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Clinical
Validation, Certification, and Classification of CyPath® Lung
A
19-month test validation clinical trial of CyPath® Lung6 collected sputum noninvasively from people at high
risk for lung cancer, including patients with the disease (N=28) and those cancer-free (N=122). Patients collected their sputum sample
over three days at home before bringing their sample to the clinical collection site. Samples were shipped overnight to the laboratory
for analysis. Study participants in the high-risk cohort had a CT to confirm they did not have lung cancer. Those in the cancer cohort
had imaging and a biopsy that confirmed lung cancer. After providing a sputum sample, participants were released from the study after
a physician either confirmed the individual was cancer-free by examination of CT imaging or confirmed the presence of lung cancer by
biopsy. Flow cytometry and patient data used in analysis to produce the results included (1) the proportion of cells with a high ratio
of high TCPP fluorescence intensity over cell size; (2) the proportion of cells with an intermediate ratio of fluorescence intensity
caused by the viability dye (FVS510) over cell size; (3) the proportion of cells that were CD206 negative but positive for one or more
of the following markers: CD66b (granulocytes), CD3 (T cells), and CD19 (B cells); and (4) patient age.
4 |
T. Neumann, et al., Premalignant and Malignant Cells in Sputum
From Lung Cancer Patients, Cancer Cytopathology, Dec. 25, 2009, page 473-481. |
|
|
5 |
El-Far MA, Pimstone N. A comparative study of 28 porphyrins
and their abilities to localize in mouse mammary carcinoma: uroporphyrin I superior to hematoporphyrin derivative. Prog Clin Biol Res.
1984;170:661–672. |
|
|
6 |
M.E. Lemieux, et al., Detection of Early-Stage Lung Cancer
in Sputum using Automated Flow Cytometry and Machine Learning. Respir Res. 2023;24(1):23. doi: 10.1186/s12931-023-02327-3. |
More
than half of those in the cancer cohort had lung cancer in the earlier Stages I-II. The analysis, performed on an LSRII flow cytometer,
resulted in 92% sensitivity and 87% specificity in the subgroup of these patients (N=132) who had no nodules or lung nodules smaller
than 20 mm on their LDCT scan, while eight out of 10 (80%) of Stage I tumors were correctly identified. Sensitivity is the percentage
of persons with the disease – in this case lung cancer – who are correctly identified by the test. Specificity is the percentage
of persons without lung cancer who are correctly identified by the test. The cancer group included all lung cancer types, but mostly
squamous cell carcinoma and adenocarcinoma lung cancer (in near equal numbers), showing that CyPath® Lung detects all
types of lung cancer.
Following
completion of the test validation trial, CyPath® Lung was evaluated independently by Precision Pathology, which developed
the test for sale as an LDT in accordance with CAP/CLIA standards. An LDT is a type of in vitro diagnostic (“IVD”)
test that is developed, validated, and performed within a single laboratory. CyPath® Lung has been validated and is being
performed by Precision Pathology, a CAP-accredited, CLIA-certified clinical pathology laboratory in San Antonio, Texas, pursuant to a
joint development agreement with the Company. In third quarter 2022, Precision was inspected by CAP in accordance with CAP/CLIA regulatory standards and regulations
resulting in continued accreditation for the laboratory and the CyPath® Lung test as an LDT.
As
part of CAP/CLIA certification, Precision Pathology evaluated the performance of CyPath® Lung employing its own laboratory
technicians and a different flow cytometer, the Navios EX. Results of Precision Pathology’s certification were comparable to those
from the test validation trial and demonstrated that CyPath® Lung remains robust to differences in sample handling, processing,
and the type of flow cytometer.
