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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended September 30, 2024
     
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from ______ to ______.

 

COMMISSION FILE NUMBER: 001-41463

 

bioAffinity Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   46-5211056
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
3300 Nacogdoches Road, Suite 216, San Antonio, Texas   78217
(Address of principal executive offices)   (Zip Code)

 

(210) 698-5334

(Registrant’s telephone number, including area code)

 

22211 W. Interstate, Suite 1206, San Antonio Texas, 78257

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.007 per share   BIAF   The Nasdaq Stock Market LLC
Tradeable Warrants to purchase Common Stock   BIAFW   The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer ☐ Accelerated filer ☐
  Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Sec 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

The number of shares of the issuer’s common stock outstanding as of November 12, 2024, was 15,584,635.

 

 

 

 

 

 

Throughout this Quarterly Report on Form 10-Q (this “Quarterly Report”), the terms “bioAffinity,” “bioAffinity Technologies,” “we,” “us,” “our” or “the Company” refer to bioAffinity Technologies, Inc., a Delaware corporation, and its wholly owned subsidiaries, OncoSelect® Therapeutics, LLC, a Delaware limited liability company, and Precision Pathology Laboratory Services, LLC, a Texas limited liability company.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are predictive in nature, depend on or refer to future events or conditions, and are sometimes identified by words such as “may,” “could,” “plan,” “project,” “predict,” “pursue,” “believe,” “expect,” “estimate,” “anticipate,” “intend,” “target,” “seek,” “potentially,” “will likely result,” “outlook,” “budget,” “objective,” “trend,” or similar expressions of a forward-looking nature and the negative versions of such expressions. The forward-looking information contained in this report is generally located under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locations as well. The forward-looking statements in this report generally relate to the plans and objectives for future operations of bioAffinity Technologies, Inc. and are based on our management’s reasonable estimates of future results or trends. Although we believe these forward-looking statements are reasonable, all forward-looking statements are subject to various risks and uncertainties, and our projections and expectations may be incorrect. The factors that may affect our expectations regarding our operations include, among others, the following:

 

  our projected financial position and estimated cash burn rate;
     
  our estimates regarding expenses, future revenues, and capital requirements;
     
  the success, cost, and timing of our clinical trials;

 

  our ability to obtain funding for our operations necessary to complete further development and commercialization of our diagnostic tests or therapeutic product candidates;
     
  our dependence on third parties, including the conduct of our clinical trials;
     
  our ability to obtain the necessary regulatory approvals to market and commercialize our diagnostic tests or therapeutic product candidates;
     
  the potential that the results of our pre-clinical and clinical trials indicate our current diagnostic tests or any future diagnostic tests or therapeutic product candidates we may seek to develop are unsafe or ineffective;
     
  the results of market research conducted by us or others;
     
  our ability to obtain and maintain intellectual property (“IP”) protection for our current diagnostic test or future diagnostic tests and therapeutic product candidates;
     
  our ability to protect our IP rights and the potential for us to incur substantial costs from lawsuits to enforce or protect our IP rights;

 

  the possibility that a third party may claim we or our third-party licensors have infringed, misappropriated, or otherwise violated their IP rights and that we may incur substantial costs and be required to devote substantial time defending against such claims;
     
  the success of competing therapies, diagnostic tests, and therapeutic products that are or will become available;
     
  our ability to expand our organization to accommodate potential growth and to retain and attract key personnel;
     
  our potential to incur substantial costs resulting from product liability lawsuits against us and the potential for such lawsuits to cause us to limit the commercialization of our diagnostic tests and therapeutic product candidates;
     
  market acceptance of our diagnostic test and diagnostic tests in development and therapeutic product candidates, the size and growth of the potential markets for our current diagnostic test, diagnostic tests in development, and therapeutic product candidates, and any future diagnostic tests and therapeutic product candidates we may seek to develop, and our ability to serve those markets;
     
  the successful development of our commercialization capabilities, including sales and marketing capabilities;
     
  compliance with government regulations, including environmental, health, and safety regulations, and liabilities thereunder;
     
  the impact of a health epidemic on our business, our clinical trials, our research programs, healthcare systems, or the global economy as a whole;
     
  general instability of economic and political conditions in the United States, including inflationary pressures, increased interest rates, economic slowdown or recession, and escalating geopolitical tensions;

 

2
 

 

 

compliance with government regulations, including environmental, health, and safety regulations, and liabilities thereunder;

     
 

anticipated uses of net proceeds from our financings;

     
  the increased expenses associated with being a public company; and
     
  other factors discussed elsewhere in this Quarterly Report.

