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 30, 2017~~

March 31, 2020

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	Trading 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,~~May 13, 2020, the number of shares of common stock outstanding was ~~10,028,763.~~11,134,520.

~~PRECIPIO, INC.~~

~~INDEX~~

Table of Contents

PRECIPIO, INC. AND SUBSIDIARIES

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 30, 2017 (Unaudited)~~March 31, 2020 (unaudited) and December 31, ~~2016~~2019		3

		~~Unaudited~~ Condensed Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (unaudited)		4

		~~Unaudited~~ Condensed Consolidated Statements of Stockholders’ Equity ~~(Deficit)~~ for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2020 and 2019 (unaudited)		5

		~~Unaudited~~ Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (unaudited)		6

		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	35

Item 3.		Quantitative and Qualitative Disclosures About Market Risk		39

Item 4.		Controls and Procedures		39

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

Item 1.		Legal Proceedings		41

Item 1A.		Risk Factors		41

Item 6.2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~Exhibits~~	43 44

Item 3.	Defaults Upon Senior Securities		44

Item 4.	Mine Safety Disclosures		44

Item 5.	Other Information		44

Item 6.	Exhibits		44

Signatures	44		46

Table of Contents

PART I.1. FINANCIAL INFORMATION


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

PRECIPIO, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)


	March 31, 2020
	(unaudited)		December 31, 2019
ASSETS
CURRENT ASSETS:
Cash	$	417	$	848
Accounts receivable, net		883		574
Inventories		195		184
Other current assets		197		272
Total current assets		1,692		1,878

PROPERTY AND EQUIPMENT, NET		415		431

OTHER ASSETS:
Operating lease right-of-use assets		463		519
Intangibles, net		16,400		16,658
Other assets		25		25
Total assets	$	18,995	$	19,511
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt, less debt issuance costs	$	180	$	321
Current maturities of convertible notes, less debt discounts and debt issuance costs		2,292		142
Current maturities of finance lease liabilities		36		52
Current maturities of operating lease liabilities		212		209
Accounts payable		2,186		1,936
Accrued expenses		1,833		1,639
Deferred revenue		—		35
Total current liabilities		6,739		4,334
LONG TERM LIABILITIES:
Long-term debt, less current maturities and debt issuance costs		194		198
Finance lease liabilities, less current maturities		112		119
Operating lease liabilities, less current maturities		263		317
Common stock warrant liabilities		402		1,338
Total liabilities		7,710		6,306
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS’ EQUITY:
Preferred stock - $0.01 par value, 15,000,000 shares authorized at March 31, 2020 and December 31, 2019, 47 shares issued and outstanding at March 31, 2020 and December 31, 2019, liquidation preference of $82 at March 31, 2020		—		—
Common stock, $0.01 par value, 150,000,000 shares authorized at March 31, 2020 and December 31, 2019, 9,506,126 and 7,898,117 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively		95		79
Additional paid-in capital		75,334		74,065
Accumulated deficit		(64,144)		(60,939)
Total stockholders’ equity		11,285		13,205
Total liabilities and stockholders’ equity	$	18,995	$	19,511

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

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PRECIPIO, INC. AND ~~SUBSIDIARY~~

~~UNAUDITED~~ SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(unaudited)


	Three Months Ended March 31,
	2020		2019
SALES:
Service revenue, net	$	1,458	$	910
Other		24		7
Revenue, net of contractual allowances and adjustments		1,482		917
less allowance for doubtful accounts		(266)		(204)
Net sales		1,216		713
COST OF SALES:
Service revenue		1,091		675
Gross profit		125		38
OPERATING EXPENSES:
Operating expenses		2,328		2,097
OPERATING LOSS		(2,203)		(2,059)
OTHER INCOME (EXPENSE):
Interest expense, net		(713)		(23)
Warrant revaluation		936		240
Derivative revaluation		—		23
Gain on settlement of liability, net		—		167
Loss on extinguishment of convertible notes		(1,225)		—
Total other expenses		(1,002)		407
LOSS BEFORE INCOME TAXES		(3,205)		(1,652)
INCOME TAX BENEFIT		—		—
NET LOSS		(3,205)		(1,652)

Deemed dividends related to beneficial conversion feature of preferred stock and fair value of warrant down round features		(3,344)		—
TOTAL DIVIDENDS		(3,344)		—
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(6,549)	$	(1,652)

BASIC AND DILUTED LOSS PER COMMON SHARE	$	(0.78)	$	(0.48)
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING		8,371,956		3,441,893

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~~ SUBSIDIARIES

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

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

(Dollars in thousands)

(unaudited)


	For the Three Months Ended March 31, 2020
	Preferred Stock			Common Stock			Additional
	Outstanding	Par		Outstanding	Par		Paid-in		Accumulated
	Shares	Value		Shares	Value		Capital		Deficit		Total
Balance, January 1, 2020	47	$	—	7,898,117	$	79	$	74,065	$	(60,939)	$	13,205
Net loss	—		—	—		—		—		(3,205)		(3,205)
Conversion of convertible notes into common stock	—		—	427,997		4		349		—		353
Issuance of common stock in connection with purchase agreements	—		—	1,180,012		12		1,338		—		1,350
Write-off debt discounts (net of debt premiums) in conjunction with convertible note conversions	—		—	—		—		(63)		—		(63)
Write-off beneficial conversion feature in conjunction with convertible note extinguishment	—		—	—		—		(523)		—		(523)
Stock-based compensation	—		—	—		—		168		—		168
Balance, March 31, 2020	47	$	—	9,506,126	$	95	$	75,334	$	(64,144)	$	11,285


	For the Three Months Ended March 31, 2019
	Preferred Stock			Common Stock			Additional
	Outstanding	Par		Outstanding	Par		Paid-in		Accumulated
	Shares	Value		Shares	Value		Capital		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

See notes to unaudited condensed consolidated financial statements

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

PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)


	Three Months Ended March 31,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,205)	$	(1,652)

Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization		281		277
Amortization of operating lease right-of-use asset		56		61
Amortization of finance lease right-of-use asset		17		15
Amortization (accretion) of deferred financing costs, debt discounts and debt premiums		664		(100)
Gain on settlement of liability, net		—		(167)
Loss on extinguishment of convertible notes		1,225		—
Stock-based compensation		168		156
Provision for losses on doubtful accounts		268		204
Warrant revaluation		(936)		(240)
Derivative revaluation		—		(23)
Changes in operating assets and liabilities:
Accounts receivable		(577)		(315)
Inventories		(11)		48
Other assets		75		86
Accounts payable		250		(425)
Operating lease liabilities		(51)		(58)
Accrued expenses and other liabilities		187		254
Net cash used in operating activities		(1,589)		(1,879)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(24)		(3)
Net cash used in investing activities		(24)		(3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on finance lease obligations		(23)		(14)
Issuance of common stock, net of issuance costs		1,350		1,726
Proceeds from convertible notes		—		250
Principal payments on convertible notes		—		(50)
Principal payments on long-term debt		(145)		(109)
Net cash flows provided by financing activities		1,182		1,803
NET CHANGE IN CASH		(431)		(79)
CASH AT BEGINNING OF PERIOD		848		381
CASH AT END OF PERIOD	$	417	$	302

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PRECIPIO, INC. AND ~~SUBSIDIARY~~

~~UNAUDITED~~ SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH ~~FLOWS~~

FLOWS- CONTINUED

(Dollars in thousands)

(unaudited)


	Three Months Ended March 31,
	2020		2019
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest	$	8	$	8

SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY
Conversion of convertible debt into common stock		325		2,933
Conversion of interest on convertible debt into common stock		28		193
Liabilities exchanged for convertible notes		—		2,150
Write-off of beneficial conversion feature in conjunction with convertible note extinguishment		523		—
Right-of-use assets obtained in exchange for lease obligations		—		750
Write-off of debt discounts (net of debt premiums) in conjunction with convertible note conversions		63		315
Write-off of derivative liability in conjunction with convertible note conversions		—		39

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.~~statements.

Table of Contents

PRECIPIO, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~

2019

1. BUSINESS DESCRIPTION

Business ~~Description~~

Description.

Precipio, Inc., and ~~Subsidiary, (“we”~~its subsidiaries, (collectively, “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~~technologies 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~~various academic institutions to capture the expertise, experience and technologies developed within academia ~~so that we can~~to provide a better standard of cancer diagnostics and aim to solve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which ~~will focus~~focuses on ~~further~~ development of various technologies, among them IV-Cell, HemeScreen and ICE-COLD-PCR, ~~(“ICP”),~~or ICP, the patented technology described further below, which ~~was~~we exclusively licensed ~~by us~~ from Dana-Farber Cancer Institute, Inc. ~~(“Dana-Farber”)~~, or Dana-Farber, at Harvard ~~University (“Harvard”).~~University. The research and development center ~~will focus~~focuses on the development of ~~this technology,~~these technologies, which we believe will enable us to commercialize these and other technologies developed bywith our current and future academic partners. The facility in Omaha was also recently certified as a CLIA and CAP facility, and we have begun bringing in house several molecular tests that the Company had previously referred out to other laboratories. Our platform also connects patients, physicians and diagnostic experts residing within academic ~~institutions. Launched in 2017, 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)~~institutions. ~~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 30, 2017,~~March 31, 2020, the Company had a net loss of ~~$10.7~~$3.2 million, ~~and~~ negative working capital of ~~$12.6~~$5.0 million and net cash used in operating activities of $1.6 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 this Quarterly Report on Form 10‑Q is dependent upon a combination of achieving its business plan, including generating additional revenue and avoiding potential business disruption due to the novel coronavirus (“COVID-19”) pandemic, 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 March 26, 2020, the Company entered into a second purchase agreement (the “LP 2020 Purchase Agreement”) with Lincoln Park Capital Fund LLC (“Lincoln Park”), 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 2020 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 Quarterly Report on Form 10-Q, we have already received $0.3 million from the LP 2020 Purchase Agreement from the sale of 500,000 shares of common stock to Lincoln Park from April 1, 2020 through the date of issuance of this Form 10-Q, leaving the Company an additional $9.7 million to draw upon in the coming year; and

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~~

purchase common stock, preferred stock or debt securities as shall have an aggregate initial offering price not to exceed $50 million. This registration statement was declared effective by the SEC on April 13, 2020 and allows the Company, from time to time, to offer up to $50 million of any combination of the securities described in the Form S-3 in one or more offerings. In order for the Company to utilize the effective S-3, it will have to file subsequent prospectus supplement(s) with regard to the securities it will offer, as applicable from time to time. As of the date of issuance of this Form 10-Q, no subsequent prospectus supplements to this effect have been filed by the Company.

