Elevai Labs Inc

ELEVAI LABS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Elevai Labs Inc. (“Elevai”) was incorporated under the laws of the State of Delaware on June 9, 2020. Elevai and its 100% owned subsidiary, Elevai Research Inc, are collectively referred to in these unaudited condensed consolidated financial statements as “the Company”.

The Company is a skincare development company engaged in the design, manufacture, and marketing of skincare products in the skincare industry. The Company’s principal activities are developing and manufacturing skincare products.

On April 29, 2024, Elevai Skincare Inc. (“Skincare”) and Elevai BioSciences Inc. (“BioSciences”) were incorporated under the laws of the state of Delaware. Elevai is the sole shareholder of Skincare and BioSciences. The purpose of Skincare is to operate the Company’s existing business. While the purpose of BioSciences is to develop the Company’s 2 drug candidates, EL-22, a clinical stage engineered probiotic expressing myostatin, and EL-32, a preclinical engineered probiotic expressing dual myostatin and activin-A. Effective May 1, 2024, Elevai transferred its operating assets and liabilities relating to its skincare business to Skincare in exchange for common shares of Skincare.

These unaudited condensed 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 and the ability of the Company to obtain necessary equity financing to continue operations, and ultimately the attainment of profitable operations.

As of March 31, 2024, and December 31, 2023, the Company had a net working capital of $1,918,631 and $3,622,091, respectively, and has an accumulated deficit of $8,421,140 and $7,023,890, respectively. Furthermore, for the three months ended March 31, 2024, and 2023, the Company incurred a net loss of $1,397,250 and $1,080,696, respectively and used $2,324,068 and $885,506, respectively of cash flows for operating activities. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These unaudited condensed 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.

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.

Management’s plans that alleviate substantial doubt about the Company’s ability to continue as a going concern include raising additional debt or equity financing. Although the Company has been successful in raising funds in the past, and expects to do so in the future, there are no guarantees that it will be able to raise funds as anticipated.

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with rules and regulations of the Securities and Exchange Commission (“SEC”) and generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and are expressed in United States dollars. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, we have included all adjustments considered necessary for a fair presentation and such adjustments are of a normal recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the years ended December 31, 2023, and 2022. The results of operations for the three months ended March 31, 2024, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2024.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the account of Elevai, and its 100% owned subsidiaries. All intercompany accounts, transactions and profits were eliminated in the unaudited condensed consolidated financial statements.

Use of Estimates

The preparation of the unaudited condensed 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 unaudited condensed consolidated financial statements in the period they are determined.

Foreign Currency Translation

The Company’s functional and reporting currency is the U.S. dollar. The functional currency of 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).

Intangible Asset

Intangible assets are recorded at cost less accumulated amortization. They are depreciated using the straight-line method over their estimated useful lives, which reflect the period over which economic benefits are expected to be realized. Management assesses impairment indicators at each reporting period end. The estimated useful lives of intangible assets are generally as follows:

New Accounting Standards

Recently Adopted Accounting Standards

In March 2022, the FASB issued ASU 2022-02, ASC Subtopic 326 “Credit Losses”: Troubled Debt Restructurings and Vintage Disclosures. Since the issuance of Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Board has provided resources to monitor and assist stakeholders with the implementation of Topic 326. Post-Implementation Review (PIR) activities have included forming a Credit Losses Transition Resource Group, conducting outreach with stakeholders of all types, developing educational materials and staff question-and-answer guidance, conducting educational workshops, and performing an archival review of financial reports. ASU No. 2022-02 is effective for annual and interim periods beginning after December 15, 2022. The adoption of this standard did not have a significant impact on the Company’s unaudited condensed consolidated financial statements.

In June 2022, the FASB issued ASU 2022-03, ASC Subtopic 820 “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. The FASB is issuing this Update (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820.

Stakeholders asserted that the language in the illustrative example resulted in diversity in practice on whether the effects of a contractual restriction that prohibits the sale of an equity security should be considered in measuring that equity security’s fair value. Some stakeholders apply a discount to the price of an equity security subject to a contractual sale restriction, whereas other stakeholders consider the application of a discount to be inappropriate under the principles of Topic 820.