 

Many of the foregoing risks and uncertainties, as well as risks and uncertainties that are currently unknown to us, are, and may be, exacerbated by factors such as the ongoing conflict between Ukraine and Russia, the war in the Middle East, escalating tensions between China and Taiwan, increasing economic uncertainty and inflationary pressures, and any consequent worsening of the global business and economic environment. New factors emerge from time to time, and it is not possible for us to predict all such factors. Should one or more of the risks or uncertainties described in this Quarterly Report or any other filing with the Securities and Exchange Commission (the “SEC”) occur or should the assumptions underlying the forward-looking statements we make herein and therein prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

 

You should read this Quarterly Report and the documents that we reference within it with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

 

Website and Social Media Disclosure

 

We use our websites (www.bioaffinitytech.com, ir.bioaffinitytech.com, www.cypathlung.com and www.precisionpath.us/) to share Company information. Information contained on or that can be accessed through our websites is not, however, incorporated by reference in this Quarterly Report. Investors should not consider any such information to be part of this Quarterly Report.

 

3
 

 

bioAffinity Technologies, Inc.

 

FORM 10-Q

TABLE OF CONTENTS

 

PART I
FINANCIAL INFORMATION
 
ITEM 1 - Condensed Consolidated Financial Statements (unaudited) 5
  Condensed Consolidated Balance Sheets at September 30, 2024 (unaudited) and December 31, 2023 5
  Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2024 and 2023 6
  Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months ended September 30, 2024 and 2023 7
  Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2024 and 2023 8
  Notes to Unaudited Condensed Consolidated Financial Statements 9
     
ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 26
     
ITEM 4 - Controls and Procedures 26
     
PART II
OTHER INFORMATION
 
ITEM 1 - Legal Proceedings 27
     
ITEM 1A - Risk Factors 27
     
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds 29
     
ITEM 3 - Defaults Upon Senior Securities 29
     
ITEM 4 - Mine Safety Disclosure 29
     
ITEM 5 - Other Information 29
     
ITEM 6 - Exhibits 30
     
  Signatures 31

 

4
 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

bioAffinity Technologies, Inc.

Condensed Consolidated Balance Sheets

 

           
   September 30, 2024   December 31, 2023 
    (unaudited)      
ASSETS          
Current assets:          
Cash and cash equivalents  $756,580   $2,821,570 
Accounts and other receivables, net   1,327,168    811,674 
Inventory   25,363    18,484 
Prepaid expenses and other current assets   440,027    321,017 
Total current assets   2,549,138    3,972,745 
           
Non-current assets:          
Property and equipment, net   418,190    458,633 
Operating lease right-of-use asset, net   493,687    370,312 
Finance lease right-of-use asset, net   877,115    1,165,844 
Goodwill   1,404,486    1,404,486 
Intangible assets, net   789,722    833,472 
Other assets   19,676    16,060 
           
Total assets  $6,552,014   $8,221,552 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable  $782,937   $604,789 
Accrued expenses   904,252    1,149,811 
Unearned revenue   24,404    33,058 
Operating lease liability, current portion   124,710    94,708 
Finance lease liability, current portion   387,780    365,463 
Notes payable, current portion   267,081     
Total current liabilities   2,491,164    2,247,829 
           
Non-current liabilities:          
Finance lease liability, net of current portion   543,007    835,467 
Operating lease liability, net of current portion   375,139    283,001 
Notes payable, net of current portion   21,679     
           
Total liabilities   3,430,989    3,366,297 
           
Commitments and contingencies (Note 11)   -       
           
Stockholders’ equity:          
Preferred stock, par value $0.001 per share; 20,000,000 shares authorized; no shares issued or outstanding at September 30, 2024, and December 31, 2023        
Common stock, par value $0.007 per share; 100,000,000 shares authorized; 13,424,648 and 9,394,610 issued and outstanding at September 30, 2024, and December 31, 2023, respectively   90,064    65,762 
Additional paid-in capital   53,708,374    49,393,972 
Accumulated deficit   (50,677,413)   (44,604,479)
           
Total stockholders’ equity   3,121,025    4,855,255 
           
Total liabilities and stockholders’ equity  $6,552,014   $8,221,552 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5
 

 

bioAffinity Technologies, Inc.