~~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 for the next twelve months from the date these condensed consolidated financial statements were issued. 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 this Quarterly Report 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.

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 to September 30, 2017 for potential recognition or disclosure in the condensed consolidated financial statements~~GAAP and, ~~concluded that, other than what is disclosed in Note 13 - Subsequent Events, there were no other subsequent events that required recognition or disclosure.~~

~~The condensed consolidated balance sheet~~ as of ~~December~~March 31, ~~2016~~ ~~was derived from our audited balance sheet as of that date. There has been no change in the balance sheet from December 31, 2016. The accompanying condensed consolidated financial statements as of~~2020 and for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019, 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~~2019 contained in our ~~current report~~Annual Report on Form ~~8-K/A,~~10‑K, filed with the Securities and Exchange Commission (the “SEC”) on ~~July 31, 2017.~~March 27, 2020, and as amended on April 7, 2020. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year ~~2017.~~2020.

Recently Adopted Accounting Pronouncements.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13 “

~~Reclassifications.~~

~~Certain reclassifications were made~~Fair Value Measurement (Topic 820)”, which modifies certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. The Company adopted this guidance on January 1, 2020. The adoption of this guidance was not material to our condensed consolidated financial 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. The Company adopted this guidance on January 1, 2020. The adoption of this guidance was not material to our condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to improve consistent application and simplify the accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. This standard is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual reporting periods, with early adoption permitted. The Company is currently evaluating the impact of adoption of this ASU and does not expect the adoption of this new standard to have a material impact on its condensed consolidated financial statements.

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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 the Company for reporting periods beginning after December 15, 2022. 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 ~~conform~~5,859,495 and 3,100,043 shares of our common stock have been excluded from the computation of diluted loss per share at March 31, 2020 and 2019, 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:


	March 31,
	2020	2019
Stock options	802,113	498,262
Warrants	907,601	917,563
Preferred stock	117,500	20,888
Convertible notes	4,032,281	1,663,330
Total	5,859,495	3,100,043

3. LONG-TERM DEBT

Long-term debt consists of the following:


	Dollars in Thousands
	March 31, 2020		December 31, 2019
Department of Economic and Community Development (DECD)	$	242	$	249
DECD debt issuance costs		(24)		(24)
Financed insurance loan		131		260
September 2018 Settlement		25		34
Total long-term debt		374		519
Current portion of long-term debt		(180)		(321)
Long-term debt, net of current maturities	$	194	$	198

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 less than $1,000 for the three months ended March 31, 2020 and 2019, respectively. Net debt issuance costs were approximately $24,000 at March 31, 2020 and December 31, 2019, 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.

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Financed Insurance Loan.

The Company finances certain of its insurance premiums (the “Financed Insurance Loans”). In July 2018, the Company financed $0.4 million with a 4.89% interest rate and fully paid off such loan as of July 2019. In July 2019, the Company financed $0.4 million with a 5.0% interest rate and will make monthly payments through May of 2020. As of March 31, 2020 and December 31, 2019, the Financed Insurance Loans outstanding balance of $0.1 million and $0.3 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 monthly principal and interest payments to the creditor over a two year ~~financial~~period, from November 1, 2018 to November 1, 2020, in full and final settlement of $0.1 million of indebtedness that was owed to the 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 approximately $0.1 million was included in current maturities of long-term debt in the Company’s condensed consolidated balance sheet as of March 31, 2020 and December 31, 2019, respectively.

4. CONVERTIBLE NOTES

Convertible notes consist of the following:


	Dollars in Thousands
	March 31, 2020		December 31, 2019
Convertible bridge notes	$	1,613	$	1,938
Convertible bridge notes discount and debt issuance costs		—		(1,796)
Convertible bridge notes premiums		679		—
Total convertible notes		2,292		142
Current portion of convertible notes		(2,292)		(142)
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”), as amended on November 29, 2018 (the “Amendment Agreement”) and amended on April 16, 2019 (“Amendment No.2 Agreement”). During 2018, pursuant to the 2018 Note Agreement, the Company issued approximately $4.5 million in Senior Secured Convertible Promissory Notes (the “Bridge Notes”) along with warrants.

On April 16, 2019, the Company entered into the Amendment No.2 Agreement which provided the Company with approximately $900,000 of gross proceeds for the issuance of notes with an aggregate principal of $989,011 (the “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 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

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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 Company also reviewed the redemption features of the April 2019 Bridge Notes and determined that there is a redemption feature (the “Bridge Notes Redemption Feature”) that qualifies as an embedded derivative. 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.

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 ~~presentation. These reclassifications~~(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 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.

On March 26, 2020, the Company entered into an amendment agreement (the “March 2020 Amendment”) amending the terms of that certain Amendment No. 2 Agreement dated April 16, 2019 and the securities purchase agreement dated May 14, 2019. As a result of the March 2020 Amendment, (i) the maturity date of the April 2019 Bridge Notes and the May 2019 Bridge Notes was extended three months from April 16, 2020 to July 16, 2020, (ii) the floor price at which conversions may occur under the April 2019 Bridge Notes and the May 2019 Bridge Notes was amended from $2.25 to $0.40, and (iii) guaranteed interest on the April 2019 Bridge Notes and the May 2019 Bridge Notes was amended from twelve months to eighteen months.

The Company reviewed the modifications and concluded that the March 2020 Amendment will be treated as an extinguishment of the related April 2019 Bridge Notes and May 2019 Bridge Notes. The difference between the carrying value of the notes just prior to modification (the “Pre-modification Debt”) and the fair value of the notes just after modification (the “Post-modification Debt”) would be recorded as a gain or loss on extinguishment in the condensed consolidated statements of operations. The Company removed the carrying value of the Pre-modification Debt which included $1.0 million of unamortized debt discounts and beneficial conversion features of $0.5 million. The Company calculated the fair value of the Post-modification Debt to be $2.6 million. The Company reviewed whether or not a beneficial conversion feature existed on the Post-modification Debt but the calculation resulted in zero intrinsic value so no new beneficial conversion feature was recorded. Management also reviewed the Bridge Notes Redemption Feature of the post-modification notes but their fair value was zero so no derivative liability was recorded at the time of modification, however this will be reassessed at the end of each reporting period. As a result, the Company recorded a debt premium on the Post-modification Debt of $0.8 million and a loss on extinguishment of convertible notes of $1.2 million in the condensed consolidated statements of operations during the three months ended March 31, 2020.

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During the three months ended March 31, 2020 and 2019, $0.3 million and $2.1 million, respectively, of bridge notes, plus interest, were converted into 427,997 and 1,019,430 shares of common stock of the Company, respectively.

During the three months ended March 31, 2020 and 2019, the change in Bridge Note debt discounts and debt premiums was as follows:


	For the Three Months Ended March 31,
	2020				2019
		Debt Discounts		Debt Premiums		Debt Discounts		Debt Premiums
Beginning balance at January 1	$	(1,796)	$	—	$	(1,111)	$	647
Additions:		—		793		—		—
Deductions:
Amortization (accretion) (1)		703		(39)		58		(160)
Write-off related to note conversions (2)		138		(75)		—		(396)
Write-off related to note extinguishment (3)		955		—		—		—
Balance at March 31	$	—	$	679	$	(1,053)	$	91

(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.

(3)

Write-offs associated with note extinguishment are recognized as a loss and included in loss on extinguishment of convertible notes in the condensed consolidated statements of operations.

The remaining debt premium of $0.7 million, as of March 31, 2020, is expected to be fully amortized by the end of 2020.

Convertible Promissory Notes – Exchange Notes.

During the three months ended March 31, 2019, $0.6 million of previously issued convertible promissory notes (the “Exchange Notes”) were converted into 155,352 shares of common stock of the Company.

As of March 31, 2020 and December 31, 2019, the outstanding balance of the Exchange Notes, net of discounts, was zero, respectively.

During the three months ended March 31, 2019, the change in Exchange Note debt discounts was as follows:


(Dollars in thousands)
	For the Three Months Ended March 31, 2019
Beginning balance at January 1	$	(83)
Deductions:
Amortization (1)		2
Write-off related to note conversions (2)		81
Balance at March 31	$	—

(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.

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As a result of Exchange Note conversions, during the three months ended March 31, 2019, the Company wrote off less than $0.1 million of derivative liability with an offset to additional paid-in capital.

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, 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 months ended March 31, 2019, the Company made no payments on, and there were no conversions of, 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 March 31, 2020 and December 31, 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”). 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.

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.

During the three months ended March 31, 2019, the Company made cash payments of less than $0.1 million on the Leviston Note and $0.2 million of the Leviston Note was converted into 73,333 shares of common stock of the Company. During 2019, the remaining $0.5 million of the Leviston note was converted into 111,024 shares of common stock of the Company.

The remaining amount due on the Leviston Note was zero as of March 31, 2020 and December 31, 2019, respectively.

