bioAffinity Technologies, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures As of December 31, 2022, the end of the period covered by this Annual Report, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Rules 13a-15(e)and 15d-15(e)). Based on that evaluation, management has concluded that due to limited resources and limited number of employees, its internal control over financial reporting was ineffective as of December 31, 2022, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. To mitigate the limited resources and employees, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. As we grow, we expect to increase the number of employees, which we believe will enable us to implement adequate segregation of duties within the internal control framework. 25 Internal Control over Financial Reporting Management’s Annual Report on Internal Control over Financial Reporting This annual report does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by rules of the SEC for newly public companies. Attestation Report of the Registered Public Accounting Firm This annual report does not include an attestation report of the Company’s registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. Changes in Internal Control over Financial Reporting There were no changes in our internal controls (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) over financial reporting during the year ended December 31, 2022, covered by this Annual Report that could materially affect, or are reasonably likely to materially affect, our financial reporting. Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. None. PART III Item 10. Directors, Executive Officers, and Corporate Governance. The information required by this item of Form 10-K will be included under the caption “Directors, Executive Officers, and Corporate Governance” in our 2023 Proxy Statement, and is incorporated by reference herein. Item 11. Executive Compensation. The information required by this item of Form 10-K will be included under the caption “Executive and Director Compensation” in our 2023 Proxy Statement and is incorporated by reference herein. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item of Form 10-K will be included in our 2023 Proxy Statement and is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item of Form 10-K will be included under the captions “Certain Relationships and Related Party Transactions” and “Board of Directors and Corporate Governance – Director Independence” in our 2023 Proxy Statement and is incorporated by reference herein. Item 14. Principal Accounting Fees and Services. The information required by this item of Form 10-K will be included in our 2023 Proxy Statement and is incorporated by reference herein. 26 PART IV Item 15. Exhibits and Financial Statement Schedules. (a) Financial Statements and Schedules. See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K. (b) Exhibits. Incorporated by Reference Exhibit No. Exhibit Title Form Filed Date Exhibit No. 3.1 Amended and Restated Certificate of Incorporation of Registrant, as currently in effect. Form S-1/A June 16, 2022 3.3 3.2 Bylaws of the Registrant, as currently in effect. Form S-1/A June 16, 2022 3.6 4.1 Form of Registrant’s Common Stock Certificate. Form S-1/A June 16, 2022 4.1 4.2 Common Stock Purchase Warrant issued to San Antonio Economic Development Corporation dated March 17, 2017. Form S-1/A May 25, 2022 4.2 4.3 Form of Common Stock Purchase Warrant issued to Holders of the Registrant’s Convertible Promissory Notes. Form S-1/A May 25, 2022 4.3 4.4 Form of Placement Agent’s Warrant issued to WallachBeth Capital, LLC. Form S-1/A August 5, 2022 4.4 4.5 Form of Representative’s Warrant issued to WallachBeth Capital, LLC. Form S-1/A July 28, 2022 4.5 4.6 Form of (Tradeable) Common Stock Purchase Warrant issued as part of the Units sold in the Registrant’s IPO. Form S-1/A August 18, 2022 4.6 4.7 Form of Warrant Agent Agreement for the Warrants issued as part of the Units sold in the Registrant’s IPO. Form S-1/A August 18, 2022 4.7 4.8 Form of (Non-tradeable) Common Stock Purchase Warrant issued as part of the Units sold in the Registrant’s IPO. Form S-1/A August 18, 2022 4.15 10.1 2014 Equity Incentive Plan of Registrant, as amended. Form S-1/A May 25, 2022 10.1 10.2 Executive Chairman Employment Agreement dated January 1, 2020, by and between Registrant and Steven Girgenti, as amended. Form S-1/A May 25, 2022 10.2 10.3 Employment Agreement dated February 1, 2015, by and between Registrant and Maria Zannes. Form S-1/A May 25, 2022 10.3 10.4 Employment Agreement dated April 4, 2016, by and between Registrant and Vivienne Rebel, as amended. Form S-1/A May 25, 2022 10.4 27 Incorporated by Reference Exhibit No. Exhibit Title Form Filed Date Exhibit No. 10.5 Employment Agreement dated February 1, 2015, by and between Registrant and Timothy Zannes. Form S-1/A May 25, 2022 10.5 10.6 Consulting Agreement dated May 25, 2017, by and between Registrant and Michael Edwards, as amended. Form S-1/A May 25, 2022 10.6 10.7 License Agreement to Participate in the UTSA New Venture Incubator Program dated June 15, 2015, by and between Registrant and the University of Texas at San Antonio. Form S-1/A May 25, 2022 10.7 10.8 Joint Development Agreement dated October 1, 2018, by and between the Registrant and Village Oaks Pathology Services, P.A. d/b/a Precision Pathology Services. Form S-1/A May 25, 2022 10.8 10.9 Agreement dated October 17, 2020, by and between Registrant and GO2 Partners. Form S-1/A May 25, 2022 10.9 14.1 Code of Business Conduct of the Registrant. Form S-1/A May 25, 2022 14.1 19.1 Insider Trading Policy of the Registrant. Filed herewith 21.1 List of Subsidiaries of the Registrant. Form S-1/A May 25, 2022 21.1 31.1 Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 Filed herewith 31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 Filed herewith 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 Furnished herewith 101.INS Inline XBRL Instance Document Filed herewith 101.SCH Inline XBRL Taxonomy Extension Schema Document Filed herewith 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document Filed herewith 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document Filed herewith 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document Filed herewith 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document Filed herewith 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) Filed herewith 28 SIGNATURES. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. bioAffinity Technologies, Inc. By: /s/ Maria Zannes Maria Zannes Chief Executive Officer, President, and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Maria Zannes President, Chief Executive Officer, and Director (Principal Executive Officer) March 31, 2023 Maria Zannes /s/ Michael Edwards Chief Financial Officer March 31, 2023 Michael Edwards (Principal Financial and Accounting Officer) /s/ Steven Girgenti Executive Chairman and Director March 31, 2023 Steven Girgenti /s/ Robert Anderson Director March 31, 2023 Robert Anderson /s/ Stuart Diamond Director March 31, 2023 Stuart Diamond /s/ Peter S. Knight Director March 31, 2023 Peter S. Knight /s/ Mohsin Meghji Director March 31, 2023 Mohsin Meghji /s/ Gary Rubin Director March 31, 2023 Gary Rubin 29 bioAffinity Technologies, Inc. Index to the Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID NO. 100) F-2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3 Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 F-4 Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the years ended December 31, 2022 and 2021 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 F-6 Notes to Consolidated Financial Statements F-7 F- 1 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of bioAffinity Technologies, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of bioAffinity Technologies, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in convertible preferred stock and stockholders’ equity (deficit), and cash flows, for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ WithumSmith+Brown, PC We have served as the Company’s auditor since 2021. New York, New York March 31, 2023 PCAOB ID Number 100 F- 2 bioAffinity Technologies, Inc. consolidated Balance Sheets 2022 2021 December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 11,413,759 $ 1,360,638 Accounts and other receivables, net 10,489 1,530 Inventory 5,540 — Prepaid expenses and other current assets 531,899 76,065 Total