Unaudited Condensed Consolidated Statements of Operations

 

                     
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2024   2023   2024   2023 
                 
Net Revenue  $2,350,386   $298,484   $7,154,429   $319,143 
                     
Operating expenses:                    
Direct costs and expenses   1,440,158    74,704    4,421,309    76,025 
Research and development   274,497    330,376    1,070,569    1,035,118 
Clinical development   93,705    106,422    194,127    161,310 
Selling, general and administrative   2,364,592    2,023,917    7,023,311    4,576,708 
Depreciation and amortization   151,298    57,569    452,005    100,805 
                     
Total operating expenses   4,324,250    2,592,988    13,161,321    5,949,966 
                     
Loss from operations   (1,973,864)   (2,294,504)   (6,006,892)   (5,630,823)
                     
Other income (expense):                    
Interest income   2,228    27,193    13,541    109,971 
Interest expense   (21,631)   (8,785)   (67,430)   (11,801)
Other income   9,683    4,606    9,683    4,606 
Other expense   (14,697)   (17,100)   (10,186)   (17,100)
                     
Total other income (expense)   (24,417)   5,914    (54,392)   85,676 
                     
Net loss before provision for income tax expense   (1,998,281)   (2,288,590)   (6,061,284)   (5,545,147)
                     
Income tax expense   2,559    2,294    11,650    18,700 
                     
Net loss  $(2,000,840)  $(2,290,884)  $(6,072,934)  $(5,563,847)
                     
Net loss per common share, basic and diluted  $(0.16)  $(0.26)  $(0.54)  $(0.65)
                     
Weighted average common shares outstanding   12,391,867    8,696,554    11,237,324    8,551,154 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

6
 

 

bioAffinity Technologies, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

 

   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
   For the Nine Months Ended September 30, 2024 
   Preferred Stock   Common Stock   Additional
Paid-in
   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
                             
Balance at December 31, 2023      $    9,394,610   $65,762   $49,393,972   $(44,604,479)  $        4,855,255 
                                    
Stock-based compensation expense           379,962    2,661    752,933        755,594 
                                    
Exercise of stock options           208,031    454    74,445        74,899 
                                    
Exercise of stock warrants           1,066,763    7,467    1,335,910        1,343,377 
                                    
Sale of Common Stock           1,960,000    13,720    2,936,280        2,950,000 
                                    
Offering costs                   (785,167)       (785,167)
Net loss                       (6,072,934)   (6,072,934)
                                    
Balance at September 30, 2024 (unaudited)      $    13,009,366   $90,064   $53,708,374   $(50,677,413)  $3,121,025 

 

   For the Three Months Ended September 30, 2024 
   Preferred Stock   Common Stock   Additional
Paid-in
   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
                             
Balance at June 30, 2024 (unaudited)      $    11,487,046   $79,407   $52,030,280   $(48,676,573)  $       3,433,114 
                                    
Stock-based compensation expense           95,605    670    185,017        185,687 
                                    
Exercise of stock warrants           1,066,715    7,467    1,335,763        1,343,230 
                                    
Sale of Common Stock           360,000    2,520    447,480        450,000 
                                    
Offering costs                   (290,167)       (290,167)
                                    
Net loss                       (2,000,840)   (2,000,840)
                                    
Balance at September 30, 2024 (unaudited)      $    13,009,366   $90,064   $53,708,374   $(50,677,413)  $3,121,025 

 

   For the Nine Months Ended September 30, 2023 
   Preferred Stock   Common Stock   Additional
Paid-in
   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
                             
Balance at December 31, 2022      $    8,381,324   $58,669   $47,652,242   $(36,667,468)  $11,043,443 
                                    
Stock-based compensation expense           270,587    1,911    512,402        514,313 
                                    
Stock issued for acquisition           564,972    3,955    996,045        1,000,000 
                                    
Net loss                       (5,563,847)   (5,563,847)
                                    
Balance at September 30, 2023 (unaudited)      $    9,216,883   $64,535   $49,160,689   $(42,231,315)  $6,993,909 

 

   For the Three Months Ended September 30, 2023 
   Preferred Stock   Common Stock   Additional
Paid-in
   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
                             