bioAffinity
Technologies intends to voluntarily seek FDA clearance of the CyPath® Lung as a Class II IVD medical device for the detection
of lung cancer. The Company has designed its pivotal trial with guidance from its clinical research organization (“CRO”),
Courante Oncology, and has prepared a pre-submission that will be submitted to the FDA for review and feedback. We anticipate a three-year
diagnostic trial including an 18-month patient enrollment of approximately 1,800 patients, with participants followed for at least one
year after enrollment to determine whether they have lung cancer. Similar to the test validation trial, the planned pivotal trial will
analyze flow cytometry and patient data including (1) the proportion of cells with a high ratio of high TCPP fluorescence intensity over
cell size; (2) the proportion of cells with an intermediate ratio of fluorescence intensity caused by the viability dye (FVS510) over
cell size; (3) the proportion of cells that were CD206 negative but positive for one or more of the following markers: CD66b (granulocytes),
CD3 (T cells), and CD19 (B cells); and (4) patient age. Patient enrollment is scheduled to begin in 2023 at up to 20 collection sites.
Assuming the study is successful, we intend to submit a de novo classification request to the FDA within six months of study completion.
The
Patient- and Physician-Friendly CyPath® Lung Process
CyPath®
Lung is designed to be noninvasive and patient friendly. The diagnostic process uses sputum that is obtained noninvasively in the privacy
of a patient’s home. Physicians order the test for their patients after lung cancer screening reveals a lung nodule considered
to be indeterminate because of the nodule size and lack of suspicious characteristics. Lung nodules are considered indeterminate if their
size is between 6-20 mm in diameter. Lung nodules of that size are associated with a lung cancer risk as low as 0.5% and up to 16%.7
For
the CyPath® Lung test, patients are given a small sample collection kit during an office visit with their physician. (See
Figure 1 below.) From the privacy of the patient’s home, the patient collects a sample of his or her sputum over three days using
a hand-held assist device that comes in the collection kit called an acapella® Choice Blue made by Smiths Medical, which
acts to break up mucus in the patient’s lung and facilitates the patient’s ability to cough up sputum from the lung into
a collection cup that is also supplied with the kit. In addition to the kit’s step-by-step instructions, an instructional video
and a live patient coach are available by calling 855-MYLUNGS to help patients with sample collection. With the patient’s permission,
the patient coach will proactively call or text patients to offer assistance. After the three-day sample of sputum is collected in the
collection cup, the patient puts the collection cup into the kit and uses a pre-addressed envelope provided in the kit to overnight the
sample to the laboratory.
7 |
Gierada et al; https://pubmed.ncbi.nlm.nih.gov/25326638/. |
At
the laboratory, the sputum is processed by technicians into a single-cell suspension and labeled with TCPP, which preferentially binds
to cancer cells and/or cancer-related cells. Cells are also stained with fluorescently labeled antibodies that identify hematopoietic
and epithelial cells within the sputum sample. A viability dye is used to eliminate dead cells. The sputum sample is analyzed using flow
cytometry, which allows an average sputum sample containing about 20 million cells to be profiled in less than 20 minutes. A laboratory
technician skilled in general laboratory techniques can accomplish sample processing, labeling, and data collection.
Physicians
receive test results within three days after the laboratory receives the patient’s sputum sample. CyPath® Lung testing
helps identify patients who should undergo more aggressive follow-up procedures to confirm a suspected lung cancer. When CyPath®
Lung sample analysis determines a patient is unlikely or very unlikely to have lung cancer, the result can serve to support a physician’s
decision to monitor this patient by following a recommended LDCT screening routine.
![](https://content.edgar-online.com/edgar_conv_img/2023/03/31/0001493152-23-010186_form10-k_01.jpg)
