bioAffinity Technologies, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis (the “MD&A”) is intended to highlight and supplement data and information presented elsewhere in this Annual Report. The MD&A is also intended to provide you with information that will assist you in understanding our consolidated financial statements, the changes in key items in those consolidated financial statements from year to year, and the primary factors that accounted for those changes. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause the Company’s financial results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the “Cautionary Note Regarding Forward-Looking Statements” section of this Annual Report and in the “Risk Factors” in this Annual Report. 55 Our MD&A is organized as follows: ● Company Overview – Discussion of our business plan and strategy to provide context for the remainder of the MD&A. ● Results of Operations – Analysis of our financial results comparing the year ended December 31, 2025, to the year ended December 31, 2024. ● Liquidity and Capital Resources – Analysis of changes in our cash flows and discussion of our financial condition and potential sources of liquidity. ● Critical Accounting Estimates – Accounting estimates are those estimates made in accordance with U.S. generally accepted accounting principles (“GAAP”) that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. Company Overview Business We develop noninvasive diagnostics to detect early-stage lung cancer and other diseases of the lung using flow cytometry and automated analysis developed by machine learning, a form of artificial intelligence (“AI”). One of our diagnostic tests analyzes cell populations, including cancer and cancer-related cells, that are indicative of a specific diseased state. CyPath ® Lung, our first commercial diagnostic test, addresses the need for noninvasive detection of early-stage lung cancer by detecting lung cancer as early as curative Stage 1A. Lung cancer is the leading cause of cancer-related deaths worldwide. Physicians order CyPath ® Lung to assist in their assessment of patients who are at high risk for lung cancer. The CyPath ® Lung test enables physicians to more confidently identify patients who will likely benefit from timely intervention and more invasive follow-up procedures and those who are likely without lung cancer and should continue routine screening. CyPath ® Lung has the potential to increase overall diagnostic accuracy of lung cancer, which could lead to increased survival, fewer unnecessary invasive procedures, reduced patient anxiety, and lower medical costs. Commercial laboratory services, including CyPath ® Lung, are performed at our wholly owned subsidiary PPLS which we acquired by purchasing the assets of Village Oaks Pathology Services, P.A., a Texas professional association d/b/a Precision Pathology Services, that included the CAP-accredited and CLIA-certified commercial laboratory it owned. We now own and operate the clinical anatomic and clinical pathology laboratory. CyPath ® Lung is offered for sale to physicians by PPLS. Through our wholly owned subsidiary, OncoSelect ® Therapeutics, LLC, we have conducted research that has led to discoveries and advancement of novel cancer therapeutic approaches that specifically and selectively target cancer cells. We expect to present our findings at conferences and publish our research in the near future. We intend to seek strategic partners to develop our therapeutic discoveries which could result in broad-spectrum cancer treatments in the future. Research and development of our diagnostic tests in the pipeline and advancement of our therapeutic discoveries have been conducted at leased laboratory space at The University of Texas at San Antonio. We plan to move our research and development efforts to privately owned laboratory space in the second quarter 2026. Current Year Financial Highlights Key financial results for the year ended December 31, 2025, include: ● Primarily as a result of the Company’s targeted strategic actions to discontinue unprofitable pathology services, reduce costs through operational efficiency, and drive sales growth for CyPath ® Lung, consolidated revenue decreased approximately 34% to $6.2 million as compared to $9.4 million for the year ended December 31, 2024. While these actions contributed to lower consolidated revenue in the short term, they improved operating focus and cost structure and are intended to position our noninvasive lung cancer diagnostic for scalable growth and improved long-term margin potential. ● CyPath ® Lung testing revenue increased approximately 87% to $963,000 as compared to $516,000 for the year ended December 31, 2024, due to a 99% increase in total test results delivered of more than 600 for the current year. ● Raised approximately $16.9 million in gross proceeds from equity transactions to fund operating activities. 