Balance at June 30, 2023 (unaudited)      $    8,555,365   $59,887   $47,978,892   $(39,940,431)  $8,098,348 
                                    
Stock-based compensation expense           96,546    693    185,752        186,445 
                                    
Stock issued for acquisition           564,972    3,955    996,045        1,000,000 
                                    
Net loss                       (2,290,884)   (2,290,884)
                                    
Balance at September 30, 2023 (unaudited)      $    9,216,883   $64,535   $49,160,689   $(42,231,315)  $6,993,909 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7
 

 

bioAffinity Technologies, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(unaudited)

 

   2024   2023 
   Nine Months Ended September 30, 
   2024   2023 
         
Cash flows from operating activities          
Net loss  $(6,072,934)  $(5,563,847)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   452,005    100,805 
Stock-based compensation expense   755,594    514,313 
Changes in operating assets and liabilities:          
Accounts and other receivables   (515,494)   71,840 
Inventory   (6,879)   (4,368)
Prepaid expenses and other assets   (122,626)   152,768 
Accounts payable   178,148    406,836 
Accrued expenses   (245,559)    (144,013)
Unearned revenue   (8,654)   38,250 
Operating lease right-of-use asset   (1,235)   5,913 
Net cash used in operating activities   (5,587,634)   (4,421,503)
           
Cash flows from investing activities          
Purchase of property and equipment   (79,082)   (36,344)
Acquisition of subsidiary, net cash acquired   

    (2,186,497)
Net cash used in by investing activities   (79,082)   (2,222,841)
           
Cash flows from financing activities          
Proceeds from issuance of Common Stock from direct offering, net of underwriting discounts, commissions, and offering expenses of $785,167   2,164,833     
Proceeds from exercised stock options   74,899     
Proceeds from exercise of warrants   1,343,377     
Payment on loans payable       (251,746)
Proceeds from loans payable   288,760     
Principal repayments on finance leases   (270,143)   (8,433)
Net cash provided by (used in) financing activities   3,601,726    (260,179)
           
Net decrease in cash and cash equivalents   (2,064,990)   (6,904,523)
Cash and cash equivalents at beginning of period   2,821,570    11,413,759 
Cash and cash equivalents at end of period  $756,580   $4,509,236 
           
Supplemental disclosures of cash flow information:          
Interest expense paid in cash  $13,541   $11,801 
Income taxes paid in cash   11,650    18,700 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

8
 

 

bioAffinity Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Note 1. NATURE OF OPERATIONS, ORGANIZATION, AND BASIS OF PRESENTATION

 

Description of Business

 

bioAffinity Technologies, Inc., a Delaware corporation (the “Company,” or “bioAffinity Technologies”), addresses the need for noninvasive diagnosis of early-stage cancer and diseases of the lung. The Company also is conducting early-stage research focused on advancing therapeutic discoveries that could result in broad-spectrum cancer treatments. bioAffinity Technologies develops proprietary noninvasive diagnostic tests using technology that identifies cancer cells and cell populations indicative of a diseased state for analysis using proprietary platforms developed using artificial intelligence (“AI”). The Company’s first diagnostic test, CyPath® Lung, is a noninvasive test for early detection of lung cancer, the leading cause of cancer-related deaths. CyPath® Lung is offered for sale to physicians by the Company’s subsidiary, Precision Pathology Laboratory Services, LLC (“PPLS”). Research and optimization of the Company’s proprietary platform for in vitro diagnostics and technologies are conducted in laboratories at PPLS and The University of Texas at San Antonio. The Company is developing its platform technologies so that in the future they will be able to detect, monitor, and treat diseases of the lung and other cancers.

 

Organization

 

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 August 14, 2023, the Company formed a wholly owned subsidiary, Precision Pathology Laboratory Services, LLC (“PPLS”), as a Texas limited liability company, to acquire the assets of Village Oaks Pathology Services, P.A., a Texas professional association d/b/a Precision Pathology Services (“Village Oaks”), including the clinical pathology laboratory it owned.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the the SEC for interim financial reporting. The condensed consolidated financial statements are unaudited and in management’s opinion include all adjustments, including normal recurring adjustments and accruals, necessary for a fair presentation of the results for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2023, was derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by GAAP. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024, or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 1, 2024 (the “2023 Form 10-K”).

