WASHINGTON, D.C. 20549

~~_______________________________~~

FORM 10-Q

~~_______________________________~~

(Mark One)


☒
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended ~~September~~June 30, ~~2017~~

2019

o	OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____ to _____

Commission File Number: ~~001-36439~~001‑36439

~~_______________________________~~

PRECIPIO, INC.

(Exact name of registrant as specified in its charter)

~~_______________________________~~

Delaware	91‑1789357

~~Delaware~~		~~91-1789357~~
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)		~~(I.R.S. Employer~~ Identification No.)

4 Science Park, New Haven, CT		06511
(Address of principal executive offices)		(Zip Code)

(203) ~~787-7888~~

787‑7888

(Registrant’s telephone number, including area code)

~~_______________________________~~

	a
Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Ticker symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	PRPO	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x X Noo

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 XNoo

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



Large accelerated filer	☐	o	Accelerated filer	o ☐
Non-accelerated filer	☒	o ~~(Do not check if a smaller reporting company)~~	Smaller reporting company	x ☒
Emerging growth company	☐	o

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~~12b‑2 of the Exchange Act). Yes o☐ No x☒

As of ~~November 9, 2017,~~August 6, 2019, the number of shares of common stock outstanding was ~~10,028,763.~~6,093,369.

~~PRECIPIO, INC.~~

~~INDEX~~

Table of Contents

PRECIPIO, INC.

INDEX

			Page No.

PART I.	Financial Information		3
			~~Page No.~~

~~PART I.~~		~~FINANCIAL INFORMATION~~	3

Item 1.		Condensed Consolidated Financial Statements		3

		Condensed Consolidated Balance Sheets at ~~September~~June 30, ~~2017 (Unaudited)~~2019 (unaudited) and December 31, ~~2016~~2018		3

		~~Unaudited~~ Condensed Consolidated Statements of Operations for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (unaudited)		4

		~~Unaudited~~ Condensed Consolidated Statements of Stockholders’ Equity ~~(Deficit)~~ for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2019 and 2018 (unaudited)		5

		~~Unaudited~~ Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (unaudited)	6	7

		Notes to ~~Unaudited~~the Condensed Consolidated Financial Statements (unaudited)		8

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	32	42

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	39	47

Item 4.		Controls and Procedures	39	47

PART II.	Other Information	~~OTHER INFORMATION~~	41 49

Item 1.		Legal Proceedings	41	49

Item 1A.		Risk Factors	41	50

Item 6.2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~Exhibits~~	43 51

Item 5.	Other Information		51

Item 6.	Exhibits		51

Signatures	44		53

Table of Contents

PART I.1. FINANCIAL INFORMATION


~~Item 1.~~	Item 1. Condensed Consolidated Financial Statements

PRECIPIO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)


		June 30, 2019
		(unaudited)		December 31, 2018
ASSETS
CURRENT ASSETS:
Cash		$	1,169	$	381
Accounts receivable, net			883		690
Inventories			189		197
Other current assets			90		525
Total current assets			2,331		1,793

PROPERTY AND EQUIPMENT, NET			458		496

OTHER ASSETS:
Operating lease right-of-use assets			627		—
Intangibles, net			18,764		19,291
Other assets			25		25
Total assets		$	22,205	$	21,605
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt, less debt issuance costs		$	103	$	263
Current maturities of convertible notes, less debt discounts and debt issuance costs			39		4,377
Current maturities of finance lease liabilities			51		57
Current maturities of operating lease liabilities			212		—
Accounts payable			2,671		5,169
Accrued expenses			1,655		1,940
Deferred revenue			19		49
Other current liabilities			—		1,910
Total current liabilities			4,750		13,765
LONG TERM LIABILITIES:
Long-term debt, less current maturities and debt issuance costs			223		253
Finance lease liabilities, less current maturities			133		155
Operating lease liabilities, less current maturities			421		—
Common stock warrant liabilities			2,336		1,132
Derivative liabilities			—		62
Deferred tax liability			70		70
Other long-term liabilities			45		45
Total liabilities			7,978		15,482
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS’ EQUITY:
Preferred stock - $0.01 par value, 15,000,000 shares authorized at June 30, 2019 and December 31, 2018, 47 shares issued and outstanding at June 30, 2019 and December 31, 2018, liquidation preference at par value at June 30, 2019 and December 31, 2018			—		—
Common stock, $0.01 par value, 150,000,000 shares authorized at June 30, 2019 and December 31, 2018, 5,993,369 and 2,298,738 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively	(1)		60		23
Additional paid-in capital	(1)		69,428		53,796
Accumulated deficit			(55,261)		(47,696)
Total stockholders’ equity			14,227		6,123
		$	22,205	$	21,605

September 30,
2017 December 31,
(unaudited) 2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 381
$ 51
Accounts receivable, net 505
388
Inventories 99
100
Other current assets 127
13
Total current assets 1,112
552

PROPERTY AND EQUIPMENT, NET 255
280

OTHER ASSETS:
Goodwill 12,817
—
Intangibles, net 20,779
—
Other assets 14
10
$ 34,977
$ 842
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 42
$ 395
Convertible bridge notes, less debt discounts and debt issuance costs —
695
Accounts payable 10,034
1,084
Current maturities of capital leases 49
46
Accrued expenses 1,872
700
Deferred revenue 210
92
Other current liabilities 1,528
—
Total current liabilities 13,735
3,012
LONG TERM LIABILITIES:
Long-term debt, less current maturities and discounts —
4,127
Common stock warrant liability 618
—
Capital leases, less current maturities 126
163
Other long-term liabilities 92
—
Total liabilities 14,571
7,302
STOCKHOLDERS’ EQUITY (DEFICIT):
Preferred stock - $0.01 par value, 15,000,000 and 1,294,434 shares authorized at September 30, 2017 and December 31, 2016, respectively, 3,641 and 780,105 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively —
8
Common stock, $0.01 par value, 150,000,000 and 1,806,850 shares authorized at September 30, 2017 and December 31, 2016, respectively, 9,446,878 and 449,175 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively 94
4
Additional paid-in capital 41,879
4,376
Accumulated deficit (21,567 ) (10,848 )
Total stockholders’ equity (deficit) 20,406
(6,460 )
$ 34,977
$ 842

(1) The common stock shares and additional paid-in capital for all periods presented reflect the one-for fifteen reverse stock split, which took effect on April 26, 2019.

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PRECIPIO, INC. AND SUBSIDIARY

~~UNAUDITED~~

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
SALES:
Service revenue, net	$	1,195	$	899	$	2,105	$	1,690
Clinical research grants		–		62		–		62
Other		4		(2)		11		3
Revenue, net of contractual allowances and adjustments		1,199		959		2,116		1,755
less allowance for doubtful accounts		(257)		(142)		(461)		(226)
Net sales		942		817		1,655		1,529
COST OF SALES:
Service revenue		770		585		1,445		1,273
Clinical research grants		–		57		–		57
Total cost of sales		770		642		1,445		1,330
Gross profit		172		175		210		199
OPERATING EXPENSES:
Operating expenses		2,467		2,358		4,564		4,536
Impairment of goodwill		–		–		–		294
TOTAL OPERATING EXPENSES		2,467		2,358		4,564		4,830
OPERATING LOSS		(2,295)		(2,183)		(4,354)		(4,631)
OTHER INCOME (EXPENSE):
Interest expense, net		(178)		(48)		(201)		(56)
Warrant revaluation		(822)		323		(582)		584
Loss on modification of warrants		(1,128)		–		(1,128)		–
Derivative revaluation		(438)		(1)		(415)		(1)
Gain on settlement of liability, net		1,084		6		1,251		147
Loss on litigation		(266)		–		(266)		–
Loss on issuance of convertible notes		(1,870)		(928)		(1,870)		(928)
Loss on settlement of equity instruments		–		–		–		(385)
		(3,618)		(648)		(3,211)		(639)
LOSS BEFORE INCOME TAXES		(5,913)		(2,831)		(7,565)		(5,270)
INCOME TAXES		–		–		–		–
NET LOSS		(5,913)		(2,831)		(7,565)		(5,270)

Deemed dividends related to beneficial conversion feature of preferred stock and fair value of consideration issued to induce conversion of preferred stock		–		(334)		–		(3,848)
TOTAL DIVIDENDS		–		(334)		–		(3,848)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(5,913)	$	(3,165)	$	(7,565)	$	(9,118)

BASIC AND DILUTED LOSS PER COMMON SHARE (1)	$	(1.05)	$	(2.29)	$	(1.66)	$	(8.20)
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING (1)		5,655,022		1,382,519		4,554,571		1,111,964

(1)

Net loss per share and the number of shares used in the per share calculations for all periods presented reflect the one-for fifteen reverse stock split, which took effect on April 26, 2019.

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
SALES
Patient service revenue, net $ 327
$ 445
$ 946
$ 1,716
less provision for bad debts (57 ) (80 ) (168 ) (309 )
Net sales 270
365
778
1,407
COST OF DIAGNOSTIC SERVICES 347
231
813
710
Gross profit (loss) (77 ) 134
(35 ) 697
OPERATING EXPENSES:
Operating expenses 2,541
497
3,981
1,573
Impairment of goodwill 1,015
—
1,015
—
TOTAL OPERATING EXPENSES 3,556
497
4,996
1,573
OPERATING LOSS (3,633 ) (363 ) (5,031 ) (876 )
OTHER INCOME (EXPENSE):
Interest expense, net (1,883 ) (136 ) (2,265 ) (378 )
Warrant revaluation —
—
(3 ) —
Loss on extinguishment of debt and induced conversion of convertible bridge notes (1,338 ) —
(1,391 ) —
Gain on settlement of liability 647
—
647
—
Merger advisory fees (73 ) —
(2,676 ) —
Other, net —
—
—
3
(2,647 ) (136 ) (5,688 ) (375 )
LOSS BEFORE INCOME TAXES (6,280 ) (499 ) (10,719 ) (1,251 )
INCOME TAX EXPENSE —
—
—
—
NET LOSS (6,280 ) (499 ) (10,719 ) (1,251 )

DEEMED DIVIDENDS ON ISSUANCE OR EXCHANGE OF PREFERRED UNITS (3,764 ) —
(9,012 ) (1,422 )
PREFERRED DIVIDENDS (84 ) —
(84 ) (433 )
TOTAL DIVIDENDS (3,848 ) —
(9,096 ) (1,855 )
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (10,128 ) $ (499 ) $ (19,815 ) $ (3,106 )

BASIC AND DILUTED LOSS PER COMMON SHARE $ (1.36 ) $ (1.15 ) $ (6.96 ) $ (7.23 )
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING 7,430,741
435,060
2,846,221
429,851

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PRECIPIO, INC. AND SUBSIDIARY

~~UNAUDITED~~

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ~~(DEFICIT)~~

~~Nine Months Ended~~
~~September 30, 2017~~

(Dollars in thousands)

(unaudited)


	For the Six Months Ended June 30, 2019
	Preferred Stock			Common Stock			Additional
	Outstanding	Par		Outstanding	Par		Paid-in		Accumulated
	Shares	Value		Shares (1)	Value (1)		Capital (1)		Deficit		Total
Balance, January 1, 2019	47	$	—	2,298,738	$	23	$	53,796	$	(47,696)	$	6,123
Net loss	—		—	—		—		—		(1,652)		(1,652)
Conversion of convertible notes into common stock	—		—	1,248,115		12		3,114		—		3,126
Issuance of common stock in connection with purchase agreements	—		—	758,076		8		1,718		—		1,726
Write-off debt premiums (net of debt discounts) in conjunction with convertible note conversions	—		—	—		—		315		—		315
Write-off debt derivative liability in conjunction with convertible note conversions	—		—	—		—		39		—		39
Stock-based compensation	—		—	—		—		156		—		156
Balance, March 31, 2019	47	$	—	4,304,929	$	43	$	59,138	$	(49,348)	$	9,833
Net loss	—		—	—		—		—		(5,913)		(5,913)
Conversion of convertible notes into common stock	—		—	1,138,310		12		4,134		—		4,146
Issuance of common stock in connection with purchase agreements	—		—	240,000		2		682		—		684
Write-off debt discounts (net of debt premiums) in conjunction with convertible note conversions	—		—	—		—		(842)		—		(842)
Write-off debt derivative liability in conjunction with convertible note conversions	—		—	—		—		438		—		438
Proceeds upon issuance of common stock from exercise of warrants	—		—	310,200		3		1,572		—		1,575
Write-off warrant liability in conjunction with warrant exercises	—		—	—		—		2,364		—		2,364
Beneficial conversion feature on issuance of convertible notes	—		—	—		—		1,792		—		1,792
Stock-based compensation	—		—	—		—		151		—		151
Payment of fractional common shares in conjunction with reverse stock split	—		—	(71)		—		(1)		—		(1)
Balance, June 30, 2019	47	$	—	5,993,368	$	60	$	69,428	$	(55,261)	$	14,227

Preferred Stock
Common Stock

Outstanding
Shares
Par
Value
Outstanding
Shares

Par
Value

Additional
Paid-in
Capital
Accumulated
Deficit

Total
Balance, January 1, 2017 780,105
$ 8
449,175
$ 4
$ 4,376
$ (10,848 )
$ (6,460 )
Net loss —

—

—

—

—

(10,719 )
(10,719 )
Conversion of warrants into preferred stock 8,542
—
—
—
25
—
25
Conversion of warrants into common stock —
—
1,958,166
20
(20 ) —
—
Conversion of preferred stock into common stock (2,526,425 ) (25 ) 3,467,666
34
(9 ) —
—
Conversion of Senior and Junior debt into preferred stock and common stock 802,920
8
1,414,700
14
4,749
—
4,771
Conversion of bridge notes into common stock —
—
515,638
6
2,732
—
2,738
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 combination 802,925
8
1,255,119
12
20,078
—
20,098
Issuance of preferred stock 135,574
1
—
—
5,379
—
5,380
Issuance of warrants in conjunction with issuance of side agreement —
—
—
—
487
—
487
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

40

—

41
Balance, September 30, 2017 3,641

$ —

9,446,878

$ 94

$ 41,879

$ (21,567 )
$ 20,406

Table of Contents


	For the Six Months Ended June 30, 2018
	Preferred Stock			Common Stock			Additional
	Outstanding	Par		Outstanding	Par		Paid-in		Accumulated
	Shares	Value		Shares (1)	Value (1)		Capital (1)		Deficit		Total
Balance, January 1, 2018	4,935	$	—	679,774	$	7	$	44,560	$	(31,542)	$	13,025
Net loss	—		—	—		—		—		(2,439)		(2,439)
Conversion of preferred stock into common stock	(4,888)		—	431,022		4		(4)		—		—
Issuance of common stock in connection with purchase agreements	—		—	59,457		1		617		—		618
Issuance of common stock in exchange for cancelation of other current liabilities	—		—	120,983		1		1,896		—		1,897
Issuance of common stock upon exercise of warrants	—		—	20,000		—		225		—		225
Stock-based compensation	—		—	—		—		82		—		82
Balance, March 31, 2018	47	$	—	1,311,236	$	13	$	47,376	$	(33,981)	$	13,408
Net loss	—		—	—		—		—		(2,831)		(2,831)
Issuance of common stock upon exercise of warrants	—		—	192,733		2		865		—		867
Beneficial conversion feature on issuance of convertible notes	—		—	—		—		1,076		—		1,076
Liability recorded related to equity purchase agreement repricing	—		—	—		—		—		(460)		(460)
Stock-based compensation	—		—	—		—		138		—		138
Balance, June 30, 2018	47	$	—	1,503,969	$	15	$	49,455	$	(37,272)	$	12,198

(1) The common stock shares and additional paid-in capital for all periods presented reflect the one-for fifteen reverse stock split, which took effect on April 26, 2019.

See notes to unaudited condensed consolidated financial statements

Table of Contents

PRECIPIO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)


	Six Months Ended June 30,
	2019		2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(7,565)	$	(5,270)

Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization		560		680
Amortization of operating lease right-of-use asset		123		—
Amortization of finance lease right-of-use asset		30		—
(Accretion) amortization of deferred financing costs, debt discounts and debt premiums		(50)		10
Gain on settlement of liability, net		(1,251)		(147)
Loss on settlement of equity instrument		—		385
Loss on litigation		266		—
Loss on issuance of convertible notes		1,870		928
Stock-based compensation		307		220
Impairment of goodwill		—		294
Provision for losses on doubtful accounts		463		224
Warrant revaluation		582		(584)
Loss on modification of warrants		1,128		—
Derivative revaluation		415		1
Changes in operating assets and liabilities:
Accounts receivable, net		(656)		(246)
Inventories, net		8		(10)
Other assets		177		263
Accounts payable		(1,316)		(27)
Operating lease liabilities		(117)		—
Accrued expenses and other liabilities		139		(332)
Net cash used in operating activities		(4,887)		(3,611)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(30)		(44)
Net cash used in investing activities		(30)		(44)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on finance lease obligations		(28)		(31)
Payment of deferred financing costs		(120)		(138)
Payment of fractional common shares in conjunction with reverse stock split		(1)		—
Issuance of common stock, net of issuance costs		2,410		618
Proceeds from exercise of warrants		1,575		1,092
Proceeds from long-term debt		—		300
Proceeds from convertible notes		2,150		1,660
Principal payments on convertible notes		(50)		—
Principal payments on long-term debt		(231)		(196)
Net cash flows provided by financing activities		5,705		3,305
NET CHANGE IN CASH		788		(350)
CASH AT BEGINNING OF PERIOD		381		421
CASH AT END OF PERIOD	$	1,169	$	71

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest	$	18	$	26
SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY
Purchases of equipment financed through accounts payable		—		34
Equipment financed through finance lease obligations		—		107
Deferred debt issuance cost financed through accounts payable		—		57
Discount of 9% on issuance of convertible bridge notes		188		164
Other current liabilities canceled in exchange for common shares		—		1,897
Conversion of convertible debt plus interest into common stock		7,272		—
Beneficial conversion feature on issuance of convertible notes		1,792		1,076
Initial valuation of derivative liability recorded in conjunction with issuance of convertible notes		1,858		142
Initial valuation of warrant liability recorded in conjunction with issuance of convertible notes		—		1,205
Liabilities exchanged for convertible notes		2,150		—
Liability recorded related to equity purchase agreement repricing		—		460
Warrant liability canceled due to settlement of equity instruments		—		456
Right-of-use assets obtained in exchange for lease obligations		750		—
Amounts included in measurement of lease liabilities		144		—
Write-off warrant liability in conjunction with warrant exercises		2,364		—
Write-off of debt discounts (net of debt premiums) in conjunction with convertible note conversions		527		—
Write-off of derivative liability in conjunction with convertible note conversions		477		—

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PRECIPIO, INC. AND SUBSIDIARY

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(Dollars in thousands)~~

Nine Months Ended
September 30,
2017 2016
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (10,719 ) $ (1,251 )

Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization 395
99
Amortization of deferred financing costs and debt discount 1,898
31
Loss on extinguishment of debt and induced conversion of convertible bridge notes 1,391
—
Gain on settlement of liability (647 ) —
Stock-based compensation and change in liability of stock appreciation rights 33
9
Merger advisory fees 2,676
—
Impairment of goodwill 1,015
—
Provision for losses on doubtful accounts 168
309
Capitalized PIK interest on convertible bridge notes —
85
Warrant revaluation 3
—
Changes in operating assets and liabilities:
Accounts receivable (129 ) (314 )
Inventories 15
(12 )
Other assets 30
(27 )
Accounts payable 484
58
Accrued expenses and other liabilities (1,094 ) 371
Net cash used in operating activities (4,481 ) (642 )
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Cash acquired in business combination 101
—
Net cash provided by investing activities 101
—
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Principal payments on capital lease obligations (34 ) (29 )
Issuance of preferred stock 5,380
—
Payment of deferred financing costs (25 ) (10 )
Proceeds from exercise of warrants 25
—
Proceeds from long-term debt 315
175
Proceeds from convertible bridge notes 1,365
455
Principal payments on convertible bridge notes (1,500 ) —
Principal payments on long-term debt (816 ) (116 )
Net cash flows provided by financing activities 4,710
475
NET CHANGE IN CASH AND CASH EQUIVALENTS 330
(167 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 51
235
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 381
$ 68

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest $ 65
$ 48
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 —
680
Series A and B preferred exchanged for long-term debt —
1,715
Conversion of bridges loans plus interest into common stock 1,787
—
Conversion of senior and junior notes plus interest into preferred stock and common stock 4,771
—



~~Deferred debt issuance cost~~	64	—
~~Beneficial conversion feature on issuance of bridge notes~~	~~1,856~~	—
~~Accrued merger cost~~	10	—
~~Issuance of warrants in conjunction with issuance of side agreement~~	~~487~~	—
~~Purchases of equipment financed through accounts payable~~	20	—

~~See notes to unaudited condensed consolidated financial statements.~~

~~PRECIPIO, INC. AND SUBSIDIARY~~

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~

2018

1. BUSINESS DESCRIPTION

Business ~~Description~~

Description.

Precipio, Inc., and ~~Subsidiary,~~its subsidiary, (“we”, “us”, “our”, the “Company” or “Precipio”) is a cancer diagnostics company providing diagnostic products and services to the oncology market. We have built and continue 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 solve 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 current and future academic partners. Our platform connects patients, physicians and diagnostic experts residing within academic institutions. Launched in ~~2017,~~2018, the platform facilitates the following relationships:

Patients: 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 enables the 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 changes 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:~~

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 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 DNA.

ICP is an enrichment technology that enables the laboratory to focus its analysis on the tumor DNA by 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 able 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 is provided in the form of a kit and sold 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 terms of the Agreement and Plan of Merger (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. (“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 combined company (See Note 3 - 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 unit of Precipio Diagnostics 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 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 ~~September~~June 30, ~~2017,~~2019, the Company had a net loss of ~~$10.7~~$7.6 million, ~~and~~ negative working capital of ~~$12.6~~$2.4 million and net cash used in operating activities of $4.9 million. The Company’s ability to continue as a going concern over the next twelve months from the date of issuance of these condensed consolidated financial statements in the Quarterly Report on Form 10‑Q 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.

To meet its current and future obligations the Company has taken the following steps to capitalize the business and successfully achieve its business plan:

On October 31, 2017, the Company entered into a Debt Settlement Agreement (the “Settlement Agreement”) with certain of its accounts payable vendors (the “Creditors”) pursuant to which the Creditors agreed to a reduction of approximately $5.0 million in currently due vendor liabilities. The Company and the Creditors agreed to restructure

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

and the extent to which we are able to secure working capital from other sources. As of the date of issuance of this Form 10-Q, we have already received $4.1 million in aggregate, including approximately $1.4 million from the sale of 328,590 shares of common stock to Lincoln Park during 2018, $2.4 million from the sale of 998,076 shares of common stock to Lincoln Park during the six months ended June 30, 2019 and $0.3 million from the sale of 100,000 shares of common stock to Lincoln Park from July 1, 2019 through the date of issuance of this Form 10-Q, leaving the Company an additional $5.9 million to draw upon in the coming year.

~~these liabilities into approximately $2.5 million in secured, long-term vendor obligations with payments beginning in July 2018 and continuing over 48 months.~~

~~On November 7, 2017, the Company completed its capital raise initiative issuing $2.8 million in units consisting of Series C Preferred stock and warrants to purchase common stock.~~

Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going ~~concern.~~concern over the next twelve months from the issuance of these condensed consolidated financial statements in the Quarterly Report on Form 10‑Q. 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.~~concern over the next twelve months from the date of issuance of the Form 10‑Q. The accompanying condensed consolidated 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.

Nasdaq Compliance

On March 26, 2019, we were notified by the Listing Qualifications Staff of The Nasdaq Stock Market LLC that we did not meet the minimum closing bid price requirement of $1 for continued listing, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). On April 25, 2019 we filed a Certificate of Amendment to our Third Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware, pursuant to which we effected a 1-for-15 reverse stock split (the “Reverse Stock Split”) of our issued and outstanding common stock. The Reverse Stock Split became effective as of 5:00 p.m. (Eastern Time) on April 26, 2019, and our common stock began trading on a split-adjusted basis on the Nasdaq Capital Market at the market open on April 29, 2019. On May 15, 2019, we received notification from Nasdaq that the Company’s stock price was in compliance with the Bid Price Requirement, and that the matter is now closed.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.

