PMGC Holdings Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations References in this quarterly report to “we,” “us,” “Elevai” or the “Company” refer to Elevai Labs Inc. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this quarterly report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Forward-Looking Statements This quarterly report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company’s registration statement on Form S-1 filed with the U.S. Securities and Exchange Commission (the “SEC”). The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at http://www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Organization and Overview of Operations Elevai Labs Inc. was incorporated in Delaware in June 2020. We are a topical skincare company specializing in aesthetic biotechnology. We have created, and continue to research, and commercialize innovative and science-driven topical skincare technologies for the medical aesthetic skincare market. We principally produce, commercialize, distribute, and sell a new generation of cosmetic topical products containing our proprietary stem cell-derived Elevai Exosomes TM . In June 2021, we entered into an agreement with Elevai Research Inc. (formerly Reactive Medical Inc.), a Canadian company under common control, whereby we purchased substantially all of the assets and liabilities Elevai Research Inc. To bring our products to market, we developed a robust fully-commercialized process from source to skin (exosome secretion to product bottling) that holds and utilizes advanced patent pending knowledge alongside our cohesive production process. Our specialty product lines are topically applied to the skin to aid in the reduction of the appearance of a range of the most common skin conditions, including pre-mature aging, oxidative stress, photodamage, hyperpigmentation, elasticity, and soft tissue deficits, such as fine lines and wrinkles. We primarily sell our products through the physician dispensed channel. Outlook Management’s Plans Over the next twelve months we intend to focus on: ● Expanding our internal sales force, hiring new employees to accelerate commercialization of our products; ● Utilizing clinical validation studies to show the efficacy of our products; ● R&D to create new product formulations and bring them to market; ● Expanding our distribution partnerships internationally 22 Results of Operations Comparison of the nine months ended September 30, 2023 and 2022. The following table provides certain selected financial information for the periods presented: Nine Months ended September 30, 2023 Nine Months ended September 30, 2022 Change Revenue $ 1,014,004 $ 627,379 $ 386,625 Cost of revenue $ 341,122 $ 273,480 $ 67,642 Gross profit $ 672,882 $ 353,899 $ 318,983 Gross profit percentage 66 % $ 56 % 10 % Depreciation $ 7,824 $ 3,325 $ 4,499 Marketing and Promotion $ 316,436 $ 134,762 $ 181,674 Consulting Fees $ 316,468 $ 248,163 $ 68,305 Office and Administration $ 1,628,931 $ 639,714 $ 989,217 Professional Fees $ 450,384 $ 94,865 $ 355,519 Investor Relations $ 84,820 $ 32,216 $ 52,604 Research and Development $ 303,769 $ 167,888 $ 135,881 Foreign exchange (gain) loss $ (480 ) $ 1,392 $ (1,872 ) Travel and entertainment $ 250,000 $ 148,495 $ 101,505 Total operating expenses $ 3,358,152 $ 1,470,820 $ 1,887,332 Loss from operations $ (2,685,270 ) $ (1,116,921 ) $ (1,568,349 ) Other expenses 1 (458,331 ) (30,690 ) (427,641 ) Net loss $ (3,143,601 ) $ (1,147,611 ) $ (1,995,990 ) Total Comprehensive Loss $ (3,142,839 ) $ (1,147,595 ) $ (1,995,244 ) Basic and dilutive loss per common share $ (0.318 ) $ (0.120 ) $ (0.198 ) Weighted average number of shares outstanding – basic and diluted 9,900,744 9,526,808 373,936 1 Other expenses relates to interest income, interest expense, loss on sale of equipment and fair value gain/loss on derivative liability. Revenue Revenue for the nine months ended September 30, 2023, was $1,014,004 as compared to $627,379 for the nine months ended September 30, 2022, an increase of $386,625. Our revenue by product category is as follows: Nine Months ended September 30, 2023 Nine Months ended September 30, 2022 Enfinity $ 509,089 232,187 Empower 408,166 51,174 White label distributor 96,750 344,018 Total Revenue $ 1,014,004 627,379 During the nine months ended September 30, 2022, the Company sold 1,581 bottles of Enfinity, produced its first batch, and sold 86 single Empower tubes (equivalent to 10.75 eight packs) as well as 182 eight packs of Empower, and sold approximately 345 liters under a white label distributor agreement. During the nine months ended September 30, 2023, the Company sold 4,469 bottles of Enfinity and sold 969 (eight packs) of Empower tubes. Additionally, the Company sold approximately 48 liters under a white label distributor agreement. The Company has seen significant growth in sales since its commercialization in Q1 2022. 