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The adoption of this standard did not have a significant impact on the Company’s unaudited condensed consolidated financial statements.

Recently Issued Accounting Standards

The Company assesses the adoption impacts of recently issued, but not yet effective, accounting standards by the Financial Accounting Standards Board on the Company’s unaudited condensed consolidated financial statements.

There are no recently issued accounting standards which may have effect on the Company’s unaudited condensed consolidated financial statements

As of March 31, 2024, receivables consisted of the following:

The Company records sales taxes receivable for recoverable sales taxes paid on eligible purchases in its Canadian subsidiary. As at March 31, 2024, and December 31, 2023, the Company recorded a provision for credit losses of $nil and $nil, respectively.

As of March 31, 2024, and December 31, 2023, prepaid and deposits consisted of the following:

As of March 31, 2024, and December 31, 2023, the security deposit on the Company’s long-term lease in the amount of $10,773 and $10,773, respectively, is classified as a non-current deposit on the balance sheet. The Company recorded a provision for credit losses of $nil and $nil, respectively.

As of March 31, 2024, and December 31, 2023, inventory consisted of the following:

Cost of inventory recognized as expense in cost of sales for the three months ended March 31, 2024, and 2023, totaled $80,907 and $19,750, respectively. In addition, the cost of inventory relating to samples given out and expensed in marketing and promotion for the three months ended March 31, 2024, and 2023, totaled $48,989 and $21,068, respectively. As at March 31, 2024, and December 31, 2023, the Company recorded an allowance for inventory of $nil and $nil, respectively.

During the three months ended March 31, 2024, and 2023, the Company capitalized depreciation of $853 and $412, respectively as part of the production of inventory.

On January 15, 2024, (the “Effective Date”), the Company entered into a license agreement with a Biotechnology company to use their proprietary technology and process to assist in formulating stem cells. The term of the license is 10 years and has a purchase price of $1,000,000. The payments structure for the intangible asset is as follows:

The cost of the intangible assets will be measured at $861,452, which is the fair value of the consideration payable on initial recognition, determined by discounting the future payments using a market interest rate of 11.75%. The determination of the interest rate was conducted by employing the revised discount rate utilized for assessing the lease liability, which was subsequently adjusted to reflect any alterations in the U.S. prime rate on the Effective Date.

During 2022, the Company entered into a noncancelable operating lease that includes two property location, one which is being used as the Company’s office and the other as its lab for research and development and the production of inventory. The lease had a commencement date of June 1, 2022 and expires on May 31, 2025, after which the term will continue on a month-to-month basis.

On July 3 rd, 2023, the Company amended the terms of the previously entered lease agreement to lease additional office space from the lessor. Rent increased from $10,773 to $13,477 per month commencing July 1, 2023, through May 31, 2025. The lease amendment required a remeasurement of the lease liability which resulted in an increase of $47,986 to the lease liability and an equal increase in the right of use asset as of July 1, 2023.

The Company recognized a total lease cost related to its noncancelable operating lease of $39,741 and $31,630 for the three months ended March 31, 2024, and 2023, respectively. The lease cost has been allocated as follows based on the square footage of each property location.

As of March 31, 2024, and December 31, 2023, the Company recorded a security deposit of $10,773. (Note 5)

Future minimum lease payments under the Company’s operating lease that has an initial noncancelable lease term in excess of one year at March 31, 2024, are as follows:

The Company used a discount rate of 11.50% upon the remeasurement of the lease liability on July 1, 2023, compared to an original discount rate of 8% on lease commencement, as its incremental cost of borrowing due to the amendment. The remaining lease term as of March 31, 2024, is 1.17 years (December 31, 2023 –1.42 years).

As of March 31, 2024, and December 31, 2023, accounts payable and accrued liabilities consisted of the following:

On January 15, 2024, the Company entered into a license agreement with a Biotechnology company to use their proprietary technology and process to assist in formulating stem cells. The fair value of the payments to be made is $950,000 (Note 8).