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5. ACCRUED EXPENSES OTHER CURRENT LIABILITIES.

Accrued expenses at March 31, 2020 and December 31, 2019 are as follows:


(dollars in thousands)	March 31, 2020		December 31, 2019
Accrued expenses	$	1,289	$	1,268
Accrued compensation		407		247
Accrued interest		137		124
	$	1,833	$	1,639

During the three months ended March 31, 2020 and 2019, the Company recorded gain on settlement of liability, net of zero and $0.2 million, respectively, from the settlement of obligations with certain vendors.

6. COMMITMENTS AND CONTINGENCIES

The Company 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

CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owed 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 March 31, 2020 and December 31, 2019.

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 ~~no effect~~a materially incomplete and misleading proxy relating to a potential merger and that the merger agreement’s deal protection provisions deter superior offers. 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. On July 10, 2019, the Court entered an order preliminarily approving the settlement. The settlement remains subject to final approval by the Court. During the third quarter of 2019, both the Company and its insurance company paid their respective amounts of $0.27 million and $1.68 million, respectively, to an escrow account where the funds are being held until they are approved for distribution. A fairness hearing of the Court took place on ~~previously reported net earnings.~~

~~Principles~~November 4, 2019 and as of ~~Consolidation.~~

~~The~~the date the condensed consolidated financial statements ~~include~~were issued, the ~~accounts of Precipio, Inc. and our wholly owned subsidiary. All inter-company balances and transactions have been eliminated in consolidation.~~

~~Use of Estimates.~~

~~The preparation of condensed consolidated financial statements requires management~~Company was waiting for the Court to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. In addition, estimates and assumptions associated with the determination of the fair value of certain assets and related impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these condensed consolidated financial statements.

~~Risks and Uncertainties.~~

~~Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our financial statements.~~ render its judgement which was still outstanding.

LEGAL AND REGULATORY ENVIRONMENT

The ~~more significant of those risks are presented below and throughout the notes to the unaudited condensed consolidated financial statements.~~

~~The Company operates in the~~ healthcare industry ~~which~~ is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not ~~necessarily~~ limited to, matters such as licensure, accreditation, government healthcare program participation ~~requirements,~~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

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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. The common stock warrant liability is recorded at fair value. See Note 11 - Fair Value for additional information.~~

~~Cash and Cash Equivalents and Other Current Assets.~~

Cash and cash equivalents include cash and investments with original maturities at the date of acquisition of three months or less. Other current assets as of September 30, 2017 of $0.1 million includes prepaid assets of less than $0.1 million and other receivables of less than $0.1 million and consisted of primarily prepaid assets as of December 31, 2016.

~~Concentrations of Risk.~~

7. LEASES

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 ofOn ~~September 30, 2017~~January.

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 services 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 months ended September 30, 2017 and 2016. Depreciation expense during each period includes depreciation related to equipment acquired under capital leases.

~~Goodwill and Intangible Assets.~~

~~As a result of the Merger,~~ 1, 2019, the Company recorded ~~goodwill~~initial ROU assets and ~~intangible~~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 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 typically at our sole discretion, therefore, the renewals to extend the lease terms are not included in our ROU assets and lease liabilities as ~~part~~they are not reasonably certain of ~~its allocation~~exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include 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 the ~~purchase consideration. See Note 3 - Reverse Merger~~lease payments.

Operating leases result in the recognition of ROU assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the ~~amounts recorded.~~

~~Goodwill~~

~~Goodwill represents~~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 ~~excess~~present value of ~~the purchase price~~lease payments over the ~~fair value~~lease term. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of ~~identifiable net assets~~12 months or 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 ~~business acquired. See Note 3 - Reverse Merger~~adoption of Topic 842, our accounting 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 optionfinance leases, previously referred 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. as capital leases, remains substantially unchanged from prior guidance.

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 pricebalance sheet presentation of our ~~common~~operating and finance leases is as follows:


(dollars in thousands)	Classification on the Condensed Consolidated Balance Sheet	March 31, 2020		December 31, 2019

Assets:
Operating lease assets	Operating lease right-of-use assets, net	$	463	$	519
Finance lease assets	Property and equipment, net		167		184
Total lease assets		$	630	$	703

Liabilities:
Current:
Operating lease obligations	Current maturities of operating lease liabilities	$	212	$	209
Finance lease obligations	Current maturities of finance lease liabilities		36		52
Noncurrent:
Operating lease obligations	Operating lease liabilities, less current maturities		263		317
Finance lease obligations	Finance lease liabilities, less current maturities		112		119
Total lease liabilities		$	623	$	697

Table of Contents

~~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~~

As of March 31, 2020 and December 31, 2019, the ~~impairment test positively or negatively,~~estimated future minimum lease payments, excluding non-lease components, are as follows:


(dollars in thousands)	Operating Leases				Finance Leases
		March 31,		December 31,		March 31,		December 31,
		2020		2019		2020		2019
2020	$	181	$	242	$	36	$	62
2021		241		241		38		38
2022		48		48		32		32
2023		35		35		28		28
2024		17		17		27		27
Thereafter		—		—		13		13
Total lease obligations		522		583		174		200
Less: Amount representing interest		(47)		(57)		(26)		(29)
Present value of net minimum lease obligations		475		526		148		171
Less, current portion		(212)		(209)		(36)		(52)
Long term portion	$	263	$	317	$	112	$	119

Other information as of March 31, 2020 and ~~the magnitude of any such impact.~~ December 31, 2019:


	March 31,	December 31,
	2020	2019
Weighted-average remaining lease term (years):
Operating leases	2.4	2.8
Finance leases	4.5	4.3
Weighted-average discount rate:
Operating leases	8.00%	8.00%
Finance leases	7.25%	7.25%

During the three months ended ~~September 30, 2017, the Company experienced a decline~~March 31, 2020 and 2019, operating cash flows from operating leases was $0.1 million, respectively, and ROU assets obtained in ~~its share price~~exchange for operating lease liabilities was zero 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$0.8 million, respectively.

Operating Lease Costs

Operating lease costs 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$0.1 million during the three months ended ~~September 30, 2017.~~

~~Intangibles~~

~~We review our amortizable long-lived assets~~March 31, 2020 and 2019, respectively. These costs are primarily related to long-term operating leases 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~~Company’s facilities and laboratory equipment. Short-term and variable lease costs were less than $0.1 million for 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 ninethree months ended ~~September 30, 2017.~~

~~In-process research~~March 31, 2020 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 accounted2019, respectively. Cash paid 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~~measurement of operating lease liabilities was less than $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

~~Table of Contents~~

~~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 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)~~March 31, 2020 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~~

~~Table of Contents~~

~~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 Diagnostics2019, respectively.

Finance Lease Costs

Finance leases 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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~~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)
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 )

~~Table of Contents~~

~~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:~~

~~Table of Contents~~

~~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.

~~Table of Contents~~

~~PRECIPIO, INC. AND SUBSIDIARY~~

~~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 isexpense are 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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~~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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~~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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~~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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~~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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~~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.

On February 17, 2017, Jesse Campbell (“Campbell”) filed a lawsuit individually and on behalf of others similarly situated against us in the District Court for the District of Nebraska alleging we have a materially incomplete and misleading proxy relating to a potential merger and that the merger agreement’s deal protection provisions deter superior offers. As a result, he alleges that we have violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereafter. Although we intend to defend the lawsuit, there can be no assurance regarding the ultimate outcome of this case. Given the uncertainty of litigation, the legal standards that must be met for, among other things, class certification and success on the merits, we are unable to estimate the amount of loss, or range of possible loss, at this time that may result from this action. In the event that a settlement is reached related to these matters, the amount of such settlement may be material to our results of operations and financial condition and may have a material adverse impact on our liquidity.

~~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.~~operations for both the three months ended March 31, 2020 and 2019. The balances within these accounts are less than $0.1 million, respectively.

~~As a result~~

Table of the merger, there was a change in ownership as defined in IRS § 382. Because of this change, use of a portion of the accumulated net operating losses and tax credit carryforwards will be 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.Contents

~~10.~~

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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~~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 150,000,000 shares to 250,000,000 shares. The Company has not yet effected this increase.

During the ~~conversion of preferred stock, senior~~three months ended March 31, 2020 and junior debt, bridge notes and warrants. Also, certain advisors of Precipio Diagnostics received 321,821 shares of Precipio common stock related to services performed in connection with the Merger. 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 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,~~2019, the Company issued ~~359,999~~427,997 and 1,248,115 shares of its common stock, ~~upon~~respectively, in connection with the conversion of ~~$900,000~~convertible notes, plus interest, totaling $0.4 million and $3.1 million, respectively. See Note 4 – Convertible Notes.

LP Purchase Agreement

On September 7, 2018, the Company entered into a purchase agreement (the “LP Purchase Agreement”) with Lincoln Park, pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of ~~its New Bridge Notes (See Note 6 - Convertible Bridge Notes) and 1,735,419~~$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 ~~upon conversion~~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, 466,667 shares of common stock, which includes the LP Commitment Shares, 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 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 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, 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. As of August 5, 2019, all shares registered under this S-1 had been sold and/or issued to Lincoln Park. On August 9, 2019, 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, an additional 1,800,000 shares of common stock that have been or may be issued to Lincoln Park under the LP Purchase Agreement. As of January 9, 2020, all shares registered under this S-1 had been sold and/or issued to Lincoln Park. On January 14, 2020, 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, an additional 920,654 shares of common stock that have been or may be issued to Lincoln Park under the LP Purchase Agreement. As of March 31, 2020, 810,012 shares registered under this S-1 had been sold and/or issued to Lincoln Park. From April 1, 2020 through the date the condensed consolidated financial statements were issued, the remaining 110,642 shares registered under this S-1 had been sold and/or issued to Lincoln Park.