 

Liquidity and Capital Resources

 

In accordance with Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements – 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 condensed 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 approximately $50.7 million at September 30, 2024. The Company’s cash and cash equivalents at September 30, 2024, were approximately $0.8 million. Based on the Company’s current expected level of operating expenditures and the cash and cash equivalents on hand at September 30, 2024, management concludes that there is substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve (12) months subsequent to the issuance of the accompanying condensed consolidated financial statements. Therefore, on October 21, 2024, the Company consummated a registered direct offering and concurrent private placement offering, pursuant to which the Company raised an additional $2.3 million in cash, see Note 15. Subsequent Events. However, 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 revenue from operations does not significantly increase. If such funding is not available or not available on terms acceptable to the Company, the Company’s current development plan may be curtailed. Furthermore, an alternative source of funding to the sale of additional equity or debt securities is the exercise of outstanding warrants for which there can be no guarantee. No adjustments have been made to the presented condensed consolidated financial statements as a result of this uncertainty.

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of condensed 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 condensed 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 valuation allowance on the Company’s deferred tax assets, stock-based compensation, valuation of goodwill and intangible assets related to the business combination, allowance for contractual adjustments and discounts related to service revenues, and the useful lives of fixed assets.

 

Principles of Consolidation

 

The Company’s condensed consolidated financial statements reflect its financial statements, those of its wholly owned subsidiaries, and certain variable interest entities where the Company is the primary beneficiary. The accompanying condensed consolidated financial statements include all the accounts of the Company, its wholly owned subsidiaries, OncoSelect® Therapeutics, LLC, and PPLS, and the variable interest entity, Village Oaks. All significant intercompany balances and transactions have been eliminated.

 

9
 

 

In determining whether the Company is the primary beneficiary of a variable interest entity, it applies a qualitative approach that determines whether it has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. The Company continuously assesses whether it is the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in the Company consolidating or deconsolidating one or more of its collaborators or partners.

 

Business Combination

 

On September 18, 2023, the Company, in connection with the Asset Purchase Agreement it entered into with Village Oaks and Roby P. Joyce, M.D., dated September 18, 2023, acquired substantially all the assets and assumed certain liabilities of Village Oaks in exchange for total consideration of $3,500,000, which consists of: (1) $2.5 million in cash paid at closing and (2) 564,972 shares of the Company’s Common Stock valued at $1 million. The assets purchased included a clinical pathology laboratory regulated by the Centers for Medicare and Medicaid Services (“CMS”) and accredited by the College of American Pathologists (“CAP”) and certified under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”). The primary reason for the acquisition was control of the laboratory in which CyPath® Lung is ordered and processed.

 

The Company recognized goodwill of $1,404,000 arising from the acquisition. The acquisition is being accounted for as a business combination in accordance with ASC 805. The Company has determined the preliminary fair values of the accounts receivable, accounts payable, and accrued expenses that make up the majority of the net working capital assumed in the acquisition.

 

The following table summarizes the purchase price and finalized purchase price allocations relating to the acquisition:

 

      
Cash  $2,500,000 
Common Stock   1,000,000 
Total purchase consideration  $3,500,000 
Assets     
Net working capital (including cash)  $912,000 
Property and equipment   326,000 
Other assets   8,000 
Customer relationships   700,000 
Trade names and trademarks   150,000 
Goodwill   1,404,000 
Total net assets  $3,500,000 

 

Goodwill represents the excess fair value after the allocation to the identifiable net assets. The calculated goodwill is not deductible for tax purposes.

 

The preliminary purchase price allocations relating to the acquisition previously reported in the Quarterly Report on Form 10-Q filed November 14, 2023, reported net working capital of $1,167,000 and goodwill of $1,149,000. The amounts have been updated to reflect the purchase price adjustments to accounts payable and accounts receivable that existed at the time of the acquisition. The Company incurred and expensed approximately $811,000 in acquisition costs.

 

For prior year comparative purposes, the pro-forma statement of operations as if combined on January 1, 2023, would result in net revenues of $5,639,186, net loss of $(6,244,179) and loss per share of $(0.73) for the nine months ended September 30, 2023.

 

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 flow.

 

Advertising Expense

 

The Company expenses all advertising costs as incurred. Advertising expense was $232,396 and $42,947 for the nine months ended September 30, 2024 and 2023, respectively, and $101,271 and $15,206 for the three months ended September 30, 2024 and 2023, respectively.