As of January 15, 2024, the fair value of the consideration payable stands at $950,000. The Company has accounted for a discount on the consideration payable to reflect the imputed interest on future installments, totaling $138,548.

On July 15, 2022, the Company issued 231,828 common stock purchase warrants with an exercise price of $2.01 as part of the conversion of promissory notes (Note 10).

On November 21, 2023, the Company completed its Initial Public Offering (“IPO”) -and issued 75,000 warrants (the “IPO warrants”). The IPO warrants are exercisable into one common share of the Company at $4 per share and expire on November 21, 2028.

We analyzed the common stock purchase warrants issued as partial settlement of the promissory notes payable and the IPO warrants against the requirements of ASC 480, Distinguishing Liabilities from Equity, and determined that the warrants should be classified as financial liabilities since the terms allows for a cashless net share settlement at the option of the holder.

ASC 815, Derivatives and Hedging, requires that the warrants be accounted for as derivative liabilities with initial and subsequent measurement at fair value with changes in fair value recorded as other income (expense).

A continuity of the Company’s common stock purchase derivative liability warrants is as follows:

We determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes Option Pricing Model to calculate the fair value as of initial recognition and as of March 31, 2024, and December 31, 2023. The Black-Scholes Option Pricing Model requires six basic data inputs: the exercise or strike price, expected time to expiration or exercise, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement.

The following assumptions were used in the Black-Scholes option pricing model:

As of March 31, 2024, the following warrants were outstanding:

As of March 31, 2024, and December 31, 2023, the weighted average life of derivative liability warrants outstanding was 3.46 and 3.71 years, respectively.

Common Stock

Authorized

As of March 31, 2024, and December 31, 2023, the Company had 300,000,000 common stock authorized, each having a par value of $0.0001.

Issued and outstanding

As of March 31, 2024, and December 31, 2023, the Company had 17,329,615 shares issued and outstanding, respectively.

Transactions during the three months ended March 31, 2024

No share capital activity in the Company during the three months ended March 31, 2024.

Transactions during the three months ended March 31, 2023

On January 6, 2023, the Company issued 62,500 common stock upon the exercise of 62,500 stock options with an exercise price of $0.60 per common stock for $37,500, of which $6 was recognized in common stock and the remaining $37,494 in additional paid-in capital.

On March 2, 2023, the Company issued 250,000 common stock and 250,000 common stock purchase warrants for $750,000, of which $25 was recognized in common stock and the remaining $749,975 in additional paid-in capital. These warrants are accounted for as equity warrants.

Preferred Stock

Authorized

As of March 31, 2024, and December 31, 2023, the Company had 75,000,000 of all preferred stock authorized, each having a par value of $0.0001 per stock.

The holders of Preferred Stock shall have the right to convert their shares of Preferred Stock, at any time, into shares of Common Stock at a conversion price of 1:1. Upon IPO, all preferred shares were converted into common shares on November 21, 2023.

Issued and outstanding

As at March 31, 2024, and December 31, 2023, the Company had Nil preferred stock issued and outstanding.

Transactions during the three months ended March 31, 2024, and 2023

There were no preferred stock transactions during the three months ended March 31, 2024, and 2023.

Equity Warrants

Transactions during the three-month ended March 31, 2024.

There was no equity warrant activity during the three months ended March 31, 2024

Transactions during the three-month ended March 31, 2023.