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 ~~Series A Senior~~common stock ~~(see below - Series A Senior Preferred Stock).~~

~~Also, during~~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 ~~three months ended September 30, 2017, the Company issued 943,600~~LP Purchase Agreement), direct Lincoln Park to purchase shares of its common stock in ~~connection with conversions~~amounts up to 30,000 shares, which amounts may be increased to up to 36,666 shares depending on the market price of its ~~Series B Preferred Stock (see below - Series B Preferred Stock).~~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 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

~~Series A~~

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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 ~~Series B Preferred Stock.~~

~~Prior~~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 ~~Merger and under Precipio Diagnostics,~~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 ~~had outstanding preferred units~~refers to as the Exchange Cap, unless (i) the Company obtains stockholder approval to issue shares of ~~367,299~~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 ~~Series A~~the issuance of the LP Commitment Shares to Lincoln Park), such that issuances and ~~412,806 for Series B as~~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 ~~31, 2016. These units have been recapitalized and are included in preferred stock. On~~20, 2018.

The LP Purchase Agreement also prohibits the ~~Closing Date, the outstanding preferred units for Series A and Series B, along~~Company from directing Lincoln Park to purchase any shares of common stock if those shares, when aggregated with ~~the related accumulated dividends, were converted into common~~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 Quarterly Report on Form 10-Q, we have already received an aggregate of $9.4 million from the sale of common stock to Lincoln Park under the LP Purchase Agreement, including approximately $1.4 million from the sale of 328,590 shares of common stock during 2018, $6.6 million from the sale of 2,778,077 shares of common stock during 2019, $1.3 million from the sale of 930,012 shares of common stock during the three months ended March 31, 2020 and $0.1 million from the sale of 110,640 shares of common stock from April 1, 2020 through April 6, 2020. As of April 6, 2020, all registered shares relating to the LP Agreement had been sold and/or issued to Lincoln Park and, effective April 13, 2020, the Company became eligible to sell additional shares to Lincoln Park pursuant to the LP 2020 Purchase Agreement, as discussed below.

LP 2020 Purchase Agreement

On March 26, 2020, the Company entered into a purchase agreement (the “LP 2020 Purchase Agreement”) and a registration rights agreement (the “LP 2020 Registration Rights Agreement”) with Lincoln Park pursuant to which Lincoln Park has agreed to purchase from us, from time to time, up to $10,000,000 of our common stock, subject to certain limitations, during the 24 month term of the LP 2020 Purchase Agreement. Pursuant to the terms of the LP 2020 Purchase Agreement, on the agreement date, the Company issued 250,000 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 2020 Commitment Shares”). Pursuant to the terms of the LP 2020 Registration Rights Agreement, on March 27, 2020, as amended on April 8, 2020, 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, 1,770,000 shares of common stock, which includes the LP 2020 Commitment Shares, that have been or may be issued to Lincoln Park under the LP 2020 Purchase Agreement. The Form S-1 was declared effective by the SEC on April 13, 2020. No shares registered under this S-1 were sold to Lincoln Park during the three months ended March 31, 2020.

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Under the LP 2020 Purchase Agreement, on any business day selected by us, we may direct Lincoln Park to purchase up to 50,000 shares of our common stock on any such business day, which we refer to as a Regular Purchase in the LP 2020 Purchase Agreement, provided, however, that (i) the Regular Purchase may be increased to up to 80,000 shares, provided that the closing sale price is not below $1.00 on the purchase date and (ii) the Regular Purchase may be increased to up to 100,000 shares, provided that the closing sale price is not below $1.50 on the purchase date. In each case, the maximum amount of any single Regular Purchase may not exceed $1,000,000 per purchase. Lincoln Park has no right to require the Company to sell any shares of common stock to Lincoln Park, but Lincoln Park is obligated to make purchases as we direct, subject to certain conditions. The purchase price for Regular Purchases shall be equal to the lesser of: (i) the lowest sale price of the common shares during the purchase date, or (ii) the average of the three (3) lowest closing sale prices of the common shares during the ten (10) business days prior to the purchase date.

Under applicable rules of The NASDAQ Capital Market, in no event may we issue or sell to Lincoln Park under the LP 2020 Purchase Agreement more than 19.99% of the shares of our common stock outstanding immediately prior to the execution of the LP 2020 Purchase Agreement (which is 1,774,024 shares, based on 8,870,129 shares outstanding immediately prior to the execution of the LP 2020 Purchase Agreement), which limitation we refer to as the Exchange Cap, unless (i) we obtain stockholder approval to issue shares of common stock in excess of the Exchange Cap or (ii) the average price of all applicable sales of our common stock to Lincoln Park under the LP 2020 Purchase Agreement equals or exceeds $0.7306 (which represents the closing consolidated bid price of our common stock on March 25, 2020 , plus an incremental amount to account for our issuance of the Commitment Shares to Lincoln Park), such that the transactions contemplated by the LP 2020 Purchase Agreement are exempt from the Exchange Cap limitation under applicable NASDAQ rules. In any event, the LP 2020 Purchase Agreement specifically provides that we may not issue or sell any shares of our common stock under the LP 2020 Purchase Agreement if such issuance or sale would breach any applicable rules or regulations of The NASDAQ Capital Market.

The LP 2020 Purchase Agreement also prohibits us from directing Lincoln Park to purchase any shares of common stock if those shares, when aggregated with all other shares of our 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 our 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 we refer to as the Beneficial Ownership Cap.

As of the date of issuance of this Quarterly Report on Form 10-Q, we have already received $0.3 millionfrom the sale of 500,000 shares of common stock to Lincoln Park which were sold from April 1, 2020 through the date of issuance of this Quarterly Report on 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, the~~

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 the~~includes a beneficial ownership blocker but has no dividend rights preferences and privileges of the new preferred stock. Generally, the holders 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(except 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~~extent dividends 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-redeemable and as a result, the Company recognized the full beneficial conversion feature in the amount of $5.2 million as a deemed dividend at the time of issuance.

Upon the closing of 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”)stock). The Company also issued an aggregate of 22,518 shares of Series A Senior stock to these holders, which shares represented the Series A Preferred Payment (as defined in the Company’s Certificate of Designation of Series A Senior Convertible Preferred Stock) accrued through the date of Conversion and immediately converted into an aggregate of 22,518 shares of the Company's common stock in connection with the Conversion. The Company issued warrants (the “Series A Conversion Warrants”) to purchase an aggregate 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 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 recorded as a deemed dividend at the time of the Conversion.

~~The Series A Preferred Payment of 22,518 shares of Series A Senior stock had a fair value of approximately $84,000 at the time of issuance and was recorded as a deemed dividend on preferred shares.~~

~~At September 30, 2017, the Company had zero shares of Series A Senior outstanding.~~

~~Series B Preferred Stock.~~

On August 28, 2017, the Company completed ~~the August~~an underwritten public offering (the “August 2017 ~~Offering of 6,000 units~~Offering”) consisting ~~of one share~~ of the Company’s Series B Preferred Stock ~~par value $0.01 per share (“Series B Preferred Stock”), which is convertible into 400 shares of common stock, par value $0.01 per share, at a conversion price of $2.50 per share,~~ and one warrant to purchase up to 400 shares of 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 an underwriting agreement dated as of August 22, 2017 (the “Underwriting Agreement”) between the Company and Aegis. The net proceedswarrants.

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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 by the Company from the sale 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.

The conversion price of the Series B Preferred Stock contains a down round feature. 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 preferred stock as equity classified, despite the down round provision. The Company will recognize the effect of the down round feature when it is triggered. At that time, the effect would be treated as a deemed dividend and as a reduction of income available to common shareholders in our basic earnings per share calculation.

~~During~~

The March 2020 Amendment, see Note 4 – Convertible Notes, triggered 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.~~

Prior to the Merger, in connection with the line of credit with Connecticut Innovations, the Company issued warrants to purchase 8,542 Series A Preferred shares of the Company, which were classified as an equity warrant, at an exercise price of $2.93 per unit, subject to adjustments as defined in the warrant agreement. The warrants were valued at $6,000 at the date of the grant utilizing the Black-Sholes model (volatility 40%, expected life 7 years, and risk free rate .36%). The value of the warrants 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).

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 resultdown round feature of the Series B Preferred Stock ~~issued in~~and, as a result, the ~~August 2017 Offering, the exercise~~conversion price of the ~~2017 New Bridge Warrants~~Company’s Series B Convertible Preferred Stock was automatically adjusted from $2.25 per share to~~$2.75~~ $0.40 per share.

~~At issuance, the 2017 New Bridge Warrants had a fair value of $211,000 and were recorded as a debt discount to the related 2017 New Bridge Notes I,~~ In connection with ~~the corresponding entry to additional paid in capital as the warrants were considered classified as equity in accordance with GAAP.~~ ~~At the time the exercise price was adjusted, due to~~ the down round ~~provision,~~adjustment, the Company calculated ~~the fair value~~an incremental beneficial conversion feature of approximately $3.3 million which was recognized as a deemed dividend at time of the down round ~~provision on the warrants to be approximately $12,000 and recorded this as deemed dividend.~~

~~Side Warrants~~

~~In connection with the bridge financing and the assumption~~adjustment (“Deemed Dividend A”).

There were no conversions 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 WarrantsSeries B Preferred Stock during the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2020 and 2019, respectively.

~~August 2017 Offering Warrants~~

~~In connection with the August 2017 Offering,~~ At March 31, 2020 and December 31, 2019, the Company had 6,900 shares of Series B designated and issued ~~2,680,000 warrants at an exercise price~~and 47 shares of ~~$3.00, which contains a down round provision.~~ Series B outstanding.