Figure
1. Patient- and Physician-Friendly CyPath® Lung Process.
CyPath®
Lung Research and Clinical Studies
The
high affinity of TCPP for cancer and cancer-related cells and its fluorescent nature makes it an excellent bio-label for cancer. The
CyPath® Lung technology is based on this concept and scientific work originating at Los Alamos National Laboratory in
collaboration with St. Mary’s Hospital in Colorado. A blinded clinical trial8 (Patriquin, et. al, 2015) of an earlier
version of CyPath® Lung used a microscope to directly identify cells labeled with TCPP in one-third or less of the sputum
sample. For each trial participant, researchers manually scanned 12 microscope slides labeled with TCPP for the presence of red fluorescing
cells (“RFCs”) displaying a spectral signature that indicated uptake of TCPP in the cell. In addition to measuring the spectral
signature, the fluorescent intensity and cell size of RFCs were measured. The test data, including fluorescent intensity over cell size,
was analyzed. The Patriquin trial was conducted over 24 months and resulted in 81% test accuracy, 77.9% sensitivity, and 65.7% specificity
in the ability to correctly differentiate between samples from lung cancer patients and those at high risk who were cancer-free. The
Patriquin trial required participants to provide a sputum sample and CT imaging of the lungs. Those in the cancer cohort underwent a
biopsy to confirm lung cancer. High-risk patients displaying indeterminate nodules were followed for 18 months to confirm they were cancer-free.
The Patriquin study concluded that optimizing the test to provide for analysis of the entire sputum sample would improve results.
8 |
Patriquin, et.al., Early detection of lung cancer with Meso-Tetra (4-Carboxyphenyl) Porphyrin-Labeled Sputum, J Thorac Oncol. 2015;10(9):1311-1318.
doi: 10.1097/JTO.0000000000000627. |
The
Company continued development of its lung cancer diagnostic technology culminating in a flow cytometry-based CyPath® Lung
test incorporating automated AI analysis that evaluates the entire sputum sample. A blinded diagnostic trial of the advanced test9
(Lemieux, et al, 2023) resulted in 92% sensitivity and 87% specificity in the subgroup of these patients (N=132) who had no nodules
or lung nodules smaller than 20 mm on their LDCT scan, while eight out of 10 (80%) of Stage I tumors were correctly identified. The cancer
group included all lung cancer types, but mostly squamous cell carcinoma and adenocarcinoma lung cancer (in near equal numbers), showing
that CyPath® Lung detects all types of lung cancer.
All
studies performed to date are summarized in the table below.
CyPath®
Lung Studies and Clinical Trials
Study
Description |
|
Results
|
|
|
|
Porphyrin’s
localization and evaluation of cancer cell uptake of four different porphyrins |
|
TCPP
porphyrin localizes more than other porphyrins in cancer cells; higher uptake of TCPP in cancer cells than in normal cells. Uptake
was determined by visual assessment. Cell lines were used. Researchers did not report the length of time taken to conduct this study,
nor any follow-up. |
|
|
|
Blinded
study to diagnose lung cancer by labeling sputum with TCPP and identifying red fluorescing cells under a microscope |
|
Study
of uranium miners (cancer N=8 / healthy N=4) that labeled sputum with TCPP resulted in 100% sensitivity and 100% specificity. Classification
of cancer was made by subjective visual assessment of the presence and intensity of red fluorescing cells on slides. In this blinded
study, one patient initially enrolled as a healthy subject was correctly diagnosed with cancer by the test. Length of study not reported.
No patient follow-up was reported except for correct detection of cancer in patient initially enrolled as healthy. |
|
|
|
Internal
validation study with microscopy-based assay completed to optimize TCPP labeling of sputum containing cancer and cancer-related cells
in lung cancer samples |
|
In
this research study lasting eight months, the florescence intensity of TCPP-labeled cells in sputum was measured by subjective visual
assessment of microscope slides to distinguish samples from cancer and healthy cohorts. Researchers who were blinded to sample origin
correctly identified samples from lung cancer patients (cancer N=15 / healthy N=12) resulting in 100% sensitivity and 100% specificity.
Participants were not followed up after providing the sputum sample and CT scan or biopsy. |
9 |
M.E.
