactured products, and reduce concentration risk over time. 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, 2026. This table indicates the sales per revenue stream as a breakdown of the total revenue balance: Medinotec Inc Group Consolidated Years Ended Feb 28, 2026 $ Feb 28, 2025 $ Outside of United States of America Internally Designed/Manufactured Sales 975,969 863,337 Distribution Agreement Sales 8,141,634 7,572,165 Sales Generated inside the United States of America Internally Designed/Manufactured Sales 611,860 678,105 9,729,463 9,113,607 The following table sets forth financial information by reportable segment for the years ending February 28, 2026 and February 28, 2025: 55 Table of Contents 1. Income/(loss) from operations Inside the United States Outside the United States Total 2026 2025 2026 2025 2026 2025 Revenue 611,860 678,105 9,117,603 8,435,502 9,729,463 9,113,607 Cost of goods sold (155,214 ) (87,826 ) (4,446,136 ) (4,207,292 ) (4,601,350 ) (4,295,118 ) Gross profit 456,646 590,279 4,671,467 4,228,210 5,128,113 4,818,489 Selling expenses (96,906 ) (65,646 ) (1,388,735 ) (47,548 ) (1,485,641 ) (113,194 ) Depreciation expense — — (80,873 ) (73,846 ) (80,873 ) (73,846 ) General and administrative expenses (865,855 ) (725,834 ) (1,451,374 ) (622,983 ) (2,317,229 ) (1,348,817 ) Research and development expenses (54,495 ) (50,000 ) (95,363 ) (41,133 ) (149,858 ) (91,133 ) Income/(loss) from operations (560,610 ) (251,201 ) 1,655,122 3,442,700 1,094,512 3,191,499 2. Total Assets Inside the United States Outside the United States Total 2026 2025 2026 2025 2026 2025 Total assets 2,058,119 2,181,184 4,754,769 4,627,789 6,812,888 6,808,973 A major component of total assets is "Cash" of $2,757,024 for the year ending February 28, 2026 and $2,769,686 for the year ending February 28, 2025. A significant portion of this is maintained inside the United States in USD of $1,816,626 for the year ending February 28, 2026 and $2,019,628 for the year ending February 28, 2025. Cost of Goods Sold For the fiscal year ended February 28, 2026, cost of goods sold was $4,601,350, compared to $4,295,118 for the fiscal year ended February 28, 2025, an increase of $306,232, or 7%. The increase in cost of goods sold was primarily attributable to higher sales volumes outside the United States, particularly increased distribution agreement sales in South Africa, partially offset by lower sales volumes in the United States. Gross profit was $5,128,113 for fiscal 2026, compared to $4,818,489 for fiscal 2025, an increase of $309,624, or 6%. Gross margin remained stable at 53% for fiscal 2026 (fiscal 2025: 53%). The increase in gross profit was driven primarily by the higher contribution from sales outside the United States. Outside the United States, revenue increased by $682,101 to $9,117,603 for fiscal 2026 from $8,435,502 for fiscal 2025, while cost of sales increased by $238,844 to $4,446,136 from $4,207,292. As a result, gross profit outside the United States increased by $443,257 to $4,671,467 for fiscal 2026 from $4,228,210 for fiscal 2025. This improvement reflected increased revenue contribution and a favorable sales mix, including increased distribution agreement sales and higher internally designed and manufactured sales outside the United States. The improvement was partially offset by the recognition of an inventory obsolescence provision during fiscal 2026, which increased cost of sales. Inside the United States, revenue decreased by $66,245 to $611,860 for fiscal 2026 from $678,105 for fiscal 2025, while cost of sales increased by $67,388 to $155,214 from $87,826. As a result, gross profit inside the United States decreased by $133,633 to $456,646 for fiscal 2026 from $590,279 for fiscal 2025. The decrease in gross profit in this segment was primarily attributable to lower revenue, lower selling prices during fiscal 2026, and higher cost of sales. 56 Table of Contents On a consolidated basis, the increase in gross profit outside the United States was partially offset by the decrease in gross profit inside the United States. Although consolidated revenue increased by $615,856, cost of sales increased by $306,232, including as a result of the inventory obsolescence provision recognized during fiscal 2026. As a result, consolidated gross margin remained substantially consistent year over year. The Company continues to monitor gross margin closely across both segments. Outside the United States, margins benefited from stronger revenue contribution and sales mix during fiscal 2026. The strengthening of the South African Rand during fiscal 2026 may also have affected margin trends compared to the prior year. The Company also continues to monitor the effect of tariffs and other input cost pressures on products sold into the United States, which may adversely affect margins if not mitigated. 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. No related party transactions were recorded in cost of sales for the fiscal year ended February 28, 2026. Operating Expenses For the fiscal year ended February 28, 2026, operating expenses totaled $4,033,601, an increase from $1,626,990 for the fiscal year ended February 28, 2025. 