Liquidation Preferences

The ~~August 2017 Offering Warrants were exercisable immediately and expire 5 years from date of issuance. The terms~~following is the liquidation preferences for the Company’s preferred stock;

Upon any liquidation, dissolution or winding-up of the August 2017 Offering Warrants prohibit a holder from exercising its August 2017 Offering Warrants if doing so would result in such holder (together with its affiliates) beneficially owning more than 4.99%Corporation, whether voluntary or involuntary, the holders shall be entitled to receive out of the ~~Company’s outstanding shares~~assets of ~~common stock after giving effect to such exercise, provided that, at~~ the ~~election of a holder and notice~~Corporation an amount equal to the ~~Company, such beneficial ownership limitation may~~par value, plus any accrued and unpaid dividends thereon, for each share of Preferred Stock before any distribution or payment shall be ~~increased~~made to ~~9.99%~~the holders of the ~~Company’s outstanding shares~~Common Stock, and if the assets of ~~common stock after giving effect~~the Corporation shall be insufficient to pay in full such ~~exercise.~~

~~Representative Warrants~~

Inamounts, then the entire assets to be distributed to the holders shall be ratably distributed among the holders in accordance with the ~~underwriting agreement for~~respective amounts that would be payable on such shares. If all amounts were paid in full; and thereafter, the August 2017 Offering, the underwriter purchased 60,000 warrants, with an exercise price of $3.125, for an aggregate price of $100. The Representative Warrants are exercisable beginning one year after the dateholders shall be entitled to receive out of the ~~prospectus for the August 2017 Offering and expiring on a date which is no more than five years from the date~~assets, whether capital or surplus, of the ~~prospectus for~~Corporation the ~~August 2017 Offering. The fair value~~same amount that a holder of Common Stock would receive if the ~~warrants at date of issuance of approximately $113,000 was treated as a stock issuance cost and recorded as a reduction to additional paid in capital.~~

~~Series A Conversion Warrants~~

The Company issued Series A Conversion Warrants to purchase an aggregate of 856,446 shares of the Company's common stock at an exercise price of $10.00 per share, which have a term of 5 years. At the time of issuance, the Series A Conversion Warrants had a fair value of $1.4 million and, as discussed in the Series A Senior Preferred Stock ~~section above, these~~ were ~~issued and recorded as deemed dividends.~~fully converted to Common Stock which amount shall be paid pari passu with all holders of Common Stock.

~~Note Conversion 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~~

~~Upon the closing of the August 2017 Offering, $900,000 of the Company’s New Bridge Notes were converted into an aggregate of 359,999 shares of the Company's common stock and 359,999 Note Conversion~~

Common Stock Warrants. The Note Conversion Warrants have an exercise price of $3.00 per share and a five year term. The exercise price contains 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 of approximately $1.0 million which is included in loss on extinguishment of debt and induced conversion of convertible bridge notes in our unaudited condensed consolidated statements of operations (See Note 6 - Convertible Bridge Notes).

The following represents a summary of the warrants outstanding as of ~~September 30, 2017:~~March 31, 2020:


			Underlying	Exercise
	Issue Year	Expiration	Shares	Price
Warrants
(1)	2014	April 2020	832	$	1,800.00
(2)	2015	December 2020	272	$	747.00
(3)	2016	January 2021	596	$	544.50
(4)	2017	June 2022	2,540	$	41.25
(4)	2017	June 2022	500	$	7.50
(5)	2017	June 2022	6,095	$	105.00
(6)	2017	August 2022	25,201	$	0.40
(7)	2017	August 2022	4,000	$	46.88
(8)	2017	August 2022	47,995	$	150.00
(8)	2017	August 2022	9,101	$	7.50
(9)	2017	August 2022	16,664	$	0.40
(9)	2017	August 2022	7,335	$	0.40
(10)	2017	October 2022	666	$	0.40
(11)	2018	October 2022	7,207	$	112.50
(12)	2018	April 2023	69,964	$	5.40
(12)	2018	April 2023	121,552	$	5.40
(13)	2018	October 2022	15,466	$	11.25
(14)	2018	July 2023	14,671	$	5.40
(14)	2018	July 2023	14,672	$	5.40
(14)	2018	August 2023	36,334	$	5.40
(14)	2018	August 2023	36,334	$	5.40
(14)	2018	September 2023	19,816	$	5.40
(14)	2018	September 2023	20,903	$	5.40
(15)	2018	November 2023	75,788	$	5.40
(15)	2018	December 2023	51,282	$	5.40
(16)	2019	April 2024	147,472	$	5.40
(17)	2019	May 2024	154,343	$	9.56
			907,601

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)~~ (2)	~~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)~~ (3)	~~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. Of the remaining outstanding warrants as of March 31, 2020, 357 warrants are recorded as a liability, See Note 9 – Fair Value for further discussion, and 239 are treated as equity.

(4)

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

~~(7)~~

(5)

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


~~(8)~~ (6)		These warrants were issued in connection with ~~the Merger~~an underwritten public offering completed on August 28, 2017 (the “August 2017 Offering”) and are the ~~Side~~August 2017 Offering Warrants discussed ~~above.~~below.


~~(9)~~ (7)		These warrants were issued in connection with the August 2017 ~~Offering and are the August 2017 Offering Warrants discussed above.~~Offering.


~~(10)~~ (8)	~~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.~~Offering.


~~(12)~~ (9)		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.~~below.

(10)

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.

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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)

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

(12)

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

(13)

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

(14)

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

(15)

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

~~11.~~

(16)

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.

(17)

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

During the three months ended March 31, 2020, 1,588 warrants expired. These warrants had been issued in connection with an offering which was completed in February 2015.

August 2017 Offering Warrants

In connection with the August 2017 Offering, the Company issued 178,666 warrants at an exercise price of $45.00, which contain a down round provision (the “August 2017 Offering Warrants”). The August 2017 Offering Warrants were exercisable immediately and expire 5 years from date of issuance.

As a result of the March 2020 Amendment, the exercise price of the August 2017 Offering Warrants was adjusted from $2.25 to $0.40. 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 $6,000 and recorded this as a deemed dividend (“Deemed Dividend B”).

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 March 2020 Amendment, the exercise price of the Note Conversion Warrants was adjusted from $2.25 to $0.40. 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 C”).

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 March 2020 Amendment, the exercise price of the Convertible Promissory Note Warrants was adjusted from $2.25 to $0.40. 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 D”).

Creditor Warrants

In the fourth quarter of 2017, the Company 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 7,207 shares of the

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Company’s common stock at an exercise price of $112.50 per share. The Creditor Warrants were issued in February 2018.

April 2018 Warrants

In connection with the issuance of Bridge Notes in April 2018, 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.

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.

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 these Q3 2018 Warrants had a five-year term and half had a one-year term. In September 2018, the exercise price was modified to $7.50.

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.

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”).

April 2019 Warrants

In connection with the issuance of the April 2019 Bridge Notes, the Company issued 147,472 warrants with an exercise price of $5.40 and a five-year term.

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.

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 three months ended March 31, 2019. The following represents a summary of the dividends recorded for the three months ended March 31, 2020:


	Amount Recorded
Deemed Dividends	(in thousands)

Dividends resulting from the March 2020 Amendment
Deemed Dividend A	$	3,333
Deemed Dividend B		6
Deemed Dividend C		*
Deemed Dividend D		5

For the three months ended March 31, 2020	$	3,344

* 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 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

The Company has 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 March 31, 2020.

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.

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 March 31, 2020, 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;~~0.8 years; annual volatility of ~~137%~~136%; and a risk-free interest rate of ~~1.20%~~0.17%. As of December

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31, 2019, assumptions and inputs used in the valuation of the 2016 Warrant Liability include: remaining life to maturity of one year; annual volatility of 140%; and a risk-free interest rate of 1.59%.

Bridge Note Warrant Liabilities

During 2018 and 2019, the Company issued warrants in connection with the issuance of Bridge Notes. All of these warrants issuances were classified as warrant liabilities (the “Bridge Note Warrant Liabilities”). See Note 4 - Convertible Notes for further discussion.

The Bridge Note Warrant Liabilities are considered Level 3 financial instruments and were valued using the Black Scholes model. As of March 31, 2020, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of 2.05 to 4.12 years; annual volatility of 118% to 164%; and risk free rate of 0.23% to 0.33%.

During the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2020 and 2019, 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 March 31, 2020
	2016 Warrant		Bridge Note		Total Warrant
	Liability		Warrant Liabilities		Liabilities
Beginning balance at January 1	$	70	$	1,268	$	1,338
Total gain:
Revaluation recognized in earnings		(12)		(924)		(936)
Balance at March 31	$	58	$	344	$	402

	Three Months Ended March 31, 2019
	2016 Warrant		Bridge Note		Total Warrant
	Liability		Warrant Liabilities		Liabilities
Beginning balance at January 1	$	116	$	1,016	$	1,132
Total gain:
Revaluation recognized in earnings		(23)		(217)		(240)
Balance at March 31	$	93	$	799	$	892

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

Valuations for derivatives related to Bridge Note redemption features were performed using the “with and without” approach, whereby the Bridge Notes were valued both with the embedded derivative and without.

Conversion Option

Valuations for derivatives related to conversion options were performed using the Monte Carlo methodology.

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~~

During the three months ended March 31, 2020, the change in the fair value of the derivative liabilities was zero. During the three months ended March 31, 2019, 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 March 31, 2019
	Bridge Notes
	Redemption		Conversion		Total Derivative
	Feature		Option		Liabilities
Beginning balance at January 1	$	30	$	32	$	62
Deductions:		—		(39)		(39)
Total (gain) loss:
Revaluation recognized in earnings		(30)		7		(23)
Balance at March 31	$	—	$	—	$	—

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

~~12. STOCK OPTIONS~~

~~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;

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. Accordingly, the shares authorized for issuance under the 2017 Plan were increased by 394,905 shares and 114,937 shares on January 1, 2020 and 2019, respectively.

