PMGC Holdings Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation. The information set forth in this section contains certain “forward-looking statements”, including, among others (i) expected changes in our revenue and profitability, (ii) prospective business opportunities and (iii) our strategy for financing our business. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as “believes”, “anticipates”, “intends” or “expects”. These forward-looking statements relate to our plans, liquidity, ability to complete financing and purchase capital expenditures, growth of our business including entering into future agreements with companies, and plans to successfully develop and obtain approval to market our product. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Although we believe that our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, in light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this Annual Report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements. Our revenues and results of operations could differ materially from those projected in the forward-looking statements as a result of numerous factors, including, but not limited to, the following: the risk of significant natural disaster, the inability of our company to insure against certain risks, inflationary and deflationary conditions and cycles, currency exchange rates, and changing government regulations domestically and internationally affecting our products and businesses. You should read the following discussion and analysis in conjunction with the Financial Statements and Notes attached hereto, and the other financial data appearing elsewhere in this Annual Report. US Dollars are denoted herein by “USD”, “$” and “dollars”. Overview 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 . 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: ● Growing our revenue using our existing infrastructure to accelerate the 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; 59 ● Expanding our distribution partnerships internationally; and ● Pursue the identification and review of strategic acquisitions to complement our business. Results of Operations Comparison of the Years Ended December 31, 2023 and 2022. The following table provides certain selected financial information for the periods presented: Year Ended December 31, 2023 Year Ended December 31, 2022 Change Revenue $ 1,712,595 $ 766,277 $ 946,318 Cost of revenue $ 578,015 $ 318,968 $ 259,047 Gross profit $ 1,134,580 $ 447,309 $ 687,271 Gross profit percentage 66 % $ 58 % 8 % Amortization $ 10,295 $ 5,034 $ 5,261 Marketing and Promotion $ 660,291 $ 192,863 $ 467,428 Consulting Fees $ 459,498 $ 324,395 $ 135,103 Office and Administration $ 2,329,067 $ 1,019,708 $ 1,309,359 Professional Fees $ 579,111 $ 192,409 $ 386,702 Investor Relations $ 91,009 $ 74,003 $ 17,006 Research and Development $ 426,243 $ 228,747 $ 197,496 Foreign exchange (gain) loss $ 6,130 $ 2,749 $ 3,381 Travel and entertainment $ 339,147 $ 198,442 $ 140,705 Total operating expenses $ 4,900,791 $ 2,238,350 $ 2,662,441 Loss from operations $ (3,766,211 ) $ (1,791,041 ) $ (1,975,170 ) Other income (expense) 1 (535,306 ) (9,227 ) (526,079 ) Net loss $ (4,301,517 ) $ (1,800,268 ) $ (2,501,249 ) Total Comprehensive Loss $ (4,301,426 ) $ (1,800,359 ) $ (2,501,067 ) Basic and dilutive loss per common share $ (0.400 ) $ (0.189 ) $ (0.211 ) Weighted average number of shares outstanding – basic and diluted 10,745,938 9,528,863 1,217,075 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 year ended December 31, 2023 was $1,712,595 as compared to $766,277 for the year ended December 31, 2022, an increase of $946,318. 60 Our revenue by product category is as follows: Year Ended December 31, 2023 Year ended December 31, 2022 Enfinity $ 857,796 $ 265,411 Empower 619,999 156,848 White label distributor 234,800 344,018 Total Revenue $ 1,712,595 $ 766,277 During 2023 and 2022, the Company sold 7,613 and 2,114 bottles of Enfinity, respectively, an increase of 5,499 bottles or 260%. In addition, the Company sold 1,464 (eight packs) of Empower tubes in 2023, compared to 350 (eight packs) of Empower tubes during 2022, and an increase of 1,114 (eight packs) or 318%. The Company also sells its media containing its Elevai Exosomes TM under a white label deal. During 2023 and 2022, the Company sold approximately 196 and 287 liters, respectively, under this white label distributor agreement, a decrease of 91 liters or 32%. In 2023, the company sold 200 units of Scalp & Hair Cleanser as they embark on diversifying their product offerings. The increase in sales volumes is primarily due to enhanced market acceptance, continued growth in the number of US accounts, onboarding of international distributors, and repeat business from current customers and distributors. Additionally, the Company has decided not to renew the white label distribution agreement, which concluded on January 16, 2024. Cost of Revenue Cost of Revenue for the year ended December 31, 2023 was $578,015 as compared to $318,968 for the year ended December 31, 2022. Our cost of revenue by product category is as follows: Year Ended December 31, 2023 Year ended December 31, 2022 Enfinity $ 303,136 $ 101,554 Empower 161,947 42,554 White label distributor 113,019 