56 Recent Financial Developments Public and Private Offerings All share and per-share amounts in the accompanying footnotes have been retroactively adjusted to reflect our 1-for-30 reverse stock split, which occurred on September 18, 2025. In October 2025, we entered into definitive agreements for the purchase and sale of 720,000 shares of Common Stock, at a purchase price of $2.50 per share in a registered direct offering priced at-the-market under Nasdaq rules. The gross proceeds from the offering were approximately $1.8 million before deducting placement agent fees and other offering expenses payable by us. On September 29, 2025, we consummated a best efforts public offering of an aggregate of (i) 1,047,694 shares of Common Stock and (ii) pre-funded warrants to purchase up to 874,067 shares of Common Stock in lieu of shares of Common Stock. Each share was sold at a public offering price of $2.50. Each pre-funded warrant was sold at a public offering price of $2.493. The total gross proceeds for the transaction were approximately $4.8 million. On August 13, 2025, we entered into a securities purchase agreement with certain institutional and accredited investors, pursuant to which we agreed to issue and sell in a private placement (i) 990 shares of our newly designated Series B Convertible Preferred Stock, with a par value $0.001 per share and stated value of $1,000 per share, for gross proceeds to us of $990,000, which were initially convertible into 143,476 shares of our Common Stock at an initial conversion price of $6.90 per share and (ii) warrants to purchase up to 223,824 shares of our Common Stock at an exercise price of $10.56 per share of Common Stock. On May 7, 2025, the Company completed a public offering of securities for gross proceeds to the Company of $3.25 million, before deducting agent fees and other estimated expenses payable by the company. The offering consisted of 338,541 shares of our Common Stock, of which 79,044 were pre-funded warrants, together with warrants to purchase up to 507,812 shares of Common Stock, at a combined offering price for each share of common stock (or pre-funded warrant) and accompanying warrant of $9.60 per share. The warrants have an exercise price of $10.56 per share and have certain provisions that allow for additional shares to be issued in the event of a reverse split of the Company’s common stock. Additionally, the warrants include an anti-dilution adjustment which is subject to stockholder approval. On February 26, 2025, pursuant to the terms of a warrant inducement agreement (the “February Inducement Agreement”), we entered into with certain holders of existing warrants dated February 25, 2025, such holders exercised for cash (i) warrants to purchase an aggregate of up to 43,402 shares of Common Stock issued on August 5, 2024 (the “August Warrants”), at the reduced exercise price of $17.40 per share, and (ii) warrants to purchase an aggregate of up to 37,878 shares of Common Stock issued on October 21, 2024 (the “October Warrants”), at the reduced exercise price of $17.40 per share. We received aggregate gross proceeds of approximately $1.4 million, before deducting advisory fees and other expenses payable by it. In consideration of the immediate exercise of the October Warrants and August Warrants by the holders thereof in accordance with the February Inducement Agreement, we issued unregistered common warrants to purchase an aggregate of up to 97,538 shares of Common Stock (120% of the number of shares of Common Stock issuable upon exercise of the October Warrants and August Warrants) to such holders. 57 Financial To date, we have devoted a substantial portion of our efforts and financial resources to the development of our diagnostic test, CyPath ® Lung. As a result, since our inception in 2014, we have funded our operations principally through private sales of our equity or debt securities. We have never been profitable, and as of December 31, 2025, we had working capital surplus of $4.7 million and an accumulated deficit of approximately $68.6 million. We expect to continue to incur significant operating losses for the foreseeable future as we continue the development of our diagnostic tests and advance our diagnostic tests through clinical trials; however, we do expect revenue to increase due to accelerating sales of CyPath ® Lung and cost-saving measures we recently instituted at PPLS. We intend to seek strategic partners for our therapeutic discoveries related to selective broad-spectrum cancer treatments through pre-clinical and clinical development. We anticipate raising additional cash needed through the private or public sales of equity or debt securities, collaborative arrangements, or a combination thereof to continue to fund our operations and develop our products. There is no assurance that any such collaborative arrangement will be entered into or that financing will be available to us when needed in order to allow us to continue our operations or, if available, on terms