Note
1. NATURE OF OPERATIONS, ORGANIZATION, AND BASIS OF PRESENTATION
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. Our 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, general and administrative matters, and capital expenditures.
In
connection with the closing of the IPO (the “IPO Closing”), the Company converted 5,296,044 shares of the convertible preferred
stock into 756,558 shares of Common Stock (“Common Shares”). Additionally, the Company converted approximately $10.6 million
in convertible notes, bridge notes and related accrued interest into 2,533,964 Common Shares.
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. 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
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 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. Operating
results for the periods presented are not necessarily indicative of the results that may be expected for the fiscal year ended December
31, 2022 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 our final IPO prospectus filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended
(the “Securities Act”) on September 2, 2022 (the “Final Prospectus”).
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 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 $35.0 million at September
30, 2022. Our cash and cash equivalents at September 30, 2022 were approximately $13.5 million, representing 96% of our total assets.
Based on our current expected level of operating expenditures, the Company believes its cash on hand at September 30, 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 worldwide, disrupted supply chains across
a range of industries, and created significant economic volatility. The impact of COVID-19 on the Company’s operational and financial
performance will depend on numerous factors, including the spread, duration, and intensity of the pandemic (including resurgences), the
emergence of new viral variants, and the impact of the pandemic on the Company’s customers, employees, clinical trial sites, and
vendors.
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 condensed consolidated financial statements in conformity with U.S. 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 non-employees; 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.
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
condensed balance sheets. At December 31, 2021, deferred offering costs totaling approximately $8,000 were included as non-current assets
in the accompanying condensed balance sheet.
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 September
30, 2022 and 2021, as they would be anti-dilutive:
SCHEDULE
OF POTENTIALLY DILUTIVE SECURITIES
| |
2022 | | |
2021 | |
| |
As of September 30, | |
| |
2022 | | |
2021 | |
Convertible preferred stock | |
| — | | |
| 756,558 | |
Shares underlying options outstanding | |
| 806,392 | | |
| 828,386 | |
Shares underlying warrants outstanding | |
| 4,624,952 | | |
| 6,428 | |
Shares underlying convertible notes outstanding | |
| 83,373 | | |
| 1,591,372 | |
Anti-dilutive
securities | |
| 5,514,717 | | |
| 3,182,744 | |
Revenue
Recognition
Our
revenue is generated exclusively from royalties for our first diagnostic test, CyPath® Lung, from sales by Precision Pathology
Services, a CAP-accredited, CLIA-certified clinical pathology laboratory and our licensee, 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.
Reclassifications
Certain
prior year balances have been reclassified to conform to current year presentation.
Recent
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. The Company has not yet determined the potential impact the adoption may have on our consolidated
financial statements.
Note
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets are summarized below:
SCHEDULE
OF PREPAID
EXPENSES AND OTHER CURRENT ASSETS
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Insurance | |
$ | 471,270 | | |
$ | 16,765 | |
Legal and professional | |
| 61,219 | | |
| 55,081 | |
Other | |
| 8,834 | | |
| 4,219 | |
Total prepaid expenses and other current assets | |
$ | 541,323 | | |
$ | 76,065 | |
Note
4. PROPERTY AND EQUIPMENT, NET
Property
and equipment are summarized below:
SCHEDULE
OF PROPERTY
AND EQUIPMENT
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Lab equipment | |
$ | 242,168 | | |
$ | 242,168 | |
Computers and software | |
| 21,463 | | |
| 21,463 | |
Property and equipment,
gross | |
| 263,631 | | |
| 263,631 | |
Accumulated depreciation | |
| (261,850 | ) | |
| (258,998 | ) |
Total property and equipment, net | |
$ | 1,781 | | |
$ | 4,633 | |
Depreciation and amortization expense was approximately $800 and $1,200
for the three months ended September 30, 2022, and 2021, respectively. Depreciation
and amortization expense was approximately $2,900 and $4,000 for the nine months ended September 30, 2022, and 2021, respectively.