 

Loss Per Share

 

Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of the Company’s Common Stock outstanding during the period. Diluted loss per share is computed by dividing net loss attributable to common stockholders by the sum of the weighted-average number of shares of Common Stock outstanding during the period and the weighted-average number of dilutive Common Stock equivalents outstanding during the period, using the treasury stock method. Dilutive Common Stock equivalents are comprised of in-the-money stock options, convertible notes payable, unvested restricted stock, and warrants based on the average stock price for each period using the treasury stock method.

 

10
 

 

The following potentially dilutive securities have been excluded from the computations of weighted average shares of Common Stock outstanding as of September 30, 2024 and 2023, as they would be anti-dilutive:

 

   2024   2023 
   As of September 30, 
   2024   2023 
Shares underlying options outstanding   337,810    683,695 
Shares underlying warrants outstanding   9,573,898    4,649,952 
Shares underlying unvested restricted stock   

415,282

    

133,414

 
Anti-dilutive securities   10,326,990    5,467,061 

 

Revenue Recognition

 

The Company recognizes as revenue the amount that reflects the consideration to which it expects to be entitled in exchange for goods sold or services rendered primarily upon completion of the testing process (when results are reported) or when services have been rendered.

 

Patient Service Fee Revenue

 

Net revenues from patient service fees accounted for greater than 85% of the Company’s consolidated net revenues for the nine months ended September 30, 2024, and are primarily comprised of a high volume of relatively low-dollar transactions. The laboratory, which provides clinical testing services and other services, satisfies its performance obligation and recognizes revenues primarily upon completion of the testing process (when results are reported) or when services have been rendered. The Company estimates the amount of consideration it expects to be entitled to receive from payer customer groups in exchange for providing services using the portfolio approach. These estimates include the impact of contractual allowances (including payer denials) and patient price concessions. The portfolios determined using the portfolio approach consist of the following groups of payer customers: healthcare insurers, government payers (Medicare and Medicaid programs), client payers, and self-pay. Contracts do not contain significant financing components based on the typical period of time between performance of services and collection of consideration.

 

The process for estimating revenues and the ultimate collection of accounts receivable involves significant judgment and estimation. The Company follows a standard process, which considers historical denial and collection experience and other factors (including the period of time that the receivables have been outstanding), to estimate contractual allowances and implicit price concessions, recording adjustments in the current period as changes in estimates. Further adjustments to the allowances, based on actual receipts, may be recorded upon settlement.

 

   2024   2023 
   For the nine months ended
September 30,
 
   2024   2023 
Patient service fees1  $6,259,806   $248,654 
Histology service fees   811,914    31,854 
Medical director fees   50,136    2,393 
Department of Defense observational studies   8,654    14,250 
Other revenues2   23,919    21,992 
Total net revenue  $7,154,429   $319,143 

 

 

  1 Patient services fees include direct billing for CyPath® Lung diagnostic test of approximately $332,000 and $24,000 for the nine months ended September 30, 2024 and 2023.
     
  2 Other revenues include pre-acquisition CyPath® Lung royalty income and laboratory services.

 

Property and Equipment

 

In accordance with ASC 360-10, Accounting for the Impairment of Long-Lived Assets, the Company periodically reviews the carrying value of its long-lived assets, such as property, equipment, and definite-lived intangible assets, to test whether current events or circumstances indicate that such carrying value may not be recoverable. When evaluating assets for potential impairment, the Company compares the carrying value of the asset to its estimated undiscounted future cash flows. If an asset’s carrying value exceeds such estimated cash flows (undiscounted and with interest charges), the Company records an impairment charge for the difference. The Company did not record any impairment for the three and nine months ended September 30, 2024, or for the fiscal year ended December 31, 2023.