The accompanying condensed consolidated financial statements are presented in conformity with GAAP. ~~We have evaluated events occurring subsequent~~As required under GAAP, pursuant to ~~September 30, 2017 for potential recognition or disclosure~~the Reverse Stock Split, unless otherwise indicated, the Company has adjusted all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying condensed consolidated financial ~~statements and concluded that, other than what is disclosed in Note 13 - Subsequent Events, there were no other subsequent events that required recognition or disclosure.~~

statements.

The condensed consolidated balance sheet as of December 31, ~~2016~~2018 was derived from our audited balance sheet as of that date. There has been no change in the balance sheet from December 31, ~~2016.~~2018, except for the retroactive adjustment to reflect the Reverse Stock Split. The accompanying condensed consolidated financial statements as of and for the ~~three and nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 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 financial statements and notes thereto ~~of Precipio Diagnostics~~ for the year ended December 31, ~~2016~~2018 contained in our ~~current report on~~Annual Report Form ~~8-K/A,~~10‑K, filed with the Securities and Exchange Commission (the “SEC”) on ~~July 31, 2017.~~April 16, 2019. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year ~~2017.~~2019.

Recently Adopted Accounting Pronouncements.

In February 2016, the FASB issued ASU No. 2016‑02, Leases-Topic 842. 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 was adopted effective January 1, 2019, using a modified retrospective transition, and thus did not adjust comparative periods. The new standard provides a

~~Reclassifications.~~

~~Certain reclassifications were made~~

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number of optional practical expedients in transition. The Company has elected the “package of practical expedients”, which permits it not to reassess under the ~~2016 financial statements~~new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight practical expedient. As a result of the adoption of Topic 842 the Company recognized approximately $0.7 million of lease liabilities and corresponding right-of-use (“ROU”) assets in its condensed consolidated balance sheet on the date of initial application. See Note 7 – Leases for additional information.

In June 2018, the FASB issued ASU 2018-07 “Compensation—Stock Compensation (Topic 718)”, which expands the scope of Topic 718 to ~~conform~~include share based payment transactions for acquiring goods and services from non-employees. The Company adopted this guidance on January 1, 2019. The adoption of this guidance was not material to ~~current year financial statement presentation. These reclassifications had no effect on previously reported net earnings.~~

~~Principles of Consolidation.~~

~~The~~our condensed consolidated financial ~~statements include~~statements.

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the ~~accounts~~FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820)”, which modifies certain disclosure requirements in Topic 820, such as the removal of ~~Precipio, Inc.~~the need to disclose the amount of and ~~our wholly owned subsidiary. All inter-company balances~~reason for transfers between Level 1 and ~~transactions~~Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. This ASU is effective for reporting periods beginning after December 15, 2019. We are currently assessing the potential impact that the adoption of this ASU will have ~~been eliminated in consolidation.~~

~~Use of Estimates.~~

~~The preparation of~~on our condensed consolidated financial ~~statements requires management~~statements.

In August 2018, the FASB issued ASU 2018-15 “Intangibles—Goodwill and Other—Internal Use Software (Subtopic 350-40)”, which aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. This ASU is effective for reporting periods beginning after December 15, 2019. We are currently assessing the potential impact that the adoption of this ASU will have on our condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments”, which replaces current methods for evaluating impairment of financial instruments not measured at fair value, including trade accounts receivable and certain debt securities, with a current expected credit loss model. This ASU is effective for reporting periods beginning after December 15, 2019. We are currently assessing the potential impact that the adoption of this ASU will have on our condensed consolidated financial statements.

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 1,760,336 and 941,882 shares of our common stock have been excluded from the computation of diluted loss per share at June 30, 2019 and 2018, respectively, because the effect is anti-dilutive due to the net loss.

The following table summarizes the outstanding securities not included in the computation of diluted net loss per share:


	June 30,
	2019	2018
Stock options	501,242	227,337
Warrants	909,189	460,876
Preferred stock	20,888	10,445
Convertible notes	329,017	243,224
Total	1,760,336	941,882

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3. LONG-TERM DEBT

Long-term debt consists of the following:


	Dollars in Thousands
	June 30, 2019		December 31, 2018
Department of Economic and Community Development (DECD)	$	263	$	274
DECD debt issuance costs		(26)		(28)
Financed insurance loan		32		204
September 2018 Settlement		57		66
Total long-term debt		326		516
Current portion of long-term debt		(103)		(263)
Long-term debt, net of current maturities	$	223	$	253

Department of Economic and Community Development.

On January 8, 2018, the Company received gross proceeds of $400,000 when it entered into an agreement with the Department of Economic and Community Development (“DECD”) by which the Company received a grant of $100,000 and a loan of $300,000 secured by substantially all of the Company’s assets (the “DECD 2018 Loan”.) The DECD 2018 Loan is a ten-year loan due on December 31, 2027 and includes interest paid monthly at 3.25%.

Debt issuance costs associated with the DECD 2018 Loan were approximately $31,000. Amortization of the debt issuance cost was approximately $2,000 for the six months ended June 30, 2019 and 2018, respectively. Net debt issuance costs were $26,000 and $28,000 at June 30, 2019 and December 31, 2018, respectively and are presented as a reduction of the related debt in the accompanying condensed consolidated balance sheets. Amortization for each of the next five years is expected to be approximately $3,000.

Financed Insurance Loan.

The Company finances certain of its insurance premiums (the “Financed Insurance Loans”). In July 2017 the Company financed $0.4 million with a 4.99 % interest rate and fully paid off such loan as of May 2018. In July 2018, the Company financed $0.4 million with a 4.89% interest rate and will make monthly payments. As of June 30, 2019 and December 31, 2018, the Financed Insurance Loans outstanding balance of $0.1 million and $0.2 million, respectively, was included in current maturities of long-term debt in the Company’s condensed consolidated balance sheet. A corresponding prepaid asset was included in other current assets.

Settlement Agreement.

On September 21, 2018, the Company entered into a settlement and forbearance agreement with a creditor (the “September 2018 Settlement”) pursuant to which, the Company agreed to make ~~estimates~~monthly principal and ~~assumptions~~interest payments to the creditor over a two year period, from November 1, 2018 to November 1, 2020, in full and final settlement of $0.1 million of indebtedness that ~~affect~~was owed to the ~~reported~~creditor on the date of the September 2018 Settlement. The settlement amount will accrue interest at the rate of 10% per annum until paid in full. The September 2018 Settlement outstanding balance of $0.1 million was included in long-term debt and accounts payable in the Company’s condensed consolidated balance sheet as of June 30, 2019 and December 31, 2018, respectively.

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4. CONVERTIBLE NOTES

Convertible notes consist of the following:


	Dollars in Thousands
	June 30, 2019		December 31, 2018
Convertible bridge notes	$	2,197	$	4,294
Convertible bridge notes discount and debt issuance costs		(2,158)		(1,111)
Convertible bridge notes premiums		—		647
Convertible promissory notes - Exchange Notes		—		630
Convertible promissory notes - Exchange notes debt issuance costs		—		(83)
Total convertible notes		39		4,377
Current portion of convertible notes		(39)		(4,377)
Convertible notes, net of current maturities	$	—	$	—

Convertible Bridge Notes.

On April 20, 2018, the Company entered into a securities purchase agreement (the “2018 Note Agreement”) with certain investors (the “April 2018 Investors”), pursuant to which the Company would issue up to approximately $3,296,703 in Senior Secured Convertible Promissory Notes along with warrants (the “Transaction”). The number of warrants is equal to the number of shares of common stock issuable upon conversion of the notes based on the conversion price at the time of issuance. Some of the warrants were issued with a one-year term and some with a five-year term. The 2018 Note Agreement includes customary representations, warranties and covenants by the Company and customary closing conditions.

The Transaction consists of a series of unregistered Senior Secured Convertible Notes (the “Bridge Notes”), bearing interest at a rate of 8% annually and an original issue discount of 9%. The Bridge Notes are convertible at a price of $7.50 per share, provided that if the notes are not repaid within 180 days of the note’s issuance date, the conversion price shall be adjusted to 80% of the lowest volume weighted average price during the prior 10 days, subject to a minimum conversion price of $4.50 per share.

The Transaction consisted of a number of drawdowns. The initial closing on April 20, 2018 provided the Company with proceeds of $1,660,000, net of an original issue discount of 9% and before debt issuance costs, for the issuance of notes with an aggregate principal of $1,824,176 (the “April 2018 Bridge Notes”).

The Bridge Notes are payable by the Company on the earlier of (i) the one year anniversary after each closing date or (ii) upon the closing of a qualified offering, namely the Company raising gross proceeds of at least $7,000,000 (the “Maturity Date”). At any time, provided that the Company gives 5 business days written notice, the Company has the right to redeem the outstanding principal amount of the Bridge Notes, including accrued but unpaid interest, all liquidated damages and all other amounts due under the Bridge Notes, for cash as follows: (i) an amount which is equal to the sum of 105% if the Company exercises its right to redeem the Bridge Notes within 90 days of the initial closing, (ii) 110% if the Company exercises its right to redeem the Bridge Notes within 180 days of the initial closing, or (iii) 115% if the Company exercises its right to redeem 180 days from the initial closing.

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The terms of the 2018 Note Agreement also stipulate that upon written demand by one of the April 2018 Investors, for any of their draws throughout the year associated with the 2018 Note Agreement after a period of time as defined within the 2018 Note Agreement, the Company shall file a registration statement within thirty (30) days after written demand covering the resale of all or such portion of the conversion shares for an offering to be made on a continuous basis pursuant to Rule 415. The registration statement filed shall be on Form S‑3 or Form S‑1, at the option of the Company. If the Company does not file a registration statement in accordance with the terms of the 2018 Note Agreement, then on the business day following the applicable filing date and on each monthly anniversary of the business day following the applicable filing date (if no registration statement shall have been filed by the Company in accordance herewith by such date), the Company shall pay to the April 2018 Investors an amount in cash, as partial liquidated damages, equal to 1% per month (pro-rata for partial months) based upon the gross purchase price of the Bridge Notes (calculated on a daily basis) under the 2018 Note Agreement. As requested by certain April 2018 investors, conversion shares related to the April 2018 Note Agreement were included in a registration statement on Form S-3 that the Company filed with the SEC on February 6, 2019 and which became effective with the SEC on February 13, 2019.

The obligations under the Bridge Notes are secured, subject to certain exceptions and other permitted payments by a perfected security interest on the assets of the Company.

The 9% discount associated with the April 2018 Bridge Notes was approximately $164,000 and ~~liabilities~~was recorded as a debt discount. The Company also incurred legal and ~~disclosure~~advisory fees associated with the April 2018 Bridge Notes of ~~contingent assets~~approximately $164,000 and ~~liabilities~~these were recorded as debt issuance costs.

As part of the initial closing, the April 2018 Investors received 243,224 warrants to purchase shares of common stock of the Company (the “April 2018 Warrants”). The April 2018 Warrants had an initial value of approximately $1.1 million at the date of issuance and were recorded as a liability with an offset to debt discount.

Pursuant to a letter agreement, dated as of April 20, 2018 (the “Letter Agreement”), the Company engaged a registered broker dealer as a financial advisor (the “Financial Advisor”). Pursuant to the Letter Agreement, the Company paid the Financial Advisor a fee of $116,000, approximately 7% of the proceeds from the sale of the April 2018 Bridge Notes. This is included in the debt issuance costs discussed above. Per the Letter Agreement, the Company also issued to the Financial Advisor 15,466 warrants to purchase shares of common stock of the Company with an exercise price of $11.25 (the “Advisor Warrants”) which were classified as a liability. See Note 9 –Fair Value for further discussion.

The April 2018 Bridge Notes contained a beneficial conversion feature valued at $1.1 million which was recorded as a debt discount with an offset to additional paid in capital at the note issuance date.

The Company reviewed the redemption features of the Bridge Notes and determined that there is a redemption feature (the “Bridge Notes Redemption Feature”) that qualifies as an embedded derivative. For the April 2018 Bridge Notes, the Company determined the initial fair value of the derivative at the time of issuance to be approximately $0.1 million which was recorded as a debt discount with an offset to derivative liability. See Note 9 –Fair Value for further discussion.

As detailed above, debt discounts and debt issuance costs related to the April 2018 Bridge Notes totaled $2.7 million. During the six months ended June 30, 2018, since the costs exceeded the $1.8 million face amount of the debt, the Company recorded $1.8 million of debt discount and debt issuance costs as a reduction of the related debt with the excess $0.9 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations. The debt discount and debt issuance costs will be amortized to interest expense over the ~~reported amounts~~life of ~~net sales~~the April 2018 Bridge Notes on a basis that approximates the effective interest method. Amortization of the discount was zero for the three and ~~expenses during~~six months ended June 30, 2019. Amortization of the ~~reporting period. In addition, estimates~~discount was $9,000 for the three and ~~assumptions~~six months ended June 30, 2018 and is included in interest expense in the unaudited condensed consolidated statements of operations.

On April 16, 2019, the Company entered into an amendment and restatement agreement (“Amendment No.2 Agreement”) amending and restating the terms of the 2018 Note Agreement (as first amended pursuant to the amendment agreement in November 2018 (the Amendment Agreement”)). The Amendment No. 2 Agreement provided the Company with approximately $900,000 of gross proceeds for the issuance of notes with an aggregate principal of $989,011 (the

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“April 2019 Bridge Notes”) together with applicable warrants, with substantially the same terms and conditions as the previously issued Bridge Notes and related warrants. The 9% discount associated with the ~~determination~~April 2019 Bridge Notes was approximately $89,000 and was recorded as a debt discount. In connection with the April 2019 Bridge Note issuances, the Company issued to the investors 147,472 warrants to purchase shares of common stock of the Company with a five year term and exercise price of $5.40 (the “April 2019 Warrants”). The April 2019 Warrants had an initial value of approximately $1.0 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 9 – Fair Value for further discussion. The April 2019 Bridge Notes were issued to investors that previously participated in the 2018 Note Agreement.

The conversion price of the April 2019 Bridge Notes shall be equal to the greater of $3.75 or $0.75 above the closing bid price of our common stock on the date prior to the original issue date. In the event the notes are not paid in full prior to 180 days after the original issue date, the conversion price shall be equal to 80% of the lowest volume weighted average price (“VWAP”) in the 10 trading days prior to the date of the notice of conversion, but in no event below the floor price of $2.25.

The Company reviewed the conversion option of the April 2019 Bridge Notes and determined that there was a beneficial conversion feature with a value of approximately $0.9 million which was recorded as a debt discount with an offset to additional paid in capital. The April 2019 Bridge Notes also contain the Bridge Notes Redemption Feature and the Company performed a valuation at the time of issuance which resulted in zero value, at that time, due to the high value of the conversion feature and a limited upside from the redemption premium.

Debt discounts and debt issuance costs related to the April 2019 Bridge Notes totaled $2.0 million. Since the costs exceeded the $1.0 million face amount of the debt at issuance, the Company recorded $1.0 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with the excess $1.0 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations during the three and six months ended June 30, 2019.

Pursuant to the Amendment No.2 Agreement, previously issued warrants were amended such that the exercise price of such warrants was amended from $7.50 to $5.40 and any warrant that had a one-year term was amended to have a five-year term. The Company reviewed the amendments to the warrants and determined that they will be treated as a modification of an outstanding equity instrument at the time of the Amendment No.2 Agreement. Management calculated the change in fair value due to the modifications to be an expense of approximately $1.1 million which is included in loss on modification of warrants in the condensed consolidated statements of operations.

On May 14, 2019, the Company entered into a securities purchase agreement pursuant to which, the Company was provided with $1,000,000 of gross proceeds for the issuance of notes with an aggregate principal of $1,098,901 (the “May 2019 Bridge Notes”) together with applicable warrants, with substantially the same terms and conditions as the previously issued Bridge Notes and related warrants. The 9% discount associated with the May 2019 Bridge Notes was approximately $99,000 and was recorded as a debt discount. In connection with the May 2019 Bridge Note issuances, the Company issued to the investors 154,343 warrants to purchase shares of common stock of the Company with a five year term and exercise price of $9.56 (the “May 2019 Warrants”). The May 2019 Warrants had an initial value of approximately $0.9 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 9 – Fair Value for further discussion. The May 2019 Bridge Notes were issued to investors that previously participated in the 2018 Note Agreement.

The conversion price of the May 2019 Bridge Notes is $7.12, provided that a) in the event the notes are not paid in full prior to 180 days after the original issue date or b) upon a registration statement (as defined in the purchase agreement) being declared effective, whichever occurs earlier, the conversion price shall be equal to 80% of the lowest VWAP in the 10 trading days prior to the date of the notice of conversion, but in no event below the floor price of $2.25.

The Company reviewed the conversion option of the May 2019 Bridge Notes and determined that there was a beneficial conversion feature with a value of approximately $0.9 million which was recorded as a debt discount with an offset to additional paid in capital. The May 2019 Bridge Notes also contain the Bridge Notes Redemption Feature and

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the Company performed a valuation at the time of issuance which resulted in zero value, at that time, due to the high value of the conversion feature and a limited upside from the redemption premium.

Debt discounts and debt issuance costs related to the May 2019 Bridge Notes totaled $2.0 million. Since the costs exceeded the $1.1 million face amount of the debt, the Company recorded $1.1 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with the excess $0.9 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations during the three and six months ended June 30, 2019.

Since the issuance of all the 2018 and 2019 Bridge Notes, $4.4 million of the total $6.6 million of convertible bridge notes, plus interest, have been converted into a total of 1,869,352 shares of common stock of the Company. This included the conversion of approximately $2.1 million and $4.2 million of Bridge Notes, plus interest, converted into 756,588 and 1,776,018 shares of common stock of the Company during the three and six months ended June 30, 2019, respectively.

As a result of the bridge note conversions, the Company wrote off approximately $0.4 million of derivative liability, with an offset to additional paid-in capital, during the three and six months ended June 30, 2019.

During the three and six months ended June 30, 2019 and 2018, the change in Bridge Note debt discounts and debt premiums was as follows:


(Dollars in thousands)	For the Three Months Ended June 30,
	2019				2018
		Debt Discounts		Debt Premiums		Debt Discounts		Debt Premiums
Beginning balance at April 1	$	(1,053)	$	91	$	—	$	—
Additions:		(2,086)		—		(1,824)		—
Deductions:
Amortization (accretion) (1)		55		(7)		9		—
Write-off related to note conversions (2)		926		(84)		—		—
Balance at June 30	$	(2,158)	$	—	$	(1,815)	$	—


	For the Six Months Ended June 30,
	2019				2018
		Debt Discounts		Debt Premiums		Debt Discounts		Debt Premiums
Beginning balance at January 1	$	(1,111)	$	647	$	—	$	—
Additions:		(2,086)		—		(1,824)		—
Deductions:
Amortization (accretion) (1)		113		(167)		9		—
Write-off related to note conversions (2)		926		(480)		—		—
Balance at June 30	$	(2,158)	$	—	$	(1,815)	$	—

(1)

Amortization/accretion is recognized as interest expense/income within the condensed consolidated statements of operations based on the effective interest method.

(2)

Write-offs associated with note conversions are recognized as an offset to additional paid-in capital at the time of the conversion.

The remaining debt discounts of $2.2 million, as of June 30, 2019, are expected to be fully amortized by the end of the second quarter of 2020.

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Convertible Promissory Notes – Exchange Notes.

In 2017, the Company entered into Debt Settlement Agreements (the “Settlement Agreements”) with certain of its accounts payable and accrued liability vendors (the “Creditors”) pursuant to which the Creditors, who were owed $6.3 million (the “Debt Obligations”) by the Company, agreed to reduce and exchange the Debt Obligations for a secured obligation in the amount of $3.2 million, $1.9 million in shares of the Company’s common stock and 7,207 warrants to purchase shares of the Company’s common stock (“Creditor Warrants”).

During 2018, the Company entered into Exchange Agreements (the “Exchange Agreements”) with three institutional investors (the “Holders”)pursuant to which the Company issued or shall issue convertible promissory notes, due January 1, 2021 (the “Exchange Notes”) in exchange (the “Exchange”) for amounts owed to the Holders pursuant to certain debt settlement agreements, dated October 31, 2017. At the time of the Exchange Agreements, $3.2 million of Secured Debt Obligations were exchanged for $2.8 million of Exchange Notes (the “Exchange Notes”). Pursuant to the terms of the Exchange Notes, the Company shall pay to the Holders the aggregate principal amount of the Exchange Notes in eighteen equal installments beginning on August 1, 2019 and ending on January 1, 2021.

The Company reviewed the Conversion Option and concluded that it meets the criteria for derivative accounting and requires bifurcation and separate accounting as a derivative. The Company determined the initial fair value of the derivative at the time of issuance to be approximately $0.4 million which was recorded as a debt discount with an offset to derivative liability. See Note 9 –Fair Value for further discussion.

The Company reviewed the Company Put Option and concluded that it meets the criteria for derivative accounting and requires bifurcation and separate accounting as a derivative. The Company determined the initial fair value of the derivative at the time of issuance to be immaterial.

Since the issuance of the Exchange Notes, the Holders have converted all $2.8 million into a total of 446,913 shares of common stock of the Company. This included the conversion of approximately zero and $0.6 million of Exchange Notes converted into zero and 155,351 shares of common stock of the Company during the three and six months ended June 30, 2019, respectively.

As of June 30, 2019 and December 31, 2018, the outstanding balance of the Exchange Notes, net of discounts, was zero and $0.6 million, respectively, and was presented within convertible notes in the Company’s condensed consolidated balance sheets.

There was no Exchange Note activity during the three months ended June 30, 2019. During the six months ended June 30, 2019, the change in Exchange Note debt discounts was as follows:


(Dollars in thousands)		2019
Beginning balance at January 1	$	(83)
Deductions:
Amortization (1)		2
Write-off related to note conversions (2)		81
Balance at June 30	$	—

(1)

Amortization is recognized as interest expense within the condensed consolidated statements of operations based on the effective interest method.

(2)

Write-offs associated with note conversions are recognized as an offset to additional paid-in capital at the time of the conversion.

As a result of the conversions, the Company has also written off approximately $0.4 million of derivative liability with an offset to additional paid-in capital, of which less than $0.1 million was during the six months ended June 30, 2019.

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Convertible Promissory Notes – Crede Note.

On January 15, 2019, the Company and Crede Capital Group LLC (“Crede”) entered into an amendment and restatement agreement (the “Crede Amendment Agreement”) in order to enable the Company to provide Crede with an alternative means of payment of a previous settlement amount, See Note 5 – Accrued Expenses and Other Current Liabilities, by issuing to Crede a convertible note in the amount of $1.45 million (the “Crede Note”). The conversion price of the Crede Note shall equal 90% of the closing bid price of the Company’s common stock on the date prior to each conversion date. The Crede Note is payable by the Company on the earlier of (i) January 15, 2021 or (ii) upon the closing of a qualified offering in which the Company receives gross proceeds of at least $4.0 million. The Crede Note may not be converted if, after giving effect to the conversion, Crede together with its affiliates would beneficially own in excess of 4.99% of the outstanding shares of the Company’s common stock. The Company, at its option, may redeem some or all of the then outstanding principal amount of the Crede Note for cash.

In accordance with the terms of the Crede Amendment Agreement, during the period commencing on the date of issuance of the Crede Note and ending on the date Crede no longer beneficially owns any portion of the Crede Note, Crede shall not sell, on any given trading day, more than the greater of (i) $10,000 of common stock (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) and (ii) 10% of the daily average composite trading volume of the Company’s common stock as reported by Bloomberg, LP (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) for such trading day.

During the three and six months ended June 30, 2019, the Company made no payments on the Crede Note. On April 16, 2019, the entire outstanding amount of $1.45 million was converted into 270,699 shares of common stock of the Company and as of June 30, 2019 the remaining amount due on the Crede Note was zero.