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 Medinotec Group of Companies for the Years Ended Feb 28, 2026 $ Feb 28, 2025 $ Compliance cost 362,172 526,603 The Medinotec Group of Companies for the Years Ended Feb 28, 2026 $ Feb 28, 2025 $ Depreciation and amortization expense 80,873 73,846 General and administrative expenses 2,317,229 1,348,817 Research and development expenses 149,858 91,133 Selling expenses 1,485,641 113,194 Total operating expenses 4,033,601 1,626,990 57 Table of Contents Key Drivers of Operating Expense Trends · General and Administrative Expenses: General and administrative expenses increased to $2,317,229 for the year ended February 28, 2026, from $1,348,817 for the year ended February 28, 2025, an increase of $968,412. The increase was driven primarily by the introduction of indirect executive compensation, under which executives who are not directly employed by the Company are compensated for time spent managing the Company through the entities by which they are employed. This accounted for approximately $549,498 of general and administrative expense during fiscal 2026. General and administrative expenses also increased due to higher salary costs associated with the appointment of more qualified full-time staff members in the finance and research and development departments. · Research and Development Expenses: Research and development expenses increased to $149,858 for the year ended February 28, 2026, from $91,133 for the year ended February 28, 2025, an increase of $58,725. The increase was primarily attributable to stock-based compensation granted to a physician in exchange for services rendered. The Company is also currently exploring the development of three new products, namely StaXstop, Septus Balloon and Vaultseal Balloon. Research and development spending remains modest relative to total operating expenses and continues to be focused on product opportunities that align with the Company’s existing technical and manufacturing capabilities. · Selling Expenses: Selling expenses increased to $1,485,641 for the year ended February 28, 2026, from $113,194 for the year ended February 28, 2025, an increase of $1,372,447. The increase was driven primarily by distributor support costs incurred under the Company’s arrangements in the South African market. The Company agreed to reimburse its distribution partner for a portion of that partner’s expenditure incurred in connection with the sale of cardiology and dialysis products in South Africa. A substantial portion of these costs related to the distributor’s employee costs for its sales force, together with other variable expenditure incurred in supporting these sales activities. These distribution costs amounted to $1,320,115 for fiscal 2026, representing the majority of the increase from fiscal 2025. · Depreciation and Amortization Expense: Depreciation and amortization expense increased modestly to $80,873 for the year ended February 28, 2026, from $73,846 for the year ended February 28, 2025. The Company allocates a portion of depreciation to products manufactured during the period, with the balance recognized in operating expenses. Future Operating Expense Growth Looking forward, the Company expects future operating expenses to continue to be influenced by regulatory compliance and corporate infrastructure requirements, sales and distribution support costs, and targeted research and development activities. The Company expects to continue incurring costs associated with operating in regulated markets, including product registrations, quality and compliance requirements, public company compliance and the personnel needed to support a growing business. In addition, as the Company continues to expand its distribution activities, particularly outside the United States, selling expenses may remain elevated due to distributor support costs, sales force-related expenditure and other market development costs required to support revenue growth. 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. Non-operating income and expenses Non-operating income and expenses totaled a net expense of $25,325 for the fiscal year ended February 28, 2026, compared to a net expense of $167,361 for the fiscal year ended February 28, 2025. The improvement was driven primarily by lower interest expense, partially offset by higher other non-operating expense. Interest expense decreased to $87,595 for fiscal 2026 from $176,416 for fiscal 2025. The decrease was primarily attributable to lower interest incurred on the loan payable to Minoan Medical, as fiscal 2026 included interest expense on that loan only through August 31, 2025, when the outstanding balance was settled. Accordingly, interest expense for fiscal 2026 reflected only a partial year of interest on this borrowing. 58 Table of Contents Interest income increased to $71,513 for fiscal 2026 from $8,668 for fiscal 2025, primarily due to higher returns earned on cash balances during the year. Other non-operating expense was $9,243 for fiscal 2026, compared to other non-operating income of $387 for fiscal 2025. Net Income The Medinotec Group of Companies reported net income of $794,502 for the fiscal year ended February 28, 2026, compared to net income of $2,159,473 for the fiscal year ended February 28, 2025, a decrease of $1,364,971. The decrease in net income was primarily attributable to the significant increase in operating expenses during fiscal 2026, which more than offset the increase in gross profit. As discussed above, revenue and gross profit increased during the year, driven primarily by stronger sales outside the United States, particularly distribution agreement sales in South Africa. However, this improvement was more than offset by higher selling expenses, general and administrative expenses and research and development expenses. The decrease in net income was partially mitigated by the improvement in non-operating income and expenses, primarily due to lower interest expense in fiscal 2026 following the settlement of the Minoan Medical loan on August 31, 2025. In addition, income tax expense was lower in fiscal 2026 than in the prior year. As a result, although the Company remained profitable for the year ended February 28, 2026, net income declined compared to the prior year. Liquidity and Capital Resources As of February 28, 2026, the Company had total current assets of $6,419,805 and total assets of $6,812,888. Total current liabilities as of February 28, 2026, were $1,101,192. The Company had working capital of $5,318,613 as of February 28, 2026. In comparison, 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. Consolidated, we had working capital of $4,918,139 as of February 28, 2025. 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. 