Lemieux, et al. Detection of Early-Stage Lung Cancer in Sputum using Automated Flow Cytometry and Machine Learning. Respir Res. 2023;24(1):23.
doi: 10.1186/s12931-023-02327-3. |
Early
Detection of Lung Cancer with Meso-Tetra (4-Carboxyphenyl) Porphyrin-Labeled Sputum10 |
|
A
24-month clinical trial of 128 high-risk smokers and cancer patients used microscopy-based assay to identify TCPP-labeled cells in
sputum (cancer N=26 / high risk N=102) that resulted in 81% accuracy, 77.9% sensitivity, 65.7% specificity. Slides were scanned.
Fluorescent intensity and cell size of RFCs were objectively measured by software. High-risk participants who were cancer-free were
followed for 18 months to confirm status. |
|
|
|
Sputum
analysis by flow cytometry; an effective platform to analyze the lung environment.11 |
|
Research
reporting on the CyPath® Lung test’s quality controls included manual analysis of cell population data acquired
by flow cytometry analysis of sputum. This research evaluated flow cytometry data from 164 participants’ sputum samples analyzed
manually for differences in cell characteristics, cell population size, and cell fluorescence intensity. |
|
|
|
Detection
of Early-Stage Lung Cancer in Sputum using Automated Flow Cytometry and Machine Learning12
|
|
Test
validation clinical trial using bioAffinity’s automated flow cytometry CyPath® Lung test (cancer N=28 / high risk
N=122) resulted in overall 82% sensitivity and 88% specificity for the test; CyPath® Lung sensitivity is 92% and specificity
is 87% for patients with lung nodules smaller than 20 mm.
|
|
|
|
Porphyrin-modified
beads for use as compensation controls in flow cytometry13 |
|
Reporting
on the protocol for preparing porphyrin-labeled compensation beads invented by bioAffinity and used to optimize the results of CyPath®
Lung test to detect early-stage lung cancer. |
The
Cancer Diagnostics Market and CyPath® Lung
The
global cancer diagnostic market is projected to grow from an estimated $172.3 billion in 2022 to $293.5 billion in 2030, with a compound
annual growth rate (“CAGR”) of 6.8%.14 The market worldwide for lung cancer diagnostic tests was estimated at
$2.6 billion in 2022 and is projected to reach $4.7 billion by 2030, with a CAGR of 7.8% over 2022-2030.15 bioAffinity Technologies
has the potential to play a significant role in the cancer diagnostic market because our platform is noninvasive, easy to use, cost-effective,
and has a potential to lead to better patient outcomes. (See Analysis of the Potential Diagnostic, Patient And Economic Impact of
CyPath® Lung When Used After LDCT Screening to Detect Lung Cancer, bioAffinity Technologies Internal Analysis with citations,
2022; attached as Appendix I of the Company’s Final Prospectus filed with the SEC on September 2, 2022, pursuant to Rule 424(b)(4)
under the Securities Act) (see https://www.sec.gov/Archives/edgar/data/1712762/000149315222024949/form424b4.htm).
10 |
Patriquin, et al. Early Detection of Lung Cancer with Meso-Tetra (4-Carboxyphenyl) Porphyrin-Labeled Sputum. J Thorac Oncol. 2015;10(9):1311-1318.
doi: 10.1097/JTO.0000000000000627. |
|
|
11 |
Bederka, et al. Sputum analysis by flow cytometry; an effective platform to analyze the lung environment. PLoS One 2022;17(8). doi: 10.1371/journal.pone.0272069. |
|
|
12 |
M.E. Lemieux, et al. Detection of Early-Stage Lung Cancer in Sputum using Automated Flow Cytometry and Machine Learning. Respir Res.