 

Property and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the asset. Amortization of leasehold improvements is computed using the shorter of the lease term or estimated useful life of the asset. Additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. Useful lives of each asset class are as follows:

 

Asset Category   Useful Life
Computer equipment   3-5 years
Computer software   3 years
Equipment   3-5 years
Furniture and fixtures   5-7 years
Vehicles   5 years
Leasehold improvements   Lesser of lease term or useful life

 

11
 

 

Intangible Assets

 

Intangible assets, net of accumulated amortization, and goodwill are summarized as follows as of September 30, 2024:

 

Description  Date Acquired  Useful Life  Cost   Amortization   Net 
Goodwill  9/18/2023     $1,404,486   $   $1,404,486 
Trade names and trademarks  9/18/2023  18 years   150,000    (8,611)   141,389 
Customer relationships  9/18/2023  14 years   700,000    (51,667)   648,333 
Total intangible assets, net        $2,254,486   $(60,278)  $2,194,208 

 

The Company incurred amortization of intangible assets of $43,750 and $1,943 for the nine months ended September 30, 2024 and 2023, respectively, and $14,583 and $1,943 for the three months ended September 30, 2024 and 2023, respectively.

 

Recent Accounting Pronouncements

 

The Company continues to monitor new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) and does not believe any accounting pronouncements issued through the date of this Quarterly Report will have a material impact on the Company’s condensed consolidated financial statements.

 

The Company adopted FASB issued Accounting Standards Update (ASU) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures on December 31, 2023. The Company used the five steps to ASC 280 to evaluate what, if any, segment reporting would be beneficial for shareholders. These five steps included: 1) evaluate operating segments for aggregation, 2) perform quantitative threshold tests, 3) evaluate remaining operating segments for aggregation, 4) ensure that 75% of revenue is reported, and 5) consider practical limit. Based on the analysis above against those five steps, management concludes that segment reporting is required for two segment operations: 1) diagnostic R&D and 2) laboratory services.

 

Segment Information

 

The Company is organized in two operating segments, Diagnostic Research and Development (“R&D”) and Laboratory Services, whereby its chief operating decision maker (“CODM”) assesses the performance of and allocates resources. The CODM is the Chief Executive Officer. Diagnostic R&D includes research and development and clinical development on diagnostic tests. Any revenues assigned to Diagnostic R&D are proceeds received from observational studies. Laboratory services include all the operations from Village Oaks and PPLS in addition to sales and marketing costs of CyPath® Lung from bioAffinity Technologies.

 

   2024   2023   2024   2023 
   Three months ended September 30,   Nine months ended September 30, 
   2024   2023   2024   2023 
Net revenue:                    
Diagnostic R&D  $1,731   $14,250   $8,654   $14,250 
Laboratory services 1   2,348,655    284,234    7,145,775    304,893 
Total net revenue   2,350,386    298,484    7,154,429    319,143 
                     
Operating expenses:                    
Diagnostic R&D   (368,202)   (436,799)   (1,264,696)   (1,196,428)
Laboratory services   (2,150,825)   (307,172)   (7,423,109)   (308,493)
General corporate activities   (1,805,223)   (1,849,017)   (4,473,516)   (4,445,045)
Total operating loss   (1,973,864)   (2,294,504)   (6,006,892)   (5,630,823)
                     
Non-operating income (expense), net   (24,417)   5,914    (54,392)   85,676 
Net loss before income tax expense   (1,998,281)   (2,288,590)   (6,061,284)   (5,545,147)
Income tax expense   (2,559)   (2,294)   (11,650)   (18,700)
Net loss  $(2,000,840)  $(2,290,884)  $(6,072,934)  $(5,563,847)

 

1 The majority of the increase versus the prior year is from the acquisition of the clinical pathology laboratory on September 18, 2023.

 

12
 

 

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 laboratory operations, preclinical studies, compensation, and consulting costs.

 

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 condensed consolidated balance sheets and within research and development expense in the accompanying condensed 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 (“U.S.”) are a significant factor in providing medical care. In the U.S., drugs, biological products, and medical devices are regulated by the Federal Food, Drug, and Cosmetic Act (“FDCA”), which is administered by the Food and Drug Administration (“FDA”) and the CMS. 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 (“LDT”) sold by Precision Pathology Laboratory Services, a CAP-accredited, CLIA-certified clinical pathology laboratory and wholly owned subsidiary.