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 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. The Company’s ability to fund longer-term operations will depend on its ability to generate revenue, manage operating expenses, and obtain additional capital if required. As of February 28, 2026, 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. 59 Table of Contents 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. 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, 2024, the Company also obtained renal dialysis distribution revenues in South Africa, which significantly contributed to the overall profitability of the Company in the 2025 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. 60 Table of Contents Cash Flows The following table summarizes our cash flows from continuing operations for the periods indicated: 2026 2025 Net cash provided by (used in): Operating Activities 906,798 877,834 Investing Activities (1,363 ) (89,013 ) Financing Activities (982,973 ) (894,482 ) Cash flows provided by Operating Activities Net cash provided by operating activities before income taxes paid was $952,541 for the fiscal year ended February 28, 2026, compared to $1,144,215 for the fiscal year ended February 28, 2025. After income taxes paid, total cash flows from operating activities were $906,798 for fiscal 2026, compared to $877,834 for fiscal 2025. Although net income declined to $794,502 from $2,159,473 in the prior year, operating cash flows remained strong. Operational cash flow benefited from improved working capital management, including better receivables collection. These benefits were partially offset by an increase in inventory, an increase in prepayments, and a decrease in accounts payable and accrued expenses. In addition, certain tax liabilities were settled during the year through a set-off and settlement arrangement by way of reductions in trade receivables, which did not result in cash outflows by the Company. Under that arrangement, DISA Life Sciences undertook to settle tax liabilities on behalf of DISA Medinotec, with DISA Medinotec’s trade receivable balance reduced accordingly. 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. Cash flows used in Investing Activities Net cash used in investing activities was $1,363 for the fiscal year ended February 28, 2026, compared to $89,013 for the fiscal year ended February 28, 2025. Investing cash outflows in both periods related to payments to acquire property, plant and equipment. The lower cash outflow in fiscal 2026 reflects significantly reduced capital expenditure compared to the prior year. Cash flows used in Financing Activities Cash flows used in financing activities for the fiscal year ended February 28, 2026, were $982,973, compared to $894,482 for the fiscal year ended February 28, 2025. These outflows related primarily to the repayment of debt. During fiscal 2026, a significant portion of the Company’s obligations to Minoan Medical (Pty) Ltd was settled through a non-cash tripartite set-off and settlement arrangement, pursuant to which DISA Life Sciences undertook to settle the loan payable on behalf of DISA Medinotec, with a corresponding reduction in DISA Medinotec’s trade receivable balance. 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, 2026, there were no off-balance sheet arrangements. 61 Table of Contents Critical Accounting Estimates The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management bases its estimates on historical experience, current conditions and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those 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. Inventories Inventories are stated at the lower of cost or net realizable value, with cost determined using the weighted-average method, and consist of raw materials, work-in-process and finished goods. Inventory cost includes purchased materials, direct labor, machine time and manufacturing overhead. Management reviews inventory for excess, slow-moving and obsolete items and records write-downs when the carrying value of inventory is not expected to be recoverable. In performing this assessment, management considers factors such as inventory age, historical usage, expected future demand, product shelf life and estimated net realizable value. Because this evaluation requires management to make assumptions about future demand and usage, actual results could differ from those estimates. However, management does not believe that reasonably likely changes in these assumptions would have a material effect on the Company’s consolidated financial statements as of February 28, 2026. There were no material changes during fiscal 2026 in the methodology used to assess inventory valuation or obsolescence. Deferred Tax Assets and Liabilities The Company accounts for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the periods in which those temporary differences are expected to reverse. Management is required to assess whether deferred tax assets are more likely than not to be realized. In making this assessment, management considers all available positive and negative evidence, including historical operating results, projections of future taxable income, the reversal of existing taxable temporary differences and available tax planning strategies. A valuation allowance is recorded when management concludes that it is more likely than not that some portion or all of a deferred tax asset will not be realized. This assessment requires significant judgment, particularly with respect to expectations for future taxable income and the weighing of positive and negative evidence. Changes in these assumptions or in tax laws could materially affect the amount of deferred tax assets and liabilities recorded in the consolidated financial statements. There were no material changes during fiscal 2026 in the methodology used to assess deferred tax assets and liabilities. 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. 62 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.