acceptable to us. If we do not raise sufficient funds in a timely manner, we may be forced to curtail operations, delay our clinical trials, cease operations altogether, or file for bankruptcy. Results of Operations Year Ended December 31, 2025 Compared to the Year Ended December 31, 2024 Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future. Net loss for the year ended December 31, 2025 was approximately $14.9 million, compared to a net loss of approximately $9.0 million for the year ended December 31, 2024, resulting from the operational activities described below. Revenue Since acquisition of the clinical pathology laboratory on September 19, 2023, additional revenue streams have been consolidated. PPLS generates three sources of revenue: (1) patient service fees, (2) histology service fees, and (3) medical director fees. The Company recognizes as revenue the amount that reflects the consideration to which it expects to be entitled in exchange for goods sold or services rendered primarily upon completion of the testing process (when results are reported) or when services have been rendered. Year Ended December 31, 2025 2024 Patient service fees 1 $ 4,917,342 $ 8,175,670 Histology service fees 1,116,912 1,103,751 Medical director fees 68,268 66,576 Department of Defense observational studies 577 8,654 Other revenues 4,860 7,371 Total net revenue $ 6,161,959 $ 9,362,022 1 Patient services fees includes direct billing for CyPath ® Lung diagnostic test of approximately $963,000 and $516,000 for the years ended December 31, 2025 and 2024, respectively. 58 Operating Expenses Year Ended Change in 2025 December 31, Versus 2024 2025 2024 $ % Operating expenses: Direct costs and expenses $ 4,226,799 $ 5,983,475 $ (1,756,676 ) (29 )% Research and development 1,383,359 1,461,227 (77,868 ) (5 )% Clinical development 705,744 321,655 384,089 119 % Selling, general and administrative 9,913,729 9,943,473 (29,744 ) 0 % Depreciation and amortization 504,836 605,637 (101,801 ) (17 )% Total operating expenses $ 16,734,467 $ 18,315,467 $ (1,581,800 ) (9 )% Operating expenses totaled $16.7 million and $18.3 million for the years ended December 31, 2025 and 2024, respectively. The decrease in operating expenses is the result of the following factors. Direct Costs and Expenses Our direct costs and expenses are primarily direct labor for pathology services, laboratory supplies and reagents, laboratory equipment, and allocated shared facilities. Direct costs and expenses totaled $4.2 million and $6.0 million during the years ended December 31, 2025 and 2024, respectively. The decrease of approximately $1.8 million for 2025 compared to 2024 was primarily attributable to the targeted strategic actions which occurred in March 2025, aimed at streamlining operations and reducing costs related to our lab operations. Research and Development Our research and development expenses consist primarily of expenditures for lab operations, preclinical studies, compensation, and consulting costs. Research and development expenses remained consistent year-over-year, totaling $1.4 million and $1.5 million for the years ended December 31, 2025 and 2024, respectively. Clinical Development Clinical development expenses totaled approximately $706,000 and $322,000 for the years ended December 31, 2025 and 2024, respectively. The increase of approximately $384,000, or 119%, for the year ended December 31, 2025, compared to the same period in 2024 was primarily attributable to an increase in professional fees in 2025 related to managing our clinical strategy for our pivotal clinical trial. Selling, General and Administrative Our selling, general and administrative expenses consist primarily of expenditures related to employee compensation, selling and marketing costs, legal, accounting and tax, and other professional services, and general operating expenses. Selling, general and administrative expenses totaled approximately $9.9 million and $9.9 million for each year ended December 31, 2025 and 2024, respectively. Our selling, general and administrative costs stayed level despite an increase of approximately $1.0 million in costs related to the addition of personnel and services to support sales of our diagnostic test, CyPath ® Lung, offset by decreases in expenses from targeted strategic actions aimed at streamlining operations and reducing costs in our lab operations. Depreciation and Amortization Depreciation and amortization expenses totaled approximately $505,000 and $606,000 for the years ended December 31, 2025 and 2024, respectively. The decrease of approximately $101,000, or 17%, for the year ended December 31, 2025, compared to the same period in 2024 was primarily attributable to the termination of a financing lease in April 2025 due to the Company’s targeted strategic actions announced in March 2025. Other Income (Expense) Year Ended Change in 2025 December 31, Versus 2024 2025 2024 $ % Interest (expense) income, net $ (20,987 ) $ (74,865 ) $ 53,878 72 % Other (expense) income, net (461,939 ) 129 (462,068 ) (358,192 )% Gain (loss) on remeasurement of warrant liabilities (3,810,278 ) — (3,810,278 ) (100 )% Total other (expense) income $ (4,293,204 ) $ (74,736 ) $ (4,218,468 ) 5,644 % Other Income (Expense) Total other income (expense), net totaled ($4.3 million) and approximately $(75,000) for the years ended December 31, 2025 and 2024, respectively. The increase in total other expenses of approximately $4.2 million is mostly attributable to the remeasurement of warrant liability and offering costs related to the May public offering, which was further reclassified as equity after the completion of certain events which prevented equity classification. 