Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _______________________________
 FORM 10-Q
 _______________________________

(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended SeptemberJune 30, 20162017
OR 
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _____ to _____
Commission File Number: 000-30975001-36439
 _______________________________
TRANSGENOMIC,PRECIPIO, INC.
(Exact name of registrant as specified in its charter)
 _______________________________

Delaware 91-1789357
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
12325 Emmet Street, Omaha, Nebraska4 Science Park, New Haven, CT 6816406511
(Address of principal executive offices) (Zip Code)
(402) 452-5400(203) 787-7888
(Registrant’s telephone number, including area code)
 _______________________________
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 such filing requirements for the past 90 days.    Yes   x No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   Yes   x No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer oAccelerated filer o
Non-accelerated filer 
o  (Do not check if a smaller reporting company)
Smaller reporting company x
Emerging growth companyo
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 Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   o    No   x
As of October 31, 2016,August 16, 2017, the number of shares of common stock outstanding was 24,786,244.6,407,860.

TRANSGENOMIC,PRECIPIO, INC.
INDEX
 
    
   Page No.    
    
PART I. 
FINANCIAL INFORMATION
3
    
Item 1. 
Condensed Consolidated Financial Statements
3
    
  
Condensed Consolidated Balance Sheets at SeptemberJune 30, 20162017 (Unaudited) and December 31, 20152016
3
    
  
Unaudited Condensed Consolidated Statements of Operations for the Three and NineSix Months Ended SeptemberJune 30, 20162017 and 20152016
4
    
  
Unaudited Condensed Consolidated Statements of Comprehensive LossStockholders’ Equity (Deficit) for the Three and NineSix Months Ended SeptemberJune 30, 2016 and 20152017
5
Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the Nine Months Ended September 30, 2016
6
    
  
Unaudited Condensed Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20162017 and 20152016
76
    
  
Notes to Unaudited Condensed Consolidated Financial Statements
86
    
Item 2. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3028
    
Item 3. Quantitative and Qualitative Disclosures About Market Risk
3734
    
Item 4. 
Controls and Procedures
3734
    
PART II. 
OTHER INFORMATION
3836
    
Item 1. 
Legal Proceedings
3836
    
Item 1A. 
Risk Factors
3836
    
Item 6. 
Exhibits
4851
    
Signatures
4953

PART I. FINANCIAL INFORMATION 
Item 1.Condensed Consolidated Financial Statements
TRANSGENOMIC,PRECIPIO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30,  June 30,  
2016 December 31,2017 December 31,
(unaudited) 2015(unaudited) 2016
ASSETS      
CURRENT ASSETS:      
Cash and cash equivalents$71
 $444
$967
 $51
Accounts receivable, net180
 264
569
 388
Inventories, net36
 50
Inventories108
 100
Other current assets314
 537
154
 13
Assets held for sale265
 1,987
Total current assets866
 3,282
1,798
 552
PROPERTY AND EQUIPMENT:   
Equipment5,592
 5,593
Furniture, fixtures & leasehold improvements1,565
 1,565
7,157
 7,158
   
Less: accumulated depreciation(6,985) (6,899)
PROPERTY AND EQUIPMENT, NET262
 280
172
 259
   
OTHER ASSETS:      
Goodwill13,832
 —
Intangibles, net982
 1,170
21,100
 —
Other assets58
 105
18
 10
$2,078
 $4,816
$37,010
 $842
LIABILITIES AND STOCKHOLDERS’ DEFICIT   
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)   
CURRENT LIABILITIES:      
Current maturities of long-term debt$7,814
 $7,596
$513
 $395
Convertible bridge notes, less debt discounts and debt issuance costs166
 695
Accounts payable6,273
 3,781
10,328
 1,084
Accrued compensation225
 321
Current maturities of capital leases48
 46
Accrued expenses2,704
 3,734
3,521
 700
Deferred revenue176
 217
210
 92
Other liabilities1,068
 1,068
Liabilities held for sale—
 264
Other current liabilities1,528
 —
Total current liabilities18,260
 16,981
16,314
 3,012
LONG TERM LIABILITIES:      
Long-term debt, less current maturities and discounts—
 4,127
Common stock warrant liability1,430
 350
618
 —
Capital leases, less current maturities138
 163
Other long-term liabilities212
 305
171
 —
Total liabilities19,902
 17,636
17,241
 7,302
STOCKHOLDERS’ DEFICIT:   
Convertible preferred stock, $0.01 par value, 15,000,000 shares authorized, 214,705 and 4,029,502 shares issued and outstanding, respectively2
 40
Common stock, $0.01 par value, 150,000,000 shares authorized, 24,139,130 and 13,915,691 shares issued and outstanding, respectively241
 139
STOCKHOLDERS’ EQUITY (DEFICIT):   
Preferred stock - $0.01 par value, 15,000,000 and 1,294,434 shares authorized at June 30, 2017 and December 31, 2016, respectively, 1,712,901 and 780,105 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively17
 8
Common stock, $0.01 par value, 150,000,000 and 1,806,850 shares authorized at June 30, 2017 and December 31, 2016, respectively, 6,407,860 and 449,175 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively64
 4
Additional paid-in capital201,522
 200,403
34,975
 4,376
Accumulated other comprehensive income—
 10
Accumulated deficit(219,589) (213,412)(15,287) (10,848)
Total stockholders’ deficit(17,824) (12,820)
Total stockholders’ equity (deficit)19,769
 (6,460)
$2,078
 $4,816
$37,010
 $842

See notes to unaudited condensed consolidated financial statements.

TRANSGENOMIC,PRECIPIO, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
 
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2016 2015 2016 2015
NET SALES$457
 $330
 $1,198
 $1,522
COST OF GOODS SOLD430
 445
 1,477
 1,375
Gross profit27
 (115) (279) 147
OPERATING EXPENSES:       
Selling, general and administrative1,252
 1,686
 4,392
 5,398
Research and development393
 455
 1,065
 1,374
 1,645
 2,141
 5,457
 6,772
OPERATING LOSS FROM CONTINUING OPERATIONS(1,618) (2,256) (5,736) (6,625)
OTHER INCOME (EXPENSE):       
Interest expense, net(285) (174) (782) (550)
Warrant revaluation12
 385
 357
 (30)
Other, net(1) (6) (1) (19)
 (274) 205
 (426) (599)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES(1,892) (2,051) (6,162) (7,224)
INCOME TAX BENEFIT—
 —
 —
 (1)
LOSS FROM CONTINUING OPERATIONS(1,892) (2,051) (6,162) (7,223)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES(34) (5,248) (25) (6,392)
NET LOSS(1,926) (7,299) (6,187) (13,615)
        
PREFERRED STOCK DIVIDENDS—
 (331) (21) (993)
        
NET LOSS FROM CONTINUING OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS(1,892) (2,382) (6,183) (8,216)
NET LOSS FROM DISCONTINUED OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS(34) (5,248) (25) (6,392)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS$(1,926) $(7,630) $(6,208) $(14,608)
        
BASIC AND DILUTED LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS$(0.08) $(0.17) $(0.28) $(0.70)
BASIC AND DILUTED LOSS PER COMMON SHARE FROM DISCONTINUED OPERATIONS$—
 $(0.38) $—
 $(0.54)
BASIC AND DILUTED LOSS PER COMMON SHARE$(0.08) $(0.55) $(0.28) $(1.24)
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING23,551,869
 13,763,240
 21,896,943
 11,784,583
 Three Months Ended Six Months Ended
 June 30, June 30,
 2017 2016 2017 2016
SALES       
Patient service revenue, net$316
 $615
 $619
 $1,271
less provision for bad debts(56) (111) (111) (229)
Net sales260
 504
 508
 1,042
COST OF DIAGNOSTIC SERVICES284
 241
 466
 479
Gross profit (loss)(24) 263
 42
 563
OPERATING EXPENSES777
 548
 1,440
 1,076
OPERATING LOSS(801) (285) (1,398) (513)
OTHER INCOME (EXPENSE):       
Interest expense, net(220) (160) (382) (242)
Warrant revaluation(3) 1
 (3) —
Loss on extinguishment of debt(53) —
 (53) —
Merger advisory fees(2,603) —
 (2,603) —
Other, net—
 —
 —
 3
 (2,879) (159) (3,041) (239)
LOSS BEFORE INCOME TAXES(3,680) (444) (4,439) (752)
INCOME TAX EXPENSE—
 —
 —
 —
NET LOSS(3,680) (444) (4,439) (752)
        
DEEMED DIVIDENDS ON ISSUANCE OR EXCHANGE OF PREFERRED UNITS(5,248) —
 (5,248) (1,422)
PREFERRED DIVIDENDS—
 —
 —
 (433)
TOTAL DIVIDENDS(5,248) —
 (5,248) (1,855)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS$(8,928) $(444) $(9,687) $(2,607)
        
BASIC AND DILUTED LOSS PER COMMON SHARE$(15.35) $(1.03) $(18.77) $(6.10)
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING581,481
 429,819
 515,968
 427,217

See notes to unaudited condensed consolidated financial statements.

TRANSGENOMIC, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)

 Three Months Ended  
 September 30,		 Nine Months Ended 
 September 30,
 2016 2015 2016 2015
Net Loss$(1,926) $(7,299) $(6,187) $(13,615)
Other comprehensive loss - foreign currency translation adjustment—
 (22) —
 (14)
Comprehensive Loss$(1,926) $(7,321) $(6,187) $(13,629)
        

See notes to unaudited condensed consolidated financial statements.



TRANSGENOMIC,PRECIPIO, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICITEQUITY (DEFICIT)
NineSix Months Ended 
 SeptemberJune 30, 20162017
(Dollars in thousands, except share data)thousands)
 


 Preferred Stock
Common Stock
 
 
 
 
 Outstanding
Shares
Par
Value
Outstanding
Shares

Par
Value

Additional
Paid-in
Capital
Accumulated
Deficit

Accumulated
Other
Comprehensive
Income

Total
Balance, December 31, 20154,029,502
 $40
 13,915,691

$139

$200,403

$(213,412)
$10

$(12,820)
Net loss—

—

—

—

—

(6,187)
—

(6,187)
Foreign currency translation adjustment—

—

—

—

—

10

(10)
—
Stock-based compensation—

—

—

—

140

—

—

140
Issuance of common shares—
 —
 1,292,722
 12
 488
 —
 —
 500
Private placement, net2,365,243
 24

—

—

519

—

—

543
Dividends on preferred stock—

—

—

—

(4,475)
—

—

(4,475)
Conversion of preferred stock and preferred stock dividends(6,180,040) (62) 8,930,717
 90
 4,447
 —
 —
 4,475
Balance, September 30, 2016214,705

$2

24,139,130

$241

$201,522

$(219,589)
$—

$(17,824)
 Preferred Stock
Common Stock
 
 
 
 Outstanding
Shares
Par
Value
Outstanding
Shares

Par
Value

Additional
Paid-in
Capital
Accumulated
Deficit

Total
Balance, January 1, 2017780,105
 $8
 449,175
 $4
 $4,376
 $(10,848)
$(6,460)
Net loss—

—

—

—

—

(4,439)
(4,439)
Conversion of warrants into preferred stock8,542
 —
 —
 —
 25
 —
 25
Conversion of warrants into common stock—
 —
 1,958,166
 20
 (20) —
 —
Conversion of preferred stock into common stock(788,647) (8) 788,647
 8
 —
 —
 —
Conversion of Senior and Junior debt into preferred stock and common stock802,920
 8
 1,414,700
 14
 4,749
 —
 4,771
Conversion of bridge notes into common stock—
 —
 155,639
 2
 885
 —
 887
Issuance of common stock for consulting services in connection with the merger—
 —
 321,821
 3
 2,186
 —
 2,189
Shares issued in connection with business combination802,925
 8
 1,255,119
 12
 20,078
 —
 20,098
Issuance of preferred stock107,056
 1
 —
 —
 399
 —
 400
Issuance of warrants in conjunction with issuance of side agreement—
 —
 —
 —
 414
 —
 414
Beneficial conversion feature on issuance of bridge notes—
 —
 —
 —
 1,856
 —
 1,856
Non-cash stock-based compensation and vesting of restricted units    64,593
 1

27

—

28
Balance, June 30, 20171,712,901

$17

6,407,860

$64

$34,975

$(15,287)
$19,769

See notes to unaudited condensed consolidated financial statements.


TRANSGENOMIC,PRECIPIO, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) 
Nine Months Ended 
 September 30,		Six Months Ended 
 June 30,
2016 20152017 2016
CASH FLOWS USED IN OPERATING ACTIVITIES:      
Net loss$(6,187) $(13,615)$(4,439) $(752)
Less loss from discontinued operations, net of tax(25) (6,392)
Loss from continuing operations(6,162) (7,223)
      
Adjustments to reconcile net loss to net cash flows used in operating activities:      
Depreciation and amortization264
 343
48
 55
Stock-based compensation111
 489
Amortization of deferred financing costs and debt discount57
 18
Loss on extinguishment of debt53
 —
Stock-based compensation and change in liability of stock appreciation rights23
 7
Merger advisory fees2,603
 —
Provision for losses on doubtful accounts72
 —
111
 229
Capitalized PIK interest on convertible bridge notes—
 81
Warrant revaluation(357) 30
3
 —
Loss on sale of fixed assets—
 14
Deferred interest47
 61
Deferred tax provision—
 —
Changes in operating assets and liabilities:      
Accounts receivable12
 158
(136) (340)
Inventories14
 —
7
 (18)
Other current assets280
 (214)
Other assets(1) 1
Accounts payable2,492
 (162)290
 91
Accrued expenses and other liabilities(728) 78
484
 238
Net cash used in continuing operations(3,955) (6,426)
Net cash provided by (used in) discontinued operations381
 (3,010)
Net cash used in operating activities(3,574) (9,436)(897) (390)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:   
Purchases of property and equipment(19) (280)
Other assets(27) (9)
Net cash used in continuing operations(46) (289)
Net cash provided by discontinued operations1,052
 1,910
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:   
Cash acquired in business combination101
 —
Net cash provided by investing activities1,006
 1,621
101
 —
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:      
Principal payments on capital lease obligations(2) (35)(23) (19)
Issuance of preferred stock, net1,779
 —
Issuance of common stock, net468
 8,977
Proceeds from borrowings500
 923
Principal payment on note payable(550) (874)
Issuance of preferred stock400
 —
Payment of deferred financing costs(25) (10)
Proceeds from exercise of warrants25
 —
Proceeds from long-term debt315
 —
Proceeds from convertible bridge notes1,365
 455
Principal payments on long-term(345) (74)
Net cash flows provided by financing activities2,195
 8,991
1,712
 352
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH—
 2
NET CHANGE IN CASH AND CASH EQUIVALENTS(373) 1,178
916
 (38)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD444
 1,609
51
 235
CASH AND CASH EQUIVALENTS AT END OF PERIOD$71
 $2,787
$967
 $197
SUPPLEMENTAL CASH FLOW INFORMATION      
Cash paid during the period for:   
Interest$—
 $365
Cash paid during the period for interest$30
 $18
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION   
Purchases of equipment financed through capital lease—
 49
Preferred unit dividend financed through exchange agreement—
 433
Convertible bridge notes exchanged for long-term debt—
 1,120
Series A and B preferred exchanged for long-term debt—
 1,715
Conversion of bridges loans plus interest into common stock877
 —
Conversion of senior and junior notes plus interest into preferred stock and common stock4,771
 —
Deferred debt issuance cost64
 —
Beneficial conversion feature on issuance of bridge notes1,856
 —
Accrued merger cost10
 —
Issuance of warrants in conjunction with issuance of side agreement414
 —

See notes to unaudited condensed consolidated financial statements.

TRANSGENOMIC,PRECIPIO, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and NineSix Months Ended SeptemberJune 30, 20162017 and 20152016

1. BUSINESS DESCRIPTION
Business Description.Description

Transgenomic,Precipio, Inc., and Subsidiary, (“we”, “us”, “our”, the “Company” or “Transgenomic”“Precipio”) is a biotechnologycancer diagnostics company advancing personalized medicine forproviding diagnostic products and services to the detectiononcology market. We have built and treatmentcontinue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technology developed within academic institutions and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located in New Haven, Connecticut and have partnered with the Yale School of Medicine to capture the expertise, experience and technologies developed within academia so that we can provide a better standard of cancer diagnostics and inherited diseases throughsolve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which will focus on further development of ICE-COLD-PCR (“ICP”), the patented technology which was exclusively licensed by us from Dana-Farber Cancer Institute, Inc. (“Dana-Farber”) at Harvard University (“Harvard”). The research and development center will focus on the development of this technology, which we believe will enable us to commercialize other technologies developed by our proprietary molecular technologiescurrent and clinicalfuture academic partners. Our platform connects patients, physicians and research services. A key goal is to bring our Multiplexed ICE COLD-PCR (“MX-ICP”) product todiagnostic experts residing within academic institutions. Launched in 2017, the clinical market through strategic partnerships and licensing agreements, enablingplatform facilitates the use of blood and other bodily fluids for more effective and patient-friendly diagnosis, monitoring and treatment of cancer.following relationships:

MX-ICPPatients: patients may search for physicians in their area and consult directly with academic experts that are on the platform. Patients may also have access to new academic discoveries as they become commercially available.

Physicians: physicians can connect with academic experts to seek consultations on behalf of their patients and may also provide consultations for patients in their area seeking medical expertise in that physician’s relevant specialty. Physicians will also have access to new diagnostic solutions to help improve diagnostic accuracy.

Academic Experts: academic experts on the platform can make themselves available for patients or physicians seeking access to their expertise. Additionally, these experts have a platform available to commercialize their research discoveries.

We intend to continue updating our platform to allow for patient-to-patient communications and allow individuals to share stories and provide support for one another, to allow physicians to consult with their peers to discuss and share challenges and solutions, and to allow academic experts to interact with others in academia on the platform to discuss their research and cross-collaborate.

ICP was developed at Harvard and is licensed exclusively by us from Dana-Farber. The technology proprietary to Transgenomic. It is a reagent that improvesenables the ability to detect genetic mutations. This technology has been validated internally on all currently available sequencing platforms, including Sanger, Next Gen Sequencing and Digital PCR. By enhancing the level of detection of genetic mutations in liquid biopsies, such as blood samples. The field of liquid biopsies is a rapidly growing market, aimed at solving the challenge of obtaining genetic information on disease progression and suppressingchanges from sources other than a tumor biopsy.

Gene sequencing is performed on tissue biopsies taken surgically from the tumor site in order to identify potential therapies that will be more effective in treating the patient. There are several limitations to this process. First, surgical procedures have several limitations, including:

Cost: surgical procedures are usually performed in a costly hospital environment. For example, according to a recent study the mean cost of lung biopsies is greater than $14,000; surgery also involves hospitalization and recovery time.

Surgical access: various tumor sites are not always accessible (e.g. brain tumors), in which cases no biopsy is available for diagnosis.

Risk: patient health may not permit undergoing an invasive surgery; therefore a biopsy cannot be obtained at all.

Time: the process of scheduling and coordinating a surgical procedure often takes time, delaying the start of patient treatment.

Second, there are several tumor-related limitations that provide a challenge to obtaining such genetic information from a tumor:

8
Table of Contents
PRECIPIO, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three and Six Months Ended June 30, 2017 and 2016


Tumors are heterogeneous by nature: a tissue sample from one area of the tumor may not properly represent the tumor’s entire genetic composition; thus, the diagnostic results from a tumor may be incomplete and non-representative.

Metastases: in order to accurately test a patient with metastatic disease, ideally an individual biopsy sample should be taken from each site (if those sites are even known). These biopsies are very difficult to obtain; therefore physicians often rely on biopsies taken from the primary tumor site.

The advent of technologies enabling liquid biopsies as an alternative to tumor biopsy and analysis is based on the fact that tumors (both primary and metastatic) shed cells and fragments of DNA into the blood stream. These blood samples are called “liquid biopsies” that contain circulating tumor DNA, or ctDNA, which hold the same genetic information found in the tumor(s). That tumor DNA is the target of genetic analysis. However, since the quantity of tumor DNA is very small in proportion to the “normal” (or “healthy”) DNA within the blood stream, there is a need to identify and separate the tumor DNA from the normal or wild-type DNA, several benefits are provided.DNA.

Historically, our operations were organizedICP is an enrichment technology that enables the laboratory to focus its analysis on the tumor DNA by enriching, and reviewed by management along our major product lines andthereby “multiplying” the presence of, tumor DNA, while maintaining the normal DNA at its same level. Once the enrichment process has been completed, the laboratory genetic testing equipment is able to identify genetic abnormalities presented in two business segments: Laboratory Servicesthe ctDNA, and Genetic Assaysan analysis can be conducted at a higher level of sensitivity, to enable the detection of such genetic abnormalities. The technology is encapsulated into a chemical that is provided in the form of a kit and Platforms. Beginningsold to other laboratories who wish to conduct these tests in-house. The chemical within the kit is added to the specimen preparation process, enriching the sample for the tumor DNA so that the analysis will detect those genetic abnormalities.
Merger Transaction

On June 29, 2017, the Company (then known as “Transgenomic, Inc.”, or “Transgenomic”), completed a reverse merger (the “Merger”) with Precipio Diagnostics, LLC, a privately held Delaware limited liability company (“Precipio Diagnostics”) in accordance with the quarter ended September 30, 2015, our operations are now organizedterms of the Agreement and Plan of Merger (the “Merger Agreement”), dated October 12, 2016, as one business segment, our Laboratory Services segment,amended on February 2, 2017 and duringJune 29, 2017, by and among Transgenomic, Precipio Diagnostics and New Haven Labs Inc. (“Merger Sub”) a wholly-owned subsidiary of Transgenomic. Pursuant to the second half of 2015, we began presenting our Genetic AssaysMerger Agreement, Merger Sub merged with and Platforms segment and a portion of our Laboratory Services segment in discontinued operations.

Our current Laboratory Services business consists of our laboratory in Omaha, Nebraska, which is focused on providing genetic analytical services related to Oncology and pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by pharmaceutical and biotechnology companies. Our laboratory employs a variety of genomic testing service technologies, including our proprietary MX-ICP technology. Our laboratory in Omaha is certified underinto Precipio Diagnostics, with Precipio Diagnostics surviving the Clinical Laboratory Improvement Amendments (“CLIA”)Merger as a high complexity laboratory and is accredited bywholly-owned subsidiary of the College of American Pathologists.

Our condensed consolidated balance sheets, statements of operations and statements of cash flows for all periods presented reflect our former Genetic Assays and Platforms activities and Patient Testing business as discontinued operationscombined company (See Note 3 - “Discontinued Operations”Reverse Merger). In connection with the Merger, the Company changed its name from Transgenomic, Inc. to Precipio, Inc., relisted its common stock under Precipio, Inc. on the National Association of Securities Dealers Automated Quotations (“NASDAQ”), and effected a 1-for-30 reverse stock split of its common stock. Upon the consummation of the Merger, the historical financial statements of Precipio Diagnostics become the Company's historical financial statements. Accordingly, the historical financial statements of Precipio Diagnostics are included in the comparative prior periods. As a result of the Merger, historical preferred stock, common stock, restricted units, warrants and additional paid-in capital, including share and per share amounts, have been retroactively adjusted to reflect the equity structure of the combined company, including the effect of the Merger exchange ratio. Pursuant to the Merger Agreement, each outstanding share of capital stock of Precipio Diagnostic was exchanged for 10.2502 pre-reverse stock split shares of Company Common Stock (the “Exchange Ratio”). See Note 3 - Reverse Merger for additional discussion of the Merger.

Going Concern.

Concern
The condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) applicable for a going concern, which assume that wethe Company will realize ourits assets and discharge ourits liabilities in the ordinary course of business. We haveThe Company has incurred substantial operating losses and havehas used cash in ourits operating activities for the past fewseveral years. As of SeptemberJune 30, 2016, we2017, the Company had a net loss of $4.4 million and negative working capital of $17.4$14.5 million. OurThe Company’s ability to continue as a going concern is dependent upon a combination of achieving its business plan, including generating additional revenue, improving cash collections, potentially selling underutilized assets and if necessary, raising additional financing to meet ourits debt obligations and pay ourpaying liabilities arising from normal business operations when they come due. The

Precipio is currently in discussions with certain investors to raise additional capital. There can be no assurance such capital is or will be available at terms favorable or agreeable to management, if at all, or that the Company will successfully complete the proposed capital raise. Since the outcome of these matters cannot be predicted with any certainty at this time, and raisesthere is substantial doubt that wethe Company will be able to continue as a going concern. These condensed consolidated


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Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that the Company will be able to successfully achieve its initiatives summarized above in order to continue as a going concern. The accompanying financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments tothat might result should the amounts and classification of assets and liabilities that may be necessary should weCompany be unable to continue as a going concern. We cannot be certain that additional financing will be available on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue our operations.concern as a result of the outcome of this uncertainty.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation.
The accompanying condensed consolidated financial statements are presented in conformity with GAAP. All amounts are presented in U.S. Dollars (“$”). Supplemental cash flows from discontinued operations are presented in Note 3 - “Discontinued Operations”. We have evaluated events occurring subsequent to SeptemberJune 30, 20162017 for potential recognition or disclosure in the condensed consolidated financial statements and concluded that, other than what is disclosed in Note 12 - Subsequent Events, there were no other subsequent events that required recognition or disclosure.

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Three and Nine Months Ended September 30, 2016 and 2015


The condensed consolidated balance sheet as of December 31, 20152016 was derived from our audited balance sheet as of that date. There has been no change in the balance sheet from December 31, 2015.2016. The accompanying condensed consolidated financial statements as of and for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 are unaudited and reflect all adjustments (consisting of only normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto of Precipio Diagnostics for the year ended December 31, 20152016 contained in our Annual Reportcurrent report on Form 10-K,8-K/A, filed with the Securities and Exchange Commission (the “SEC”) on April 14, 2016.July 31, 2017. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year 2016.2017.
Certain prior year amounts have been reclassified to conform to the current year presentation in our condensed consolidated financial statements, which consists of the effects of reclassifications from the presentation of our discontinued operations.
Principles of Consolidation.
The condensed consolidated financial statements include the accounts of Transgenomic,Precipio, Inc. and our wholly owned subsidiary. All inter-company balances and transactions have been eliminated in consolidation.
Risks and Uncertainties.
Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our financial statements. The more significant of those risks are presented below and throughout the notes to the unaudited condensed consolidated financial statements.
Use of Estimates.

The preparation of condensed consolidated financial statements 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 financial statements and the reported amounts of net sales and expenses during the reporting period. In addition, estimates and assumptions associated with the determination of the fair value of certain assets and related impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these condensed consolidated financial statements.
Risks and Uncertainties.
Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our financial statements. The more significant of those risks are presented below and throughout the notes to the unaudited condensed consolidated financial statements.
The Company operates in the healthcare industry which is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time.

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Three and Six Months Ended June 30, 2017 and 2016


Fair Value.
Unless otherwise specified, book value approximates fair market value. The common stock warrant liability is recorded at fair value. See Note 910 - “Fair Value”Fair Value for additional information.
Cash and Cash Equivalents and Other Current Assets.
Cash and cash equivalents include cash and investments with original maturities at the date of acquisition of three months or less. Other current assets as of SeptemberJune 30, 20162017 of $0.3$0.2 million includeincludes prepaid assets of $0.1 million and other receivables of $0.2 million.$0.1 million and consisted of primarily prepaid assets as of December 31, 2016.
Concentrations of Cash.Risk.
From time to time, we may maintain a cash position with financial institutions in amounts that exceed federallyFederal Deposit Insurance Corporation insured limits. We have not experienced any losses on such accounts as of SeptemberJune 30, 20162017.
Accounts Receivable.
Service companies in the health care industry typically grant credit without collateral to patients. The following is a summarymajority of activitythese patients are insured under third-party insurance agreements. The services provided by the Company are routinely billed utilizing the Current Procedural Terminology (CPT) code set designed to communicate uniform information about medical services and procedures among physicians, coders, patients, accreditation organizations, and payers for administrative, financial, and analytical purposes. CPT codes are currently identified by the allowanceCenters for doubtful accounts from continuing operations during the threeMedicare and nine months ended September 30, 2016Medicaid Services and 2015:

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Threethird-party payors. The Company utilizes CPT codes for Pathology and Nine Months Ended September 30, 2016 and 2015


 Dollars in Thousands
 
Beginning
Balance
 Additions Deductions 
Ending
Balance
Three Months Ended September 30, 2016$157
 $2
 $(19) $140
Three Months Ended September 30, 2015$20
 $50
 $—
 $70
Nine Months Ended September 30, 2016$87
 $72
 $(19) $140
Nine Months Ended September 30, 2015$20
 $50
 $—
 $70
While payment terms are generally 30 days, we have also provided extended payment terms in certain cases. Accounts receivable are carried at original invoice amount and shown net of allowance for doubtful accounts. The estimate made for doubtful accounts is based on a review of all outstanding amounts on a quarterly basis. We determine the allowance for doubtful accounts by regularly evaluating individual payor receivables and considering a payor’s financial condition, credit history, reimbursement rates and current economic conditions. Accounts receivable are written off when deemed uncollectible and after all collection efforts have been exhausted. Recoveries of accounts receivable previously written off are recorded as a reduction in bad debt expense when received.
Inventories.
Inventories are stated at the lower of cost or market net of allowance for obsolete inventory. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process, which approximates the first-in, first-out (FIFO) method. At September 30, 2016, our net inventories were less than $0.1 million and were comprised predominantly of raw materials.Laboratory Services contained within codes 80000-89398.
 
The following is a summary of activity for the allowance for obsolete inventory during the three and nine months ended September 30, 2016 and 2015:
 Dollars in Thousands
 
Beginning
Balance
 Additions Deductions 
Ending
Balance
Three Months Ended September 30, 2016$63
 $—
 $—
 $63
Three Months Ended September 30, 2015$—
 $—
 $—
 $—
Nine Months Ended September 30, 2016$63
 $—
 $—
 $63
Nine Months Ended September 30, 2015$—
 $—
 $—
 $—
We determine the allowance for obsolescence by evaluating inventory quarterly for items deemed to be slow moving or obsolete.
Property and Equipment.
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:
Leasehold improvements1 to 10 years
Furniture and fixtures3 to 7 years
Production equipment3 to 7 years
Computer equipment3 to 7 years
Research and development equipment2 to 7 years
Depreciation expense in continuing operations related to property and equipment was less than $0.1 million for each of the three month periodssix months ended SeptemberJune 30, 20162017 and 2015. Depreciation expense was $0.1 million and $0.2 million for the nine month periods ended September 30, 2016 and 2015, respectively.2016. Depreciation expense during each period includes depreciation related to equipment acquired under capital leases.
Goodwill and Intangible Assets.
IntangibleAs a result of the Merger, the Company recorded goodwill and intangible assets include intellectual propertyas part of its allocation of the purchase consideration. See Note 3 - Reverse Merger for the amounts recorded.

Goodwill

Goodwill is tested for impairment annually. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs that may impact goodwill. Impairment occurs when the carrying value is determined to be not recoverable, thereby causing the carrying value of the goodwill to exceed its fair value. If impaired, the asset’s carrying value is reduced to its fair value. No events have transpired in the six months ended June 30, 2017 that would require an impairment analysis prior to our scheduled review.

Intangibles

We review our amortizable long-lived assets for impairment annually or whenever events indicate that the carrying amount of the asset (group) may not be recoverable. An impairment loss may be needed if the sum of the future undiscounted cash flows is less than the carrying amount of the asset (group). The amount of the loss would be determined by comparing the fair market value of the asset to the carrying amount of the asset (group). There were no impairment charges during the six months ended June 30, 2017.
In-process research and patents.development (“IPR&D”) represents the fair value assigned to research and development assets that were not fully developed at the date of the Merger. Until the IPR&D projects are completed, the assets are accounted for as indefinite-lived intangible assets and subject to impairment testing. For the six months ended June 30, 2017, there was no impairment of IPR&D.
Stock-Based Compensation.

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Three and NineSix Months Ended SeptemberJune 30, 20162017 and 20152016


1. Intellectual Property.    Initial costs paid to license intellectual property from independent third parties are capitalized and amortized using the straight-line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.
2. Patents.    We capitalize legal costs, filing fees and other expenses associated with obtaining patents on new discoveries and amortize these costs using the straight-line method over the shorter of the legal life of the patent or its economic life beginning on the date the patent is issued.
Stock-Based Compensation.
All stock-based awards to date have exercise prices equal to the market valueprice of the shares atour common stock on the date of grant and have 10-yearten-year contractual terms. Unvested awards as of SeptemberJune 30, 20162017 had vesting periods of up to three years from the date of grant. None of the awards outstanding at SeptemberJune 30, 20162017 are subject to performance or market-based vesting conditions.
We measure and recognize compensation expense for all stock-based awards made to employees and directors. Compensation expense, net of estimated forfeitures, is based on the calculated fair value of the awards as measured at the grant date and is expensed over the service period of the awards.
During the three and ninesix months ended Septemberboth June 30, 2017 and 2016, we recorded compensation expense for all stock awards of zero andless than $0.1 million respectively, within selling, general and administrativeoperating expense. During the three and nine months ended September 30, 2015, we recorded compensation expense for all stock awards of $0.2 million and $0.5 million, respectively. As of SeptemberJune 30, 2016,2017, the unrecognized compensation expense related to unvested stock awards was less than $0.1 million, which is expected to be recognized over a weighted-average period of 1.1 years.
We granted stock options to purchase an aggregate of 11,250 and 25,250 shares of our common stock during the three and nine months ended September 30, 2016, respectively. The fair value of the stock options granted during the year was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: risk-free interest rates of 1.56% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of 6.00 years, based on expected exercise activity behavior; and volatility of 85% based on the historical volatility of our common stock over a time that is consistent with the expected life of the options.one year.
Included in our stock awards outstanding as of SeptemberJune 30, 20162017 were fully vested stock appreciation rights (“SARs”) to purchase 98,3332,777 shares of our common stock. The SARs were issued solely to oura former executive officersofficer and will vestvested over three years from the date of grant.
Net Sales Recognition.
Revenue is realized and earned when all of the following criteria are met:
Persuasive evidence of an arrangement exists;
Delivery has occurred or services have been rendered;
The seller’s price to the buyer is fixed or determinable; and
Collectability is reasonably assured.