23 Cost of Revenue Cost of Revenue for the nine months ended September 30, 2023, was $341,122 as compared to $273,480 for the nine months ended September 30, 2022. Our cost of revenue by product category is as follows: Nine Months ended September 30, 2023 Nine Months ended September 30, 2022 Enfinity $ 192,044 $ 76,559 Empower 110,988 22,051 White label distributor 38,090 174,870 Total Cost of Revenue $ 341,122 $ 273,480 The increase in cost of revenue is directly attributed to the increase in sales during the nine months ended September 30, 2023, compared to 2022. The following is a breakdown of the components of cost of revenue: Nine Months ended September 30, 2023 Nine Months ended September 30, 2022 Cost of inventory $ 187,135 $ 225,908 Sales commission 86,567 32,574 Shipping cost 60,750 7,178 Inventory write down and wastage 6,670 7,820 Total Cost of Revenue $ 341,122 $ 273,480 Gross Profit The following is a breakdown of gross profit percentage by product category: Nine Months ended September 30, 2023 Nine Months ended September 30, 2022 Enfinity 62 % 67 % Empower 73 % 57 % White label distributor 61 % 49 % Overall Gross Profit Percentage 66 % 56 % Gross profit for the nine months ended September 30, 2023, was $672,882 as compared to $353,899 for the nine months ended September 30, 2022, an increase of $318,983. This represents an overall gross margin percentage of 66% during the nine month period ending September 30, 2023, compared to 56% in the nine month period ending September 30, 2022. The overall increase in gross margin percentage is primarily due to the increase in the gross margin on the Empower product category, and that the Company sold a higher ratio of Enfinity and Empower products compared to while label distributor sales which, are sold at a lower margin. 24 The increase in the gross margin percentage on Empower from 57% during the nine months ended September 30, 2022 to 73% in the nine months ended September 30, 2023, is primarily related to the write down, during 2022, of Empower tubes that were the wrong size, as well as an increase sales from our internal sales force compared to distributor sales, which yield a higher gross margin. The decrease in the gross margin percentage on Enfinity from 67% during the nine months ended September 30, 2022 to 62% in the nine months ended September 30, 2023, is primarily related to higher sales commissions as the Company hired more sales reps to drive sales. The increase in the white label distributor gross margin from 49% to 61% is due to the Company achieving a higher sales price from the sale of 5ml units compared to 30ml or 50ml units. During the nine months ended September 30, 2023, all of the white label distributor sales were 5ml units, compared to the majority being 30ml and 50ml units during the 2022 comparative period. Research and Development Expenses (“R&D”) R&D expenses for the nine months ended September 30, 2023, were $303,769 compared to $167,888 for the nine months ended September 30, 2022, an increase of $135,881. R&D related to the Company’s Enfinity, Empower and white label distributor products. The increase in R&D is mainly driven by an increase in lab employees hired towards the end of July 2022. In addition, the Company was in its old lab location during Q1 2022 compared to the new lab location in the nine months ended September 30, 2023 period (the Company has been in its new lab since July 2022). The new lab location has a higher production and R&D capacity which brings an increase in rent and utilities. During both the nine months ended September 30, 2023 and 2022, the Company’s lab staff worked on increasing the efficiency and refining the production process. Marketing and Promotion Marketing and promotion expenses for the nine months ended September 30, 2023, were $316,436 compared to $134,762 for the nine months ended September 30, 2022, an increase of $ 181,674. The Company increased its marketing and promotion efforts to drive sales, which included giving out product samples with a cost of $96,184 during the nine months ended September 30, 2023, compared to only $29,437 during the nine months ended September 30, 2022. Office and Administrative Expenses Office and administrative expenses for the nine months ended September 30, 2023, were $1,628,931, compared to $639,714 for the nine months ended September 30, 2022, an increase of $989,217. The increase is mainly the result of salaries and wages of $1,000,313 and office rent of $89,600 incurred for the nine months ended September 30, 2023, compared to $384,322 and $47,947 in the nine months ended September 30, 2022, a combined increase of $657,644. The Company increased its headcount and moved into a larger office location to accommodate the commercialization of its products and growth in operations during the nine months ended September 30, 2023. During the nine months ended September 30, 2023, office and administrative expenses also include share-based compensation of $337,551, compared to $90,271 in nine months ended September 30, 2022, an increase of $247,280. The increase in share-based compensation expense is due to the continued vesting of stock options granted during 2021 and 2022, with additional options issued during 