Item 7. Management’s Discussion and Analysis
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.
48
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, 2023, to the year ended December
31, 2022.
●
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 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
bioAffinity
Technologies, Inc. (the “Company,” “bioAffinity,” “we,” or “our”) develops noninvasive
diagnostics to detect early-stage lung cancer and other diseases of the lung. We are advancing research into our therapeutic discoveries
which could result in broad-spectrum cancer treatments in the future. We develop proprietary noninvasive diagnostic tests using flow
cytometry and automated analysis developed by 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. Research and optimization of our platform technologies
are conducted in laboratories at our wholly owned subsidiary, Precision Pathology Laboratory Services, LLC (“PPLS”) and The
University of Texas at San Antonio. Commercial laboratory services are performed at PPLS.
Our
diagnostic test, CyPath ® Lung, addresses the need for noninvasive detection of early-stage lung cancer. 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.
Through
our wholly owned subsidiary, OncoSelect ® Therapeutics, LLC, our research has led to discoveries and advancement of novel
cancer therapeutic approaches that specifically and selectively target cancer cells.
Through
our wholly owned subsidiary PPLS, we acquired the assets of Village Oaks Pathology Services, P.A., a Texas professional association d/b/a
Precision Pathology Services, including the CAP-accredited and CLIA-certified commercial laboratory it owned, and we now own and operate
the clinical anatomic and clinical pathology laboratory.
Recent
Developments
On
March 6, 2024, we received aggregate gross proceeds of $2.5 million from the sale to four institutional investors (the “Purchasers”)
of (1) 1,600,000 shares of our Common Stock in a registered direct offering, and (2) Common Warrants to purchase an aggregate of 1,600,000
shares of Common Stock (the “Common Warrants”) with an exercise price of $1.64 in a concurrent private placement (the “Transactions”).
The
Common Stock was offered pursuant to a shelf registration statement on Form S-3 (File No. 333-275608), which was declared effective on
November 27, 2023, (as amended from time to time, the “Registration Statement”). The Common Warrants and the shares of Common
Stock issuable upon exercise of the Common Warrants (the “Common Warrant Shares”) were issued in a concurrent private placement
and have not been registered. The Common Warrants will be exercisable commencing on the effective date of stockholder approval for the
issuance of the shares of Common Stock issuable upon exercise of the Common Warrants (the “Stockholder Approval Date”) and
will expire on the fifth anniversary of the Stockholder Approval Date.
Pursuant
to the terms of the Purchase Agreement, until 60 days following the closing of the Transactions, we have agreed not to issue (or enter
into any agreement to issue) any shares of Common Stock or Common Stock equivalents, subject to certain exceptions. We have further agreed
not to enter into an agreement involving a variable rate transaction until 12 months following the closing of the Transactions, provided
however that the prohibition on “at-the-market offerings” and the issuance of common stock pursuant to an equity line of
credit shall expire on the six-month anniversary of the closing date of this offering. In addition, our Chief Executive Officer and each
of our directors have entered into lock-up agreements with the Company pursuant to which each of them has agreed not to, for a period
of 60 days from the closing of the Transactions, offer, sell, transfer or otherwise dispose of our securities, subject to certain exceptions.
In addition, from the date of the Purchase Agreement until the date that is nine (9) months after the date of the Purchase Agreement,
upon any issuance by the Company or any of its subsidiaries of Common Stock, common stock equivalents for cash consideration, Indebtedness
(as defined in the Purchase Agreement) or a combination of units thereof for capital raising purposes other than an at-the-market offering
(a “Subsequent Financing”), the Purchasers shall have the right to participate in the Subsequent Financing in an amount up
to the percentage of such Purchaser’s participation in the Transactions on the same terms, conditions and price provided for in
the Subsequent Financing.
49
WallachBeth
Capital LLC acted as the placement agent for the offering and received a cash fee of 9.0% of the aggregate gross proceeds paid to us
for the securities sold in the transactions and reimbursement of certain out-of-pocket expenses. As additional compensation we issued
to WallachBeth Capital LLC a warrant (the “Placement Agent Warrant”) to purchase an aggregate of 32,000 shares of Common
Stock, such number of shares equal to two percent (2.0%) of the number of shares of Common Stock issued in the registered direct offering,
at an exercise price per share equal to $1.64, which is equal to the exercise price of the Common Warrants. The Placement Agent Warrant
is exercisable via “cashless exercise” in certain circumstances.
We
also agreed to file a registration statement to register the resale of the Common Warrant Shares and the shares of Common Stock issuable
upon exercise of the Placement Agent Warrant (the “Placement Agent Warrant Shares”) within 30 days of the date of the Purchase
Agreement and to use commercially reasonable efforts to keep such registration statement effective at all times until no Purchaser owns
any Warrants or Warrant Shares and until the Placement Agent does not own the Placement Agent Warrant or any Placement Agent Warrant
Shares. We are also obligated to hold a stockholders’ meeting 90 days after the closing date and every three months thereafter
seeking approval of the exercise of the Common Warrants.