In our Biomarker IdentificationNew Haven, Connecticut laboratory, we primarily recognize revenue for services rendered upon completion of the testing process. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including retroactive adjustment under reimbursement agreements with third-party payors. Revenue under third-party payor agreements is subject to audit and retroactive adjustment. Provisions for third-party payor settlements are provided in the period in which the related services are rendered and adjusted in the future periods, as final settlements are determined.

In our Omaha, Nebraska laboratory, we perform services on a project by project basis. When we receive payment in advance, we initially defer the revenue and recognize it when we deliver the service. These projects typically do not extend beyond one year.

At each of SeptemberJune 30, 20162017 and December 31, 2015,2016, deferred net sales associated with pharmacogenomics research projects included in the balance sheet in deferred revenue waswere $0.2 million.million and $0.1 million, respectively.

NetTaxes collected from customers and remitted to government agencies for specific net sales from Patient Testing laboratories, reportedproducing transactions are recorded net with no effect on the income statement.

Presentation of Insurance Claims and Related Insurance Recoveries.

The Company accounts for its insurance claims and related insurance recoveries at their gross values as partstandards for health care entities do not allow the Company to net insurance recoveries against the related claim liabilities. There were no insurance claims or insurance recoveries recorded during the three and six months ended June 30, 2017 and 2016.
Income Taxes.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of discontinued operations,assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are recognized on an individual test basis and take place when the test report is completed, reviewed and sentexpected to reverse. Deferred tax assets are reduced by a valuation allowance to the client lessextent that it is more likely than not that they will not be realized.

Beneficial Conversion Features.

The intrinsic value of a beneficial conversion feature (“BCF”) inherent to a convertible note payable, which is not bifurcated and accounted for separately from the reserve for insurance, Medicareconvertible note payable and Medicaid contractual adjustments. There are no deferred net sales associated with our Patient Testing services. Adjustmentsmay not be settled in cash upon conversion, is treated as a discount to the allowances, based on actual receiptsconvertible note payable. This discount is amortized over the period from third party payers, are reflectedthe date of issuance to the first conversion date using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the estimated contractual allowance applied prospectively.period of retirement to interest expense. In general, the fourth quarter of 2015, we adjusted our contractual allowance rates to better reflectBCF is measured by comparing the reimbursement level we expect to achieve on Patient Testing billings. The adjustment negatively impacted our Patient Testing revenues for all periods after the third quarter of 2015. (See Note 3 - “Discontinued Operations”).

Net sales of Genetic Assays and Platforms products, reported as discontinued operations (See Note 3 - “Discontinued Operations”) are recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of aneffective

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unconditional customer order and transferconversion price, after considering the relative fair value of title and risk of ownershipdetachable instruments included in the financing transaction, if any, to the customer, typically upon shipmentfair value of the product under a purchase order. Our sales terms do not providecommon shares at the commitment date to be received upon conversion.

Deemed dividends are also recorded for the rightintrinsic value of return unlessconversion options embedded in preferred shares based upon the product is damaged or defective. Net sales from certain services associated withdifferences between the analytical instruments, to be performed subsequent to shipmentfair value of the products,underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares. When the preferred shares are non-redeemable the BCF is deferredfully amortized into additional paid-in capital and recognized whenpreferred discount. If the servicespreferred shares are provided. Such services, mainly limited to installation and training services that are not essentialredeemable, the discount is amortized from the commitment date to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. We also enter into various service contracts that cover installed instruments. These contracts cover specific time periods and net sales associated with these contracts are deferred and recognized ratably over the service period.
Common Stock Warrants.
Certain of our issued and outstanding warrants to purchase common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability (“Common Stock Warrant Liability”). We are required to present these instruments at fair value at each reporting date and any changes in fair values are recorded as an adjustment to earnings. The Common Stock Warrant Liabilities are considered Level Three financial instruments for purposes of fair value measurement. See Note 9 - “Fair Value” for additional information.first conversion date.
Loss Per Share.
Basic loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted loss per share includes shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to 10,701,4532,545,463 and 10,392,7282,771,149 shares of our common stock have been excluded from the computation of diluted loss per share at SeptemberJune 30, 20162017 and 2015,2016, respectively, because the effect is anti-dilutive due to the net loss.
Recent Accounting Pronouncements.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU No. 2014-09”).Customers. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer. ASU No. 2014-09 will replace most existing revenue recognition guidance in GAAPgenerally accepted accounting principles in the U.S. when it becomes effective. In July 2015, the FASB decided to defer the effective date of this new accounting guidance by one year. As a result, ASU No. 2014-09 will be effective for us for all annual and interim reporting periods beginning after December 15, 2017 and early adoption would be permitted as of the original effective date. The new standard permits the use of either the retrospective or cumulative effect transition method. We do not expect to early adopt this guidance and we have not selected a transition method. We are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40)(“ASU No. 2014-15”). This guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We do not expect to early adopt this guidance and do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard amends the recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating leases and amends disclosure requirements associated with leasing arrangements. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new standard simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements, forfeitures and classification on the statement of cash flows. This guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016; however, early2016. The Company adopted ASU No. 2016-09 as of January 1, 2017. The adoption of this guidance does not have a material effect on the Company’s financial position and results of operations.

In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments.ASU No. 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows by adding or clarifying guidance on eight specific cash flow issues. ASU No. 2016-15 is permitted.effective for fiscal years beginning after December 15, 2017, and for interim periods within that fiscal year. We do not expect to early adopt this guidance and are currently evaluating the impact this guidancebelieve ASU No. 2016-15 will have a material effect on our financial condition,position and results of operationsoperations.

In January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU No. 2017-01 adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, and cash flows.interim periods within those fiscal years. The Company does not believe ASU No. 2017-01 will have a material effect on its financial position and results of operations.


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In January 2017, FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test. It is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment test performed with a measurement date after January 1, 2017. The Company has adopted this standard and there was no impact on its consolidated financial statements because a goodwill impairment has not occurred after January 1, 2017.

In July 2017, FASB issued ASU No. 2017-11, Earning Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815), which was issued in two parts, Part I, Accounting for Certain Financial Instruments with Down Round Features and Part II, Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of ASC No. 2017-11 addresses the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. The amendments in Part II of ASU 2017-11 recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the codification, to a scope exception. Part II amendments do not have an accounting effect. The ASU 2017-11 is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company has early adopted this standard as of January 1, 2017 with the only impact being that the warrants with down round provisions entered into in June 2017 were treated as equity classification. (See Note 5 - Convertible Bridge Notes).

3. DISCONTINUED OPERATIONSREVERSE MERGER

On September 8, 2015, we entered into an Asset Purchase AgreementJune 29, 2017 (the “Asset Purchase Agreement”“Closing Date”), the Company completed the Merger with Edge BioSystems, Inc. (“Edge Bio”), pursuant to which we sold our manufacturing, marketing and selling of high quality polymer and silica based beads and resin and chromatography columns business (collectively,Precipio Diagnostics, in accordance with the “Columns Business”). The Columns Business was part of our former segment, Genetic Assays and Platforms. Pursuant to the Asset Purchase Agreement, Edge Bio acquired substantially allterms of the assets used solelyMerger Agreement. Upon the consummation of the Merger, the historical financial statements of Precipio Diagnostics become the Company's historical financial statements. Accordingly, the historical financial statements of Precipio Diagnostics are included in the comparative prior periods.
On the Closing Date, the outstanding common and preferred units of Precipio Diagnostics and certain debt of Precipio Diagnostics were converted into (i) 5,352,847 shares of Precipio common stock, together with cash in lieu of fractional units, and (ii) 802,920 shares of Precipio preferred stock with an aggregate face amount equal to $3 million.
In connection with the Columns BusinessMerger, on the Closing Date, Precipio also issued promissory notes and assumedshares of Precipio preferred and common stock in a number of transactions, whereby:

Holders of certain liabilitiessecured indebtedness of the Columns BusinessTransgenomic received in exchange for such indebtedness 802,925 shares of Precipio preferred stock in an amount equal to $3.0 million stated value, and 352,630 shares of Precipio common stock;

Holders of Transgenomic preferred stock converted it into 7,155 shares of Precipio common stock; and

Precipio issued 107,056 shares of Precipio preferred stock to certain investors in exchange for $400,000 in a total cash purchase price of approximately $2.1 million (the “Asset Sale”), which was paid on September 8, 2015 upon the closing of the Asset Sale. During the year ended December 31, 2015, we recorded a gain onprivate placement. Precipio also completed the sale of the Columns Businessan aggregate of $1.5 million.$800,000 of promissory notes pursuant to a securities purchase agreement.

On November 25, 2015, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with ADSTEC Corporation (“ADSTEC”) and ADS Biotec Inc., a wholly-owned subsidiary of ADSTEC (“Buyer”), pursuant to which we sold (1) to ADSTEC our facilities located in Glasgow, Scotland andConsideration
The preliminary estimated purchase consideration based on Irvington Road in Omaha, Nebraska (together, the “Facilities”) and all of our stock, inventory and raw materials located at the Facilities (collectively, the “Inventory”), and (2) to Buyer (a) allvalue of the remaining assets relating to our Genetic Assays and Platforms business segment (the “Business”), other than the Inventory (the “Purchased Assets”), and (b) all of the ordinary sharesequity of Transgenomic, Limited, a wholly-owned subsidiary of ours (the “Shares”).the accounting acquiree, is as follows:

Pursuant to the Purchase Agreement, ADSTEC and Buyer acquired the Facilities, the Inventory, the Purchased Assets and the Shares for an aggregate purchase price of approximately $300,000, and Buyer assumed our financial and human resources commitments related to the Business (the “Transaction”). During the year ended December 31, 2015, we recorded a loss on the Transaction of $1.7 million.

Together, the Asset Sale and the Transaction represent the divestiture of our Genetic Assays and Platforms business, resulting in a strategic shift that had a major effect on our operations and financial results. Therefore, the divested operations of our Genetic Assays and Platforms business meet the criteria to be reported as discontinued operations.
During the fourth quarter of 2015, our Board of Directors took actions to begin the process of divesting our Patient Testing business in New Haven, Connecticut. In March 2016, we announced that we had suspended testing services in our Patient Testing laboratory as we review and evaluate various strategic alternatives for that business. As a result of these actions, as of December 31, 2015, our Patient Testing business met the criteria to be reported as discontinued operations. We anticipate that we will complete the divestiture of the Patient Testing business during 2016.
The related assets, liabilities, results of operations and cash flows for both the Genetic Assays and Platforms business and Patient Testing business are classified as assets held for sale, liabilities held for sale and discontinued operations for all periods presented.

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Results
(dollars in thousands)  
Legacy Transgenomic common stock$6,088
Fair value of preferred stock converted to common stock 49
Fair value of debt converted to common stock 2,398
Fair value of debt converted to preferred stock 9,796
Fair value of existing bridge notes 1,275
Fair value of warrants 1,996
Purchase consideration$21,602

In estimating the preliminary purchase consideration above, Transgenomic used its closing stock price of $6.80 as of the discontinued operations consistedClosing Date. Transgenomic had 895,334 common shares outstanding prior to the Merger. In connection with the Merger, Transgenomic preferred stock converted into 7,155 shares of Precipio common stock and certain of Transgenomic debt and accrued interest converted into 352,630 shares of Precipio common stock and 802,925 shares of Precipio preferred stock, face value $3.0 million with an 8% annual dividend. At the following:
 Three months ended September 30, Nine months ended September 30,
(Dollars in thousands)2016 2015 2016 2015
Net sales$283
 $5,507
 $1,960
 $17,868
Cost of goods sold57
 3,203
 1,251
 9,980
Gross profit226
 2,304
 709
 7,888
Selling, general and administrative expense252
 1,910
 1,621
 8,325
Research and development expense98
 106
 166
 330
Impairment of long-lived assets—
 7,024
 —
 7,024
Operating income (loss) from discontinued operations(124) (6,736) (1,078) (7,791)
Gain on sale of business/assets90
 1,532
 1,053
 1,532
Income (loss) from discontinued operations before income taxes(34) (5,204) (25) (6,259)
Income tax expense—
 44
 —
 133
Income (loss) from discontinued operations, net of taxes$(34) $(5,248) $(25) $(6,392)
Closing Date, the preferred stock had a fair value of $12.20 per share.

The loss from discontinued operations for the nine month period ended September 30, 2016, includes approximately $1.1 million in proceeds received from the saleAllocation of assets of our discontinued Patient Testing business.
Assets and liabilities of the discontinued operations are classified as assets held for sale and liabilities held for sale in the condensed consolidated balance sheets and consisted of the following:
 Dollars in Thousands
 September 30,
2016		 December 31,
2015
ASSETS   
Accounts receivable, net$244
 $1,905
Other current assets21
 82
Total Assets$265
 $1,987
    
LIABILITIES   
Accrued compensation$—
 $264
Total Liabilities$—
 $264
    
Purchase Consideration

The following is a summarytable sets forth an allocation of activitythe purchase consideration to the identifiable tangible and intangible assets of Transgenomic, the accounting acquiree, based on fair values as of the Closing Date with the excess recorded as goodwill:

(dollars in thousands)  
Current and other assets$419
Property and equipment 29
Goodwill 13,832
Other intangible assets(1) 
 21,100
Total assets 35,380
Current liabilities 13,604
Other liabilities 174
Total liabilities 13,778
Net assets acquired$21,602

(1)Other intangible assets consist of:
(dollars in thousands)  
Acquired technology$18,990
Customer relationships 250
Non-compete agreements 30
Trademark and trade name 40
Backlog 200
In-process research and development 1,590
Total intangibles$21,100

We determined the estimated fair value of the acquired technology but using the multi-period excess earnings method of the income approach. The estimated fair value of the remaining identifiable intangible assets acquired were determined primarily by using the income approach.

Unaudited pro forma information

The operating results of Transgenomic for the allowanceperiod after the Closing Date to June 30, 2017 have been included in the Company's condensed consolidated financial statements as of and for doubtful accounts from discontinued operations during the three and ninesix months ended SeptemberJune 30, 2016 and 2015. The allowance for doubtful accounts from discontinued operations is included in the assets held for sale in the condensed consolidated balance sheets.2017.


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 Dollars in Thousands
 
Beginning
Balance
 Additions Deductions 
Ending
Balance
Three Months Ended September 30, 2016$10,462
 $—
 $(5,192) $5,270
Three Months Ended September 30, 2015$8,406
 $1,052
 $(168) $9,290
Nine Months Ended September 30, 2016$14,664
 $—
 $(9,394) $5,270
Nine Months Ended September 30, 2015$7,927
 $3,782
 $(2,419) $9,290

4. INTANGIBLES AND OTHER ASSETS
We review our amortizable long-lived assets for impairment annually or whenever events indicate thatThe following unaudited pro forma information presents the carrying amount of the asset (group) may not be recoverable. An impairment loss may be neededCompany's financial results as if the sumacquisition of the future undiscounted cash flows is less than the carrying amount of the asset (group). The amount of the loss would be determined by comparing the fair market value of the asset to the carrying amount of the asset (group).Transgenomic had occurred on January 1, 2016:
Long-lived intangible assets as of September 30, 2016 and December 31, 2015 consisted of the following:
 Dollars in Thousands
 September 30, 2016
 Cost 
Accumulated
Amortization
 
Net Book
Value
Patents680
 80
 600
Intellectual property672
 290
 382
 $1,352
 $370
 $982



 Dollars in Thousands
 December 31, 2015
 Cost 
Accumulated
Amortization
 
Net Book
Value
Patents980
 274
 706
Intellectual property671
 207
 464
 $1,651
 $481
 $1,170

Estimated Useful Life
PatentsLife of the patent
Intellectual property7 years
Other assets include U.S. security deposits and deferred tax assets, net of applicable valuation allowances.
Amortization expense for intangible assets was $0.2 million and $0.1 million during the nine month periods ended September 30, 2016 and 2015, respectively. Amortization expense for intangible assets is expected to be $0.1 million for each of the years ending December 31, 2016, 2017, 2018, 2019 and 2020.






Dollars in thousands, except per share amounts   
 Six months ended June 30,
 2017 2016
Net sales$1,472
 $1,783
Net loss available to common stockholders(13,864) (13,266)
Loss per common share$(2.16) $(2.07)
    




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5.
4.         LONG-TERM DEBT

Long-term debt consists of the following:

  Dollars in Thousands
  September 30, 2016 December 31, 2015
Revolving Line of Credit(1)
 $3,243
 $3,025
Term Loan(2)
 4,000
 4,000
Convertible Promissory Notes (3)
 571
 571
Total debt 7,814
 7,596
Current portion of long-term debt (7,814) (7,596)
Long-term debt, net of current maturities $—
 $—
(1)
Revolving Line of Credit.Amounts advanced under the Revolving Line accrue interest at an annual rate equal to the greater of (a) 6.25% or (b) the Wall Street Journal prime rate plus 3%. The current interest rate is 6.50%. Interest is payable on a monthly basis, with the balance payable at the maturity of the Revolving Line. Under the Loan Agreement, we pay the Lenders a commitment fee of $20,000 on each one-year anniversary of March 13, 2013, the Effective Date, during the term of the Revolving Line. In addition, a fee of 0.5% per annum is payable quarterly on the unused portion of the Revolving Line. The Revolving Line matures on November 1, 2017.

(2)
Term Loan.We received $4.0 million under the Term Loan on the Effective Date. Pursuant to the terms of the Loan Agreement, as amended, the maturity date of the Loan Agreement was extended until November 1, 2017 and no principal payments on the Term Loan are due until such date. The current interest rate is 9.1%.

We will pay the Lenders an additional final payment of $120,000 at maturity or prepayment of the Term Loan. In addition, if we repay the Term Loan prior to maturity, we will pay the Lenders a prepayment penalty of 1% of the total outstanding balance under the Term Loan.
  Dollars in Thousands
  June 30, 2017 December 31, 2016
Senior Notes $—
 $3,270
Senior Note debt issuance costs —
 (9)
Junior Notes —
 584
Connecticut Innovations - line of credit 162
 162
Department of Economic and Community Development (DECD) 226
 243
DECD debt issuance costs —
 (30)
Webster Bank —
 328
Webster Bank debt discounts and issuance costs —
 (26)
Convertible promissory notes 125
 —
Total long-term debt 513
 4,522
Current portion of long-term debt (513) (395)
Long-term debt, net of current maturities $—
 $4,127

Additional Terms.
The Loan Agreement contains affirmativeSenior and negative covenants. UnderJunior Notes

During 2016, the Term Loan, we agreed not to (i) pledge or otherwise encumber our assets other than toCompany raised $525,000 from members through the Lenders, (ii) enter into additional borrowings or guarantees, (iii) repurchase our capital stock, or (iv) enter into certain mergers or acquisitions without the Lenders’ consent. Additionally, the Loan Agreement containsissuance of senior notes which accrue interest at a subjective acceleration clauserate of 12% and are payable at the discretionsooner of the Lenders. Asclosing of September 30, 2016, we were nota qualified public offering, as outlined in compliance with the Loan Agreement, as amended by the Ninth Amendment, due to the fact that we did not make the required monthly interest payments during the third quarter and have not received a waiver for the non-compliance and as such all debt has been classified as current at September 30, 2016.note agreement, or five years from date of issuance.

To secureAlso during 2016, the repaymentCompany restructured equity through a redemption and exchange agreement by exchanging Member Equity comprised of any amounts borrowed under the Revolving LineSeries A and the Term Loan, we granted the Lenders a security interest in all of our assets. The occurrence of an event of default under the Loan Agreement could resultSeries B Convertible Preferred Units in the accelerationamount of our obligations under the Loan Agreement, would increase the applicable$2,147,716 (members’ initial investment of $1,715,000, plus declared dividends on these preferred units of $432,716), and Convertible Bridge Notes of $1,120,000, plus accrued interest rate under the Revolving Line or Term Loan (or both) by 5%of $61,073 for new senior notes of $2,744,968 (“Senior Notes”) and would permit the Lenders to exercise remedies with respect to the collateral under the Loan Agreement. Asnew junior notes of the date these financials were available for release, the Lenders have not exercised the remedies under the Loan Agreement.

(3) Convertible Promissory Notes. $583,821 (“Junior Notes”). The Senior and Junior Notes accrue interest at a rate of 6% per year12% and mature15%, respectively, and have maturity dates ranging from March 2021 to September 2021, or earlier based on December 31, 2016.certain qualifying events as outlined in the note agreements.

Revolving Line and Term Loan.During the six months ended June 30, 2017, the Company raised $315,000 from members through the issuance of Senior Notes at a rate of 12% interest that are payable at the sooner of the closing of a qualified public offering, as outlined in the note agreement, or five years from date of issuance.

On March 13, 2013 (the “Effective Date”), wethe Closing Date of the Merger, the outstanding balance of $3,584,968 in Senior Notes and $583,821 in Junior Notes, plus accrued interest of $602,373, were converted into 802,920 shares of Precipio preferred stock and 1,414,700 shares of Precipio common stock. There were no Senior or Junior Notes outstanding as June 30, 2017.

As of December 31, 2016, the outstanding balance of Senior and Junior Notes was $3,269,968 and $583,821, respectively, with accrued interest included within the accrued expenses on the accompanying condensed consolidated balance sheet of $279,740 and $71,258, respectively.

Connecticut Innovations, Incorporated

The Company entered into a Loan and Security Agreement with affiliates of Third Security, LLC (the “Lenders”) for (a) a revolving line of credit (the “Revolving Line”)on April 1, 2012 with borrowing availabilityConnecticut Innovations, Incorporated (Connecticut Innovations), an entity affiliated with a director of the Company, for up to $4.0 million, subject$500,000 with interest paid monthly at 8%, due on September 1, 2018. Principal and interest payments began February 1, 2013 and ranged from $7,436 to reduction based on our eligible accounts receivable, and (b) a term loan (the “Term Loan” and, together with$12,206 until September 2016, when the Revolving Line, the “Loan Agreement”) of $4.0 million. Proceeds were used to pay off a three year senior secured promissory note payable to PGxHealth, LLC, which wasCompany entered into on December 29, 2010 in conjunction with our acquisition ofa forbearance agreement to 1) defer monthly principal payments until October 2017 and 2) make interest-only payments totaling $1,041 per month through October 2017. Pursuant to the FAMILION family of genetic tests, and for general corporate and working capital purposes.forbearance agreement, the

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On August 2, 2013, weCompany was also restricted from any additional borrowings under the line of credit. The line was secured by substantially all of the Company’s assets.

In connection with the Merger, the Company was to pay in full its loan obligations with Connecticut Innovations. The outstanding balance was $162,066 at both June 30, 2017 and December 31, 2016. The outstanding principal and accrued interest balance was paid in full in July 2017.

Department of Economic and Community Development.

The Company entered into an amendmenta 10-year term loan with the Department of Economic and Community Development (“DECD”) on May 1, 2013 for $300,000, with interest paid monthly at 3%, due on April 23, 2023. The loan was secured by substantially all of the Company’s assets but was subordinate to the Loan Agreement (the “Amendment”).term loan with Webster Bank and the Connecticut Innovations line of credit. In connection with the Merger, the Company was to pay in full its loan obligations with DECD. The Amendment, which became effectiveoutstanding balance was $225,714 and $243,287 as of June 30, 2013, reduced our future minimum revenue2017 and December 31, 2016, respectively. The outstanding principal and accrued interest balance was paid in full in July 2017.

Webster Bank.

The Company entered into a 3.5-year term loan with Webster Bank on December 1, 2014 for $500,000, with interest paid monthly at the one month LIBOR rate (1.16% at June 30, 2017) plus 500 basis points, due on May 31, 2018. The line was secured by substantially all of the Company’s assets and had first priority over all other outstanding debt.

The term loan with Webster Bank was subject to financial covenants underrelating to maintaining adequate cash runway, as defined in the Loan Agreementterm loan agreement. As of December 31, 2016 the Company was not in compliance with these covenants and, modifiedas such, the interest rates applicable toWebster Bank debt has all been presented as current in the amounts advanced under the Revolving Line.accompanying condensed consolidated financial statements.

On November 14, 2013, we entered intoJune 29, 2017, the closing date of the Merger, the Company paid in full its loan obligations (including principal and interest) with Webster Bank. The outstanding balance was zero and $328,000 as of June 30, 2017 and December 31, 2016, respectively.

During the three and six months ended June 30, 2017, the Company incurred a second amendmentloss on extinguishment of debt in the approximate amount of $53,000, related to the Loan Agreementextinguishment of the Connecticut Innovations, DECD and Webster Bank loans.

Convertible Promissory Notes.

The Company, as part of the merger, assumed an Unsecured Convertible Promissory Note (the “Second Amendment”“Note”) with an accredited investor (the “Investor”) in the aggregate principal amount of $125,000 and interest accrues at a rate of 6% per year. The Note provided that two-thirds of the outstanding principal amount of the Note was due upon the earlier to occur of the close of the Merger or June 17, 2017 (such applicable date, the “Maturity Date”).  The Second Amendment, which became effective asremaining one-third of October 31, 2013, reduced our future minimum revenue covenants under the Loan Agreement.principal amount outstanding on the Note was to be paid on the six month anniversary of the Maturity Date.

On January 27, 2014, we entered into a third amendment to the Loan Agreement (the “Third Amendment”). Pursuant toMaturity Date, the Third Amendment,then outstanding aggregate amount owed on the Lenders agreed to waive certain eventsNote of default under$143,041 ($125,000 in principal amount and $18,041 of accrued interest which is included within accrued expenses on the Loan Agreement, and the parties amended certain provisions of the Loan Agreement, including the minimum liquidity ratio that we must maintain during the term of the Loan Agreement.

On March 3, 2014, we entered into a fourth amendment to the Loan Agreement (the “Fourth Amendment”).accompanying consolidated condensed balance sheet) became due. Pursuant to the terms of the Fourth Amendment, we were not requiredNote, the Company’s failure to makepay any principal or interest payments underwithin 10 days of the Term Loan fordate such payment is due will constitute an event of default (the “Prospective Event of Default”). On June 21, 2017, the period from March 1, 2014 through March 31, 2015.Investor agreed to waive the Prospective Event of Default and agreed to further extend the Maturity Date of the Note pursuant to a side letter to the Note (the “Side Letter”). The Side Letter provides that two-thirds of the outstanding principal amount of the Note must be paid upon the earlier to occur of (1) the closing of a public offering by the Company of either common stock, convertible preferred stock or convertible preferred notes or (2) August 16, 2017 (such applicable date, the “Deferred Maturity Date”). As of August 21, 2017, the Company has not made any payment related to amounts that were due on August 16, 2017. Pursuant to the terms of the Notes, the Company’s failure to pay any principal or interest within 10 days of the date such payment is due will constitute an event of default. The Company is attempting to negotiate a resolution with the Investor so that the Company will not default on such payment; however, there is no guarantee that the Company will be able to work out a satisfactory resolution. The remaining one-third of the principal amount outstanding on the Note must be paid on the six month anniversary of the Deferred Maturity Date (the “Extended Maturity Date”). All accrued and unpaid interest on the debt that was deferredoutstanding principal amount of the Note will be due and not paid was capitalizedimmediately payable on the Extended Maturity Date, unless the Note is converted in which case such interest will be payable in shares of the Company’s common stock as part of the Term Loan. The amount of interest that was capitalized from March 1, 2014 to March 31, 2015 was $0.4 million.conversion.

On October 22, 2014, we entered into a fifth amendment to the Loan Agreement (the “Fifth Amendment”). Pursuant to the Fifth Amendment, the parties amended certain provisions of the Loan Agreement, including reducing the minimum liquidity and revenue covenants under the Loan Agreement. The Fifth Amendment also reduced the aggregate amount that we may borrow under the Revolving Line from $4.0 million to $3.0 million.

On April 1, 2015, we entered into a sixth amendment to the Loan Agreement (the “Sixth Amendment”). Pursuant to the Sixth Amendment, among other things, (a) the Lenders waived specified events of default under the terms of the Loan Agreement, (b) commencing April 1, 2015, we began making monthly interest payments with respect to the Term Loan to the Lenders, (c) we were not be obligated to make monthly payments of principal under the Term Loan to the Lenders until April 1, 2016, (d) we made an initial prepayment of a portion of the Term Loan balance in the amount of approximately $148,000 on April 1, 2015 and will make one or more additional prepayments to the Lenders under the Loan Agreement upon the occurrence of certain events, as defined in the Loan Agreement, and (e) we were not required to comply with the minimum liquidity ratio under the terms of the Loan Agreement until the earliest to occur of a specified event, as defined in the Loan Agreement, or March 31, 2016. The Sixth Amendment also extends the time period in which we must provide certain reports and statements to the Lenders and amends the circumstances pursuant to which we may engage in certain sales or transfers of our business or property without the consent of the Lenders.
As of June 30, 2015, we were in compliance with all financial covenants of the Loan Agreement, but were not in compliance with the restrictions limiting the amount that we may borrow under the Revolving Line. Accordingly, on August 10, 2015, we received a waiver from the Lenders relating to this non-compliance and paid the Lenders an aggregate of $0.7 million, which brought us back into compliance with the terms of the Revolving Line.

On September 4, 2015, we entered into a seventh amendment to the Loan Agreement (the “Seventh Amendment”). The Seventh Amendment, among other things, (a) provided that the Lenders waived specified events of default under the terms of the Loan Agreement, (b) reduced our future minimum revenue covenants under the Loan Agreement, (c) reduced our borrowing availability under the Revolving Line to approximately $2.3 million, and (d) limited our borrowing base under the Loan Agreement to the amount of the Revolving Line.

On January 6, 2016, we entered into an eighth amendment to the Loan Agreement (the “Eighth Amendment”). The Eighth Amendment, among other things, (a) provided that the Lenders waived specified events of default under the terms of the Loan Agreement, (b) reduced our future minimum revenue covenants under the Loan Agreement, (c) extended the maturity date of the Loan Agreement until November 1, 2017, and (d) provided for the repayment of an overadvance of $750,000 previously provided by the Lenders to us pursuant to the Loan Agreement.

On June 6, 2016, we entered into a ninth amendment to the Loan Agreement (the “Ninth Amendment”). The Ninth Amendment, among other things, (a) provided that the Lenders waived specified events of default under the terms of the Loan Agreement, (b) amended the prepayment terms of the Loan Agreement, (c) provided for the reduction of amounts available under the Revolving Line upon the prepayment or repayment of certain amounts by us, (d) removed the minimum liquidity ratio and minimum net revenue financial covenants applicable to us under the Loan Agreement, (e) amended the circumstances pursuant to which we may5.         CONVERTIBLE BRIDGE NOTES.

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engage in certain sales or transfers
Convertible Bridge Notes.

During the year ended December 31, 2016, the Company had outstanding $695,000 of our business or property withoutunsecured convertible bridge notes. The notes accrued interest at a rate of 14% and were payable on the consentextended maturity date of December 31, 2016. During January 2017, the holders of the Lenders,convertible bridge notes agreed to waive the maturity date of December 31, 2016 and (f) capitalized certain amounts owed by uschange it to payable on demand and accrue interest until paid.

The convertible bridge notes had conversion terms of (i) convertible into Series C Preferred Units of the Lenders and added such overdue amounts toCompany (at a 30% discount) upon a Qualified Series C Financing (as defined in the outstandingnote agreement), (ii) at the option of the holders of a majority of the then-outstanding principal amount of the Revolving Line.
As a resultnotes, convertible into Series C Preferred Units of the Ninth Amendment,Company (at a 30% discount) upon any other Series C Financing, or (iii) if no such Qualified Series C Financing occurs, or no such optional conversion takes place by the overadvancematurity date (as hereinafter defined), the convertible notes will be fully repaid by Company or the notes and accrued and unpaid interest shall convert into Preferred Series B Units (at a 30% discount) of the Preferred Series B conversion Price as defined in the operating agreement provided that existed at March 31, 2016 was addednotice is given to the outstanding principal amountCompany at least one day prior to maturity.  In the event a Deemed Liquidity Event (merger, sale, IPO, or transaction with exchange of 50% or more of voting power) the holders of the Revolving Linenotes at their sole discretion can (a) require the Company to pay an amount equal to two times the principal and no overadvance existed as of September 30, 2016.