2023;24(1):23. doi: 10.1186/s12931-023-02327-3. |
|
|
13 |
Bauta, et al., Porphyrin-modified beads for use as compensation controls in flow cytometry, Journal of Visualized Experiments (JoVE)
2023, CITATION |
|
|
14 |
Research and Markets. Cancer Diagnostics Market Size, Share & Trends Analysis Report by Product (Consumables, Instruments), by Technology,
by Screening Type, by Application, by End-user, by Region, and Segment Forecasts, 2022-2030. Oct. 2022. ResearchAndMarkets.com. |
|
|
15 |
ReportLinker. Global Lung Cancer Diagnostics Industry. Jan. 2023. ReportLinker.com. |
CyPath®
Lung is currently utilized as a diagnostic tool for detecting early-stage lung cancer. bioAffinity is conducting research for the
expansion of its flow cytometric platform technology to detect and monitor lung diseases, such as Chronic Obstructive Pulmonary Disease (COPD) and asthma, and other cancers.
The
Company licensed CyPath® Lung to Precision Pathology, which began marketing CyPath® Lung in Texas as an
LDT in accordance with CAP/CLIA regulations pursuant to the terms of the joint development agreement between the Company and Precision
Pathology. Limited funds were available to market CyPath® Lung until the Company completed its IPO in September 2022.
CyPath® Lung is sold to physicians who order CyPath® Lung for patients at high risk for lung cancer after
an LDCT confirms the presence of lung nodule(s).
As
a front-end diagnostic tool used in conjunction with LDCT, the Company’s lung cancer test will help determine whether more expensive,
specialized, and/or invasive tests are warranted. CyPath® Lung compares favorably to current standards of care for diagnosing
lung cancer, including invasive biopsies, as seen in the table shown below.
Comparison
of CyPath® Lung to Current Standards of Care
Diagnostic Test or
Procedure |
|
Intended
Patient |
|
Sensitivity |
|
Specificity |
|
Procedural
Risk |
|
|
|
|
|
|
|
|
|
CyPath®
Lung16 |
|
High
risk |
|
82% |
|
88% |
|
None |
|
|
|
|
|
|
|
|
|
CyPath®
Lung |
|
High
risk – nodules less than 20 mm |
|
92% |
|
87% |
|
None |
|
|
|
|
|
|
|
|
|
Low
Dose CT screening17 |
|
High
risk |
|
93.80% |
|
73.40% |
|
Radiation
exposure |
|
|
|
|
|
|
|
|
|
FDG
PET imaging18 |
|
Suspicious
lung nodules |
|
88% |
|
75% |
|
Radiation
exposure |
|
|
|
|
|
|
|
|
|
Bronchoscopy19 |
|
Suspicious
lung nodules – central lesions |
|
88% |
|
47% |
|
Invasive,
risk of
collapsed/bleeding lung infection |
|
|
|
|
|
|
|
|
|
Fine
Needle Biopsy20 |
|
Suspicious
lung nodules |
|
90.4% |
|
75.4% |
|
Invasive,
risk of
collapsed/bleeding lung infection |
|
|
|
|
|
|
|
|
|
Core
Needle Biopsy21 |
|
Suspicious
lung nodules |
|
89.1% |
|
88.6% |
|
Invasive,
risk of
collapsed/bleeding lung infection |
16 |
Rebel, VI, et al. Automated Flow Cytometry Test Distinguishes
Cancer from Non-Cancer in Sputum with High Sensitivity and Specificity, poster, 2020 World Conference on Lung Cancer. January 2021. |
|
|
17 |
National Lung Screening Trial Research Team, Church TR, Black
WC, Aberle DR, Berg CD, Clingan KL, et al. Results of initial low dose computed tomographic screening for lung cancer. N Engl J Med.