Convertible Promissory Notes – Leviston Note

On February 8, 2018, the Company entered into an equity purchase agreement (the “2018 Purchase Agreement”) with Leviston Resources LLC (“Leviston”), see Note 8 – Stockholders Equity for details of the 2018 Purchase Agreement. On January 29, 2019, the Company entered into a settlement agreement (the “Leviston Settlement”) with Leviston pursuant to which the Company issued to Leviston a convertible note in the amount of $0.7 million (the “Leviston Note”) in full satisfaction of certain obligations to Leviston. The Leviston Note is payable by the Company (i) in fourteen equal monthly installments commencing on the earlier to occur of (x) the last day of the month upon which a registration statement to be filed by the Company covering the resale of the shares of common stock underlying the Leviston Note is declared effective by the Securities and Exchange Commission and (y) the six month anniversary of the date of issuance, (ii) upon the closing of a qualified offering, namely the Company raising gross proceeds of at least $4.0 million or (iii) such earlier date as the Leviston Note is required or permitted to be repaid pursuant to its terms. The Company, at its option, may redeem some or the entire then outstanding principal amount of the Leviston Note for cash.

The conversion price in effect on any conversion date shall equal the VWAP of the common stock on such Conversion Date. The Leviston Note may not be converted if, after giving effect to the conversion, Leviston together with its affiliates, would beneficially own in excess of 4.99% of the outstanding shares of the Company’s common stock.

In accordance with the terms of the Leviston Settlement, during the period commencing on the issuance date of the Leviston Note and ending on the date Leviston no longer beneficially owns any shares of common stock issuable upon conversion of the Leviston Note, Leviston shall not sell, on any given trading day, more than the greater of (i) $10,000 of common stock (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) and (ii) 10% of the daily average composite trading volume of the Company’s common stock as reported by Bloomberg, LP (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) for such trading day.

In addition to the Leviston Settlement and the Leviston Note, the Company and Leviston have each executed a release pursuant to which each of the Company and Leviston agreed to release the other party from their respective obligations arising from or concerning the Obligations.

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During the three and six months ended June 30, 2019, the Company made cash payments of zero and less than $0.1 million, respectively, on the Leviston Note. During the three and six months ended June 30, 2019, $0.5 million and $0.7 million of the Leviston note was converted into 111,023 and 184,357 shares of common stock of the Company, respectively. As of June 30, 2019, the remaining amount due on the Leviston Note was zero. As of December 31, 2018, the Company had recorded liabilities related to Leviston of $0.5 million and $0.2 million which were included in other current liabilities and accrued expenses, respectively, in the condensed consolidated balance sheet.

5. ACCRUED EXPENSES OTHER CURRENT LIABILITIES.

Accrued expenses at June 30, 2019 and December 31, 2018 are as follows:


(dollars in thousands)	June 30, 2019		December 31, 2018
Accrued expenses	$	1,325	$	1,583
Accrued compensation		277		118
Accrued interest		53		239
	$	1,655	$	1,940

The Company was able to reduce certain accrued expense and accounts payable amounts through negotiations with certain vendors to settle outstanding liabilities and the Company recorded these amounts as gains which are included in gain on settlement of liability, net. During the three and six months ended June 30, 2019, approximately $1.1 million and $1.3 million, respectively, was recorded as a gain. Similarly, the Company recorded a net gain of less than $0.1 million and $0.1 million during the three and six months ended June 30, 2018, respectively.

Other current liabilities are as follows:


(dollars in thousands)	June 30, 2019		December 31, 2018
Liability related to equity purchase agreement		—		460
Liability for settlement of equity instrument		—		1,450
	$	—	$	1,910

On February 20, 2018, Crede filed a lawsuit against the Company in the Supreme Court of the State of New York for Summary Judgment in Lieu of Complaint requiring the Company to pay cash owed to Crede. On March 12, 2018, Precipio entered into a settlement agreement (the “Crede Agreement”) with Crede pursuant to which Precipio agreed to pay Crede a total sum of $1.925 million over a period of 16 months payable in cash, or at the Company’s discretion, in stock, in accordance with terms contained in the Crede Agreement.

As of the date of the Crede Agreement, the fair value of ~~certain assets and~~the common stock warrant liability related ~~impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used~~to Crede was revalued to approximately $0.4 million, resulting in ~~preparing these condensed consolidated financial statements.~~

~~Risks and Uncertainties.~~

~~Certain risks and uncertainties are inherent~~a gain of $0.2 million included in ~~our day-to-day operations and~~warrant revaluation 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.~~statement of operations during the three months ended March 31, 2018. At the time of the Crede Agreement, the Company recorded an additional loss of $0.4 million, which is included in loss on settlement of equity instruments in the unaudited condensed consolidated statement of operations for the six months ended June 30, 2018. During 2018, the Company paid approximately $0.5 million to Crede, with a remaining balance of $1.45 million as of December 31, 2018. On January 15, 2019 the $1.45 million liability was replaced with the Crede Note.

As of December 31, 2018, the Company had recorded a liability of approximately $0.5 million related to an equity purchase agreement with Leviston, which is included in other current liabilities on our condensed consolidated balance sheet. On January 29, 2019, the Company entered into the Leviston Settlement pursuant to which the Company issued the Leviston Note in full satisfaction of the $0.5 million discussed above along with approximately $0.2 million of other obligations owed to Leviston which are included in accrued expenses in our condensed consolidated balance sheet at December 31, 2018. See Note 4 – Convertible Notes.

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6. COMMITMENTS AND CONTINGENCIES

The Company ~~operates~~is involved in legal proceedings related to matters, which are incidental to its business. Also, the Company is delinquent on the payment of outstanding accounts payable for certain vendors and suppliers who have taken or have threatened to take legal action to collect such outstanding amounts. See below for a discussion on these matters.

LITIGATIONS

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. A liability of $0.1 million was reflected in accounts payable within the accompanying condensed consolidated balance sheet at December 31, 2018. On April 19, 2019, the Company executed a settlement agreement with XIFIN pursuant to which the Company paid to XIFIN an agreed amount of $40,000 as settlement in consideration for total release from all outstanding amounts due and payable by the Company to XIFIN. The settlement amount was paid in full by the Company on April 19, 2019.

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 less than $0.1 million has been recorded and is reflected in accounts payable within the accompanying condensed consolidated balance sheets at June 30, 2019 and December 31, 2018.

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 had 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, Campbell alleges that we have violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a‑9 promulgated thereafter. The Company filed a motion to dismiss all claims, which motion was fully briefed on November 27, 2017. The Court granted the Company’s motion in full on May 3, 2018 and dismissed the lawsuit. The Eighth Circuit reversed the decision of the District Court and remanded the case back to the District Court. The parties filed a notice with the Court on May 22, 2019, announcing that they had reached a settlement in principle. On June 21, 2019, the parties filed a stipulation of settlement, in which defendants are released from all claims and expressly deny that that they have committed any act or omission giving rise to any liability. The stipulation includes a settlement payment of $1.95 million, which will be primarily funded by our insurance. On July 10, 2019, the Court entered an order preliminarily approving the settlement. The settlement remains subject to final approval by the Court. The Company’s insurance policy includes a deductible of approximately $0.8 million and the Company has previously paid approximately $0.5 million in legal fees in connection with the litigation which have been applied to the deductible leaving approximately $0.3 million to be paid by the Company and approximately $1.7 million to be paid by the insurance company. A liability of approximately $0.3 million has been recorded and is reflected in accrued expenses within the accompanying condensed consolidated balance sheets at June 30, 2019.

On March 21, 2018, Bio-Rad Laboratories filed a lawsuit against us in the Superior Court Judicial Branch of the State of Connecticut for Summary Judgment in Lieu of Complaint requiring us to pay cash owed to Bio-Rad in the amount of $39,000 that was recorded in accounts payable within the accompanying condensed consolidated balance sheet at December 31, 2018. Subsequently, the obligation was paid in full during the second quarter 2019 resulting in no remaining amount due to Bio-Rad as of the filing of this Quarterly Report on Form 10-Q.

OTHER COMMITMENTS

On January 2, 2019, the Company entered into a settlement agreement with a third party service provider pursuant to which we agreed to pay the service provider an aggregate amount of approximately $0.6 million, plus accrued interest at a rate of 8%, pursuant to an agreed upon payment schedule, ending in September 2019, in consideration for the cancellation of an outstanding debt owed by the Company to the service provider in the aggregate amount of approximately $1.5 million (the “Owed Amount”) which was recorded in accounts payable at December 31, 2018. During the three and

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six months ended June 30, 2019, the Company made payments of $0.4 million and $0.6 million, respectively, to the service provider as payment in full of the agreed upon payment schedule. The service provider waived the difference between the settlement amount and the Owed Amount and, as such, the Company recorded a gain on settlement of approximately $0.9 million which is included in gain on settlement of liability, net in the condensed consolidated statements of operations for the three and six months ended June 30, 2019. There was no remaining balance due on the Owed Amount at June 30, 2019.

LEGAL AND REGULATORY ENVIRONMENT

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,~~requirement, reimbursement for patient services and Medicare and Medicaid fraud

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

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.

~~Fair Value.~~

~~Unless otherwise specified, book value approximates fair value.~~

7. LEASES

On January 1, 2019, the Company recorded initial ROU assets and corresponding operating lease liabilities of approximately $750,000 and a reversal of deferred rent and prepaid expenses of approximately $6,000 resulting in no cumulative effect adjustment upon adoption of Topic 842. The Company leases administrative facilities and laboratory equipment through operating lease agreements. In addition we rent various equipment used in our diagnostic lab and in our administrative offices through finance lease arrangements. Our operating leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common ~~stock warrant liability~~area or other maintenance costs). The facility leases include one or more options to renew, from 1 to 5 years or more. The exercise of lease renewal options is ~~recorded~~typically at ~~fair value. See Note 11 - Fair Value for additional information.~~

~~Cash~~our sole discretion, therefore, the renewals to extend the lease terms are not included in our ROU assets and ~~Cash Equivalents~~lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and, ~~Other Current Assets.~~

~~Cash and cash equivalents~~when they are reasonably certain of exercise, we include ~~cash and investments with original maturities~~the renewal period in our lease term. As our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of ~~acquisition~~the lease payments.

Operating leases result in the recognition of ~~three~~ROU assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or ~~less.~~ less are not recorded on the balance sheet. The primary leases we enter into with initial terms of 12 months or less are for equipment.

Upon the adoption of Topic 842, our accounting for finance leases, previously referred to as capital leases, remains substantially unchanged from prior guidance.

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The balance sheet presentation of our operating and finance leases is as follows:


(dollars in thousands)	Classification on the Condensed Consolidated Balance Sheet	June 30, 2019

Assets:
Operating lease assets	Operating lease right-of-use assets	$	627
Finance lease assets	Property and equipment, net		193
Total lease assets		$	820

Liabilities:
Current:
Operating lease obligations	Current maturities of operating lease liabilities	$	212
Finance lease obligations	Current maturities of finance lease liabilities		51
Noncurrent:
Operating lease obligations	Operating lease liabilities, less current maturities		421
Finance lease obligations	Finance lease liabilities, less current maturities		133
Total lease liabilities		$	817

As of June 30, 2019, the estimated future minimum lease payments, excluding non-lease components, are as follows:


(dollars in thousands)	Operating Leases		Finance Leases		Total
Remainder of 2019	$	129	$	35	$	164
2020		242		46		288
2021		241		38		279
2022		48		32		80
2023		35		27		62
Thereafter		17		41		58
Total lease obligations		712		219		931
Less: Amount representing interest		(79)		(35)		(114)
Present value of net minimum lease obligations		633		184		817
Less, current portion		(212)		(51)		(263)
Long term portion	$	421	$	133	$	554

Other ~~current assets~~information as of ~~September~~June 30, ~~2017 of $0.1 million includes prepaid~~2019:


Weighted-average remaining lease term (years):
Operating leases	3.0
Finance leases	4.8
Weighted-average discount rate:
Operating leases	8.00%
Finance leases	7.25%

During the six months ended June 30, 2019, operating cash flows from operating leases was $144,000 and ROU assets ~~of less than~~obtained in exchange for operating lease liabilities was $750,000.

Operating Lease Costs

Operating lease costs were $0.1 million and ~~other receivables of less than $0.1~~$0.2 million during the three and ~~consisted of primarily prepaid assets as of December 31, 2016.~~

~~Concentrations of Risk.~~

From time to time, we may maintain a cash position with financial institutions in amounts that exceed Federal Deposit Insurance Corporation insured limits. We have not experienced any losses on such accounts as of ~~September~~six months ended June 30, ~~2017~~.

Service companies in the health care industry typically grant credit without collateral to patients. The majority of these 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 services2019, respectively, and procedures among physicians, coders, patients, accreditation organizations, and payers for administrative, financial, and analytical purposes. CPT codes are currently identified by the Centers for Medicare and Medicaid Services and third-party payors. The Company utilizes CPT codes for Pathology and Laboratory Services contained within codes 80000-89398.

~~Property and Equipment.~~

~~Depreciation expense related to property and equipment was less than~~ $0.1 million for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016. Depreciation expense during each period includes depreciation~~2018, respectively. These costs are primarily related to ~~equipment acquired under capital leases.~~

~~Goodwill and Intangible Assets.~~

~~As a result of the Merger, the Company recorded goodwill and intangible assets as part of its allocation of the purchase consideration. See Note 3 - Reverse Merger~~long-term operating leases for the ~~amounts recorded.~~Company’s facilities and laboratory equipment.

~~Goodwill~~

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of the business acquired. See Note 3 - Reverse Merger for the amount recorded. 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 indicate that the assets might be impaired. In assessing goodwill for impairment, the Company has the option to assess qualitative factors to determine whether events or circumstances indicate that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, for which the consolidated Company is considered one reporting unit. If this is the case, then performing the quantitative goodwill impairment test is unnecessary. An entity can choose not to perform a qualitative assessment for any or all of its reporting units, and proceed directly to the use of the quantitative impairment test. In assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the relevant events and circumstances that may impact the fair value and the carrying amount of a reporting unit are assessed. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgments by management. These judgments include the consideration of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, events which are specific to the company, and trends in the market price of our common

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

stock. Each factor is assessed to determine whether it impacts the impairment test positively or negatively, and the magnitude of any such impact. During the three months ended September 30, 2017, the Company experienced a decline in its share price and a significant reduction in its market capitalization, as such the Company determined that an assessment of goodwill should be performed using the qualitative approach described above. Based on the qualitative assessment, the Company concluded that it was more likely than not that the fair value of the Company was less than its carry value. While there were positive qualitative factors discovered during the qualitative analysis, the instability of the market price of the Company’s common stock and the decline in revenues were significant adverse factors that directed a full assessment. In estimating fair value, the Company utilized the market capitalization to estimate the fair value. The impairment test performed by the Company indicated that the estimated fair value of the Company was less than its carrying amount. As a result of the analysis performed, the Company recorded a goodwill impairment charge of $1.0 million during the three months ended September 30, 2017.

~~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 value of the asset to the carrying amount of the asset (group). There were no impairment charges during the nine months ended September 30, 2017.

In-process research and 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 nine months ended September 30, 2017, there was no impairment of IPR&D.

~~Stock-Based Compensation.~~

All stock-based awards to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Unvested awards as of September 30, 2017 had vesting periods of up to four years from the date of grant. None of the awards outstanding at September 30, 2017 are subject to performance or market-based vesting conditions.

~~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 New 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 September 30, 2017 and December 31, 2016, deferred net sales included in the balance sheet in deferred revenue were $0.2 million and $0.1 million, respectively.~~

~~Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the income statement.~~

~~Presentation of Insurance Claims and Related Insurance Recoveries.~~

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

The Company accounts for its insurance claims and related insurance recoveries at their gross values as standards 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 nine months ended September 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 assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent 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 convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the 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 period of retirement to interest expense. In general, the BCF is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.

Deemed dividends are also recorded for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the 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 fully amortized into additional paid-in capital and preferred discount. If the preferred shares are redeemable, the discount is amortized from the commitment date to the 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 5,919,819 and 2,765,904 shares of our common stock have been excluded from the computation of diluted loss per share at September 30, 2017 and 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”) 2014-09, Revenue from Contracts with Customers and has subsequently issued supplemental and/or clarifying ASUs (collectively “ASC 606”). ASC 606 outlines a five-step framework that intends to clarify the principles for recognizing revenue and eliminate industry-specific guidance. In addition, ASC 606 revises current disclosure requirements in an effort to help financial statement users better understand the nature, amount, timing, and uncertainty of revenue that is recognized. ASC 606 will be effective for our annual reporting period beginning on January 1, 2018, including interim periods within that year. ASC 606 may be applied either retrospectively to each prior reporting period presented or use the modified retrospective transition method with the cumulative effect of initial adoption recognized at the date of initial application. We expect to apply the new standard using the modified retrospective method upon its adoption date on January 1, 2018. Under the modified retrospective method, we will recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information will not be restated and will continue to be reported under the accounting standards in effect for those periods. Implementation steps we are taking include reviewing our current accounting policies and practices to identify potential differences that would result from the application of this standard, determining key factors to recognize revenue as prescribed by the new standard that may be applicable to each of our business segments, analyzing our current portfolio of business contracts including our third-party payor contracts and evaluating our historical accounting policies and practices to identify potential differences in applying the new guidance. We anticipate that our evaluation will include the related qualitative disclosures regarding the potential impact of the effects of the accounting policies we expect to apply and a comparison to our current revenue recognition policies. We expect to complete this process prior to the filing of, and make disclosures in, our Annual Report on Form 10-K for the year ended December 31, 2017. Based on our evaluation so far, we believe there will be no significant changes required to our

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

business processes, systems and controls to effectively report revenue recognition under the new standard. Adoption of the new standard is not expected to materially change the timing or amount of revenue recognized in 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~~

Finance Lease Costs

Finance 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. 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 effective for fiscal years beginning after December 15, 2017, and for interim periods within that fiscal year. We do not believe ASU No. 2016-15 will have a material effect on our financial position and results of operations.

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 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.

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, as discussed above, performed interim impairment testing of goodwill during the three months ended September 30, 2017 which resulted in the Company recording a goodwill impairment charge of $1.0 million.

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 are classified within equity. (See Note 6 - Convertible Bridge Notes and Note 10 - Stockholders' Equity).

~~3. REVERSE MERGER~~

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

On June 29, 2017 (the “Closing Date”), the Company completed the Merger with Precipio Diagnostics, in accordance with the terms of the Merger 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~~property and ~~preferred units of Precipio Diagnostics~~equipment, net 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 Merger,~~finance lease liabilities, less current maturities on the ~~Closing Date, Precipio also issued promissory notes and shares of Precipio preferred and common stock in a number of transactions, whereby:~~

Holders of certain secured indebtedness of Transgenomic 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 private placement. Precipio also completed the sale of an aggregate of $800,000 of promissory notes pursuant to a securities purchase agreement.

~~Purchase Consideration~~

~~The preliminary estimated purchase consideration based on the value of the equity of Transgenomic, the accounting acquiree, is as follows:~~

(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 Closing 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 Closing Date, the preferred stock had a fair value of $12.20 per share.

~~Allocation of Purchase Consideration~~

The following table sets forth an allocation of the 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:

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

(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 period after the Closing Date to September 30, 2017 have been included in the Company's condensed consolidated financial statements as of and for the three and nine months ended September 30, 2017.

~~The following unaudited pro forma information presents the Company's financial results as if the acquisition of Transgenomic had occurred on January 1, 2016:~~

Dollars in thousands, except per share amounts
Nine months ended September 30,
2017 2016
Net sales $ 1,742
$ 2,605
Net loss available to common stockholders (22,980 ) (15,838 )
Loss per common share $ (3.40 ) $ (2.48 )

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

~~4. INTANGIBLES~~

We had no intangible assets as of December 31, 2016. In conjunction with the Merger, we recorded intangible assets of $21.1 million. As of September 30, 2017 our intangible assets consisted of the following:

Dollars in Thousands
September 30, 2017
Cost
Accumulated
Amortization

Net Book
Value
Technology $ 18,990
$ 237
$ 18,753
Customer relationships 250
21
229
Backlog 200
50
150
Covenants not to compete 30
8
22
Trademark 40
5
35
IPR&D 1,590
—
1,590
$ 21,100
$ 321
$ 20,779




	~~Estimated Useful Life~~
~~Technology~~	~~20 years~~
~~Customer relationships~~	~~3 years~~
~~Backlog~~	~~1 year~~
~~Covenants not to compete~~	~~1 year~~
~~Trademark~~	~~2 years~~

Until our in-process research and development projects are completed, the assets are accounted for as indefinite-lived intangible assets and subject to impairment testing. For the nine months ended September 30, 2017, there was no impairment of IPR&D.

Amortization expense for intangible assets was $0.3 million during the three and nine month periods ended September 30, 2017. Amortization expense for intangible assets is expected to be $0.6 million, $1.2 million, $1.0 million, $1.0 million and $0.9 million for each of the years ending December 31, 2017, 2018, 2019, 2020 and 2021, respectively.

~~5. LONG-TERM DEBT~~

~~Long-term debt consists of the following:~~

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

Dollars in Thousands
September 30, 2017 December 31, 2016
Senior Notes $ —
$ 3,270
Senior Note debt issuance costs —
(9 )
Junior Notes —
584
Connecticut Innovations - line of credit —
162
Department of Economic and Community Development (DECD) —
243
DECD debt issuance costs —
(30 )
Webster Bank —
328
Webster Bank debt discounts and issuance costs —
(26 )
Convertible promissory notes 42
—
Total long-term debt 42
4,522
Current portion of long-term debt (42 ) (395 )
Long-term debt, net of current maturities $ —
$ 4,127

~~Senior and Junior Notes~~

During 2016, the Company raised $525,000 from members through the issuance of senior notes which accrue interest at a rate of 12% and 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.

Also during 2016, the Company restructured equity through a redemption and exchange agreement by exchanging Member Equity comprised of Series A and Series B Convertible Preferred Units in the amount of $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 of $61,073 for new senior notes of $2,744,968 (“Senior Notes”) and new junior notes of $583,821 (“Junior Notes”). The Senior and Junior Notes accrue interest at a rate of 12% and 15%, respectively, and have maturity dates ranging from March 2021 to September 2021, or earlier based on certain qualifying events as outlined in the note agreements.

During the nine months ended September 30, 2017, prior to the Merger, 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 the 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 September 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~~

sheets. The Company entered into a line of credit on April 1, 2012 with Connecticut Innovations, Incorporated (Connecticut Innovations), an entity affiliated with a director of the Company, for up to $500,000 with interest paid monthly at 8%, due on September 1, 2018. Principalassociated amortization expense and interest payments began February 1, 2013 and ranged from $7,436 to $12,206 until September 2016, when the Company entered into a 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 forbearance agreement, the Company 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 paid in full its loan obligations with Connecticut Innovations. The outstanding balance was zero and $162,066 as of September 30, 2017 and December 31, 2016, respectively.

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

~~Department of Economic and Community Development.~~

The Company entered into a 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 term loan with Webster Bank and the Connecticut Innovations line of credit. In connection with the Merger, the Company paid in full its loan obligations with DECD. The outstanding balance was zero and $243,287 as of September 30, 2017 and December 31, 2016, respectively. The outstanding principal and accrued interest balance paid in full in July 2017 was $225,714.

~~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 relating to maintaining adequate cash runway, as defined in the term loan agreement. As of December 31, 2016 the Company was not in compliance with these covenants and, as such, the Webster Bank debt has all been presented as current in the accompanying condensed consolidated financial statements.

On June 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 September 30, 2017 and December 31, 2016, respectively.

During the nine months ended September 30, 2017, the Company incurred a loss on extinguishment of debt in the approximate amount of $53,000, related to the extinguishment 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 “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 remaining one-third of the principal amount outstanding on the Note was to be paid on the six month anniversary of the Maturity Date.

~~On the Maturity Date, the then outstanding aggregate amount owed on the Note of $143,041~~ ($125,000 in principal amount and $18,041 of accrued interest) became due. Pursuant to the terms of the Note, 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 “Prospective Event of Default”). On June 21, 2017, the 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”). On August 31, 2017, the Company made payment of $83,333, two-thirds of the then outstanding principal amount. 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 outstanding principal amount of the Note will be due and immediately 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 conversion. As of September 30, 2017, the outstanding principal amount due was $41,666 and accrued interest was approximately $20,000 and is included ~~within accrued expenses on the accompanying condensed consolidated balance sheet.~~

~~6. CONVERTIBLE BRIDGE NOTES.~~

~~Convertible Bridge Notes.~~

During the year ended December 31, 2016, the Company had outstanding $695,000 of unsecured convertible bridge notes. The notes accrued interest at a rate of 14% and were payable on the extended maturity date of December 31, 2016. During January 2017, the holders of the convertible bridge notes agreed to waive the maturity date of December 31, 2016 and change it to payable on demand and accrue interest until paid.