59 Liquidity and Capital Resources To date, we have funded our operations primarily through our IPO, exercise of warrants, and the sale of our equity and debt securities, resulting in gross proceeds of approximately $58.2 million. We have evaluated whether there are conditions and events that raise substantial doubt about our ability to continue as a going concern for at least one year after the date the consolidated financial statements are issued. Recent Financings In October 2025, we entered into definitive agreements for the purchase and sale of 720,000 shares of Common Stock, at a purchase price of $2.50 per share in a registered direct offering priced at-the-market under Nasdaq rules. The gross proceeds to us from the offering were approximately $1.8 million before deducting placement agent fees and other offering expenses payable by us. On September 29, 2025, we consummated a best efforts public offering of an aggregate of (i) 1,047,694 shares of Common Stock and (ii) pre-funded warrants to purchase up to 874,067 shares of Common Stock in lieu of shares of Common Stock. Each share was sold at a public offering price of $2.50. Each pre-funded warrant was sold at a public offering price of $2.493. The total gross proceeds for the transaction were approximately $4.8 million. On August 13, 2025, we entered into a securities purchase agreement with certain institutional and accredited investors, pursuant to which we agreed to issue and sell in a private placement (i) 990 shares of our newly designated Series B Convertible Preferred Stock, with a par value $0.001 per share and stated value of $1,000 per share, for gross proceeds to us of $990,000, which were initially convertible into 143,476 shares of our Common Stock at an initial conversion price of $6.90 per share and (ii) warrants to purchase up to 223,824 shares of our Common Stock at an exercise price of $10.56 per share of Common Stock. On May 7, 2025, the Company completed a public offering of securities for gross proceeds to the Company of $3.25 million, before deducting agent fees and other estimated expenses payable by the company. The offering consisted of 338,541 shares of our Common Stock, of which 79,044 were pre-funded warrants, together with warrants to purchase up to 507,812 shares of Common Stock, at a combined offering price for each share of common stock (or pre-funded warrant) and accompanying warrant of $9.60 per share. The warrants have an exercise price of $10.56 per share and have certain provisions that allow for additional shares to be issued in the event of a reverse split of the Company’s common stock. Additionally, the warrants include an anti-dilution adjustment which is subject to stockholder approval. On February 26, 2025, pursuant to the terms of a warrant inducement agreement (the “February Inducement Agreement”), we entered into with certain holders of existing warrants dated February 25, 2025, such holders exercised for cash (i) warrants to purchase an aggregate of up to 43,402 shares of Common Stock issued on August 5, 2024 (the “August Warrants”), at the reduced exercise price of $17.40 per share, and (ii) warrants to purchase an aggregate of up to 37,878 shares of Common Stock issued on October 21, 2024 (the “October Warrants”), at the reduced exercise price of $17.40 per share. We received aggregate gross proceeds of approximately $1.4 million, before deducting advisory fees and other expenses payable by it. In consideration of the immediate exercise of the October Warrants and August Warrants by the holders thereof in accordance with the February Inducement Agreement, we issued unregistered common warrants to purchase an aggregate of up to 97,538 shares of Common Stock (120% of the number of shares of Common Stock issuable upon exercise of the October Warrants and August Warrants) to such holders. We have incurred losses since our inception in 2014 as a result of significant expenditures for operations and research and development and, prior to April 2022, the lack of any approved diagnostic test or therapeutic products to generate revenue. During 2025 and 2024, we had net losses of $14.9 million and $9.0 million, respectively, and we expect to incur substantial additional losses in future