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. 54 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, 2024, to the year ended December 31, 2023. ● 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. 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. 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 optimization of our platform technologies are conducted in laboratories at our wholly owned subsidiary, PPLS and leased laboratory space at The University of Texas at San Antonio. Current Year Financial Highlights Key financial results for the year ended December 31, 2024 include: ● Consolidated revenue increased approximately 270% to $9.4 million as compared to $2.5 million for the year ended December 31, 2023, primarily as a result of the acquisition of PPLS in September 2023. ● CyPath ® Lung testing revenue increased approximately 1,400% to $0.5 million as compared to $35 thousand for the year ended December 31, 2023, due to an increase in total test results delivered of more than 600 for the current year. ● Raised approximately $6.9 million in gross proceeds from equity transactions to fund operating activities. Recent Financial Developments Targeted Strategic Actions In March 2025, we announced targeted strategic actions to improve financial performance and accelerate the commercial growth of CyPath® Lung, taking steps to deliver approximately $4 million in annual cost savings at our subsidiary PPLS, while increasing resources to expand CyPath® Lung sales in high-potential national markets. Specifically, cost savings are a result of labor cost reductions, operational efficiency enhancements, and discontinuing certain pathology services with suboptimal profit margins to focus on high-margin services such as CyPath ® Lung and by discontinuing certain pathology services with suboptimal profit margins. Public and Private Offerings On February 26, 2025, pursuant to the terms of the February Inducement Agreement certain holders of existing warrants exercised for cash (i) October Warrants to purchase an aggregate of up to 1,302,082 shares of Common Stock, at the reduced exercise price of $0.58 per share, and (ii) August Warrants to purchase an aggregate of up to 1,136,391 shares of Common Stock, at the reduced exercise price of $0.58 per share. We received aggregate gross proceeds of approximately $1.4 million, before deducting advisory fees and other expenses payable by us. 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 (the “February Warrants”) to purchase an aggregate of up to 2,926,166 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. 55 We agreed in the February Inducement Agreement to file a registration statement to register the resale of the shares of Common Stock (the “February Warrant Shares”) issuable upon exercise of the February Warrants (the “Resale Registration Statement”) as soon as practicable (and in any event within 45 calendar days following the date of the Inducement Agreement), and to use commercially reasonable efforts to have the Resale Registration Statement declared effective by the SEC and to keep such registration statement effective at all times until the Holders no longer own any February Warrants or February Warrant Shares. On October 21, 2024, we issued to certain institutional investors (i) in a registered direct offering, 2,048,294 shares of our Common Stock, and (ii) in a concurrent private placement (the “October Private Placement”), common warrants to purchase an aggregate of 2,662,782 shares of Common Stock, with an exercise price of $1.50, pursuant to a securities purchase agreement, dated October 18, 2024, that we entered into with such institutional investors, and received aggregate gross proceeds from the offerings of approximately $2.7 million, before deducting placement agent fees and other offering expenses. The common warrants issued in the October Private Placement became exercisable on December 20, 2024, the date that our stockholders approved the issuance of the shares of Common Stock issuable upon exercise of such warrants, and expire on December 19, 2029. 56 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, 2024, we had a working capital deficit of $0.4 million and an accumulated deficit of approximately $53.6 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, 2024 Compared to the Year Ended December 31, 2023 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, 2024 was approximately $9.0 million, compared to a net loss of approximately $7.9 million for the year ended December 31, 2023, resulting from the operational activities described below. Revenue Post-acquisition, additional revenue streams have been generated 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: (1) royalties from our diagnostic test, CyPath ® Lung, (2) clinical flow cytometry services provided to Village Oaks related to 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. Year Ended December 31, 2024 2023 Patient service fees 1 $ 8,175,670 $ 2,199,558 Histology service fees 1,103,751 272,660 Medical director fees 66,576 19,324 Department of Defense observational studies 8,654 19,442 Other revenues 7,371 21,515 Total net revenue $ 9,362,022 $ 2,532,499 1 Patient services fees includes direct billing for CyPath® Lung diagnostic test of approximately $516,000 and $35,000 for the years ended December 31, 2024 and 2023, respectively. 57 Operating Expenses Year Ended Change in 2024 December 31, Versus 2023 2024 2023 $ % Operating expenses: Direct costs and expenses $ 5,983,475 $ 1,740,884 $ 4,242,591 244 % Research and development 1,461,227 1,467,936 (6,709 ) 0 % Clinical development 321,655 256,661 64,994 25 % Selling, general and administrative 9,943,473 6,790,654 3,152,819 46 % Depreciation and amortization 605,637 249,592 356,045 143 % Total operating expenses $ 18,315,467 $ 10,505,727 $ 7,809,740 74 % Operating expenses totaled $18.3 million and $10.5 million for the years ended December 31, 2024 and 2023, 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 approximately $6.0 million and $1.7 million during 2024 and 2023, respectively. The increase of approximately $4.3 million, or 244%, was primarily attributable to the laboratory operations of PPLS being owned for the full fiscal year 2024, compared to approximately 3.5 months in fiscal year 2023. 