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

The convertible bridge notes had conversion terms of (i) convertible into Series C Preferred Units of the Company (at a 30% discount) upon a Qualified Series C Financing (as defined in the note agreement), (ii) at the option of the holders of a majority of the then-outstanding principal amount of the notes, convertible into Series C Preferred Units of the 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 maturity 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 notice is given to the Company 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 notes at their sole discretion can (a) require the Company to pay an amount equal to two times the principal and accrued and unpaid interest or (b) convert all unpaid principal and interest at a rate of 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 share, 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. (“Aegis”) 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 Company's 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.

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 the Closing Date. The 2017 New Bridge Notes I have 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 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 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 Bridge Notes I. On August 28, 2017, these 2017 New Bridge Notes I were partially converted and the remaining were paid off, refer below for further discussion.

Pursuant to the Exchange Agreement, the 2017 Bridge Warrants were canceled and replaced with new warrants to acquire 45,600 shares of our common stock (the “2017 New Bridge Warrants”). The initial exercise price of the 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 offering price in the Qualified Offering, but in no event lower than $1.50 per share, which has been considered 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 capital as the warrants were considered classified as equity in accordance with GAAP. As discussed in Note 2 of the accompanying unaudited condensed consolidated financial statements, the Company 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 an aggregate of $800,000 of a convertible promissory note (the “2017 New

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

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 is 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 2017 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 common 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 Bridge Note II. On August 28, 2017, this 2017 New Bridge Note II was partially converted and the remaining was paid off, refer below for further discussion.

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. All performance obligations have been met and the Company has recorded a merger advisory expense of $73,000 and $487,000 related to the Side Warrants during the three and nine months ended September 30, 2017, respectively.

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 Bridge Notes, together with any premium and interest.

~~Conversion and Payment of the 2017 New Bridge Notes I and New Bridge Note II (collectively, the “New Bridge Notes”).~~

On August 28, 2017, the Company completed an underwritten public offering (the “August 2017 Offering”) of 6,000 units consisting of one share of the Company’s Series B Preferred Stock and one warrant to purchase up to 400 shares of the Company's common stock at a combined public offering price of $1,000 per unit for gross proceeds of $6.0 million (see Note 10 - Stockholders' Equity).

At the time of the closing of the August 2017 Offering, the aggregate amount due to the holders of the New Bridge Notes was $2,436,551 ($2,000,000 in principal, $400,000 for a 20% redemption premium and $36,551 in accrued interest). Upon the closing of the August 2017 Offering, the Company made a cash payment of $1,536,551 to extinguish certain notes and the remaining $900,000 of the Company’s New Bridge Notes were converted into an aggregate of 359,999 shares of the Company's common stock (the “Note Conversion Shares”) at a conversion price of $2.50 per share and 359,999 warrants to purchase the Company's common stock (the “Note Conversion Warrants”). The Company issued the Note Conversion Warrants to the holders of the New Bridge Notes as consideration for their election to convert their New Bridge Notes into shares of the Company's common stock. The Company treated the $900,000 debt conversion as an induced conversion and determined that the fair value of the consideration given in the conversion exceeded the fair value of the debt pursuant to its original conversion terms by approximately $1.0 million. This amount was recorded as an expense included in loss on extinguishment of debt and induced conversion of convertible bridge notes in our unaudited condensed consolidated statements of operations. The Company also recorded a loss on extinguishment of debt of approximately $0.4 million related to the extinguishment of the $1,536,551 portion paid in cash, which was also recorded as an expense within the loss on extinguishment of debt and induced conversion of convertible bridge notes line in our unaudited condensed consolidated statements of operations. See Note 10 Stockholders Equity (Deficit) for discussion of the Note Conversion Warrants.

Upon conversion and payment of the New Bridge Notes, all remaining debt discounts and debt issuance costs associated with the conversions were fully amortized to interest expense and debt discounts and debt issuance costs associated with the portion paid in cash were amortized to interest expense up through the payment date. During the three and nine months ended September 30, 2017, debt discounts and debt issuance costs amortized to interest expense were $1.8 million and $1.9 million, respectively. As of September 30, 2017, the outstanding convertible bridge notes balance was zero.

~~7. ACCRUED EXPENSES.~~

~~Accrued expenses consist of the following:~~

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

September 30, 2017 December 31, 2016
Accrued expenses $ 1,323
$ 50
Accrued compensation 529
155
Accrued interest 20
495
$ 1,872
$ 700

~~8. 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 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.

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 for 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 was recorded and is reflected in accrued expenses at 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. On September 8, 2017, we and UNMC entered into a First Amendment to the Settlement Agreement with quarterly payments in the amount of $25,000 due commencing on December 15, 2017 and ending on June 15, 2020 and a final payment of $100,000 due on or before September 15, 2020. A $0.4 million liability has been recorded and is reflected in accrued expenses at September 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,

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

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”) to pay $175,000 in three installments, 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 have been made to Fox Chase. On October 3, 2017, the final payment of $55,000 was paid to Fox Chase totaling $175,000. Once received Fox Chase was obligated to cause the Action to be formally dismissed with prejudice. The dismissal is still pending as of November 15, 2017. 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 $0.2 million liability has been recorded and is reflected in accrued expenses at September 30, 2017.

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 September 30, 2017. Effective as of October 31, 2017, we and Mount Sinai agreed to enter into a new settlement agreement to restructure these liabilities into a secured, long-term debt obligation of $0.4 million accruing interest at 10% with monthly principal and interest payments of $12,700 beginning in July 2018 and continuing over 48 months and to issue warrants in the amount of 24,900 shares, that are exercisable for common stock, on a 1-for-1 basis, with an exercise price of $7.50 per share, exercisable on the date of issuance with a term of 5 years. The Company does not plan to apply to list the Warrants on the NASDAQ Capital Market, any other national securities exchange or any other nationally recognized trading system.

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. During the three and nine months ended September 30, 2017, the Company made payments totaling $0.4 million and a $0.2 million liability has been recorded and is reflected in accrued expenses at September 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. During the three and nine months ended September 30, 2017, the Company made payments totaling $0.1 million and a $0.2 million liability has been recorded and is reflected in accrued expenses at September 30, 2017.

We and Science Park Development Corporation (“SPDC”) entered into that certain Lease 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 that we 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 September 30, 2017. We and Science Park are currently in negotiations to restructure the settlement agreement.

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. During the three and nine months ended September 30, 2017, the Company made payments of less than $0.1 million and a liability of approximately $0.2 million has been recorded and is reflected in accrued expenses at September 30, 2017.

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

On March 9, 2016, counsel for Edge BioSystems, Inc. (“EdgeBio”) sent a demand letter on behalf of EdgeBio to us in connection with the terms of that 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 violation of the terms of the EdgeBio Agreement. On September 13, 2016, we received a demand for payment letter from EdgeBio’s counsel alleging that the balance due to EdgeBio is approximately $0.1 million. On September 19, 2017 a summary of action from the Judicial District of New Haven, CT for a judgement of $113,000 was issued. A liability of approximately $0.1 million has been recorded and is reflected in accrued expenses at September 30, 2017 and we and EdgeBio are currently in discussions regarding settlement.

~~9. INCOME TAXES~~

The Company's transaction with Precipio Diagnostics, LLC constitutes a reverse acquisition under Treas. Reg.§˜1.1502-75(d)(3). Consequently, the Company's portion of the year, prior to the transaction will not be included in the current year’s US federal consolidated income tax return, but instead filed in a separate short period tax return.

Income tax expense for both the three months and nine months ended September 30, 2017 was zero as a result of recording a full valuation allowance against the deferred tax asset generated predominantly by net operating losses.

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~~operations for both 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~~three and tax credit carryforwards will be eliminated and the remainder will be limited in future periods. Since the net deferred tax assets have a full valuation allowance recorded, any limitation generated from this calculation would not effect the current financial statements.

~~10.~~six months ended June 30, 2019 is less than $0.1 million, respectively.

8. 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.

~~In connection with~~ On December 20, 2018, the ~~Merger,~~Company’s shareholders approved the ~~Company effected a 1-for-30 reverse stock split~~proposal to authorize the Company’s Board of Directors to, in its ~~common stock. This reverse stock split became effective on June 13, 2017~~discretion, amend the Company’s Third Amended and ~~unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and~~Restated Certificate of Incorporation to increase the ~~accompanying unaudited condensed consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split. Additionally, as a result~~total number 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 unit of Precipio Diagnostics was exchanged for 10.2502 pre-reverse stock splitauthorized shares of ~~the Company's common stock.~~

During 2017, restricted stock of zero and 59,563 shares were granted during the three and nine months ended September 30, 2017, none of which vested prior to the merger. Upon closing of the merger, all shares fully vested. During 2017, 64,593

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

~~shares were released to common stock. We recorded stock compensation expense of approximately $28,000 related to the restricted stock that vested during the nine months ended September 30, 2017.~~

~~On the Closing Date, Precipio Diagnostics received 7,356,170 shares of Precipio~~ common stock from ~~the conversion of preferred stock, senior and junior debt, bridge notes and warrants. Also, certain advisors of Precipio Diagnostics received 321,821~~150,000,000 shares ~~of Precipio common stock related~~ to ~~services performed in connection with the Merger.~~250,000,000 shares. The ~~fair value of these advisory shares was $2.2 million at the date of the Merger and is included as a merger advisory fee expense in the accompanying financial statements.~~

~~As part of the Merger, Precipio Diagnostics also received 200,081 shares of Precipio common stock that have~~Company has 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.~~

~~Upon the closing of the August 2017 Offering,~~yet effected this increase.

On February 12, 2018, the Company issued ~~359,999~~120,983 shares of its common stock ~~upon conversion~~in exchange for approximately $1.9 million of ~~$900,000 of its New Bridge Notes (See~~debt obligations. See Note ~~6 -~~4 – Convertible ~~Bridge Notes) and 1,735,419 shares of its common stock upon conversion of its Series A Senior stock (see below - Series A Senior Preferred Stock).~~

~~Also, during~~Notes.

During the ~~three~~six months ended ~~September~~June 30, ~~2017,~~2018, the Company issued ~~943,600~~208,000 shares of its common stock in connection with conversions of its Series B Preferred Stock and 223,022 shares of its common stock in connection with conversions of its Series C Preferred Stock. Aside from 4,000 shares of common stock issued in connection with conversions of its Series C Preferred Stock, all of the shares of common stock issued for the six months ended June 30, 2018 in connection with conversions of its Series B Preferred Stock and Series C Preferred Stock (together the “Preferred Stock”) were issued after the Company induced the holders of its Preferred Stock to convert their shares of Preferred Stock to shares of the company’s common stock (see below - ~~Series B~~ Preferred ~~Stock)~~Stock induced conversions).

~~Series A~~

During the three and ~~Series B Preferred Stock.~~

~~Prior~~six months ended June 30, 2018, the Company issued 192,733 and 212,733 shares of its common stock, respectively, in connection with the exercise of 192,733 and 212,733 warrants, respectively. The warrant exercises resulted in net cash proceeds to the ~~Merger~~Company of approximately $0.9 million and ~~under Precipio Diagnostics,~~$1.1 million during the three and six months ended June 30, 2018.

During the three and six months ended June 30, 2019, the Company issued 310,200 shares of its common stock in connection with the exercise of 310,200 warrants. The warrant exercises resulted in net cash proceeds to the Company of approximately $1.6 million during the six months ended June 30, 2019.

Also, during the three and six months ended June 30, 2019, the Company issued 1,138,310 and 2,386,425 shares, respectively, of its common stock in connection with the conversion of convertible notes, plus interest, totaling $4.1 million and $7.3 million, respectively. See Note 4 – Convertible Notes.

2018 Purchase Agreement

On February 8, 2018 the Company entered into an equity purchase agreement (the “2018 Purchase Agreement”) with Leviston for the purchase of up to $8,000,000 (the “Aggregate Amount”) of shares (the “Shares”) of the Company’s common stock from time to time, at the Company’s option. Shares offered and sold prior to February 13, 2018 were issued pursuant to the Company’s shelf registration statement on Form S‑3 (and the related prospectus) that the Company filed with the Securities and Exchange Commission (the “SEC”) and which was declared effective by the SEC on February 13, 2015 (the “Shelf Registration Statement”).

Leviston purchased 48,076 shares (the “Investor Shares”) of the Company’s common stock following the close of business on February 9, 2018, subject to customary closing conditions, at a price per share of $15.60 for approximately $750,000. The shares were sold pursuant to the Shelf Registration Statement. The Company incurred approximately

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$132,000 in costs which have been treated as issuance costs within additional paid-in capital in the accompanying unaudited condensed consolidated balance sheet.

As required by the terms of the 2018 Purchase Agreement, the Company timely filed an S-1 on April 16, 2018. The S-1 Registration Statement was not declared effective by the SEC and on August 10, 2018 the Company filed a withdrawal request with the SEC. No securities had ~~outstanding preferred units~~been issued or sold under this Registration Statement. The Company determined not to proceed with the offering as the Company sought to re-negotiate the terms of ~~367,299 for Series A~~the equity purchase agreement in order to comply with the requirements of the SEC pursuant to a letter from the SEC dated August 7, 2018.

In consideration of Leviston’s agreement to enter into the 2018 Purchase Agreement, the Company agreed to pay to Leviston a commitment fee in shares of the Company’s common stock equal in value to 5.25% of the total Aggregate Amount (the “Leviston Commitment Shares”), payable in three installments upon achieving certain milestones. The first installment of 1.75% was due on or before February 12, 2018 and ~~412,806 for Series B~~this amount, of $140,000, was paid to Leviston through the issuance of 11,381 shares of the Company’s common stock on February 12, 2018.

In accordance with the terms of the 2018 Purchase Agreement, the Company provided Leviston with a price protection provision, if the Company issues any warrants in connection with issuances, sales or an agreement in writing to issue common stock or common stock equivalents by the Company, Leviston will have the right to receive a proportionate amount of such warrants, cash or shares, at Leviston’s sole election, valued using the Black Scholes formula. As a result of 2018 Note Agreement and the April 2018 Warrants issued, the Company was required to provide Leviston with a proportionate and equivalent coverage in the form of warrants, stock or cash in the amount of approximately $460,000. As Leviston has the ability to elect the form of compensation, the Company has recorded the $460,000 as a liability as of December 31, ~~2016. These units~~2018, within the other current liabilities line of the accompanying condensed consolidated balance sheet.

As of December 31, 2018, the Company had a total of $0.7 million in accruals (see Note 5 – Accrued Expenses and Other Current Liabilities) for potential obligations to Leviston, but had not issued any additional shares or made any payments to Leviston. On January 29, 2019, the Company entered into the Leviston Settlement pursuant to which the Company issued to Leviston the Leviston Note in full satisfaction of all obligations owed to Leviston. See Note 4 – Convertible Notes for further details of the Leviston Note.

LP Purchase Agreement

On September 7, 2018, the Company entered into the LP Purchase Agreement, pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of $10,000,000 of common stock of the Company (subject to certain limitations) from time to time over the term of the LP Purchase Agreement. Pursuant to the terms of the LP Purchase Agreement, on the agreement date, the Company issued 40,000 shares of its common stock to Lincoln Park as consideration for its commitment to purchase shares of common stock of the Company under the LP Purchase Agreement (the “LP Commitment Shares”). Also on September 7, 2018, the Company entered into a registration rights agreement with Lincoln Park (the “LP Registration Rights Agreement”), pursuant to which on September 14, 2018, the Company filed with the SEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, 466,666 shares of common stock, which includes the LP Commitment Shares, that have been ~~recapitalized and are included in preferred stock.~~or may be issued to Lincoln Park under the LP Purchase Agreement. The Form S-1 was declared effective by the SEC on September 28, 2018. As of January 16, 2019, all shares registered under this S-1 had been sold and/or issued to Lincoln Park. On February 1, 2019, the ~~Closing Date, the outstanding preferred units for Series A and Series B, along~~Company filed with the ~~related accumulated dividends, were converted~~SEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, an additional 1,000,000 shares of common stock that have been or may be issued to Lincoln Park under the LP Purchase Agreement. The Form S-1 was declared effective by the SEC on February 12, 2019.

Under the LP Purchase Agreement, the Company may, from time to time and at its sole discretion, on any single business day on which the closing price of its common stock is not less than $1.50 per share (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the LP Purchase Agreement), direct Lincoln Park to purchase shares of its common stock in amounts up to 30,000 shares, which amounts may be increased to up to 36,666 shares depending on the market price of its common stock at the time of sale and subject to a maximum commitment by Lincoln Park of $1,000,000 per single purchase, which the

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Company refers to as “regular purchases”, plus other “accelerated amounts” and/or “additional accelerated amounts” under certain circumstances. The Company will control the timing and amount of any sales of its common stock to Lincoln Park. The purchase price of the shares that may be sold to Lincoln Park in regular purchases under the LP Purchase Agreement will be based on the market price of the common stock of the Company preceding the time of sale as computed under the LP Purchase Agreement. The purchase price per share will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the business days used to compute such price. The Company may at any time in its sole discretion terminate the LP Purchase Agreement without fee, penalty or cost upon one business day notice. There are no restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the LP Purchase Agreement or LP Registration Rights Agreement, other than a prohibition on the Company entering into certain types of transactions that are defined in the LP Purchase Agreement as “Variable Rate Transactions”. Lincoln Park may not assign or transfer its rights and obligations under the Purchase Agreement.

Under applicable rules of The Nasdaq Capital Market, in no event may the Company issue or sell to Lincoln Park under the LP Purchase Agreement more than 19.99% of the shares of its common stock outstanding immediately prior to the execution of the LP Purchase Agreement (which is 308,590 shares based on 1,543,724 shares outstanding immediately prior to the execution of the LP Purchase Agreement), which limitation the Company refers to as the Exchange Cap, unless (i) the Company obtains stockholder approval to issue shares of common stock in excess of the Exchange Cap or (ii) the average price of all applicable sales of the Company’s common stock to Lincoln Park under the LP Purchase Agreement equals or exceeds $7.05 (which represents the closing consolidated bid price of the Company’s common stock on September 7, 2018, plus an incremental amount to account for the issuance of the LP Commitment Shares to Lincoln Park), such that issuances and sales of the Company’s common stock to Lincoln Park under the LP Purchase Agreement would be exempt from the Exchange Cap limitation under applicable Nasdaq rules. In any event, the LP Purchase Agreement specifically provides that the Company may not issue or sell any shares of its common stock under the LP Purchase Agreement if such issuance or sale would breach any applicable Nasdaq rules. The Company received shareholder approval on December 20, 2018.

The LP Purchase Agreement also prohibits the Company from directing Lincoln Park to purchase any shares of common stock if those shares, when aggregated with all other shares of the ~~Company.~~

Company’s common stock then beneficially owned by Lincoln Park and its affiliates, would result in Lincoln Park and its affiliates having beneficial ownership, at any single point in time, of more than 4.99% of the then total outstanding shares of the Company’s common stock, as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Rule 13d-3 thereunder, which limitation the Company refers to as the Beneficial Ownership Cap as defined in the LP Agreement.

As of the date of issuance of this Form 10-Q, we have already received $4.1 million in aggregate, including approximately $1.4 million from the sale of 328,590 shares of common stock to Lincoln Park during 2018, $0.7 million and $2.4 million from the sale of 240,000 and 998,076 shares of common stock to Lincoln Park during the three and six months ended June 30, 2019, respectively, and $0.3 million from the sale of 100,000 shares of common stock to Lincoln Park from July 1, 2019 through the date of issuance of this Form 10-Q.

Preferred 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 such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. 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 such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares 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 preferred stock may be issued with a preference over the common stock as 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 the common stock.

Series ~~A Senior~~B Preferred Stock.

~~In connection with the Merger,~~

On August 25, 2017, the Company filed a Certificate of Designation ~~with the Secretary~~ of ~~State~~Preferences, Rights and Limitations of Series B Convertible Preferred Stock (“Series B Preferred Stock”) with the State of Delaware ~~on June 29, 2017, designating 4,100,000~~which designates 6,900 shares of ~~the Company’s~~our preferred stock as Series B Preferred Stock. The Series B Preferred Stock has a stated value of $1,000 per share and a par value of $0.01 per ~~share, as~~share. The Series ~~A Senior Convertible~~B Preferred Stock ~~("Series A Senior") and establishing~~includes a beneficial ownership blocker but has no dividend rights (except to the ~~rights, preferences and privileges~~extent dividends are also paid on the common stock).

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The 2018 Purchase Agreement triggered the ~~new preferred stock. Generally, the holders~~down round feature of the Series A Senior stock are entitled to vote as a single voting group with the holders of the Company's common stock, and the holders of the Series A Senior stock are generally entitled to that number of votes as is equal to the number of whole shares of the Company's common stock into which the Series A Senior stock may be converted as of the record date of such vote or consent.

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

So long as the shares of Series A Senior stock are outstanding certain actions will require the separate approval of at least two-thirds of the Series A Senior stock, including: changes to the terms (requires three-fourths approval) of the Series A Senior stock, changes to the number of authorized shares of Series A Senior 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 A Senior stock also will be entitled to share in any dividends paid on the Company's common stock.

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.

We determined that there was a beneficial conversion feature in connection with the issuances of the Series A Senior 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-redeemableB Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from the reduced $21.00 per share price, related to the 2017 Series C issuance, to $15.60 per share. In connection with the down round adjustment, the Company ~~recognized the full~~calculated an incremental beneficial conversion feature inof approximately $1.4 million which was recognized as a deemed dividend during the ~~amount~~six months ended June 30, 2018 (“Deemed Dividend A”).

The 2018 Inducement Agreement, discussed below, triggered the down round feature of ~~$5.2~~the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $15.60 per share to $11.25 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $40,000 which was recognized as a deemed dividend during the six months ended June 30, 2018 (“Deemed Dividend B”).

The 2018 Note Agreement, see Note 4 – Convertible Notes, triggered the down round feature of the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $11.25 per share to $4.50 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $0.2 million which was recognized as a deemed dividend at ~~the~~ time of ~~issuance.~~

~~Upon~~ the ~~closing of~~down round adjustment (“Deemed Dividend K”).

During the August 2017 Offering, all of the Company’s outstanding Series A Senior stock converted into an aggregate of 1,712,901 shares of the Company's common stock, at the existing conversion rate of one share of Common Stock for one share of Series A Senior stock (the “Conversion”). The Company also issued an aggregate of 22,518six months ended June 30, 2018, 2,340 shares of Series ~~A Senior stock to these holders, which~~B Preferred Stock were converted into 208,000 shares ~~represented~~of our common stock.

At June 30, 2019 and December 31, 2018, the Company had 6,900 shares of Series AB designated and issued and 47 shares of Series B outstanding.

Series C Preferred ~~Payment (as defined in~~Stock

On November 6, 2017, the ~~Company’s~~Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series ~~A Senior~~C Convertible Preferred ~~Stock) accrued through~~Stock (“Series C Preferred Stock”) with the ~~date~~State of ~~Conversion and immediately converted into an aggregate of 22,518~~Delaware which designates 2,748 shares of our preferred stock as Series C Preferred Stock. The Series C Preferred Stock has a stated value of $1,000 per share and a par value of $0.01 per share.

The conversion price of the ~~Company's common stock in~~Series C Preferred Stock contains a down round feature. The 2018 Purchase Agreement triggered the down round feature of the Series C Preferred Stock and, as a result, the conversion price of the Company’s Series C Convertible Preferred Stock was automatically adjusted from $21.00 per share to $15.60 per share. In connection with the ~~Conversion. The~~down round adjustment, the Company ~~issued warrants (the “Series A Conversion Warrants”) to purchase~~calculated an ~~aggregate~~incremental beneficial conversion feature of 856,446 shares of Common Stock to these former holders of Series A Senior stock as consideration for the conversion of their shares of Series A Senior stock into shares of Common Stock. The Company treated this as an induced conversion of the Series A Senior stock.