Stock Options.

The Company accounts for all stock-based compensation payments to employees and directors, including grants of employee stock options, at fair value at the date of grant 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 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.

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During the three months ended March 31, 2020, the Company granted stock options to purchase up to 325,050 shares of common stock at a weighted average exercise price of $2.09. The following table summarizes stock option activity under our plans during the ~~nine~~three months ended ~~September 30, 2017~~:March 31, 2020:


	Number of	Weighted-Average
	Options	Exercise Price
Outstanding at January 1, 2020	490,330	$	8.30
Granted	325,050		2.09
Forfeited	(13,267)		5.43
Outstanding at March 31, 2020	802,113	$	5.85
Exercisable at March 31, 2020	244,357	$	11.06

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 30, 2017,~~March 31, 2020, there were ~~236,590~~662,674 options that were vested or expected to vest with an aggregate intrinsic value of ~~approximately one hundred thousand with~~zero and a remaining weighted average contractual life of ~~9.9~~8.9 years. ~~The weighted-average grant date fair values, based on the Black-Scholes option model, of options granted during the nine months ended September 30, 2017 was $1.63.~~

During the three ~~and nine~~ months ended ~~both September~~March 30, ~~2017~~2019, there were 276,700 options granted with a weighted average exercise price of $2.25 and ~~2016,~~3,333 options forfeited with a weighted average exercise price of $2.10.

For the three months ended March 31, 2020 and 2019, we recorded compensation expense for all stock awards of ~~less than $0.1~~$0.2 million, respectively, within operating ~~expense.~~ expense in the accompanying statements of operations.As of ~~September 30, 2017,~~March 31, 2020, 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~~2.4 years.

11. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE

ASC Topic 606, “Revenue from contracts with customers”

The Company follows the guidance of ASC 606 for the recognition of revenue from contracts with customers to transfer goods and services. The Company performed a comprehensive review of its 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 to a customer.

Step 4: Allocate transaction price. Sub-steps include assessing the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to the 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

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

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and the execution of contracts for biomarker testing and clinical research. Payment terms for the services provided are 30 days, unless separately negotiated.

Diagnostic testing

Control of the laboratory testing services is transferred to the customer at a point in 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 ~~September 30, 2017, zero SARs shares were outstanding. During~~ the ~~nine~~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.

Biomarker testing and clinical project services

Control of the biomarker testing and clinical project services are transferred to 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 months ended ~~September 30, 2017,~~March 31, 2020 and 2019 were as follows (prior-period amounts are not adjusted under the ~~SARs~~modified-retrospective method of adoption):


	For the Three Months Ended March 31,
(dollars in thousands)	Diagnostic Testing				Biomarker Testing				Total
	2020		2019		2020		2019		2020		2019
Medicaid	$	9	$	3	$	—	$	—	$	9	$	3
Medicare		524		394		—		—		524		394
Self-pay		50		4		—		—		50		4
Third party payers		517		356		—		—		517		356
Contract diagnostics		—		—		358		153		358		153
Service revenue, net	$	1,100	$	757	$	358	$	153	$	1,458	$	910

Revenue from the Medicare and Medicaid programs account for a portion of the Company’s 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 method based on historical experience. The

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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”), 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”).

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 liability, ~~decreased approximately $1,000~~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 revenue from deferred revenue. For the period ended March 31, 2020 and December 31, 2019, the deferred revenue was zero and $35,000, 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 revenue recognition date to properly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by payers. Accordingly, the total revenue and receivables reported in our condensed consolidated financial statements are recorded at ~~September~~ the amounts expected to 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 our revenue are contracted and fixed fees for specific services and are recorded without an allowance for contractual discounts. The following table presents our revenues initially recognized for each associated payer class during the three months ended March 31, 2020 and 2019.


	For the Three Months Ended March 31,
(dollars in thousands)					Contractual Allowances and				Revenues, net of Contractual
	Gross Revenues				adjustments				Allowances and adjustments
	2020		2019		2020		2019		2020		2019
Medicaid	$	9	$	3	$	—	$	—	$	9	$	3
Medicare		524		394		—		—		524		394
Self-pay		50		4		—		—		50		4
Third party payers		1,808		1,017		(1,291)		(661)		517		356
Contract diagnostics		358		153		—		—		358		153
		2,749		1,571		(1,291)		(661)		1,458		910
Clinical research grants and other		24		7		—		—		24		7
	$	2,773	$	1,578	$	(1,291)	$	(661)	$	1,482	$	917

Allowance for Doubtful Accounts

The Company provides for a general allowance for collectability of services when recording net sales. The Company has adopted the policy of recognizing net sales to the extent 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 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 months ended March 31, 2020 and 2019.

30 ~~2017, no liability was~~

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	For the Three Months Ended March 31,
	Revenues, net of
(dollars in thousands)	Contractual Allowances				Allowances for doubtful
	and adjustments				accounts				Total
	2020		2019		2020		2019		2020		2019
Medicaid	$	9	$	3	$	(8)	$	(3)	$	1	$	—
Medicare		524		394		(79)		(59)		445		335
Self-pay		50		4		—		—		50		4
Third party payers		517		356		(179)		(142)		338		214
Contract diagnostics		358		153		—		—		358		153
		1,458		910		(266)		(204)		1,192		706
Clinical research grants and other		24		7		—		—		24		7
	$	1,482	$	917	$	(266)	$	(204)	$	1,216	$	713

Costs to Obtain or Fulfill a Customer Contract

Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in ~~accrued~~operating expenses ~~since there~~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.

The following summarizes the mix of receivables:


(dollars in thousands)	March 31, 2020		December 31, 2019
Medicaid	$	31	$	107
Medicare		1,692		814
Self-pay		65		88
Third party payers		1,710		2,203
Contract diagnostic services		327		36
	$	3,825	$	3,248
Less allowance for doubtful accounts		(2,942)		(2,674)
Accounts receivable, net	$	883	$	574

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The following table presents the roll-forward of the allowance for doubtful accounts for the three months ended March 31, 2020.


			Allowance for
			Doubtful
(dollars in thousands)			Accounts
Balance, January 1, 2020			$	(2,674)
Collection Allowance:
Medicaid	$	(8)
Medicare		(79)
Third party payers		(179)
		(266)
Bad debt expense	$	(2)
Total charges				(268)
Balance, March 31, 2020			$	(2,942)

Customer Revenue and Accounts Receivable Concentration

Customers that accounted for 10% or greater of our net sales or accounts receivable for the identified periods is as follows:


	Net sales
	Three Months Ended				Accounts receivable, as of
	March 31,				March 31,		December 31,
	2020		2019		2020		2019

Customer A	27	%	*		33	%	*
Customer B	10	%	*		28	%	17	%
Customer C	*		*		*		12	%
Customer D	*		22	%	*		*

* represents less than 10%

12. SUBSEQUENT EVENTS

The Company has evaluated events and transactions subsequent to March 31, 2020 through the date the condensed consolidated financial statements were ~~no shares outstanding.~~

~~13. SUBSEQUENT EVENTS~~

~~Debt Settlement Agreements~~

issued.

Paycheck Protection Program

On ~~October 31, 2017,~~April 23, 2020, the Company entered into a ~~Debt Settlement Agreement~~promissory note (the ~~“Settlement Agreement”~~“Promissory Note”) ~~with certain~~evidencing an unsecured $787,200 loan under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (or “PPP”) was established under the recently congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The PPP Loan to the Company is being made through Webster Bank, N.A.

The term of ~~its accounts payable vendors (the “Creditors”) pursuant~~the PPP Loan is two years. The interest rate on the PPP Loan is 1.00% and payments shall be deferred for the first six months of the term of the loan. Under the terms of the CARES Act, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be

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determined, subject to ~~which~~limitations, based on the ~~Creditors agreed to a reduction~~use of ~~approximately $5.0 million in currently due vendor liabilities.~~loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. The Company ~~and~~intends to use all or a significant majority of 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,PPP Loan amount for qualifying expenses but no assurance is provided that the Company ~~agreed to issue to certain~~will obtain forgiveness of the ~~Creditors warrants~~PPP Loan in whole or in part.

The Promissory Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the Promissory Note. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment against the Company.

Nasdaq Delisting Notice

On April 29, 2020, Precipio, Inc. received written notice (the ~~“Creditor Warrants”~~“Notice”) ~~to purchase approximately 86,000 shares~~from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based on the closing bid price of the Company’s common stock for the preceding 30 consecutive business days (March 17, 2020 to April 28, 2020) that the Company is not in compliance with the $1.00 minimum bid price requirement for continued listing on the Nasdaq Capital Market (the “Minimum Bid Price Requirement”), as set forth in Nasdaq Listing Rule 5550(a)(2). The Notice has no immediate effect on the listing of Precipio’s common stock, and its common stock will continue to trade on the Nasdaq Capital Market under the symbol “PRPO” at this time.

Given the extraordinary market conditions, Nasdaq has determined to toll the compliance periods for the bid price and market value of publicly held shares requirements (collectively, the "Price-based Requirements") through June 30, 2020 and, therefore, on April 16, 2020, Nasdaq filed an ~~exercise~~immediately effective rule change with the SEC. Accordingly, the compliance periods for the Price-based Requirements will be reinstated on July 1, 2020.

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), Precipio has a period of 180 calendar days from July 1 , 2020, or until December 28, 2020 to regain compliance with the Minimum Bid Price Requirement. To regain compliance, the closing bid price of ~~$7.50~~Precipio’s common stock must meet or exceed $1.00 per ~~share.~~share for at least ten consecutive business days during this 180 calendar day period.