Convertible Promissory Notes.

On December 31, 2014, we entered into an Unsecured Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”) with an accredited investor (the “Investor”), pursuant to which we agreed to issueaccrued and sell to the Investor in a private placement an unsecured convertible promissory note (the “Initial Note”). We issued the Initial Note in the aggregateunpaid interest or (b) convert all unpaid principal amount of $750,000 to the Investor on December 31, 2014. Pursuant to the terms of the Initial Note,and interest accrued at a rate of 6%70% of the applicable security.  These notes were subordinated to Connecticut Innovations, DECD and Webster Bank.

In connection with the Merger, on the Closing Date, convertible bridge notes of $695,000, plus $192,000 of accrued interest, were converted into 155,639 shares of Precipio common stock.

2017 New Bridge Notes I.

Prior to the Merger, the Company (then Transgenomic) completed the sale of an aggregate of $1.2 million of non-convertible promissory notes (the “2017 Bridge Notes”) in a bridge financing pursuant to a securities purchase agreement (the “Purchase Agreement”), for which $561,500 was then given to Precipio Diagnostics through the issuance of a promissory note and is eliminated in consolidation. The financing was intended to help facilitate the completion of the Merger. The 2017 Bridge Notes had an annual interest rate of 4% and a 90-day maturity. The 2017 Bridge Notes may be repaid by the Company at any time in cash upon payment of a 20% premium. In connection with the issuance of the 2017 Bridge Notes, the Company issued warrants (the “2017 Bridge Warrants”) to acquire 40,000 shares of the Company's common stock at an exercise price of $15.00 per yearshare, subject to anti-dilution protection. The Purchase Agreement provides certain piggyback registration rights for the holders of the 2017 Bridge Warrants for a period of six months after the closing of the bridge financing. Aegis Capital Corp. acted as placement agent for the bridge financing and received a placement agent fee of $84,000 and warrants (the “Aegis Warrants”) to acquire 5,600 shares of the Initial Note was setCompany's common stock at an exercise price of $15.00 per share. The Aegis Warrants are identical to maturethe 2017 Bridge Warrants except that the Aegis Warrants do not have anti-dilution protection.

At the time of the Merger, the 2017 Bridge Notes were extinguished and replaced with convertible promissory notes (the “2017 New Bridge Notes I”) with an original principal amount of $1.2 million in the aggregate pursuant to an Exchange Agreement (the “Exchange Agreement”) entered into on December 31, 2016. Under the Initial Note,Closing Date. The 2017 New Bridge Notes I have an annual interest rate of 8.0% and are due and payable upon the outstanding principal and unpaid interest accrued wasearlier to occur of (i) October 1, 2017 or (ii) the closing of a Qualified Offering (as defined in the 2017 New Bridge Notes I). The 2017 New Bridge Notes I are convertible into shares of our common stock at an initial conversion price of $3.736329 per share, subject to adjustment, and may be convertible into shares of our preferred stock at the holder’s option if the Company does not complete a Qualified Offering (as defined in the 2017 New Bridge Notes I) by October 1, 2017. The Company may redeem the 2017 New Bridge Notes I at any time in cash upon payment of a 20% premium, or $240,000. As the convertible promissory notes were convertible into the Company's common stock at a conversion rate lower than the fair market value of the common stock at the time of issuance, the Company recorded $989,000 as follows: (i) commencing upona beneficial conversion feature, which was recorded as a debt discount in the balance sheet. The discount will be amortized using the effective interest method through the first conversion date of issuance of the Initial Note (but no earlier than January 1, 2015),2017 New Bridge Notes I.

Pursuant to the Investor was entitledExchange Agreement, the 2017 Bridge Warrants were canceled and replaced with new warrants to convert, on a one-time basis, up to 50% of the outstanding principal and unpaid interest accrued under the Initial Note, intoacquire 45,600 shares of our common stock at a conversion price equal to the lesser of (a) the average closing(the “2017 New Bridge Warrants”). The initial exercise price of the common stock on the principal securities exchange or securities market on which our common stock2017 New Bridge Warrants is then traded (the “Market”) for the 20 consecutive trading days immediately preceding the date of conversion, and (b) $2.20$7.50 (subject to adjustment for stock splits, stock dividends, other distributions, recapitalizations andadjustments). If the like); and (ii) commencing February 15, 2015,Company completes a Qualified Offering (as defined in the Investor was entitled to convert, on a one-time basis, any or all2017 New Bridge warrants), the exercise price of the remaining outstanding principal and unpaid interest accrued under2017 New Bridge Warrants will become the Initial Note, into shareslower of our common stock at a conversion price equal to 85%(i) $7.50, or (ii) 110% of the average closingper share offering price of our common stock onin the Market for the 15 consecutive trading days immediately preceding the date of conversion. The Initial NoteQualified Offering, but in no event lower than $1.50 per share, which has been convertedconsidered a down round provision. At issuance, the 2017 New Bridge Warrants had a fair value of $211,000 and were recorded as a debt discount to the related 2017 New Bridge Notes I, with the corresponding entry to additional paid in full into 502,786 shares of our common stock,capital as the warrants were considered classified as equity in accordance with the termsGAAP. As discussed in Note 2 of the Initial Note.

On January 15, 2015, we entered into the Note Purchase Agreement with seven accredited investors (the “Additional Investors”) and, on January 20, 2015, issued and sold to the Additional Investors, in a private placement, notes (the “Additional Notes”) in an aggregate principal amount of $925,000. The Additional Notes have the same terms and conditions as the Initial Note. As of September 30, 2016, $400,000 of the aggregate principal amount of the Additional Notes, and accrued interest thereon, has been converted into an aggregate of 281,023 shares of our common stock.

6. COMMITMENTS AND CONTINGENCIES
We are subject to a number of claims of various amounts that arise out of the normal course of our business. In our opinion, the disposition of pending claims, in excess of recorded accruals, could have a material adverse effect on ouraccompanying unaudited condensed consolidated financial position, results of operations or cash flows. On February 25, 2016, the Board of Regents of the University of Nebraska (“UNMC”) filed a lawsuit against us in the District Court of Douglas County, Nebraska, for breach of contract and seeking recovery of $0.7 million owed by us to UNMC. We and UNMC are currently in discussions to determine a mutually agreeable means by which to settle the outstanding liability. A $0.7 million liability has been recorded at December 31, 2015 and September 30, 2016.
In addition, on April 13, 2016, Fox Chase Cancer Center (“Fox Chase”) filed a lawsuit against us in the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania Civil Trial Division (the “Court of Common Pleas”), alleging, among other things, breach of contract, tortious interference with present and prospective contractual relations, unjust enrichment, fraudulent conversion and conspiracy and seeking punitive damages in addition to damages and other relief. This lawsuit relates to a license agreement we entered into with Fox Chase in August 2000, as amended (the “License Agreement”), as well as the assignment of certain of our rights under the License Agreement to Integrated DNA Technologies, Inc. (“IDT”) pursuant to the Surveyor Kit Patent, Technology and Inventory Purchase Agreement we entered into with IDT effective as of July 1, 2014 (the “IDT Agreement”). Pursuant to the terms of the IDT Agreement, we agreed to indemnify IDT with respect to certain of the claims asserted in the Fox Chase proceeding. On July 8, 2016, the Court of Common Pleas sustained our preliminary objections to several of Fox Chase’s claims and dismissed the claims for tortious interference, fraudulent conversion, conspiracy, punitive damages and attorney’s fees.  Accordingly, the case has been narrowed so that only certain contract claims and an unjust enrichment claim remain pending against us. We believe that we have good and substantial defenses to the claims asserted by Fox Chase. We are unable to determine whether any loss will occur or to estimate the range of such potential loss; therefore, no amount of loss has been accrued by us as of the date of filing of this Quarterly Report on Form 10-Q. Furthermore, there is no guarantee that we will prevail in this suit or receive any damages or other relief if we do prevail.statements,

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On June 23, 2016, the Icahn SchoolCompany early adopted ASU 2017-11, which allowed the Company to treat the warrants as equity classified, despite the down round provision.

2017 New Bridge Note II.

In connection with the Merger, on the Closing Date and pursuant to a Securities Purchase Agreement (the “Bridge Purchase Agreement”), the Company completed the sale of Medicine at Mount Sinai (“Mount Sinai”) filedan aggregate of $800,000 of a lawsuit against usconvertible promissory note (the “2017 New Bridge Note II”). The Company received net proceeds of $721,000 from the sale of the 2017 New Bridge Note II, which will be used for working capital purposes. The 2017 New Bridge Note II has an annual interest rate of 8.0% and are due and payable upon the earlier to occur of (i) October 1, 2017 or (ii) the closing of a Qualified Offering (as defined in the Supreme Court2017 New Bridge Note II). The 2017 New Bridge Note II is convertible into shares of our common stock at an initial conversion price of $3.736329 per share, subject to adjustment, and may be convertible into shares of our preferred stock at the holder’s option if the Company does not complete a Qualified Offering (as defined in the 2017 New Bridge Note II) by October 1, 2017. The Company may redeem the 2017 New Bridge Note II at any time in cash upon payment of a 20% premium, or $160,000.

As the 2017 New Bridge Note II was convertible into the Company's common stock at a conversion rate lower than the fair market value of the Statecommon stock at the time of issuance, the Company recorded $656,000 as a beneficial conversion feature, which was recorded as a debt discount in the balance sheet. The discount will be amortized using the effective interest method through the first conversion date of the 2017 New York, CountyBridge Note II.

In connection with the bridge financing and the assumption of certain obligations by an entity controlled by Mark Rimer (a director of the Company), the Company issued to that entity warrants (the “Side Warrants”) to purchase an aggregate of 91,429 shares of the Company's common stock at an exercise price of $7.00 per share (subject to adjustment), with a fair value of $487,000 at the date of issuance. The Side Warrants have a term of 5 years and are exercisable as to 22,857 shares of the Company's common stock upon grant and as to 68,572 shares of the Company's common stock upon the entity’s performance of the assumed obligations. The Company has recorded merger advisory expense of $414,000 related to the Side Warrants during the three and six months ended June 30, 2017. The remaining fair value of $73,000 will be recorded as expense at the time the performance obligations are met.
In addition, upon the Company consummating one or more rounds of equity financing following July 1, 2017, with aggregate gross proceeds of at least $7 million, the Company will use a portion of the proceeds from such financing to repay the principal amount of the 2017 New York, alleging, among other things, breachBridge Notes, together with any premium and interest.

As of contract and, alternatively, unjust enrichment and quantum merit, and seeking recovery of $0.7 million owed by us to Mount Sinai for services rendered. We and Mount Sinai are currently in discussions to determine a mutually agreeable means by which to settleJune 30, 2017, the outstanding liability. A $0.7convertible notes balance was $2.0 million, liabilitynet of debt discounts of $1.7 million and debt issuance cost of $0.1 million. Accrued interest of approximately $10,000 is included within accrued expenses on the accompanying condensed consolidated balance sheet.


6.         ACCRUED EXPENSES.

Accrued expenses consist of the following:

  June 30, 2017 December 31, 2016
Accrued expenses $2,560
 $50
Accrued compensation 791
 155
Accrued interest 170
 495
  $3,521
 $700


7. CONTINGENCIES

The Company is involved in legal proceedings related to matters, which are incidental to its business. The Company has also assumed a number of claims as a result of the Merger. See below for a discussion on these matters.

The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program

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participation requirement, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers.

Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been recordedmade, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at December 31, 2015 and September 30, 2016.this time.

The outcome of legal proceedings and claims brought against us are subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, our financial statements for such reporting period could be materially adversely affected. In general, the resolution of a legal matter could prevent us from offering our services or products to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results.

Claims assumed in the Merger

The Company assumed a number of claims as a result of the Merger. In addition to the claims described below, we are delinquent on the payment of outstanding accounts payable certain of our vendors and suppliers who have taken or have threatened to take legal action to collect such outstanding amounts.

On February 25, 2016, the Board of Regents of the University of Nebraska (“UNMC”) filed a lawsuit against us in the District Court of Douglas County, Nebraska, for breach of contract and seeking recovery of $0.7 million owed by us to UNMC. A $0.4 million liability has been recorded and is reflected in accrued expenses at March 31, 2017 and December 31, 2016. We and UNMC entered into a settlement agreement dated February 6, 2017, which included, among other things, a mutual general release of claims, and our agreement to pay $0.4 million to UNMC in installments over a period of time. As of March 15, 2017, the initial payment due to UNMC under the settlement agreement is delinquent. We and UNMC are currently in discussions to extend the date of the initial payment due to UNMC. A $0.4 million liability has been recorded and is reflected in accrued expenses at June 30, 2017.

On April 13, 2016, Fox Chase Cancer Center (“Fox Chase”) filed a lawsuit against Transgenomic in the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania Civil Trial Division (the “Court of Common Pleas”), alleging, among other things, breach of contract, tortious interference with present and prospective contractual relations, unjust enrichment, fraudulent conversion and conspiracy and seeking punitive damages in addition to damages and other relief. This lawsuit relates to a license agreement Transgenomic entered into with Fox Chase in August 2000, as amended (the “License Agreement”), as well as the assignment of certain of Transgenomic's rights under the License Agreement to Integrated DNA Technologies, Inc. (“IDT”) pursuant to the Surveyor Kit Patent, Technology and Inventory Purchase Agreement Transgenomic entered into with IDT effective as of July 1, 2014 (the “IDT Agreement”). Pursuant to the terms of the IDT Agreement, Transgenomic agreed to indemnify IDT with respect to certain of the claims asserted in the Fox Chase proceeding. On July 8, 2016, the Court of Common Pleas sustained Transgenomic's preliminary objections to several of Fox Chase’s claims and dismissed the claims for tortious interference, fraudulent conversion, conspiracy, punitive damages and attorney’s fees.  Accordingly, the case has been narrowed so that only certain contract claims and an unjust enrichment claim remained pending against Transgenomic.
During June 2017, prior to the Merger, Transgenomic entered into a settlement agreement with Fox Chase (the “Agreement”) which will resolve all outstanding claims in the litigation brought in April 2016 by Fox Chase against Transgenomic in the Court of Common Pleas of Philadelphia County (the “Action”). The case will remain pending with the Court until all settlement payments to Fox Chase have been made. Under the Agreement the Company will make three (3) payments to Fox Chase totaling $175,000. The last payment is to be made on or before September 30, 2017, and once received Fox Chase is obligated to cause the Action to be formally dismissed with prejudice. Also, on July 13, 2017 the Company entered into an agreement with its co-Defendant, IDT, regarding the Company’s indemnity obligations to IDT for legal fees and expenses incurred in the Action pursuant to the terms of the IDT Agreement. The IDT Agreement provides for monthly payments of $27,800 from the Company to IDT, in the total amount of $139,000, commencing on August 15, 2017 and concluding on December 15, 2017. A $0.3 million liability has been recorded and is reflected in accrued expenses at June 30, 2017.

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On June 23, 2016, the Icahn School of Medicine at Mount Sinai (“Mount Sinai”) filed a lawsuit against us in the Supreme Court of the State of New York, County of New York, alleging, among other things, breach of contract and, alternatively, unjust enrichment and quantum merit, and seeking recovery of $0.7 million owed by us to Mount Sinai for services rendered. We and Mount Sinai entered into a settlement agreement dated October 27, 2016, which included, among other things, a mutual general release of claims, and our agreement to pay approximately $0.7 million to Mount Sinai in installments over a period of time. A $0.7 million liability has been recorded and is reflected in accrued expenses at June 30, 2017. Effective as of February 1, 2017, we and Mount Sinai agreed to amend the terms of our settlement agreement to extend the date of the initial payment due to Mount Sinai.
On December 19, 2016, Todd Smith (“Smith”) filed a lawsuit against us in the District Court of Douglas County Nebraska, alleging breach of contract and seeking recovery of $2.2 million owed by us to Smith for costs and damages arising from a breach of our obligations pursuant to a lease agreement between the parties. On April 7, 2017, we entered into a settlement agreement with Smith related to the early termination of our lease for our Omaha, Nebraska facility. The agreement included, among other things, a mutual general release of claims, and our agreement to pay approximately $0.6 million to Smith in installments over a period of time. A $0.6 million liability has been recorded and is reflected in accrued expenses at June 30, 2017.
On February 21, 2017, XIFIN, Inc. (“XIFIN”) filed a lawsuit against us in the District Court for the Southern District of California alleging breach of written contract and seeking recovery of approximately $0.27 million owed by us to XIFIN for damages arising from a breach of our obligations pursuant to a Systems Services Agreement between us and XIFIN, dated as of February 22, 2013, as amended and restated on September 1, 2014. On April 5, 2017, the court clerk entered default against us. On May 5, 2017, XIFIN filed an application for entry of default judgment against us. A $0.3 million liability has been recorded and is reflected in accrued expenses at June 30, 2017.
We and Science Park Development Corporation (“SPDC”) entered into that certain equipment, vehiclesLease dated as of December 31, 2011, as modified by the First Amendment to Lease dated as of June 18, 2013, as further modified by a letter agreement dated as of February 2, 2015, as modified by the Second Amendment to Lease dated as of June 26, 2015 (the “ SPDC Lease”). In November 2016, SPDC alleged that we defaulted on our obligations under the SPDC Lease. Specifically, SPDC alleges that we failed to pay approximately $0.4 million in rental payments due under the SPDC Lease and operating facilities under non-cancellable operating leases that expire on various dates through 2022. The future minimum lease payments required under these leases arewe vacated a portion of the leased premises in violation of the terms of the SPDC Lease. We and SPDC entered into a settlement agreement dated March 6, 2017, which included, among other things, a mutual general release of claims, and our agreement to pay approximately $0.4 million to SPDC in installments over a period of time. This liability has been recorded and is reflected in accrued expenses at June 30, 2017.
CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owe approximately $0.2 million for certain patent maintenance services rendered. CPA Global has not filed claims against us in connection with this allegation. A liability of approximately $0.2 million has been recorded and is reflected in accrued expenses at June 30, 2017.
On March 9, 2016, counsel for Edge BioSystems, Inc. (“EdgeBio”) sent a demand letter on behalf of EdgeBio to us in connection with the remainderterms of 2016, $0.7 millionthat certain Asset Purchase Agreement dated September 8, 2015 (the “EdgeBio Agreement”). EdgeBio alleges, among other things, that certain customers of EdgeBio erroneously remitted payments to us, that such payments should have been paid to EdgeBio and that we failed to remit these funds to EdgeBio in 2017, $0.7 million in 2018, $0.7 million in 2019, $0.7 million in 2020 and $0.4 million thereafter. Rent expense for eachviolation of the nine month periods endedterms of the EdgeBio Agreement. On September 30,13, 2016, and 2015 was $0.2 million. At September 30, 2016, firm commitmentswe received a demand for payment letter from EdgeBio’s counsel alleging that the balance due to vendors totaledEdgeBio is approximately $0.1 million. A liability of approximately $0.1 million has been recorded and is reflected in accrued expenses at June 30, 2017.
On February 17, 2017, Jesse Campbell (“Campbell”) filed a lawsuit individually and on behalf of others similarly situated against us in the District Court for the District of Nebraska alleging we have a materially incomplete and misleading proxy relating to a potential merger and that the merger agreement’s deal protection provisions deter superior offers.  As a result, he alleges that we have violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereafter.  Although we intend to defend the lawsuit, there can be no assurance regarding the ultimate outcome of this case. Given the uncertainty of litigation, the legal standards that must be met for, among other things, class certification and success on the merits, we are unable to estimate the amount of loss, or range of possible loss, at this time that may result from this action. In the event that a settlement is reached related to these matters, the amount of such settlement may be material to our results of operations and financial condition and may have a material adverse impact on our liquidity.

7.8. INCOME TAXES

Annually, we
We file U.S. Federal, state and foreigna US federal consolidated income tax returns.  All U.S. Federalreturn and most state loss carryforwards remain subject to adjustment in the event of an income tax examination.returns in various jurisdictions. We have statutes of limitation open for federal & state income tax returns related to tax years 2014 through 2016.
Income tax expense from continuing operations was zero for the three and nine months ended September 30, 2016. Income tax expense was zero forboth the three months ended September 30, 2015 and for the ninesix months ended SeptemberJune 30, 2015, we had an income tax benefit2017 was zero as a result of approximately one thousand dollars. We maintainrecording a full valuation allowance on ouragainst the deferred tax asset generated predominantly by net operating losses. For the three and six months ended June 30, 2016, the Company was organized as a limited liability company and operated under the default classification as a partnership until July 31, 2016. Consequently, prior to August 1, 2016, income tax expense or benefits were calculated at the members’ level.

We had no material interest or penalties during fiscal 2017 or fiscal 2016, and we do not anticipate any such items during the next twelve months. Our policy is to record interest and penalties directly related to uncertain tax positions as income tax expense in the condensed consolidated statements of operations.

As a result of the merger, there was a change in ownership as defined in IRS § 382. Because of this change, use of a portion of the accumulated net operating losses and tax credit carryforwards will be limited in future periods. Further, a portion of the carryforwards will expire before being applied to reduce future income tax liabilities. Since the net deferred tax assets having concluded that we arehave a full valuation allowance recorded, any limitation generated from this calculation would not more likely than not going to realizeeffect the benefit of our deferred tax assets, including our net operating loss carryforwards.current financial statements.
During each of the three and nine month periods ended September 30, 2016 and 2015, there were no material changes to the liability for uncertain tax positions.

8.9. STOCKHOLDERS’ EQUITY (DEFICIT)

Common Stock.

Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have 150,000,000
shares of common stock authorized for issuance.
On February 2, 2012, we entered into definitive agreements with institutional and other accredited investors and raised approximately $22.0 million in a private placement financing (the “Private Placement”), which included an aggregate of $3.0 million in convertible notes issued in December 2011 to entities affiliated with Third Security, LLC, a related party, that automatically converted into shares of our common stock and warrants to purchase such common stock on the same terms as all investors in the Private Placement. Pursuant to the purchase agreement, we issued an aggregate of 1,583,333 shares of our common stock at a price per share of $12.00, as well as five-year warrants to purchase up to an aggregate of 823,333 shares of our common stock with an exercise price of $15.00 per share. In connection with the Merger, the Company effected a 1-for-30 reverse stock split of its common stock. This reverse stock split became effective on June 13, 2017 and, unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying unaudited condensed consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split. Additionally, as a result of the Merger, the Company has recapitalized its stock. All historical preferred stock, common stock, restricted units, warrants and additional paid-in capital, including share and per share amounts, have been retroactively adjusted to reflect the equity structure of the combined company, including the effect of the Merger exchange ratio. Pursuant to the Merger Agreement, each outstanding share of capital stock of Precipio Diagnostics was exchanged for 10.2502 pre-reverse stock split shares of the Company's common stock.
As of December 31, 2016, there were 449,175 share of common stock outstanding.
During 2017, restricted stock of 59,563 shares were granted during the three and six months ended June 30, 2017, none of which vested prior to the merger, upon closing of the merger, all shares fully vested. During 2017, 64,593 shares were released to common stock. We recorded stock compensation expense of approximately $28,000 related to restricted stock that vested during the six months ended June 30, 2017.
On the Closing Date, Precipio Diagnostics received 4,317,152 shares of Precipio common stock from the conversion of the convertiblepreferred stock, senior and junior debt, bridge notes issued by us to the entities affiliated with Third Security, LLC, the entitiesand warrants. Also, certain advisors of Precipio Diagnostics received an aggregate of 250,000321,821 shares of ourPrecipio common stock and 125,000 warrants on the same terms as all investors in the Private Placement. Craig-Hallum Capital Group LLC (“Craig-Hallum”) served as the sole placement agent for the offering. In consideration forrelated to services rendered as the placement agent in the offering, we agreed to (a) pay to the placement agent cash commissions equal to $1,330,000, or 7.0% of the gross proceeds received in the offering; (b) issue to the placement agent a five-year warrant to purchase up to 31,666 shares of our common stock (representing 2% of the shares sold in the Private Placement) with an exercise price of $15.00 per share and other terms that are the same as the terms of the warrants issued in the Private Placement; and (c) reimburse the placement agent for reasonable out-of-pocket expenses, including fees paid to the placement agent’s legal counsel, incurredperformed in connection with the offering, which reimbursable expenses were not to exceed $125,000.Merger. The costs incurred to completefair value of these advisory shares was $2.2 million at the Private Placement were recordeddate of the Merger and is included as a reduction in equitymerger advisory fee expense in the amountaccompanying financial statements.
As part of $1.5 million. Net proceeds from this offeringthe Merger, Precipio Diagnostics also received 200,081 shares of Precipio common stock that have not been issued yet. 135,000 of these shares are being held for future issuance to advisors pending completion of certain performance obligations. If these performance obligations are not met, the shares will remain with Precipio Diagnostics as part of the unissued pool. For any shares that remain unissued, it is the intent of the Company to allocate these to Precipio Diagnostics shareholders on a pro rata basis.
Also, upon completion of the Merger, Transgenomic legacy stockholders had 1,255,119 shares of Precipio common stock outstanding.
As of June 30, 2017, there were used for general corporate and working capital purposes, primarily to accelerate development6,407,860 shares of several of our key initiatives.Precipio common stock outstanding.

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On January 24, 2013, weCommon Stock Warrants.
Prior to the merger, in connection with the line of credit with Connecticut Innovations, the Company issued warrants to purchase 8,542 Series A Preferred shares of the Company, which were classified as an equity warrant, at an exercise price of $2.93 per unit, subject to adjustments as defined in the warrant agreement. The warrants were valued at $6,000 at the date of the grant utilizing the Black-Sholes model (volatility 40%, expected life 7 years, and risk free rate .36%). The value of the warrants were treated as a debt discount. At the Merger date, the warrants were exercised and then converted into shares of Precipio common stock.
In connection with the Webster Bank agreement, the Company issued 7 years warrants to purchase 20,000 Series B Preferred shares of the Company. At the Merger date, Webster Bank declined to exercise their warrants and, per the terms of the warrant agreement, the warrants were retired.
In March 2016, the Company entered into a Securities Purchase Agreementredemption and exchange agreement with certain institutionalmember's relating to their 275,237 Preferred A Units and other accredited investors pursuant to which we: (a) sold208,087 Preferred B Units. Under the terms of the agreement, the unit holders would exchange their units in the Company for the issuance of debt. The aggregate purchase price per the agreement was the member's initial investment of $750,000 for Preferred A Units and $965,000 for Preferred B Units, along with a preferred return of 8%, recorded as a dividend in the amount of $432,716. In addition to the investorsdebt issued as consideration for the member's preferred units, the Company also issued common warrant units, which allows the holders to collectively purchase common units of the Company, representing approximately 60% of the Company at the time of exercise. At the time of issuance, this represented approximately 1,958,204 common units. The common warrant units had a $0.00 exercise price with a ten year expiration date. The common warrant units were classified as equity awards and the fair value upon issuance was calculated utilizing a discounted cash flow analysis to value the Company's equity and an option pricing method to allocate the value of the equity. The fair value of the warrants was determined directly utilizing the option pricing method as the exercise price was $0.00. The aggregate value of 1,383,333the common warrant units was $1,421,738, which was considered a deemed dividend. At the time of the Merger, these warrants were converted into 1,958,204 shares of Precipio common stock.
Warrants Assumed in Merger
At the time of the Merger, Transgenomic had a number of outstanding warrants related to various financing transactions that occurred between 2013-2016. Details related to year issued, expiration date, amount of underlying common shares and exercise price are included in the table below.
2017 New Bridge Warrants
During the six months ended June 30, 2017, prior to the Merger, Transgenomic completed the sale of the 2017 Bridge Notes in the amount of $1.2 million and the issuance of the 2017 Bridge Warrants to acquire 40,000 shares of the Company's common stock at an exercise price of $15.00 per share, subject to anti-dilution protection. Aegis Capital Corp. acted as placement agent for the bridge financing and received Aegis Warrants to acquire 5,600 shares of Transgenomic common stock at an exercise price of $15.00 per share. The Aegis Warrants are identical to the 2017 Bridge Warrants except that the Aegis Warrants do not have anti-dilution protection. (See Note 5 - Convertible Bridge Notes).
In connection with the Merger, the holders of the 2017 Bridge Notes, the 2017 Bridge Warrants and the Aegis Warrants agreed to exchange the 2017 Bridge Notes, the 2017 Bridge Warrants and the Aegis Warrants for 2017 New Bridge Notes and the 2017 New Bridge Warrants to acquire 45,600 shares of our common stock at a price per share of $6.00 for aggregate gross proceeds of approximately $8.3 million; and (b) issued to the investors warrants to purchase up to an aggregate of 691,655 shares of our common stock with anstock. (See Note 5 - Convertible Bridge Notes). The initial exercise price of $9.00the 2017 New Bridge Warrants is $7.50 (subject to adjustments). If the Company completes a Qualified Offering (as defined in the 2017 New Bridge Warrants), the exercise price of the 2017 New Bridge Warrants will become the lower of (i) $7.50 or (ii) 110% of the per share (the “2013 Offering”). Theoffering price in the Qualified Offering, but in no event lower than $1.50 per share.
At issuance, the 2017 New Bridge Warrants had a fair value of $211,000 and were recorded as a debt discount to the related 2017 New Bridge Notes I, with the corresponding entry to additional paid in capital as the warrants may be exercised,were considered classified as equity in whole or in part, at any time from January 30, 2013 until January 30, 2018accordance with GAAP.
Side Warrants
In connection with the bridge financing and contain both cash and “cashless exercise” features. Affiliatesthe assumption of Third Security, LLC purchasedcertain obligations by an aggregateentity controlled by Mark Rimer (a director of 500,000 shares of common stock and warrantsthe Company), the Company issued to that entity Side Warrants to purchase an aggregate of 250,00091,429 shares of the Company's common stock in the 2013 Offering on the same terms as the other investors. Net proceeds from the 2013 Offering were used for general corporate and working capital purposes.
In connection with the 2013 Offering, we entered into a registration rights agreement with the investors (the “Registration Rights Agreement”). The Registration Rights Agreement required that we file with the SEC a registration statement to register for resale the shares of common stock sold and the shares of common stock issuable upon exercise of the warrants (the “Warrant Shares”) by March 16, 2013. The registration statement was filed with the SEC on March 15, 2013 and was declared effective by the SEC on March 29, 2013.
The 2013 Offering required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the Private Placement. Theat an exercise price of the warrants decreased from $15.00$7.00 per share (subject to $12.96 per share and the numberadjustment), with a fair value of shares issuable upon exercise of the warrants increased from 948,333 to 1,097,600.
On October 22, 2014, we entered into a Securities Purchase Agreement with certain accredited investors (the “October 2014 Investors”), pursuant to which we, in a private placement, issued and sold to the October 2014 Investors (the “2014 Private Placement”) an aggregate of 730,776 shares of our common stock$487,000 at a price per share of $3.25 for an aggregate purchase price of approximately $2.4 million, and warrants to purchase up to an aggregate of 365,388 shares of our common stock with an initial exercise price of $4.00 per share that are exercisable for the period from April 22, 2015 through April 22, 2020. In connection with the 2014 Private Placement, we also issued a warrant to purchase up to an aggregate of 9,230 shares of our common stock to one advisor. The warrants issued in the 2014 Private Placement include both cash and “cashless exercise” features.
The 2014 Private Placement required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the February 2012 common stock and warrant sale. The exercise price of the warrants decreased from $11.73 per share to $10.86 per share and the number of shares issuable upon exercise of the warrants increased from 1,212,665 to 1,309,785.
On December 31, 2014, we entered into the Note Purchase Agreement with the Investor pursuant to which we agreed to issue and sell the Initial Note to the Investor (the “Note Private Placement”). See Note 5 - “Debt-Convertible Promissory Notes” for additional information regarding the terms of the Initial Note. Pursuant to the terms of the Note Purchase Agreement, we are subject to certain registration obligations and we may be required to effect one or more other registrations to register for resale the shares of our common stock issued or issuable under the Initial Note in connection with certain “piggy-back” registration rights granted to the Investor.

The Note Private Placement required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the February 2012 common stock and warrant sale. The exercise price of the 2012 warrants decreased from $10.86 per share to $10.25 per share and the number of shares issuable upon exercise of the warrants increased from 1,309,785 to 1,387,685.

On January 15, 2015, we entered into the Note Purchase Agreement with the Additional Investors and, on January 20, 2015, issued and sold to the Additional Investors, in a private placement, the Additional Notes in an aggregate principal amount of $925,000 (the “Additional Note Private Placement”). The Additional Notes have the same terms and conditions as the Initial Note.

Craig-Hallum acted as the sole placement agent for the sale and issuance of the Additional Notes. In connection with the sale and issuance of the Additional Notes, we issued to Craig-Hallum an unsecured convertible promissory note, upon the same terms and conditions as the Notes, in an aggregate principal amount equal to 5% of the proceeds received by us pursuant to the sale and issuance of the Additional Notes, or $46,250 (the “Placement Agent Note”). As of the date of filing of this Quarterly Report on form 10-Q, the Placement Agent Note remains outstanding.