 

Note 3. ACCOUNTS AND OTHER RECEIVABLES, NET

 

The following is a summary of accounts receivables and other receivables:

 

   September 30, 2024   December 31, 2023 
Patient service fees  $1,119,933   $657,717 
Histology service fees   151,548    121,301 
Medical director fees   6,494    3,103 
Other receivables1   49,193    29,553 
Total accounts and other receivables, net  $1,327,168   $811,674 

 

Note 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets are summarized below:

 

   September 30, 2024   December 31, 2023 
         
Prepaid insurance  $275,706   $171,855 
Legal and professional   10,148    24,476 
Other   154,173    124,686 
Total prepaid expenses and other current assets  $440,027   $321,017 

 

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Note 5. PROPERTY AND EQUIPMENT, NET

 

Property and equipment are summarized below:

 

   September 30, 2024   December 31, 2023 
         
Lab equipment  $662,747   $647,214 
Computers and software   81,433    68,682 
Leasehold improvements   19,353    9,941 
Vehicles   148,103    105,919 
Property and equipment, gross   911,636    831,756 
Accumulated depreciation   (493,446)   (373,123)
Total property and equipment, net  $418,190   $458,633 

 

Depreciation expense was $119,526 and $66,780 for the nine months ended September 30, 2024 and 2023, respectively, and $40,472 and $45,095 for the three months ended September 30, 2024 and 2023, respectively.

 

Note 6. ACCRUED EXPENSES

 

Accrued expenses are summarized below:

 

   September 30, 2024   December 31, 2023 
         
Compensation  $659,294   $857,037 
Legal and professional   66,361    257,926 
Clinical   135,286    15,350 
Other   43,311    19,498 
Total accrued expenses  $904,252   $1,149,811 

 

Note 7. UNEARNED REVENUE

 

The Company engaged in an observational study of CyPath® Lung with the U.S. Department of Defense (“DOD”). A total of 70 CyPath® Lung units were ordered and shipped. However, in compliance with FASB ASC 606, the performance obligation was complete for only 40 units as of September 30, 2024. The performance obligation is deemed complete after samples have been collected, processed, analyzed, and results communicated to patients. The unearned revenue balance amounted to $24,404 and $33,058 as of September 30, 2024, and December 31, 2023, respectively.

 

Note 8. FAIR VALUE MEASUREMENTS

 

The Company analyzes all financial instruments with features of both liabilities and equity under the 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 and other receivables, prepaid and other current assets, accounts payable, accrued expenses, and loan payable, are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

 

Note 9. LEASES

 

The Company has one operating lease for its real estate and office space for the CAP/CLIA laboratory, as well as multiple finance leases for lab equipment in Texas that were acquired through the September 18, 2023, acquisition. Additionally, the Company entered into another operating lease on September 1, 2024 with regard to office space. The Company has operating leases consisting of office space with remaining lease terms ranging from 3.1 to 5.9 years as of September 30, 2024. The Company has finance leases consisting of office and lab equipment with remaining lease terms ranging from approximately 1.5 to 3.3 years as of September 30, 2024, for which the Company has determined that it will use the equipment for a major part of its remaining economic life.

 

The lease agreements generally do not provide an implicit borrowing rate. Therefore, the Company used a benchmark approach as of the date of inception of the leases to derive an appropriate incremental borrowing rate to discount remaining lease payments. The Company benchmarked itself against other companies of similar credit ratings and comparable quality and derived imputed interest rates ranging from 7.43% to 8.07% for the lease term lengths.

 

Leases with an initial term of 12 months or less are not recorded on the balance sheet. There are no material residual guarantees associated with any of the Company’s leases, and there are no significant restrictions or covenants included in the Company’s lease agreements. Certain leases include variable payments related to common area maintenance and property taxes, which are billed by the landlord, as is customary with these types of charges for office space. The Company has not entered into any lease arrangements with related parties, and the Company is not the sublessor in any arrangement.

 

The Company’s existing leases contain escalation clauses and renewal options. The Company has evaluated several factors in assessing whether there is reasonable certainty that the Company will exercise a contractual renewal option. For leases with renewal options that are reasonably certain to be exercised, the Company included the renewal term in the total lease term used in calculating the right-of-use asset and lease liability.

 

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The components of lease expense, which are included in selling, general and administrative expense and depreciation and amortization for the three and nine months ended September 30, 2024 and 2023, are as follows:

 

   2024   2023   2024   2023 
   Three months ended September 30,   Nine months ended September 30, 
   2024   2023   2024   2023 
Amortization of right-of-use asset - finance lease  $96,243   $32,081   $288,729   $32,081 
Interest on lease liabilities - finance lease   21,533    8,634    67,318    8,634 
Operating lease cost   33,198    9,972    93,029    9,972 
Total lease cost  $150,974   $50,687   $449,076   $50,687