2013;368(21):1980-1991. doi: 10.1056/NEJMoa1209120. |
|
|
18 |
Deppen SA, et al. Accuracy of FDG-PET to diagnose lung cancer
in areas with infectious lung disease: a meta-analysis, JAMA. 2014;312(12):1227-1336. doi: 10.1001/jama.2014.11488. |
|
|
19 |
Silvestri GA, et al. A bronchial genomic classifier for the
diagnostic evaluation of lung cancer. N Engl J Med. 2015;373:243-251. doi: 10.1056/NEJMoa1504601 |
|
|
20 |
Yao X, Gomes MM, Tsao MS, Allen CJ, Geddie W, Sekhon H. Fine-needle
aspiration biopsy versus core-needle biopsy in diagnosing lung cancer: a systemic review. Curr Oncol. 2012;19(1):e16-e27. doi: 10.3747/co.19.871. |
|
|
21 |
Zhang Y, Luo G, Etxeberria J, Hao Y. Global patterns and trends
in lung cancer incidence: a population-based study. J Thorac Oncol. 2021;16:933–944. |
bioAffinity’s
business model is to immediately address the need for a quick-to-market, noninvasive, cost-effective lung cancer diagnostic that will
save lives and reduce medical costs. The Company is ready to capture a growing market. The U.S. Preventive Services Task Force recommended
doubling the number of Americans at high risk for lung cancer who are recommended for annual screening from 9 million to an estimated
18 million. China has an estimated 300 million smokers.46 The European Union is estimated to have 34 million people at high
risk for lung cancer. Following its entry into the U.S. market, the Company expects to pursue CE marking of CyPath® Lung
for sale in the European Union and is pursuing collaboration with a strategic partner to develop the test for the China market.
bioAffinity
conducted market research with pulmonologists, oncologists, cardiothoracic surgeons, radiologists, and internists engaged in the diagnosis
and treatment of lung cancer to help assess these stakeholders’ reactions to the new diagnostic, CyPath® Lung. Research
revealed a strong interest in CyPath® Lung, driven by the high level of unmet clinical need for noninvasive diagnostics.
A survey conducted with 240 pulmonologists and internists, the primary audience for the test, showed that 96% would use CyPath®
Lung if it were available today as an adjunct used for diagnosis after LDCT screening. Physicians see the value of a noninvasive
diagnostic technology with the ability to confirm or rule out cancer and reduce the number of costly invasive procedures that result
from LDCT’s low positive predictive rate.
CyPath®
Lung Business Development Plan
We
believe in the viability of the Company’s Business Plan based on the circumstances surrounding our business that are known to us
as of the date of this report. However, the timing, strategies, and stages of our Business Plan may evolve in light of new circumstances
that cannot be predicted with certainty at this time. Our Business Plan envisions four phases of expanding market entry into the U.S.,
the EU, and worldwide that are timed to maximize Company resources and minimize market risk. Phase 1 of our Business Plan begins with
a controlled market launch of the Company’s LDT CyPath® Lung in Texas followed by expansion into the Southwest market
area. Limited marketing was undertaken prior to the IPO that provided funds necessary to begin our controlled market launch. In February
2023, the Company announced that the marketing and advertising firms of Havas Health & You and Trinity Life Sciences had been engaged
to build the CyPath® Lung brand and position it for success in the cancer diagnostics sector. Havas Health & You,
the world’s largest global health network, is creating the branding and broader marketing strategy to align with the need for a
patient-friendly diagnostic that gives physicians another tool to assess the potential or presence of lung cancer in their high-risk
patients. Trinity Life Sciences is providing advisory services, insights, and analytics to bioAffinity Technologies’ marketing
strategy for CyPath® Lung. The Company expects to begin a staged nationwide expansion of sales and marketing following
the successful completion of its controlled launch in 2023. Phase 2 of our Business Plan anticipates entering the EU market with CyPath®
Lung as a CE-marked IVD test with sales in the Netherlands, followed by a staged EU expansion. Phase 3 of our Business Plan focuses
on the marketing of an FDA-cleared CyPath® Lung test, beginning with a pivotal clinical trial in the U.S. Phase 4 of our
Business Plan accelerates the market presence of CyPath® Lung in countries in Asia, Eastern Europe, and Australia after
obtaining FDA marketing authorization in 2026.