The Additional Note Private Placement required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the Private Placement. The exercise price of these warrants decreased from $10.25 per share to $9.59 per share and the number of shares issuable upon exercise of the warrants increased from 1,387,685 to 1,483,161.


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On February 27, 2015, we entered into a purchase agreement with Craig-Hallum (the “Underwriter”) relating to our sale and issuance of 3,573,899 shares of our common stock and corresponding warrants to purchase up to 714,780 shares of our common stock (the “February 2015 Offering”). Each share of common stock was sold in combination with a warrant to purchase 0.20 of a share of common stock. The purchase price to the public for each share of common stock and accompanying warrant was $1.95.
The purchase price paid by the Underwriter to us for the common stock and accompanying warrants was $1.8135. The net proceeds from the February 2015 Offering, after deducting the Underwriter’s discount and other estimated February 2015 Offering expenses, were approximately $6.2 million.
The accompanying warrants are exercisable immediately upon their initial issuance date at an exercise price of $2.24 per share and will expire five years from the date of issuance. The exercise price will also be subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock.
The February 2015 Offering required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the Private Placement. The exercise price of these warrants decreased from $9.59 per share to $7.56 per share and the number of shares issuable upon exercise of the warrants increased from 1,483,161 to 1,881,396.
On June 30, 2015, we entered into a Securities Purchase Agreement with certain accredited investors (the “July 2015 Investors”) pursuant to which, on July 7, 2015, we sold to the July 2015 Investors (a) an aggregate of approximately 1.5 million shares of our common stock at a price per share of $1.42, (b) warrants (the “Series B Warrants”) to purchase up to an aggregate of 0.7 million shares of our common stock with an exercise price of $0.01 per share, and (c) warrants (the “Series A Warrants” and, together with the Series BSide Warrants the “July 2015 Warrants”) to purchase up to an aggregate of 1.2 million shares of our common stock, with an exercise price of $1.66 per share (collectively, the “July 2015 Offering”). Each of the July 2015 Warrants hashave a term of 5 years and 1/2 years.are exercisable as to 22,857 shares of the Company's common stock upon grant and as to 68,572 shares of the Company's common stock upon the entity’s performance of the assumed obligations. The Series BCompany has recorded merger advisory expense of $414,000 related to the Side Warrants were immediately exercisable upon issuance. The Series A Warrants became exercisable on January 7, 2016,during the three and six months fromended June 30, 2017. The remaining fair value of $73,000 will be recorded as expense at the date of issuance. The aggregate gross proceeds to us fromtime the July 2015 Offering were approximately $3.0 million.
Craig-Hallum (the “2015 Placement Agent”) served as the sole placement agent for the July 2015 Offering. In consideration for services rendered as the placement agent in the July 2015 Offering, we (a) paid to the 2015 Placement Agent cash commissions equal to approximately $212,783, or 7.0% of the gross proceeds received in the July 2015 Offering; (b) issued to the 2015 Placement Agent a five-year warrant to purchase up to 107,033 shares of our common stock with an exercise price of $1.66 per share and which is subject to other terms thatperformance obligations are the same as the terms of the Series A Warrants; and (c) reimbursed the 2015 Placement Agent for reasonable out-of-pocket expenses, including fees paid to the 2015 Placement Agent’s legal counsel, incurred in connection with the July 2015 Offering, which reimbursable expenses did not exceed $50,000.met.
The July 2015 Offering required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the Private Placement. The exercise price of these warrants decreased from $7.56 per share to $6.50 per share and the number of shares issuable upon exercisefollowing represents a summary of the warrants increased from 1,881,396 to 2,188,177.
On January 6, 2016, we entered into a Securities Purchase Agreement (the “SPA”) with certain accredited investors (the “2016 Investors”), pursuant to which, on January 8, 2016, we sold to the 2016 Investors, and the 2016 Investors purchased from us (the “January 2016 Offering”), an aggregate of approximately $2.2 million of units (the “Units”) consisting of (a) an aggregate of 2,365,243 shares (the “A-1 Preferred Shares”) of our Series A-1 Convertible Preferred Stock (the “A-1 Preferred”), and (b) warrants (the “2016 Warrants”) to purchase up to an aggregate of 1,773,929 shares of our common stock. Each Unit was sold to the 2016 Investors at a purchase price of $0.93 per Unit. The A-1 Preferred Shares are convertible into shares of our common stock at an initial rate of 1-for-1, which conversion rate is subject to further adjustment as set forth in our Certificate of Designation of Series A-1 Convertible Preferred Stock, which was filed with the Secretary of State of the State of Delaware on January 8, 2016 (the “Series A-1 Certificate of Designation”). Pursuant to the terms of the Series A-1 Certificate of Designation, the holders of the A-1 Preferred Shares will generally be entitled to that number of votes as is equal to the product obtained by multiplying: (i) the number of whole shares of our common stock into which the A-1 Preferred may be convertedoutstanding as of the record date of such vote or consent, by (ii) 0.93, rounded down to the nearest whole number. Therefore, every 1.075269 shares of A-1 Preferred will generally initially be entitled to one vote. In May 2016, 2,150,538 of the A-1 Preferred Shares were converted into 2,150,538 shares of our common stock. At June 30, 2016, there were 214,705 A-1 Preferred Shares outstanding.

The 2016 Warrants were immediately exercisable upon issuance, have a term of five years and have an exercise price of $1.21 per share of our common stock. Each 2016 Warrant includes both cash and “cashless exercise” features and an exchange feature whereby the holder of the 2016 Warrant may exchange (the “Exchange Right”) all or any portion of the 2016 Warrant for a number of shares of our common stock equal to the quotient obtained by dividing the “Exchange Amount” by the closing bid price of our common stock on the second trading day prior to the date the 2016 Warrant is exchanged (the “Exchange Price”).

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Under the 2016 Warrants, the “Exchange Amount” is based upon a Black Scholes option pricing model, and the aggregate Exchange Amount under all of the 2016 Warrants will be $1,436,882, subject to adjustment to the extent that the risk-free U.S. Treasury rate fluctuates between the date of issuance of the 2016 Warrants and the date the 2016 Warrants are exchanged. Each 2016 Warrant provides that the number of shares that may be issued upon exercise of the Exchange Right is limited to the number of shares that may be purchased pursuant to the terms of the 2016 Warrant, unless we have previously obtained stockholder approval or approval from The Nasdaq Stock Market LLC to issue any additional shares of our common stock (the “Additional Shares”) pursuant to the Exchange Right (the “Required Approvals”). For any Exchange Right exercised more than 90 days following the issuance of the 2016 Warrants, if we have not obtained either of the Required Approvals, we will be required to pay the 2016 Warrant holder an amount in cash for any Additional Shares that we cannot issue without the Required Approvals based on the Exchange Amount.

The 2016 Warrants further provide that, to the extent the closing bid price of our common stock on the second trading day prior to the date the 2016 Warrant is exchanged is less than $0.50, the Exchange Price will be deemed to be equal to $0.50, and, in addition to issuing shares of our common stock based on this Exchange Price, we will be required to pay to the 2016 Warrant holder an amount in cash equal to the product obtained by multiplying (a) $0.50 minus the closing bid price of our common stock on the second trading day prior to the date the 2016 Warrant is exchanged, by (b) the aggregate number of shares of our common stock issued to the 2016 Warrant holder by the Company in such exchange at an Exchange Price equal to $0.50. Therefore, if the Required Approvals are obtained, based on the Exchange Amount of $1,436,882 (which, as noted above, is subject to adjustment to the extent that the risk-free U.S. Treasury rate fluctuates between the date of the issuance of the 2016 Warrants and the date the 2016 Warrants are exchanged), the maximum number of shares of our common stock issuable pursuant to the Exchange Right in the 2016 Warrants will be 2,873,765. In addition, if, for example, assuming an Exchange Amount of $1,436,882, the closing bid price of our common stock on the second trading day prior to the date the 2016 Warrants are exchanged is $0.25, we would be required to pay to the 2016 Warrant holders cash in an aggregate amount of $718,441 in addition to issuing the 2016 Warrant holders 2,873,765 shares.

In accordance with the terms of the SPA, we amended that certain Series A Warrant to purchase up to an aggregate of 1,161,972 shares of our common stock previously issued by us to an affiliate of one of the 2016 Investors on July 7, 2015 (the “Original Warrant”), as previously reported by us on our Amendment No. 1 to Current Report on Form 8-K/A, filed with the SEC on July 7, 2015 (as so amended, the “Amended Warrant”). The Amended Warrant amends the Original Warrant to provide that the Amended Warrant is subject to the same terms and conditions as the 2016 Warrants and, therefore, includes both cash and “cashless exercise” features and an Exchange Right whereby the number of shares issuable pursuant to the Exchange Right is equal to the “Amended Warrant Exchange Amount”, which is based on a Black Scholes option pricing model, and will be $941,197, subject to adjustment to the extent that the risk-free U.S. treasury rate fluctuates between the date of issuance of the Amended Warrant and the date the Amended Warrant is exchanged. The Amended Warrant is exercisable for up to 1,161,972 shares of our common stock in the event we have obtained either of the Required Approvals with respect to the Amended Warrant. In the event the Amended Warrant holder exercises the Amended Warrant more than 90 days following the issuance of the Amended Warrant, if we have not obtained either of the Required Approvals, we will be required to pay the Amended Warrant holder an amount in cash for the shares of our common stock that we cannot issue under the Amended Warrant pursuant to such exercise without the Required Approvals based on the Amended Warrant Exchange Amount.

The Amended Warrant also provides that, to the extent the closing bid price of our common stock on the second trading day prior to the date the Amended Warrant is exchanged is less than $0.50, the Exchange Price will be deemed to be equal to $0.50, and, in addition to issuing shares of our common stock based on this Exchange Price (assuming receipt of the Required Approvals), we will be required to pay to the Amended Warrant holder an amount in cash equal to the product obtained by multiplying (a) $0.50 minus the closing bid price of our common stock on the second trading day prior to the date the Amended Warrant is exchanged, by (b) the aggregate number of shares of our common stock issued to the Amended Warrant holder by us in such exchange at an Exchange Price equal to $0.50. Therefore, if the Required Approvals are obtained, based on the Amended Warrant Exchange Amount of $941,197 (which, as noted above, is subject to adjustment to the extent that the risk-free U.S. Treasury rate fluctuates between the issuance of the Amended Warrant and the date the Amended Warrant is exchanged), the maximum number of shares of our common stock issuable pursuant to the Exchange Right in the Amended Warrant will be 1,882,395. In addition, if, for example, assuming an Amended Warrant Exchange Amount of $941,197, the closing bid price of our common stock on the second trading day prior to the date the Amended Warrant is exchanged is $0.25, we would be required to pay to the Amended Warrant holder cash in an aggregate amount of $470,599 in addition to issuing the Amended Warrant holder 1,882,395 shares.

In connection with entering into the SPA, we also entered into a Registration Rights Agreement, dated January 8, 2016, with the 2016 Investors. Pursuant to the terms of the Registration Rights Agreement, we were required to file with the SEC a registration statement to register for resale the shares of our common stock issuable upon conversion of the A-1 Preferred Shares and the shares

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of our common stock issuable upon exercise of the 2016 Warrants and the Amended Warrant by January 25, 2016. We filed the required registration statement with the SEC on January 25, 2016.

Craig-Hallum (the “Placement Agent”) served as the sole placement agent for the January 2016 Offering. In consideration for services rendered as the Placement Agent in the January 2016 Offering, we (1) paid to the Placement Agent cash commissions equal to approximately $140,000, or 7.0% of the gross proceeds received in the January 2016 Offering, excluding any proceeds received from Third Security, LLC or any of its affiliates; (2) issued to the Placement Agent, for a price of $50, a five-year warrant to purchase up to 107,527 shares of our common stock at an exercise price of $1.21 per share (the “Agent Warrant”), which is subject to the same terms as the 2016 Warrants except that the Agent Warrant was not exercisable until July 8, 2016 and does not contain the Exchange Right; and (3) reimbursed the Placement Agent for reasonable out-of-pocket expenses, including fees paid to the Placement Agent’s legal counsel, incurred in connection with the January 2016 Offering, which reimbursable expenses did not exceed $50,000.

The January 2016 Offering and the payment of all accrued and unpaid dividends on the Series A Preferred Stock and Series B Preferred Stock in the form of shares of our common stock at a rate of $1.00 per share of our common stock discussed under “-Conversion of Preferred Stock” below required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the Private Placement. The exercise price of these warrants decreased to $4.39 per share and the number of shares issuable upon exercise of the warrants increased from 2,188,177 to 3,239,827.

On May 31, 2016, we issued to a vendor an aggregate of 78,000 shares of our common stock and, on June 14, 2016, we issued to a second vendor an aggregate of 64,153 shares of our common stock. Such shares of common stock were issued to the vendors in lieu of an aggregate cash amount of approximately $89,000 owed by us to such vendors for services previously performed by such vendors. We issued the shares to the vendors in transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws. The offering of the shares to the vendors did not involve a public offering, and no general solicitation or advertisement was made in connection with the offering of the shares to the vendors.

On June 7, 2016, we entered into an At the Market Offering Agreement (the “ATM Agreement”) with Craig-Hallum, as sales agent, pursuant to which we may offer and sell, from time to time, through Craig-Hallum, up to $3,500,000 of shares (the “Shares”) of our common stock. Any Shares offered and sold in the offering will be issued pursuant to our effective shelf registration statement on Form S-3 (File No. 333-201907) and the related prospectus previously declared effective by the SEC on February 13, 2015, as supplemented by a prospectus supplement, dated June 7, 2016, that we filed with the SEC pursuant to Rule 424(b)(5) under the Securities Act of 1933, as amended (the “Securities Act”). The number of shares eligible for sale under the ATM Agreement will be subject to the limitations of General Instruction I.B.6 of Form S-3.

Under the terms of the ATM Agreement, we will pay Craig-Hallum a placement fee of 3.25% of the gross sales price of the Shares, unless Craig-Hallum acts as principal, in which case we may sell Shares to Craig-Hallum as principal at a price to be agreed upon by us and Craig-Hallum. We will also reimburse Craig-Hallum for certain expenses incurred in connection with the ATM Agreement, and agreed to provide indemnification and contribution to Craig-Hallum with respect to certain liabilities, including liabilities under the Securities Act and the Securities Exchange Act of 1934, as amended.
During the three and nine months ended September 30, 2016, we sold 1,035,255 and 1,150,569 shares under the ATM Agreement.  For the nine months ended September 30, 2016, the average sales price per common share was $0.42 and the aggregate net proceeds from the sales totaled $0.5 million.

During the three months ended September 30, 2016, the sale of shares under the ATM Agreement required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the Private Placement. The exercise price of these warrants decreased to $4.23 per share and the number of shares issuable upon exercise of the warrants increased from 3,262,088 to 3,362,276.
Common Stock Warrants.
During the nine months ended September 30, 2016 and 2015, we issued warrants to purchase 3,055,555 and 3,466,841 shares of common stock, respectively. None of the issued warrants were exercised during such periods. The warrants issued in the nine months ended September 30, 2016 included 1,174,099 warrants issued due to repricing requirements of the Private Placement and 1,881,456 warrants issued in connection with the January 2016 Offering. The warrants issued in the nine months ended September

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30, 2015 included 800,492 warrants issued due to repricing requirements of the Private Placement and 2,666,349 warrants issued in connection with the February 2015 Offering and the July 2015 Offering. Warrants to purchase an aggregate of 8,976,354 shares of common stock were outstanding at September 30, 2016.
2017:
Warrant Holder Issue Year Expiration 
Underlying
Shares
 
Exercise
Price
Various Institutional Holders(1)
 2012 February 2017 2,919,043 $4.23
Affiliates of Third Security, LLC(1)
 2012 February 2017 443,233 $4.23
Various Institutional Holders(2)
 2013 January 2018 441,655 $9.00
Affiliates of Third Security, LLC(2)
 2013 January 2018 250,000 $9.00
Various Institutional Holders(3)
 2014 April 2020 374,618 $4.00
Various Institutional Holders(4)
 2015 February 2020 714,780 $2.24
Various Institutional Holders(5)
 2015 December 2020 122,433 $1.66
Various Institutional Holders(5)
 2015 December 2020 667,164 $0.01
Various Institutional Holders(6)
 2015 January 2021 1,161,972 $1.21
Affiliates of Third Security, LLC(7)
 2016 January 2021 161,026 $1.21
Various Institutional Holders(7)
 2016 January 2021 1,720,430 $1.21
      8,976,354  
 Issue Year Expiration 
Underlying
Shares
 
Exercise
Price
Warrants Assumed in Merger
(1)2013 January 2018 23,055 $270.00
(2)2014 April 2020 12,487 $120.00
(3)2015 February 2020 23,826 $67.20
(4)2015 December 2020 4,081 $49.80
(5)2015 January 2021 38,733 $36.30
(6)2016 January 2021 29,168 $36.30
        
Warrants
(7)2017 June 2022 45,600 $7.50
(8)2017 June 2022 91,429 $7.00
     268,379  

(1)These warrants were issued in connection with the Private Placementan offering which was completed in February 2012 and are classified as a liability in our financial statements. See Note 9 - “Fair Value” for additional information. These warrants also contain certain anti-dilution provisions that provide for an adjustment to the exercise price and number of shares issuable upon exercise of the warrant in the event that we engage in certain issuances of shares of our common stock at a price lower than the exercise price of the warrant.January 2013.
(2)These warrants were issued in connection with the 2013 Offering,a private placement which was completed in January 2013.October 2014.
(3)These warrants were issued in connection with the 2014 Private Placement,an offering which was completed in October 2014.February 2015.
(4)These warrants were issued in connection with the February 2015 Offering,an offering which was completed in FebruaryJuly 2015.
(5)These warrants were originally issued in connection with thean offering in July 2015, Offering,and were amended in connection with an offering which was completed in July 2015.January 2016.
(6)These warrants were originally issued in connection with the July 2015 Offering, which was completed in July 2015, and were amended in connection with the January 2016 Offering,an offering which was completed in January 2016.
(7)These warrantsare the 2017 New Bridge Warrants which were issued in connection with the January 2016 Offering,Merger. See discussion above for additional information.
(8)These are the Side Warrants which was completedwere issued in January 2016.connection with the Merger. See discussion above for additional information
Issuance of
Series A and Series B Preferred Stock.

On March 5, 2014, we entered into aThe Company had outstanding preferred units of 367,299 for Series A and 412,806 for Series B Convertible as of December 31, 2016. These shares have been recapitalized and are included in preferred stock. On the Closing Date, the outstanding preferred units for Series A and Series B, along with the related accumulated dividends, were converted into common shares of the Company.
Preferred Stock Purchase Agreement (the “Series B Purchase Agreement”)Stock.
The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with affiliates of Third Security, LLC (the “2014 Third Security Investors”), pursuant to which we,such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a private placement, sold and issued an aggregateresolution or resolutions adopted by the Board of 1,443,297Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of our Series B Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”), at a price per sharesuch class or any series thereof: (i) the number of $4.85 for an aggregate purchase price of approximately $7.0 million. Each share of Series B Preferred Stock issued pursuant toshares; (ii) the Series B Purchase Agreement was initially convertible intodividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares of our common stock at a rate of 1-for-1, which conversion rate was subject to further adjustment as set forth in the Certificate of Designation of Series B Convertible Preferred Stock.

In connection with the Series B financing, we also entered into a Registration Rights Agreement, dated March 5, 2014, with the 2014 Third Security Investors, pursuant to which we granted certain demand, “piggy-back” and S-3 registrations rights covering the resale of the shares of common stock underlying the Series B Preferred Stock issued pursuant to the Series B Purchase Agreement and all shares of common stock issuable upon any dividend or other distribution with respect thereto.


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are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The Series B financing requiredpreferred stock may be issued with a preference over the repricing and issuance of additional common stock warrantsas to the payment of dividends. We have no current plans to issue any additional preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any additional preferred stock issued by the Company could have an adverse effect on the rights of the holders of warrants issued in the Private Placement. The exercise pricecommon stock.
Series A Senior Preferred Stock.
In connection with the Merger, the Company filed a Certificate of Designation with the Secretary of State of the warrants decreased from $12.96 per share to $11.73 per share and the numberState of Delaware on June 29, 2017, designating 4,100,000 shares issuable upon exercise of the warrants increased from 1,097,600 to 1,212,665.

Conversion of Preferred Stock.

On January 6, 2016, the Company entered into a Conversion Agreement (the “Conversion Agreement”) with the holders (the “Preferred Holders”) of all of the Company’s outstanding shares of Series A Convertible Preferred Stock, par value $0.01 per share, (the “Seriesas Series A Preferred Stock”), and Series BSenior Convertible Preferred Stock pursuant to which, among other things,("Series A Senior") and establishing the Preferred Holders: (a) elected to convert allrights, preferences and privileges of the outstanding shares of Series A Preferred Stock and Series B Preferred Stock into shares of our common stock, in each case in accordance withnew preferred stock. Generally, the terms thereof, and (b) agreed that all accrued and unpaid dividends on the Series A Preferred Stock and Series B Preferred Stock would be paid by the Company in shares of our common stock at a rate of $1.00 per share of our common stock (collectively, the “Conversion”).

The outstanding shares of Series A Preferred Stock were convertible into shares of our common stock at a rate of 1-for-3, and the outstanding shares of Series B Preferred Stock were convertible into shares of our common stock at a rate of 1-for-1. Prior to the entry into the Conversion Agreement, there were 2,586,205 shares of Series A Preferred Stock outstanding, which were converted into 862,057 shares of our common stock, and 1,443,297 shares of Series B Preferred Stock outstanding, which were converted into 1,443,297 shares of our common stock, for an aggregate of 2,305,354 shares of our common stock issued upon conversionholders of the Series A Preferred Stock and Series B Preferred Stock (the “Conversion Shares”). AtSenior stock are entitled to vote as a single voting group with the timeholders of the entry into the Conversion Agreement, there were $3,681,591.90 in accrued and unpaid dividends on the outstanding shares of Series A Preferred Stock, which were converted, in accordance with the Conversion Agreement, into 3,681,590 shares of ourCompany's common stock, and $793,236.17 in accrued and unpaid dividends on the outstanding shares of Series B Preferred Stock, which were converted, in accordance with the terms of the Conversion Agreement, into 793,235 shares of our common stock, for an aggregate of 4,474,825 shares of our common stock issued pursuant to the accrued and unpaid dividends on the Series A Preferred Stock and Series B Preferred Stock. Therefore, in connection with the full conversionholders of the Series A Preferred Stock and Series B Preferred Stock, plusSenior stock are generally entitled to that number of votes as is equal to the conversionnumber of all accrued and unpaid dividends thereon, we issued an aggregate of 6,780,179whole shares of ourthe Company's common stock tointo which the Preferred Holders on January 6, 2016.Series A Senior stock may be converted as of the record date of such vote or consent.

Following the conversion ofSo long as the shares of Series A Preferred Stock andSenior stock are outstanding certain actions will require the separate approval of at least two-thirds of the Series B Preferred Stock into commonA Senior stock, noincluding: changes to the terms (requires three-fourths approval) of the Series A Senior stock, changes to the number of authorized shares of Series A Preferred StockSenior stock, issuing a series of preferred stock that is senior to the Series A Senior stock, changing the size of the board of directors, certain changes to the capital stock of the Company, bankruptcy proceedings and granting security interests in the Company’s assets.
The Series A Senior stock will be convertible into the Company's common stock at any time at the then applicable conversion price. The initial conversion price for the Series A Senior stock issued in connection with the Merger and the other transactions described herein is $3.736329, but will be subject to anti-dilution protections including adjustments for stock splits, stock dividends, other distributions, recapitalizations and the like. Additionally, each holder of the Series A Senior stock will have a right to convert such holder's Series A Senior stock into securities issued in any future private offering of the Company's securities at a 15% discount to the proposed price in such private offering.
The Series A Senior stock will be entitled to an annual 8% cumulative payment in lieu of interest or dividends, payable in-kind for the first two years and in cash or in-kind thereafter, at the option of the Company. The Series B Preferred Stock remain outstanding.A Senior stock also will be entitled to share in any dividends paid on the Company's common stock.
Preferred Stock Dividends.As discussed in Note 3 - Reverse Merger, in connection with the Merger, the Company issued 1) to holders of certain Transgenomic secured indebtedness, 802,925 shares of Series A Senior stock in an amount equal to $3 million, 2) to holders of certain Precipio Diagnostic indebtedness, 802,920 shares of Series A Senior stock in an amount equal to $3 million and 3) to certain investors, 107,056 shares of Series A Senior stock in exchange for $400,000 in a private placement. The Company had outstanding Series A Senior shares of 1,712,901 as of June 30, 2017.

We had cumulative undeclared dividends on ourdetermined that there was a beneficial conversion feature in connection with the issuances of the Series A Preferred StockSenior stock since the conversion price of $3.736329 was at a discount to the fair market value of the Company's common stock at issuance date. The Series A Senior stock is non-redeemable and Series B Preferred Stock of zero and $4.4 million at September 30, 2016 and December 31, 2015, respectively. Since dividends should generally not be recognized as a liability until declared, we hadresult, the Company recognized the full beneficial conversion feature in the amount of $5.2 million as a recorded liabilitydeemed dividend at the time of zero for these undeclared dividends.issuance.
We had no undeclared dividends for the three months ended September 30, 2016. For the three months ended September 30, 2015 and the nine months ended September 30, 2016 and 2015, we had undeclared dividends. In accordance with the FASB’s Accounting Standards Codification Topic 260-10-45-11, “Earnings per Share”, these dividends were added to the net loss per share calculation.

9.10. FAIR VALUE

FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our condensed consolidated financial statements.
FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:

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Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and

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Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.

Debt.
Our long term debt book value approximates fair market value due to the variable interest rate it bears.

Common Stock Warrant Liabilities.

Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability.

20122016 Warrant Liability
The 2012Company assumed the 2016 Warrant Liability in the merger and it represents the fair value of the 1.2 millionTransgenomic warrants issued in February 2012,January 2016, of which, through a series25,584 warrants remain outstanding as of changes in exercise price since February 2012, are now exercisable for 3.4 million shares of common stock.June 30, 2017. We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our Statement of Operations. Management does not believe that this liability will be settled by a use of cash.
The 2012 Warrant Liability is considered a Level 3 financial instrument and is valued using a Monte Carlo simulation model. This method is well suited to valuing options with non-standard features, such as anti-dilution protection. A Monte Carlo simulation model uses repeated random sampling to simulate significant uncertainty in inputs. Assumptions and inputs used in the valuation of the common stock warrants are broken down into four sections: Static Business Inputs; Static Technical Inputs; Simulated Business Inputs; and Simulated Technical Inputs.
Static Business Inputs include: our equity value, which was estimated using our stock price of $0.28 as of September 30, 2016; the amount of the down-round financing; the timing of the down-round financing; and the expected exercise period of 0.41 years from the valuation date.
Static Technical Inputs include: volatility of 67% and the risk-free interest rate of 0.42% based on the 1-year U.S. Treasury yield interpolated from the six-month and one-year U.S. Treasury bonds.
Simulated Business Inputs include: the probability of down-round financing, which was estimated to be 100% for simulated equity values below the down-round financing cut-off point.
Simulated Technical Inputs include: our equity value follows a geometric Brownian motion and is simulated over weekly periods; and a down-round financing event that was randomly simulated in an iteration based on the 100% discrete probability of a down-round financing for those iterations where our simulated equity value at the expected timing of a down-round financing event was below the down-round financing cut-off point.

During the three and nine months ended September 30, 2016 and 2015, the changes in the fair value of the liability measured using significant unobservable inputs (Level 3) were comprised of the following:
  Dollars in Thousands
  For the Three Months Ended
  September 30, 2016 September 30, 2015
Beginning balance at July 1 $—
 $560
Total (gains) or losses: 
  
Recognized in earnings —
 (385)
Balance at September 30 $—
 $175


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Three and Nine Months Ended September 30, 2016 and 2015


  Dollars in Thousands
  For the Nine Months Ended
  September 30, 2016 September 30, 2015
Beginning balance at January 1 $350
 $145
Total (gains) or losses:    
Recognized in earnings (350) 30
Balance at September 30 $—
 $175

2016 Warrant Liability
The 2016 Warrant Liability represents the fair value of the 1.8 million warrants issued in January 2016. We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in ourcondensed consolidated Statement of Operations.
The Common Stock2016 Warrant Liability is considered a Level 3 financial instrument and is valued using a binomial lattice simulation model. This method is well suited to valuing options with non-standard features. Assumptions and inputs used in the valuation of the common stock warrants include;include: our equity value, which was estimated using our stock price of $0.28$9.00 as of SeptemberJune 30, 2016;2017; volatility of 86%121%; and a risk-free interest rate of 1.04%1.64%.
During the three and nine months ended SeptemberJune 30, 2016,2017, the changes in the fair value of the liability measured using significant unobservable inputs (Level 3) were comprised of the following:
  Dollars in Thousands 
  For the Three Months Ended 
  September 30, 2016 
Beginning balance at July 1 $1,442
 
Total (gains) or losses:   
Recognized in earnings (12) 
Balance at September 30 $1,430
 
  Dollars in Thousands 
  For the Nine Months Ended 
  September 30, 2016 
Beginning balance at January 1 $—
 
Additions 1,437
 
Total (gains) or losses:   
Recognized in earnings (7) 
Balance at September 30 $1,430
 
The change in unrealized gains or losses of Level 3 liabilities was included in earnings and was reported in other income (expense) in our Statement of Operations.
Dollars in Thousands  
  For the Three Months Ended
  June 30, 2017
Beginning balance at April 1 $—
Additions - liability assumed in the Merger 615
Total (gains) or losses:  
Recognized in earnings 3
Balance at June 30 $618


10.11. STOCK OPTIONS
 
Stock Options.

The Company's 2006 Equity Incentive Plan (the "2006 Plan") was terminated as to future awards on July 12, 2016. The Company's 2017 Stock Option and Incentive Plan (the "2017 Plan") was adopted by the Company's stockholders on June 5, 2017 and will expire on June 5, 2027. The following table summarizes stock option activity under our plans during the six months ended June 30, 2017:

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Three and NineSix Months Ended SeptemberJune 30, 20162017 and 20152016


The following table summarizes stock option activity during the nine months ended September 30, 2016:
 
 
Number of
Options
 
Weighted-Average
Exercise Price
Outstanding at January 1, 20161,107,794
 $3.45
Granted25,250
 0.84
Forfeited(252,589) 3.28
Outstanding at September 30, 2016880,455
 $3.39
Exercisable at September 30, 2016574,650
 $4.08
 
Number of
Options
 
Weighted-Average
Exercise Price
Outstanding at January 1, 201724,600
 $107.83
Granted—
 —
Forfeited(2,460) 75.76
Outstanding at June 30, 201722,140
 $111.39
Exercisable at June 30, 201719,908
 $119.13
    
During the nine months ended September 30, 2016, we granted options to purchase 25,250 shares of our common stock at a weighted-average exercise price of $0.84 per share under our 2006 Equity Incentive Plan, as amended (the “Plan”). Options to purchase an aggregate of 641,560 shares of our common stock were granted during the nine months ended September 30, 2015.

As of SeptemberJune 30, 2016,2017, there were 574,650 options exercisable and 860,41121,713 options that were vested or expected to vest with an aggregate intrinsic value of zero.zero with a remaining weighted average contractual life of 6.9 years.

Stock Appreciation Rights (“SARs”)

The following table summarizesAs of June 30, 2017, 2,777 outstanding and exercisable SARs activity under the Plan during the nine months ended September 30, 2016:
 
Number of
SARs
 
Weighted-Average
Exercise Price
Outstanding at January 1, 201698,333
 $4.14
Outstanding at September 30, 201698,333
 $4.14
Exercisable at September 30, 201692,558
 $4.20

shares were vested or expected to vest. All outstanding SARs were issued solely to oura former chief executive officers.

As of September 30, 2016, 92,558 shares subject to outstanding SARs were exercisable and 98,333 shares were vested or expected to vest.officer. The weighted-average exercise price of these SARs was $4.14$129.60 per share and the aggregate intrinsic value was zero.zero with a remaining weighted average contractual life of 6.25 years. During the six months ended June 30, 2017, the SARs liability decreased approximately $5,000 and at June 30, 2017, a liability of approximately $7,000 was recorded in accrued expenses.

11.12. SUBSEQUENT EVENTS

Merger Agreement

On October 12, 2016, Transgenomic, New Haven Labs Inc.,August 1, 2017, the Company announced that it was planning a wholly owned subsidiarypublic offering of Transgenomic (“Merger Sub”common stock and together with Transgenomic,warrants in an underwritten public offering. There can be no assurances as to whether the “Transgenomic Parties”), and Precipio Diagnostics, LLC (“Precipio”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Precipiooffering will become a wholly owned subsidiary of Transgenomic (the “Merger”), on the terms and subjectbe completed, or as to the conditions set forth insize or terms of the Merger Agreement. Followingoffering. Even if the Merger, Transgenomic will change its name to Precipio, Inc. (“New Precipio”). The parties expect the Merger to close in 2016.
When the Mergeroffering is completed, (i)��each outstanding common unit of Precipiothe Company will be converted into the rightneed to receive an amount of shares of New Precipio common stock based on an exchange ratio set forth in the Merger Agreement, which is dependent on the relative amount of outstanding liabilities of each of the parties at the time of the Merger, together with cash in lieu of fractional units, which will result in Precipio unit holders owning between 62% and 80% of the outstanding shares of New Precipio common stock (not taking into account the issuance of New Precipio preferred stock in the Merger or the private placement discussed below) and (ii) each outstanding preferred unit of Precipio will be converted into the right to receive shares of New Precipio preferred stock in an aggregate amount equal to $3 million.