174,860 Total Cost of Revenue $ 578,015 $ 318,968 The increase in cost of revenue is directly attributed to the increase in sales during 2023 compared to 2022. The following is a breakdown of the components of cost of revenue: Year Ended December 31, 2023 Year ended December 31, 2022 Cost of inventory $ 348,234 $ 243,285 Sales commission 127,266 52,508 Shipping cost 87,667 14,880 Inventory write down 14,848 8,295 Total Cost of Revenue $ 578,015 $ 318,968 Gross Profit Gross profit for the year ended December 31, 2023, was $1,134,580 as compared to $447,309 for the year ended December 31, 2022, an increase of $687,287. This represents an overall gross margin percentage of 66% during 2023, compared to 58% in 2022. The overall increase in gross margin percentage is primarily due to the Company selling a higher ratio of Enfinity and Empower products compared to while label distributor sales which are sold at a lower margin. The Company also saw gross margin improvements in each of its product categories due to operational efficiencies gained, a reduction in the relative inventory write down compared to sales, and securing better volume pricing with some of its key suppliers. 61 The following is a breakdown of gross profit percentage by product category: Year Ended December 31, 2023 Year ended December 31, 2022 Enfinity 65 % 62 % Empower 74 % 73 % White label distributor 52 % 49 % Overall Gross Profit Percentage 66 % 58 % Research and Development Expenses Research and development expenses for the year ended December 31, 2023, were $426,243 compared to $228,747 for the year ended December 31, 2022, an increase of $197,496. Research and Development related to the Company’s Enfinity, Empower and development of new products for the Company. 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 for the entire year ended December 31, 2023 (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 years ended December 31, 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 year ended December 31, 2023, were $660,291 compared to $192,863 for the year ended December 31, 2022, an increase of $467,428. During 2023, the Company increased its marketing and promotion efforts to drive sales and support the Company’s existing customers, which included giving out product samples with a cost of $124,376 (2022 - $46,693), and attending and sponsoring industry conferences. Office and Administrative Expenses Office and administrative expenses for the year ended December 31, 2023, were $2,329,067, compared to $1,019,708 for the year ended December 31, 2022, an increase of $1,309,359. The increase is mainly the result of salaries and wages of $1,386,339 and office rent of $126,096 incurred during 2023, compared to $617,425 and $73,363 in 2022, a combined increase of $821,647. The Company increased its headcount and moved into a larger office location to accommodate the commercialization of its products and growth in operations during 2023. During 2023, office and administrative expenses also include share-based compensation of $476,905, compared to $164,907 in 2022, an increase of $311,998. 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 year ended December 31, 2023, compared to the year ended December 31, 2022. Consulting Fees Consulting fees for the year ended December 31, 2023, were $459,498, compared to $324,395 for the year ended December 31, 2022, an increase of $135,103. During 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 the CFO) in a consulting capacity. The increase in consulting fees is consistent with the increase in operations. Professional Fees Professional fees for the year ended December 31, 2023 was $579,111, compared to $192,409 for the year ended December 31, 2022, an increase of $386,702. Professional fees comprise of legal, audit and accounting services. The increase during 2023 is primarily due to an increase in audit, legal and accounting services pursuant to the completion of the Company’s initial public offering (“IPO”). 62 Travel and Entertainment Travel and entertainment for the year ended December 31, 2023 was $339,147, compared to $198,442 for the year ended December 31, 2022, an increase of $140,705. Travel and entertainment expenses are related primarily to costs incurred during the attendance of industry trade shows and conferences. The increase in the year ended December 31, 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 year ended December 31, 2023 was $91,009, compared to $74,003 for the year ended December 31, 2022. The increase in investor relations spending is consistent with the Company’s growth strategy, which includes promotion to current and potential investors. Liquidity and Capital Resources The accompanying 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 December 31, 2023 and 2022, the Company had a net working capital of $3,622,091 and $963,050, respectively, and has an accumulated deficit of $7,023,890 and $2,722,373, respectively. Furthermore, for the years ended December 31, 2023 and 2022, the Company incurred a net loss of $4,301,517 and $1,800,268, respectively and used $4,556,811 and $1,585,876, 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 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 December 31, 2023 we had cash of $3,326,851, with $1,154,901 as