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.
Prior
to the acquisition, Precision Pathology Services had licensed and developed CyPath ® Lung as an LDT for sale to physicians.
The license agreement provided that revenues from the sale would be split evenly between the Company and Village Oaks. In the second
quarter of 2022, prior to the acquisition, we started to recognize revenue as part of a limited beta market testing program of the CyPath ®
Lung test. We have never been profitable, and as of December 31, 2023, we had total working capital of $1.7 million and an accumulated
deficit of approximately $44.6 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 the acquisition. We intend to license our therapeutic products for clinical development should animal and pre-clinical
studies prove successful.
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, 2023, Compared to the Year Ended December 31, 2022
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, 2023, was approximately $7.9 million, compared to a net loss of approximately $8.2 million for the
year ended December 31, 2022, resulting from the operational activities described below.
Revenue
Post-acquisition,
additional revenue streams have been consolidated starting September 19, 2023. PPLS generates three sources of revenue: (1) patient service
fees, (2) histology service fees, and (3) medical director fees. Pre-acquisition, bioAffinity Technologies’ revenue was generated
in three ways for pre-acquisition: (1) royalties from the Company’s diagnostic test, CyPath ® Lung, (2) clinical
flow cytometry services provided to Village Oaks related to the Company’s CyPath ® Lung test, and (3) CyPath ®
Lung tests purchased by the U.S. Department of Defense (“DOD”) for an observational study, “Detection of Abnormal
Respiratory Cell Populations in Lung Cancer Screening Patients Using the CyPath ® Lung Assay (NCT05870592),” and
research and development on using bronchoalveolar lavage fluid as a biological sample to assess cardiopulmonary function and exercise
performance in military personnel post-COVID-19 infection. The royalty income from CyPath ® Lung and clinical flow cytometry
services income, beginning September 19, 2023, are related party income, and therefore, eliminated from consolidated net revenues. See
net revenue summarized in the table below.
For
year ended December 31,
2023
2022
Patient service
fees 1
$ 2,199,558
$ —
Histology service fees
272,660
—
Medical director fees
19,324
—
Department of Defense observational studies
19,442
—
Other revenues 2
21,515
4,803
Total
net revenue
$ 2,532,499
$ 4,803
1
Patient services fees includes direct billing for CyPath® Lung diagnostic test.
2
Other revenues include pre-acquisition CyPath® Lung royalty income and laboratory services.
50
Operating
Expenses
Year Ended
Change in
2023
December
31,
Versus
2022
2023
2022
$
%
Operating expenses:
Direct costs
and expenses
$ 1,740,884
$ 467
$ 1,740,417
372,680 %
Research and development
1,467,936
1,378,624
89,312
6 %
Clinical development
256,661
145,546
111,115
76 %
Selling, general and
administrative
6,790,654
2,481,042
4,314,612
174 %
Depreciation
and amortization
249,592
10,185
239,410
2,351 %
Total operating expenses
$ 10,505,727
$ 4,015,861
$ 6,494,866
162 %
Operating
expenses totaled $10.5 million and $4.0 million during 2023 and 2022, respectively. The increase 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 $1.7 million and $467 during 2023 and 2022, respectively. The increase
of approximately $1.7 million for 2023 compared to 2022 was primarily attributable to the laboratory operations of the newly acquired
PPLS.
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 totaled $1.5 million and $1.4 million during 2023 and 2022, respectively. The increase of approximately
$89,000, or 6%, for 2023 compared to 2022 was primarily attributable to an increase in compensation costs and benefits as we added research
personnel.
Clinical
Development
Clinical
development expenses totaled approximately $257,000 and $146,000 during 2023 and 2022, respectively. The increase of approximately $111,000,
or 76%, for 2023 compared to 2022 was primarily attributable to an increase in compensation costs and benefits as we added clinic development
personnel.
Selling,
General and Administrative
Our
selling, general and administrative expenses consist primarily of expenditures related to employee compensation, legal, accounting and
tax, other professional services, and general operating expenses.
Selling,
general and administrative expenses totaled approximately $6.8 million and $2.5 million during 2023 and 2022, respectively. The increase
of approximately $4.3 million, or 174%, for 2023 compared to 2022, was primarily attributable to general and administration costs acquired
from PPLS ($820,000), accounting, legal, and professional fee costs associated with the acquisition of PPLS ($811,000), the accounting,
legal, and professional fee costs associated with the SEC filing of a registration statement on Form S-1 ($197,000), increase in stock-based
compensation ($486,000), increase in employee compensation ($838,000) as we added sales and administrative personnel, increase in branding
and marketing collateral ($391,000), increase in directors and officers (“D&O”) insurance ($290,000), increase in public
company-related expenses ($294,000) as well as an increase related to board compensation ($147,000), and other operational expenses.