At
each phase of commercialization, bioAffinity Technologies will develop messaging and marketing programs, including key convention attendance,
digital marketing, social media presence, and advertising, to create an “inbound” lead generation mechanism that delivers
our message to our target audience. In addition, bioAffinity will collaborate with key opinion leaders (“KOLs”) to expand
our third-party reference and speaking pool of experts. The Company will provide support and collateral materials, including posters,
presentations, videos, and peer-reviewed papers, to our KOLs who will present data and their experience with CyPath® Lung
at key meetings. This content can be shared across platforms, including websites and sales tools, and will be used as references to support
our product claims as well as sales and marketing efforts to physicians, reference laboratories, and patients. We will also work with
lung cancer advocacy groups throughout all phases to support the message that routine screening can diagnose cancer at an early stage
and save lives.
The
Competition for CyPath® Lung
In
2022, we evaluated 67 companies advancing tests for the early detection of lung cancer that provided at least a scientific foundation
for their tests. These competitors are investigating lung cancer screening and diagnostic methods that use various types of collected
samples (blood, breath, nasal epithelial cells, saliva, sputum, and urine) or imaging systems. Of those 67 companies, we found that only
11 had conducted clinical studies in a manner and with results that could lead to further analysis. The majority of these 11 tests are
in research and development, with only four tests on the market and one available to a limited number of medical centers. Although CyPath®
Lung was never tested directly against any of these five tests, comparison of the published performance numbers suggests CyPath®
Lung might outperform them all. (See Summary of Comparative Performance Analysis of Tests on the Market, bioAffinity Technologies
Internal Analysis, 2022; attached as Appendix II of the Company’s Final Prospectus (see https://www.sec.gov/Archives/edgar/data/1712762/000149315222024949/form424b4.htm)).
From
the 67 companies we evaluated, we found only seven tests, including CyPath® Lung, that represent a balanced test for early
lung cancer detection and that have advanced to the point that there is sufficient data for evaluation. Of our six competitors with well-balanced
tests (two sell the same test; one in the U.S. and one in China), four companies (20/20 GeneSystems48,49; Nuclexi50;
Savicell51; Visongate52) conducted their studies on a population that does not match the high-risk population for
which the test is intended. Their clinical data, therefore, is suspect as it applies to the population of patients who actually will
use the test. The two remaining balanced tests are not on the market.
We
believe there are many reasons why CyPath® Lung is a superior test when compared to its competitors. First, lung sputum
is an excellent medium for early lung cancer detection because sputum is in close contact with the tumor and pre-cancerous areas that
shed cancer and pre-cancerous cells directly into the sputum, can be obtained noninvasively, and can be transported easily. Moreover,
sputum contains immune cell populations in reaction to the presence of a tumor. Second, bioAffinity’s proprietary technology is
straightforward. bioAffinity’s CyPath® Lung platform technology is not a molecular test and does not collect genetic
material that requires immediate processing. CyPath® Lung uses well-established flow cytometry techniques to investigate
cells contained in the sputum for characteristics that indicate whether cancer is present. Sample processing is straightforward, and
laboratory technicians can be easily trained. Reagents used by the test are widely available. Data acquisition and analysis is fully
automated, allowing for efficient test results. Third, CyPath® Lung has shown high specificity and sensitivity that is
similar to far more invasive and more expensive procedures currently used to detect lung cancer. Fourth, CyPath® Lung
is cost effective. Existing CPT cost codes that have a reimbursable track record have been identified for use with CyPath. Fifth and
as important as any of our test’s benefits, CyPath® Lung is patient friendly, providing at-home sample collection
that is noninvasive and offers particular benefit during a public healthcare crisis like the coronavirus pandemic.
For
a discussion of our competitors and competitive analysis, please see the “Business – The Competition for CyPath®
Lung” section of our Final Prospectus (see https://www.sec.gov/Archives/edgar/data/1712762/000149315222024949/form424b4.htm).