On March 2, 2023, the Company issued 250,000 common stock and 250,000 common stock purchase warrants. Each warrant is exercisable at $3.00 per common stock. The warrants shall be exercisable, in whole or in part at the issue date but such exercisability shall cease upon the date of the Company’s IPO and listing of its common shares on the Nasdaq Capital Market or other Trading Market and shall continue to be exercisable in whole or in part immediately after the Lock-up Period but no later than the Warrant Expiration Date or Accelerated Warrant Expiration Date (the “Exercise Period”). In the event of the Company’s initial public offering and listing of shares of its common stock on a Trading Market, the Company shall notify the holder at least fifteen (15) calendar days prior to the consummation of such IPO. “Trading Market” shall mean a “national securities exchange” that has registered with the SEC under Section 6 of the Securities Exchange Act of 1934. The Expiration Date shall be the earlier of (i) three years and one hundred eighty (180) days from the issue date (the “Warrant Expiration Date”) or (ii) upon the Company’s reasonable judgment and written notice to the purchaser, of the Company’s option to accelerate the Warrant Expiration Date whereby upon purchaser’s receipt of the Company’s written notice of acceleration during the Exercise Period, the Purchaser’s option to exercise any number of warrants shall occur no later than fourteen (14) days following the receipt of the written notice of acceleration (the “Accelerated Warrant Expiration Date”). For the avoidance of doubt, it shall be reasonable for the Company to accelerate the Expiration Date of this warrant to coincide with transactions including, but not limited to (i) a change of control including but not limited to the voluntary or involuntary sale, assignment, transfer or other disposition, or transfer by operation of law, of more than 50% of any direct or indirect equity interest of the Company; or (ii) a subsequent capital financing other than the IPO consisting of but not limited to an offer or proposal for, or indication of interest in, the issuance of debt or the capital stock of the Company.

As of March 31, 2024, and December 31, 2023, the following equity warrants were outstanding:

As of March 31, 2024, and December 31, 2023, the weighted average life of equity warrants outstanding was 2.56 and 2.81 years, respectively.

Stock Options

The Company has a stock option plan included in the Company’s 2020 Equity Incentive Plan (the “Plan”) where the Board of Directors or any of its committees can grant Incentive Stock Options, Nonstatutory Stock Options, and Restricted Stock to employees, advisors and directors of the Company. As of December 31, 2023 and March 31, 2024, the aggregate number of shares allocated and made available for issuance pursuant to stock options granted under the Plan shall not exceed 1,734,188 shares. The plan shall remain in effect until it is terminated by the Board of Directors.

Transactions during the three-month ended March 31, 2024

In January 2024, the Company granted 12,500 stock options with a contractual life often years and an exercise price of $5.00 per common stock. These stock options were valued at $16,178 using the Black-Scholes Option Pricing Model. The options vest 25% on the first anniversary of the grant date and the remaining 75% vest evenly over 36 months thereafter.

On March 6, 2024, the Company granted 80,000 stock options with a contractual life of ten years and an exercise price of $1.00 per common stock. These stock options were valued at $52,845 using the Black-Scholes Option Pricing Model. The options vest 25% on the first anniversary of the grant date and the remaining 75% vest evenly over 36 months thereafter.

Transactions during the three-month ended March 31, 2023

On February 1, 2023, the Company granted 10,000 stock options with a contractual life often years and an exercise price of $5.00 per common stock. These stock options were valued at $10,767 using the Black-Scholes Option Pricing Model. The options vest 25% on the first anniversary of the grant date and the remaining 75% vest evenly over 36 months thereafter.

The following assumptions were used in the Black-Scholes option pricing model:

The continuity of stock options for the three months ended March 31, 2024, and December 31, 2023, is summarized below:

As of March 31, 2024, the following options were outstanding, entitling the holders thereof the right to purchase one common stock for each option held as follows:

As of March 31, 2024, and December 31, 2023, the weighted average life of stock options outstanding was 7.69 years and 7.84 years, respectively.

During the three months ended March 31, 2024, and 2023, the Company recorded $55,339 and $75,161, respectively, in share-based compensation expense, of which $53,929 and $1,410, and $71,901 and $3,260, respectively is included in office and administration and research and development, respectively.

Related parties consist of the following individuals and corporations:

Key management personnel include those persons having authority and responsibility for planning, directing, and controlling the activities of the Company as a whole. The Company has determined that key management personnel consist of members of the Company’s Board of Directors, corporate officers, and individuals with more than 10% control.