2023. The remaining increase is consistent with the increase in operations in the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. Consulting Fees Consulting fees for the nine months ended September 30, 2023, were $316,468, compared to $248,163 for the nine months ended September 30, 2022, an increase of $68,305. During the nine months ended September 30, 2023, and 2022, the Company incurred consulting fees in relation to recruitment, strategic introductions, business advisory, international relations, and strategy. In addition, the Company received services from a number of parties (including companies controlled by related parties and CFO) in a consulting capacity. The increase in consulting fees is consistent with the increase in operations. Professional Fees Professional fees for the nine months ended September 30, 2023, was $450,384, compared to $94,865 for the nine months ended September 30, 2022, an increase of $355,519. Professional fees comprise of legal, audit and accounting services. The increase during the nine months ended September 30, 2023, is primarily due to an increase in audit, legal and accounting services pursuant to the Company’s goal of filing its preliminary initial registration (S-1 Form) with the SEC and completing an initial public offering (“IPO”). 25 Travel and Entertainment Travel and entertainment for the nine months ended September 30, 2023, was $250,000, compared to $148,495 for nine months ended September 30, 2022, an increase of $101,505. Travel and entertainment expenses are related primarily to costs incurred during the attendance of industry trade shows and conferences. The increase in the nine months ended September 30, 2023, compared to 2022 is due to the Company increasing its presence at trade shows and conferences to raise awareness of the Company, its products and to drive business development. Investor Relations Investor relations for the nine months ended September 30, 2023, was $84,820, compared to $32,216 for the nine months ended September 30, 2022. The increase in investor relations spending is consistent with the Company’s growth strategy. Results of Operations Comparison of the three months ended September 30, 2023 and 2022. The following table provides certain selected financial information for the periods presented: Three Months ended September 30, 2023 Three Months ended September 30, 2022 Change Revenue $ 554,654 $ 432,122 $ 122,532 Cost of revenue $ 188,509 $ 194,428 $ (5,919 ) Gross profit $ 366,145 $ 237,694 $ 128,451 Gross profit percentage 66 % $ 55 % 11 % Depreciation $ 2,439 $ 1,630 $ 809 Marketing and Promotion $ 99,709 $ 73,273 $ 26,436 Consulting Fees $ 82,781 $ 109,443 $ (26,662 ) Office and Administration $ 664,922 $ 312,297 $ 352,625 Professional Fees $ 143,654 $ 49,706 $ 93,948 Investor Relations $ 9,100 $ 18,430 $ (9,330 ) Research and Development $ 86,374 $ 89,325 $ (2,951 ) Foreign exchange (gain) loss $ (3,113 ) $ (465 ) $ (2,648 ) Travel and entertainment $ 65,830 $ 55,892 $ 9,938 Total operating expenses $ 1,151,696 $ 709,531 $ 442,165 Loss from operations $ (785,551 ) $ (471,837 ) $ (313,714 ) Other expenses 1 2,504 (27,248 ) 29,752 Net loss $ (783,047 ) $ (499,085 ) $ (283,962 ) Total Comprehensive Loss $ (782,660 ) $ (499,311 ) $ (283,349 ) Basic and dilutive loss per common share $ (0.078 ) $ (0.052 ) $ (0.026 ) Weighted average number of shares outstanding – basic and diluted 10,023,002 9,526,808 496,194 1 Other expenses relates to interest income, interest expense, loss on sale of equipment and fair value gain/loss on derivative liability. 26 Revenue Revenue for the three months ended September 30, 2023, was $554,654 as compared to $432,122 for the three months ended September 30, 2022, an increase of $122,532. Our revenue by product category is as follows: Three Months ended September 30, 2023 Three Months ended September 30, 2022 Enfinity $ 252,035 153,262 Empower 205,869 30,892 White label distributor 96,750 247,968 Total Revenue $ 554,654 432,122 During the three months ended September 30, 2022, the Company sold 999 bottles of Enfinity, sold 145 Empower eight packs as well as 24 single Empower tubes (equivalent to 3 eight packs) and sold approximately 298 liters under a white label distributor agreement. During the three months ended September 30, 2023, the Company sold 2,388 bottles of Enfinity and sold 483 (eight packs) of Empower tubes and sold 48 liters under a white label distributor agreement. The Company has seen significant growth in sales since its commercialization in Q1 2022. Cost of Revenue Cost of Revenue for the three months ended September 30, 2023, was $188,509 as compared to $194,428 for the three months ended September 30, 2022. Our cost of revenue by product category is as follows: Three Months ended September 30, 2023 Three Months ended September 30, 2022 Enfinity $ 93,661 $ 48,031 Empower 56,758 9,663 White label distributor 38,090 136,734 Total Cost of Revenue $ 188,509 $ 194,428 The Company achieved an overall decrease in cost of revenue despite the overall increase in sales. This is driven