current assets 11,961,687 1,438,233 Deferred offering costs — 7,942 Property and equipment, net 214,438 4,633 Other assets 6,000 2,500 Total assets $ 12,182,125 $ 1,453,308 LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities: Accounts payable $ 345,042 $ 230,407 Accrued expenses 541,894 483,501 Accrued interest — 1,121,392 Current portion of Paycheck Protection Program loan — 52,074 Loan payable 251,746 — Convertible notes payable at fair value — 11,152,151 Total current liabilities 1,138,682 13,039,525 Paycheck Protection Program loan, less current portion — 160,184 Total liabilities 1,138,682 13,199,709 Commitments and contingencies (See Note 9) - Convertible preferred stock, par value $ 0.001 per share; 20,000,000 shares authorized; 0 and 756,558 shares issued and outstanding, aggregate liquidation preference of $ 0 and $ 5,825,648 at December 31, 2022 and 2021, respectively — 4,044,318 Stockholders’ equity (deficit): Preferred stock, no shares issued or outstanding at December 31, 2022 and 2021, respectively — — Common Stock, par value $ 0.007 per share; 14,285,714 shares authorized; 8,381,324 and 2,677,140 shares issued and outstanding as of December 31, 2022 and 2021, respectively 58,669 18,740 Additional paid-in capital 47,652,242 12,703,896 Accumulated deficit ( 36,667,468 ) ( 28,513,355 ) Total stockholders’ equity (deficit) 11,043,443 ( 15,790,719 ) Total liabilities, convertible preferred stock, and stockholders’ equity (deficit) $ 12,182,125 $ 1,453,308 The accompanying notes are an integral part of these consolidated financial statements. F- 3 bioAffinity Technologies, Inc. consolidated Statements of Operations For the Years Ended December 31, 2022 and 2021 2022 2021 2022 2021 Revenue $ 4,803 $ — Cost of sales 467 — Gross profit 4,336 — Operating expenses: Research and development 1,142,777 1,007,476 Clinical development 145,546 130,475 Selling, general and administrative 2,727,071 1,068,871 Total operating expenses 4,015,394 2,206,822 Loss from operations ( 4,011,058 ) ( 2,206,822 ) Other income (expense): Interest income 46,708 424 Interest expense ( 2,532,640 ) ( 1,001,854 ) Gain on extinguishment of debt 212,258 239,200 Fair value of warrants issued — ( 4,080,339 ) Fair value adjustments on convertible notes payable ( 1,866,922 ) 724,928 Loss before income taxes ( 8,151,654 ) ( 6,324,463 ) Income tax expense ( 2,459 ) ( 1,950 ) Net loss $ ( 8,154,113 ) $ ( 6,326,413 ) Net loss per common share, basic and diluted $ ( 1.81 ) $ ( 2.36 ) Weighted average common shares outstanding 4,498,964 2,675,270 The accompanying notes are an integral part of these consolidated financial statements. F- 4 bioAffinity Technologies, Inc. consolidated Statements of Changes in Convertible preferred stock and Stockholders’ Equity (Deficit) For the Years Ended December 31, 2022 and 2021 Shares Amount Shares Amount Capital Deficit Deficit Convertible Additional Stockholders’ Preferred Stock Common Stock Paid-in Accumulated Equity Shares Amount Shares Amount Capital Deficit (Deficit) Balance at December 31, 2020 756,558 $ 4,044,318 2,674,860 $ 18,724 $ 7,095,355 $ ( 22,186,942 ) $ ( 15,072,863 ) Stock-based compensation expense — — 2,280 16 42,996 — 43,012 Fair value of warrants issued — — — — 4,080,339 — 4,080,339 Beneficial conversion feature for bridge notes — — — — 739,602 — 739,602 Debt discount for warrants issued — — — — 745,604 — 745,604 Net loss — — — — — ( 6,326,413 ) ( 6,326,413 ) Balance at December 31, 2021 756,558 $ 4,044,318 2,677,140 $ 18,740 $ 12,703,896 $ ( 28,513,355 ) $ ( 15,790,719 ) Stock-based compensation expense — — 29,728 208 248,384 — 248,592 Beneficial conversion feature for bridge notes — — — — 462,344 — 462,344 Return of capital from stock split — — — — ( 185 ) — ( 185 ) Debt discount for warrants issued — — — — 352,250 — 352,250 Common stock issued upon initial public offering, net of underwriters’ commission and offering costs of $ 1.8 million — — 1,282,600 8,978 6,018,436 — 6,027,414 Common stock issued on conversion of convertible preferred stock ( 756,558 ) $ ( 4,044,318 ) 756,558 5,296 4,039,022 — 4,044,318 Common stock issued on conversion of notes payable — — 2,533,964 17,738 16,047,594 — 16,065,332 Exercise of warrants — — 1,036,486 7,255 7,706,055 — 7,713,310 Exercise of stock options — — 64,848 454 74,446 — 74,900 Net loss — — — — — ( 8,154,113 ) ( 8,154,113 ) Balance at December 31, 2022 — $ — 8,381,324 $ 58,669 $ 47,652,242 $ ( 36,667,468 ) $ 11,043,443 The accompanying notes are an integral part of these consolidated financial statements. F- 5 bioAffinity Technologies, Inc. consolidated Statements of Cash Flows For the Years Ended December 31, 2022 and 2021 2022 2021 2022 2021 Cash flows from operating activities Net loss $ ( 8,154,113 ) $ ( 6,326,413 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 10,182 4,817 Accretion of debt issuance costs 2,055,627 480,574 Fair value adjustments on convertible notes payable 1,866,922 ( 724,928 ) Stock-based compensation expense 248,592 43,012 Fair value of warrants issued — 4,080,339 Gain on extinguishment of debt ( 212,258 ) ( 239,200 ) Changes in operating assets and liabilities: Accounts and other receivables ( 8,959 ) — Inventory ( 5,540 ) — Prepaid expenses and other assets ( 492,753 ) ( 34,990 ) Accounts payable 114,635 39,020 Accrued expenses 66,335 107,744 Accrued interest 440,485 521,047 Net cash used in operating activities ( 4,070,845 ) ( 2,048,978 ) Cash flows from investing activities Purchase of property and equipment ( 219,987 ) — Net cash used in investing activities ( 219,987 ) — Cash flows from financing activities Proceeds from loan payable 555,148 212,258 Payment on loans payable ( 269,983 ) — Proceeds from issuance of convertible notes payable 724,000 3,295,000 Repayment of convertible loan payable ( 425,000 ) — Proceeds from issuance of common stock from the initial public offering, net of underwriting discounts, commissions and offering expenses of approximately $ 1.8 million 6,027,414 — Exercise of warrants 7,713,310 — Exercise of stock options 74,900 — Return of capital from stock split ( 185 ) — Payment of debt issuance costs ( 55,651 ) ( 180,750 ) Net cash provided by financing activities 14,343,953 3,326,508 Net increase in cash and cash equivalents 10,053,121 1,277,530 Cash and cash equivalents at beginning of year 1,360,638 83,108 Cash and cash equivalents at end of year $ 11,413,759 $ 1,360,638 Supplemental disclosures of cash flow information: Income taxes paid in cash $ 2,459 $ 1,950 Interest paid $ 30,637 — Conversion of convertible preferred stock into common stock $ 4,044,318 — Conversion of convertible notes payable into common stock $ 16,065,332 — Fair value of warrants issued to placement agents $ 352,250 $ 74,556 Beneficial conversion feature for bridge notes $ 462,344 $ 739,602 The accompanying notes are an integral part of these consolidated financial statements. F- 6 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 Note 1. BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS Description of Business bioAffinity Technologies, Inc., a Delaware corporation (the “Company,” “we,” or “our”), addresses the need for noninvasive diagnosis of early-stage cancer and diseases of the lung and for targeted cancer treatment. The Company develops proprietary noninvasive diagnostic tests and cancer therapeutics using technology that preferentially targets cancer cells and cell populations indicative of a diseased state. Our first diagnostic test, CyPath ® Lung, is a noninvasive test for early detection of lung cancer, the leading cause of cancer-related deaths. Research and optimization of our proprietary platform for in vitro diagnostics and technologies are conducted in our laboratories at The University of Texas at San Antonio. We are developing our platform technologies so that, in the future, they will be able to detect, monitor, and treat diseases of the lung and other cancers. Organization and Initial Public Offering The Company was formed on March 26, 2014, as a Delaware corporation with its corporate offices located in San Antonio, Texas. On June 15, 2016, the Company formed a wholly owned subsidiary, OncoSelect ® Therapeutics, LLC, as a Delaware limited liability company. On September 6, 2022, the Company completed its initial public offering (the “IPO”) of 1,282,600 units (the “Units”) at an offering price of $ 6.125 per Unit (the “Offering Price”). Each Unit consists of (i) one share of the Company’s common stock, par value $ 0.007 per