Note
5. ACCRUED EXPENSES
Accrued
expenses are summarized below:
SCHEDULE
OF ACCRUED
EXPENSES
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Compensation | |
$ | 231,628 | | |
$ | 277,185 | |
Legal and professional | |
| 188,524 | | |
| 166,069 | |
Clinical | |
| 49,630 | | |
| 39,482 | |
Other | |
| 4,253 | | |
| 765 | |
Total accrued expenses | |
$ | 474,035 | | |
$ | 483,501 | |
Note
6. LOAN PAYABLE
In
March 2021, the Company received a second U.S. Small Business Administration (the “SBA”) Paycheck Protection Program
(“PPP”) Loan for $0.2
million bearing interest at a one percent (1.0%)
fixed annual rate, and will mature in two
years, and is eligible for forgiveness under certain conditions. In light of the technical two-year nature of the loan, the
Company presented a portion of the PPP balance as a current liability. In April 2022, the Company received forgiveness from the SBA.
The Company recorded a gain of $0.2
million on the extinguishment of debt in the accompanying condensed consolidated statements of operations in each of the nine months
ended September 30, 2022 and 2021, respectively.
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. CONVERTIBLE NOTES PAYABLE
In
September 2022, in connection with the closing of the IPO, the Company converted approximately $10.6
million in convertible notes, bridge notes and related accrued interest 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 $2.6 million to related parties,
which were convertible into the next class of equity securities in which the Company issued and sold equity securities with aggregate
gross proceeds of at least $5.0 million. The conversion price was determinable 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 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. The convertible notes payable had a maturity date of December 31, 2020, and bore interest at 8% annually, and
was 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 $1.0
million in notes payable, including $0.4
million to related parties, which were convertible into the next class of equity securities in which the Company issued and sold
equity securities with aggregate gross proceeds of at least $5.0
million. The conversion price was determinable as eighty percent (80%)
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 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. 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, which were convertible into the next class of equity securities in which the Company issued and sold
equity securities with aggregate gross proceeds of at least $5.0 million. The conversion price was determinable as eighty percent (80%)
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 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. The terms provided that upon completion of a bridge financing sufficient
to provide working capital to complete an IPO, the notes would be 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 8% annually. Upon completion of the IPO, the notes automatically converted into shares of Common Stock.
Bridge
Notes
In
the fourth quarter of 2021 and the first 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 principal amount of the note divided by 10.5.
As a result, the Company issued warrants to purchase 199,986 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 the notes automatically
converted into shares of Common Stock. In October 2022, the Company repaid $175,000 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, we paid commissions
of nine percent (9%) and issued our placement agent a warrant to purchase 29,464 shares of Common
Stock. The warrant issued to our placement agent has 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 at December 31, 2021:
SCHEDULE
OF CONVERTIBLE NOTES PAYABLE
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Secured convertible notes payable | |
$ | 5,041,957 | | |
$ | 5,041,957 | |
Unsecured convertible notes payable | |
| 4,364,000 | | |
| 3,740,000 | |
Principal amount of convertible notes payable | |
| 9,405,957 | | |
| 8,781,957 | |
Debt issuance costs | |
| — | | |
| (1,185,382 | ) |
Fair value adjustments on convertible notes payable | |
| 5,422,498 | | |
| 3,555,576 | |
Conversion on IPO | |
| (14,503,455 | ) | |
| 3,555,576 | |
Total convertible notes payable | |
$ | 325,000 | | |
$ | 11,152,151 | |
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 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. The table below summarizes the Company’s assets and liabilities that are measured at fair value at
September 30, 2022 and December 31, 2021, respectively:
SCHEDULE OF FAIR VALUE INSTRUMENTS
| |
Fair value measured at September 30, 2022 | |
| |
Total at September 30, 2022 | | |
Using Quoted Prices in active markets (Level 1) | | |
Using Significant other observable inputs (Level 2) | | |
Using Significant unobservable inputs (Level 3) | |
| |
| | | |
| | | |
| | | |
| | |
Convertible notes payable | |
$ | 325,000 | | |
$ | — | | |
$ | 325,000 | | |
$ | — | |
| |
Fair value measured at December 31, 2021 | |
| |
Total at December 31, 2021 | | |
Using Quoted Prices in active markets (Level 1) | | |
Using Significant other observable inputs (Level 2) | | |
