| 2. Significant Accounting Policies | 2. Significant
Accounting Policies a. Nature
of business/basis of preparation Basis
of presentation The
consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States.
Emerging
Growth Company (ECG) status The
Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart our
Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required
to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding
executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Prior
period reclassification Certain prior period amounts in
the consolidated statements of operations and comprehensive loss and consolidated balance sheets have been reclassified to conform with
the current period presentation.
b. Foreign
currency translation
i. Translation
of foreign subsidiary The
accounts of the foreign subsidiaries are translated into U.S. dollars. Assets and liabilities are translated at year-end exchange rates
and income and expense accounts are translated at average exchange rates in effect during the year. Translation adjustments resulting
from fluctuations in the exchange rates are recorded in accumulated other comprehensive income, a separate component of stockholders'
equity. ii.
Exposed to currency variations in subsidiary The
primary operations and functional currency of both Disa Medinotec (Pty) Ltd and Medinotec Capital (Pty) Ltd is in South African Rand.
Due to the emerging market nature of this currency the spread volatility of the currency low and high can be material during a year.
The conversion of the currency from Rand to reporting currency US Dollar can cause significant up or downward trends that are recorded
in reserves under the heading accumulated comprehensive income. The
functional currency as well as the reporting currency for Medinotec Inc is the US Dollar.
c. Cash
and cash equivalents
i. Highly
liquid investments The
Medinotec Group of Companies considers all highly liquid investments with a remaining maturity of three months or less at the time of
purchase to be cash equivalents. These cash equivalents consist primarily of term deposits and certificates of deposit. Investments with
maturities from greater than three months to one year are classified as short-term investments, while those with maturities in excess
of one year are classified as long-term investments. Cash equivalents and short-term investments are stated at cost which approximates
market value.
d. Accounts
Receivable
i. Allowance
based on a review and management evaluation Accounts
receivables are presented on the consolidated balance sheets, net of estimated uncollectible amounts. The carrying amounts of trade accounts
receivable represent the maximum credit risk exposure of these assets. In
accordance with FASB ASC 326, Measurement of Credit Losses on Financial Instruments ("ASC 326"), the Company evaluates the
collectability of outstanding accounts receivable balances to determine an allowance for credit losses that reflects its best estimate
of the lifetime expected credit losses. One
major client constitutes 83%
of the accounts receivable balance as at February 29, 2024, compared to 0%
on February 28, 2023. An
allowance for credit losses is calculated taking into account all accounts older than 121+ days.
e. Property,
plant and equipment
i. Depreciation
rates Property
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided for using the straight-line
method over the estimated useful lives as follows for the major classes of assets:
Plant
and machinery 10
years
Laboratory
equipment 5
years
Furniture
and fixtures 6
years
Motor
vehicles 5
years
Computer
equipment 3
years
Office
equipment 6
years
Computer
software 2
years
Leasehold improvements 3 years
Small assets 1 year
f. 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. g. Impairment
of long-lived assets The
Company assesses long-lived assets for impairment in accordance with the provisions of Financial Accounting Standards Board ASC 360,
Property, Plant and Equipment. Long-lived assets (asset group), such as property and equipment subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The carrying amount of a
long-lived asset is not recoverable if it exceeds the sum of the undiscounted future cash flows expected to result from the use and
eventual disposition of the asset. The amount of impairment loss, if any, is measured as the difference between the carrying value
of the asset and its estimated fair value. Fair
value is determined through various valuation techniques, including discounted cash flow models, quoted market values, and third-party
independent appraisals, as considered necessary. h. Leases We determine if an arrangement
is a lease at inception. We determine the classification of the lease, whether operating or financing, at the lease commencement date,
which is the date the leased assets are made available for use. We use the non-cancelable lease term when recognizing the right-of-use
(“ROU”) assets and lease liabilities, unless it is reasonably certain that a renewal or termination option will be exercised.