share (“Common Stock”), (ii) one tradeable warrant (a “Tradeable Warrant”) exercisable for the purchase of one share of Common Stock at an exercise price of $ 7.35 per share, and (iii) one non-tradeable warrant (a “Non-tradeable Warrant”) exercisable for the purchase of one share of Common Stock at an exercise price of $ 7.656 per share. The sale of Units in the IPO generated gross proceeds to the Company of approximately $ 7.8 million before deducting underwriting discounts, commissions, and other offering expenses. The Company intends to use the net proceeds from the Offering for working capital and for general corporate purposes, including product and test development, sales, general and administrative matters, and capital expenditures. In connection with the closing of the IPO, the Company converted 5,296,044 shares of the convertible preferred stock into 756,558 shares of Common Stock. Additionally, the Company converted approximately $ 16.1 million in convertible notes, Bridge Notes, and related accrued interest into 2,533,964 Common Stock. See Note 8. In June 2022, the Company completed a 1-for-7 reverse stock split of its Common Stock. All share and per share amounts have been adjusted on a retroactive basis in these consolidated financial statements to reflect the effect of the reverse stock split. In addition, the stock split resulted in the par value of the Company’s Common Stock increasing to $ 0.007 per share. Basis of Presentation The consolidated financial statements of the Company have been prepared in accordance with U.S. accounting principles generally accepted (“GAAP”). In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern for at least one year after the date the consolidated financial statements are issued. The Company has incurred significant losses and negative cash flows from operations since inception and expects to continue to incur losses and negative cash flows for the foreseeable future. As a result, the Company had an accumulated deficit of $ 36.7 million at December 31, 2022. Our cash and cash equivalents at December 31, 2022 were approximately $ 11.4 million, representing 93 % of our total assets. Based on our current expected level of operating expenditures, the Company believes its cash on hand at December 31, 2022, is sufficient to fund the Company’s ongoing operations for a period of a least twelve (12) months subsequent to the issuance of the accompanying consolidated financial statements. Thereafter, the Company may need to raise further capital through the sale of additional equity or debt securities or other debt instruments, strategic relationships or grants, or other arrangements to support its future operations. If such funding is not available or not available on terms acceptable to the Company, the Company’s current development plan may be curtailed. COVID-19 The rapid global spread of the COVID-19 virus since December 2019 has affected production and sales, and disrupted supply chains across a range of industries. The impact of COVID-19 on the Company’s operations and financial performance will depend on numerous factors, including but not limited to the duration and spread of the virus and the impact on the Company’s customers, employees, clinical trial sites, and vendors. F- 7 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 As the COVID-19 pandemic continues to evolve, the ultimate impact of the pandemic on the Company’s operations is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted, including the duration of the pandemic, additional or modified government actions, and the actions taken to contain COVID-19 or address its impact, among others. Management does not yet know the full extent of potential delays or impacts on the Company, clinical trials, research programs, healthcare systems, or the global economy, but continues to monitor the situation closely. Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include: the fair value of the Company’s Common Stock used to measure stock-based compensation for options granted to employees and nonemployees; the valuation allowance on the Company’s deferred tax assets; and the fair value of the convertible notes payable. Principles of Consolidation The accompanying consolidated financial statements include all of the accounts of the Company and its wholly owned subsidiary, Oncoselect Therapeutics, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents For the purpose of the statement of cash flows, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates market value, because of the short maturity of these instruments. Concentration of Risk The Company has significant cash balances at financial institutions which throughout the year regularly exceed the federally insured limit of $ 250,000 . Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s financial condition, results of operations, and cash flows. Accounts and Other Receivables, Net Accounts and other receivables, net consists of amounts invoiced to Precision Pathology Services (“Precision Pathology”), a CAP-accredited, CLIA-certified clinical pathology laboratory and our licensee for royalties from sales of our first diagnostic test, CyPath® Lung. The allowance for doubtful accounts is based on forecasted losses and a review on a specific identification basis of the collectability of outstanding receivables. As of December 31, 2022 and 2021, there is no allowance for doubtful accounts. Prepaid Expenses and Other Assets Prepaid expenses and other assets consist of prepaid insurance, maintenance contracts, dues, and legal retainers, etc. Expense is calculated using the straight-line method over the estimated useful lives of the respective term of service. Deferred Offering Costs The Company capitalizes certain legal, accounting, and other third-party fees that are directly related to the Company’s equity financings, including its IPO, until such financings are consummated. After consummation of the equity financing, these costs are recorded as a reduction of the proceeds received as a result of the financing. The Company capitalized certain legal, accounting, and other third-party fees that were directly related to the Company’s IPO. After the completion of the IPO in September 2022, total deferred offering costs of approximately $ 1.8 million were offset against the proceeds from the IPO and reclassified to additional paid-in capital in the accompanying consolidated balance sheets. At December 31, 2021, deferred offering costs totaling approximately $ 8,000 were included as non-current assets in the accompanying consolidated balance sheet. Property and Equipment, Net Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally three ( 3 ) years. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company recognizes an impairment charge in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to the asset group. No impairment losses were incurred during the years ended December 31, 2022 and 2021, respectively. F- 8 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 Patent Expenses Costs related to filing and pursuing patent applications, as well as costs related to maintaining the Company’s existing patent portfolio, are recorded as expenses as incurred since recoverability of such expenditures is uncertain. Stock-Based Compensation Expense Compensation expense related to stock options granted to employees and non-employees is measured at the grant date based on the estimated fair value of the award and is recognized on a straight-line basis over the requisite service period. Forfeitures are recognized as a reduction of stock-based compensation expense as they occur. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model. The Black-Scholes option pricing model used to compute share-based compensation expense requires use of accounting judgment and financial estimates. Items requiring estimation include the expected term option holders will retain their vested stock options before exercising them and the estimated volatility of the Company’s Common Stock price over the expected term of a stock option. Application of alternative assumptions could result in different share-based compensation amounts being recorded in the financial statements. See Note 11 for additional disclosures related to stock-based compensation. Advertising expense The Company expenses all advertising costs as incurred. Advertising expense was approximately $ 3,000 for the year ended December 31, 2022. There were no advertising expenses for the year ended December 31, 2021. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which the related temporary difference becomes deductible. The Company includes interest and penalties related to uncertain tax positions as part of income tax expense, if any. No such interest or penalties were recognized during the years ended December 31, 2022 and 2021, and the Company had no accruals for interest and penalties at December 31, 2022 or 2021. Revenue Recognition Our revenue is generated exclusively from royalties for our first diagnostic test, CyPath ® Lung, from sales by Precision Pathology that began a limited market launch in the second quarter of 2022 to pulmonologists in the San Antonio, Texas, area designed to refine future positioning and develop strategic insight for our CyPath ® Lung test. The services are completed upon release of a patient’s test result to the ordering healthcare provider. To determine revenue recognition for the arrangements that the Company determines are within the scope of ASC 606, Revenue from Contracts with Customers, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Loss Per Share Basic earnings (loss) per share is computed by dividing net income (loss) attributable to Common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to Common stockholders by the sum of the weighted-average number of common shares outstanding during the period and the weighted-average number of dilutive common share equivalents outstanding during the period, using the treasury stock method. Dilutive common share equivalents are comprised of in-the-money stock options, convertible notes payable, and warrants, based on the average stock price for each period using the treasury stock method. The following potentially dilutive securities have been excluded from the computations of weighted average shares outstanding as of December 31, 2022 and 2021, as they would be anti-dilutive: SCHEDULE OF POTENTIALLY DILUTIVE SECURITIES 2022 2021 Year Ended December 31, 2022 2021 Convertible preferred stock — 756,558 Shares underlying options outstanding 806,392 878,380 Shares underlying warrants outstanding 4,649,952 1,890,183 Shares underlying convertible notes outstanding — 2,357,941 Anti-dilutive securities 5,456,344 5,883,062 F- 9 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 Segment Information The Company is organized as a single operating segment, whereby its chief operating decision maker assesses the performance of and allocates resources to the business as a whole. Fair Value of Financial Instruments Assets and liabilities recorded at fair value on a recurring basis in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy for disclosure of fair value measurements is as follows: ● Level 1 inputs consist of unadjusted quoted prices in active markets for identical assets or liabilities and have the highest priority. ● Level 2 valuations are based on quoted prices in markets that are not active. ● Level 3 valuations are based on inputs that are unobservable and supported by little or no market activity. See Note 7 for the fair value hierarchy table and inputs used in the fair value measurement for assets and liabilities. Research and Development Research and development costs are charged to expense as incurred. The Company’s research and development expenses consist primarily of expenditures for lab operations, preclinical studies, compensation, and consulting costs. The Company incurred research and development expenses of $ 1.1 million and $ 1.0 million for the years ended December 31, 2022 and 2021, respectively. Accrued Research and Development Costs The Company records accrued liabilities for estimated costs of research and development activities conducted by service providers, which include preclinical studies. The Company records the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and includes these costs in accrued expenses in the accompanying balance sheets and within research and development expense in the accompanying consolidated statements of operations. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with service providers. The Company makes significant judgments and estimates in determining the accrued expenses balance in each reporting period. As actual costs become known, the Company adjusts its accrued liabilities. The Company has not experienced any material differences between accrued costs and actual costs incurred since its inception. Regulatory Matters Regulations imposed by federal, state, and local authorities in the United States are a significant factor in providing medical care. In the United States, drugs, biological products, and medical devices are regulated by the United States Food, Drug and Cosmetic Act, which is administered by the U.S. Food and Drug Administration (“FDA”) and the Center for Medicare and Medicaid. The Company has not yet obtained marketing authorization from the FDA but is able to market its CyPath® Lung test as a Laboratory Developed test licensed to and sold by Precision Pathology Services, a CAP-accredited, CLIA-certified clinical pathology laboratory. Reclassifications Certain prior year balances have been reclassified to conform to current year presentation. The Company reclassified patent and annuity costs of approximately $ 236,000 and $ 188,000 from research and development to selling, general and administrative for the years ended December 31, 2022, and 2021, respectively. F- 10 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 Recently Issued Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistency in application. ASU 2019-12 will be effective for public entities for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2019-12 and concluded there is no impact on the Company’s consolidated financial statements. In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model, a convertible debt instrument will be reported as a single liability instrument with no separate accounting for embedded conversion features. This new standard also removes certain settlement conditions that are required for contracts to qualify for equity classification and simplifies the diluted earnings per share calculations by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in diluted earnings per share calculations. The new standard will be effective for fiscal years beginning after December 15, 2023, for smaller reporting companies. As the Company currently does not have debt with conversion and other options, the Company does not believe the adoption will have a material impact on our consolidated financial statements. Note 3. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets at December 31, 2022 and 2021, are summarized below: SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS 2022 2021 December 31, 2022 2021 Prepaid insurance $ 340,078 $ 16,765 Legal and professional 72,048 55,081 Other 119,773 4,219 Total prepaid expenses and other current assets $ 531,899 $ 76,065 Note 4. PROPERTY AND EQUIPMENT, NET Property and equipment at December 31, 2022 and 2021, are summarized below: SCHEDULE OF PROPERTY AND EQUIPMENT 2022 2021 December 31, 2022 2021 Lab equipment $ 462,155 $ 242,168 Computers and software 21,463 21,463 Property and equipment, gross 483,618 263,631 Less: accumulated depreciation and amortization ( 269,180 ) ( 258,998 ) Total property and equipment, net $ 214,438 $ 4,633 Depreciation and amortization expense was $ 10,182 and $ 4,817 for the years ended December 31, 2022, and 2021, respectively. Note 5. ACCRUED EXPENSES Accrued expenses at December 31, 2022 and 2021, are summarized below: SCHEDULE OF ACCRUED EXPENSES 2022 2021 December 31, 2022 2021 Compensation $ 340,680 $ 277,185 Legal and professional 144,440 166,069 Clinical 50,922 39,481 Other 5,852 766 Total accrued expenses $ 541,894 $ 483,501 F- 11 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 Note 6. LOAN PAYABLE The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provided stimulus measures, including the Paycheck Protection Program (“PPP”), to provide certain small businesses with liquidity to support their operations during the COVID-19 pandemic. In April 2020, the Company received an initial $ 0.2 million PPP Loan (the “PPP Loan”) bearing interest at a one percent ( 1 %) fixed annual rate, with a maturity date of two years , and was eligible for forgiveness under certain conditions. In October 2020, the Company submitted an application for forgiveness with its lender. In June 2021, the Company received