Using 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 and December 31, 2021:
SCHEDULE OF FAIR VALUE ASSETS AND LIABILITIES
| |
Fair Value | | |
Valuation Technique | |
Unobservable Input | |
Range (Weighted Average) | |
Convertible notes payable at December 31, 2021 | |
$ | 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 | % |
The
Company transferred $325,000 of convertible notes payable from level 3 to level 2 during the nine months ended September 30, 2022, to
account for notes that were not converted at the time of the Company’s IPO. See Note 7. There were no transfers into or out of
level 3 during the nine months ended September 30, 2021. The Company issued a total of $0.7 million and $0.5 million in convertible notes
during for the nine months ended September 30, 2022, and 2021, respectively, which are included in the 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, 2021 | |
$ | 11,152,151 | |
Additional convertible notes payable issued | |
| 724,000 | |
Repayment of convertible notes payable | |
| (100,000 | ) |
Debt discount for warrants issued | |
| (787,566 | ) |
Accretion of debt issuance costs | |
| 1,972,948 | |
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 | |
| (14,503,455 | ) |
Fair value of convertible notes payable at September 30, 2022 (Unaudited) | |
$ | — | |
Fair value of convertible notes payable at December 31, 2020 | |
$ | 9,767,461 | |
Additional 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 | |
Note
9. COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
Company leases its corporate offices under an agreement that is renewable on September 1, 2023. The Company leases its laboratory
and additional office space under an operating lease that is renewable annually by written notice by the Company and will require
renewal in February 2023. Rent expense for office and lab space amounted to approximately $15,000 and $13,000 for each of the three
months ended September 30, 2022 and 2021, respectively. Rent expense for office and lab space amounted to approximately $41,000
and $39,000 for each of
the nine months ended September 30, 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’ 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
will make 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.
Convertible
Preferred Stock
The
Company has authorized a total of 20,000,000 shares of preferred stock, $0.001 par value per share. Prior to the IPO, the Company issued
5,296,044 shares of preferred stock, designated as Series A. In July 2017, the Company completed a private placement of securities in
which 1.3 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 4.0 million shares of Series A Preferred Stock 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 Closing were automatically converted into 745,558 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 September
30, 2022, no Preferred Stock is outstanding.
Common
Stock
The
Company has authorized a total of 14,285,714 shares of Common Stock, $0.007 par value per share. In November 2021, the Company received
stockholder approval to increase the number of authorized shares from 7,142,857 shares to 14,285,714 shares. As of September 30, 2022,
the Company has issued 8,369,750 shares of Common Stock.
Note
11. STOCK-BASED COMPENSATION
The
Company grants options under its 2014 Equity Incentive Plan (the “Plan”). Under the Plan, the Company is authorized to grant
options for up to 1.1 million shares of Common Stock. The Company has reserved 1.0 million shares to be used under the Plan. Options
may be granted to employees, the Company’s board of directors and external consultants who provide services to the Company. Options
granted under the Plan 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 Plan will terminate according to the respective terms of the Plan in September 2026.
The
Company has recorded stock-based compensation expense (credit) related to the issuance of stock option awards in the following line items
in the accompanying condensed consolidated statement of operations:
SUMMARY OF STOCK-BASED COMPENSATION EXPENSE RECOGNIZED FOR STOCK OPTION AWARDS
| |
| | |
| |
| |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Research and development | |
$ | 3,318 | | |
$ | 12,094 | |
General and administrative | |
| 208,427 | | |
| 120,437 | |
Total | |
$ | 211,745 | | |
$ | 132,531 | |
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, 2021 | |
| 878,380 | | |
$ | 4.12 | | |
| | | |
| | |
Granted | |
| 7,142 | | |
| 4.20 | | |
| | | |
| | |
Exercised | |
| (64,848 | ) | |
| 1.16 | | |
| | | |
| | |
Forfeited | |
| (14,282 | ) | |
| 5.95 | | |
| | | |
| | |
Outstanding at September 30, 2022 | |
| 806,392 | | |
$ | 4.33 | | |
| 4.3 | | |
$ | 647,793 | |
| |
| | | |
| | | |
| | | |
| | |
Vested and exercisable at September 30, 2022 | |
| 787,746 | | |
$ | 4.31 | | |
| 4.1 | | |
$ | 647,793 | |
As
of September 30, 2022, there was no unrecognized compensation cost related to non-vested stock options. During the nine months ended
September 30, 2022, 64,848 options were exercised for proceeds of approximately $75,000. During the nine months ended September 30, 2021,
no options were exercised.