~~At the date of the Conversion, the fair value of the Series A Conversion Warrants~~approximately $0.8 million which was approximately $1.4 million. The Company determined that the $1.4 million represented the excess fair value of all consideration transferred to the Series A Senior holders as compared to the fair value of the Series A Senior stock pursuant to its original conversion terms. The $1.4 million was recordedrecognized as a deemed dividend atduring the ~~time of~~three months ended March 31, 2018 (“Deemed Dividend C”).

During the ~~Conversion.~~

~~The Series A Preferred Payment of 22,518~~six months ended June 30, 2018, 2,548 shares of Series ~~A Senior stock had a fair value~~C Preferred Stock were converted into 223,022 shares of ~~approximately $84,000 at the time of issuance~~our common stock.

At June 30, 2019 and ~~was recorded as a deemed dividend on preferred shares.~~

~~At September 30, 2017,~~December 31, 2018, the Company had 2,748 shares of Series C designated and issued and zero shares of Series ~~A Senior~~C outstanding.

~~Series B~~

Preferred ~~Stock.~~

Stock induced conversions

On ~~August 28, 2017,~~March 21, 2018, the Company ~~completed the August 2017 Offering~~entered into a letter agreement (the “2018 Inducement Agreement”) with certain holders of ~~6,000 units consisting of one share~~shares of the Company’s Series B Preferred Stock ~~par value $0.01 per share (“~~and Series BC Preferred Stock (together the “Preferred Stock”), ~~which is convertible into 400~~and warrants (the “Warrants”) to purchase shares of the Company’s common stock issued in the Company’s public offering in August 2017 and registered direct offering in November 2017. Pursuant to the 2018 Inducement Agreement, the Company and the investors agreed that, as a result of the issuance of shares of common stock ~~par value $0.01~~pursuant to that Purchase Agreement, dated February 8, 2018, by and between the Company and the investor named therein, and effective as of the time of execution of the 2018 Inducement Agreement, the exercise price of the Warrants was reduced to $11.25 per share ~~at a~~(the “Exercise Price Reduction”) and the conversion price of ~~$2.50 per share,~~the Preferred Stock was reduced to $11.25

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(the “Conversion Price Reduction”). As consideration for the Company’s agreement to the Exercise Price Reduction and ~~one warrant~~the Conversion Price Reduction, (i) each investor agreed to ~~purchase up to 400~~convert the shares of Preferred Stock held by such investor into shares of Common Stock and (ii) one investor agreed to exercise 44,444 Warrants and another investor agreed to exercise 33,333 Warrants all as of the date of the 2018 Inducement Agreement. As discussed above, as of June 30, 2019, all shares of Preferred Stock, except 47 shares of Series B Preferred Stock, were converted to shares of our common stock (the “August 2017 Offering Warrants”) at a combined public offering price of $1,000 per unit. The August 2017 Offering included the sale of 280,000 August 2017 Offering Warrants pursuant to the over-allotment option exercised by Aegis Capital Corp. (“Aegis”) for $0.01 per share or $2,800. The Offering was completed pursuant to the terms of the 2018 Inducement Agreement and 20,000 Warrants were exercised at the $11.25 exercise price.

The 2018 Inducement Agreement represented an ~~underwriting agreement dated as of August 22, 2017 (the “Underwriting Agreement”) between the Company and Aegis. The net proceeds~~

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

~~received~~inducement by the Company ~~from the sale~~to convert shares of the ~~units was approximately $5.0 million, after deducting underwriting discounts and estimated offering expenses, which have been recorded as stock issuance costs within additional paid in capital.~~

~~For purposes of recording this transaction, the gross proceeds of $6.0 million from the August 2017 Offering were allocated to the Series B~~ Preferred Stock and the August 2017 Offering Warrants based on their relative fair values at the date of issuance. The portion allocated to the Series B Preferred stock was $3.1 million with the remaining $2.9 million allocated to the August 2017 Offering Warrants. As a result of the allocation of the proceeds, we determined that there was a beneficial conversion feature in connection with the issuance of the Series B Preferred Stock since the calculated effective conversion price was at a discount to the fair market value of the Company's common stock at issuance date. The Company recognized the full beneficial conversion feature in the amount of $2.3 million as a deemed dividend at time of issuance.

Stock. The conversion price of the ~~Series B~~ Preferred Stock ~~contains a down round feature. As discussed in Note 2~~and the exercise price of the ~~accompanying unaudited condensed consolidated financial statements, the Company early adopted ASU 2017-11, which allowed the Company~~Warrants were reduced from $15.60 per share to ~~treat the preferred stock as equity classified, despite the down round provision.~~$11.25 per share, respectively. The Company ~~will recognize~~calculated the ~~effect~~fair value of the ~~down round feature when it is triggered. At that time,~~additional securities and consideration to be approximately $1.2 million (“Deemed Dividend D”). During the ~~effect would be treated~~six months ended June 30, 2018, this amount was recorded as a charge to additional paid-in-capital and as a deemed dividend ~~and as~~resulting in a reduction of income available to common shareholders in our basic earnings per share calculation.

~~During the three and nine months ended September 30, 2017, 2,359 shares of Series B Preferred Stock were converted into 943,600 shares of our common stock.~~

~~At September 30, 2017, the Company had 3,641 shares of Series B Preferred Stock outstanding.~~

Common Stock Warrants.

The following represents a summary of the warrants outstanding as of June 30, 2019:


			Underlying	Exercise
	Issue Year	Expiration	Shares	Price
Warrants Assumed in Merger
(1)	2014	April 2020	832	$	1,800.00
(2)	2015	February 2020	1,588	$	1,008.00
(3)	2015	December 2020	272	$	747.00
(4)	2016	January 2021	596	$	544.50

Warrants
(5)	2017	June 2022	2,540	$	41.25
(5)	2017	June 2022	500	$	7.50
(6)	2017	June 2022	6,095	$	105.00
(7)	2017	August 2022	25,201	$	2.25
(8)	2017	August 2022	4,000	$	46.88
(9)	2017	August 2022	47,995	$	150.00
(9)	2017	August 2022	9,101	$	7.50
(10)	2017	August 2022	16,664	$	2.25
(10)	2017	August 2022	7,335	$	2.25
(11)	2017	October 2022	666	$	2.25
(12)	2017	May 2023	—	$	2.25
(13)	2018	October 2022	7,207	$	112.50
(14)	2018	April 2023	69,964	$	5.40
(14)	2018	April 2023	121,552	$	5.40
(15)	2018	October 2022	15,466	$	11.25
(16)	2018	July 2023	14,671	$	5.40
(16)	2018	July 2023	14,672	$	5.40
(16)	2018	August 2023	36,334	$	5.40
(16)	2018	August 2023	36,334	$	5.40
(16)	2018	September 2023	19,816	$	5.40
(16)	2018	September 2023	20,903	$	5.40
(17)	2018	November 2023	75,788	$	5.40
(17)	2018	December 2023	51,282	$	5.40
(18)	2019	April 2024	147,472	$	5.40
(19)	2019	May 2024	154,343	$	9.56
			909,189

~~Prior to the Merger,~~

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(1)

These warrants were issued in connection with a private placement which was completed in October 2014.

(2)

These warrants were issued in connection with an offering which was completed in February 2015.

(3)

These warrants were issued in connection with an offering which was completed in July 2015.

(4)

These warrants were issued in connection with an offering which was completed in January 2016. Of the remaining outstanding warrants as of June 30, 2019, 357 warrants are recorded as a liability, See Note 9 – Fair Value for further discussion, and 239 are treated as equity.

(5)

These warrants were issued in connection with a June 2017 merger transaction (the “Merger”).

(6)

These warrants were issued in connection with the Merger.

(7)

These warrants were issued in connection with an underwritten public offering completed on August 28, 2017 (the “August 2017 Offering”) and are the August 2017 Offering Warrants discussed below.

(8)

These warrants were issued in connection with the August 2017 Offering.

(9)

These warrants were issued in connection with the conversion of our Series A Senior stock, at the time of the closing of the August 2017 Offering.

(10)

These warrants were issued in connection with the conversion of convertible bridge notes, at the time of the closing of the August 2017 Offering, and are the Note Conversion Warrants discussed below.

(11)

These warrants were issued in connection with the waiver of default the Company received in the fourth quarter of 2017 in connection with the Convertible Promissory Notes and are the Convertible Promissory Note Warrants discussed below.

(12)

These warrants were issued in connection with the Series C Preferred Offering and are the Series C Warrants discussed below.

(13)

These warrants were issued in connection with the Debt Obligation settlement agreements and are the Creditor Warrants discussed below.

(14)

These warrants were issued in connection with the 2018 Note Agreement and are the April 2018 Warrants discussed below.

(15)

These warrants were issued in connection with the 2018 Note Agreement and are the Advisor Warrants discussed below.

(16)

These warrants were issued in connection with the 2018 Note Agreement and are the Q3 2018 Warrants discussed below.

(17)

These warrants were issued in connection with the 2018 Note Agreement and subsequent Amendment Agreement and are the Q4 2018 Warrants discussed below.

(18)

These warrants were issued in connection with the 2018 Note Agreement and subsequent Amendment No. 2 Agreement and are the April 2019 Warrants discussed below.

(19)

These warrants were issued in connection with the May 2019 Bridge Notes and are the May 2019 Warrants discussed below.

August 2017 Offering Warrants

In connection with the ~~line of credit with Connecticut Innovations,~~August 2017 Offering, the Company issued 178,666 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.~~$45.00, which contain a down round provision (the “August 2017 Offering Warrants”). The ~~warrants~~August 2017 Offering Warrants were ~~valued at $6,000 at the~~exercisable immediately and expire 5 years from 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 was 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 redemption and exchange agreement with certain member's relating to their 275,237 Preferred A Units and 208,087 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 debt issued as consideration for the members' 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 the 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~~

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

During the nine months ended September 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 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).

issuance.

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. (See Note 6 - Convertible Bridge Notes). The initial exercise price of the 2017 New Bridge Warrants was $7.50 (subject to adjustments). These warrants had a provision that if the Company completed a Qualified Offering (as defined in the 2017 New Bridge Warrants), the exercise price of the 2017 New Bridge Warrants would become the lower of (i) $7.50 or (ii) 110% of the per share offering price in the Qualified Offering, but in no event lower than $1.50 per share. As a result of the Series BC Preferred ~~Stock issued in~~Offering, the exercise price of the August 2017 Offering ~~the exercise price~~ ~~of the 2017 New Bridge~~ Warrants was adjusted to~~$2.75~~ $21.00 per share.

~~At issuance, the 2017 New Bridge Warrants had a fair value of $211,000 and were recorded~~

In February 2018, as a ~~debt discount~~result of 2018 Purchase Agreement, the exercise price of the August 2017 Offering Warrants was adjusted to ~~the related 2017 New Bridge Notes I, with the corresponding entry to additional paid in capital as the warrants were considered classified as equity in accordance with GAAP.~~ $15.60. At the time the exercise price was adjusted, ~~due to~~the Company calculated the fair value of the down round provisions on the warrants to be approximately $62,000 and recorded this as a deemed dividend (“Deemed Dividend E”). In addition, as a result of the 2018 Inducement Agreement, the exercise price of the August 2017 Offering Warrants was further adjusted to $11.25 as a result of the Exercise Price Reduction discussed above.

In April 2018, as a result of the 2018 Note Agreement, the exercise price of the August 2017 Offering Warrants was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down

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round provision on the warrants to be approximately $63,000 and recorded this as a deemed dividend (“Deemed Dividend L”).

There were 6,800 and 141,400 August 2017 Offering Warrants exercised during the six months ended June 30, 2019 and 2018, respectively, for proceeds to the Company of approximately $15,000 and $771,000, respectively. During the six months ended June 30, 2019 and 2018, the intrinsic value of the August 2017 Offering Warrants exercised was $36,000 and $406,000, respectively.

Note Conversion Warrants

Upon the closing of the August 2017 Offering, the Company issued 23,999 warrants to purchase the Company’s common stock (the “Note Conversion Warrants”). The Note Conversion Warrants have an exercise price of $45.00 per share and contain a down round provision. As a result of the Series C Preferred Offering, the exercise price of the Note Conversion Warrants was adjusted to $21.00 per share.

In February 2018, as a result of 2018 Purchase Agreement, the exercise price of the Note Conversion Warrants was adjusted to $15.60. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately ~~$12,000~~$8,000 and recorded this as a deemed ~~dividend.~~dividend (“Deemed Dividend F”). In addition, as a result of the 2018 Inducement Agreement, the exercise price of the Note Conversion Warrants was further adjusted to $11.25. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $5,000 and recorded this as a deemed dividend (“Deemed Dividend G”).

In April 2018, as a result of the 2018 Note Agreement, the exercise price

~~Side~~ of the Note Conversion Warrants

was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $10,000 and recorded this as a deemed dividend (“Deemed Dividend M”).

Convertible Promissory Note Warrants

The Convertible Promissory Note Warrants had an original exercise price of $45.00 per share and contain a down round provision. As a result of the Series C Preferred Offering, the exercise price of the Convertible Promissory Note Warrants was adjusted to $21.00 per share.

In February 2018, as a result of 2018 Purchase Agreement, the exercise price of the Convertible Promissory Note Warrants was adjusted to $15.60. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend (“Deemed Dividend H”). In addition, as a result of the 2018 Inducement Agreement, the exercise price of the Convertible Promissory Note Warrants was further adjusted to $11.25. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend (“Deemed Dividend I”).

In April 2018, as a result of the 2018 Note Agreement, the exercise price of the Convertible Promissory Note Warrants was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend (“Deemed Dividend N”).

Series C Warrants

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 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. All performance obligations have been met and the Company has recorded merger advisory expense of $73,000 and $487,000 related to the Side Warrants during the three and nine months ended September 30, 2017, respectively.

~~August 2017 Offering Warrants~~

~~In connection with the August 2017~~Series C Preferred Offering, the Company issued ~~2,680,000~~130,857 warrants at an exercise price of ~~$3.00,~~$24.45, which ~~contains~~contain a down round provision. ~~The August 2017 Offering~~Series C Warrants ~~were~~are exercisable ~~immediately~~on the six-month anniversary of the date of issuance and expire 5 years from date ~~of issuance.~~they are initially exercisable. The terms of the ~~August 2017 Offering~~Series C Warrants prohibit a holder from exercising its ~~August 2017 Offering~~Series C Warrants if doing so would result in such holder (together with its affiliates) beneficially owning more than 4.99% of the Company’s outstanding shares of common stock after giving effect to such exercise,

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provided that, at the election of a holder and notice to the Company, such beneficial ownership limitation may be increased to 9.99% of the Company’s outstanding shares of common stock after giving effect to such exercise.

~~Representative Warrants~~

In ~~accordance with~~February 2018, as a result of the ~~underwriting agreement for~~2018 Purchase Agreement, the ~~August 2017 Offering, the underwriter purchased 60,000 warrants, with an~~ exercise price of ~~$3.125, for an aggregate~~the Series C Warrants was adjusted to $15.60. At the time the exercise price ~~of $100. The Representative Warrants are exercisable beginning one year after~~was adjusted, the ~~date of~~Company calculated the ~~prospectus for the August 2017 Offering and expiring on a date which is no more than five years from the date of the prospectus for the August 2017 Offering. The~~ fair value of the down round provision on the warrants ~~at date~~to be approximately $58,000 and recorded this as a deemed dividend (“Deemed Dividend J”). In addition, as a result of ~~issuance~~the 2018 Inducement Agreement, the exercise price of the Series C Warrants was further adjusted to $11.25 as a result of the Exercise Price Reduction discussed above.

In April 2018, as a result of the 2018 Note Agreement, the exercise price of the Series C Warrants was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $45,000 and recorded this as a deemed dividend (“Deemed Dividend O”).

There were 25,037 Series C Warrants exercised during both the three and six months ended June 30, 2019 for proceeds to the Company of approximately ~~$113,000~~$56,000. During the six months ended June 30, 2019, the intrinsic value of the Series C Warrants exercised was ~~treated as a stock issuance cost~~approximately $43,000. There were 71,333 Series C Warrants exercised during both the three and ~~recorded as a reduction~~six months ended June 30, 2018 for proceeds to ~~additional paid in capital.~~

the Company of approximately $321,000. During the six months ended June 30, 2018, the intrinsic value of the Series ~~A Conversion~~C Warrants

~~The~~ exercised was approximately $202,000.

Creditor Warrants

In the fourth quarter of 2017, the Company ~~issued Series A Conversion~~entered into Settlement Agreements with the Creditors pursuant to which the Company agreed to issue, to certain of its Creditors, 7,207 Creditor Warrants to purchase ~~an aggregate of 856,446~~7,207 shares of the ~~Company's~~Company’s common stock at an exercise price of ~~$10.00~~$112.50 per ~~share, which~~share. The Creditor Warrants were issued in February 2018. See Note 4 – Convertible Notes.

April 2018 Warrants

In connection with the issuance of the April 2018 Bridge Notes, the Company issued 243,224 warrants at an exercise price of $11.25 at time of issuance. At issuance, half of these April 2018 Warrants had a five-year term and half had a one-year term. In September 2018, the exercise price was amended to $7.50. At the time of issuance, as discussed in Note 4 - Convertible Notes, the April 2018 Warrants had a fair value of approximately $1.1 million and were recorded as a liability with an offset to debt discount.

In April 2019, as a result of the Amendment No.2 Agreement, the exercise price of the April 2018 Warrants was adjusted to $5.40 and all April 2018 Warrants that had a one-year term were amended to have a five-year term. Due to these modifications, the change in fair value of the April 2018 Warrants was calculated to be an expense of approximately $0.7 million which is included in warrant revaluation and modification in the consolidated statements of operations for the three and six months ended June 30, 2019.

There were 51,708 April 2018 Warrants exercised during the three and six months ended June 30, 2019 for proceeds to the Company of approximately $279,000. During the six months ended June 30, 2019, the intrinsic value of the April 2018 Warrants exercised was approximately $128,000.

Advisor Warrants

At the time of the 2018 Note Agreement, the Company issued 15,466 warrants with an exercise price of $11.25 to a financial advisor. At the time of issuance, as discussed in Note 4 - Convertible Notes, the Advisor Warrants had a fair value of approximately $0.1 million and were recorded as a liability with an offset to debt discount.

Q3 2018 Warrants

In connection with the issuance of bridge notes during the third quarter of 2018, the Company issued 196,340 warrants with an exercise price of $11.25 at time of issuance (the “Q3 2018 Warrants”). At the time of issuance, half of

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these Q3 2018 Warrants had a five-year term and half had a one-year term. The Q3 2018 Warrants had a fair value of ~~5 years.~~approximately $0.7 million and were recorded as a liability with an offset to debt discount.

In April 2019, as a result of the Amendment No.2 Agreement, the exercise price of the Q3 2018 Warrants was adjusted to $5.40 and all Q3 2018 Warrants that had a one-year term were amended to have a five-year term. Due to these modifications, the change in fair value of the Q3 2018 Warrants was calculated to be an expense of approximately $0.4 million which is included in warrant revaluation and modification in the consolidated statements of operations for the three and six months ended June 30, 2019.

There were 53,610 Q3 2018 Warrants exercised during the three and six months ended June 30, 2019 for proceeds to the Company of approximately $289,000. During the six months ended June 30, 2019, the intrinsic value of the Q3 2018 Warrants exercised was approximately $133,382.

Q4 2018 Warrants

In connection with the issuance bridge notes during the fourth quarter of 2018, the Company issued 300,115 warrants with an exercise price of $5.40 at time of issuance and a five-year term (the “Q4 208 Warrants”). At the time of issuance, the ~~Series A Conversion~~Q4 2018 Warrants had a fair value of ~~$1.4~~approximately $0.7 million and ~~as discussed in the Series A Senior Preferred Stock section above, these~~ were ~~issued and~~ recorded as ~~deemed dividends.~~

~~Note Conversion~~a liability with an offset to debt discount.

There were 173,045 Q4 2018 Warrants

~~Table~~ exercised during the three and six months ended June 30, 2019 for proceeds to the Company of ~~Contents~~

~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September~~approximately $934,000. During the six months ended June 30, ~~2017 and 2016~~

~~Upon~~2019, the ~~closing~~intrinsic value of the ~~August 2017 Offering, $900,000~~Q4 2018 Warrants exercised was approximately $489,000.

April 2019 Warrants

In connection with the issuance of the ~~Company’s New~~April 2019 Bridge Notes, ~~were converted into an aggregate of 359,999 shares of~~ the ~~Company's common stock and 359,999 Note Conversion Warrants. The Note Conversion Warrants have~~Company issued 147,472 warrants with an exercise price of ~~$3.00 per share~~$5.40 and a ~~five year~~five-year term. ~~The exercise price contains~~At the time of issuance, as discussed in Note 4 - Convertible Notes, the April 2019 Warrants had a ~~down round provision. The conversion of the Company's New Bridge Notes was treated as an induced conversion and at the date of the conversion the Company recorded an expense~~fair value of approximately $1.0 million ~~which is included~~and were recorded as a liability with an offset to debt discount.

May 2019 Warrants

In connection with the issuance of the May 2019 Bridge Notes, the Company issued 154,343 warrants with an exercise price of $5.40 and a five-year term. At the time of issuance, as discussed in ~~loss on extinguishment of debt and induced conversion of convertible bridge notes in our unaudited condensed consolidated statements of operations (See~~ Note 64 - Convertible ~~Bridge Notes).~~Notes, the May 2019 Warrants had a fair value of approximately $0.9 million and were recorded as a liability with an offset to debt discount.

Deemed Dividends

As discussed above, certain of our preferred stock and warrant issuances contain down round provisions which require us 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.

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There were no deemed dividends during the six months ended June 30, 2019. The following represents a summary of the ~~warrants outstanding as of September~~dividends recorded for the six months ended June 30, ~~2017:~~2018:


	Amount Recorded
Deemed Dividends	(in thousands)

Dividends resulting from the 2018 Purchase Agreement
Deemed Dividend A	$	1,358
Deemed Dividend C		829
Deemed Dividend E		62
Deemed Dividend F		8
Deemed Dividend H		*
Deemed Dividend J		58

Dividends resulting from the 2018 Inducement Agreement
Deemed Dividend B		40
Deemed Dividend D		1,154
Deemed Dividend G		5
Deemed Dividend I		*

Dividends resulting from the 2018 Note Agreement
Deemed Dividend K		216
Deemed Dividend L		63
Deemed Dividend O		45
Deemed Dividend M		10
Deemed Dividend N		*

For the six months ended June 30, 2018	$	3,848

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 $2.75
(8) 2017 June 2022 91,429 $7.00
(9) 2017 August 2022 2,680,000 $3.00
(10) 2017 August 2022 60,000 $3.125
(11) 2017 August 2022 856,446 $10.00
(12) 2017 August 2022 359,999 $3.00
4,224,824


~~(1)~~	~~These warrants were issued in connection with an offering which was completed in January 2013.~~


~~(2)~~	~~These warrants were issued in connection with a private placement which was completed in October 2014.~~


~~(3)~~	~~These warrants were issued in connection with an offering which was completed in February 2015.~~


~~(4)~~	~~These warrants were issued in connection with an offering which was completed in July 2015.~~


~~(5)~~	~~These warrants were originally issued in connection with an offering in July 2015, and were amended in connection with an offering which was completed in January 2016.~~


~~(6)~~	~~These warrants were issued in connection with an offering which was completed in January 2016.~~


~~(7)~~	~~These warrants were issued in connection with the Merger and are the 2017 New Bridge Warrants discussed above.~~


~~(8)~~	~~These warrants were issued in connection with the Merger and are the Side Warrants discussed above.~~


~~(9)~~	~~These warrants were issued in connection with the August 2017 Offering and are the August 2017 Offering Warrants discussed above.~~


~~(10)~~	~~These warrants were issued in connection with the August 2017 Offering and are the Representative Warrants discussed above.~~


~~(11)~~	These warrants were issued in connection with the conversion of our Series A Senior stock, at the time of the closing of the August 2017 Offering, and are the Series A Conversion Warrants discussed above.