Additionally, compensation increased due to additional personnel and support services to support the launch of sales of our diagnostic
test, CyPath ® Lung.
Other
Income (Expense)
Year Ended
Change in
2023
December
31,
Versus
2022
2023
2022
$
%
Interest income (expense), net
$ 85,006
$ (2,485,932 )
$ 2,570,938
62 %
Other income (expense), net
(27,796 )
—
(27,796 )
0 %
Gain on extinguishment of debt
—
212,258
(212,258 )
-100 %
Loss on change in
fair value of convertible notes
—
(1,866,992 )
1,866,922
100 %
Total other income
(expense)
$ 57,210
$ (4,140,596 )
$ 4,197,806
7,237 %
Other
income (expense) totaled approximately $57,210 and ($4.1) million for 2023 and 2022, respectively.
Interest
income (expense)
We
had net interest income (expense) of approximately $85,000 and ($2.5) million for the years ended December 31, 2023 and 2022, respectively.
The current year amount related to approximately $120,000 interest earned from money market account partially offset by interest paid
in financing lease for laboratory equipment. The favorable improvement is based on convertible notes being converted to common stock
in the prior year.
51
(Loss)
gain on change in fair value of convertible notes
The
loss on the change in fair value of convertible notes was $0 during 2023 compared to a loss of $1.9 million during 2022, respectively.
The prior year recognized the change in the fair value of convertible notes converted to stock, the reduction in the expected term, and
other assumptions during the reported periods.
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 $36.8 million. 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.
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 2023 and
2022, we had net losses of $7.9 million and $8.2 million, respectively, and we expect to incur substantial additional losses in
future periods. We have an accumulated deficit of approximately $44.6 million as of December 31, 2023. Based on the Company’s
current expected level of operating expenditures and the cash on hand of approximately $2.7 million at the time of this filing,
management concludes that there is substantial doubt about the Company’s 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. Cash and cash
equivalents were approximately $2.8 million as of December 31, 2023 which does not take into account the gross proceeds of $2.5
million that we received in March 2024. At the time of this filing, cash is expected to be sufficient through September 2024. 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.
Cash
Flows
The
following information reflects cash flows for the years presented:
Year Ended
December
31,
2023
2022
Cash and cash equivalents at
beginning of year
$ 11,413,749
$ 1,360,638
Net cash used in operating
activities
(6,037,806 )
(4,070,845 )
Net cash used in investing
activities
(2,209,399 )
(219,987 )
Net
cash provided (used) by financing activities
(344,984 )
14,343,953
Cash and cash equivalents
at end of year
$ 2,821,570
$ 11,413,759
Net
Cash Used in Operating Activities
Net
cash used in operating activities was approximately $6.0 million and $4.1 million for the years ended December 31, 2023, and 2022, respectively.
The increase of approximately $1.9 million in cash used by operations during the year ended December 31, 2023, compared to 2022, was
primarily attributable to prior year recognizing approximately $1.9 million in fair value adjustments on convertible notes payable.
Net
Cash Used in Investing Activities
The
Company used approximately $2.2 million in investing activities in 2023, compared to $0.2 million used for the year ended December 31,
2022. The increase in cash used in investing activities in 2023, compared to 2022, is attributable to the acquisition of PPLS.
Net
Cash Provided by Financing Activities
During
the year ended December 31, 2023, net cash used by financing activities was $345,000 as compared to net cash proceeds of $14.3 million
during 2022. During the year ended December 31, 2022, net cash provided by financing activities was $14.3 million primarily due to net
proceeds of approximately $6.0 million from issuance of Common Stock in our IPO, as well as proceeds of approximately $7.8 million from
the exercise of warrants and options.
Critical
Accounting Estimates
The
preparation of financial statements in conformity with GAAP in the United States 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. These estimates
relate to 3 rd party historical contractual discounts and adjustments (e.g. insurance providers) and patient historical uncollectible
amounts. There can be a significant delay from the time a patient has been serviced to the invoicing of that service and then the net
proceeds collected. Historical data is used to determine estimates for those “in service” revenues that have not been billed
or collected at the reporting period.
52
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 Company enters into contracts with its customers
for these enters. 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 ASC 842, Leases , In February 2016, the FASB issued Topic 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 increment 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.
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.
Item
8. Financial Statements and Supplementary Data.
The
information required by this item is presented at the end of this Annual Report beginning on page F-1 and is incorporated herein by reference.
Item
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
53