by an increase in the overall gross margin from 55% to 66%, as further explained below. The following is a breakdown of the components of cost of revenue: Three Months ended September 30, 2023 Three Months ended September 30, 2022 Cost of inventory $ 113,239 $ 169,286 Sales commission 39,150 19,952 Shipping cost 32,372 5,190 Inventory write down 3,748 - Abnormal Wastage - - Total Cost of Revenue $ 188,509 $ 194,428 27 Gross Profit The following is a breakdown of gross profit percentage by product category: Three Months ended September 30, 2023 Three Months ended September 30, 2022 Enfinity 63 % 69 % Empower 72 % 69 % White label distributor 61 % 45 % Overall Gross Profit Percentage 66 % 55 % Gross profit for the three months ended September 30, 2023, was $366,145 as compared to $237,694 for the three months ended September 30, 2022, an increase of $128,451. This represents an overall gross margin percentage of 66% during the three month period ending September 30, 2023, compared to 55% in the three month period ending September 30, 2022. The overall increase in gross margin percentage is primarily due to the increase in the gross margin on the Empower product category, and that the Company sold a higher ratio of Enfinity and Empower products compared to while label distributor sales which, are sold at a lower margin. The decrease in the gross margin percentage on Enfinity from 69% during the three months ended September 30, 2022 to 63% in the three months ended September 30, 2023, is primarily related to an increase in commission paid to sales representatives. The increase in the gross margin percentage on Empower from 69% during the three months ended September 30, 2022 to 72% in the three months ended September 30, 2023 is primarily related to the Company achieving a reduction in the weighted average per unit cost of its Empower product. The increase in the white label distributor gross margin from 45% to 61% is due to the Company achieving a higher sales price from the sale of 5ml units compared to 30ml or 50ml units. During the three months ended September 30, 2023, all of the white label distributor sales were 5ml units, compared to only 30ml and 50ml units during the 2022 comparative period. Research and Development Expenses (“R&D”) R&D expenses for the three months ended September 30, 2023, were $86,374 compared to $89,325 for the three months ended September 30, 2022, a decrease of $2,951. R&D costs related to the Company’s Enfinity, Empower and white label distributor products. The decrease relates to less money spend on consulting firms to assist in R&D for the Company’s products in the three months ended September 30, 2023. Marketing and Promotion Marketing and promotion expenses for the three months ended September 30, 2023, were $99,709 compared to $73,273 for the three months ended September 30, 2022, an increase of $26,436. The Company increased its marketing and promotion efforts to drive sales, which included giving out product samples with a cost of $31,466 during the three months ended September 30, 2023, compared to only $17,030 during the three months ended September 30, 2022. Office and Administrative Expenses Office and administrative expenses for the three months ended September 30, 2023, were $664,922, compared to $312,297 for the three months ended September 30, 2022, an increase of $352,625. The increase is mainly the result of salaries and wages of $392,163 and office rent of $35,462 incurred for the three months ended September 30, 2023, compared to $193,975 and $32,666 in the three months ended September 30, 2022, a combined increase of $200,984 The Company increased its headcount and moved into a larger office location to accommodate the commercialization of its products and growth in operations during the three months ended September 30, 2023. During the three months ended September 30, 2023, office and administrative expenses also include share-based compensation of $158,813, compared to $33,864 in three months ended September 30, 2022, an increase of $124,949. The increase in share-based compensation expense is due to the continued vesting of stock options granted during 2021 and 2022, with additional options issued during 2023. The remaining increase is consistent with the increase in operations in the three months ended September 30, 2023, compared to the three months ended September 30, 2022. 