If Precipio is not in compliance with the Minimum Bid Price Requirement by December 28, 2020, Nasdaq may provide Precipio with a second 180 calendar day period to regain compliance. To qualify for the second 180 calendar day period, the Company would be required to (i) meet the continued listing requirement for the Nasdaq Capital Market for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, except for the Minimum Bid Price Requirement, and (ii) notify Nasdaq of its intent to cure its noncompliance with the Minimum Bid Price, including by effecting a reverse stock split, if necessary. If Precipio does not indicate its intent to cure the deficiency or if it does not appear to Nasdaq that it would be possible for the Company to cure the deficiency, Precipio would not be eligible for the second 180 calendar day period, and its common stock would then be subject to delisting from the Nasdaq Capital Market.

If Precipio does not regain compliance within the allotted compliance period(s), including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that Precipio’s common stock will be subject to delisting. Precipio would then be entitled to appeal the Nasdaq Staff’s determination to a Nasdaq Listing Qualifications Panel and request a hearing.

The Company intends to monitor the closing bid price of its common stock and consider its available options to resolve its noncompliance with the Minimum Bid Price Requirement. No determination regarding Precipio’s response to the Notice has been made at this time. There can be no assurance that Precipio will be able to regain compliance with the Minimum Bid Price Requirement or will otherwise be in compliance with the other listing standards for the Nasdaq Capital Market.

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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~~

Joint Venture

In April 2020, the Company formed a joint venture with Poplar Healthcare PLLC (“Poplar”), which we refer to as the Joint Venture. The Joint Venture was formed by the Limited Liability Company ~~also~~Agreement of Precipio Oncometrix LLC, a Delaware limited liability company (“POC”), which was entered into ~~a Security Agreement~~as of April 11, 2020 (the ~~“Security Agreement”~~“Effective Date”), ~~dated October 31, 2017, with~~by and among POC, Poplar, and Precipio SPV Inc. (“Precipio SPV”), a ~~collateral agent for the Creditors, pursuant to which the Company granted to the collateral agent, for the benefit of the Creditors, a security interest in certain property~~newly formed subsidiary of the Company, together with such other persons who from time to ~~secure its obligations under~~time become party hereto by executing a counterpart signature page in accordance with the ~~Settlement Agreement.~~

terms hereof. POC was formed as a limited liability company on April 2, 2020 in accordance with the statutes and laws of the State of Delaware relating to limited liability companies, including, without limitation, the Delaware Act, by the filing of a Certificate of Formation with the office of the Secretary of State of the State of Delaware. Precipio SPV was incorporated in the State of Delaware on March 10, 2020 for the sole purpose of being a party to the Joint Venture.

The ~~Creditor Warrants have a per share exercise price~~business purpose of ~~$7.50, are exercisable~~the Joint Venture is to facilitate and capitalize on the ~~date~~combined capabilities, resources and healthcare industry relationships of ~~issuance~~its members by partnering, promoting and ~~will expire five years from~~providing oncology services to office based physicians, hospitals and medical centers. Under the ~~date of issuance.~~

~~Issuance of preferred stock and warrants~~

On November 2, 2017, the Company entered into 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 shareterms of the ~~Company’s Series C Convertible Preferred Stock, par value $0.01 per share (the “Series C Preferred Stock”), convertible into~~Joint Venture, Precipio SPV has a ~~number~~49% ownership interest in the Joint Venture, with Poplar having a 51 % ownership.

Table of shares of the Company’s common stock equal to $1,000 divided by $1.40 and warrants to purchase up to 1,962,857 shares of common stock with an exercise price of $1.63 per share (the “Warrants”) at a combined offering price 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 to the extent dividends are also paid on the common stock). The securities comprising the units are immediately separable and were issued separately.Contents

The gross proceeds to the Company from the sale 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.

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: the expected or potential impact of COVID-19 which is highly uncertain and will depend on future developments, 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,~~2019, which we filed with the Securities and Exchange Commission ~~(the~~

~~“SEC”)~~ on ~~July 31, 2017.~~March 27, 2020. Results for the three ~~and nine~~months ~~months~~ ended ~~September 30, 2017~~March 31, 2020 are not necessarily indicative of results that may be attained in the future.

~~Merger~~

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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

Overview

We are ~~included in the comparative prior periods.~~

~~Overview~~

~~Precipio, Inc., and 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~~technologies 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~~various academic institutions to capture the expertise, experience and technologies developed within academia ~~so that we can~~to provide a better standard of cancer diagnostics and aim to solve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which ~~will focus~~focuses on ~~further~~ development of various technologies, among them IV-Cell, HemeScreen and ICE-COLD-PCR, or ICP, the patented technology described further below, which ~~was~~we exclusively licensed ~~by us~~ from Dana-Farber Cancer Institute, Inc., or Dana-Farber, at Harvard University. The research and development center ~~will focus~~focuses on the development of ~~this technology,~~these technologies, which we believe will enable us to commercialize these and other technologies developed bywith our current and future academic partners. The facility in Omaha was also recently certified as a CLIA and CAP facility, and we have begun bringing in house several molecular tests that the Company had previously referenced out to other laboratories. Our platform also connects patients, physicians and diagnostic experts residing within academic ~~institutions. Launched in 2017, the platform facilitates the following relationships:~~

~~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:~~

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 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 ensure that we continue product development. We continue to build on our long standing relationships with Yale Medicine, Harvard, and Dana Farber. Collaboration with academia and biopharma remains an integral component of our 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 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. In connection with the settlement, we agreed to issue to certain of the Creditors warrants to purchase approximately 86,000 shares 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, pursuant to which we granted to the collateral agent, for the benefit 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~~ ~~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~~institutions. 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 30, 2017, we~~March 31, 2020, the Company had a net loss of ~~$10.7~~$3.2 million, ~~and~~ negative working capital of ~~$12.6~~$5.0 million and net cash used in operating activities of $1.6 million. ~~Our~~The Company’s ability to continue as a going concern over the next twelve months from the date of issuance of this Quarterly Report on Form 10-Q is dependent upon a combination of achieving ~~our~~its business plan, including generating additional revenue and avoiding potential business disruption due to COVID-19, 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:

On March 26, 2020, the Company entered into a second purchase agreement with Lincoln Park (the “LP 2020 Purchase Agreement”), 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 2020 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 Quarterly Report on Form 10-Q, we have already received $0.3 million from the LP 2020 Purchase Agreement from the sale of 500,000 shares of common stock to Lincoln Park from April 1, 2020 through the date of issuance of this Form 10-Q, leaving the Company an additional $9.7 million to draw upon in the coming year; and

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.

The Company filed with the SEC a registration statement on Form S-3 on March 27, 2020, as amended on April 9, 2020, to register an indeterminate number of shares of common stock and preferred stock, such indeterminate principal amount of debt securities and such indeterminate number of warrants to purchase common stock, preferred stock or debt securities as shall have an aggregate initial offering price not to exceed $50 million. This registration statement was declared effective by the SEC on April 13, 2020 and allows the Company, from time to time, to offer up to $50 million of any combination of the securities described in the Form S-3 in one or more offerings. In order for the Company to utilize the effective S-3, it will have to file subsequent prospectus supplement(s) with regard to the securities it will offer, as applicable from time to time. As of the date of issuance of this Form 10-Q, no subsequent prospectus supplements to this effect have been filed by the Company.

~~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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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.

Outlook - COVID-19 related

The COVID-19 outbreak in the United States has caused significant business disruption. The extent of the impact of COVID-19 on the Company's operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, and impact on the Company's customers, employees and vendors, all of which are uncertain and cannot be predicted. These uncertainties could have a material adverse effect on our business, financial condition or results of operations. We have been actively monitoring the COVID-19 situation and its impact on the global economy and the Company. As the global pandemic evolves, we will continue to monitor the extent to which COVID-19 impacts our revenues, expenses and liquidity.

Results of Operations for the Three Months Ended March 31, 2020 and 2019

Net Sales. Net sales were as follows:


	Dollars in Thousands
	Three Months Ended
	March 31,				Change
	2020		2019		$		%
Service revenue, net, less allowance for doubtful accounts	$	1,192	$	706	$	486	69	%
Other		24		7		17	243	%
Net Sales	$	1,216	$	713	$	503	71	%

Net sales for the three months ended March 31, 2020 were approximately $1.2 million, an increase of $0.5 million as compared to the same period in 2019. During the three months ended March 31, 2020, service revenue increased due to patient diagnostic service revenue which had an increase of $0.3 million as compared to the same period in 2019 due to an increase in cases processed. We processed 683 cases during the three months ended March 31, 2020 as compared to 360 cases during the same period in 2019, or a 90% increase in cases. The increase in volume is the result of increased sales personnel. The service revenue increase also included an increase of $0.2 million in contract diagnostics revenue for the three months ended March 31, 2020 as compared to the same period in 2019.

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 $1.1 million and $0.7 million for the three months ended March 31, 2020 and 2019, respectively. Cost of sales in the current year period, as compared to prior year, included an increase in patient diagnostic costs which are in line with the changes in related revenues discussed above.

Gross Profit (Loss). Gross profit (loss) and gross margins were as follows:


	Dollars in Thousands
	Three Months Ended
	March 31,				Margin %
	2020		2019		2020		2019
Gross Profit	$	125	$	38	10	%	5	%

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Gross margin was 10% of total net sales, for the three months ended March 31, 2020, compared to 5% of total net sales for the same period in 2019. The gross profit was $0.1 million and less than $0.1 million, respectively, during the three months ended March 31, 2020 and 2019, 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 $0.2 million to $2.3 million for the three months ended March 31, 2020 as compared to the same period in 2019. This increase includes a $0.4 million increase in sales and marketing costs, which is primarily increased personnel costs related to our increase in patient diagnostic service revenues. These increases were partially offset by a decrease of $0.1 million in general and administrative professional fees and a decrease of $0.1 million in research and development costs.