forgiveness from the SBA and recorded a gain of $ 239,000 on the extinguishment of debt in the accompanying consolidated statements of operations. In March 2021, the Company received a second PPP Loan for $ 0.2 million bearing interest at a one percent ( 1 %) fixed annual rate, and will mature in five years , and is eligible for forgiveness under certain conditions. In April 2022, the Company received notice the loan was forgiven by the SBA and recorded a gain of $ 212,000 on the extinguishment of debt in the accompanying consolidated statements of operations. In September 2022, the Company obtained short-term financing of approximately $ 0.5 million with ten monthly payments of approximately $ 42,000 and interest at a 4.3 % fixed annual rate for director and officer insurance policies. Note 7. FAIR VALUE MEASUREMENTS The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (“FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, prepaid and other expenses, accounts payable, and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. There are no assets and liabilities that are measured at fair value at December 31, 2022. The table below summarizes the Company’s assets and liabilities that are measured at fair value at December 31, 2021: SCHEDULE OF FAIR VALUE INSTRUMENTS Fair value measured at December 31, 2021 Total at December 31, 2021 Quoted Prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Convertible notes payable $ 11,152,151 — — $ 11,152,151 A description of the valuation techniques and the values used for significant unobservable inputs to derive fair value measurements for those assets and liabilities measured at fair value at December 31, 2021: SCHEDULE OF FAIR VALUE ASSETS AND LIABILITIES Fair value Valuation technique Unobservable Input Range (weighted average) Convertible notes payable at 12/31/21 $ 11,152,151 Risky Put + Stock Payoff Probability weighting assigned to automatic and optional conversion scenarios 90 %/ 10 % Applied discount rate 79.1 % Common share class volatility 46.1 % Preferred stock class volatility 3.9 % Negotiation discount 1.6 % F- 12 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 The Company transferred $ 325,000 of convertible notes payable from level 3 to level 2 during the year ended December 31, 2022, to account for notes that were not converted at the time of the Company’s IPO. During the fourth quarter of 2022, these notes, together with the related accrued interest, were repaid in full. See Note 8. There were no transfers into or out of level 3 during the year ended December 31, 2021. The Company issued a total of $ 0.7 million and $ 3.3 million in convertible notes for the years ended December 31, 2022, and 2021, respectively, which are included in level 3 liabilities. The following table summarizes the fair values of convertible note payables and the change in fair value at each measurement date: SCHEDULE OF CHANGE IN FAIR VALUE Fair value of convertible notes payable at December 31, 2020 $ 9,767,461 Convertible notes payable issued 3,295,000 Debt discount for warrants issued ( 1,665,956 ) Accretion of debt issuance costs 480,574 Change in fair value of convertible notes payable ( 724,928 ) Fair value of convertible notes payable at December 31, 2021 $ 11,152,151 Additional convertible notes payable issued 724,000 Repayment of convertible notes payable ( 100,000 ) Debt discount for warrants issued ( 870,245 ) Accretion of debt issuance costs 2,055,627 Change in fair value of convertible notes payable 1,866,922 Transfer from level 3 to level 2 ( 325,000 ) Conversion of convertible notes payable into common stock ( 14,503,455 ) Fair value of convertible notes payable at December 31, 2022 $ — Note 8. CONVERTIBLE NOTES PAYABLE In September 2022, in connection with the closing of the IPO, the Company converted approximately $ 16.1 million consisting of approximately $ 9.1 million in convertible notes and Bridge Notes, related accrued interest of approximately $ 1.6 million, and approximately $ 5.4 million of fair value adjustments into 2,533,964 shares of Common Stock. From August 2018 through July 2020, the Company issued a total of $ 5.0 million in notes payable, including $ 2.7 million to related parties, convertible into the next class of equity securities in which the Company issues and sells equity securities with aggregate gross proceeds of at least $ 5.0 million. The conversion price was initially determined as seventy percent ( 70 %) multiplied by the per share purchase price for the next equity financing. Additionally, provided no equity financing had occurred, and the note was still outstanding, the noteholder could have elected to convert the outstanding principal and accrued interest into shares of the Company’s Common Stock at a price of $ 6.62 per share. The convertible notes payable had a maturity date of December 31, 2020 , bore interest at 8 % annually, and were secured by the intellectual property of the Company. The Company obtained the necessary noteholder approvals to extend the maturity date of the notes in November 2021 to May 31, 2022, and in May 2022 to August 2022. In July 2022, the Company obtained approval from a majority of the noteholders to extend the maturity date from August 31, 2022, to October 31, 2022, for certain Bridge Notes in exchange for a Common Stock purchase warrant equal to the principal amount of each note divided by 10.5. As a result, the Company issued warrants to purchase 478,446 shares of Common Stock at a price of $ 5.25 per share. See Note 12 for additional disclosures related to warrants. Upon completion of the IPO, the notes automatically converted into shares of Common Stock. Conversion of the note at the IPO closing extinguished this security and resulted in the Company wholly owning all its intellectual property without a security interest. From October 2020 through June 2021, the Company issued a total of $ 0.9 million in notes payable, including $ 0.5 million to related parties, convertible into the next class of equity securities in which the Company issues and sells equity securities with aggregate gross proceeds of at least $ 5.0 million. The conversion price was determined as eighty percent ( 80 %) multiplied by the per share purchase price for the next equity financing. Additionally, provided no equity financing has occurred and the note is still outstanding, the noteholder could have elected to convert the outstanding principal and accrued interest into shares of the Company’s Common Stock at a price of $ 6.62 per share. The convertible notes payable bore interest at 8 % annually and had a maturity date in October 2021 . The Company obtained the necessary noteholder approvals to extend the maturity date of the notes in December 2021 to May 2022 and in May 2022 to August 2022. In July 2022, the Company obtained approval from a majority of the noteholders to extend the maturity date from August 31, 2022, to October 31, 2022, for certain Bridge Notes in exchange for a Common Stock purchase warrant equal to the principal amount of each note divided by 10.5. As a result, the Company issued warrants to purchase 79,795 shares of the Company’s Common Stock at a price of $ 5.25 per share. See Note 12 for additional disclosures related to warrants. Upon completion of the IPO, the $ 0.9 million of the notes automatically converted into shares of Common Stock. In October 2022, the Company repaid $ 100,000 for the note that was not converted at the time of the Company’s IPO. In the second and third quarters of 2021, the Company issued a total of approximately $ 0.9 million in additional notes payable, including $ 0.1 million to related parties, convertible into the next class of equity securities in which the Company issues and sells equity securities with aggregate gross proceeds of at least $ 5.0 million. The conversion price was initially determined as eighty percent ( 80 %) multiplied by the per share purchase price for the next equity financing. Additionally, provided no equity financing has occurred and the note was still outstanding, the noteholder could elect to convert the outstanding principal and accrued interest into shares of the Company’s Common Stock at a price of $ 6.62 per share. As a result of the completion of a bridge financing sufficient to provide working capital to complete an IPO, the notes became convertible into the Company’s equity securities on the same terms as the conversion feature established in the bridge financing. The convertible notes