~~(12)~~	~~These warrants were issued in connection with the conversion of convertible bridge notes, at the time of the closing of the August 2017 Offering, and are the Note Conversion Warrants discussed above.~~

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

~~11.~~

* Represents less than one thousand dollars

9. 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:

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

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

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.

~~2016 Warrant Liability~~

The Company assumed the 2016 Warrant Liability in the Merger and it represents the fair value of Transgenomic warrants issued in January 2016, of which, 25,584 warrants remain outstanding as of September 30, 2017. We are required to record these instruments at fair value at each

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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 condensed consolidated ~~Statement~~statement of ~~Operations.~~

operations.

2016 Warrant Liability

In the Merger, the Company assumed a warrant liability related to warrants issued in January 2016 (the “2016 Warrant Liability”) and it represents the fair value of such warrants, of which, 357 warrants remain outstanding as of June 30, 2019.

In March 2018, a portion of the 2016 Warrant Liability was part of a settlement agreement pursuant to a lawsuit that was filed against the Company by one of the warrant holders. As such, approximately $0.4 million of the warrant liability, representing 1,347 warrants, was canceled on the date of the settlement agreement and replaced by and amounts now recorded as other current liabilities or other long-term liabilities. For further detail, see discussion of the Crede Agreement in Note 5 – Accrued Expenses And Other Current Liabilities.

The 2016 Warrant Liability is considered a Level 3 financial instrument and iswas valued using ~~a binomial lattice simulation model. This method is well suited to valuing options with non-standard features. Assumptions~~the Monte Carlo methodology. As of June 30, 2019, assumptions and inputs used in the valuation of the ~~common stock warrants~~2016 Warrant Liability include: ~~our equity value, which was estimated using our stock price~~remaining life to maturity of ~~$2.16 as of September 30, 2017;~~1.5 years; annual volatility of ~~137%~~141%; and a risk-free interest rate of ~~1.20%~~1.84%.

As of December 31, 2018, assumptions and inputs used in the valuation of the 2016 Warrant Liability include: remaining life to maturity of two years; annual volatility of 176%; and a risk-free interest rate of 2.48%.

Bridge Note Warrant Liabilities

During 2018 and 2019, the Company issued 243,224 of April 2018 Warrants, 15,466 of Advisor Warrants, 196,340 of Q3 2018 Warrants, 300,115 of Q4 2018 Warrants, 147,472 of April 2019 Warrants and 154,343 of May 2019 Warrants. All of these warrants issuances were classified as warrant liabilities (the “Bridge Note Warrant Liabilities”). See Note 4 - Convertible Notes for further discussion of each warrant.

The Bridge Note Warrant Liabilities are considered Level 3 financial instruments and were valued using the Black Scholes model. As of June 30, 2019, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of 2.81 to 4.88 years; annual volatility of 147% to 173%; and risk free rate of 1.71% to 1.76%.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019 and 2018, the ~~changes~~change in the fair value of the ~~liability~~warrant liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:


Dollars in Thousands
	Three Months Ended June 30, 2019
	2016 Warrant		Bridge Note		Total Warrant
	Liability		Warrant Liabilities		Liabilities
Beginning balance at April 1	$	93	$	799	$	892
Additions:		–		1,858		1,858
Total (gains) losses:
Revaluation recognized in earnings		(7)		829		822
Modification recognized in earnings		–		1,128		1,128
Deductions – warrant exercises		–		(2,364)		(2,364)
Balance at June 30	$	86	$	2,250	$	2,336

	Three Months Ended June 30, 2018
	2016 Warrant		Bridge Note		Total Warrant
	Liability		Warrant Liabilities		Liabilities
Beginning balance at April 1	$	124	$	–	$	124
Additions:		–		1,205		1,205
Total gains:
Revaluation recognized in earnings		–		(323)		(323)
Balance at June 30	$	124	$	882	$	1,006

Dollars in Thousands
For the Three Months Ended
September 30, 2017
Beginning balance at July 1 $ 618
Additions - liability assumed in the Merger —
Total (gains) or losses:
Recognized in earnings —
Balance at September 30 $ 618

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~


Dollars in Thousands
	Six Months Ended June 30, 2019
	2016 Warrant		Bridge Note		Total Warrant
	Liability		Warrant Liabilities		Liabilities
Beginning balance at January 1	$	116	$	1,016	$	1,132
Additions:		–		1,858		1,858
Total (gains) losses:
Revaluation recognized in earnings		(30)		612		582
Modification recognized in earnings		–		1,128		1,128
Deductions – warrant exercises		–		(2,364)		(2,364)
Balance at June 30	$	86	$	2,250	$	2,336

	Six Months Ended June 30, 2018
	2016 Warrant		Bridge Note		Total Warrant
	Liability		Warrant Liabilities		Liabilities
Beginning balance at January 1	$	841	$	–	$	841
Additions:		–		1,205		1,205
Total gains:
Revaluation recognized in earnings		(261)		(323)		(584)
Deductions – warrant liability settlement		(456)		–		(456)
Balance at June 30	$	124	$	882	$	1,006

Derivative Liabilities.

Certain of our issued and outstanding convertible notes contain features that are considered derivative instruments and are required to bifurcated from the debt host and accounted for separately as derivative liabilities. The estimated fair value of the derivatives will be remeasured at each reporting date and any change in estimated fair value of the derivatives will be recorded as non-cash adjustments to earnings. The gains or losses included in earnings are reported in other income (expense) in our condensed consolidated statement of operations.

Bridge Notes Redemption Feature

At the time of the Bridge Note issuances, the Company recorded derivative instruments as liabilities with an initial fair value of approximately $0.3 million. The valuations were performed using the “with and without” approach, whereby the Bridge Notes were valued both with the embedded derivative and without, and the difference in values was recorded as the derivative liability. See Note 4 - Convertible Notes for further discussion.

Conversion Option

The Company recorded derivative liabilities related to the Conversion Option of the Exchange Notes issued during 2018 with an initial fair value of approximately $0.4 million. The valuations were performed using the Monte Carlo methodology. See Note 4 - Convertible Notes for further discussion.

Dollars in Thousands
For the Nine Months Ended
September 30, 2017
Beginning balance at January 1 $ —
Additions - liability assumed in the Merger 615
Total (gains) or losses:
Recognized in earnings 3
Balance at September 30 $ 618

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During the three and six months ended June 30, 2019 and 2018, the change in the fair value of the derivative liabilities measured using significant unobservable inputs (Level 3) was comprised of the following:


(Dollars in thousands)	Three Months Ended June 30, 2019
	Bridge Notes
	Redemption		Conversion		Total Derivative
	Feature		Option		Liabilities
Beginning balance at April 1	$	—	$	—	$	—
Deductions:		(438)		—		(438)
Total loss:
Revaluation recognized in earnings		438		—		438
Balance at June 30	$	—	$	—	$	—

		Three Months Ended June 30, 2018
	Bridge Notes
	Redemption		Conversion		Total Derivative
	Feature		Option		Liabilities
Beginning balance at April 1	$	—	$	—	$	—
Additions:		142		—		142
Total loss:
Revaluation recognized in earnings		1		—		1
Balance at June 30	$	143	$	—	$	143


	Six Months Ended June 30, 2019
	Bridge Notes
	Redemption		Conversion		Total Derivative
	Feature		Option		Liabilities
Beginning balance at January 1	$	30	$	32	$	62
Deductions:		(438)		(39)		(477)
Total loss:
Revaluation recognized in earnings		408		7		415
Balance at June 30	$	—	$	—	$	—

	Six Months Ended June 30, 2018
	Bridge Notes
	Redemption		Conversion		Total Derivative
	Feature		Option		Liabilities
Beginning balance at January 1	$	—	$	—	$	—
Additions:		142		—		142
Total loss:
Revaluation recognized in earnings		1		—		1
Balance at June 30	$	143	$	—	$	143

~~12. STOCK OPTIONS~~

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~~Stock Options.~~

10. EQUITY INCENTIVE PLAN

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 there were 44,444 shares of common stock reserved for issuance under the 2017 Plan. The 2017 Plan will expire on June 5, 2027.

Amendment of the 2017 Stock Option and Incentive Plan

On January 31, 2018, at a special meeting of the stockholders of the Company, the stockholders approved an amendment and restatement of the 2017 Plan to:

increase the aggregate number of shares authorized for issuance under the 2017 Plan by 359,300 shares to 403,744 shares;

increase the maximum number of shares that may be granted in the form of stock options or stock appreciation rights to any one individual in any one calendar year and the maximum number of shares underlying any award intended to qualify as performance-based compensation to any one individual in any performance cycle, in each case to 66,666 shares of common stock; and

add an “evergreen” provision, pursuant to which the aggregate number of shares authorized for issuance under the 2017 Plan will be automatically increased each year beginning on January 1, 2019 by 5% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or such lesser number of shares determined by the Company’s Board of Directors or Compensation Committee.

Stock Options.

The Company accounts for all stock-based compensation payments to employees and directors, including grants of employee stock options, at fair value and expenses the benefit in operating expense in the condensed consolidated statements of operations over the service period of the awards. The Company records the expense for stock-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model, which requires various assumptions including estimating stock price volatility, expected life of the stock option, risk free interest rate and estimated forfeiture rate.

During the six months ended June 30, 2019, the Company granted stock options to purchase up to 285,364 shares of common stock at a weighted average exercise price of $2.37. 100,000 of the stock options granted during the six months ended June 30, 2019 were awards subject to performance-based milestone vesting.

The following table summarizes stock option activity under our plans during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~:2019:


	Number of	Weighted-Average
	Options	Exercise Price
Outstanding at January 1, 2019	224,895	$	15.90
Granted	285,364		2.37
Forfeited	(9,017)		6.92
Outstanding at June 30, 2019	501,242	$	8.29
Exercisable at June 30, 2019	99,047	$	20.22

Number of
Options

Weighted-Average
Exercise Price
Outstanding at January 1, 2017 24,600
$ 107.83
Granted 225,332
1.87
Forfeited (13,044 ) 103.13
Outstanding at September 30, 2017 236,888
$ 7.30
Exercisable at September 30, 2017 10,284
$ 121.97

As of ~~September~~June 30, ~~2017,~~2019, there were ~~236,590~~400,693 options that were vested or expected to vest with an aggregate intrinsic value of approximately ~~one hundred thousand with~~$0.2 million and a remaining weighted average contractual life of ~~9.9~~9.2 years. ~~The weighted-average grant date fair values, based on~~

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During the ~~Black-Scholes option model, of~~six months ended June 30, 2018, there were 219,101 options granted ~~during the nine months ended September 30, 2017 was $1.63.~~

~~During~~with a weighted average exercise price of $10.65 and 7,530 options forfeited with a weighted average exercise price of $42.60.

For the three and ~~nine~~six months ended ~~both September~~June 30, ~~2017 and 2016,~~2019, we recorded compensation expense for all stock awards of ~~less than~~ $0.1 million and $0.3 million, respectively, within operating ~~expense.~~ expense in the accompanying statements of operations. For the three and six months ended June 30, 2018, we recorded compensation expense for all stock awards of $0.1 million and $0.2 million, respectively. As of ~~September~~June 30, ~~2017,~~2019, the unrecognized compensation expense related to unvested stock awards was ~~$0.4~~$2.2 million, which is expected to be recognized over a weighted-average period of ~~3.8~~2.5 years.

~~Stock Appreciation Rights (~~“~~SARs~~”)

11. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE

ASC Topic 606, “Revenue from contracts with customers”

The Company follows the guidance of ~~September 30, 2017, zero SARs shares were outstanding. During~~ASC 606 for the ~~nine months ended September 30, 2017, the SARs liability decreased approximately $1,000~~recognition of revenue from contracts with customers to transfer goods and ~~at September 30, 2017, no liability was recorded in accrued expenses since there were no shares outstanding.~~

~~13. SUBSEQUENT EVENTS~~

~~Debt Settlement Agreements~~

~~On October 31, 2017, the~~services. The Company ~~entered into~~performed a ~~Debt Settlement Agreement (the “Settlement Agreement”) with certain~~comprehensive review of its ~~accounts~~existing revenue arrangements following the five-step model:

Step 1: Identification of the contract with the customer. Sub-steps include determining the customer in a contract; Initial contract identification and determine if multiple contracts should be combined and accounted for as a single transaction.

Step 2: Identify the performance obligation in the contract. Sub-steps include identifying the promised goods and services in the contract and identifying which performance obligations within the contract are distinct.

Step 3: Determine the transaction price. Sub-steps include variable consideration, constraining estimates of variable consideration, the existence of a significant financing component in the contract, noncash consideration and consideration payable ~~vendors (the “Creditors”) pursuant to which the Creditors agreed~~ to a ~~reduction~~customer.

Step 4: Allocate transaction price. Sub-steps include assessing the amount of approximately $5.0 million in currently due vendor liabilities. The Company and the Creditors agreed to restructure these liabilities into approximately $2.5 million in secured, long-term vendor obligations with payments beginning in July 2018 and continuing over 48 months. In connection with the settlement, the Company agreed to issue to certain of the Creditors warrants (the “Creditor Warrants”) to purchase approximately 86,000 shares of the Company’s common stock at an exercise price of $7.50 per share.

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~~PRECIPIO, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2017 and 2016~~

~~The Company also entered into a Security Agreement (the “Security Agreement”), dated October 31, 2017, with a collateral agent for the Creditors, pursuant~~consideration to which the Company ~~granted~~expects to be entitled in exchange for transferring the promised goods or services to the ~~collateral agent,~~customer.

Step 5: Satisfaction of performance obligations. Sub-steps include ascertaining the point in time when an asset is transferred to the customer and the customer obtains control of the asset upon which time the Company recognizes revenue.

Nature of Contracts and Customers

The Company’s contracts and related performance obligations are similar for its customers and the sales process for all customers starts upon the receipt of requisition forms from the customers for patient diagnostic testing and the execution of contracts for biomarker testing and clinical research. Payment terms for the ~~benefit~~services provided are 30 days, unless separately negotiated.

Diagnostic testing

Control of the ~~Creditors,~~laboratory testing services is transferred to the customer at a ~~security interest~~point in ~~certain property~~time. As such, the Company recognizes revenue for laboratory testing services at a point in time based on the delivery method (web-portal access or fax) for the patient’s laboratory report, per the contract.

Clinical research grants

Control of the clinical research services are transferred to the customer over time. The Company will recognize revenue utilizing the “effort based” method, measuring its progress toward complete satisfaction of the performance obligation.

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Biomarker testing and clinical project services

Control of the biomarker testing and clinical project services are transferred to ~~secure its obligations~~the customer over time. The Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results.

The Company generates revenue from the provision of diagnostic testing provided to patients, biomarker testing provided to bio-pharma customers and clinical research grants funded by both bio-pharma customers and government health programs.

Disaggregation of Revenues by Transaction Type

We operate in one business segment and, therefore, the results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Service revenue, net for the three and six months ended June 30, 2019 and 2018 were as follows (prior-period amounts are not adjusted under the ~~Settlement Agreement.~~

~~The Creditor Warrants have a per share exercise price~~modified-retrospective method of ~~$7.50, are exercisable on the date of issuance and will expire five years~~adoption):


	For the Three Months Ended June 30,
(dollars in thousands)	Diagnostic Testing				Biomarker Testing				Total
	2019		2018		2019		2018		2019		2018
Medicaid	$	9	$	11	$	—	$	—	$	9	$	11
Medicare		450		281		—		—		450		281
Self-pay		11		20		—		—		11		20
Third party payers		451		219		—		—		451		219
Contract diagnostics		—		—		274		368		274		368
Service revenue, net	$	921	$	531	$	274	$	368	$	1,195	$	899


	For the Six Months Ended June 30,
(dollars in thousands)	Diagnostic Testing				Biomarker Testing				Total
	2019		2018		2019		2018		2019		2018
Medicaid	$	12	$	23	$	—	$	—	$	12	$	23
Medicare		844		415		—		—		844		415
Self-pay		15		46		—		—		15		46
Third party payers		807		350		—		—		807		350
Contract diagnostics		—		—		427		856		427		856
Service revenue, net	$	1,678	$	834	$	427	$	856	$	2,105	$	1,690

Revenue from the ~~date of issuance.~~

~~Issuance of preferred stock~~Medicare and ~~warrants~~

~~On November 2, 2017, the Company entered into~~Medicaid programs account for a ~~Placement Agency Agreement (the “Placement Agreement”) with Aegis Capital Corp. for the sale on a reasonable best efforts basis of 2,748 units, each consisting of one share~~portion of the Company’s ~~Series C Convertible Preferred Stock, par~~patient diagnostic service revenue. Laws and regulations governing those programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term.

Revenue Recognition

Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value ~~$0.01 per share (the “Series C Preferred Stock”~~method based on historical experience. The Company does not typically enter arrangements where multiple contracts can be combined as the terms regarding services are generally found within a single agreement/requisition form. The Company derives its revenues from three types of transactions: diagnostic testing (“Diagnostic”), ~~convertible into~~and clinical research grants from state and federal research programs, and other revenues from the Company’s ICP technology and bio-pharma projects encompassing genetic diagnostics (collectively “Biomarker”).

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Deferred revenue

Deferred revenue, or unearned revenue, refers to advance payments for products or services that are to be delivered in the future. The Company records such prepayment of unearned revenue as a ~~number~~liability, as revenue that has not yet been earned, but represents products or services that are owed to a customer. As the product or service is delivered over time, the Company recognizes the appropriate amount of ~~shares~~revenue from deferred revenue. For the period ended June 30, 2019 and December 31, 2018, the deferred revenue was $19,000 and $49,000, respectively.

Contractual Allowances and Adjustments

We are reimbursed by payers for services we provide. Payments for services covered by payers average less than billed charges. We monitor revenue and receivables from payers and record an estimated contractual allowance for certain revenue and receivable balances as of the ~~Company’s common stock equal~~revenue recognition date to ~~$1,000 divided~~properly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by ~~$1.40~~payers. Accordingly, the total revenue and ~~warrants~~receivables reported in our condensed consolidated financial statements are recorded at the amounts expected to ~~purchase up to 1,962,857 shares~~be received from these payers. For service revenue, the contractual allowance is estimated based on several criteria, including unbilled claims, historical trends based on actual claims paid, current contract and reimbursement terms and changes in customer base and payer/product mix. The billing functions for the remaining portion of ~~common stock with~~our revenue are contracted and fixed fees for specific services and are recorded without an ~~exercise price~~allowance for contractual discounts. The following table presents our revenues initially recognized for each associated payer class during the three and six months ended June 30, 2019 and 2018.


	For the Three Months Ended June 30,
(dollars in thousands)					Contractual Allowances and				Revenues, net of Contractual
	Gross Revenues				adjustments				Allowances and adjustments
	2019		2018		2019		2018		2019		2018
Medicaid	$	12	$	26	$	(3)	$	(15)	$	9	$	11
Medicare		467		292		(17)		(11)		450		281
Self-pay		11		20		—		—		11		20
Third party payers		1,571		531		(1,120)		(312)		451		219
Contract diagnostics		274		368		—		—		274		368
		2,335		1,237		(1,140)		(338)		1,195		899
Clinical research grants and other		4		60		—		—		4		60
	$	2,339	$	1,297	$	(1,140)	$	(338)	$	1,199	$	959


(dollars in thousands)	For the Six Months Ended June 30,
					Contractual Allowances and				Revenues, net of Contractual
	Gross Revenues				adjustments				Allowances and adjustments
	2019		2018		2019		2018		2019		2018
Medicaid	$	15	$	41	$	(3)	$	(18)	$	12	$	23
Medicare		861		429		(17)		(14)		844		415
Self-pay		15		46		—		—		15		46
Third party payers		2,588		848		(1,781)		(498)		807		350
Contract diagnostics		427		856		—		—		427		856
		3,906		2,220		(1,801)		(530)		2,105		1,690
Clinical research grants and other		11		65		—		—		11		65
	$	3,917	$	2,285	$	(1,801)	$	(530)	$	2,116	$	1,755

Allowance for Doubtful Accounts

The Company provides for a general allowance for collectability of ~~$1.63 per share (the “Warrants”) at a combined offering price~~services when recording net sales. The Company has adopted the policy of ~~$1,000 per unit, in a registered direct offering (the “Series C Preferred Offering”). The Series C Preferred Stock includes a beneficial ownership blocker but has no dividend rights (except~~recognizing net sales to the extent ~~dividends~~it expects to collect that amount. Reference FASB 954‑605‑45‑5 and ASU 2011‑07, Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debt, and the Allowance for Doubtful Accounts. The change in the allowance for doubtful accounts is directly

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related to the increase in patient service revenues. The following table presents our reported revenues net of the collection allowance and adjustments for the three and six months ended June 30, 2019 and 2018.


	For the Three Months Ended June 30,
	Revenues, net of
(dollars in thousands)	Contractual Allowances				Allowances for doubtful
	and adjustments				accounts				Total
	2019		2018		2019		2018		2019		2018
Medicaid	$	9	$	11	$	(9)	$	(12)	$	—	$	(1)
Medicare		450		281		(68)		(42)		382		239
Self-pay		11		20		—		—		11		20
Third party payers		451		219		(180)		(88)		271		131
Contract diagnostics		274		368		—		—		274		368
		1,195		899		(257)		(142)		938		757
Clinical research grants and other		4		60		—		—		4		60
	$	1,199	$	959	$	(257)	$	(142)	$	942	$	817


	For the Six Months Ended June 30,
	Revenues, net of
(dollars in thousands)	Contractual Allowances				Allowances for doubtful
	and adjustments				accounts				Total
	2019		2018		2019		2018		2019		2018
Medicaid	$	12	$	23	$	(12)	$	(23)	$	—	$	—
Medicare		844		415		(127)		(62)		717		353
Self-pay		15		46		—		—		15		46
Third party payers		807		350		(322)		(141)		485		209
Contract diagnostics		427		856		—		—		427		856
		2,105		1,690		(461)		(226)		1,644		1,464
Clinical research grants and other		11		65		—		—		11		65
	$	2,116	$	1,755	$	(461)	$	(226)	$	1,655	$	1,529

Costs to Obtain or Fulfill a Customer Contract

Sales commissions are ~~also paid~~expensed when incurred because the amortization period would have been one year or less. These costs are recorded in operating expenses in the condensed consolidated statements of operations.

Shipping and handling costs are comprised of inbound and outbound freight and associated labor. The Company accounts for shipping and handling activities related to contracts with customers as fulfillment costs which are included in cost of sales in the condensed consolidated statements of operations.

Accounts Receivable

The Company has provided an allowance for potential credit losses, which has been determined based on management’s industry experience. The Company grants credit without collateral to its patients, most of who are insured under third party payer agreements.

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The following summarizes the ~~common stock).~~ mix of receivables:


(dollars in thousands)	June 30, 2019		December 31, 2018
Medicaid	$	90	$	82
Medicare		770		633
Self-pay		73		108
Third party payers		1,852		1,382
Contract diagnostic services		269		193
Other		—		—
	$	3,054	$	2,398
Less allowance for doubtful accounts		(2,171)		(1,708)
Accounts receivable, net	$	883	$	690

The ~~securities comprising~~following table presents the ~~units are immediately separable~~roll-forward of the allowance for doubtful accounts for the six months ended June 30, 2019.


			Allowance for
			Doubtful
(dollars in thousands)			Accounts
Balance, January 1, 2019			$	(1,708)
Collection Allowance:
Medicaid	$	(12)
Medicare		(127)
Third party payers		(322)
		(461)
Bad debt expense	$	(2)
Total charges				(463)
Balance, June 30, 2019			$	(2,171)

Customer Revenue and Accounts Receivable Concentration

Customer revenue and accounts receivable concentration amounted to the following for the identified periods.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Percentage of net sales by customer:
Customer A	29	%	40	%	26	%	44	%
Customer B	11	%	*		*		*

* represents less than 10%

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	June 30,		December 31,
	2019		2018
Percentage of total accounts receivable by customer:
Customer A	28	%	23	%
Customer B	*		*

* represents less than 10%

12. SUBSEQUENT EVENTS

The Company has evaluated events and transactions subsequent to June 30, 2019 through the date the condensed consolidated financial statements were issued ~~separately.~~and there are no other events to report other than what has been disclosed in the condensed consolidated financial statements.