In connection with the Merger, at the effective time of the Merger, New Precipio also will issue shares of New Precipio preferred stock in a private placement, whereby:raise additional funding.


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holders of indebtedness of Transgenomic will receive $3 million in New Precipio preferred stock in exchange for such indebtedness; and

New Precipio will issue for cash up to $7 million in New Precipio preferred stock to investors in a private placement.

New Precipio preferred stock will be issued based on a pre-money valuation of New Precipio of $25 million and will represent, in the aggregate, approximately 34% of the outstanding shares of New Precipio common stock on an as-converted basis, including New Precipio preferred stock issued in the Merger and the private placement.

The board of managers of Precipio and the boards of directors of Transgenomic and Merger Sub, and Transgenomic, in its capacity as the sole stockholder of Merger Sub, have each approved the Merger Agreement and the board of managers of Precipio and the board of directors of Transgenomic have each recommended that their respective equity holders approve the transactions contemplated by the Merger Agreement. Transgenomic will hold a special meeting of its stockholders to approve the issuance of shares of Transgenomic common stock pursuant to the Merger, as required by Nasdaq Listing Rules, as well as certain other matters (the “Special Meeting”).
The Merger Agreement contains various representations, warranties and covenants of the Transgenomic Parties and Precipio, including, among others, covenants (i) by each of Precipio and Transgenomic to operate its business in the ordinary course, (ii) by each of Precipio and Transgenomic not to engage in certain kinds of transactions during the period between the execution of the Merger Agreement and the completion of the Merger, (iii) by Precipio to have its members approve the Merger and (iv) by Transgenomic to hold the Special Meeting.
Under the Merger Agreement, Precipio and Transgenomic are subject to customary “no shop” provisions that limit their respective abilities to solicit alternative acquisition proposals from third parties or to provide confidential information to third parties, subject to a “fiduciary out” provision that allows Precipio and Transgenomic to provide information and participate in discussions with respect to certain unsolicited written proposals and to terminate the Merger Agreement and enter into an acquisition agreement with respect to a superior proposal in compliance with the terms of the Merger Agreement (a “Superior Proposal”).
Completion of the Merger is subject to various conditions, including, among others: (i) approval of the holders of a majority of Transgenomic’s shares of outstanding common stock, (ii) approval of the requisite amount of the members of Precipio, (iii) approval of an amendment to the Certificate of Incorporation of Transgenomic contemplating the New Preferred Stock Financing (described below) and changing the name of Transgenomic to Precipio, Inc. or such other name as determined by Precipio, (iv) obtaining certain third party consents, (v) the absence of any judgment, injunction, order or decree prohibiting or enjoining the completion of the Merger, (vi) consummation of the New Preferred Stock Financing, (vii) approval of listing of the Parent Common Stock on NASDAQ, (viii) completion of the Common Unit Recapitalization (described above), (ix) increase in the size of the Transgenomic board by two members and the appointment of designees in accordance with the Merger Agreement and (x) the lock-up of certain Transgenomic stockholders and Precipio members.
In addition, the obligation of the parties to complete the Merger is subject to certain other conditions, including (i) subject to the standards set forth in the Merger Agreement, the accuracy of the representations and warranties of the other party, (ii) compliance of each party with its covenants in all material respects and (iii) no material adverse effect of either party.
The Merger Agreement contains certain termination rights for both the Transgenomic Parties and Precipio. Either may terminate the Merger Agreement if the Merger is not completed on or before the date that is six months following the date of the Merger Agreement. Moreover, either party may terminate the Merger Agreement if the other party changes its recommendation to its security holders to approve the Merger and the related transactions or enter into an agreement with a third party regarding a Superior Proposal (as defined in the Merger Agreement).
The Merger Agreement also provides that, upon termination of the Merger Agreement under certain circumstances, Transgenomic will be required to pay to Precipio a termination payment of $256,500. If the Merger Agreement is terminated for certain other reasons, Precipio will be required to pay Transgenomic a termination payment of $256,500.
The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached hereto as Exhibit 2.1 and incorporated by reference herein. The Merger Agreement has been included as an exhibit hereto solely to provide investors and security holders with information regarding its terms. It is not intended to be a source of financial, business or operational information about Transgenomic, Precipio or their respective subsidiaries or affiliates. The representations, warranties and covenants contained in the Merger Agreement are made only for purposes of the Merger Agreement and are made as of specific dates; are solely for the benefit of the parties; may be subject to

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Three and Nine Months Ended September 30, 2016 and 2015


qualifications and limitations agreed upon by the parties in connection with negotiating the terms of the Merger Agreement, including being qualified by confidential disclosures made for the purpose of allocating contractual risk between the parties rather than establishing matters as facts; and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors or security holders. Investors and security holders should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts or condition of Transgenomic, Precipio or their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in public disclosures.
In connection with the Merger, the Supporting Stockholders and Supporting Members (as defined in the Merger Agreement) are obligated to enter into a lock-up agreement with the combined company at the Effective Time pursuant to which the Supporting Stockholders will agree, among other things, not to sell shares of Transgenomic common stock for the six month period beginning at the Effective Time.
The Merger Agreement also provides that the combined company will enter into employment agreements with certain employees of Precipio at the Effective Time and that the officers of the combined company will be agreed to by the parties prior to the Effective Time.

Special Meeting of Stockholders
At our 2016 Special Meeting of Stockholders (the “Special Meeting”) held on October 31, 2016, our stockholders approved the proposal to authorize our Board of Directors to, in its discretion, amend our Third Amended and Restated Certificate of Incorporation to effect a reverse stock split of our common stock at a ratio of between one-for-ten to one-for-thirty, such ratio to be determined by our Board of Directors (the “Reverse Split Proposal”). The Reverse Split Proposal was described in detail in our definitive proxy statement filed with the Securities and Exchange Commission on September 22, 2016, as supplemented on October 13, 2016.
The approval of the Reverse Split Proposal by our stockholders provides our Board of Directors with the authority to carry out the reverse stock split, but our Board of Directors is not obligated to do so. If our Board of Directors determines to effect the reverse stock split, it intends to select a reverse stock split ratio that it believes would be most likely to achieve the anticipated benefits of the reverse stock split. Notwithstanding approval of the Reverse Split Proposal by our stockholders, our Board of Directors may, in its sole discretion, abandon the Reverse Split Proposal and determine, prior to the effectiveness of any filing with the Secretary of State of the State of Delaware, not to effect the reverse stock split. If our Board of Directors fails to implement the reverse stock split on or prior to the first anniversary date of the Special Meeting, stockholder approval again would be required prior to implementing any reverse stock split.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information
This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis, contains forward-looking statements. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, insurance reimbursements, product pricing, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, business strategy, industry conditions, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, expected financial and other benefits from our organizational restructuring activities, actions of governments and regulatory factors affecting our business, retaining key employees and other risks as described in our reports filed with the Securities and Exchange Commission. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or the negative versions of these terms and other similar expressions.
You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons, including those described in Part

II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q and in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which we filed with the Securities and Exchange Commission on April 14, 2016.10-Q.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
The following discussion should be read together with our financial statements and related notes contained in this Quarterly Report on Form 10-Q and with the audited financial statements relatedand notes and Management’s Discussion and Analysis included in our Annual Report on Form 10-Kthereto of Precipio Diagnostics for the fiscal year ended

December 31, 2015, which we2016 contained in our current report on Form 8-K/A, filed with the Securities and Exchange Commission (the “SEC”) on April 14, 2016.July 31, 2017. Results for the three and ninesix months ended SeptemberJune 30, 20162017 are not necessarily indicative of results that may be attained in the future.
Merger

On June 29, 2017, or the Closing Date, the Company (then known as Transgenomic, Inc., or Transgenomic), completed a reverse merger, or the Merger with Precipio Diagnostics, LLC, a privately held Delaware limited liability company, or Precipio Diagnostics, in accordance with the terms of the Agreement and Plan of Merger, or the Merger Agreement, dated October 12, 2016, as amended on February 2, 2017 and June 29, 2017, by and among Transgenomic, Precipio Diagnostics and New Haven Labs Inc., or Merger Sub, a wholly-owned subsidiary of Transgenomic. Pursuant to the Merger Agreement, Merger Sub merged with and into Precipio Diagnostics, with Precipio Diagnostics surviving the Merger as a wholly-owned subsidiary of the merged company. In connection with the Merger, the Company changed its name from Transgenomic, Inc. to Precipio, Inc and effected a 1-for-30 reverse stock split of its common stock. Upon the consummation of the Merger, the historical financial statements of Precipio Diagnostics become the Company's historical financial statements. Accordingly, the historical financial statements of Precipio Diagnostics are included in the comparative prior periods.

Overview

Transgenomic,Precipio, Inc., and Subsidiary, (“we”, “us”, “our”, the “Company” or “Transgenomic”“Precipio”) is a biotechnologycancer diagnostics company advancing personalized medicine forproviding diagnostic products and services to the detectiononcology market. We have built and treatmentcontinue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technology developed within academic institutions and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located in New Haven, Connecticut and have partnered with the Yale School of Medicine to capture the expertise, experience and technologies developed within academia so that we can provide a better standard of cancer diagnostics and inherited diseases throughsolve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which will focus on further development of ICE-COLD-PCR. or ICP, the patented technology which was exclusively licensed by us from Dana-Farber Cancer Institute, Inc., or Dana-Farber, at Harvard University. The research and development center will focus on the development of this technology, which we believe will enable us to commercialize other technologies developed by our proprietary molecular technologiescurrent and clinicalfuture academic partners. Our platform connects patients, physicians and research services. A key goal is to bring our Multiplexed ICE COLD-PCR (“MX-ICP”) product todiagnostic experts residing within academic institutions. Launched in 2017, the clinical market through strategic partnerships and licensing agreements, enablingplatform facilitates the use of blood and other bodily fluids for more effective and patient-friendly diagnosis, monitoring and treatment of cancer.following relationships:

MX-ICPPatients: patients may search for physicians in their area and consult directly with academic experts that are on the platform. Patients may also have access to new academic discoveries as they become commercially available.

Physicians: physicians can connect with academic experts to seek consultations on behalf of their patients and may also provide consultations for patients in their area seeking medical expertise in that physician’s relevant specialty. Physicians will also have access to new diagnostic solutions to help improve diagnostic accuracy.

Academic Experts: academic experts on the platform can make themselves available for patients or physicians seeking access to their expertise. Additionally, these experts have a platform available to commercialize their research discoveries.

We intend to continue updating our platform to allow for patient-to-patient communications and allow individuals to share stories and provide support for one another, to allow physicians to consult with their peers to discuss and share challenges and solutions, and to allow academic experts to interact with others in academia on the platform to discuss their research and cross-collaborate.

ICP was developed at Harvard and is licensed exclusively by us from Dana-Farber. The technology proprietary to Transgenomic. It is a reagent that improvesenables the ability to detect genetic mutations by 100 - 400 fold over existing technologies. This technology has been validated internally on all currently available sequencing platforms, including Sanger, Next Gen Sequencing and Digital PCR. By enhancing the level of detection of genetic mutations in liquid biopsies, such as blood samples. The field of liquid biopsies is a rapidly growing market, aimed at solving the challenge of obtaining genetic information on disease progression and suppressingchanges from sources other than a tumor biopsy.

Gene sequencing is performed on tissue biopsies taken surgically from the tumor site in order to identify potential therapies that will be more effective in treating the patient. There are several limitations to this process. First, surgical procedures have several limitations, including:

Cost: surgical procedures are usually performed in a costly hospital environment. For example, according to a recent study the mean cost of lung biopsies is greater than $14,000; surgery also involves hospitalization and recovery time.

Surgical access: various tumor sites are not always accessible (e.g. brain tumors), in which cases no biopsy is available for diagnosis.

Risk: patient health may not permit undergoing an invasive surgery; therefore a biopsy cannot be obtained at all.

Time: the process of scheduling and coordinating a surgical procedure often takes time, delaying the start of patient treatment.

Second, there are several tumor-related limitations that provide a challenge to obtaining such genetic information from a tumor:
Tumors are heterogeneous by nature: a tissue sample from one area of the tumor may not properly represent the tumor’s entire genetic composition; thus, the diagnostic results from a tumor may be incomplete and non-representative.

Metastases: in order to accurately test a patient with metastatic disease, ideally an individual biopsy sample should be taken from each site (if those sites are even known). These biopsies are very difficult to obtain; therefore physicians often rely on biopsies taken from the primary tumor site.

The advent of technologies enabling liquid biopsies as an alternative to tumor biopsy and analysis is based on the fact that tumors (both primary and metastatic) shed cells and fragments of DNA into the blood stream. These blood samples are called “liquid biopsies” that contain circulating tumor DNA, or ctDNA, which hold the same genetic information found in the tumor(s). That tumor DNA is the target of genetic analysis. However, since the quantity of tumor DNA is very small in proportion to the “normal” (or “healthy”) DNA within the blood stream, there is a need to identify and separate the tumor DNA from the normal or wild-type,DNA.

ICP is an enrichment technology that enables the laboratory to focus its analysis on the tumor DNA several benefits are provided. Itby enriching, and thereby “multiplying” the presence of, tumor DNA, while maintaining the normal DNA at its same level. Once the enrichment process has been completed, the laboratory genetic testing equipment is generally understoodable to identify genetic abnormalities presented in the ctDNA, and an analysis can be conducted at a higher level of sensitivity, to enable the detection of such genetic abnormalities. The technology is encapsulated into a chemical that most current technologies are unable to consistently identify mutations that occuris provided in less than approximately 5%the form of a sample. However, many mutations found at much lower levels, even as low as 0.01%, are knownkit and sold to be clinically relevant and can have significant consequencesother laboratories who wish to a patient: both in terms of how they will respondconduct these tests in-house. The chemical within the kit is added to a given drug or treatment and how a given tumor is likely to change over time. More importantly, in our view, is the ability to significantly improvespecimen preparation process, enriching the level of detection while using blood, saliva and even urine as a source for DNA, rather than depending on painful, expensive and potentially dangerous tumor biopsies. We believe that this is an important advancement in patient care with respect to cancer detection, treatment and monitoring and can result in significant cost savingssample for the healthcare system by replacing invasive procedures withtumor DNA so that the simple collection of blood or other bodily fluids. By broadening the types of samples that can be used for testing and allowing all sequencing platforms to provide improved identification of low level mutations, MX-ICP has the potential to make testing more readily available and more patient friendly, enableanalysis will detect those genetic monitoring of disease progression, effectively guide treatment protocols, and reduce the overall cost of diagnosis and monitoring while significantly improving patient outcomes.abnormalities.

Historically,The following discussion should be read together with our operations were organizedfinancial statements and reviewed by management along our major product lines and presented in two business segments: Laboratory Services and Genetic Assays and Platforms. Beginning with the quarter ended September 30, 2015, our operations are now organized as one business segment, our Laboratory Services segment, and during the fourth quarter of 2015, we began including a portion of our Laboratory Services segment as discontinued operations.

Our laboratory in Omaha, Nebraska is focused on providing genetic analytical services related to oncology and pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by pharmaceutical and biotechnology companies. Our laboratory employs a variety of genomic testing service technologies, including our proprietary MX-ICP technology. ICE COLD-PCR is a proprietary ultra-high sensitivity platform technology with breakthrough potential to enable wide adoption of personalized, precision medicine in cancer and other diseases. It can be run in any laboratory that contains standard PCR systems. MX-ICP enables detection of multiple known and unknown mutations from virtually any sample type, including tissue biopsies, blood, urine, saliva, cell-free DNA (“cfDNA”) and circulating tumor cells (“CTCs”) at levels greater than 1,000-fold higher than standard DNA sequencing techniques. It is easy to implement and use within existing workflows. Our laboratory in Omaha is certified under the Clinical Laboratory Improvement Amendments (“CLIA”) as a high complexity laboratory and is accredited by the College of American Pathologists.

Our condensed consolidated balance sheets, statements of operations and statements of cash flows for all periods presented reflect our former Genetic Assays and Platforms activities and Patient Testing business as discontinued operations (See Note 3 - “Discontinued Operations” in the Notes to Unaudited Condensed Consolidated Financial Statementsnotes contained in this Quarterly Report on Form 10-Q).Report. Results for the three and six months ended June 30, 2017 are not necessarily indicative of results that may be attained in the future.



ThirdSecond Quarter 20162017 Overview and Recent Highlights

Below isDuring the second quarter of 2017, both Precipio Diagnostics and Transgenomic worked to prepare for the Merger. From an operation perspective, since each company had a summarycertified CLIA lab, management determined that consolidation would both streamline company operations and reduce the regulatory burden, while significantly decreasing operating costs on a going forward basis. Both companies continued to work to integrate their various teams and related operations; the finance teams of both companies worked together to prepare for the combination of both companies financial, billing, AP and accounting systems to ensure a smooth transition upon completion of the Merger. Customer service and logistics functions also were combined to ensure that the proper efficiencies were achieved once the Merger was completed.

From a corporate governance perspective, the Company enhanced its board of directors and will further supplement its board of directors with experienced industry individuals. In addition, the Company also formulated its scientific advisory board, to create a strong scientific backbone to support the management team, and ensure that the Company continues product development.  We continue to build on our long standing relationships with Yale Medicine, Harvard, and Dana Farber. Collaboration with academia and biopharma remains an integral component of our most recent business activities:

Signed Data Sharing Agreement with Ventana Medical Systems, Inc. -strategy to access advanced genetic technology and diagnostic testing in the cancer marketplace for future growth. In September 2016,April 2017, we signed a data sharingcontract renewal with Yale for diagnostic pathology services and medical director leadership.
During the three months ending June 30, 2017, we expanded the diagnostic sales force and focused on product branding. These efforts will continue through 2017 and beyond. In addition, significant resource was directed on communicating the broad technical synergies and product development capabilities created through the Merger. We signed our first multi-national distribution agreement with Ventana Medical Systems, Inc.,Clearbridge Health, a subsidiary of Roche Holdings (“Ventana”). The agreement allows Ventana to access DNA test results from an existing research agreement between us and the University of MelbourneSingaporean-based healthcare company that will be providing Precipio’s services in Australia. As part of this research agreement, the University of Melbourne is conducting additional clinical validation studies of our MX-ICP technology.numerous countries throughout Asia.
Added New Distributors in China and India for our ICEme Kits that Enable Liquid Biopsy Cancer Testing on Existing Platforms - In September 2016, we signed agreements with two additional distributors in China and India for our ICEme™ Mutation Enrichment Kits for cancer genomic testing. The kits incorporate our MX-ICP technology and are designed to enable virtually any laboratory to conduct high quality DNA mutation detection in cancer patients using plasma, blood or tissue samples and existing sequencing platforms. The new distributors, Joying Bio in China and Biotron Healthcare in India, are important suppliers of advanced life science products in their respective markets.
Uncertainties
We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. We have been able to historically finance our operating losses through borrowings or from the issuance of additional equity. At SeptemberJune 30, 2016,2017, we had cash and cash equivalents of $0.1approximately $1.0 million. Our ability to continue as a going concern is dependent upon a combination of generating additional revenue improving cash collections, potentially selling underutilized assets and ifraising necessary raising additional financing to meet our obligations and pay our liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raises substantial doubt that we will be able to continue as a going concern.

Results of Continuing Operations

for the Three Months Ended SeptemberJune 30, 20162017 and 20152016
Net Sales. Net sales were as follows:
 Dollars in Thousands
 Three Months Ended  
 September 30, Change
 2016 2015 $     %
Total Net Sales$457
 $330
 $127
 38%
 Dollars in Thousands
 Three Months Ended  
 June 30, Change
 2017 2016 $     %
Total Net Sales$260
 $504
 $(244) (48)%
Net sales increaseddecreased by $0.1$0.2 million, or 38%48%, during the three months ended SeptemberJune 30, 20162017 as compared to the same period in 20152016. SalesThe decrease is entirely due to the decrease in cases processed during the three months ended June 30, 2017 as compared to the same period in 2016. We processed 230 cases during the three months ended June 30, 2017 as compared to 338 cases during the same period in 2016, or a 32% decrease in cases. The decrease in volume is the result of our contract laboratory services were flat year over year. The slight increase in total netturnover of key sales for the current year period reflects higher grant revenues.personnel.
Cost of Goods Sold.Diagnostic Services. Cost of goods solddiagnostic services includes material and supply costs for the products that we sellpatient tests performed and other direct costs (primarily personnel costs rent, supplies and depreciation)rent) associated with the operations of our laboratories.laboratory. Cost of diagnostic services increased by less than $0.1 million, or 19%, for the three months ended June 30, 2017 as compared to the same period in 2016. The increase is due to increased professional fees involved with the processing of patient tests in the three months ended June 30, 2017.
Gross Profit. Gross profit and gross margins were as follows:
 Dollars in Thousands
 Three Months Ended  
 September 30, Margin %
 2016 2015 2016 2015
Gross Profit$27
 $(115) 6% (35)%
 Dollars in Thousands
 Three Months Ended  
 June 30, Margin %
 2017 2016 2017 2016
Gross (Loss) Profit$(24) $263
 (10)% 52%
Gross profitloss was $27,000, or 6%a negative (10)% of total net sales, during the thirdsecond quarter of 2016,2017, compared to negative $115,000, or (35)%52% of total net sales, during the same quarter of 20152016. The increased gross profit decreased by $0.3 million during the three months ended SeptemberJune 30, 20162017 as compared to the same period of 2015 is2016 due to increased revenues.the decreased revenues discussed above and associated fixed costs to operate the laboratory.
Selling, General and AdministrativeOperating Expenses. Selling, general and administrativeOperating expenses primarily consist of personnel costs, marketing,professional fees, travel costs, professional fees, facility costs and bad debt provisions.depreciation. Our selling, general and administrative

costs decreasedoperating expenses increased by $0.4$0.2 million to $1.3$0.8 million during the three month periodmonths ended SeptemberJune 30, 20162017 as compared to the same period in 2015. This decrease was due2016. The increase in operating expenses reflects the increase in professional fees attributed to lower professional and lower stock compensation costs in the third quarter of 2016 as comparedlegal expenses related to the third quarter of 2015.
Research and Development Expenses. Research and development expenses primarily include personnel costs, intellectual property fees, patent costs, outside services, laboratory supplies and facility costs and are expensed in the period in which they are incurred. For the three months ended September 30, 2016, research and development expenses totaled $0.4 million as compared to $0.5 million for the three months ended September 30, 2015. Research and development expenses totaled 86% and 138% of net sales during the three months ended September 30, 2016 and 2015, respectively.Merger.
Other Income (Expense). Other expense for both the three months ended SeptemberJune 30, 20162017 and 20152016 includes interest expense of approximately $0.30.2 million and $0.2 million, respectively. In addition, we recorded less than $0.1 million offor interest related to our debt. Also included in other incomeexpense for the three months ended SeptemberJune 30, 2016 and other income2017 was $2.6 million of $0.4 million for the three months ended September 30, 2015 for the revaluation of common stock warrants, which was dueadvisory fees related to the change in fair value of the common stock warrant liability. The income and expense associated with the change in fair value of the warrants is a non-cash item.Merger.

NineResults of Operations for the Six Months Ended SeptemberJune 30, 20162017 and 20152016

Net Sales. Net sales were as follows:
 Dollars in Thousands
 Nine Months Ended  
 September 30, Change
 2016 2015 $     %
Total Net Sales$1,198
 $1,522
 $(324) (21)%
 Dollars in Thousands
 Six Months Ended  
 June 30, Change
 2017 2016 $     %
Total Net Sales$508
 $1,042
 $(534) (51)%
Net sales decreased by $0.3$0.5 million, or 21%51%, duringfor the ninesix months ended SeptemberJune 30, 20162017 as compared to the same period in 20152016. The decrease reflects fewer sales of our contract laboratory servicesis entirely due to the decrease in cases processed during the six months ended June 30, 2017 as compared to the same period in 2016. We processed 429 cases during the six months ended June 30, 2017 as compared to 727 cases during the same period in 2016, or a 41% decrease in cases. The decrease in volume is the result of fewer customers with active projects in the current year partially offset by increased grant revenues in the current year.turnover of key sales personnel.
Cost of Goods Sold.Diagnostic Services. Cost of goods solddiagnostic services includes material and supply costs for the products that we sellpatient tests performed and other direct costs (primarily personnel costs rent, supplies and depreciation)rent) associated with the operations of our laboratories.laboratory. Cost of diagnostic services remained flat for the six months ended June 30, 2017 as compared to the same period in 2016.
Gross Profit. Gross profit and gross margins were as follows:
 Dollars in Thousands
 Nine Months Ended  
 September 30, Margin %
 2016 2015 2016 2015
Gross Profit$(279) $147
 (23)% 10%
 Dollars in Thousands
 Six Months Ended  
 June 30, Margin %
 2017 2016 2017 2016
Gross (Loss) Profit$42
 $563
 8% 54%
Gross profit was a negative $0.3 million, or (23)%8% of total net sales, duringfor the first ninesix months of 2016,ended June 30, 2017, compared to $0.1 million, or 10%54% of total net sales, duringfor the same period of 20152016. The decrease in gross profit in the current year is a result of lower revenues during the nine months ended September 30, 2016 as compared to the first nine months of 2015. The negative gross margin in the current year is due to lower revenues that were insufficient to cover our laboratory’s fixed direct costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel costs, professional fees, facility costs and bad debt provisions. Our selling, general and administrative costs decreased by $1.0 million to $4.4$0.5 million during the nine month periodsix months ended SeptemberJune 30, 20162017 as compared to the same period in 2015. This decrease2016 and was due to lowerthe decreased revenues discussed above.
Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs and lower stock compensation costs indepreciation. Our operating expenses increased by $0.3 million to $1.4 million for the first ninesix months of 2016ended June 30, 2017 as compared to the same period of 2015.
Researchin 2016. The increase in operating expenses reflects the increase fees attributed to legal and Development Expenses. Research and developmentprofessional expenses primarily include personnel costs, intellectual property fees, outside services, collaboration expenses, laboratory supplies and facility costs and are expensed inrelated to the period in which they are incurred. For the nine months ended September 30, 2016, research and development expenses totaled $1.1 million as compared to $1.4 million for the nine months ended September 30, 2015. Research and development expenses totaled 89% and 90% of net sales during the nine months ended September 30, 2016 and 2015, respectively.Merger.
Other Income (Expense). Other expense for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 includes interest expense of $0.8approximately $0.3 million and $0.6$0.2 million, respectively. In addition, we recorded $0.4respectively, for interest related to our debt. The increase in the current year is due to increased interest bearing instruments outstanding during the six months ended June 30, 2017 as compared to the same period in 2016. Also included in other expense for the six months ended June 30, 2017 was $2.6 million of other income for the nine months ended September 30, 2016 and other expense of less than $0.1 million for the nine months ended September 30, 2015 for the revaluation

of common stock warrants, which was dueadvisory fees related to the change in fair value of the common stock warrant liability. The income and expense associated with the change in fair value of the warrants is a non-cash item.

Discontinued Operations For The Three and Nine Months Ended September 30, 2016 and 2015

During the third quarter of 2015, we decided to divest our Genetic Assays and Platforms business, resulting in a strategic shift that had a major effect on our operations and financial results. Therefore, the divested Genetic Assays and Platforms operations meet the criteria to be reported as discontinued operations.

During the fourth quarter of 2015, our Board of Directors took actions to begin the process of divesting our Patient Testing business located in New Haven, Connecticut. In March 2016, we announced that we had suspended testing services in our Patient Testing laboratory as we review and evaluate various strategic alternatives for that business. As a result of these actions, our Patient Testing business meets the criteria to be reported as discontinued operations.

The related assets, liabilities, results of operations and cash flows for both the Genetic Assays and Platforms business and Patient Testing business are classified as assets held for sale, liabilities held for sale and discontinued operations for all periods presented.

Net loss from discontinued operations for the three and nine months ended September 30, 2016, includes approximately $0.1 million and $1.1 million, respectively, in proceeds received from the sale of assets of our discontinued Patient Testing business.

Revenues and net loss of the discontinued operations consisted of the following:
 Three months ended September 30, Nine months ended September 30,
(Dollars in thousands)2016 2015 2016 2015
Net sales$283
 $5,507
 $1,960
 $17,868
Net loss from discontinued operations, before tax$(34) $(5,204) $(25) $(6,259)
Income tax expense—
 44
 —
 133
Loss from discontinued operations, net of tax$(34) $(5,248) $(25) $(6,392)

Merger.

Liquidity and Capital Resources
The condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) applicable for a going concern, which assume that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company has incurred substantial operating losses and has used cash in its operating activities for the past several years. As of June 30, 2017, the Company had a net loss of $4.4 million and negative working capital of $14.5 million. The Company’s ability to continue as a going concern is dependent upon a combination of achieving its business plan, including generating additional revenue, and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due.

Precipio is currently in discussions with certain investors to raise additional capital. There can be no assurance such capital is available at terms favorable or agreeable to management, if at all, or that the Company will successfully complete the proposed capital raise. Since the outcome of these matters cannot be predicted with any certainty at this time, there is substantial doubt that the Company will be able to continue as a going concern.

Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that the Company will be able to successfully achieve its initiatives summarized above in order to continue as a going concern. The accompanying financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result should the Company be unable to continue as a going concern as a result of the outcome of this uncertainty.

Our working capital positions at SeptemberJune 30, 20162017 and December 31, 20152016 were as follows: 
Dollars in ThousandsDollars in Thousands
September 30,
2016		 
December 31,
2015
 ChangeJune 30,
2017		 
December 31,
2016
 Change
Current assets (including cash and cash equivalents of $71 and $444, respectively)$866
 $3,282
 $(2,416)
Current assets (including cash and cash equivalents of $967 and $51, respectively)$1,798
 $552
 $1,246
Current liabilities18,260
 16,981
 1,279
16,314
 3,012
 13,302
Working capital$(17,394) $(13,699) $(3,695)$(14,516) $(2,460) $(12,056)

Conversion Agreement

On January 6, 2016, we entered into a Conversion Agreement (the “Conversion Agreement”) withWe completed the holders (the “Preferred Holders”) of all of our outstanding shares of Series A Convertible Preferred Stock (the “Series A Preferred”),Merger on June 29, 2017 and Series B Convertible Preferred Stock (the “Series B Preferred”), pursuant to which, among other things, the Preferred Holders: (1) elected to convert all of the outstanding shares of Series A Preferred and Series B Preferred into shares of our common stock in each case in accordance with the terms thereof, and (2) agreed that all accrued and unpaid dividends on the Series A Preferred and Series B Preferred would be paid by us in shares of common stock at a rate of $1.00 per share of common stock (collectively, the “Conversion”).


The outstanding shares of Series A Preferred were convertible into shares of common stock at a rate of 1-for-3, and the outstanding shares of Series B Preferred were convertible into shares of common stock at a rate of 1-for-1. Prior to the entry into the Conversion Agreement, there were 2,586,205 shares of Series A Preferred outstanding, which were converted into 862,057 shares of common stock, and 1,443,297 shares of Series B Preferred outstanding, which were converted into 1,443,297 shares of common stock, for an aggregate of 2,305,354 shares of common stock issued upon conversion of the Series A Preferred and Series B Preferred. At the time of the entry into the Conversion Agreement, there were $3,681,591 in accrued and unpaid dividends on the outstanding shares of Series A Preferred, which were converted, in accordance with the Conversion Agreement, into 3,681,590 shares of common stock, and $793,236 in accrued and unpaid dividends on the outstanding shares of Series B Preferred, which were converted, in accordance with the terms of the Conversion Agreement, into 793,235 shares of common stock, for an aggregate of 4,474,825 shares of our common stock issued pursuant to the accrued and unpaid dividends on the Series A Preferred and Series B Preferred. Therefore, in connection with the full conversion of the Series A Preferred and Series B Preferred, plus the conversion of all accrued and unpaid dividends thereon,Merger we issued an aggregate of 6,780,179 shares of common Stock to the Preferred Holders on January 6, 2016.

January 2016 Private Placement

On January 6, 2016, we entered into a Securities Purchase Agreement (the “A-1 Preferred Purchase Agreement”) with certain accredited investors (the “A-1 Preferred Investors”), pursuant to which, on January 8, 2016, we sold to the A-1 Preferred Investors, and the A-1 Preferred Investors purchased from us (the “A-1 Preferred Offering”), an aggregate ofraised approximately $2.2$1.2 million of units (the “Units”) consisting of (1) an aggregate of 2,365,243 shares (the “A-1 Preferred Shares”) of our Series A-1 Convertible Preferred Stock (the “A-1 Preferred”), and (2) warrants (the “Warrants”) to purchase up to an aggregate of 1,773,929 shares of our common stock. Each Unit was sold to the A-1 Preferred Investors at a purchase price of $0.93 per Unit. The A-1 Preferred Shares are convertible into shares of common stock at an initial rate of 1-for-1, which conversion rate is subject to further adjustment as set forth in our Certificate of Designation of Series A-1 Convertible Preferred Stock, which was filed with the Secretary of State of the State of Delaware on January 8, 2016 (the “Series A-1 Certificate of Designation”). Pursuant to the terms of the Series A-1 Certificate of Designation, the holders of the A-1 Preferred Shares will generally be entitled to that number of votes as is equal to the product obtained by multiplying: (a) the number of whole shares of common stock into which the A-1 Preferred may be converted as of the record date of such vote or consent, by (b) 0.93, rounded down to the nearest whole number. Therefore, every 1.075269 shares of A-1 Preferred will generally initially be entitled to one vote.