periods. We have an accumulated deficit of approximately $68.6 million as of December 31, 2025. Based on our current expected level of operating expenditures and the cash on hand of approximately $4.0 million at the time of this filing, management concludes that there is substantial doubt about our ability to continue as a going concern for a period of at least twelve (12) months subsequent to the issuance of the accompanying consolidated financial statements. Without funding from the proceeds of a capital raise or strategic relationship or grant, management anticipates that our cash resources are sufficient to continue operations through June 2026. Cash and cash equivalents were approximately $6.4 million as of December 31, 2025. We need to raise further capital through the sale of additional equity or debt securities or other debt instruments, strategic relationships or grants, or through exercised outstanding warrants to support our future operations. Our business plan includes expansion for our commercialization efforts which will require additional funding. If we are unable to improve our liquidity position, we may not be able to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate revenue and raise capital from financing transactions. There can be no assurance that we will be successful in accomplishing these objectives. 60 Cash Flows The following information reflects cash flows for the years presented: Year Ended December 31, 2025 2024 Cash and cash equivalents at beginning of year $ 1,105,291 $ 2,821,570 Net cash used in operating activities (9,328,842 ) (7,264,795 ) Net cash used in investing activities (60,568 ) (79,083 ) Net cash provided by financing activities 14,733,901 5,627,599 ) Cash and cash equivalents at end of year $ 6,449,782 $ 1,105,291 Net Cash Used in Operating Activities Net cash used in operating activities was approximately $9.3 million and $7.3 million for the years ended December 31, 2025 and 2024, respectively. The increase of approximately $2.0 million in cash used by operations during the years ended December 31, 2025, compared to the same period in 2024 was primarily attributable to an increase of $5.9 million in our loss from operations, a decrease in accounts payable and accrued expenses by $0.5 million offset by a decrease in accounts receivable by $0.9 million compared to the prior year, decrease in stock compensation by $0.3 million, decrease in depreciation and amortization by $0.1 million, and a fair value adjustment to the warrant liability by $3.8 million related to the May 2025 warrant agreement. Net Cash Used in Investing Activities We used approximately $61,000 for the year ended December 31, 2025, in investing activities related primarily to purchase of computer and lab equipment, compared to approximately $79,000 used in investing activities for the year ended December 31, 2024. Net Cash Provided by Financing Activities Cash provided in financing activities was approximately $14.7 million compared to cash provided by financing activities of approximately $5.6 million for the years ended December 31, 2025 and 2024, respectively. The change in proceeds from prior year was primarily related to net proceeds from the equity transactions of $15.1 million offset by payments for loans and finance leases of $0.4 million, compared to the prior year of equity transactions of $5.8 million offset by payments for loans and finance leases of approximately $0.2 million. Critical Accounting Estimates The preparation of financial statements in conformity with GAAP in the U.S. requires management to make significant judgments and estimates that affect the reported amounts of assets and liabilities and 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. Management bases these significant judgments and estimates on historical experience and other assumptions it believes to be reasonable based upon information presently available. Actual results could differ from those estimates under different assumptions, judgments, or conditions. Patient Fee Revenues We follow ASC 606, Revenue from Contracts with Customers , which requires revenue recognition in the period in which the service was performed. To be able to report timely net revenues for the period, estimates are used for a portion of uncollected balances. The Company follows a standard process, which considers historical denial and collection experience and other factors (including the period of time that the receivables have been outstanding), to estimate contractual allowances and implicit price concessions, recording adjustments in the current period as changes in estimates. The process for estimating revenues and the ultimate collection of accounts receivable involves significant judgment and estimation. 