payable had a maturity date in December 2022 and bore interest at eight percent ( 8 %) annually. Upon completion of the IPO, the notes automatically converted into shares of Common Stock. F- 13 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 Bridge Notes In the fourth quarter of 2021 and until our IPO in the third quarter of 2022, the Company issued a total of $ 2.6 million in Bridge Notes, which were convertible into the Company’s Common Stock, at the time of an IPO, or at the noteholder’s option, at $ 4.20 per share, adjusted to reflect any stock split, stock dividend, or other similar change in the Common Stock. The Bridge Notes bore interest at 6 % and had a maturity date of May 31, 2022 . In May 2022, the Company obtained the necessary noteholder approvals to extend the maturity date of the notes to August 31, 2022. In July 2022, the Company obtained approval from a majority of the noteholders to extend the maturity date to October 31, 2022, for certain Bridge Notes in exchange for a Common Stock purchase warrant equal to the principal amount of the note divided by 10.5. As a result, the Company issued warrants to purchase 758,227 shares of the Company’s Common Stock at a price of $ 5.25 per share. See Note 12 for additional disclosures related to warrants. Upon completion of the IPO, approximately $ 2.3 million of the notes automatically converted into shares of Common Stock. In the fourth quarter of 2022, the Company repaid $ 325,000 for those notes that were not converted at the time of the Company’s IPO. Additionally, each noteholder received a warrant to purchase one share of Common Stock based on the investor’s bridge note principal balance investment. The warrants have a five-year term at an exercise price equal to $ 5.25 per share. In connection with the IPO, the Company paid commissions of nine percent ( 9 %) and issued its placement agents warrants to purchase 54,464 shares of Common Stock. The warrants issued to the Company’s placement agents have substantially the same terms as the warrants issued to our noteholders. The Company elected to account for the convertible notes payable at fair value with any changes in fair value being recognized through the consolidated statements of operations until the convertible notes are settled. The fair value of the convertible notes was determined with the assistance of a third-party specialist, considering the value of the notes payable that would be received by converting into common stock in each scenario, plus a put option. In coordination with the Company’s IPO, the notes were converted to Common Stock. Convertible notes payable consisted of the following: SCHEDULE OF CONVERTIBLE NOTES PAYABLE December 31, 2021 Secured convertible notes payable $ 5,041,957 Unsecured convertible notes payable 3,740,000 Principal amount of convertible notes payable 8,781,957 Debt issuance costs ( 1,185,382 ) Fair value adjustments on convertible notes payable 3,555,576 Total convertible notes payable $ 11,152,151 The Company elected to account for the convertible notes payable at fair value with any changes in fair value being recognized through the consolidated statements of operations until the convertible notes are settled. The fair value of the convertible notes was determined with the assistance of a third-party specialist, considering the value of the notes payable that would be received by converting into Common Stock in each scenario, plus a put option. Note 9. COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases its corporate offices under a month-to-month agreement and lab space under an operating lease that is renewable annually and expires in February 2024. Rent expense for office and lab space amounted to approximately $ 65,000 and $ 52,000 for the years ended December 31, 2022 and 2021, respectively. Legal Matters From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of business. To date, the Company had no material pending legal proceedings. Note 10. CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) In June 2022, the Company completed a 1-for-7 reverse stock split of its Common Stock. All share and per share amounts have been adjusted on a retroactive basis in these condensed consolidated financial statements to reflect the effect of the reverse stock split. The Company made a cash payment to stockholders for all fractional shares that it would otherwise be required to issue as a result of the stock split. In addition, the stock split resulted in the par value of the Company’s Common Stock increasing to $ 0.007 per share. F- 14 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 Convertible Preferred Stock The Company has authorized a total of 20,000,000 shares of $ 0.001 per share par value preferred stock. In July 2017, the Company completed a private placement of securities in which 0.2 million shares of Series A preferred stock were sold, resulting in net proceeds of $ 1.5 million. As part of the closing, the Company issued 0.6 million shares in exchange for $ 2.6 million of the Company’s convertible notes payable and related accrued interest. In accordance with the Certificate of Designation of the Series A preferred stock, all of the shares of Series A preferred stock that were issued and outstanding at the time of the IPO were automatically converted into 756,558 fully paid and nonassessable shares of Common Stock at a 1-for-7 conversion rate (as adjusted for the 1-for-7 reverse stock split ). The shares of Series A preferred stock that were so converted ceased to be part of the Company’s authorized stock and will never again be issued by the Company. As of December 31, 2022, no preferred stock is outstanding. The Company classifies convertible preferred stock outside of stockholders’ deficit because the shares contain deemed liquidation rights that are a contingent redemption feature not solely within the control of the Company. The holders of the Series A preferred stock had various rights, preferences, and privileges as follows: Voting Rights Each share of Series A preferred stock was entitled to the number of votes equal to the number of shares of Common Stock into which each share of Series A preferred stock could be converted at the record date for determination of the stockholders entitled to vote. The voting rights and powers were equal to the voting rights and powers of the Common Stock. For so long as 30% or more of the shares of Series A preferred stock remain outstanding, the holders of the Series A preferred stock, voting together as a single class, were entitled to elect one director of the Company . Dividends The holders of shares of Series A preferred stock were entitled to receive dividends, when, as, and if declared by the Company’s board of directors, out of any assets legally available therefor, prior, and in preference to any declaration of payment of any dividend on the Company’s Common Stock at the rate of 8% per share. The right to receive dividends was not cumulative, and no right to such dividends would accrue to the holders of Series A preferred stock by reason of the fact that dividends on such shares are not declared or paid in any year . Optional Conversion Rights Each share of Series A preferred stock was convertible, at the option of the holder, at any time after the date of issuance of such share into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series A original issuance price by the conversion price in effect at the time of conversion. As of December 31, 2021, each of the 756,558 shares of Series A preferred stock was convertible into one share of Common Stock. The respective applicable conversion prices for the Series A preferred stock were subject to adjustment upon any future stock split, stock dividend, combination, reclassification, or similar event affecting the convertible preferred stock or any series thereof. Mandatory Conversion Rights Each share of Series A preferred stock automatically converted into the number of shares of Common Stock determined in accordance with the conversion rate upon the earlier of: (a) the closing of a public offering of Common Stock at a price of at least $ 3.00 per share resulting in at least $ 10,000,000 of gross proceeds, or (b) written consent of a majority of the holders of the then-outstanding shares of Series A preferred stock. Liquidation Preference In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, the holders of Series A preferred stock were entitled to receive an amount equal to $ 7.70 