Remuneration attributed to key management personnel are summarized as follows:

During the three months ended March 31, 2024, the Company incurred consulting fees of $50,833 (March 31, 2023 - $21,250) to GB Capital Ltd., a company controlled by Graydon Bensler, CFO and Director. In addition, the Company incurred consulting fees of $30,000 (December 31, 2023 - $30,000) to Northstrive Companies Inc., a company controlled by the Company’s Chairman and former President.

Jordan Plews, CEO and Director, earned a Salary of $56,454 and $55,021 respectively during the three months ended March 31, 2024, and 2023 (includes employer taxes of $6,454 and $4,826, respectively).

Brenda Buechler, Chief Marketing Officer, earned a Salary of $77,669 and $52,326, respectively during the three months ended March 31, 2024, and 2023 (includes employer taxes of $8,086 and $4,826 respectively).

Christoph Kraneiss, Chief Commercial Officer, earned a Salary of $72,892 and $72,792, respectively during the three months ended March 31, 2024, and 2023 (includes employer taxes of $6,225 and $4,093, respectively).

During the three months ended March 31, 2024, and 2023, the company issued the following stock options to related parties:

On March 1, 2024, the Company granted 80,000 stock options to directors of the company with a contractual life of 10 years and exercise price of $1.00 per share of common stock. These stock options were valued at $45,986 using the Black-Scholes Option Pricing Model. The options vest 25% on the first anniversary of the grant date and the remaining 75% vest evenly over 36 months thereafter.

Details of the fair value granted to each related party in the current and prior periods, and the related expense recorded for the three months ended March 31, 2024, and 2023 is as follow:

As of March 31, 2024, and December 31, 2023, the Company had $22,195 and $22,455, respectively due to companies controlled by Braeden Lichti, of which $22,195 and $22,455, respectively is unsecured, non-interest bearing and are due on demand.

As of March 31, 2024, the Company had $38,500 (December 31, 2023 - $34,378) in consulting fees due to Graydon Bensler, CFO and Director, $15,143 (December 31, 2023 - $15,143) due to companies controlled by Braeden Lichti, and $Nil and $Nil (December 31, 2023 - $4,272 and $879) due to Jordan Plews, CEO and Director, and Christopher Kraneiss, Chief Commercial Officer, respectively, for expenses incurred on behalf of the Company.

There were no commitments as of March 31, 2024, and December 31, 2023, or during the periods then ended.

As of March 18, 2024, the Company has voluntarily stopped sale of its products in Canada following a communication from Health Canada regarding the way the Company’s products are marketed in Canada. The Company is working with Canadian regulatory and legal counsel to explore options to rectify the issues raised. On April 30, 2024, the Company’s appointed Canadian distributor terminated the existing distribution agreement. Termination of the distributor agreement does not result in any penalties or damages.

Customers

For the three months ended March 31, 2024, the Company recorded 11% of its revenue from its largest customer. The Company’s largest customer, representing $67,500 of revenue, relates to sales to a distributor during the period. During the three months ended March 31, 2023, the Company recorded 18% of its revenue from its largest customer. The Company’s largest customer, representing $25,500 of revenue, relates to a distributor agreement.

As of March 31 ,2024 and December 31, 2023, the Company had $49 receivables due from these customers and $Nil 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 three months ended March 31 ,2024, and 2023, the Company had 3 key suppliers that represented approximately 66% and 3 key suppliers that represented approximately 70%, 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):

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.

Management has evaluated events subsequent to the year ended March 31, 2024, up to May 15, 2024, for transactions and other events that may require adjustment of and/or disclosure in the consolidated financial statements.

On April 30, 2024, the Company’s appointed Canadian distributor terminated the existing distribution agreement. (Note 15).

On April 30, 2024, the Company entered into an exclusive licensing agreement with a biomedical and pharmaceutical company for an upfront fee of $400,000 and 950,000 shares of common stock.

On May 3, 2024, the Company entered into a consulting agreement with a maturity of May 3, 2025. The consultant is to be paid $15,000 monthly as well as 612,500 common shares on each of May 3, 2024, August 1, 2024, November 1, 2024, and February 2, 2025.

ELEVAI LABS INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)