61 Patient Fee Receivables and Considerations for Credit Losses We follow accounting considerations of CECL - Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. With the acquisition of PPLS and control of Village Oaks, the Company’s board-certified pathologists provide anatomic and clinical pathology services for patients and other customers. The Company’s other customer types include contract research organizations (“CRO’s), hospitals, and independent laboratories. The majority of the Company’s revenues stem from fees for services provided to patients, and thus, in those arrangements, the patient is the customer, although the services may be requested by a physician on the patient’s behalf. Furthermore, in addition to its contracts with patients, the Company separately contracts with third-party payors (insurance companies and governmental payors), who are typically responsible for all or the majority of the fees agreed upon for such services provided to patients. Historically, material amounts of gross charges are not collected due to various agreements with insurance companies, capped pricing levels for government payors and uncollectible balances from individual payers. To estimate these allowances of credit losses, the Company assesses the portfolio risk segments and historical data on collection rates. These estimated allowances offset patient revenues and accounts receivables. Discount Rate for Finance Leased Equipment We follow Leases (“ASC 842”). In February 2016, the FASB issued Topic ASC 842, under which a lessee is required to recognize most leases on its balance sheet. The Company has elected to apply a third-party valuation incremental borrowing rate (“IBR”) as the discount rate by class of underlying assets when the rate is not implicit in the lease. Share-Based Compensation We follow ASC 718, Compensation – Stock Compensation , which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, directors, and non-employees based on estimated fair values. We have used the Black-Scholes option pricing model to estimate grant date fair value for all option grants. The assumptions we use in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As such, as we use different assumptions based on a change in factors, our stock-based compensation expense could be materially different in the future. Accounting for Income Taxes We are governed by U.S. income tax laws, which are administered by the Internal Revenue Service (“IRS”). We follow ASC 740, Accounting for Income Taxes , which requires an asset and liability approach to financial accounting and reporting for income taxes. 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. 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. Assessment of Goodwill and Intangible Assets Our indefinite-lived assets include Goodwill and Intangible Assets resulting from the acquisition of PPLS. Goodwill represents the purchase price in excess of fair values assigned to the underlying identifiable net assets of the acquired business. Goodwill and Intangible Assets are reviewed annually for impairment unless circumstances dictate the need for more frequent assessment. In performing impairment tests for our Goodwill in 2024, in accordance with ASC 350 - Intangibles – Goodwill and Other , we opted to complete a quantitative assessment at the PPLS level as opposed to relying on a qualitative assessment as permitted in the guidance. This quantitative assessment required that the estimated fair value of PPLS’ net assets, including Goodwill, be calculated and compared to the carrying amount. If that estimated fair value is in excess of the carrying amount, no impairment is recognized. We performed this assessment as of December 31, 2025. We estimated the fair value of the net assets tested using a discounted cash flow model. The income-based approach required significant judgment to estimate future cash flows, including revenue growth inclusive of long-term growth rate assumptions and the discount rate. Significant changes in our estimates and assumptions could affect our fair value calculations. Our estimate of fair value exceeded the carrying amount and therefore resulted in no impairment. Going Concern Our evaluation of our ability to continue as a going concern requires us to evaluate our future sources and uses of cash sufficient to fund our currently expected operations in conducting research and development activities one year from the date our consolidated financial statements are issued. We evaluate the probability associated with each source and use of cash resources in making our going concern determination. The research and development of our diagnostic tests and therapeutic products are inherently subject to uncertainty. Off-Balance Sheet Arrangements We do not engage in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, as a part of our ongoing business. Accordingly, we did not have any off-balance sheet arrangements during any of the periods presented. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are a smaller reporting company as defined by Item 10 of Regulation S-K and are not required to provide the information otherwise required under this Item 7A.