of December 31, 2022 The following table provides selected financial data as of December 31, 2023 and 2022, respectively. December 31, 2023 December 31, 2022 Change Current assets $ 4,919,444 $ 1,551,322 $ 3,368,122 Current liabilities $ 1,297,353 $ 588,272 $ 709,081 Working capital $ 3,622,091 $ 963,050 $ 2,659,041 The following table summarizes our cash flows from operating, investing and financing activities: Year Ended December 31, 2023 Year Ended December 31, 2022 Change Cash used in operating activities $ (4,556,811 ) $ (1,585,876 ) $ (2,970,935 ) Cash used in investing activities $ (11,191 ) $ (32,027 ) $ 20,836 Cash provided by financing activities $ 6,738,890 $ 2,362,259 $ 4,376,631 Cash Flow from Operating Activities For the year ended December 31, 2023, net cash flows used in operating activities was $4,556,811 compared to $1,585,876 used during the year ended December 31, 2022, respectively, primarily due to net loss and timing of settlement of assets and liabilities. Cash Flows from Investing Activities During the years ended December 31, 2023 and 2022, we used $11,191 and $32,027, 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. In 2022, net cash used in investing activities include proceeds of $3,500 generated on the sale of equipment. 63 Cash Flows from Financing Activities During the year ended December 31, 2023, we had cash flow provided by financing activities of $6,738,890 compared to cash flow provided by financing activities of $2,362,259 in 2022, an increase of $4,376,631. During 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. Additionally, the Company completed its IPO and issued 1,500,000 common shares, for gross proceeds of $6,000,000 ($5,237,806 net of share issuance cost). In 2022, the Company raised $183,970 through short term convertible notes that were converted into Series A preferred stock and common stock purchase warrants. The Company raised an additional $2,153,289, net of share issuance cost of $33,132, through its Series A preferred stock financing and another $25,000 upon the exercise of stock options in exchange for common shares. Critical Accounting Policies and Significant Judgments and Estimates This discussion and analysis of our financial condition and results of operations is based on our 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 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 consolidated financial statements in the period they are determined. 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 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. 64 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 year ended December 31, 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). Inventory Inventory consist 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 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 years ended December 31, 2023 and 2022, the Company recorded $487,738 and $171,869, respectively, in share-based compensation expense, of which $476,905 and $10,833, and $164,907 and $6,962 , respectively is included in office and administration and research and development, respectively. 65 Determining the appropriate fair value model and the related assumptions requires judgment. During the years ended December 31, 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 For the year ended December 31, 2023, the Company recorded 34% of its revenue from its 3 largest customers. The Company’s largest customer, representing $234,800 of revenue, relates to sales to a wholesaler during the period. During the year ended December 31, 2022, the Company recorded 54% of its revenue from its two largest customers, each representing 45% and 9% respectively. The Company’s largest customer, representing $344,018 of revenue, relates to a white label distributor agreement signed during the year. As of December 31, 2023, the Company had $49 receivables due from these customers and $7,500 in customer deposits were received from its largest customer. The Company expects its dependence on these major customers to decrease over time as it enters into additional distributor agreements and builds out its sales team. Suppliers During the year end December 31, 2023 and 2022, the Company had 3 key suppliers that represented approximately 73% and 3 key suppliers that represented approximately 64%, 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): Year Ended December 31, 2023 Year ended December 31, 2022 Supplier 1 32 % 39 % Supplier 2 29 % 14 % Supplier 3 12 % 11 % Total 73 % 64 % 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. 66 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. Future Related Party Transactions After completion of this Offering, the Corporate Governance Committee of our Board of Directors (which we will establish and which will consist solely of independent directors) will be required to approve all related party transactions. All related party transactions will be made or entered into on terms that are no less favorable to use than can be obtained from unaffiliated third parties. Impact of Inflation We do not believe the impact of inflation on our Company is material. Inflation Risk We are also 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. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item. 67