We account for lease components and non-lease components as a single lease component. Modifications are assessed to determine whether
incremental differences result in new contract terms and accounted for as a new lease or whether the additional right of use should be
included in the original lease and continue to be accounted for with the remaining ROU asset. Operating lease ROU assets and liabilities are recognized at the lease
commencement date based on the present value of the lease payments over the lease term. Lease payments consist of the fixed payments under
the arrangement, less any lease incentives. Variable costs, such as common area maintenance costs and additional payments for percentage
rent, are not included in the measurement of the ROU assets and lease liabilities, but are expensed as incurred. As the implicit rate
of the leases is not determinable, we use an incremental borrowing rate based on the estimated rate of interest for collateralized borrowing
over a similar term of the lease payments in determining the present value of the lease payments. Lease expenses are recognized on a straight-line
basis over the lease term. We do not recognize ROU assets on lease arrangements with a term of 12 months or less. i. Allowance
for loan impairment The Company records allowances
for loan impairment when it is determined that the Company will be unable to collect amounts due to the Company according to the
terms of the underlying agreement.
j. Employee
benefit plans The
Company contributes 2.5%
for eligible employees to a pension plan registered under the laws of South Africa. The
Company also contributes a portion of the medical aid contribution for eligible employees to an approved medical insurance scheme.
k. Income
taxes Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The
Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized
income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition
or measurement are reflected in the period in which the change in judgment occurs. The
Company records interest related to unrecognized tax benefits in interest expense and penalties in general and administrative expenses.
l. Financial
instruments
i. Fair
Value Measurements Fair
value accounting is applied for all assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually). Fair value is defined as the exchange price that would
be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants on the measurement date. The consolidated entities follow
the established framework for measuring fair value and expands disclosures about fair value measurements.
ii. Concentrations
of Credit Risk Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, trade
accounts receivable and loans. The Company invests its excess cash in low-risk, highly liquid money market funds and certificates of
deposit with a major financial institution.
iii. Exposed
to currency variations in subsidiary The primary operations and functional
currency of a subsidiary's business is in South African Rand. Due to the emerging market nature of this currency the spread volatility
of the currency low and high can be material during a year. The conversion of the currency from Rand to reporting currency US Dollar
can cause significant up or downward trends that is recorded in reserves under the heading accumulated comprehensive income. The effect
on the reserves for the year ended February 29, 2024 was $15,804
$80,650
iv. Interest
rate Risk Market
interest rate risk may result in loss from fluctuations in the future cash flows or fair values of financial instruments. Interest rate
risk is managed principally through monitoring interest rate gaps and basis risk and by having pre-approved limits for repricing bands. The
interest rate risk relates solely to the related party loan.
m. Comprehensive
income / loss
i. Comprehensive
income / loss Comprehensive
loss consists of net loss and other gains and losses affecting stockholders’ equity that, under GAAP, are excluded from net loss.
Our other comprehensive loss represents foreign currency translation adjustment attributable to our operations. Refer to Consolidated
Statements of Comprehensive Loss. Total
foreign currency transaction gains for the year ended February 29, 2024 was $15,804 ,
compared to $80,650
for the year ended February 28, 2023. n. Revenue
recognition The
Company generates revenues through two distinct revenue sources:
1. From the sale of high-quality medical devices which are self-manufactured through in-depth research and development; and
2. 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 customers 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 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. 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. The
Company sells a significant amount to DISA Life Sciences. For the year ending February 29, 2024, 86%
of the Company's total revenue is derived from this single customer in the distribution environment
in South Africa compared to 62%
for the year ending February 28, 2023. 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) —
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 $2,827,457 $2,478,434 $2,582,272 o. Cost
of goods sold Cost
of goods sold consists primarily of raw material purchases, manufacturing costs and employee benefits paid to operational personnel
associated with the production of our medical devices. p.
General and administrative expenses General
and administrative expenses consists mostly of personnel costs, consulting fees as well as audit fees. q.
Research and development All
research and development expenses are expensed as incurred and are included in operating expenses. r.