The Warrants were immediately exercisable upon issuance, have a term of five years and have an exercise price of $1.21 per share of common stock. Each Warrant also includes both cash and cashless exercise features and an exchange feature whereby the holder of the Warrant may exchange all or any portion of the Warrant for a number of shares of our common stock equal to the quotient obtained by dividing the “Exchange Amount” by the closing bid price of our common stock on the second trading day prior to the date the Warrant is exchanged (the “Exchange Right”). Under the Warrants, the “Exchange Amount” is based upon a Black Scholes option pricing model, and the aggregate Exchange Amount under all of the Warrants will be $1,436,882, subject to adjustment to the extent that the risk-free U.S. Treasury rate fluctuates between the date of issuance of the Warrants and the date the Warrants are exchanged. Each Warrant provides that the number of shares that may be issued upon exercise of the Exchange Right is limited to the number of shares that may be purchased pursuant to the terms of the Warrant, unless we have previously obtained stockholder approval or approval from The Nasdaq Stock Market LLC to issue any additional shares of our common stock (the “Additional Shares”) pursuant to the Exchange Right (the “Required Approvals”). For any Exchange Right exercised more than 90 days following the issuance of the Warrants, if we have not obtained either of the Required Approvals, we will be required to pay the Warrant holder an amount in cash for any Additional Shares that we cannot issue without the Required Approvals based on the Exchange Amount.

gross proceeds. At the Market Offering

On June 7, 2016, we entered into an At the Market Offering Agreement (the “ATM Agreement”) with Craig-Hallum Capital Group LLC, as sales agent (“Craig-Hallum”), pursuant to which we may offer and sell, from time to time, through Craig-Hallum, up to $3,500,000 of shares (the “Shares”) of our common stock. Any Shares offered and sold in the offering will be issued pursuant to our effective shelf registration statement on Form S-3 (File No. 333-201907) and the related prospectus previously declared effective by the Securities and Exchange Commission (the “SEC”) on February 13, 2015, as supplemented by a prospectus supplement, dated June 7, 2016, that we filed with the SEC pursuant to Rule 424(b)(5) under the Securities Act. The number of shares eligible for sale under the ATM Agreement will be subject to the limitations of General Instruction I.B.6 of Form S-3. During the nine months ended September 30, 2016, we sold 1,150,569 shares under the ATM Agreement.  The average sales price per common share was $0.42 and the aggregate net proceeds from the sales totaled $0.5 million.

Please see Note 5 - “Debt” and Note 6 - “Commitments and Contingencies” in the Notes to Unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional information regarding our outstanding debt and debt servicing obligations.
At September 30, 2016,2017, we had cash on hand of $0.1$1.0 million. Our current operatingTo execute our strategic plan, projects improved operating resultsmanagement is currently planning to raise additional investment capital. On August 1, 2017, we announced that we were planning a public offering of common stock and monetization of underutilized assets. As with any operating plan, there are risks associated with our ability to execute it. Therefore, therewarrants in an underwritten public offering. There can be no assurance that weassurances as to whether the offering will be ablecompleted, or as to satisfy our obligations,the size or achieveterms of the operating improvements as contemplated byoffering. Even if the current operating plan. If we are unable to execute this plan,offering is completed, we will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated.funding. We could raisecannot be certain that additional funds through various potential sources such as through the sale of assets or sale of debt or equity securities. However, there can be no assurance that the additional funding sourcesfinancing will be available to us at reasonableon acceptable terms, or at all. Ifall, and our failure to raise capital could limit our ability to continue our operations. The accompanying financial statements have been prepared assuming we arewill continue as a going concern and do not include any adjustments that might result should we be unable to achieve our operating plan or obtain additional financing, our business would be jeopardized and we may not be able to continue as a going concern.concern as a result of the outcome of this uncertainty.


Analysis of Cash Flows - NineSix Months Ended SeptemberJune 30, 20162017 and 20152016
Net Change in Cash and Cash Equivalents. Cash and cash equivalents decreasedincreased by $0.4$0.9 million during the ninesix months ended SeptemberJune 30, 2016,2017, compared to an increasea decrease of $1.2less than $0.1 million during the ninesix months ended SeptemberJune 30, 2015. These amounts include cash provided by discontinued operations of $1.4 million and cash used in discontinued operations of $1.1 million, for the nine months ended September 30, 2016 and 2015, respectively.2016.
Cash Flows From Continuing Operations
Cash Flows Used in Operating Activities. The cash flows used in operating activities of $4.0$0.9 million during the ninesix months ended SeptemberJune 30, 20162017 included a net loss of $6.2$4.4 million and a decreasean increase in accrued expensesaccounts receivable of $0.7$0.1 million. These were partially offset by an increase in accounts payable, accrued expenses and other liabilities of $2.5$0.8 million and a decrease in other current assetsnon-cash adjustments of $0.3$3.0 million. The cash flows used in operating activities in the first ninesix months of 20152016 included the net loss of $7.2 million, a decrease in accounts payable of $0.2$0.8 million and an increase in other current assetsaccounts receivable of $0.2$0.3 million. These were partially offset by a decreasean increase in accounts receivablepayable, accrued expenses and other liabilities of $0.2$0.3 million and other non-cash adjustments of $0.9$0.4 million.
Cash Flows Used inProvided by Investing Activities. Cash flows used inprovided by investing activities for continuing operations were $0.1 million and $0.3zero for the six months ended June 30, 2017 and 2016, respectively. The $0.1 million for the ninesix months ended SeptemberJune 30, 2016 and 2015, respectively.2017 was cash acquired as part of the merger transaction.
Cash Flows Provided by Financing Activities. Cash flows provided by financing activities totaled $2.2$1.7 million for the ninesix months ended SeptemberJune 30, 2016,2017, which included net proceeds of approximately $1.8$0.3 million from our Unitthe issuance $0.5of senior notes, $1.4 million from sales under the ATM Agreementissuance of convertible notes, and $0.5$0.4 million from borrowing on our debt.the issuance of preferred stock. These proceeds were partially offset by payments on our debt, capital lease obligations and for deferred financing costs of approximately $0.6$0.4 million. Cash flows provided by financing activities during the ninesix months ended SeptemberJune 30, 20152016 included net proceeds of $9.0 million from our common stock offerings and $0.9$0.5 million from the issuance of unsecured convertible promissory notes. These werenotes partially offset by $0.1 million of payments on our debt, and capital lease obligations of $0.9 million.and for deferred financing costs.

Off-Balance Sheet Arrangements
At each of SeptemberJune 30, 20162017 and December 31, 20152016, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations and Commitments
There
We have been no material changesentered into certain operating leases and purchase commitments as part of our normal course of business. See the accompanying unaudited condensed consolidated financial statements and Note 7 - “Contingencies” in the Notes to unaudited condensed consolidated financial statements for additional information regarding our contractual obligations outside the normal course of business as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on April 14, 2016.commitments


Critical Accounting Policies and Estimates

Accounting policies used in the preparation of our consolidated financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgments or estimates may vary under

different assumptions or circumstances. OurFor additional information regarding our critical accounting policies are discussedand estimates, see the accompanying unaudited condensed consolidated financial statements and Note 2 - “Summary of Significant Accounting Policies” in the Notes to unaudited condensed consolidated Financial Statements and Note 1 of the audited financial statements and notes thereto of Precipio Diagnostics for the year ended December 31, 2016 contained in our Annual Reportcurrent report on Form 10-K for the fiscal year ended December 31, 2015,8-K/A, filed with the Securities and Exchange Commission (the “SEC”) on April 14, 2016.July 31, 2017.

Recently Issued Accounting Pronouncements
Please refer to our Annual Report on Form 10-K forSee the fiscal year ended December 31, 2015, filed with the Securitiesaccompanying unaudited condensed consolidated financial statements and Exchange Commission on April 14, 2016. There have been no changes to those accounting pronouncements listed except as noted in Note 2 - “Summary of Significant Accounting Policies-Recent Accounting Pronouncements”Policies” in the Notes to Unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.unaudited condensed financial statements for additional information regarding recently issued accounting pronouncements.

Impact of Inflation
We do not believe that price inflation or deflation had a material adverse effect on our financial condition or results of operations during the periods presented.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.

Item 4.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures

Management performed, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, an evaluation of the effectiveness ofOur management has concluded that our disclosure controls and procedures as defined in Rules 13a-15(e)nor our internal controls over financial reporting will prevent all fraud and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).material error. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarizedprovide reasonable assurance of achieving our objectives and reported within the time periods specified in the Securitiesour President and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures arenot effective at a reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to allow timely decisions regarding required disclosures. their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate
A material weakness is a significant deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Based on the evaluation, our Chief Executive Officer and Interimour Chief Financial Officer concluded that, as of June 30, 2017, the following deficiencies are believed to be material weaknesses:

The Company’s inability to account for the complex technical accounting treatment of complex debt and equity instruments.
The Company’s controls as related to revenue recognition resulting from the fact the Company does not have contracts with certain payors and does not have proper controls over the estimates for doubtful accounts and contractual allowances.

Accounting for technical accounting and valuation of complex debt and equity instrumentsSeptember 30, 2016:

A material weakness exists pertaining to a lack of expertise in the technical accounting and valuation of complex debt and equity instruments that are required to be reported in accordance with accounting principles generally accepted in the United States of

America and the valuation of fair values.  To address the material weaknesses the Company continues to seek assistance with various third parties with expertise in such instruments and matters of fair value, in order to ensure that the Company's financial statements were prepared in accordance with U.S. GAAP on a timely basis.

Controls related to revenue recognition, our disclosure:

A material weakness exists due to the fact the Company does not have contracts with certain payors and does not have proper controls over the estimates for doubtful accounts and procedures were effectivecontractual allowances. The Company’s net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered. Revenue estimates are also subject to retroactive adjustments under reimbursement agreements. Healthcare reimbursement laws and regulations governing Medicare and Medicaid programs that represent a portion of the Company’s net patient service revenues are extremely complex and subject to interpretation. As a result, there is at least a reasonable assurance level.possibility that recorded estimates could change by a material amount in the near future. To address the material weakness the Company has added an additional review and reconciliation step to the revenue recognition process to ensure that all reported revenue recognizes appropriate third party contractual allowances and allowance for doubtful accounts. In addition, the additional review process will include current collection trends of payments and their impact on realizable revenues.

Changes in Internal Control over Financial Reporting
On June 29, 2017, the reverse merger of Precipio Diagnostics, Inc. and Transgenomic Inc. was completed. The reporting period for the six months ended June 30, 2017, reflects the financial statements and operating activity of Precipio Diagnostic, the controlling entity of the merger transaction.

Prior to the merger, Precipio Diagnostics was a privately operated company. Effective with the merger, Transgenomic changed its name to Precipio, Inc. and Mr. Ilan Danieli, Chief Executive Officer of Precipio Diagnostics and Carl Iberger, Chief Financial Officer of Precipio Diagnostics were appointed CEO and CFO respectively of Precipio, Inc., replacing Mr. Paul Kinnon, CEO and acting CFO of Transgenomic Inc.

We have evaluated the changes in our internal control over the financial reporting that occurred during the threesix months ended SeptemberJune 30, 20162017. Management has identified a lack of sufficient personnel in the accounting function due to our limited resources with appropriate skills, training and concluded that there have not been any changes that have materially affected, or are reasonably likelyexperience to materially affect, our internal control overperform the review processes to ensure the complete and proper application of generally accepted accounting principles. Management is addressing this material weakness with the addition of accounting and financial reporting.resource with proper skills, training and experience. As of the merger date, June 29, 2017, Management has added experienced accounting staff consisting of a Director of Accounting, Director of Financial Reporting and a staff accountant and additional administrative staff.



PART II. OTHER INFORMATION
 
Item 1.Legal Proceedings
We are subject to a number of claims of various amounts that arise out of
See the normal course of our business. In our opinion, the disposition of pending claims, in excess of recorded accruals, could have a material adverse effect on ouraccompanying unaudited condensed consolidated financial position, results of operations or cash flows. On February 25, 2016, the Board of Regents of the University of Nebraska (“UNMC”) filed a lawsuit against usstatements and Note 7 - “Contingencies” in the District Court of Douglas County, Nebraska, for breach of contract and seeking recovery of $0.7 million owed by usNotes to UNMC. We and UNMC are currently in discussions to determine a mutually agreeable means by which to settle the outstanding liability. A $0.7 million liability has been recorded at December 31, 2015 and September 30, 2016.
In addition, on April 13, 2016, Fox Chase Cancer Center (“Fox Chase”) filed a lawsuit against us in the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania Civil Trial Division (the “Court of Common Pleas”), alleging, among other things, breach of contract, tortious interference with present and prospective contractual relations, unjust enrichment, fraudulent conversion and conspiracy and seeking punitive damages in addition to damages and other relief. This lawsuit relates to a license agreement we entered into with Fox Chase in August 2000, as amended (the “License Agreement”), as well as the assignment of certain of our rights under the License Agreement to Integrated DNA Technologies, Inc. (“IDT”) pursuant to the Surveyor Kit Patent, Technology and Inventory Purchase Agreement we entered into with IDT effective as of July 1, 2014 (the “IDT Agreement”). Pursuant to the terms of the IDT Agreement, we agreed to indemnify IDT with respect to certain of the claims asserted in the Fox Chase proceeding. On July 8, 2016, the Court of Common Pleas sustained our preliminary objections to several of Fox Chase’s claims and dismissed the claims for tortious interference, fraudulent conversion, conspiracy, punitive damages and attorney’s fees.  Accordingly, the case has been narrowed so that only certain contract claims and an unjust enrichment claim remain pending against us. We believe that we have good and substantial defenses to the claims asserted by Fox Chase. We are unable to determine whether any loss will occur or to estimate the range of such potential loss; therefore, no amount of loss has been accrued by us as of the date of filing of this Quarterly Report on Form 10-Q. Furthermore, there is no guarantee that we will prevail in this suit or receive any damages or other relief if we do prevail.
On June 23, 2016, the Icahn School of Medicine at Mount Sinai (“Mount Sinai”) filed a lawsuit against us in the Supreme Court of the State of New York, County of New York, alleging, among other things, breach of contract and, alternatively, unjust enrichment and quantum merit, and seeking recovery of $0.7 million owed by us to Mount Sinai for services rendered. We and Mount Sinai are currently in discussions to determine a mutually agreeable means by which to settle the outstanding liability. A $0.7 million liability has been recorded at December 31, 2015 and September 30, 2016.
The outcome of legal proceedings and claims brought against us are subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, ourunaudited condensed consolidated financial statements for such reporting period could be materially adversely affected. In general, the resolution of aadditional information regarding legal matter could prevent us from offering our services or products to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results.proceedings.

Item 1A.Risk Factors
Investing in our common stock involves
There are a high degreenumber of risk. You should consider carefully the risks and uncertainties described below, together with allthat may have a material effect on the operating results of the other information in this Quarterly Report on Form 10-Q, before making a decision to invest in our common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business and our financial conditioncondition. The following information updates, and results of operations couldshould be materially and adversely affected. In that event,read in conjunction with, the trading price of our common stock could decline, and you could lose part or all of your investment.
Risk factors marked with an asterisk (*) below include a change from or an update to the risk factors includeddiscussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with2016, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K, as updated in our Quarterly Report for the Securitiesquarter ended March 31, 2017 and Exchange Commission on April 14, 2016.this Quarterly Report, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

*Risks Related to our Business and Strategy

We have a history of operatingincurred losses since our inception and mayexpect to incur losses for the foreseeable future. We cannot be certain that we will achieve or sustain profitability.

We have incurred losses since our inception and expect to incur losses in the future.
We have experienced annual losses from continuing operations since inception As of our operations. Our operating loss for the years endedJune 30, 2017 and December 31, 2015 and 2014 was $9.22016, we have an accumulated total deficit of approximately $12.7 million and $10.6$10.8 million, respectively, and forrespectively. For the ninesix months ended SeptemberJune 30, 20162017 and 2015 was $5.7 million and $6.6 million, respectively. These historical losses have been due principally to the expenses that we have incurred in order to develop and market our products, the fixed nature of our manufacturing costs and merger and acquisition costs.

*Recurring operating losses raise substantial doubt about our ability to continue as a going concern.
We have incurred substantial operating losses and have used cash in our operating activities for the past several years. As of September 30, 2016, we had negative working capital of $17.4 million.
The audit report issued by our independent registered public accounting firm for our financial statements for the fiscal year ended December 31, 2015 states2016, we had a net loss and comprehensive loss attributable to common stockholders of approximately $1.8 million and $4.1 million, respectively. To date, we have experienced negative cash flow from development of our diagnostic technology, as well as from the costs associated with establishing a laboratory and building a sales force to market our products and services. We expect to incur substantial net losses for the foreseeable future to further develop and commercialize our diagnostic technology. We also expect that our independent registered public accounting firm has substantial doubt in our abilityselling, general and administrative expenses will continue to continue as a going concernincrease due to the risk thatadditional costs associated with market development activities and expanding our staff to sell and support our products. Our ability to achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or, if achieved, sustain profitability.

Because of the numerous risks and uncertainties associated with further development and commercialization of our diagnostic technology and any future tests, we are unable to predict the extent of any future losses or when we will become profitable, if ever. We may not have sufficientnever become profitable and you may never receive a return on an investment in our common stock. An investor in our common stock must carefully consider the substantial challenges, risks and uncertainties inherent in the development and commercialization of tests in the medical diagnostic industry. We may never successfully commercialize our diagnostic technology or any future tests, and our business may fail.

We will need to raise substantial additional capital to commercialize our diagnostic technology, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our product development programs or collaboration efforts.

As of June 30, 2017, our cash balance was $1.0 million and liquid assets at December 31, 2015our working capital was approximately negative $16.3 million. Due to cover our operatingrecurring losses from operations and capital requirements for the next 12 months. If that is the case, and if sufficient cash cannot be obtained, we would have to substantially alter, or possibly even discontinue, operations. Additionally, as of September 30, 2016, we do not believeexpectation that we will have sufficient cashcontinue to meet our operating requirements for at leastincur losses in the next 12 months. Our financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q do not include any adjustments that might result from the outcome of this uncertainty.
Our current operating plan is designed to improve operating results, improve collection rates and monetize underutilized assets. There are no guarantees that these effortsfuture, we will be successfulrequired to raise additional capital to complete the development and if not,commercialization of our current product candidates. To date, to fund our operations and develop and commercialize our products, we have relied primarily on equity and debt financings. When we seek additional capital, we may use more cash than projected andseek to sell additional equity and/or debt securities or to obtain a credit facility, which we may not be able to meetdo on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our current obligations. As with any operating plan, thereperformance and investor sentiment. If we are risks associated withunable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates, restrict our operations or obtain funds by entering into agreements on unattractive terms.

The commercial success of our product candidates will depend upon the degree of market acceptance of these products among physicians, patients, health care payors and the medical community and on our ability to execute it. Therefore,successfully market our product candidates.


Our products may never gain significant acceptance in the marketplace and, therefore, may never generate substantial revenue or profits for us. Our ability to achieve commercial market acceptance for our existing and future products will depend on several factors, including:
our ability to convince the medical community of the clinical utility of our products and their potential advantages over existing diagnostics technology;
the willingness of physicians and patients to utilize our products; and
the agreement by commercial third-party payors and government payors to reimburse our products, the scope and amount of which will affect patients’ willingness or ability to pay for our products and will likely heavily influence physicians’ decisions to recommend our products.
 In addition, physicians may rely on guidelines issued by industry groups, such as the National Comprehensive Cancer Network, medical societies, such as the College of American Pathologists, or CAP, or other key oncology-related organizations before utilizing any diagnostic test. Although we have a study underway to demonstrate the clinical utility of our existing products, none of our products are, and may never be, listed in any such guidelines.

We believe that publications of scientific and medical results in peer-reviewed journals and presentations at leading conferences are critical to the broad adoption of our products. Publication in leading medical journals is subject to a peer-review process, and peer reviewers may not consider the results of studies involving our products sufficiently novel or worthy of publication. The failure to be listed in physician guidelines or to be published in peer-reviewed journals could limit the adoption of our products. Failure to achieve widespread market acceptance of our products would materially harm our business, financial condition, and results of operations.

If we cannot compete successfully with our competitors, including new entrants in the market, we may be unable to increase or sustain our revenue or achieve and sustain profitability.

The medical diagnostic industry is intensely competitive and characterized by rapid technological progress. In each of our potential product areas, we face significant competition from large biotechnology, medical diagnostic and other companies. Our closest competitors fall largely into two groups, consisting of companies that specialize in oncology and offer directly competing services to our diagnostic services, offering their services to oncologists and pathology departments within hospitals, as well as large commercial companies that offer a wide variety of laboratory tests that range from simple chemistry tests to complex genetic testing. The technologies associated with the molecular diagnostics industry are evolving rapidly and there is intense competition within such industry. Certain molecular diagnostics companies have established technologies that may be competitive to our product candidates and any future tests that we develop. Some of these tests may use different approaches or means to obtain diagnostic results, which could be more effective or less expensive than our tests for similar indications. Moreover, these and other future competitors have or may have considerably greater resources than we do in terms of technology, sales, marketing, commercialization and capital resources. These competitors may have substantial advantages over us in terms of research and development expertise, experience in clinical studies, experience in regulatory issues, brand name exposure and expertise in sales and marketing as well as in operating central laboratory services. Many of these organizations have financial, marketing and human
resources greater than ours; therefore, there can be no assurance that we can successfully compete with present or potential competitors or that such competition will not have a materially adverse effect on our business, financial position or results of operations.

Since our diagnostic technology is under development, we cannot predict the relative competitive position of any product based upon our diagnostic technology. However, we expect that the following factors will determine our ability to compete effectively: safety and efficacy; product price; turnaround time; ease of administration; performance; reimbursement; and marketing and sales capability.

In July 2017, we commenced a study to demonstrate the impact of academic pathology expertise on diagnostic accuracy. There is no assurance that this study, or other studies or trials we may conduct, will demonstrate favorable results. If the results of this study, or other studies or trials we may conduct, demonstrate unfavorable or inconclusive results, customers may choose our competitors’ products over our products and our commercial opportunities may be reduced or eliminated.

We believe that many of our competitors spend significantly more on research and development-related activities than we do. Our competitors may discover new diagnostic tools or develop existing technologies to compete with our diagnostic technology. Our commercial opportunities will be reduced or eliminated if these competing products are more effective, are more convenient or are less expensive than our product candidates.

We may not be able to satisfydevelop new products or enhance the capabilities of our obligations,systems to keep pace with rapidly changing technology and customer requirements, which could have a material adverse effect on our business and operating results.

Our success depends on our ability to develop new products and applications for our diagnostic technology in existing and new markets, while improving the performance and cost-effectiveness of our systems. New technologies, techniques or achieveproducts could emerge that might offer better combinations of price and performance than our current or future products and systems. Existing or future markets for our products, as well as potential markets for our diagnostic product candidates, are characterized by rapid technological change and innovation. It is critical to our success that we anticipate changes in technology and customer requirements and successfully introduce new, enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and cost-effective basis. At the operating improvementssame time, however, we must carefully manage the introduction of new products. If customers believe that such products will offer enhanced features or be sold for a more attractive price, they may delay purchases until such products are available. We may also have excess or obsolete inventory of older products as contemplatedwe transition to new products and our experience in managing product transitions is very limited. If we do not successfully innovate and introduce new technology into our product lines or effectively manage the transitions to new product offerings, our revenues and results of operations will be adversely impacted.

Competitors may respond more quickly and effectively than we do to new or changing opportunities, technologies, standards or customer requirements. We anticipate that we will face increased competition in the future as existing companies and competitors develop new or improved products and as new companies enter the market with new technologies.

We currently depend on the services of pathologists at a single academic partner and the loss of the services of these pathologists would adversely impact our ability to develop, commercialize and deliver our products.

We currently depend on the services of pathologists at a single academic partner to review and render their diagnostic interpretation of our test results and to prepare the final diagnostic results that we integrate into our final report for our customers. Although we are in the process of adding new academic partners, it would be difficult to replace the services provided by the pathologists at our current partner if their services became unavailable to us for any reason prior to adding other academic partners. If this academic partner does not successfully carry out its contractual duties or obligations and meet expected deadlines; if this partner needs to be replaced, or if the quality or accuracy of the services provided by the pathologists at this partner were compromised for any reason, we would likely not be able to provide our services in a manner expected by our customers, and our financial results and the commercial prospects for our products could be harmed. The loss of the services of these pathologists would severely harm our ability to develop, commercialize and deliver our products, and our business, financial condition and operating plan.results would be materially adversely affected.

We depend upon our officers, and if we are not able to retain them or recruit additional qualified personnel, the commercialization of our product candidates and any future tests that we develop could be delayed or negatively impacted.

Our success is largely dependent upon the continued contributions of our officers. Our success also depends in part on our ability to attract and retain highly qualified scientific, commercial and administrative personnel. In order to pursue our test development and commercialization strategies, we will need to attract and hire additional personnel with specialized experience in a number of disciplines, including assay development, laboratory and clinical operations, sales and marketing, billing and reimbursement. There is intense competition for personnel in the fields in which we operate. If we are unable to execute this plan, weattract new employees and retain existing employees, the development and commercialization of our product candidates and any future tests could be delayed or negatively impacted.

We will need to findincrease the size of our organization, and we may experience difficulties in managing growth.

We are a small company with 30 full-time employees as of July 31, 2017. Future growth will impose significant added responsibilities on members of management, including the need to identify, attract, retain, motivate and integrate highly skilled personnel. We may increase the number of employees in the future depending on the progress of our development of diagnostic technology. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to:.

manage our clinical studies effectively;
integrate additional sourcesmanagement, administrative, manufacturing and regulatory personnel;
maintain sufficient administrative, accounting and management information systems and controls; and
hire and train additional qualified personnel.
 We may not be able to accomplish these tasks, and our failure to accomplish any of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations asthem could harm our financial results.


We currently contemplated. We could seek to raise additional funds through various potential sources such as through the sale of assets or sale of debt or equity securities. However, there can be no assurance that the additional funding sources will be available to us at reasonable terms or at all.have limited experience in marketing products. If we are unable to achieveestablish marketing and sales capabilities and retain the proper talent to execute on our operating plan or obtain additional financing, our business would be jeopardizedsales and marketing strategy, we may not be able to generate product revenue.

We have developed limited experience in marketing our products and services. We intend to continue to develop our in-house marketing organization and sales force, which will require significant capital expenditures, management resources and time. We will have to compete with other diagnostic companies to recruit, hire, train and retain marketing and sales personnel.

If we are unable to further grow our internal sales, marketing and distribution capabilities, we will pursue collaborative arrangements regarding the sales and marketing of our product candidates or future products, however, we may not be able to establish or maintain such collaborative arrangements, or if we are able to do so, they may not have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be successful. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates.

We may not realize the anticipated benefits of our merger with Precipio Diagnostics.

In June 2017, we completed our merger with Precipio Diagnostics, LLC, or Precipio Diagnostics. Integrating the operations of the businesses of Precipio Diagnostics successfully or otherwise realizing any of the anticipated benefits of the merger with Precipio, including anticipated cost savings and additional revenue opportunities, involves a number of potential challenges. The failure to meet these integration challenges could seriously harm our results of operations and the market price of our common stock may decline as a going concern.result.
*We have substantial debt
Realizing the benefits of the merger will depend in part on the integration of information technology, operations and other financial obligationspersonnel. These integration activities are complex and time-consuming and we may encounter unexpected difficulties or incur unexpected costs, including:

our inability to achieve the cost savings and operating synergies anticipated in the merger, including synergies relating to increased purchasing efficiencies and a reduction in costs associated with the merger;
diversion of management attention from ongoing business concerns to integration matters;
difficulties in consolidating and rationalizing information technology platforms and administrative infrastructures;
complexities associated with managing the geographic separation of the combined businesses and consolidating multiple physical locations where management may determine consolidation is desirable;
difficulties in integrating personnel from different corporate cultures while maintaining focus on providing consistent, high quality customer service;
challenges in demonstrating to our customers that the merger will not result in adverse changes in customer service standards or business focus; and
possible cash flow interruption or loss of revenue as a result of change of ownership transitional matters.
 We may not successfully integrate the operations of the businesses in a timely manner and may not realize the anticipated net reductions in costs and expenses and other benefits and synergies of the merger with Precipio Diagnostics to the extent, or in the timeframe, anticipated. In addition to the integration risks discussed above, our ability to realize these net reductions in costs and expenses and other benefits and synergies could be adversely impacted by practical or legal constraints on our ability to combine operations.

Reimbursement and Regulatory Risks Relating to Our Business

If commercial third-party payors or government payors fail to provide coverage or adequate reimbursement, or if there is a decrease in the amount of reimbursement for our existing products or any future products we develop, our ability to successfully commercialize our technology, and our revenue and prospects for profitability, would be harmed.

Sales of our existing and any future products we develop will depend, in large part, upon the availability of reimbursement from third-party payors. These third-party payors include government healthcare programs such as Medicare and Medicaid, managed care providers, accountable care organizations, private health insurers, and other organizations. In particular, we believe that obtaining a positive local coverage determination or national coverage determination, and a favorable reimbursement rate from the Centers for Medicare & Medicaid Services, or CMS, or the applicable Medicare Administrative Contractor, or MAC, for each of our existing products, and any future products we develop, across substantially all medically indicated cancers will be a necessary element in achieving material commercial success. Physicians and patients may not order our products unless commercial third-party payors and government payors authorize such ordering and pay for all, or a substantial portion, of the list price, and certain

commercial third-party payors may not agree to reimburse our existing products or future products if CMS or the MACs assigned to the jurisdictions in which our operational laboratory facilities are located do not issue positive coverage decisions for such products.

Commercial third-party payors and government payors are increasingly attempting to contain healthcare costs by demanding price discounts, by limiting coverage on which diagnostic products they will pay for and the amounts that they will pay for new molecular diagnostic products, and by creating conditions to reimbursement, such as coverage eligibility requirements based upon clinical evidence development involving research studies and the collection of physician decision impact and patient outcomes data. Because of these cost-containment trends, commercial third-party payors and government payors that currently provide or in the future may provide reimbursement for one or more of our products may reduce, suspend, revoke, or discontinue payments or coverage at any time, including those payors that designate one or more of our existing products and/or clinically indicated tumor types as experimental and investigational. Payors may also create conditions to coverage or contract with third-party vendors to manage laboratory benefit coverage, in both cases creating burdens for ordering physicians and patients that may make our products more difficult to sell. The percentage of submitted claims that are ultimately paid, the length of time to receive payment on claims, and the average reimbursement of those paid claims, is likely to vary from period to period.

As a result, there is significant uncertainty surrounding whether the use of products that incorporate new technology, such as our products, will be eligible for coverage by commercial third-party payors and government payors or, if eligible for coverage, what the reimbursement rates will be for these products. The fact that a diagnostic product has been approved for reimbursement in the past, or has received U.S. Food and Drug Administration, or FDA, approval, for any particular indication or in any particular jurisdiction, does not guarantee that such diagnostic product will remain approved for reimbursement or that similar or additional diagnostic products and/or clinically indicated tumor types will be approved in the future. Reimbursement of our existing and future products by commercial third-party payors and government payors may depend on a number of factors, including a payor’s determination that our existing and future products are:

not experimental or investigational;
medically reasonable and necessary;
appropriate for the specific patient;
cost effective;
supported by peer-reviewed publications;
included in clinical practice guidelines and pathways; and
supported by clinical utility and health economic studies demonstrating improved outcomes and cost effectiveness.

Market acceptance, sales of products based upon our diagnostic technology, and our profitability may depend on reimbursement policies and health care reform measures. Several entities conduct technology assessments of medical tests and devices and provide the results of their assessments for informational purposes to other parties. These assessments may be used by third-party payors and health care providers as grounds to deny coverage for a test or procedure. The levels at which government authorities and third-party payors, such as private health insurers and health maintenance organizations, may reimburse the price patients pay for such products could affect whether we are able to commercialize our products. Our product candidates may receive negative assessments that may impact our ability to receive reimbursement of the test. Since each payor makes its own decision as to whether to establish a policy to reimburse our test, seeking these approvals may be a time-consuming and costly process. We cannot be sure that reimbursement in the United States or elsewhere will be available for any of our products in the future. If reimbursement is not available or is limited, we may not be able to commercialize our products.