28 Consulting Fees Consulting fees for the three months ended September 30, 2023, were $82,781, compared to $109,443 for the three months ended September 30, 2022, a decrease of $26,662. During the three months ended September 30, 2023, and 2022, the Company incurred consulting fees in relation to recruitment, strategic introductions, business advisory, international relations, and strategy. In addition, the Company received services from a number of parties (including companies controlled by related parties and CFO) in a consulting capacity. Professional Fees Professional fees for the three months ended September 30, 2023, was $143,654, compared to $49,706 for the three months ended September 30, 2022, an increase of $93,948. Professional fees comprise of legal, audit and accounting services. The increase during the three months ended September 30, 2023, is primarily due to an increase in audit, legal and accounting services pursuant to the Company’s goal of filing its preliminary initial registration (S-1 Form) with the SEC and completing an initial public offering (“IPO”). Travel and Entertainment Travel and entertainment for the three months ended September 30, 2023, was $65,830, compared to $55,892 for the three months ended September 30, 2022, an increase of $9,938. Travel and entertainment expenses are related primarily to costs incurred during the attendance of industry trade shows and conferences. The increase in the three months ended September 30, 2023, compared to 2022 is due to the Company increasing its presence at trade shows and conferences to raise awareness of the Company, its products and to drive business development. Investor Relations Investor relations for the three months ended September 30, 2023, was $9,100, compared to $18,430 for the three months ended September 30, 2022. The decrease in investor relations spending is attributed to the conclusion of an annual contract with an investor relations firm during the three months ended September 30, 2023. Liquidity and Capital Resources The accompanying unaudited condensed interim consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and ultimately the attainment of profitable operations. As of September 30, 2023, and December 31, 2022, the Company had a net working capital deficit of $366,971, and a positive working capital $963,050, respectively, and has an accumulated deficit of $5,865,974 and $2,722,373, respectively. In addition, as of September 30, 2023, the Company has a total equity deficit of $163,895. Furthermore, for nine months ended September 30, 2023, and 2022, the Company incurred a net loss of $3,143,601 and $1,147,611, respectively and used $2,168,661 and $1,079,472 respectively of cash flows for operating activities. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The accompanying unaudited condensed interim consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Our principal liquidity requirements are for working capital, capital expenditure, research and development and inventory production. We fund our liquidity requirements primarily through cash on hand, cash flows from operations, and the issuance of common and preferred stock. As of September 30, 2023, we had cash of $476,855, with $1,154,901 as of December 31, 2022. 29 The following table provides selected financial data as of September 30, 2023, December 31, 2022, respectively. September 30, 2023 December 31, 2022 Change Current assets $ 1,276,604 $ 1,551,322 $ (274,718 ) Current liabilities $ 1,643,575 $ 588,272 $ 1,055,303 Working capital $ (366,971 ) $ 963,050 $ (1,330,021 ) The following table summarizes our cash flows from operating, investing, and financing activities: Nine Month Ended September 30, 2023 Nine Month Ended September 30, 2022 Change Cash used in operating activities $ (2,168,661 ) $ (1,079,472 ) $ (1,089,189 ) Cash used in investing activities $ (11,191 ) $ (33,427 ) $ 22,236 Cash provided by financing activities $ 1,501,085 $ 2,275,161 $ (774,076 ) Cash Used in Operating Activities For the nine months ended September 30, 2023, net cash flows used in operating activities was $2,168,661 compared to $1,079,472 used during the nine months ended September 30, 2022, respectively, primarily due to net loss and timing of settlement of assets and liabilities. Cash Used in Investing Activities During the nine months ended September 30, 2023, and 2022, we used $11,191 and $33,427, respectively, in investing activities primarily related to the purchase of equipment for our lab space to be used on the production of inventory and research and development, as well as the purchase of equipment for use at conferences and trade shows. Cash Flows from Financing Activities During the nine months ended September 30, 2023, we had cash flows provided by financing activities of $1,501,085 compared to $2,275,161, financing activities during the nine months ended September 30, 2022. During the nine months ended September 30, 2023, the Company raised $1,463,585 through the issuance of common stock and common stock purchase warrants, and another $37,500 upon the exercise of stock options in exchange for common stock. Critical Accounting Policies and Significant Judgments and Estimates This discussion and analysis of our financial condition and results of operations is based on our condensed interim consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of the condensed interim consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to revenue recognition, the collectability of receivables, valuation of inventory, fair value of derivative liabilities and stock options, useful lives and recoverability of long-lived assets, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from those estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the condensed interim consolidated financial statements in the period they are determined. 