~~The gross proceeds to the Company from the sale~~

Table of the Series C Preferred Stock and Warrants, before deducting the placement agent fee and other estimated offering expenses payable by the Company and assuming no exercise of the Warrants, were $2,748,000. The Company expects to use the net proceeds of the offering for general corporate purposes, including, but not limited to, growth of the Company’s sales force and business development team, progression of the Company’s product development and working capital. The offering closed on November 9, 2017.Contents

The Series C Preferred Offering required the Company to adjust downward the exercise and conversion prices of various warrants and Series B Preferred Stock that were outstanding at the time of the closing of the Series C Preferred Offering due to the down round provisions contained in certain of the Company's warrants and Series B Preferred Stock.

~~Item 2.~~

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.~~

10-Q and our prior filings with the Securities and Exchange Commission.

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 condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q and with the ~~audited~~ financial statements, related notes and ~~notes thereto of Precipio Diagnostics~~Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016 contained in our current report on Form 8-K/A,~~2018, which we filed with the Securities and Exchange Commission ~~(the~~

~~“SEC”)~~ on ~~July 31, 2017.~~April 16, 2019. Results for the three and ~~nine~~six months ~~months~~ ended ~~September~~June 30 ~~2017~~, 2019 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

Precipio, Inc., and ~~Subsidiary,~~its subsidiary, (“we”, “us”, “our”, the “Company” or “Precipio”) is a cancer diagnostics company providing diagnostic products and services to the oncology market. We have built and continue 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 solve 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,~~(“ICP”), the patented technology which was exclusively licensed by us from Dana-Farber Cancer Institute, Inc.~~, or Dana-Farber,~~ (“Dana-Farber”) at Harvard ~~University.~~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 current and future academic

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partners. Our platform connects patients, physicians and diagnostic experts residing within academic institutions. ~~Launched in 2017, the~~The platform facilitates the following relationships:

~~Patients: patients may search for physicians in their area and consult directly with~~

Academic Experts: academic experts ~~that are~~ 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.

Recent Developments

Nasdaq Compliance

On March 26, 2019, we were notified by 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~~Listing Qualifications Staff 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.

~~ICP was developed at Harvard and is licensed exclusively by us from Dana-Farber.~~ The technology enables the 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 changes from sources other than a tumor biopsy.

~~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:~~

The following discussion should be read together with our financial statements and related notes contained in this Quarterly Report. Results for the three and nine months ended September 30, 2017 are not necessarily indicative of results that may be attained in the future.

~~Third Quarter 2017 Overview and Recent Highlights~~

During the third quarter of 2017, laboratory operations for Clinical Laboratory Improvement Amendments regulated commercial diagnostic testing were relocated and consolidated from the Omaha, Nebraska facility to New Haven, Connecticut. The initiative has enabled the Company to leverage its laboratory assets to accelerate commercialization of research and development products. The Company continued to work to integrate the finance organizations providing financial, billing, AP and accounting functions.

From a corporate governance perspective, we enhanced our board of directors by electing three experienced industry individuals. In addition, we also formulated our scientific advisory board, to create a strong scientific backbone to support the management team, and ensureNasdaq Stock Market LLC that we ~~continue product development. We continue~~did not meet the minimum closing bid price requirement of $1 for continued listing, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). On April 25, 2019 we filed a Certificate of Amendment to ~~build on~~ our ~~long standing relationships with Yale Medicine, Harvard,~~Third Amended and ~~Dana Farber. Collaboration with academia and biopharma remains an integral component~~Restated Certificate of ~~our strategy to access advanced genetic technology and diagnostic testing in the cancer marketplace for future growth.~~

During the three months ending September 30, 2017, we focused on expanding our product offering and market awareness for ICP-PCR. 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 Clearbridge Health, a Singaporean-based healthcare company that will be providing Precipio’s services in numerous countries throughout Asia.

We have continued efforts to restructure our pre-merger debt obligations to manage expenses and cash flow obligations. On October 31, 2017, we entered into a Debt Settlement Agreement, or the Settlement Agreement, with certainIncorporation (the “Certificate of ~~our accounts payable vendors, or the Creditors, pursuant to which the Creditors agreed to a reduction of approximately $5.0 million in currently due~~

vendor liabilities. We and the Creditors agreed to restructure these liabilities into approximately $2.5 million in secured, long-term vendor obligations with payments beginning in July 2018 and continuing over 48 months. In connectionAmendment”) with the ~~settlement, we agreed to issue to certain~~Secretary of ~~the Creditors warrants to purchase approximately 86,000 shares~~State of ~~our common stock at an exercise price of $7.50 per share.~~

~~We also entered into a Security Agreement, dated October 31, 2017, with a collateral agent for the Creditors,~~Delaware, pursuant to which we ~~granted to~~effected a 1-for-15 reverse stock split (the “Reverse Stock Split”) of our issued and outstanding common stock. The Reverse Stock Split became effective as of 5:00 p.m. (Eastern Time) on April 26, 2019, and our common stock began trading on a split-adjusted basis on the ~~collateral agent, for~~Nasdaq Capital Market at the ~~benefit~~market open on April 29, 2019. On May 15, 2019, we received notification from Nasdaq that the Company’s stock price was in compliance with the Bid Price Requirement, and that the matter is now closed. Unless otherwise indicated, all share and per share amounts herein are reflective of the ~~Creditors, a security interest in certain of our property to secure our obligations under the Settlement Agreement.~~

~~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 September 30, 2017, we had cash and cash equivalents of approximately $0.4 million. Our ability to continue as a going concern is dependent upon a combination of generating additional revenue and raising necessary 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 Operations for the Three Months Ended~~ Reverse Stock Split.~~September 30, 2017~~ ~~and~~ ~~2016~~

~~Net Sales.~~ ~~Net sales were as follows:~~

Dollars in Thousands
Three Months Ended
September 30, Change
2017 2016 $ %
Total Net Sales $ 270
$ 365
$ (95 ) (26 )%

~~Net sales decreased by $0.1 million, or~~ ~~26%, during the three months ended~~ ~~September 30, 2017~~ ~~as compared to the same period in~~ ~~2016~~. The decrease is entirely due to the decrease in cases processed during the three months ended September 30, 2017 as compared to the same period in 2016. We processed 207 cases during the three months ended September 30, 2017 as compared to 269 cases during the same period in 2016, or a 23% decrease in cases. ~~The decrease in volume is the result of turnover of key sales personnel.~~

~~Cost of Diagnostic Services.~~ Cost of diagnostic services includes material and supply costs for the patient tests performed and other direct costs (primarily personnel costs and rent) associated with the operations of our laboratory. Cost of diagnostic services increased by $0.1 million, or 46%, for the three months ended September 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 September 30, 2017.

~~Gross Profit.~~ ~~Gross profit and gross margins were as follows:~~

Dollars in Thousands
Three Months Ended
September 30, Margin %
2017 2016 2017 2016
Gross (Loss) Profit $ (77 ) $ 134
(29 )% 35 %

~~Gross loss was a negative (29)% of total net sales, during the~~ ~~third~~ ~~quarter of 2017, compared to 35% of total net sales during the same quarter in~~ ~~2016~~. The gross profit decreased by $0.2 million during the three months ended September 30, 2017 as compared to the same period in 2016 due to the decreased revenues discussed above and associated fixed costs to operate our laboratories.

~~Operating Expenses.~~ Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs and depreciation. Our operating expenses increased by $3.1 million to $3.6 million during the three months ended September 30, 2017 as compared to the same period in 2016. The increase in operating expenses reflects the increase in professional fees attributed to legal expenses related to the Merger and increased compensation and other costs associated with restructuring the organization resulting from the Merger. Additional increases in our general and administrative expenses resulted from increased amortization

related to acquired intangibles from the Merger and expenses related to operating as a public company. The increase during the three months ended September 30, 2017 also included a $1.0 million impairment of goodwill charge resulting from interim impairment testing of goodwill during the current quarter. The interim impairment testing was triggered by the significant reduction in our market capitalization during the three months ended September 30, 2017.

~~Other Income (Expense).~~ Other expense for the three months ended September 30, 2017 and 2016 includes interest expense of approximately $1.9 million and $0.2 million, respectively. The increase in interest expense is due to $1.8 million of debt discounts and debt issuance costs that were amortized to interest expense during the third quarter of 2017 as a result of the payment and conversion of all of our convertible bridge notes during the quarter.

~~Also included in other expense for the three months ended September 30, 2017 was $0.1 million of advisory fees related to the Merger.~~

Lastly, other expense included $1.3 million in losses on extinguishment of debt and induced conversion of convertible bridge notes related to the conversion and payment of our convertible bridge notes during the current quarter.

~~During the three months ended September 30, 2017, other income included $0.6 million in gains on settlements of certain vendor liabilities.~~

~~Results of Operations for the Nine Months Ended September 30, 2017 and~~ ~~2016~~

~~Net Sales.~~ ~~Net sales were as follows:~~

Dollars in Thousands
Nine Months Ended
September 30, Change
2017 2016 $ %
Total Net Sales $ 778
$ 1,407
$ (629 ) (45 )%

~~Net sales decreased by $0.6 million, or 45%, for the nine months ended September 30, 2017 as compared to the same period in~~ ~~2016~~. The decrease is entirely due to the decrease in cases processed during the nine months ended September 30, 2017 as compared to the same period in 2016. We processed 636 cases during the nine months ended September 30, 2017 as compared to 996 cases during the same period in 2016, or a 36% decrease in cases. The decrease in volume is the result of turnover of key sales personnel.

~~Cost of Diagnostic Services.~~ Cost of diagnostic services includes material and supply costs for the patient tests performed and other direct costs (primarily personnel costs and rent) associated with the operations of our laboratory. Cost of diagnostic services increased by $0.1 million for the nine months ended September 30, 2017 as compared to the same period in 2016. The increase is due to increased expenses to restructure and relocate the laboratory operations as a result of the Merger in 2017 and increased professional fees involved with the processing of patient tests during the nine months ended September 30, 2017.

~~Gross Profit.~~ ~~Gross profit and gross margins were as follows:~~

Dollars in Thousands
Nine Months Ended
September 30, Margin %
2017 2016 2017 2016
Gross (Loss) Profit $ (35 ) $ 697
(5 )% 49 %

~~Gross profit was a negative (5)% of total net sales, for the nine months ended September 30, 2017, compared to 49% of total net sales for the same period in~~ ~~2016. The gross profit decreased by $0.7 million during the nine months ended September 30, 2017 as compared to the same period in 2016 and was due to the decreased revenues discussed above.~~

~~Operating Expenses.~~ Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs and depreciation. Our operating expenses increased by $3.4 million to $5.0 million for the nine months ended September 30, 2017 as compared to the same period in 2016. The increase in operating expenses reflects the increase in professional fees attributed to legal expenses related to the Merger and increased compensation and other costs associated with the increased headcount and additional facility resulting from the Merger. Additional increases in our general and administrative expenses resulted from increased amortization related to acquired intangibles from the Merger and expenses related to operating as a public company. The increase during the nine months ended September 30, 2017 also included a $1.0 million impairment of goodwill charge

resulting from interim impairment testing of goodwill during the third quarter. The interim impairment testing was triggered by the significant reduction in our market capitalization during the three months ended September 30, 2017.

~~Other Income (Expense).~~ Other expense for the nine months ended September 30, 2017 and 2016 includes interest expense of approximately $2.3 million and $0.4 million, respectively. The increase in interest expense in the current year is due to $1.9 million of debt discounts and debt issuance costs that were amortized to interest expense during 2017 related to our convertible bridge notes which were paid or converted to common stock during the third quarter.

~~Also included in other expense for the nine months ended September 30, 2017 was $2.7 million of advisory fees related to the Merger.~~

Lastly, other expense included $1.4 million in losses on extinguishment of debt and induced conversion of convertible bridge notes primarily related to the conversion and payment of our convertible bridge notes during the current quarter.

~~During the nine months ended September 30, 2017, other income included $0.6 million in gains on settlements of certain vendor liabilities.~~

~~Liquidity and Capital Resources~~

Going 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 ~~our~~its assets and discharge ~~our~~its liabilities in the ordinary course of business. ~~We have~~The Company has incurred substantial operating losses and ~~have~~has used cash in ~~our~~its operating activities for the past several years. As of ~~September~~June 30, ~~2017, we~~2019, the Company had a net loss of ~~$10.7~~$7.6 million, ~~and~~ negative working capital of ~~$12.6~~$2.4 million and net cash used in operating activities of $4.9 million. ~~Our~~The Company’s ability to continue as a going concern over the next twelve months from the date of issuance of this form 10-Q is dependent upon a combination of achieving ~~our~~its business plan, including generating additional revenue, and raising additional financing to meet ~~our~~its debt obligations and paying liabilities arising from normal business operations when they come due.

To meet ~~our~~its current and future obligations ~~we have~~the Company has taken the following steps to capitalize the business and successfully achieve ~~our~~its business plan:

The Company has entered into a purchase agreement with Lincoln Park (the “LP Purchase Agreement” or “Equity Line”), pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of $10.0 million of common stock of the Company (subject to certain limitations) from time to time over the term of the LP Purchase Agreement. The extent we rely on Lincoln Park as a source of funding will depend on a number of factors including, the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. As of the date of issuance of this Form 10-Q, we have already received $4.1 million in aggregate, including approximately $1.4 million from the sale of 328,590 shares of common stock to Lincoln Park during 2018, $2.4 million from the sale of 998,076 shares of common stock to Lincoln Park during the six months ended June 30, 2019 and $0.3 million from the sale of 100,000 shares of common stock to Lincoln Park from July 1,

On October 31, 2017, we entered into a Debt Settlement Agreement, or the Settlement Agreement, with certain of our accounts payable vendors, or the Creditors, pursuant to which the Creditors agreed to a reduction of approximately $5.0 million in currently due vendor liabilities. We and the Creditors agreed to restructure these liabilities into approximately $2.5 million in secured, long-term vendor obligations with payments beginning in July 2018 and continuing over 48 months.

~~On November 7, 2017, we completed our capital raise initiative issuing $2.8 million in units consisting of Series C Preferred shares and warrants to purchase shares of our common stock.~~

~~Our working capital positions at~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~ ~~were as follows:~~

Dollars in Thousands
September 30,
2017
December 31,
2016
Change
Current assets (including cash and cash equivalents of $381 and $51, respectively) $ 1,112
$ 552
$ 560
Current liabilities 13,735
3,012
10,723
Working capital $ (12,623 ) $ (2,460 ) $ (10,163 )

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2019 through the date of issuance of this Form 10-Q, leaving the Company an additional $5.9 million to draw upon in the coming year.

We completed the Merger on June 29, 2017 and in connection with the Merger we raised approximately $1.2 million in gross proceeds and during the third quarter we completed an underwritten public offering with net proceeds of approximately $5.0 million. These proceeds were used to fund our operating expenses and for payments on our debt and other liabilities. At September 30, 2017, we had cash on hand of $0.4 million. To execute our strategic plan, on November 9, 2017 we raised additional funds from the sale of our Series C Preferred Stock and warrants to purchase our common stock. Net proceeds from this offering were approximately $2.4 million. Also, on October 31, 2017, we entered into the Settlement Agreement with the Creditors pursuant to which the Creditors agreed to a reduction of approximately $5.0 million in currently due vendor liabilities. We and the Creditors agreed to restructure these liabilities into approximately $2.5 million in secured, long-term vendor obligations with payments beginning in July 2018 and continuing over 48 months.

Notwithstanding the aforementioned circumstances, there remains substantial doubt about ~~our~~the Company’s ability to continue as a going ~~concern.~~concern over the next twelve months from the date of issuance of this Quarterly Report on Form 10-Q. There can be no assurance that wethe Company will be able to successfully achieve ~~our~~its initiatives summarized above in order to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared assuming wethe Company will continue as a going concern and do not include any adjustments that might result should wethe Company be unable to continue as a going concern as a result of the outcome of this uncertainty.

Results of Operations for the Three Months Ended June 30, 2019 and 2018

Net Sales. Net sales were as follows:


	Dollars in Thousands
	Three Months Ended
	June 30,				Change
	2019		2018		$		%
Service revenue, net, less allowance for doubtful accounts	$	938	$	757	$	181	24	%
Clinical research grants		—		62		(62)	(100)	%
Other		4		(2)		6	300	%
Net Sales	$	942	$	817	$	125	15	%

Net sales for the three months ended June 30, 2019 were approximately $0.9 million, an increase of $0.1 million as compared to the same period in 2018. During the three months ended June 30, 2019, patient diagnostic service revenue had an increase of $0.3 million as compared to the same period in 2018 due to an increase in cases processed. We processed 445 cases during the three months ended June 30, 2019 as compared to 383 cases during the same period in 2018, or a 16% increase in cases. The increase in volume is the result of increased sales personnel. This increase was offset by a decrease of $0.1 million in contract diagnostic service revenue and a decrease of $0.1 million in clinical research grants for the three months ended June 30, 2019 as compared to 2018.

Cost of Sales. Cost of sales includes material and supply costs for the patient tests performed and other direct costs (primarily personnel costs and rent) associated with the operations of our laboratory and the costs of projects related to clinical research grants (personnel costs and operating supplies). Cost of sales was $0.8 million and $0.7 million for the three months ended June 30, 2019 and 2018, respectively. Cost of sales in the current year period, as compared to prior year, included an increase in patient diagnostic costs offset by a decrease in contract diagnostic and clinical grant costs which are in line with the changes in related revenues discussed above.

Gross Loss. Gross loss and gross margins were as follows:


	Dollars in Thousands
	Three Months Ended
	June 30,				Margin %
	2019		2018		2019		2018
Gross Profit	$	172	$	175	18	%	21	%

Gross margin was 18% of total net sales, for the three months ended June 30, 2019, compared to 21% of total net sales for the same period in 2018. The gross profit was approximately $0.2 million during the three months ended June 30, 2019 and 2018, respectively.

Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs and depreciation and amortization. Our operating expenses increased by $0.1 million to $2.5 million for the three months ended June 30, 2019 as compared to the same period in 2018. This increase is a result of an increase in selling

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expenses of $0.2 million due to increased headcount partially offset by a decrease of $0.1 million in amortization of acquired intangibles.

Other Income (Expense). Other expense, net was $3.4 million and $0.6 million for the three months ended June 30, 2019 and 2018, respectively, and included expense from warrant and derivative revaluations of $2.4 million and income from warrant and derivative revaluations $0.3 million, respectively, and a loss on issuance of convertible notes of $1.9 million and $0.9 million, respectively. During the three months ended June 30, 2019, the other expense items were partially offset by gains on settlements of liabilities of $1.1 million.

Results of Operations for the Six Months Ended June 30, 2019 and 2018

Net Sales. Net sales were as follows:


	Dollars in Thousands
	Six Months Ended
	June 30,				Change
	2019		2018		$		%
Service revenue, net	$	1,644	$	1,464	$	180	12	%
Clinical research grants		—		62		(62)	(100)	%
Other		11		3		8	267	%
Net Sales	$	1,655	$	1,529	$	126	8	%

Net sales for the six months ended June 30, 2019 were approximately $1.6 million, an increase of $0.1 million as compared to the same period in 2018. During the six months ended June 30, 2019, patient diagnostic service revenue had an increase of $0.6 million as compared to the same period in 2018 due to an increase in cases processed. We processed 805 cases during the six months ended June 30, 2019 as compared to 523 cases during the same period in 2018, or a 54% increase in cases. The increase in volume is the result of increased sales personnel. This increase was offset by a decrease of $0.4 million in contract diagnostic service revenue and a decrease of $0.1 million in clinical research grants for the six months ended June 30, 2019 as compared to 2018.

Cost of Sales. Cost of sales includes material and supply costs for the patient tests performed and other direct costs (primarily personnel costs and rent) associated with the operations of our laboratory and the costs of projects related to clinical research grants (personnel costs and operating supplies). Cost of sales was $1.4 million and $1.3 million for the six months ended June 30, 2019 and 2018, respectively. Cost of sales in the current year period, as compared to prior year, included an increase in patient diagnostic costs offset by a decrease in contract diagnostic and clinical grant costs which are in line with the changes in related revenues discussed above

Gross Loss. Gross loss and gross margins were as follows:


	Dollars in Thousands
	Six Months Ended
	June 30,				Margin %
	2019		2018		2019		2018
Gross Profit (Loss)	$	210	$	199	13	%	13	%

Gross margin was 13% of total net sales, for the six months ended June 30, 2019 and 2018, respectively, and the gross profit was approximately $0.2 million during the six months ended June 30, 2019 and 2018, respectively.

Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs and depreciation and amortization. Our operating expenses decreased by $0.2 million to $4.6 million for the six months ended June 30, 2019 as compared to the same period in 2018. This decrease is a result of a decrease in impairment of goodwill of $0.3 million, a decrease in legal and other professional fees of $0.4 million and a decrease in

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amortization of acquired intangibles of $0.1 million. The decreases were partially offset by a $0.5 million increase in selling, general and administrative personnel costs due to a higher headcount and an increase of $0.1 million in stock compensation costs.

Other Income (Expense). Other expense, net was $2.9 million and $0.6 million for the six months ended June 30, 2019 and 2018, respectively, and included expense from warrant and derivative revaluations of $2.1 million and income from warrant and derivative revaluations $0.6 million, respectively, a loss on issuance of convertible notes of $1.9 million and $0.9 million, respectively, and a loss recorded on settlement of equity instruments of zero and $0.4 million respectively.

During the six months ended June 30, 2019 and 2018, the other expense items were partially offset by gains on settlements of liabilities of $1.3 million and $0.1 million, respectively.

Liquidity and Capital Resources

Our working capital positions were as follows:


	Dollars in Thousands
	June 30, 2019		December 31, 2018		Change
Current assets (including cash of $1,169 and $381 respectively)	$	2,331	$	1,793	$	538
Current liabilities		4,750		13,765		(9,015)
Working capital	$	(2,419)	$	(11,972)	$	9,553

During the first half of 2019 we received gross proceeds of $2.4 million from sale of 998,076 shares of our common stock, $1.6 million from the exercise of 310,200 warrants and $2.1 million from the issuance of convertible notes. We also converted $7.3 million of convertible notes, including interest, into 2,386,425 shares of our common stock.

Analysis of Cash Flows ~~- Nine~~– Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~

2018

Net Change in ~~Cash and Cash Equivalents.~~Cash. Cash ~~and cash equivalents~~ increased by ~~$0.3~~$0.8 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017, compared to a decrease of $0.2 million during the nine months ended September 30, 2016.~~2019 and 2018, respectively.

Cash Flows Used in Operating Activities. The cash flows used in operating activities of ~~$4.5~~approximately $4.9 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 included a net loss of ~~$10.7~~$7.6 million, an increase in accounts receivable of $0.7 million, a decrease in ~~accrued expenses and other liabilities~~accounts payable of ~~$1.1~~$1.3 million and ~~an increase~~a decrease in ~~accounts receivable~~operating lease liabilities of $0.1 million. These were partially offset by an increase in ~~accounts payable~~accrued expenses and other liabilities of ~~$0.5~~$0.1 million, a decrease in inventories of $0.2 million and non-cash adjustments of ~~$5.9~~$4.5 million. The non-cash adjustments to net loss include, among other things, depreciation and amortization, changes in provision for losses on doubtful accounts, warrant and derivative revaluations, stock based compensation, gains on settlements of liabilities and losses on the issuance of convertible notes. The cash flows used in operating activities in the ~~first nine~~six months ~~of 2016~~ended June 30, 2018 included the net loss of ~~$1.3~~$5.3 million ~~and~~ an increase in accounts receivable of $0.2 million and a decrease in accrued expenses and other liabilities of $0.3 million. These were partially offset by ~~an increase~~a decrease in ~~accounts payable, accrued expenses and~~ other ~~liabilities~~assets of ~~$0.5~~$0.2 million and non-cash adjustments of ~~$0.5~~$2.0 million.

Cash Flows ~~Provided by~~Used In Investing Activities. Cash flows ~~provided by~~used in investing activities were ~~$0.1 million~~$30,000 and ~~zero~~$44,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016, respectively. The $0.1 million for the nine months ended September 30, 2017 was cash acquired as part~~2018, respectively, resulting from purchases of ~~the merger transaction.~~property and equipment.