During
the nine months ended September 30, 2022, the Company issued options to purchase 7,142 shares of Common Stock to a non-employee. 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 nine months ended September 30, 2022, the Company issued restricted stock units (RSUs) for 14,999 shares of Common Stock to an employee
and a non-employee. The shares vest in equal monthly installments over terms of between immediately to one year, subject to the employee
and non-employee providing continuous service through the vesting date. During the nine months ended September 30, 2022, approximately
21,000 shares vested from RSUs previously issued.
During
the nine months ended September 30, 2021, the Company issued options to purchase 29,279 shares of Common Stock and 11,752 RSUs. The per
share weighted-average fair value of the options granted during 2021 was estimated at $1.85 on the date of grant.
The
following table summarizes weighted-average assumptions using the Black-Scholes option-pricing model used on the date of the grants issued
during the nine months ended September 30, 2022 and 2021, respectively:
SCHEDULE OF FAIR VALUE ASSUMPTIONS
| |
2022 | | |
2021 | |
Fair value of Common Stock | |
$ | 4.62 | | |
$ | 3.08 | |
Volatility | |
| 63.9 | % | |
| 88.1 | % |
Expected term (years) | |
| 6.0 | | |
| 6.2 | |
Risk-free interest rate | |
| 2.20 | % | |
| 0.92 | % |
Dividend yield | |
| 0 | % | |
| 0 | % |
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 condensed consolidated balance
sheet at fair value, and changes in fair value during the periods presented in the condensed consolidated statement of operations,
which is revalued at each balance sheet date subsequent to the initial issuance of the stock warrant. During the nine months ended
September 30, 2022, 1,036,486
warrants were exercised into an equivalent number of Common Shares for proceeds of approximately $7.7
million. During the nine months ended September 30, 2021, no warrants were exercised into an equivalent number of Common
Shares.
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.
In
2022, the Company issued $724,000 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 was due, if not settled prior, on May 31, 2022. See Note
7. Each Bridge Note was issued with 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.
The
Company issued an aggregate of 167,557 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 $0.4 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 nine
months ended September 30, 2022, the Company recognized approximately $2.0 million in interest expense related to the amortization of
the debt discount and issuance costs.
The
following table summarizes the calculated aggregate fair values for the warrants using the Black-Scholes method based on the following
assumptions at September 30, 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 | % |
Note
13. RELATED PARTY TRANSACTIONS
Convertible
Bridge Promissory Notes
On
August 11, 2022, certain officers and directors of the Company purchased convertible promissory Bridge Notes from the Company that bore
interest at 6% per year and had maturity dates of October 31, 2022. The unpaid principal and accrued interest under each such Bridge
Note was convertible into shares of Common Stock at a conversion price of $4.20 per share. Upon the IPO Closing, each Bridge Note automatically
converted into a certain number of shares of Common Stock based on the outstanding principal balance and accrued and unpaid interest
under such note as of September 6, 2022. Additionally, in connection with purchasing a Bridge Note, each purchaser received a warrant
(“Bridge Warrant”) that had a five-year term and was convertible into the number of shares of Common Stock specified below
at an exercise price of $5.25 per share.
Zannes
Note and Warrant
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.
Girgenti
Note and Warrant
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
14. SUBSEQUENT EVENTS
The
Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the condensed
consolidated financial statements were available to be issued. Based upon this review, other than as described below, the Company
did not identify any subsequent events that would have required adjustment or disclosure in the consolidated financial
statements.
In
October 2022, the Company repaid $275,000 in convertible notes, Bridge Notes and related accrued interest for those notes that were not
converted at the time of the Company’s IPO. See Note 7.