The United States and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare. We expect that there will continue to be federal and state proposals to implement governmental controls or impose healthcare requirements. In addition, the Medicare program and increasing emphasis on managed or accountable care in the United States will continue to put pressure on product utilization and pricing. Utilization and cost control initiatives could decrease the volume of orders and payment that we would receive for any products in the future, which would limit our revenue and profitability. If we are unable to obtain reimbursement approval from commercial third-party payors and Medicare and Medicaid programs for our product candidates, or if the amount reimbursed is inadequate, our ability to generate revenues could be limited.

Changes in the way that the FDA regulates laboratory tests developed, manufactured, validated, and performed by laboratories like ours could result in additional expense in offering our current and any future products or even more debt,possibly delay or suspend development, manufacture, or commercialization of such products.

The FDA does not currently regulate most laboratory developed tests, or LDTs. The FDA historically took the position that, although such LDTs are medical devices, it would exercise enforcement discretion by not requiring compliance with the Federal Food, Drug, and Cosmetic Act, or the FDCA, or its regulations. However, in June 2010, the FDA announced that it intended to

no longer exercise enforcement discretion for LDTs and in October 2014, the FDA published two draft guidance documents that, if finalized, would implement a regulatory approach for most LDTs. In the draft guidance documents, the FDA stated that it had serious concerns regarding the lack of independent review of the evidence of clinical validity of LDTs and asserted that the requirements under Clinical Laboratory Improvement Amendments, or CLIA, do not address the clinical validity of any LDT. The draft guidance documents proposed to impose a risk-based, phased-in approach for LDTs similar to the existing framework forin vitrodiagnostic devices. In November 2016, the FDA announced that it would not finalize the draft guidance documents for LDTs prior to the end of the Obama administration.

In January 2017, the FDA released a discussion paper synthesizing public comments on the 2014 draft guidance documents and outlining a possible approach to regulation of LDTs. The discussion paper has no legal status and does not represent a final version of the LDT draft guidance documents. In the discussion paper, the FDA states that there is “a growing consensus that additional oversight of LDTs is necessary.” Similar to the FDA’s 2014 draft guidance, the FDA’s discussion paper proposes a risk-based framework that would require most LDTs to comply with most of the FDA’s regulatory requirements for medical devices. Unlike the draft guidance, however, the discussion paper proposes to exempt currently marketed LDTs from premarket review, requiring only new or modified tests to be approved or cleared by the agency. In addition, the FDA proposed requiring LDTs to comply with only a subset of the medical device quality system regulations, or QSRs, and proposed other changes from the 2014 draft guidance. We cannot predict whether the FDA will take action to regulate LDTs under the new administration or what approach the FDA will seek to take.

Legislative proposals have been introduced in Congress or publicly circulated, each of which would implement differing approaches to the regulation of LDTs. We cannot predict whether any of these legislative proposals will be enacted into law or the impact such new legal requirements would have on our business.

In addition, in November 2013, the FDA finalized guidance regarding the sale and use of products labeled for research or investigational use only. Among other things, the guidance states that the FDA continues to be concerned about distribution of research- or investigational-use only products intended for clinical diagnostic use. The guidance states that the FDA will assess whether a manufacturer of such research- or investigational-use only products intends its products be used for clinical diagnostic purposes by examining the totality of circumstances, including advertising, instructions for clinical interpretation, presentations that describe clinical use, and specialized technical support such as assistance performing clinical validation, surrounding the distribution of the product in question. The FDA has advised that if evidence demonstrates that a product is inappropriately labeled for research- or investigational-use only, the device could be deemed misbranded and adulterated within the meaning of the FDCA. If the FDA were to undertake enforcement actions, some of our suppliers may cease selling research-use only products to us, and any failure to obtain an acceptable substitute could significantly and adversely affect our business, financial condition and results of operations.

For tests that are subject to FDA regulation, we may not be able to obtain timely approvals for our tests or otherwise comply with FDA regulatory requirements, which could delay or prevent us from commercializing our tests or subject us to enforcement action and harm our business.

If the FDA takes action to finalize and implement a regulatory system for LDTs, or if legislation is enacted that subjects LDTs to FDA regulation, we would need to comply with FDA regulatory requirements for our LDTs or any future LDTs intended for clinical use. For products that are subject to FDA requirements, including requirements for premarket clearance or approval, we may not be able to obtain such clearance or approvals on a timely basis, or at all. Our business could be negatively impacted if we are required to stop selling molecular information products pending their clearance or approval, or the launch of any new products that we develop could be delayed. The cost of conducting clinical trials and otherwise developing data and information to support premarket applications may be significant. In order to conduct a clinical investigation involving human subjects for the purpose of demonstrating the safety and effectiveness of a device, a sponsor of an investigation must, among other things, apply for and obtain institutional review board, or IRB, approval of the proposed investigation. In addition, if the clinical study involves a “significant risk” (as defined by the FDA) to human health, the sponsor of the investigation must also submit and obtain FDA approval of an investigational device exemption, or IDE, application. We or the applicable study sponsor, as applicable, may not be able to obtain FDA and/or IRB approval to undertake clinical trials in the United States for any new devices we intend to market in the United States.

If a product is classified as a Class III medical device, that product would likely be required to be approved by the FDA under a premarket approval, or PMA, which must be supported by valid scientific evidence to demonstrate a reasonable assurance of safety and effectiveness of the subject product, typically including the results of human clinical trials that demonstrate the clinical utility of that product. During the review of our PMAs, the FDA may indicate areas in which the FDA believes additional data or information is necessary to reach a decision on the application. We may need to expend significant time and resources in responding to such FDA requests, which could include performing additional testing or developing new data to support the PMA. Depending

on the nature of the requests, we may not be able to provide the data or information that the FDA believes necessary to resolve the deficiencies.

For devices not subject to a PMA, we may be required to submit either a de novo reclassification request or, if classified as a Class II medical device, a premarket notification or 510(k). Under the 510(k) process, we must demonstrate that our products are substantially equivalent in technological characteristics and intended use to legally-marketed predicate devices. If we are unable to identify an appropriate predicate that is substantially equivalent to our device, we would be required to submit a PMA or a de novo reclassification request. The FDA’s 510(k) clearance process usually takes from four to twelve months, but it can take longer. Under the de novo process, we may request that the FDA classify a low or moderate risk device that lacks an appropriate predicate as a Class I or Class II device. The de novo process typically requires the development of clinical data and usually takes between six to twelve months from the time of submission of the de novo application, but can take longer.

In addition, as part of its review of a PMA, the FDA may conduct preapproval inspections pursuant to the FDA’s Bioresearch Monitoring (BIMO) program. During such inspections, FDA investigators may review the data and information supporting our PMA applications or may review the procedures and systems used to design or manufacture the device that is under review. The FDA may indicate areas where additional data or information is necessary, or areas where corrective or preventive actions should be implemented. We may need to expend significant time and resources in responding to such FDA requests, and depending on the nature of the requests, we may not be able to provide the data or information or implement the actions that the FDA believes are necessary.

After approval, products subject to FDA regulation are required to comply with post-market requirements. Among the requirements, we and our suppliers must comply with the FDA’s QSR, which sets forth requirements for manufacturers of devices, including the methods and documentation for the design, control testing, quality assurance, labeling, packaging, storage, and shipping of our devices. Further, if there are any modifications made to our PMA-approved marketed products, a PMA supplement may be required to be submitted to, and approved by, the FDA before the modified device may be marketed. Other post-market requirements include facility registration, product listing, adverse event reporting, recalls, corrections and removals, and restrictions on advertising and promotion. These requirements could subject our business to further regulatory risks and costs. The FDA enforces the requirements of the FDCA through announced and unannounced inspections. Failure to comply with the FDA’s view of our satisfaction of applicable regulatory requirements could require us to expend time and resources to respond to the FDA’s observations and to implement corrective and preventive actions, as appropriate. If we cannot resolve such issues to the satisfaction of the FDA, we may be subject to enforcement actions, including untitled or warning letters, fines, injunctions, or civil or criminal penalties. In addition, we could be subject to a recall or seizure of current or future products, operating restrictions, a partial suspension, or a total shutdown of production. Any such enforcement action would have a material adverse effect on our business, financial condition, and operations.

We are subject to the data privacy, security and breach notification requirements of HIPAA, HITECH and other data privacy and security laws, and the failure to comply with these rules, or allegations that we have failed to do so, could result in civil or criminal sanctions.

Numerous federal and state laws and regulations, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, as amended, or HITECH, govern the collection, dissemination, security, use and confidentiality of patient-identifiable health information. As required by HIPAA, the United States Department of Health and Human Services, or HHS, has adopted standards to protect the privacy and security of this health-related information. The HIPAA privacy regulations contain detailed requirements concerning the use and disclosure of individually identifiable health information and the grant of certain rights to patients with respect to such information by “covered entities.” Because of our CLIA laboratory we are a covered entity under HIPAA. We have taken actions to comply with the HIPAA privacy regulations including the creation and implementation of policies and procedures, staff training, execution of HIPAA-compliant contractual arrangements with certain service providers and various other measures. Although we believe we are in default under our loan agreement with affiliatessubstantial compliance, ongoing implementation and oversight of Third Security, LLC, which means that the lenders under the loan agreement have the right to cease making additional advances, accelerate repayment of all sums duethese measures involves significant time, effort and take action to collect the amounts owed to them, including foreclosing on their security interest, each of which could adversely affect us.expense.
Our revolving line of credit and term loan with affiliates of Third Security, LLC, a related party (the “Lenders”), are governed by a Loan and Security Agreement, as amended (the “Loan and Security Agreement”), which contains certain affirmative and negative covenants. As of September 30, 2016, we had borrowings of $7.2 million under the Loan and Security Agreement. Under the term loan, we agreed not to (i) pledge or otherwise encumber our assets other than
In addition to the Lenders, (ii) enter into additional borrowingsprivacy requirements, HIPAA covered entities must implement certain administrative, physical, and technical security standards to protect the integrity, confidentiality and availability of certain electronic health-related information received, maintained, or guarantees, (iii) repurchase our capital stock,transmitted by covered entities or (iv) enter into certain mergers or acquisitions without the Lenders’ consent. To secure the repayment of amounts borrowed under the revolving line of credit and term loan,their business associates. Although we granted the Lenders a security interesthave taken actions in all of our assets. As of September 30, 2016, we were notan effort to be in compliance with these security regulations, a security incident that bypasses our information security systems causing an information security breach, loss of protected health information, or PHI, or other data subject to privacy laws or a material disruption of our operational systems could have a material adverse effect on our business, along with fines. Furthermore, ongoing implementation and oversight of these security measures involves significant time, effort and expense.


Further, HITECH, as implemented in part by an omnibus final rule published in the LoanFederal Register on January 25, 2013, further requires that patients be notified of any impermissible acquisition, access, use, or disclosure of their unsecured PHI that compromises the privacy or security of such information. HHS has established the presumption that all impermissible uses or disclosures of unsecured PHI constitute breaches unless the covered entity or business associate establishes affirmatively through a risk analysis that there is a low probability the information has been compromised. HITECH and Security Agreement,implementing regulations specify that such notifications must be made without unreasonable delay and in no case later than 60 calendar days after discovery of the breach. Breaches affecting 500 patients or more must be reported immediately to HHS, which will post the name of the breaching entity on its public website. Furthermore, breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS of such breaches at least annually. These breach notification requirements apply not only to impermissible disclosures of unsecured PHI to outside third parties but also to impermissible internal access to or use of such PHI. All breaches also require written notice to be sent to affected individuals.

The scope of the privacy and security requirements under HIPAA was substantially expanded by HITECH, which also increased penalties for violations. Currently, violations of the HIPAA privacy, security and breach notification standards may result in civil penalties ranging from $100 to $50,000 per violation, subject to a cap of $1,500,000 in the aggregate for violations of the same standard in a single calendar year. The amount of penalty that may be assessed depends, in part, upon the culpability of the applicable covered entity or business associate in committing the violation. HITECH also authorized state attorneys general to file suit on behalf of residents of their states. Applicable courts may be able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. HITECH also mandates that the Secretary of HHS conduct periodic compliance audits of a cross-section of HIPAA covered entities and business associates. Every covered entity and business associate is subject to being audited, regardless of the entity’s compliance record.

State laws may impose more protective privacy restrictions related to health information and may afford individuals a private right of action with respect to the violation of such laws. Both state and federal laws are subject to modification or enhancement of privacy protection at any time. We are subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These statutes vary and could impose additional requirements on us and more severe penalties for disclosures of health information. If we fail to comply with HIPAA, similar state laws or any new laws, including laws addressing data confidentiality, security or breach notification, we could incur substantial monetary penalties and substantial damage to our reputation.

States may also impose restrictions related to the confidentiality of personal information that is not considered PHI under HIPAA, including certain identifying information and financial information of our patients. These state laws may impose additional notification requirements in the event of a breach of such personal information. Failure to comply with such data confidentiality, security and breach notification laws may result in substantial monetary penalties.

HIPAA and HITECH also include standards for common healthcare electronic transactions and code sets, such as claims information, plan eligibility and payment information. Covered entities such as us (with our CLIA laboratory) are required to conform to such transaction set standards.

We may become subject to the Anti-Kickback Statute, Stark Law, False Claims Act, Civil Monetary Penalties Law and may be subject to analogous provisions of applicable state laws and could face substantial penalties if we fail to comply with such laws.

There are several federal laws addressing fraud and abuse that apply to businesses that receive reimbursement from a federal health care program. There are also a number of similar state laws covering fraud and abuse with respect to, for example, private payors, self-pay and insurance. Currently, we receive a substantial percentage of our revenue from private payors and from Medicare. Accordingly, our business is subject to federal fraud and abuse laws, such as the Anti-Kickback Statute, the Stark Law, the False Claims Act, the Civil Monetary Penalties Law and other similar laws. Moreover, we are already subject to similar state laws. We have operated, and intend to continue to operate, our business in compliance with these laws. However, these laws are subject to
modification and changes in interpretation, and are enforced by authorities vested with broad discretion. Federal and state enforcement entities have significantly increased their scrutiny of healthcare companies and providers which has led to investigations, prosecutions, convictions and large settlements. We continually monitor developments in this area. If these laws are interpreted in a manner contrary to our interpretation or are reinterpreted or amended, or if new legislation is enacted with respect to healthcare fraud and abuse, illegal remuneration, or similar issues, we may be required to restructure our affected operations to maintain compliance with applicable law. There can be no assurances that any such restructuring will be possible or, if possible, would not have a material adverse effect on our results of operations, financial position, or cash flows.

Anti-Kickback Statute

A federal law commonly referred to as the “Anti-Kickback Statute” prohibits the knowing and willful offer, payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The term “remuneration” has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market value. The Patient Protection and Affordable Care Act, as amended by the Ninth Amendment, dueHealth Care and Education Reconciliation Act, or the PPACA, amended the intent requirement of the Anti-Kickback Statute such that a person or entity can be found guilty of violating the statute without actual knowledge of the statute or specific intent to violate the statute. Further, the PPACA now provides that claims submitted in violation of the Anti-Kickback Statute constitute false or fraudulent claims for purposes of the federal False Claims Act, or FCA, including the failure to timely return an overpayment. Many states have adopted similar prohibitions against kickbacks and other practices that are intended to influence the purchase, lease or ordering of healthcare items and services reimbursed by a governmental health program or state Medicaid program. Some of these state prohibitions apply to remuneration for referrals of healthcare items or services reimbursed by any third-party payor, including commercial payors and self-pay patients.

Stark Law

Section 1877 of the Social Security Act, or the Stark Law, prohibits a physician from referring a patient to an entity for certain “designated health services” reimbursable by Medicare if the physician (or close family members) has a financial relationship with that entity, including an ownership or investment interest, a loan or debt relationship or a compensation relationship, unless an exception to the fact that we did not makeStark Law is fully satisfied. The designated health services covered by the required monthly interest payments duringlaw include, among others, laboratory and imaging services. Some states have self-referral laws similar to the third quarterStark Law for Medicaid claims and have not received a waiver for the non-compliance. We are therefore currently in default under the Loan and Security Agreement. Accordingly, under the termscommercial claims.

Violation of the LoanStark Law may result in prohibition of payment for services rendered, a refund of any Medicare payments for services that resulted from an unlawful referral, $15,000 civil monetary penalties for specified infractions, criminal penalties, and Security Agreement,potential exclusion from participation in government healthcare programs, and potential false claims liability. The repayment provisions in the Lenders currently haveStark Law are not dependent on the rightparties having an improper intent; rather, the Stark Law is a strict liability statute and any violation is subject to cease making additional advances, accelerate repayment of all sums dueamounts arising out of tainted referrals. If physician self-referral laws are interpreted differently or if other legislative restrictions are issued, we could incur significant sanctions and take actionloss of revenues, or we could have to collectchange our arrangements and operations in a way that could have a material adverse effect on our business, prospects, damage to our reputation, results of operations and financial condition.

False Claims Act

The FCA prohibits providers from, among other things, (1) knowingly presenting or causing to be presented, claims for payments from the Medicare, Medicaid or other federal healthcare programs that are false or fraudulent; (2) knowingly making, using or causing to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the federal government; or (3) knowingly making, using or causing to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government. The “qui tam” or “whistleblower” provisions of the FCA allow private individuals to bring actions under the FCA on behalf of the government. These private parties are entitled to share in any amounts owedrecovered by the government, and, as a result, the number of “whistleblower” lawsuits that have been filed against providers has increased significantly in recent years. Defendants found to them,be liable under the FCA may be required to pay three times the actual damages sustained by the government, plus civil penalties ranging between $5,500 and $11,000 for each separate false claim.

There are many potential bases for liability under the FCA. The government has used the FCA to prosecute Medicare and other government healthcare program fraud such as coding errors, billing for services not provided, and providing care that is not medically necessary or that is substandard in quality. The PPACA also provides that claims submitted in connection with patient referrals that result from violations of the Anti-Kickback Statute constitute false claims for the purpose of the FCA, and some courts have held that a violation of the Stark law can result in FCA liability, as well. In addition, a number of states have adopted their own false claims and whistleblower provisions whereby a private party may file a civil lawsuit in state court. We are required to provide information to our employees and certain contractors about state and federal false claims laws and whistleblower provisions and protections.

Civil Monetary Penalties Law

The Civil Monetary Penalties Law prohibits, among other things, the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person or entity knows or should know is likely to influence the beneficiary’s selection of a particular provider or supplier of items or services reimbursable by a federal or state healthcare program. This broad provision applies to many kinds of inducements or benefits provided to patients, including foreclosing on their security interestcomplimentary items, services or forcing us into bankruptcy, which wouldtransportation that are of more than a nominal value. This law could affect how we have to structure our operations and activities.

Healthcare policy changes, including legislation reforming the U.S. healthcare system, may have a material adverse effect on our financial condition, results of operations, and cash flows.
In March 2010, legislation collectively referred to as the Affordable Care Act, or ACA, was enacted in the United States. The ACA, as subsequently amended, made a number of substantial changes in the way healthcare is financed by both governmental and private insurers. Among other things, the ACA:

requires each medical device manufacturer and importer to pay an excise tax equal to 2.3% of the sale price for its taxable medical devices. In 2015, Congress imposed a 2-year moratorium on this medical device tax, so that medical device sales during the period between January 1, 2016 and December 31, 2017 are exempt from the tax. Absent further legislative action, the tax will be automatically reinstated for medical device sales starting on January 1, 2018. If the tax is reinstated and if our products become regulated as medical devices, we could be required to begin paying this tax on the sales of our products for which we submit a marketing application, such as a 510(k) or PMA, to the FDA; and
mandates a reduction in payments for clinical laboratory services paid under the Medicare Clinical Laboratory Fee Schedule, or CLFS, of 1.75% for the years 2011 through 2015. In addition, a productivity adjustment is made to the fee schedule payment amount.

 On April 1, 2013, cuts to the federal budget were implemented, known as sequestration, resulting in a 2% annual cut in Medicare payments for all services, including clinical laboratory testing. Congress has since extended this 2% Medicare sequester through fiscal year 2025. At this time, it remains uncertain how long the cuts will be continued.

Many CPT procedure codes for molecular pathology tests that we use to bill our products were revised by the American Medical Association, or AMA, effective January 1, 2013. These new CPT codes were developed and implemented for individual genes, or the components of a multi-gene panel. In a final rule for calendar year 2013, CMS announced that it decided to keep the new molecular codes on the CLFS rather than move them to the Physician Fee Schedule. CMS then announced that for 2013, it would price the new codes using a “gap filling” process. Under this approach, CMS referred the CPT codes to the MACs to allow them to determine an appropriate price. CMS then calculated the median of the pricing provided by the MACs to establish and publish a National Limitation Amount, or NLA, by CPT code for 2014.

In 2014, the AMA approved and implemented new CPT codes for genomic sequencing-based panel tests in cancer, effective January 1, 2015. In 2015, CMS used a “gap filling” process to price some of these new codes, which involved referring the new codes to the MACs to allow them to determine and submit to CMS an appropriate price if they deemed a code to be a covered service. CMS then established and published for 2016 an NLA for some of these codes, including the code associated with testing for 5-50 genes as calculated by determining the median price as provided by the MACs for the applicable code. If CMS reduces reimbursement for the new CPT codes for individual genes or fails to price new multi-gene panel codes which cover our products, or if commercial payors who often base pricing on Medicare fee schedules reduce non-contracted payment rates below the new NLA amount for CPT codes corresponding to individual genes, mandate use of the new sequencing-based panel CPT codes, or decide to stop payment on specific CPT codes altogether, our revenue could be adversely affected.

Additionally, in April 2014 the Protecting Access to Medicare Act of 2014, or PAMA, was enacted into law. Section 216 of PAMA reforms the Medicare payment system for clinical laboratory tests paid through the CLFS. PAMA establishes a market-based payment system for Medicare payment for clinical diagnostic laboratory tests. Under this new methodology, CMS will establish Medicare payment for each test based on the weighted median of the payment rates for private payors for the test. PAMA also creates a new class of test called the Advanced Diagnostic Laboratory Test, or ADLT, defined as a test offered and furnished by a single laboratory that is not sold for use by a laboratory other than the original developing laboratory and is either a (1) multi-biomarker test of DNA, RNA or proteins with a unique algorithm yielding a single, patient-specific result, (2) test that is cleared or approved by the FDA, or (3) test meeting other similar criteria established by the Secretary of Health and Human Services.

PAMA requires certain clinical laboratories meeting a threshold of Medicare revenues to report private payor payment rates and corresponding test volumes. PAMA also directed CMS to establish parameters to implement PAMA by June 30, 2015 and requires the market-based payment system to start on January 1, 2017. In June 2016, CMS issued the Medicare Clinical Diagnostic Laboratory Tests Payment System Final Rule, or the Final Rule, to implement the laboratory test payment provisions of PAMA. Because the issuance of the Final Rule was delayed, CMS delayed the market-based payment rates until January 1, 2018. The agency has issued sub-regulatory guidance on data collection and reporting and on additional topics, including a list of specific billing codes for which laboratories must report data. CMS is expected to publish additional sub-regulatory guidance describing how PAMA will be implemented, including an application process for ADLTs. At this time, the full impact of the implementation of PAMA on new and existing tests is uncertain. Our average commercial payor reimbursement starting in 2018 could be adversely affected depending upon if and how commercial payors adopt this new Medicare pricing methodology and the payment rates.


The Center for Medicare and Medicaid Innovation announced in June 2016 the launch of the Oncology Care Model, or OCM, beginning on July 1, 2016. The OCM is a five-year voluntary program that includes 190 physician practices in 31 states, as well as 16 private payors. Under the OCM, participating practices receive performance based payments on the basis of how their prices for 6-month “episodes” of cancer care triggered by receipt of chemotherapy compare to “benchmark” prices for similar episodes. These benchmarks are based on the historical data for the period of January 2012 through June 2015. The model may impact the utilization of our tests among those practices participating in OCM.

Finally, the recent presidential and congressional elections in the U.S. could result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy that could significantly impact our business and the healthcare industry. While it is not possible to predict whether and when any such changes will occur, specific proposals discussed during and after the election that could have a material impact on us include, but are not limited to, the repeal of the ACA, modifications and elimination of programs and reductions in staffing at the FDA and CMS, and initiatives to contain or reduce governmental spending in the healthcare area, including Medicare and Medicaid reimbursement. We cannot predict what future healthcare initiatives will be introduced or implemented at the federal or state level, or how any future legislation or regulation may affect us. Any taxes imposed by federal legislation and the expansion of the government’s role in the U.S. healthcare industry generally, as well as changes to the reimbursement amounts paid by payors for our existing and future products, may reduce our profits and have a material adverse effect on our business, financial condition, results of operations, and cash flows.

If we fail to comply with the complex federal, state, local and foreign laws and regulations that apply to our business, we could suffer severe consequences that could materially and adversely affect our operating results and financial condition.

We are subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention, or treatment of disease. CLIA regulations mandate specific standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality control, quality assurance, and inspections. Our laboratory facilities located in the United States each have a current certificate of accreditation under CLIA to conduct our analyses through our accreditation by CAP. To renew these certificates, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make unannounced inspections of our clinical reference laboratories at any time.

Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing licensure, or our failure to renew a CLIA certificate, a state or foreign license, or accreditation, could have a material adverse effect on our business. Most CLIA deficiencies are not classified as “condition-level” deficiencies, and there are no adverse effects upon the laboratory operations as long as the deficiencies are corrected. Remediation of these deficiencies are routine matters, with corrections occurring within several hours or weeks. More serious CLIA deficiencies could rise to the level of “condition-level” deficiencies, and CMS has the authority to impose a wide range of sanctions, including revocation of the CLIA certification along with a bar on the ownership or operation of a CLIA certified laboratory by any owners or operators of the deficient laboratory. There is an administrative hearing procedure that can be pursued by the laboratory in the event of imposition of such sanctions, during which the sanctions are stayed, but the process can take a number of years to complete. If we were to lose our CLIA certification or CAP accreditation, we would not be able to operate our clinical laboratories and perform our molecular tests, which would result in material harm to our business and results of operations.
We may be required
In addition to amendCLIA and HIPAA, our Loanoperations are subject to other extensive federal, state, local, and Security Agreement, refinanceforeign laws and regulations, all or partof which are subject to change. These laws and regulations currently include, among others:

HIPAA, under which the Department of Health and Human Services established comprehensive federal standards with respect to the privacy and security of protected health information and requirements for the use of certain standardized electronic transactions; certain of our existing debt, sell assets, incur additional indebtednessservices, are subject to these standards and requirements;
amendments to HIPAA under the Health Information Technology for Economic and Clinical Health Act, or raise equity. Further, based upon our actual performance levels, our covenants relatingthe HITECH Act, and related regulatory amendments, which strengthen and expand HIPAA privacy and security standards, increase penalties for violators, extend enforcement authority to income, debt coveragestate attorneys general, and cash flowimpose requirements for breach notification;
the federal Anti-Kickback Statute, which prohibits knowingly and minimum working capital requirementswillfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal healthcare program;
the federal Stark physician self-referral law, which prohibits a physician from making a referral for certain designated health services covered by a federal healthcare program, including laboratory and pathology services, if the physician or an immediate family member has a financial relationship with the entity providing the designated health services, unless the financial relationship falls within an applicable exception to the prohibition;

the federal False Claims Act, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government;
the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or other federal or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or other federal or state healthcare program, unless an exception applies;
other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, fee-splitting restrictions, prohibitions on the provision of products at no or discounted cost to induce physician or patient adoption, and false claims acts, which may extend to services reimbursable by any third-party payor, including private insurers;
the prohibition on reassignment of Medicare clinical laboratory claims, which, subject to certain exceptions, precludes the reassignment of such Medicare claims to any other party;
the rules regarding billing for diagnostic tests reimbursable by the Medicare program, which in certain circumstances prohibit laboratories from charging the Medicare program directly for services provided to hospital inpatients and outpatients, and also prohibit a physician or other supplier from marking up the price of the technical component or professional component of certain diagnostic tests ordered by the physician or other supplier and supervised or performed by a physician who does not “share a practice” with the billing physician or supplier;
state laws that prohibit other specified practices, such as billing physicians for testing that they order; waiving coinsurance, copayments, deductibles, and other amounts owed by patients; billing a state Medicaid program at a price that is higher than what is charged to one or more other payors;
federal and state laws regulating lobbying activities, including the disclosure of payments made in connection with such activities; and
similar foreign laws and regulations that apply to us in the countries in which we operate.

 Our failure to comply could limitlead to civil or criminal penalties, exclusion from participation in government healthcare programs, or prohibitions or restrictions on our ability to conduct commercial activities. We believe that we are in material compliance with all statutory and regulatory requirements, but there is a risk that one or more government agencies could take a contrary position. These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. If one or more such agencies allege that we may be in violation of any of these requirements, regardless of the outcome, it could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations and other commercial third-party payors.

Intellectual Property Risks Related to Our Business

If we are unable to protect our intellectual property effectively, we may be unable to prevent third parties from using our technologies, which would impair our competitive advantage.

We rely on patent protection as well as a combination of trademark, copyright and trade secret protection, and other contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we fail to protect our intellectual property, we will be unable to prevent third parties from using our technologies and they will be able to compete more effectively against us.

Our future patent applications may not result in issued patents and any patents issued to us may be challenged, invalidated or held unenforceable. We may not be successful in defending challenges made in connection with our patents and patent applications.

In addition to our patents, we rely on contractual restrictions to protect our proprietary technology. We require our employees and third parties to sign confidentiality agreements and employees to also sign agreements assigning to us all intellectual property arising from their work for us. Nevertheless, these measures may not be effective in protecting our intellectual property rights.

We depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling some of our products.

We have entered into several license agreements with third parties for certain licensed technologies that are, or may become, relevant to the products we market, or plan to market, including our license agreement with Dana-Farber Cancer Institute, Inc., pursuant to which we license our ICE-COLD-PCR technology. In addition, we may in the future elect to license third party intellectual property to further our business objectives and/or as needed for freedom to operate for our products. We do not and will not own the patents, patent applications or other intellectual property rights that are a subject of these licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents, patent applications and other intellectual property rights are or will be subject to the continuation of and compliance with the terms of those licenses.

We might not be able to obtain licenses to technology or other intellectual property rights that we require. Even if such licenses are obtainable, they may not be available at a reasonable cost or multiple licenses may be needed for the same product (e.g., stacked royalties). We could therefore incur additional debt,substantial costs related to royalty payments for licenses obtained from third parties, which could hindernegatively affect our abilitygross margins. Further, we could encounter delays in product introductions, or interruptions in product sales, as we develop alternative methods or products.

In some cases, we do not or may not control the prosecution, maintenance, or filing of the patents or patent applications to executewhich we hold licenses, or the enforcement of these patents against third parties. As a result, we cannot be certain that drafting or prosecution of the licensed patents and patent applications by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights.

The patents issued to us may not be broad enough to provide any meaningful protection one or more of our competitors may develop more effective technologies, designs or methods without infringing our intellectual property rights and one or more of our competitors may design around our proprietary technologies.

If we are not able to protect our proprietary technology, trade secrets and know-how, our competitors may use our inventions to develop competing products. We own certain patents relating to our diagnostic technology. However, these patents may not protect us against our competitors, and patent litigation is very expensive. We may not have sufficient cash available to pursue any patent litigation to its conclusion because other than revenue from licensing, milestone and royalty income we currently generate only minimal revenue from our diagnostic services.

We cannot rely solely on our current business strategy. Our abilitypatents to make scheduled payments onbe successful. The standards that the U.S. Patent and Trademark Office and foreign patent office’s use to grant patents, and the standards that U.S. and foreign courts use to interpret patents, are not the same and are not always applied predictably or uniformly and can change, particularly as new technologies develop. As such, the degree of patent protection obtained in the U.S. may differ substantially from that obtained in various foreign countries. In some instances, patents have been issued in the U.S. while substantially less or no protection has been obtained in Europe or other countries.

We cannot be certain of the level of protection, if any, which will be provided by our debtpatents if we attempt to enforce them and they are challenged in court where our competitors may raise defenses such as invalidity, unenforceability or possession of a valid license. In addition, the type and extent of any patent claims that may be issued to us in the future are uncertain. Any patents which are issued may not contain claims that will permit us to stop competitors from using similar technology.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other financial obligations and comply with financial covenants depends on our financial and operating performance. Our financial and operating performance will continue to be subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.
*Our existing indebtedness could adversely affect our ability to fulfill our obligations and may place us at a competitive disadvantage in our industry.
We continue to have substantial debt outstandingintellectual property rights and we may incur additional indebtedness from timebe unable to timeprotect our rights to, finance working capital, product development efforts, strategic acquisitions, investmentsor use, our diagnostic technology.

Third parties may challenge the validity of our patents and alliances, capital expendituresother intellectual property rights, resulting in costly litigation or other general corporate purposes, subject to the restrictions contained in our existing indebtednesstime-consuming and expensive proceedings, which could deprive us of valuable rights. If we become involved in any intellectual property litigation, interference or other agreements under which we incur indebtedness. Our outstanding indebtedness and debt service requirements could adversely affect our ability to operate our

business and may limit our ability to take advantage of potential business opportunities. For example, our existing level of indebtedness presents the following risks:
judicial or administrative proceedings, we will be required to use aincur substantial portion of our cash flow from operations to pay principal and interest on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, product development efforts, acquisitions, investments and strategic alliances and other general corporate requirements;
our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and our industry and could limit our ability to pursue other business opportunities, borrow more money for operations or capital in the future and implement our business strategies;
our level of indebtednessexpenses and the covenants within our debt instrumentsdiversion of financial resources and technical and management personnel. An adverse determination may restrict us from raising additional financing on satisfactory terms to fund working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances, and other general corporate requirements; and
our outstanding indebtedness may make it difficult forsubject us to attract additional financing when needed.