30 The Company’s policy for property and equipment requires judgement in determining whether the present value of future expected economic benefits exceeds capitalized costs. The policy requires management to make certain estimates and assumptions about future economic benefits related to its operations. Estimates and assumptions may change if new information becomes available. If information becomes available suggesting that the recovery of capitalized cost is unlikely, the capitalized cost is written off/impaired to the condensed interim consolidated statement of operations. The assessment of whether the going concern assumption is appropriate requires management to take into account all available information about the future, which is at least, but not limited to, 12 months from the date the financial statements are issued. The Company is aware that material uncertainties related to events or conditions may cast substantial doubt upon the Company’s ability to continue as a going concern. Revenue Recognition In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. Since ASU 2014-09 was issued, several additional ASUs have been issued to clarify various elements of the guidance. These standards provide guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer. Revenue is measured based on the consideration the Company expects to receive in exchange for those products. In instances where financial acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. Revenues are recognized under ASC 606, “Revenue from Contracts with Customers,” in a manner that reasonably reflects the delivery of its products and services to customers in return for expected consideration. The Company generates revenue through the sale of skincare products. Revenue from the sale of skincare products are recognized at the point in time when the Company considered revenue realized or realizable and earned, which is typically when all of the five following criteria are met: (1) the contract with the customer is identifiable (i.e. when a sales transaction has been entered into between the Company and the customer), (2) the performance obligation in the contract is identifiable (i.e. the customer has ordered a known quantity of product to be delivered), (3) the transaction price is determinable (i.e. the customer has agreed to the Company’s price for the products ordered), (4) the Company is able to allocate the transaction price to the performance obligations in the contract, and (5) the performance obligations have been satisfied, which is typically upon delivery of the product to the customer. Transaction prices for performance obligations are explicitly outlined in relevant agreements; therefore, the Company does not believe that significant judgements are required with respect to the determination of the transaction price, including any variable consideration identified. The Company is responsible for providing the products to customers. As a result, the Company is considered the Principal when providing products to customers. As the Company collects payment at the time of the customer order, its contracts do not have a significant financing component. Customers are entitled to replacement or full refund of any damaged or defective product, after the return of the damaged or defective product to the Company. There were no significant returns or refunds during the nine months ended September 30, 2023, and 2022. Foreign Currency Translation The Company’s functional and reporting currency is the U.S. dollar. The functional currency of the Company’s Canadian subsidiary, Elevai Research Inc. (“Elevai Research”) is the Canadian dollar. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets, liabilities, and items recorded in income arising from transactions denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. The accounts of Elevai Research are translated to U.S. dollars using the current rate method. Accordingly, assets and liabilities are translated into U.S. dollars at the period-end exchange rate while revenues and expenses are translated at the average exchange rates during the period. Related exchange gains and losses are included in a separate component of stockholders’ equity as accumulated other comprehensive income (loss). 