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 $1.5 million for the years ended December 31, 2024 and 2023. Clinical Development Clinical development expenses totaled $321,655 and $256,661 for the years ended December 31, 2024 and 2023, respectively. The increase of $64,994, or 25% 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 $9.9 million and $6.8 million for the years ended December 31, 2024 and 2023, respectively. The increase of approximately $3.1 million, or 46% was primarily attributable to the laboratory operations of PPLS being owned for the full fiscal year 2024, compared to approximately 3.5 months in fiscal year 2023. Additionally, the increase was due to the expansion of sales efforts for CyPath ® Lung, partially offset by a reduction in legal and professional fees. Other Income (Expense) Year Ended Change in 2024 December 31, Versus 2023 2024 2023 $ % Interest (expense) income, net $ (74,865 ) $ 85,006 $ 159,871 (188 )% Other income (expense), net 129 (27,796 ) (27,925 ) (100 )% Total other (expense) income $ (74,736 ) $ 57,210 $ 131,946 231 % Other net income (expense) totaled $129 and $(27,796) for the years ended December 31, 2024 and 2023, respectively, an increase of approximately $28,000, or 100%. The net other expense for the year ended December 31, 2023 related to the loss on the disposal of an asset and other non-operating costs. The net other income for the year ended December 31, 2024 related to approximately a $9,000 gain on a sale of an asset and offset by property taxes. Interest income (expense) We had net interest (expense) income of approximately $(74,865) and $85,006 for the years ended December 31, 2024 and 2023, respectively. The prior 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 current year amount related to approximately $18,000 interest earned from money market account offset by interest paid in financing lease for laboratory equipment. 58 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 $42.7 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 February 2025 Warrant Inducement On February 26, 2025, pursuant to the terms of the February Inducement Agreement certain holders of existing warrants exercised for cash (i) October Warrants to purchase an aggregate of up to 1,302,082 shares of Common Stock, at the reduced exercise price of $0.58 per share, and (ii) August Warrants to purchase an aggregate of up to 1,136,391 shares of Common Stock, at the reduced exercise price of $0.58 per share. We received aggregate gross proceeds of approximately $1.4 million, before deducting advisory fees and other expenses payable by us. 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 2,926,166 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. October 2024 Registered Direct Offering and Concurrent Private Placement On October 21, 2024, we issued to certain institutional investors (i) in a registered direct offering, 2,048,294 shares of our Common Stock, and (ii) in a concurrent private placement, common warrants to purchase an aggregate of 2,662,782 shares of Common Stock, with an exercise price of $1.50, pursuant to a securities purchase agreement, dated October 18, 2024, that we entered into with such institutional investors, and received aggregate gross proceeds from the offerings of approximately $2.7 million, before deducting placement agent fees and other offering expenses. August 2024 Warrant Inducement, Registered Director Offering and Concurrent Private Placement On August 5, 2024, pursuant to the terms of the August Inducement Agreement, certain holders of existing warrants, exercised for cash March Warrants to purchase an aggregate of up to 1,041,667 shares of Common Stock, at the reduced exercise price of $1.25 per share. We received aggregate gross proceeds of approximately $1.3 million, before deducting advisory fees and other expenses payable by us. In consideration of the immediate exercise of the March Warrants by the holders thereof in accordance with the August Inducement Agreement, we issued unregistered common warrants to purchase an aggregate of up to 1,302,082 shares of Common Stock (120% of the number of shares of Common Stock issuable upon exercise of the March Warrants) to such holders. On August 5, 2024, we also issued to an institutional investor (i) in a registered direct offering, 360,000 shares of Common Stock, and (ii) in a concurrent private placement, warrants to purchase an aggregate of 450,000 shares of Common Stock, with an exercise price of $1.50. We received aggregate gross proceeds from the offerings of approximately $450,000, before deducting fees payable to the placement agent and other estimated offering expenses. March 2024 Registered Direct Offering and Concurrent Private Placement On March 8, 2024, we issued to certain investors, pursuant to a Securities Purchase Agreement (1) 1,600,000 shares of Common Stock in a registered direct offering, and (2) warrants to purchase an aggregate of 1,600,000 shares of Common Stock with an exercise price of $1.64, in a concurrent private placement. The direct offering resulted in gross proceeds of $2.5 million. 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 2024 and 2023, we had net losses of $9.0 million and $7.9 million, respectively, and we expect to incur substantial additional losses in future periods. We have an accumulated deficit of approximately $53.6 million as of December 31, 2024. Based on our current expected level of operating expenditures and the cash on hand of approximately $390 thousand 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 April 2025. Cash and cash equivalents were approximately $1.1 million as of December 31, 2024, which does not take into account the gross proceeds of $1.4 million that we received in February 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. Cash Flows The following information reflects cash flows for the years presented: Year Ended December 31, 2024 2023 Cash and cash equivalents at beginning of year $ 2,821,570 $ 11,413,749 Net cash used in operating activities (7,264,795 ) (6,037,806 ) Net cash used in investing activities (79,083 ) (2,209,399 ) Net cash provided by (used in) financing activities 5,627,599 (344,984 ) Cash and cash equivalents at end of year $ 1,105,291 $ 2,821,570 Net Cash Used in Operating Activities Net cash used in operating activities was approximately $7.3 million and $6.0 million for the years ended December 31, 2024 and 2023, respectively. The increase of approximately $1.3 million in cash used by operations was primarily attributable to the laboratory operations of PPLS being owned for the full fiscal year 2024, compared to approximately 3.5 months in fiscal year 2023. Additionally, the increase was due to the expansion of sales efforts for CyPath ® Lung. 59 Net Cash Used in Investing Activities We used approximately $79,000 in investing activities for the year ended December 31, 2024, compared to $2.2 million used for the year ended December 31, 2023. The significant decrease of $1.4 million in cash used in investing activities was primarily due to equipment purchases in the current year, and the investing activities in the prior year related to the acquisition of PPLS. Net Cash Provided by Financing Activities During the year ended December 31, 2024, net cash provided by financing activities was $5.5 million as compared to net cash used in financing activities of $0.3 million during 2023, representing an increase of approximately $5.9 million. During the year ended December 31, 2024, net cash provided by financing activities was primarily due to net proceeds of approximately $5.8 million from issuance of Common Stock and, option and warrant exercises, partially offset by financing payments. 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. 60 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, 2024. 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.