As of September 30, 2016, we weresignificant liabilities or require us to seek licenses that may not in compliance with the Loan and Security Agreement, as amended by the Ninth Amendment, due to the fact that we did not make the required monthly interest payments during thebe available from third quarter and weparties on commercially favorable terms, if at all. Further, if such claims are therefore currently in default under the Loan and Security Agreement. Accordingly,proven valid, through litigation or otherwise, we may be required to attemptpay substantial financial damages, which can be tripled if the infringement is deemed willful, or be required to renegotiate the termsdiscontinue or significantly delay development, marketing, selling and licensing of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.affected products and intellectual property rights.

Our future capital needs are uncertaincompetitors may have filed, and we may need to raise additional funds in the future.
Our future capital needs are uncertain and we may need to raise additional funds in the future through debtfile, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications and could further require us to obtain rights to issued patents covering such technologies. There may be third-party patents, patent applications and other intellectual property relevant to our potential products that may block or equity offerings. Our future capital requirements will dependcompete with our products or processes. If another party has filed a United States patent application on many factors, including, but not limited to:
Revenue generatedinventions similar to ours, we may have to participate in an interference proceeding declared by salesthe United States Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our products;
Expenses incurredUnited States patent position with respect to such inventions. In addition, we may not prevail in manufacturing and selling our products;
Costsany of developing new productsthese suits or technologies;
Costs associatedthat the damages or other remedies if any, awarded against us could be substantial. Claims of intellectual property infringement may require us to enter into royalty or license agreements with capital expenditures;
The number and timing of strategic transactions; and
Working capital requirements related to growing existing business.

We may need additional capital to finance our growth or to compete, which may cause dilution to existing stockholders or limit our flexibility in conducting our business activities.
We may need to raise additional capital in the future to fund expansion, respond to competitive pressures or acquire complementary businesses, technologies or services. Such additional financingthird parties that may not be available on acceptable terms, acceptable to us orif at all. To the extent that we raise additional capital by issuing equity securities, our stockholdersWe may experience substantial dilution, and to the extent we engage in additional debt financing, if available, we mayalso become subject to additional restrictive covenants that could limitinjunctions against the further development and use of our flexibility in conducting future business activities. If additional financing is not available or not available on acceptable terms, we may not be able to continue as a going concern, fund our expansion, promote our brands, take advantage of acquisition opportunities, develop or enhance services or respond to competitive pressures.
Governmental payers and health care plans have taken steps to control costs.
Medicare, Medicaid and private insurers have increased their efforts to control the costs of health care services, including clinical testing services. They may reduce fee schedules or limit/exclude coverage for certain types of tests that we perform. Medicaid reimbursement varies by state and is subject to administrative and billing requirements and budget pressures. We expect efforts to reduce reimbursements, impose more stringent cost controls and reduce utilization of testing services will continue. These efforts, including changes in laws or regulations, maytechnology, which would have a material adverse impact on our business.
Weakness in U.S. or global economic conditions could have an adverse effect on our businesses.
The economies of the United States and other regions of the world in which we do business have experienced significant weakness, which, in the case of the U.S., has recently resulted in significant unemployment and slower growth in economic activity. A decline in economic conditions may adversely affect demand for our services and products, thus reducing our revenue. These conditions could also impair the ability of those with whom we do business to satisfy their obligations to us. The strengthening of the U.S. dollar has the potential to adversely impact U.S. businesses that operate overseas.

Sales have been variable.
Our laboratory performs project-based work that changes from quarter to quarter. Therefore, comparison of the results of successive quarters may not accurately reflect trends or results for the full year due to the fact that ICP is a new product and will enable the liquid biopsy market to evolve rapidly and ensure Precision Medicine is adopted globally. We see the ICP business and revenues growing as our commercial strategy is successful and our partnerships and licensing agreements become profitable.
Changes in payer mix could have a material adverse impact on our net sales and profitability.
Testing services are billed to physicians, patients, government payers such as Medicare, and insurance companies. Tests may be billed to different payers depending on a particular patient’s medical insurance coverage. Government payers have increased their efforts to control the cost, utilization and delivery of health care services as well as reimbursement for laboratory testing services. Further reductions of reimbursement for Medicare and Medicaid services or changes in policy regarding coverage of tests or other requirements for payment, such as prior authorization or a physician or qualified practitioner’s signature on test requisitions, may be implemented from time to time. Reimbursement for the laboratory services component of our business is also subject to statutory and regulatory reduction. Reductions in the reimbursement rates and changes in payment policies of other third party payers may occur as well. Such changes in the past have resulted in reduced payments as well as added costs and have decreased test utilization for the clinical laboratory industry by adding more complex new regulatory and administrative requirements. As a result, increases in the percentage of services billed to government payers could have an adverse impact on our net sales.
We may experience temporary disruptions and delays in processing biological samples at our facilities.
We may experience delays in processing biological samples caused by software and other errors. Any delay in processing samples could have an adverse effect on our business, financial condition and results of operations.
Our laboratories require ongoing CLIA certification.
The CLIA extended federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally-approved accreditation agency. The CLIA requires that all clinical laboratories meet quality assurance, quality control and personnel standards. Laboratories must also undergo proficiency testing and are subject to inspections.
The sanctions for failure to comply with the CLIA requirements include suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, cancellation or suspension of the laboratory’s approval to receive Medicare and/or Medicaid reimbursement, as well as significant fines and/or criminal penalties. The loss or suspension of a CLIA certification, imposition of a fine or other penalties, or future changes in the CLIA law or regulations (or interpretation of the law or regulations) could have a material adverse effect on us.
We believe that we are in compliance with all applicable laboratory requirements, but no assurances can be given that our laboratories will pass all future certification inspections.
Failure to comply with HIPAA could be costly.
The Health Insurance Portability and Accountability Act (“HIPAA”) and associated regulations protect the privacy and security of certain patient health information and establish standards for electronic health care transactions in the United States. These privacy regulations establish federal standards regarding the uses and disclosures of protected health information. Our Molecular Labs are subject to HIPAA and its associated regulations. If we fail to comply with these laws and regulations we could suffer civil and criminal penalties, fines, exclusion from participation in governmental health care programs and the loss of various licenses, certificates and authorizations necessary to operate our Patient Testing business. We could also incur liabilities from third party claims.
Our business could be adversely impacted by health care reform.
Government attention to the health care industry in the United States is significant and may increase. The Patient Protection and Affordable Care Act passed by Congress and signed into law by President Obama in March 2010 could adversely impact our business. While certain portions of the legislation have already gone into effect, the ultimate impact of the legislation on the health care industry is still unknown, and the overall impact on our business is likely to be extensive and could result in significant changes to our business and our customers’ businesses.

*We are subject to a number of claims of various amounts that arise out of the normal courseSome of our business.
We are subjectcompetitors may be able to a numbersustain the costs of claims of various amounts that arise out of the normal course of our business. Specifically, on February 25, 2016, the Board of Regents of the University of Nebraska (“UNMC”) filed a lawsuit against us in the District Court of Douglas County, Nebraska for breach of contract and seeking recovery of $0.7 million owed by us to UNMC. We and UNMC are currently in discussions to determine a mutually agreeable means by which to settle the outstanding liability. A $0.7 million liability has been recorded and is reflected in accrued expenses at December 31, 2015 and September 30, 2016.
complex patent litigation more effectively than we can because they have substantially greater resources. In addition, on April 13, 2016, Fox Chase Cancer Center (“Fox Chase”) filed a lawsuit against us inany uncertainties resulting from the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania Civil Trial Division (the “Court of Common Pleas”), alleging, among other things, breach of contract, tortious interference with presentinitiation and prospective contractual relations, unjust enrichment, fraudulent conversion and conspiracy and seeking punitive damages in addition to damages and other relief. This lawsuit relates to a license agreement we entered into with Fox Chase in August 2000, as amended (the “License Agreement”), as well as the assignment of certain rights of our rights under the License Agreement to Integrated DNA Technologies, Inc. (“IDT”), pursuant to the Surveyor Kit Patent, Technology and Inventory Purchase Agreement we entered into with IDT effective as of July 1, 2014 (the “IDT Agreement”). Pursuant to the terms of the IDT Agreement, we agreed to indemnify IDT with respect to certain of the claims asserted in the Fox Chase proceeding. On July 8, 2016, the Court of Common Pleas sustained our preliminary objections to several of Fox Chase’s claims and dismissed the claims for tortious interference, fraudulent conversion, conspiracy, punitive damages and attorney’s fees.  Accordingly, the case has been narrowed so that only certain contract claims and an unjust enrichment claim remain pending against us. We believe that we have good and substantial defenses to the claims asserted by Fox Chase. However, there is no guarantee that we will prevail in this suit or receive any damages or other relief if we do prevail.
On June 23, 2016, the Icahn School of Medicine at Mount Sinai (“Mount Sinai”) filed a lawsuit against us in the Supreme Court of the State of New York, County of New York, alleging, among other things, breach of contract and, alternatively, unjust enrichment and quantum merit, and seeking recovery of $0.7 million owed by us to Mount Sinai for services rendered. We and Mount Sinai are currently in discussions to determine a mutually agreeable means by which to settle the outstanding liability. A $0.7 million liability has been recorded at December 31, 2015 and September 30, 2016.
Our ongoing and future litigation could result in significant additional costs and further divert the attention of our management and key personnel from our business operations and the implementation of our business strategy. In addition, the dispositioncontinuation of any of the pending claims against us, in excess of recorded accruals,litigation could have a material adverse effect on our financial position, resultsability to raise the funds necessary to continue our operations.

Third parties may assert ownership or commercial rights to inventions we develop.

Third parties may in the future make claims challenging the inventorship or ownership of operationsour intellectual property. For example, third parties that have been introduced to or cash flows.
have benefited from our inventions may attempt to replicate or reverse engineer our products and circumvent ownership of our inventions. We have written agreements with collaborators that provide for the ownership of intellectual property arising from our collaborations. In some instances, there may not be adequate written provisions to address clearly the resolution of intellectual property rights that may arise from a collaboration. If we cannot successfully negotiate sufficient ownership and commercial rights to the inventions that result from our use of a third-party collaborator’s materials where required, or if disputes otherwise arise with respect to the intellectual property developed with the use of a collaborator’s samples, we may be subjectlimited in our ability to client lawsuits.
Providerscapitalize on the market potential of clinical testing servicesthese inventions. In addition, we may face claims that our agreements with employees, contractors, or consultants obligating them to assign intellectual property to us are ineffective, or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such inventions. Litigation may be subjectnecessary to lawsuits alleging negligenceresolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property, or other legal claims. Potential suitsmay lose our exclusive rights in that intellectual property. Either outcome could involve claims for substantial damages. Litigation could also have an adverse impact on our client basebusiness.

Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.

We employ individuals who were previously employed at other diagnostic or biopharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees and our reputation. We maintain liability insurance coverageconsultants do not use the proprietary information or know-how of others in their work for certainus, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result from providing or failingin substantial costs and be a distraction to provide clinical testing services, including inaccurate testing resultsmanagement and other exposures. Our insurance coverage limits our maximum recovery on individual claims and, therefore, there is no assurance that such coverage will be adequate.
*The sale of our products and business operations in international markets subjects us to additional risks.
During the past several years, international sales have represented a significant portion of our total net sales. As a result, a major portion of our net sales are subject to risks associated with international sales and operations. These risks include:
Payment cycles in foreign markets are typically longer than in the U.S., and capital spending budgets for research agencies can vary over time with foreign governments;
Changes in foreign currency exchange rates can make our products more costly in local currencies because our foreign sales are typically paid for in British Pounds or in Euros;
The potential for changes in U.S. and foreign laws or regulations that result in additional import or export restrictions, higher tariffs or other taxes, more burdensome licensing requirements or similar impediments may limit our ability to sell products and services profitably in these markets; and
The fluctuation of foreign currency exchange rates to the U.S. Dollar and the Euro to the British Pound can cause our net sales and expenses to increase or decrease, which adds risk to our financial statements.employees.

In addition, manyThe testing, manufacturing and marketing of the countries in whichmedical diagnostic devices entails an inherent risk of product liability and personal injury claims.

To date, we have sales, includingexperienced no product liability or personal injury claims, but any such claims arising in the U.S. and several of the members of the European Union,future could have experienced and continue to experience uncertain economic conditions resulting from global as well as local factors. For example, on June 23, 2016, the United Kingdom (the “UK”) held a referendum pursuant to which voters elected to leave the

European Union, commonly referred to as Brexit. As a result of UK voters’ election to leave the European Union, the British government is expected to begin negotiating the terms of the UK’s future relationship with the European Union. Although the long-term effects of Brexit will depend on any agreements the UK makes to retain access to the European Union markets, Brexit has created additional uncertainties that may ultimately result in new regulatory costs and challenges for companies and increased restrictions on imports and exports throughout Europe, which could adversely affect our ability to conduct and expand our operations in Europe and which may have anmaterial adverse effect on our business, financial condition and results of operations. In addition, BrexitPotential product liability or personal injury claims may also increaseexceed the possibility that other countries may decide to leave the European Union in the future.

Our dependence onamount of our suppliers exposes us to certain risks.
We rely on various suppliers for products and materials to produce our products. In the event that they would be unable to deliver these items due to product shortagesinsurance coverage or business closures, we may be unable to deliver our products to our customers in a timely manner or may need to increase our prices. The current economy posesexcluded from coverage under the additional riskterms of our suppliers’ inability to continue their businesses as usual.
Our markets are very competitive.
Many ofpolicy or limited by other claims under our competitors have greater resources than we do and may enjoy other competitive advantages. This may allow them to more effectively market their products toumbrella insurance policy. Additionally, our customers or potential customers, to develop products that make our products obsolete or to produce and sell products less expensively than us. As a result of these competitive factors, demand for and pricing of our products and services could be negatively affected.
Our patents may not protect us from others using our technology, which could harm our business and competitiveposition.
Patent law relating to the scope of claims in the technology fields in which we operate is still evolving. The degree of future protection for our proprietary rights is uncertain. Furthermore, we cannot be certain that others will not independently develop similar or alternative products or technology, duplicate any of our products, or, if patents are issued to us, design around the patented products developed by us. Our patents or licenses could be challenged by litigation and, if the outcome of such litigation were adverse to us, our competitors could be free to use our technology. Weexisting insurance may not be able to obtain additional patents for our technology, or if we are able to do so, patents may not providerenewed by us with adequate protection or be commercially beneficial. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits.
We cannot be certain that other measures taken to protect our intellectual property will be effective.
We rely upon trade secrets, copyright and trademark laws, non-disclosure agreements and other contractual confidentiality provisions to protect some of our confidential and proprietary information that we are not seeking patent protection for various reasons. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. If such measures do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced.
We are dependent upon licensed technologies and may need to obtain additional licenses in the future to offer our products and remain competitive.
We have licensed key components of our technologies from third parties. If these agreements were to terminate prematurely due to our breach of the terms of these licenses or we otherwise fail to maintain our rights to such technologies, we may lose the right to manufacture or sellat a substantial portion of our products. In addition, we may need to obtain licenses to additional technologies in the future in order to keep our products competitive. If we fail to license or otherwise acquire necessary technologies, we may not be able to develop new products that we need to remain competitive.
The protection of intellectual property in foreign countries is uncertain.
A significant percentage of our sales are to customers located outside the U.S. Patent and other intellectual property laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws. We may need to bring proceedings to defend our patent rights or to determine the validity of our competitors’ foreign patents. These proceedings could result in substantial cost and diversionlevel of our other efforts. Finally, some of the patent protections availablecoverage comparable to usthat presently in the U.S. are not available to us in foreign countries due to the laws of those countries.

Our products could infringe on the intellectual property rights of others.
There are a significant number of U.S. and foreign patents and patent applications submitted for technologies in, or related to, our area of business. As a result, our use of our technology could infringe patents or proprietary rights of others. This may lead others to assert patent infringement or other intellectual property claims against us. We could incur substantial costs in litigation if we are required to defend against intellectual property claims by third parties. Additionally, any licenses that we might need as a result of any actual infringement might not be available to us on commercially reasonable terms,effect, if at all.
Our failure to comply with any applicable government laws and regulations or otherwise respond to claims relating to improper handling, storage or disposal of hazardous chemicals that we use may adversely affect our results of operations.
Our research and development and manufacturing activities involve the controlled use of hazardous materials and chemicals. We are subject to federal, state, local and international laws and regulations governing the use, storage, handling and disposal of hazardous materials and waste products. If we fail to comply with applicable laws or regulations, we could be required to pay penalties or be held liable for any damages that result and this liability could exceed our financial resources. We cannot be certain that accidental contamination or injury will not occur. Any such accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs.
*We may issue a substantial amount of our common stock to holders of options and warrants and this could reduce themarket price for our stock.
At September 30, 2016, we had obligations to issue 10,701,453 shares of common stock upon exercise of outstanding stock options, warrants or conversion rights. The issuance of these securities may be dilutive to our current stockholders and could negatively impact the market price of our common stock.
*Our common stock is thinly traded and a large percentage of our shares are held by a small group of unrelated, institutional owners.
At September 30, 2016, we had 24,139,130 shares of common stock outstanding. The sale of a significant number of shares into the public market has the potential to cause significant downward pressure on the price of our common stock. This is particularly the case if the shares being placed into the market exceed the market’s ability to absorb the stock. This presents an opportunity for short sellers to contribute to the further decline of our stock price. If there are significant short sales of our stock, the price decline that would result from this activity will cause the share price to decline more so, which, in turn, may cause long holders of the stock to sell their shares, thereby contributing to sales of our stock in the market. In addition, the large concentration of our shares are held by a small group of stockholders which could result in increased volatility in our stock price due to the limited number of shares available in the market.
We have previously identified material weaknesses and ineffective internal controls could impact our business and financial results.
Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. In the course of auditing our financial statements as of and for the year ended December 31, 2014, our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting relating to proper timing and recognition of revenue and the elements used in our analysis and evaluation of the allowance for doubtful accounts to ensure that the allowance for doubtful accounts is reasonably stated. We remediated these material weaknesses in the year ended December 31, 2015.
Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and financial results could be harmed, we could fail to meet our financial reporting obligations and we may not be able to accurately report financial results or prevent fraud.
*As we are currently not in compliance with the continued listing requirements of The Nasdaq Stock Market LLC (“Nasdaq”), Nasdaq may delist our shares of common stock, which would have an adverse impact on the trading volume, liquidity and market price of our common shares.

On February 23, 2016, we received written notice (the “First Notice”) from Nasdaq indicating that, based on the closing bid price of our common stock for the preceding 30 consecutive business days, we were not in compliance with the $1.00 minimum bid price requirement for continued listing on the Nasdaq Capital Market (the “Minimum Bid Price Requirement”), as set forth

in Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had a period of 180 calendar days, or until August 22, 2016, to regain compliance with the Minimum Bid Price Requirement. To have regained compliance, the closing bid price of our common stock must have met or exceeded $1.00 per share for at least ten consecutive business days during this 180 calendar day period.

On April 20, 2016, we received a second written notice (the “Second Notice”) from Nasdaq indicating that, based on the stockholders’ equity reported in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on April 14, 2016, we were not in compliance with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market, which requires listed companies to maintain stockholders’ equity of at least $2,500,000 (the “Minimum Stockholders’ Equity Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(2)(C), we had a period of 45 calendar days, or until June 6, 2016, to submit a plan to regain compliance with the Minimum Stockholders’ Equity Requirement. Nasdaq indicated that, if our plan was accepted, Nasdaq may have granted an extension of up to 180 calendar days, or until October 17, 2016, to evidence compliance. We initially submitted our plan to regain compliance with the Minimum Stockholders’ Equity Requirement to Nasdaq on May 31, 2016 and provided Nasdaq with supplemental information on June 22, 2016 and June 29, 2016. On June 30, 2016, based on the information we submitted to Nasdaq, Nasdaq granted us the maximum allowable 180 day extension to October 17, 2016 to evidence compliance with the Minimum Stockholders’ Equity Requirement.

On August 24, 2016, we received a determination letter (the “Determination Letter”) from the staff of Nasdaq stating that we had not regained compliance with the Minimum Bid Price Requirement. The Determination Letter also stated that we were not eligible for an additional 180-day extension to regain compliance with the Minimum Bid Price Requirement because we did not meet the Minimum Stockholders’ Equity Requirement for continued listing on the Nasdaq Capital Market, which requires listed companies to maintain stockholders’ equity of at least $2,500,000 (the “Minimum Stockholders’ Equity Requirement”), as set forth in Nasdaq Listing Rule 5550(b)(1) and as discussed below. In addition, the Determination Letter provided that our common stock would be delisted from the Nasdaq Capital Market at the opening of business on September 2, 2016 unless we requested a hearing before the Nasdaq Hearings Panel (the “Panel”).
On August 29, 2016, we requested a hearing before the Panel to appeal the Determination Letter in accordance with Nasdaq rules and as stated in the Determination Letter, and the hearing (the “Hearing”) was held on October 13, 2016. At the Hearing, we asked that the Panel continue our listing through December 31, 2016, to allow us to close the Merger, which we expect to result in a combined entity that will meet all initial listing standards for the Nasdaq Capital Market; however, we noted that we will need to effectuate a reverse stock split to ensure compliance with the Minimum Bid Price Requirement.

On November 1, 2016, we received a decision letter (the “Decision Letter”) from the staff of Nasdaq stating that the Panel had granted our request for continued listing on Nasdaq until December 31, 2016, subject to the following conditions.
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1.On or before November 15, 2016 we must report to the Panel, in writing, regarding the status of the reverse stock split, the filing of a definitive proxy for the Merger, and any feedback received from the staff of Nasdaq regarding the prospects of the application of the post-merger entity for listing on the Nasdaq Capital Market.

2.On or before December 31, 2016, we must have closed the Merger and gained approval from the staff of Nasdaq for listing of the post-merger company on the Nasdaq Capital Market.

In addition, in order to fully comply with the terms of the Decision Letter, we must be able to demonstrate compliance with all requirements for continued listing on Nasdaq, and, in the event that we are unable to do so, our securities may be delisted from Nasdaq in the future.

If we are unable to fully comply with the terms of the Decision Letter and are unable to demonstrate compliance with all requirementsheld liable for continued listing on Nasdaq, our securities may be delisted from Nasdaq in the future. We intend to monitor the closing bid price of our common stock and consider our available options to resolve our noncompliance with the Minimum Bid Price Requirement and the Minimum Stockholders’ Equity Requirement. There can be no assurance that we will be able to regain compliance with the Minimum Bid Price Requirement or the Minimum Stockholders’ Equity Requirement or will otherwise be in compliance with the other listing standards for the Nasdaq Capital Market. A suspension or delisting of our common stock could adversely affect our relationships with our business partners and suppliers and customers’ and potential customers’ decisions to purchase our products and services, and could have a material, adverse impact on our business and operating results. In addition, a suspension or delisting could impair our ability to raise additional capital through equity or debt financings and our ability to attract and retain employees by means of equity compensation.

Upon a potential delisting from Nasdaq, if our common stock is not then eligible for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic bulletin board

established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it is likely that there would be significantly less liquidity in the trading of our common stock; decreases in institutional and other investor demand for our common stock, coverage by securities analysts, market making activity and information available concerning trading prices and volume; and fewer broker-dealers willing to execute trades in our common stock. Also, it may be difficult for us to raise additional capital ifclaim against which we are not listed on a major exchange. The occurrence of any of these events could result in a further decline ininsured or for damages exceeding the market pricelimits of our common stock andinsurance coverage, such claim could have a material adverse effect on us.

*Failure to complete the Mergerour cash flow and private placement could negatively impact our stock price and our future business and financial results.

Although we have agreed to use reasonable efforts to obtain stockholder approval of the proposal to issue shares of our common stock and preferred stock in connection with the Merger, there is no assurance that these proposals will be approved. If these proposals are not approved, and asthus potentially a result the Merger is not completed:

Our ongoing business may be adversely affected; and
We may be required, under certain circumstances, to pay Precipio a termination fee of up to $256,500.

*The announcement and pendency of the Merger may cause disruptions in our business, which could have an adverse effect on our businesses, financial conditions or results of operations.

The announcement and pendency of the Merger could cause disruptions in our business. Specifically:

our current and prospective employees may experience uncertainty about their future roles with the combined company following completion of the Merger, which might adversely affect our ability to retain key personnel and attract new personnel;
third parties may seek to terminate and/or renegotiate their relationships with us as a result of the transaction; and
our management’s attention has been focused on the Merger, which may divert management’s attention from our core business and other opportunities that could have been beneficial to us.

These disruptions could be exacerbated by a delay in the completion of the Merger or termination of the Merger Agreement and could have anmaterially adverse effect on our business, financial condition orand results of operations prioroperations.

All of our diagnostic technology development and our clinical services are performed at two laboratories, and in the event either or both of these facilities were to the completionbe affected by a termination of the Merger.lease or a man-made or natural disaster, our operations could be severely impaired.

*The MergerWe are performing all of our diagnostic services in our CLIA laboratory located in New Haven, Connecticut and our research and development operations are based in our facility in Omaha, Nebraska. Despite precautions taken by us, any future natural or man-made disaster at these laboratories, such as a fire, earthquake or terrorist activity, could cause substantial delays in our operations, damage or destroy our equipment and testing samples or cause us to incur additional expenses.

In addition, we are leasing the facilities where our laboratories operate. We are currently in compliance with all and any lease obligations, but should the leases terminate for any reason, or if at any time either of the laboratories is subjectmoved due to conditions outside our control, it could cause substantial delay in our diagnostics operations, damage or destroy our equipment and biological samples or cause us to incur additional expenses. In the receiptevent of consentsan extended shutdown of either laboratory, we may be unable to perform our services in a timely manner or at all and approvals thattherefore would be unable to operate in a commercially competitive manner. This could harm our operating results and financial condition.

Further, if we have to use a substitute laboratory while our facilities were shut down, we could only use another facility with established state licensure and accreditation under CLIA. We may not be received.

The Merger Agreement providesable to find another CLIA-certified facility and comply with applicable procedures, or find any such laboratory that would be willing to perform the parties cannot complete the Merger unless they receive various consents and approvals from Nasdaq and other third parties. While we believe that we will receive the requisite approvals, there can be no assurance that such approvals will be received.

*While the Merger is pending, we willtests for us on commercially reasonable terms. Additionally, any new laboratory opened by us would be subject to contractual limitations that could adversely affect our business.

The Merger Agreement restricts us from taking certain specified actions while the Merger is pending without Precipio’s consent, including incurring indebtedness, making capital expenditurescertification under CLIA and licensure by various states, which would take a significant amount of time and result in excess of $5,000, acquiring any assets or selling, leasing or otherwise transferring any assets, and increasingdelays in any material manner the compensation, bonuses or benefits of any directors, officers, employees, former employees or consultants, subject to certain exceptions in the ordinary course of business. These restrictions may prevent us from pursuing otherwise attractive business opportunities that may arise and making other changes to our business prior to the closing of the Merger or termination of the Merger Agreement.

*The Merger Agreement restricts our ability to pursue certain alternatives to the Merger and requires us to pay a reverse termination fee to Precipio if we do.

The Merger Agreement contains non-solicitation provisions that, subject to limited exceptions, restrictcontinue our ability to initiate, solicit or encourage or take any action to discuss or accept a competing third-party proposal. Although our Board of Directors is permitted to change its recommendation that stockholders approve the matters relating to the Merger if it determines in good faith that this action is reasonably likely to be required to comply with its fiduciary duties and certain other conditions, doing so in certain situations would require us to pay a termination fee to Precipio of $256,500. Additionally, these non-solicitation provisions could discourage a potential acquiror that might have an interest in acquiring all or a significant part of us from considering or proposing that acquisition, or might result in a potential acquiror proposing to pay a lower per share price to acquire us than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable to Precipio in certain circumstances.

*We have incurred substantial expenses in connection with the Merger.

We have incurred and will incur additional substantial expenses in connection with the Merger, whether or not the Merger is completed. These costs include fees for financial advisors, attorneys and accountants, filing fees and financial printing costs. If the Merger is not consummated, we will be responsible for our own expenses, which are not reimbursable in the event the Merger does not occur.operations.




Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

On May 31, 2016, we issued to a vendor an aggregate of 78,000 shares ofNone other than the sales previously disclosed in our common stockCurrent reports on Form 8-K filed on April 17,2017, June 27, 2017 and on June 14, 2016, we issued to a second vendor an aggregate of 64,153 shares of our common stock. Such shares of common stock were issued to the vendors in lieu of an aggregate cash amount of approximately $89,000 owed by us to such vendors for services previously performed by such vendors. We issued the shares to the vendors in transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws. The offering of the shares to the vendors did not involve a public offering, and no general solicitation or advertisement was made in connection with the offering of the shares to the vendors.20, 2017.

Item 6.Exhibits
(a)Exhibits
†2.1
 Agreement and Plan ofSecond Amendment to the Merger dated October 12, 2016, by and among Transgenomic, Inc., New Haven Labs Inc. and Precipio Diagnostics, LLCAgreement (incorporated by reference to Exhibit 2.1 toof the Registrant’s Current Report onCompany’s Form 8-K filed on October 13, 2016).June 30, 2017)
3.1
 Third Amended and Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on June 30, 2017)
3.13.2
 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Registrant.Company’s Form 8-K filed on June 30, 2017)
3.3
 Certificate of Elimination (incorporated by reference to Exhibit 3.3 of the Company’s Form 8-K filed on June 30, 2017)
10.1
Securities Purchase Agreement, dated as of April 13, 2017, between the Company and the investors parties thereto (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on April 17, 2017)
10.2
Form of Bridge Notes (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on April 17, 2017)
10.3
Form of Bridge Warrant (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on April 17, 2017)
10.4
Precipio Note (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed on April 17, 2017)
10.5
Subordination Agreement (incorporated by reference to Exhibit 10.5 of the Company’s Form 8-K filed on April 17, 2017)
10.6
Side Letter to extend Maturity Date of Unsecured Convertible Promissory Note by and between the Company and MAZ Partners LP, dated as of June 21, 2017 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on June 27, 2017)
10.7
2017 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on June 28, 2017)
10.8
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on June 28, 2017)
10.9
Form of Non-Qualified Stock Option Agreement for Company Employees (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on June 28, 2017)
10.1
Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed on June 28, 2017)
10.11
Securities Purchase Agreement with the Private Placement Purchasers (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on June 30, 2017)
10.12
Investors’ Rights Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on June 30, 2017)
10.13
Exchange Agreement (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on June 30, 2017)
10.14
New Bridge Securities Purchase Agreement (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed on June 30, 2017)
10.15
Form of New Bridge Promissory Note (incorporated by reference to Exhibit 10.5 of the Company’s Form 8-K filed on June 30, 2017)
10.16
Form of New Bridge Warrant (incorporated by reference to Exhibit 10.6 of the Company’s Form 8-K filed on June 30, 2017)
10.17
Form of Side Warrant (incorporated by reference to Exhibit 10.7 of the Company’s Form 8-K filed on June 30, 2017)
10.18
Amended and Restated Pathology Services Agreement, dated March 21, 2017, by and between the Company and Yale University (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K/A filed on July 31, 2017)
10.19
Lease, dated July 11, 2017, by and between the Company and Science Park Development Corporation (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K/A filed on July 31, 2017)
   
31.1
 Certification of Paul Kinnon, President,Ilan Danieli, Chief Executive Officer, and Interimpursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.

31.2
Certification of Carl Iberger, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.
   
32.1
  Certification of Paul Kinnon, President,Ilan Danieli, Chief Executive Officer and Interim Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.
   
99.132.2
  FormCertification of Voting Agreement, by and among Transgenomic, Inc., Precipio Diagnostics, LLC, and certain holdersCarl Iberger, Chief Financial Officer, pursuant to Section 906 of Transgenomic common stock (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on October 13, 2016).
99.2
FormSarbanes-Oxley Act of Voting Agreement, by and among Transgenomic, Inc., Precipio Diagnostics, LLC, and certain members and warrantholders of Precipio (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on October 13, 2016).2002, as amended.
   
101.INS
 XBRL Instance Document
   
101.SCH
 XBRL Taxonomy Extension Schema Document
   
101.CAL
 XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF
 XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB
 XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE
 XBRL Taxonomy Extension Presentation Linkbase Document
   
†


Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to this agreement have been omitted. The Registrant agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
    
  TRANSGENOMIC,PRECIPIO, INC.
    
Date:November 14, 2016August 21, 2017By:
/S/ PAUL KINNONILAN DANIELI



Paul KinnonIlan Danieli
President, Chief Executive Officer and Interim (Principal Executive Officer)
Date:August 21, 2017By:
/S/ CARL IBERGER
Carl Iberger
Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)
    

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