31 Inventory Inventory consists of raw materials, work-in-progress and finished goods and are valued at the lower of cost or net realizable value. The Company’s manufacturing process involves the production of our proprietary stem cell-derived Elevai Exosomes TM . Finished goods consists of a new generation of cosmetic topical products containing our proprietary stem cell-derived Elevai Exosomes TM . Cost is determined using the weighted average cost formula. Net realizable value is determined on the basis of anticipated sales proceeds less the estimated selling expenses. Management compares the cost of inventories with the net realizable value and an allowance is made to write down inventories to net realizable value, if lower. Stock-Based Compensation Employees – The Company accounts for share-based compensation under the fair value method which requires all such compensation to employees, including the grant of employee stock options, to be calculated based on its fair value at the measurement date (generally the grant date), and recognized in the condensed interim consolidated statement of operations over the requisite service period. Nonemployees – During June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”) to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees. Under the requirements of ASU 2018-07, the Company accounts for share-based compensation to non-employees under the fair value method which requires all such compensation to be calculated based on the fair value at the measurement date (generally the grant date) and recognized in the statement of operations over the requisite service period. During the nine months ended September 30, 2023, and 2022, the Company recorded $346,550 and $94,099, respectively, in share-based compensation expense, of which $337,551 and $8,999, and $90,271 and $3,828, respectively is included in office and administration and research and development, respectively. Determining the appropriate fair value model and the related assumptions requires judgment. During nine months ended September 30, 2023, and 2022, the fair value of each option grant was estimated using a Black-Scholes option-pricing model. The expected volatility represents the historical volatility of comparable publicly traded companies in similar industries, adjusted for variables such as stock price, market capitalization and life cycle. Due to limited historical data, the expected term for options granted is equal to the contractual life. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of stock options. The Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero. Concentrations Customers During the nine month period ended September 30, 2023, the Company recorded 14% of its revenue from its largest customer. The Company’s largest customer relates to sales to a wholesaler during the period. During the nine months ended September 30, 2022, the Company recorded 55% of its revenue from a single customer. The Company’s largest customer relates to sales to a wholesaler during the period. As of September 30, 2023 and December 31, 2022, the Company had $49 and $nil receivables due from this customer, respectfully, and $nil and $5,992, respectfully, in customer deposits were received from its largest customer. The Company expects its dependence on major customers to decrease over time as it enters into additional distributor agreements and builds out its sales team. 32 Suppliers During the nine month period ended September 30, 2023 and 2022, the Company had 3 key suppliers that represented approximately 66% and 72%, respectively of the cost incurred in the purchase and production of inventory. The table below represents a breakdown of each supplier as a percentage of the cost incurred (Suppliers are shown from largest to smallest and does not necessarily represent the same suppliers period over period): Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 Supplier 1 26 % 46 % Supplier 2 23 % 14 % Supplier 3 17 % 12 % Total 66 % 72 % The Company continually evaluates the performance of its suppliers and the availability of alternatives to substitute or supplement its inventory production supply chain. The Company believes that a breakdown in supply from one of its key suppliers would be overcome in a short amount of time given the availability of alternatives. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditure or capital resources that is material to investors. JOBS Act On April 5, 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was signed into law. The JOBS Act contains provisions that, among other things, eases certain reporting requirements for qualifying public companies. We will qualify as an “emerging growth company” and under the JOBS Act will be allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies. We are electing to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. Related Party Transactions Parties are related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management, and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to the extent that one of the transacting parties might be prevented from fully pursuing its separate interests. The Company discloses all related party transactions.” Impact of Inflation We do not believe the impact of inflation on our Company is material. Inflation Risk We are exposed to inflation risk. Inflationary factors, such as increases in labor costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses. Market Risk Market risk is the risk of loss arising from adverse changes in market rates and prices. Our market risk exposure is generally limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes. 33 Item 3. Quantitative and Qualitative Disclosures About Market Risk Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).