Research and Development
Activities
The Company is continuing its
research and development activities pertaining to diagnostics that include multiple studies we believe will support FDA final approval
of CyPath® Lung, which we will seek after the pivotal trial is complete. Our scientists also have begun preliminary studies
toward the development of CyPath® Lung for detection of Chronic Obstructive Pulmonary Disease (COPD) and the assay’s
use with bronchoalveolar lavage fluid (BAL). With regard to therapeutic research, the Company continues its experiments focused on establishing
proof-of-concept for our discovery that the silencing or knockdown of two genes that each encode a cell surface receptor results in cancer
death without much harm to healthy cells with the intent of advancing toward animal studies.
Intellectual
Property Portfolio
As
of March 31, 2023, the Company and its subsidiary OncoSelect have a patent estate that includes 14 issued U.S. and foreign counterpart
patents, including two U.S. patents and twelve foreign counterpart patents in Australia, Canada, China, France, Germany, Hong Kong, Italy,
Mexico, Spain, Sweden, and the United Kingdom. One U.S. patent and nine counterpart foreign patents directed at diagnostic applications
expire in 2030. Therapeutic patents registered in Australia, China Mexico and the U.S. expire in 2037.
With
regard to our diagnostic test CyPath® Lung and other diagnostic candidates, we have one issued U.S. patent and nine foreign
counterpart patents in Canada, China, France, Germany, Hong Kong, Italy, Spain, Sweden, and the United Kingdom. With regard to our diagnostic
patent applications, one family is directed at diagnosing lung health using flow cytometry, and the other family is directed at proprietary
compensation beads used to calibrate the flow cytometry instrument and used in CyPath® Lung data acquisition. Pending
applications directed at diagnosing lung health include one pending U.S. non-provisional patent application and eight foreign counterpart
patent applications in Australia, Canada, China, European Patent Office, Hong Kong, Japan, Mexico, and Singapore filed in 2019, one Patent
Cooperation Treaty (PCT) International Application directed to the composition of compensation beads and one PCT International Application
directed to diagnosing lung health using flow cytometry were filed in 2022.
With
regard to our therapeutic product candidates, we have one issued U.S. patent, two pending U.S. patent applications, three issued foreign
patents, ten foreign applications pending in Canada, China, European Patent Office, Hong Kong, India, and Japan and one pending PCT International
Application,. The therapeutic intellectual property is made up of four families directed at our therapeutic product candidates, including
two families directed at siRNA product candidates, one family directed at soluble CD320 used in the treatment of cancer, and one family
directed at porphyrin conjugates for treating cancer.
Government
Regulation
For
a discussion of the extensive government regulation that the Company and our IVD medical device, CyPath® Lung, are subject
to, please see the “Business – Government Regulation” section of our Final Prospectus (see https://www.sec.gov/Archives/edgar/data/1712762/000149315222024949/form424b4.htm).
Our
Employees
The
Company places significant emphasis on the recruitment, development, and retention of its employees who include award-winning scientists
dedicated to advancing scientific discovery from bench to bedside. Of the Company’s 14 employees, all of whom are employed full-time
by the Company, one holds an MD and seven hold PhDs in biology or medicinal chemistry. Approximately nine employees are engaged in research
and development and approximately five in sales or general administration.
Our
Executive Vice President and Chief Medical and Science Officer, Vivienne Rebel, holds an MD and PhD. Business development is led by our
Vice President of Operations, Xavier Reveles, who has 25 years of experience as a clinical geneticist skilled in the creation and management
of CLIA clinical laboratories, coding, and CPT reimbursement valuations. Mr. Reveles is board certified by the American Society of Clinical
Pathology as a clinical specialist in cytogenetics who has successfully launched multiple diagnostics and commercial laboratories. The
innovative and collaborative culture at bioAffinity is in part responsible for the high degree of retention and professional advancement.
Of those employees hired prior to 2022, most have been with the Company for more than five years of its nine-year history. Outside partnerships
and collaborations that advance business and scientific research are encouraged, allowing the Company to multiply workforce efforts without
expending significant capital.
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.
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.
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 | |
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.
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 | |
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 | % |
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.
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.
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.
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.
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.
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 | |
$ | — | | |
$ | — | |
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.