Cash Flows Provided by Financing Activities. Cash flows provided by financing activities totaled ~~$4.7~~$5.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, which included proceeds of ~~$0.3~~$2.4 million from the issuance of ~~senior notes, $1.4~~common stock, $1.6 million from the exercise of warrants and $2.1 million from the issuance of convertible ~~notes and $5.4 million from the issuance of preferred stock.~~notes. These proceeds were partially offset by payments on our long-term debt of ~~$0.8 million, payments on our convertible bridge notes of $1.5~~$0.2 million and payments ~~of capital~~for our finance lease obligations and deferred financing costs of ~~$0.1~~$0.2 million. Cash flows provided by financing activities ~~during~~totaled $3.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018, which included proceeds of $0.6 million from the issuance of common stock, $0.3 million from the issuance of long-term debt, $1.7 million from the issuance of convertible notes and ~~other debt~~proceeds of $1.1 million from the exercise of

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warrants. These were partially offset by ~~$0.1 million of~~ payments on our long-term debt of $0.2 million and payments for our capital lease obligations and ~~for~~ deferred financing ~~costs.~~costs of $0.2 million

Off-Balance Sheet Arrangements

At each of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~,2018, 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

We have entered 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 8 - “Contingencies” in the Notes

No significant changes to ~~unaudited condensed consolidated financial statements for additional information regarding our~~ contractual obligations and commitments

occurred during the six months ended June 30, 2019, as compared to those disclosed in our Annual Report on form 10‑K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission on April 16, 2019.

Critical Accounting Policies and Estimates

Accounting policies used in the preparation of our 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. ~~For additional information regarding our~~Our critical accounting policies ~~and estimates, see the accompanying unaudited condensed consolidated financial statements and Note 2 - “Summary of Significant Accounting Policies”~~are discussed in ~~the Notes to unaudited condensed consolidated Financial Statements and Note 1 of the audited financial statements and notes thereto of Precipio Diagnostics~~our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016 contained in our current report on Form 8-K/A,~~2018, filed with the Securities and Exchange Commission ~~(the “SEC”)~~ on ~~July 31, 2017.~~

April 13, 2019.

Recently Issued Accounting Pronouncements

See the accompanying unaudited condensed consolidated financial statements and Note 2 - “Summary of Significant Accounting Policies” in the Notes to 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~~Disclosure 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.~~

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

~~Our~~

As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Chief Executive Officer and Chief Financial Officer, ~~evaluated~~an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of ~~September 30, 2017. Our management recognizes that neither our disclosure controls and procedures nor our internal controls over financial reporting will prevent all fraud and material error.~~the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to management including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. In

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designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving ~~our objectives. Further,~~ the ~~design of a~~desired control ~~system must reflect the fact that there are resource constraints,~~objectives, and ~~the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems,~~ no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within ~~the Company~~a company have been detected. ~~The design~~Management is required to apply its judgment in evaluating the cost-benefit relationship of ~~any system of~~possible 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.procedures. Based on the evaluation, ~~of our disclosure controls and procedures as of September 30, 2017, our~~the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures ~~are not~~were effective at a reasonable assurance ~~level.~~

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 our Chief Financial Officer concluded that,~~level as of ~~September 30, 2017, the following deficiencies, that were noted in our Quarterly Report on Form 10-Q for the quarterly period ended~~ June 30, ~~2017, continue 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 instruments~~:

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~~:

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 contractual 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 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.

While implementation of the remediation actions are in process, it will take time for such actions to be fully integrated and confirmed to be effective and sustainable. Until such time, the material weaknesses described above will continue to exist.

2019.

Changes in Internal Control over Financial Reporting

We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended ~~September~~June 30, ~~2017~~2019 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION


~~Item 1.~~	~~Legal Proceedings~~

~~See~~

Item 1. Legal Proceedings

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. A liability of $0.1 million was reflected in accounts payable within the accompanying ~~unaudited~~ condensed consolidated ~~financial statements~~balance sheet at December 31, 2018. On April 19, 2019, the Company executed a settlement agreement with XIFIN pursuant to which the Company paid to XIFIN an agreed amount of $40,000 as settlement in consideration for total release from all outstanding amounts due and ~~Note 8 - “Contingencies”~~payable by the Company to XIFIN. The settlement amount was paid in full by the Company on April 19, 2019.

On February 17, 2017, Jesse Campbell (“Campbell”) filed a lawsuit individually and on behalf of others similarly situated against us in the ~~Notes~~District Court for the District of Nebraska alleging we had a materially incomplete and misleading proxy relating to ~~unaudited~~a potential merger and that the merger agreement’s deal protection provisions deter superior offers. As a result, Campbell alleges that we have violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a‑9 promulgated thereafter. The Company filed a motion to dismiss all claims, which motion was fully briefed on November 27, 2017. The Court granted the Company’s motion in full on May 3, 2018 and dismissed the lawsuit. The Eighth Circuit reversed the decision of the District Court and remanded the case back to the District Court. The parties filed a notice with the Court on May 22, 2019, announcing that they had reached a settlement in principle. On June 21, 2019, the parties filed a stipulation of settlement, in which defendants are released from all claims and expressly deny that that they have committed any act or omission giving rise to any liability. The stipulation includes a settlement payment [of $1.95 million], which will be primarily funded by our insurance. On July 10, 2019, the Court entered an order preliminarily approving the settlement. The settlement remains subject to final approval by the Court. The Company’s insurance policy includes a deductible of approximately $0.8 million and the Company has previously paid approximately $0.5 million in legal fees in connection with the litigation which have been applied to the deductible, leaving approximately $0.3 million to be paid by the Companyand approximately $1.7 million to be paid by the insurance company. A liability of approximately $0.3 million has been recorded and is reflected in accrued expenses within the accompanying condensed consolidated ~~financial statements~~balance sheets at June 30, 2019.

On March 21, 2018, Bio-Rad Laboratories filed a lawsuit against us in the Superior Court Judicial Branch of the State of Connecticut for ~~additional information regarding legal proceedings.~~Summary Judgment in Lieu of Complaint requiring us to pay cash owed to Bio-Rad in the amount of $39,000 that was recorded in accounts payable within the accompanying condensed consolidated balance sheet at December 31, 2018. Subsequently, the obligation was paid in full during the second quarter 2019 resulting in no remaining amount due to Bio-Rad as of the filing of this Quarterly Report on Form 10-Q.

LEGAL AND REGULATORY ENVIRONMENT

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

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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.


~~Item 1A.~~	~~Risk Factors~~

~~There~~

Item 1A. Risk Factors

As disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, there are a number of risks and uncertainties that may have a material effect on the operating results of our business and our financial condition. The following information updates, and should be read in conjunction with, the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report and our Annual Report on Form 10-K ~~as updated in our Quarterly Report for the quarter ended June 30, 2017 and 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.

We have incurred losses since our inception and expect 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. As of ~~September~~June 30, 2017 and December 31, 2016, we have an accumulated total deficit of approximately $21.5 million and $10.8 million, respectively. For the nine months ended September 30, 2017 and the fiscal year ended December 31, 2016,2019, we had a net loss ~~and comprehensive loss attributable to common stockholders~~ of ~~approximately $19.8~~$7.6 million, negative working capital of $2.4 million and ~~$4.1 million, respectively.~~net cash used in operating activities of $4.9 million. 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 selling, general and administrative expenses will continue to increase due to the additional 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 never become profitable and you may never receive a return on an investment in our securities. An investor in our securities 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 or force us to restrict or cease operations.

As of ~~September~~June 30, ~~2017,~~2019, our cash balance was ~~$0.4~~$1.2 million and our working capital was approximately negative ~~$12.6~~$2.4 million. Due to our recurring losses from operations and the expectation that we will continue to incur losses in the future, we will be required to raise additional capital to complete the development and commercialization of our current product candidates and to pay off our obligations. 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 seek to sell additional equity and/or debt securities or to obtain a credit facility, which we may not be able to do on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable 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 or cease our operations or obtain funds by entering into agreements on unattractive terms.

We ~~will need to obtain stockholder approval of the shares issued and issuable in our November 2017 registered direct offering before we can raise additional capital.~~

Our Series C Certificate of Designation prohibits us from issuing any shares of common stock or securities convertible or exercisable into common stock at a price per share below the then effective conversion price of our Series C Preferred Stock,are subject to ~~certain~~concentrations of revenue risk and concentrations of credit risk in accounts receivable.

~~exceptions, or entering into any agreement or making any public announcement with respect to such a dilutive issuance, until we~~

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We have filed a proxy statement under Section 14(a) of the Exchange Act or information statement pursuant to Section 14(c) of the Exchange Act with the SEC and obtained approval of our November 2017 registered direct offering from our stockholders, or the Stockholder Approval, including approval of issuances in excess of the maximum number of shares issuable under the rules and regulations of the Nasdaq Capital Market. In addition, pursuant to the placement agency agreement for our November 2017 registered direct offering, or the November Offering, we have agreed, until the later of (i) 90 days after the closing date of the November Offering, and (ii) the date on which Stockholder Approval has been obtained, not to issue, enter into any agreement to issue or announce the issuance or proposed issuance of any shares of common stock or securities convertible or exercisable into common stock, subject tohad certain exceptions; provided that the foregoing restriction under the placement agency agreement will lapse at such time as each holder of Series C Preferred Stock owns less than 20% of the number of shares of Series C Preferred Stock originally purchased in the November Offering and less than 20% of the warrants (based on the number of shares underlying the warrants) originally purchased in the November Offering. If we are not able to obtain Stockholder Approval or a waiver of the foregoing restriction under the placement agency agreement, we will not be able to raise additional capital and we may have to significantly delay, scale back or discontinue the development and/or commercialization of onecustomers whose revenue individually represented 10% or more of our ~~product candidates~~total revenue, or ~~restrict~~whose accounts receivable balances individually represented 10% or ~~cease~~more of our ~~operations.~~

total accounts receivable.

For the three months ended June 30, 2019, two customers represented approximately 40% of our total revenue and for the three months ended June 30, 2018 one customer accounted for 40% of our total revenue. For the six months ended June 30, 2019 and 2018, one customer accounted for 26% and 44% of our total revenue, respectively. We expect to maintain the relationship with these customers, however, the loss of, or significant decrease in demand from, any of our top customers could have ~~identified~~a material ~~weaknesses~~adverse effect on our business, results of operations and financial condition.

At June 30, 2019 and December 31, 2018, one customer accounted for 28% and 23% of our total accounts receivable, respectively. The business risks associated with this concentration, including increased credit risks for this and other customers and the possibility of related bad debt write-offs, could negatively affect our margins and profits. Additionally, the loss of any of our top customers, whether through competition or consolidation, or a disruption in ~~our internal control over financial reporting that~~sales to such a customer, could ~~if not remediated,~~ result in ~~material misstatements in our financial statements.~~

~~We have identified material weaknesses in our internal control over financial reporting that could, if not remediated, result in material misstatements in our financial statements.~~

~~Based on our evaluation~~a decrease of ~~internal control over financial reporting, we have identified~~ the ~~following deficiencies that we believe to be material weaknesses: (i) our lack of expertise necessary to validate the proper accounting~~Company’s future sales, earnings and ~~valuation for the complex technical accounting treatment of complex debt and equity instruments and (ii) our controls as related to revenue recognition resulting from the fact~~cash flows. Generally, we do not ~~have contracts with certain payors~~require collateral or other securities to support our accounts receivable and ~~do not have proper controls over the estimates for doubtful accounts and contractual allowances.~~

We have initiated remedial measures, but if our remedial measures are insufficient to address the material weaknesses, or if the material weaknesses are not remediated within the time period we currently anticipate, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements, and we could be required to restate our financial results. In addition, ifwhile we are ~~unable~~directly affected by the financial condition of our customers, management does not believe significant credit risks exist at June 30, 2019.

If we cannot continue to ~~successfully remediate these material weaknesses~~satisfy Nasdaq listing maintenance requirements and ~~if we are unable to produce accurate and timely financial statements,~~other rules, our common stock ~~price~~ may be ~~materially adversely affected and~~delisted, which could negatively impact the price of our securities.

Although our common stock is listed on the Nasdaq Capital Market, we may be unable to ~~maintain compliance with applicable stock exchange~~continue to satisfy the listing ~~requirements. Effective internal controls are necessary for us to produce reliable financial reports~~maintenance requirements and ~~are important to helping prevent financial fraud.~~rules. If we ~~cannot provide reliable financial reports~~are unable to satisfy the Nasdaq Stock Market, or ~~prevent fraud,~~Nasdaq, criteria for maintaining our ~~business and operating results~~listing, our securities could be ~~harmed, investors could lose confidence~~subject to delisting.

On March 26, 2019, we were notified by the Listing Qualifications Staff of The Nasdaq Stock Market LLC that we did not meet the minimum closing bid price requirement of $1 for continued listing, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). On April 25, 2019 we filed the Certificate of Amendment with the Secretary of State of Delaware, pursuant to which we effected a 1-for-15 reverse stock split (the “Reverse Stock Split”) of our ~~reported financial information,~~issued and ~~the trading price~~outstanding common stock. The Reverse Stock Split became effective as of 5:00 p.m. (Eastern Time) on April 26, 2019, and our common stock ~~could drop significantly.~~

began trading on a split-adjusted basis on the Nasdaq Capital Market at the market open on April 29, 2019. On May 15, 2019, we received notification from Nasdaq that the Company’s stock price was in compliance with the Bid Price Requirement, and that the matter is now closed.

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

~~None other than the sales previously disclosed in our Current reports on Form 8-K filed on April 17, 2017, June 27, 2017 and June 20, 2017.~~

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a)

Exhibits


~~Item 6.~~	~~Exhibits~~


~~(a)~~	~~Exhibits~~



~~1.1~~			Underwriting Agreement, dated August 22, 2017, by and among the Company and the underwriters party thereto (incorporated by reference to Exhibit 1.1 of the Company’s Form 8-K filed on August 23, 2017).
~~3.1~~			~~Certificate of Designation for Series B Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on August 31, 2017).~~
~~4.1~~			~~Form of Offering Warrant (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on August 23, 2017).~~
~~4.2~~			~~Form of Underwriter Warrant (incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K filed on August 23, 2017).~~
~~4.3~~			~~Form of Conversion Warrant (incorporated by reference to Exhibit 4.3 of the Company’s Form 8-K filed on August 23, 2017).~~

31.1			Certification of ~~Ilan Danieli, Chief~~Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.

31.2			Certification of ~~Carl Iberger, Chief~~Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.

~~32.1~~ 32.1*			Certification of ~~Ilan Danieli, Chief~~Principal Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.

Table of Contents

~~32.2~~ 32.2*			Certification of ~~Carl Iberger, Chief~~Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 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

*This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference

~~SIGNATURES~~

Table of Contents

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.

	PRECIPIO, INC.

Date: August 9, 2019	By:		/S/ ILAN DANIELI
		~~PRECIPIO, INC.~~ Ilan Danieli

~~Date:~~	~~November 20, 2017~~	~~By:~~	/S~~/ ILAN DANIELI~~
			~~Ilan Danieli~~ Chief Executive Officer (Principal Executive Officer)


Date: August 9, 2019	~~November 20, 2017~~ By:	~~By:~~	/S/S/ CARL IBERGER
			Carl Iberger
		Chief Financial Officer (Principal Financial Officer)



	September 30,
	2017			December 31,
	(unaudited)			2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	381		$	51
Accounts receivable, net	505			388
Inventories	99			100
Other current assets	127			13
Total current assets	1,112			552

PROPERTY AND EQUIPMENT, NET	255			280

OTHER ASSETS:
Goodwill	12,817			—
Intangibles, net	20,779			—
Other assets	14			10
	$	34,977		$	842
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt	$	42		$	395
Convertible bridge notes, less debt discounts and debt issuance costs	—			695
Accounts payable	10,034			1,084
Current maturities of capital leases	49			46
Accrued expenses	1,872			700
Deferred revenue	210			92
Other current liabilities	1,528			—
Total current liabilities	13,735			3,012
LONG TERM LIABILITIES:
Long-term debt, less current maturities and discounts	—			4,127
Common stock warrant liability	618			—
Capital leases, less current maturities	126			163
Other long-term liabilities	92			—
Total liabilities	14,571			7,302
STOCKHOLDERS’ EQUITY (DEFICIT):
Preferred stock - $0.01 par value, 15,000,000 and 1,294,434 shares authorized at September 30, 2017 and December 31, 2016, respectively, 3,641 and 780,105 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	—			8
Common stock, $0.01 par value, 150,000,000 and 1,806,850 shares authorized at September 30, 2017 and December 31, 2016, respectively, 9,446,878 and 449,175 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	94			4
Additional paid-in capital	41,879			4,376
Accumulated deficit	(21,567		)	(10,848		)
Total stockholders’ equity (deficit)	20,406			(6,460		)
	$	34,977		$	842



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
SALES
Patient service revenue, net	$	327		$	445		$	946		$	1,716
less provision for bad debts	(57		)	(80		)	(168		)	(309		)
Net sales	270			365			778			1,407
COST OF DIAGNOSTIC SERVICES	347			231			813			710
Gross profit (loss)	(77		)	134			(35		)	697
OPERATING EXPENSES:
Operating expenses	2,541			497			3,981			1,573
Impairment of goodwill	1,015			—			1,015			—
TOTAL OPERATING EXPENSES	3,556			497			4,996			1,573
OPERATING LOSS	(3,633		)	(363		)	(5,031		)	(876		)
OTHER INCOME (EXPENSE):
Interest expense, net	(1,883		)	(136		)	(2,265		)	(378		)
Warrant revaluation	—			—			(3		)	—
Loss on extinguishment of debt and induced conversion of convertible bridge notes	(1,338		)	—			(1,391		)	—
Gain on settlement of liability	647			—			647			—
Merger advisory fees	(73		)	—			(2,676		)	—
Other, net	—			—			—			3
	(2,647		)	(136		)	(5,688		)	(375		)
LOSS BEFORE INCOME TAXES	(6,280		)	(499		)	(10,719		)	(1,251		)
INCOME TAX EXPENSE	—			—			—			—
NET LOSS	(6,280		)	(499		)	(10,719		)	(1,251		)

DEEMED DIVIDENDS ON ISSUANCE OR EXCHANGE OF PREFERRED UNITS	(3,764		)	—			(9,012		)	(1,422		)
PREFERRED DIVIDENDS	(84		)	—			(84		)	(433		)
TOTAL DIVIDENDS	(3,848		)	—			(9,096		)	(1,855		)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(10,128	)	$	(499	)	$	(19,815	)	$	(3,106	)

BASIC AND DILUTED LOSS PER COMMON SHARE	$	(1.36	)	$	(1.15	)	$	(6.96	)	$	(7.23	)
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING	7,430,741			435,060			2,846,221			429,851



	Preferred Stock					Common Stock
	Outstanding Shares		Par Value			Outstanding Shares	Par Value		Additional Paid-in Capital			Accumulated Deficit			Total
Balance, January 1, 2017	780,105		$	8		449,175	$	4	$	4,376		$	(10,848	)	$	(6,460	)
Net loss	—		—			—	—		—			(10,719		)	(10,719		)
Conversion of warrants into preferred stock	8,542		—			—	—		25			—			25
Conversion of warrants into common stock	—		—			1,958,166	20		(20		)	—			—
Conversion of preferred stock into common stock	(2,526,425	)	(25		)	3,467,666	34		(9		)	—			—
Conversion of Senior and Junior debt into preferred stock and common stock	802,920		8			1,414,700	14		4,749			—			4,771
Conversion of bridge notes into common stock	—		—			515,638	6		2,732			—			2,738
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 combination	802,925		8			1,255,119	12		20,078			—			20,098
Issuance of preferred stock	135,574		1			—	—		5,379			—			5,380
Issuance of warrants in conjunction with issuance of side agreement	—		—			—	—		487			—			487
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		40			—			41
Balance, September 30, 2017	3,641		$	—		9,446,878	$	94	$	41,879		$	(21,567	)	$	20,406



	Nine Months Ended September 30,
	2017			2016
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss	$	(10,719	)	$	(1,251	)

Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization	395			99
Amortization of deferred financing costs and debt discount	1,898			31
Loss on extinguishment of debt and induced conversion of convertible bridge notes	1,391			—
Gain on settlement of liability	(647		)	—
Stock-based compensation and change in liability of stock appreciation rights	33			9
Merger advisory fees	2,676			—
Impairment of goodwill	1,015			—
Provision for losses on doubtful accounts	168			309
Capitalized PIK interest on convertible bridge notes	—			85
Warrant revaluation	3			—
Changes in operating assets and liabilities:
Accounts receivable	(129		)	(314		)
Inventories	15			(12		)
Other assets	30			(27		)
Accounts payable	484			58
Accrued expenses and other liabilities	(1,094		)	371
Net cash used in operating activities	(4,481		)	(642		)
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Cash acquired in business combination	101			—
Net cash provided by investing activities	101			—
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Principal payments on capital lease obligations	(34		)	(29		)
Issuance of preferred stock	5,380			—
Payment of deferred financing costs	(25		)	(10		)
Proceeds from exercise of warrants	25			—
Proceeds from long-term debt	315			175
Proceeds from convertible bridge notes	1,365			455
Principal payments on convertible bridge notes	(1,500		)	—
Principal payments on long-term debt	(816		)	(116		)
Net cash flows provided by financing activities	4,710			475
NET CHANGE IN CASH AND CASH EQUIVALENTS	330			(167		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	51			235
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	381		$	68

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest	$	65		$	48
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	—			680
Series A and B preferred exchanged for long-term debt	—			1,715
Conversion of bridges loans plus interest into common stock	1,787			—
Conversion of senior and junior notes plus interest into preferred stock and common stock	4,771			—



(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



(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



(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



Dollars in thousands, except per share amounts
	Nine months ended September 30,
	2017			2016
Net sales	$	1,742		$	2,605
Net loss available to common stockholders	(22,980		)	(15,838		)
Loss per common share	$	(3.40	)	$	(2.48	)



	Dollars in Thousands
	September 30, 2017
	Cost		Accumulated Amortization		Net Book Value
Technology	$	18,990	$	237	$	18,753
Customer relationships	250		21		229
Backlog	200		50		150
Covenants not to compete	30		8		22
Trademark	40		5		35
IPR&D	1,590		—		1,590
	$	21,100	$	321	$	20,779



	Dollars in Thousands
	September 30, 2017			December 31, 2016
Senior Notes	$	—		$	3,270
Senior Note debt issuance costs	—			(9		)
Junior Notes	—			584
Connecticut Innovations - line of credit	—			162
Department of Economic and Community Development (DECD)	—			243
DECD debt issuance costs	—			(30		)
Webster Bank	—			328
Webster Bank debt discounts and issuance costs	—			(26		)
Convertible promissory notes	42			—
Total long-term debt	42			4,522
Current portion of long-term debt	(42		)	(395		)
Long-term debt, net of current maturities	$	—		$	4,127



	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	$2.75
(8)	2017	June 2022	91,429	$7.00
(9)	2017	August 2022	2,680,000	$3.00
(10)	2017	August 2022	60,000	$3.125
(11)	2017	August 2022	856,446	$10.00
(12)	2017	August 2022	359,999	$3.00
			4,224,824



Dollars in Thousands
	For the Three Months Ended
	September 30, 2017
Beginning balance at July 1	$	618
Additions - liability assumed in the Merger	—
Total (gains) or losses:
Recognized in earnings	—
Balance at September 30	$	618



Dollars in Thousands
	For the Nine Months Ended
	September 30, 2017
Beginning balance at January 1	$	—
Additions - liability assumed in the Merger	615
Total (gains) or losses:
Recognized in earnings	3
Balance at September 30	$	618



	Number of Options		Weighted-Average Exercise Price
Outstanding at January 1, 2017	24,600		$	107.83
Granted	225,332		1.87
Forfeited	(13,044	)	103.13
Outstanding at September 30, 2017	236,888		$	7.30
Exercisable at September 30, 2017	10,284		$	121.97



	Dollars in Thousands
	September 30, 2017			December 31, 2016			Change
Current assets (including cash and cash equivalents of $381 and $51, respectively)	$	1,112		$	552		$	560
Current liabilities	13,735			3,012			10,723
Working capital	$	(12,623	)	$	(2,460	)	$	(10,163	)