Interest expense Interest
expense relates mostly to is an unsecured loan from Minoan Medical which is repayable
over the next 2 years . The loan carries interest at the prevailing prime lending rate
of the time. The prevailing lending rate in South Africa was 11.75%
at year end. The terms of this loan are deemed to be market related. s.
Earnings per share Basic
earnings (loss) per share are computed based on the weighted average number of ordinary shares outstanding during each year. The
diluted net loss per share is computed by giving effect to all potentially dilutive securities outstanding for the period. For periods
in which we report net losses, diluted net loss per share is the same as basic net loss per share because potentially dilutive common
shares are not assumed to have been issued if their effect is anti-dilutive.
t. Principles
of consolidation
i. Consolidated
- all intercompany transactions eliminated The consolidated financial statements
include the accounts of Medinotec Inc., Medinotec Capital Proprietary Limited and the financial statements of DISA Medinotec Proprietary
Limited, known as “the Company”. All significant intercompany transactions have been eliminated.
u. Use
of estimates
i. Actual
results could differ The
preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates and may have an impact on future periods.
v. Recently
issued accounting standards In August
2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-05, Business
Combinations-Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement (“ASU 2023-05”), which addresses
the accounting for contributions made to a joint venture, upon formation, in a joint venture’s separate financial statements. The
amendments require certain joint ventures to apply a new basis of accounting upon formation by recognizing and initially measuring most
of their assets and liabilities at fair value. The objectives of the amendments are to provide decision-useful information to investors
and other allocators of capital in a joint venture’s financial statements and also to reduce diversity in practice. ASU 2023-05
is effective for both public and private joint venture entities with a formation date on or after January 1, 2025. Early adoption is
permitted. Entities may elect to apply the guidance retrospectively to joint ventures with a formation date prior to January 1, 2025.
The Company does not expect the adoption of this standard to have a material impact on its condensed consolidated financial statements
and related disclosures. In June
2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual
Sale Restrictions to clarify that a contractual restriction on the sale of an equity security is not considered part of a unit of account
of the equity security, and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot,
as a separate unit of account, recognize and measure a contractual sale restriction. The amendments also require the following disclosures
for equity securities subject to the contractual sale restrictions. 1. The
fair value of equity securities subject to the contractual sale restrictions reflected on the balance sheet. 2. The
nature and remaining duration of the restriction(s). 3. The
circumstances that could cause a lapse in the restriction(s). This guidance
is effective for fiscal years beginning after December 15, 2023, and interim periods within those financial years. The Company does not
expect the adoption of this standard to have a material impact on the Company’s condensed consolidated financial statements and
related disclosures. In September
2022, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) ASU 2022-04,
Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which enhances transparency
surrounding the use of supplier finance programs. The new guidance requires qualitative and quantitative disclosure sufficient to enable
users of the financial statements to understand the nature, activity during the period, changes from period to period and potential magnitude
of such programs. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those
fiscal years, except for the amendment on roll forward information, which is effective for fiscal years beginning after December 15,
2023. The Company is currently evaluating the ASU to determine its impact on the Company’s disclosures. In November
2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures", which amends
the disclosure to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment
expenses on an annual and interim basis for to enable investors to develop more decision-useful financial analyses. All public entities
will be required to report segment information in accordance with the new guidance starting in annual periods beginning after December
15, 2023. The Company is currently assessing potential impacts of ASU 2023-06 and does not expect the adoption of this guidance will
have a material impact on its condensed consolidated financial statements and disclosures. In December
2023, the FASB issued ASU 2023-09, " Income Taxes (Topic 740): Improvements to Income Tax Disclosures", which amends the disclosure
to address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily
related to the rate reconciliation and income taxes paid information and includes certain other amendments to improve the effectiveness
of income tax disclosures. For entities other than public business entities, the requirements will be effective for annual periods beginning
after December 15, 2025. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early
adoption is permitted. The Company is currently assessing potential impacts of ASU 2023-09 and does not expect the adoption of this guidance
will have a material impact on its condensed consolidated financial statements and disclosures and the Company is in a loss position
and not incurring any tax expenses. |