per share (subsequent to the reverse-stock-split calculation) plus an additional amount equal to any dividends declared or accrued but unpaid on each share. If, upon such liquidation event, the assets and funds distributed are insufficient to permit the payment to each holder of the Series A preferred stock of the full preferential amount, the entire assets and funds legally available for distribution to the holders of Series A preferred stock would have been distributed ratably among the holders of the Series A preferred stock based on the number of shares held. Deemed liquidation events include the sale of the Company or grant of an unlimited exclusive license to the Company’s technology or intellectual property rights. F- 15 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 Common Stock The Company has authorized a total of 14,285,714 shares of $ 0.007 per share par value Common Stock. Holders of Common Stock are entitled to cast one vote for each share held of record on all matters presented to the stockholders and have no cumulative voting rights. As of December 31, 2022, the Company has issued 8,381,324 shares of Common Stock. In November 2021, the Company received shareholder approval to increase the number of authorized shares from 7,142,857 to a total of 14,285,714 shares of $ 0.007 per share par value Common Stock. Note 11. STOCK-BASED COMPENSATION The Company grants options under its 2014 Equity Incentive Plan (the “Plan”). The Plan is authorized to grant Incentive Stock Options, Non-statutory Stock Options, or Restricted Stock for up to 1.1 million shares of Common Stock, or twenty percent (20%) of the total issued and outstanding Common Stock, whichever is greater. The Company has reserved 1.1 million shares to be under the plan. Options may be granted to employees, the Company’s board of directors, and external consultants who provide service to the Company. The options have vesting schedules with terms of one to four years and become fully exercisable based on specific terms imposed at the date of grant. The requisite service period for employees or consultants begins on the grant date and ends when the employee or consultant ceases to be employed or providing service, unless a longer period is provided in the option agreement. The requisite service period for directors begins on the grant date and ends on the option term provided in the option agreement. Options are exercisable for a period of up to ten (10) years from grant date. The Plan will terminate according to the respective terms of the Plan in September 2026. The Company has recorded stock-based compensation expense related to the issuance of stock option awards in the following line items in the accompanying consolidated statements of operations: SUMMARY OF STOCK-BASED COMPENSATION EXPENSE RECOGNIZED FOR STOCK OPTION AWARDS 2022 2021 Research and development $ 7,832 $ 25,262 Selling, general and administrative 240,760 17,750 Total stock-based compensation expense $ 248,592 $ 43,012 The following table summarizes stock option activity under the Plan: SUMMARY OF OPTION ACTIVITY Number of options Weighted- average exercise price Weighted- average remaining contractual term (in years) Aggregate intrinsic value Outstanding at December 31, 2020 824,104 $ 4.10 Granted 79,273 5.49 Exercised — — Forfeited ( 24,997 ) 7.70 Outstanding at December 31, 2021 878,380 $ 4.12 Granted 7,142 4.20 Exercised ( 64,848 ) 1.16 Forfeited ( 14,282 ) 5.95 Outstanding at December 31, 2022 806,392 $ 4.33 4.0 $ 164,255 Vested and exercisable at December 31, 2022 800,838 $ 4.31 4.0 $ 164,255 As of December 31, 2022, there was no unrecognized compensation cost related to non-vested stock options. During the year ended December 31, 2021, the Company issued options to purchase 79,273 shares of Common Stock to employees and non-employees. The per share weighted-average fair value of the options granted during 2021 was estimated at $ 2.23 on the date of grant. During the year ended December 31, 2021, no options were exercised. During the year ended December 31, 2021, the Company issued restricted stock units (RSUs) for 7,856 shares of Common Stock to employees. The shares vest in equal monthly installments over terms of between one to three years, subject to the employee providing continuous service through the vesting date. The approximately 6,000 unissued shares vest over a weighted-average period of 1.7 years. During the year ended December 31, 2022, the Company issued options to purchase 7,142 shares of Common Stock to employees. The per share weighted-average fair value of the options granted during 2022 was estimated at $ 2.84 on the date of grant. During the year ended December 31, 2022, 64,848 options were exercised into an equivalent number of common shares. The company received proceeds of approximately $ 75,000 from the exercise of the options. F- 16 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 The following table summarizes weighted-average assumptions using the Black-Scholes option-pricing model used on the date of the grants issued during the years ended December 31, 2022, and 2021, respectively: SCHEDULE OF FAIR VALUE ASSUMPTIONS 2022 2021 Fair value of Common Stock $ 4.62 $ 3.79 Volatility 63.9 % 72.8 % Expected term (years) 6.0 6.1 Risk-free interest rate 2.20 % 1.14 % Dividend yield 0 % 0 % Black-Scholes requires the use of subjective assumptions which determine the fair value of stock-based awards. These assumptions include: Fair value of Common Stock —The fair value of stock option and restricted share grants are determined based on the closing price of our stock on the date of grant. Expected term —The expected term represents the period that stock-based awards are expected to be outstanding. The expected term for option grants is determined using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the stock-based awards. Expected volatility — Since the Company does not have sufficient trading history for its Common Stock, the expected volatility is estimated based on the average volatility for comparable publicly traded biotechnology companies over a period equal to the expected term of the stock-based awards. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available. Risk-free interest rate —The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of a stock-based award. Expected dividend —The Company has never paid dividends on its Common Stock and has no plans to pay dividends on its Common Stock. Therefore, the Company used an expected dividend yield of zero. Note 12. WARRANTS We account for Common Stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement. Warrants are accounted for as derivative liabilities if the warrants allow for cash settlement or provide for modification of the warrant exercise price in the event subsequent sales of Common Stock by the Company are at a lower price per share than the then-current warrant exercise price. We classify derivative warrant liabilities on the consolidated balance sheet at fair value, and changes in fair value during the periods presented in the consolidated statement of operations, which is revalued at each consolidated balance sheet date subsequent to the initial issuance of the stock warrant. In September 2022, in connection with our IPO, we issued a total of 1,282,600 Tradeable Warrants, each exercisable for the purchase of one share of Common Stock at an exercise price of $ 7.35 per share, and 1,282,600 Non-tradeable Warrants, each exercisable for the purchase of one share of Common Stock at an exercise price of $ 7.656 per share. The Common Stock and the Tradeable Warrants trade on The Nasdaq Capital Market under the symbols “BIAF’ and “BIAFW,” respectively. Pursuant to the underwriting agreement dated August 31, 2022, (the “Underwriting Agreement”) between the Company and WallachBeth Capital, LLC, as representative of the underwriters (the “Underwriters”), and solely for purposes of covering any over-allotments made in connection with our IPO, we granted the Underwriters an option to purchase up to an additional 192,390 shares of Common Stock at the Offering Price per Unit less $ 0.02 , and/or up to 192,390 Tradeable Warrants at $ 0.01 per Tradeable Warrant, and/or up to 192,390 Non-tradeable Warrants at $ 0.01 per Non-tradeable Warrant, or any combination of additional shares of Common Stock, Tradeable Warrants, and Non-tradeable Warrants representing in the aggregate up to 15% of the number of Units sold in the IPO (the “Over-Allotment Option”). The Over-Allotment Option was exercisable for a period of 45 days from the date of our Final Prospectus . The Underwriters exercised a portion of their overallotment option and purchased 110,167 Tradeable Warrants at a purchase price of $ 0.01 per warrant, and 110,167 non-tradable warrants at a purchase price of $ 0.01 per warrant. F- 17 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 In 2022, 1,036,486 warrants were exercised into an equivalent number of Common Shares for proceeds of approximately $ 7.7 million. During the year ended December 31, 2021, no warrants were exercised into an equivalent number of common shares. In 2022, the Company issued an additional 226,842 equity-classified Common Stock warrants. Proceeds from the Bridge Notes were allocated to the notes and warrants on a relative fair value basis resulting in a beneficial conversion feature (“BCF”) of $ 0.5 million and equal to the excess fair value of the Company’s Common Stock over the effective conversion price of the Bridge Notes. The BCF was recorded as a debt discount and is being amortized over the life of the Bridge Notes using the effective interest method. For the year ended December 31, 2022, the Company recognized approximately $ 2.1 million in interest expense related to the amortization of the debt discount and issuance costs. From October 2021 through August 2022, the Company issued approximately $ 2.7 million in convertible promissory notes (“Bridge Notes”), which accrued interest at a rate of 6 % per year. Originally, all principal and unpaid interest on the Bridge Notes were due, if not settled prior, on May 31, 2022. See Note 8. Each Bridge Note was issued an accompanying warrant to purchase one share of the Company’s Common Stock for each conversion share based on the principal balance of each Bridge Note at an exercise price equal to $ 5.25 per share. In 2021, the Company issued an aggregate of 464,272 equity-classified Common Stock warrants. Proceeds from the Bridge Notes were allocated to the notes and warrants on a relative fair value basis resulting in a BCF of $ 0.7 million and equal to the excess fair value of the Company’s Common Stock over the effective conversion price of the Bridge Notes. The BCF was recorded as a debt discount and was being amortized over the life of the Bridge Notes using the effective interest method. For the year ended December 31, 2021, the Company recognized $ 0.5 million in interest expense including the amortization of the debt discount. In connection with the issuance of the Bridge Notes, the Company amended the 2018 and 2020 Notes whereby upon completion of an IPO, all outstanding principal and interest will convert into shares of the Company’s Common Stock and at $ 4.20 per share. As an inducement to amending the notes to extend the maturity dates until October 31, 2022, the Company issued 1,419,483 Common Stock warrants with the same terms and conditions as the warrants issued to the Bridge Note holders. The estimated fair value of the warrants was $ 4.1 million and immediately expensed within the accompanying statement of operations. The following table summarizes the calculated aggregate fair values for the warrant derivative liability using the Black-Scholes method based on the following assumptions at December 31, 2022: SCHEDULE OF FAIR VALUE OF WARRANTS Exercise price per share of warrant $ 5.25 Fair market closing price per share of Common Stock $ 4.13 Volatility 107 - 121 % Expected term (years) 5.0 Risk-free interest rate 1.37 - 1.62 % Dividend yield 0 % In March 2017, the Company issued an aggregate of 6,428 Common Stock purchase warrants, which are classified as equity. The warrants were issued with an exercise price of $ 7.00 per share and expire on the tenth anniversary of the issuance date. Note 13. INCOME TAXES Deferred tax assets and valuation allowance The Company had, subject to limitation, approximately $ 18.4 million of net operating loss carryforwards at December 31, 2022, of which approximately $ 6.0 million will begin expiring in 2034. The remaining balance of approximately $ 12.4 million will carry forward indefinitely. A 100 % valuation allowance has been provided for the deferred tax benefits resulting from the net operating loss carryover due to a lack of earnings history. In addressing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. The valuation allowance increased by approximately $ 0.8 million and $ 0.5 million for the years ended December 31, 2022, and 2021, respectively. Significant components of deferred tax assets are as follows: SCHEDULE OF DEFERRED TAX ASSETS December 31, 2022 2021 Deferred tax assets: Net operating loss carryover $ 3,871,192 $ 3,302,836 Stock compensation 477,055 434,645 Capitalized R&E costs 260,560 — Depreciation and amortization ( 7,337 ) 1,099 Other 5,708 3,974 Tax credits 443,867 484,778 Total deferred tax assets 5,051,045 4,227,332 Less: valuation allowance ( 5,051,045 ) ( 4,227,332 ) Net deferred tax assets $ — $ — F- 18 bioAffinity Technologies, Inc. Notes to Consolidated Financial Statements For the Years Ended December 31, 2022 and 2021 The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2022 and 2021, was as follows: SCHEDULE OF RECONCILIATION OF STATUTORY FEDERAL INCOME TAX RATE Year Ended December 31, 2022 2021 Tax at federal statutory rate ( 21.0 )% ( 21.0 )% Permanent differences 10.4 14.8 Research and development credits 2.2 ( 1.9 ) Change in valuation allowance 10.1 8.1 Effective income tax rate — % — % Unrecognized tax benefits As of December 31, 2022 and 2021, the Company has unrecognized tax benefits related to tax credits of $ 190,229 and $ 49,646 , respectively. None of the unrecognized tax benefits as of December 31, 2022, if recognized, would impact the effective tax rate due to the valuation allowance, and no interest or penalties have been recognized. A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows: SCHEDULE OF UNRECOGNIZED TAX BENEFITS December 31, 2022 2021 Beginning balance $ 49,646 $ 70,893 Deductions based on tax positions related to the prior year 110,681 ( 21,247 ) Additions based on tax positions related to the current year 29,902 — Ending balance $ 190,229 $ 49,646 The Company is not under audit with any taxing jurisdiction at this time. The Company’s tax returns for the previous three years remain open for audit by the respective tax jurisdictions. Note 14. RELATED PARTY TRANSACTIONS From August 2018 through July 2020, the Company has issued a total of $ 5.0 million in notes payable to various investors, of which $ 3.1 million were sold to related parties. See Note 8, Convertible Notes Payable, for further information. From October 2020 through June 2021, the Company issued a total of $ 0.9 million in notes payable, including $ 0.5 million to related parties. From June 2021 through September 2021, the Company issued a total of approximately $ 0.9 million in additional notes payable, including $ 0.1 million to related parties. All of these notes bore interest at 8 % per annum. The unpaid principal and accrued interest under the notes may be converted into shares of the Company’s Common Stock at a conversion price of $ 4.20 per share. The notes automatically converted into shares of the Company’s Common Stock upon the completion of our IPO. In August 2022, Maria Zannes, the founder, President, Chief Executive Officer, and a director of the Company, purchased a Bridge Note in the principal amount of $ 99,000 . Upon the IPO Closing, the Bridge Note automatically converted into 23,672 shares of Common Stock. In connection with her Bridge Note purchase, Ms. Zannes received a Bridge Warrant to purchase 23,571 shares of Common Stock at an exercise price of $ 5.25 per share. In August 2022, Steven Girgenti, the Executive Chairman and a director of the Company, purchased a Bridge Note in the principal amount of $ 150,000 . Upon the IPO closing, the Bridge Note automatically converted into 35,866 shares of Common Stock. In connection with his Bridge Note purchase, Mr. Girgenti received a Bridge Warrant to purchase 35,714 shares of Common Stock at an exercise price of $ 5.25 per share. Note 15. SUBSEQUENT EVENTS The Company evaluated all events or transactions that occurred after December 31, 2022, up through the date the consolidated financial statements were issued. During this period, the Company did not have any material subsequent events required to be disclosed as of and for the period ended December 31, 2022. F- 19