Other Income (Expense). We recorded other expense, net of $1.0 million for the three months ended March 31, 2020 and other income, net of $0.4 million for the three months ended March 31, 2019. The current year period expense of $1.0 million includes a $1.2 million expense for loss on extinguishment of convertible notes which was recorded in conjunction with the March 2020 Amendment, and interest expense, net of $0.7 million primarily from the amortization of debt discounts related to our convertible notes. These expenses were partially offset by $0.9 million of income recorded on warrant revaluations. The prior year period income of $0.4 million included income from warrant revaluations of $0.2 million and a $0.2 million gain on settlement of liability. These were partially offset by less than $0.1 million of interest expense, net.

Liquidity and Capital Resources

Our working capital positions were as follows:


	Dollars in Thousands
	March 31, 2020		December 31, 2019		Change
Current assets (including cash of $417 and $848 respectively)	$	1,692	$	1,878	$	(186)
Current liabilities		6,739		4,334		2,405
Working capital	$	(5,047)	$	(2,456)	$	(2,591)

During the three months ended March 31, 2020 we received gross proceeds of $1.4 million from sale of 1,180,012 shares of our common stock. We also converted $0.4 million of convertible notes, including interest, into 427,997 shares of our common stock.

Analysis of Cash Flows ~~- Nine~~– Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~

2019

Net Change in ~~Cash and Cash Equivalents.~~Cash. Cash decreased by $0.4 million and ~~cash equivalents increased by $0.3~~$0.1 million during the ~~nine~~three months ended ~~September 30, 2017, compared to a decrease of $0.2 million during the nine months ended September 30, 2016.~~March 31, 2020 and 2019, respectively.

Cash Flows Used in Operating Activities. The cash flows used in operating activities of ~~$4.5~~approximately $1.6 million during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 included a net loss of ~~$10.7~~$3.2 million, ~~a decrease in accrued expenses and other liabilities of $1.1 million and~~ an increase in accounts receivable of $0.5 million and a decrease in operating lease liabilities of $0.1 million. These were partially offset by an increase in accounts payable of ~~$0.5~~$0.2 million, a decrease in other assets of $0.1 million, an increase in accrued expenses and other liabilities of $0.2 million and non-cash adjustments of ~~$5.9~~$1.7 million. The non-cash adjustments to net loss include, among other things, depreciation and amortization, changes in provision for losses on doubtful accounts, warrant revaluations, stock based compensation, and loss on extinguishment of convertible notes. The cash flows used in operating activities in the ~~first nine~~three months ~~of 2016~~ended March 31, 2019 included the net loss of ~~$1.3~~$1.6 million ~~and~~ an increase in accounts receivable of $0.3 million and a decrease in accounts payable of $0.4 million. These were partially offset by an increase in ~~accounts payable,~~operating lease liabilities and accrued expenses and other liabilities of ~~$0.5~~$0.2 million and non-cash adjustments of ~~$0.5~~$0.2 million.

Cash Flows ~~Provided by~~Used In Investing Activities. Cash flows ~~provided by~~used in investing activities were ~~$0.1 million and zero for the nine months ended September 30, 2017 and 2016, respectively. The~~less than $0.1 million for the ~~nine~~three months ended ~~September 30, 2017 was cash acquired as part~~March 31, 2020 and 2019, respectively, resulting from purchases of ~~the merger transaction.~~property and equipment.

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Cash Flows Provided by Financing Activities. Cash flows provided by financing activities totaled ~~$4.7~~$1.2 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, which included proceeds of $1.4 million from the issuance of common stock partially offset by payments on our long-term debt and convertible notes of $0.2 million. Cash flows provided by financing activities totaled $1.8 million for the three months ended March 31, 2019, which included proceeds of $1.7 million from the issuance of common stock and $0.3 million from the issuance of ~~senior notes, $1.4 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~~$0.1 million and payments ~~of capital~~for our finance lease obligations and deferred financing costs of $0.1 ~~million. Cash flows provided by financing activities during the nine months ended September 30, 2016 included proceeds of $0.6~~ million ~~from the issuance of convertible notes and other debt partially offset by $0.1 million of payments on our debt, capital lease obligations and for deferred financing costs.~~

Off-Balance Sheet Arrangements

At each of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~,2019, 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 three months ended March 31, 2020, as compared to those disclosed in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission on March 27, 2020.

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,~~2019, filed with the Securities and Exchange Commission ~~(the “SEC”)~~ on ~~July 31, 2017.~~

March 27, 2020.

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,

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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 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.

March 31, 2020.

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 30, 2017~~March 31, 2020 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

CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owed 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 ~~unaudited~~condensed consolidated balance sheets at March 31, 2020 and December 31, 2019.

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. 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. On July 10, 2019, the Court entered an order preliminarily approving the settlement. The settlement remains subject to final approval by the Court. During the third quarter of 2019, both the Company and its insurance company paid their respective amounts of $0.27 million and $1.68 million, respectively, to an escrow account where the funds are being held until they are approved for distribution. A fairness hearing of the Court took place on November 4, 2019 and as of the date the condensed consolidated financial statements were issued, the Company was waiting for the Court to render its judgement which was still outstanding.

LEGAL AND REGULATORY ENVIRONMENT

The healthcare industry is subject to numerous laws and ~~Note 8 - “Contingencies”~~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.

Violations of these laws and regulations could result in expulsion from government healthcare programs together with the ~~Notes~~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 ~~unaudited condensed consolidated financial statements for additional information regarding legal proceedings.~~

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, 2019, 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,~~2019, 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 30, 2017 and December~~March 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,~~2020, we had a net loss ~~and comprehensive loss attributable to common stockholders~~ of ~~approximately $19.8~~$3.2 million, negative working capital of $5.0 million and ~~$4.1 million, respectively.~~net cash used in operating activities of $1.6 million. To date, we have experienced negative cash flow from development of our diagnostic technology, as well as

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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 30, 2017,~~March 31, 2020, our cash balance was $0.4 million and our working capital was approximately negative ~~$12.6~~$5.0 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~~

If we cannot continue to ~~obtain stockholder approval~~satisfy NASDAQ listing maintenance requirements and other rules, our securities may be delisted, which could negatively impact the price 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~~securities.

Although our common stock is listed on the NASDAQ Capital Market, we may be unable to continue to satisfy the listing maintenance requirements and rules. If we are unable to satisfy The NASDAQ Stock Market, or NASDAQ, criteria for maintaining our listing, our securities ~~convertible or exercisable into common stock at~~could be subject to delisting.

On April 29, 2020, we received a letter from Nasdaq notifying us that for the past 30 consecutive business days, the closing bid price per share of our common stock was below the ~~then effective conversion~~$1.00 minimum bid price requirement for continued listing on the Nasdaq Capital Market, as required by Nasdaq Listing Rule 5550(a)(2), or the Bid Price Rule. As a result, we were notified by Nasdaq that we are not in compliance with the Bid Price Rule. Nasdaq has provided us until December 28, 2020 to regain compliance with the Bid Price Rule.

To regain compliance with the Bid Price Rule, the closing bid price of our ~~Series C Preferred Stock, subject~~common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during the grace period. If our common stock does not regain compliance with the Bid Price Rule during this grace period, we will be eligible for an additional grace period of 180 calendar days provided that we satisfy Nasdaq’s continued listing requirement for market value of publicly held shares and all other initial listing standards for listing on The Nasdaq Capital Market, other than the minimum bid price requirement, and provide written notice to ~~certain~~

~~exceptions, or entering into any agreement or making any public announcement with respect~~Nasdaq of our intention to ~~such a dilutive issuance, until~~cure the delinquency during the second grace period. If we meet these requirements, Nasdaq will inform us that we have ~~filed a proxy statement under Section 14(a) of the Exchange Act or information statement pursuant~~been granted an additional 180 calendar days. However, if it appears 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 to 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~~cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide notice that our securities will be subject to delisting.

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We are presently evaluating various courses of action to regain compliance with the Bid Price Rule. However, there can be no assurance that we will be able to regain compliance.

If NASDAQ delists our securities, we could face significant consequences, including:

a limited availability for market quotations for our securities;

reduced liquidity with respect to our securities;

a determination that our common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in reduced trading;

activity in the secondary trading market for our common stock;

limited amount of news and analyst coverage; and

a decreased ability to issue additional securities or obtain additional financing in the future.

In addition, we would no longer be subject to NASDAQ rules, including rules requiring us to have a certain number of independent directors and ~~we may~~to meet other corporate governance standards

We face risks related to health pandemics and other widespread outbreaks of contagious disease, including the novel coronavirus, COVID-19, which could significantly disrupt our operations and impact our financial results.

Our business could be disrupted and materially adversely affected by the recent outbreak of COVID-19. In December 2019, an outbreak of respiratory illness caused by a strain of novel coronavirus, COVID-19, began in China. As of April 2020, that outbreak has led to numerous confirmed cases worldwide, including in the United States. The outbreak and government measures taken in response have ~~to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates or restrict or cease our operations.~~

~~We have identified material weaknesses in our internal control over financial reporting that~~also had a significant impact, both direct and indirect, on businesses and commerce. Global health concerns, such as coronavirus, could ~~if not remediated,~~also result in ~~material misstatements~~social, economic, and labor instability in the countries in which we or the third parties with whom we engage operate.

The spread of COVID-19 has created a worldwide humanitarian and economic crisis. The events we are living through are in many ways unprecedented, with large-scale quarantines, border closings, school closings, and physical distancing. Governments and communities have been jolted into action to “flatten the curve.” As an organization we have accelerated 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~~actions to protect employees, customers and suppliers.

The future progression of the outbreak and its effects on our ~~evaluation of internal control over~~business and operations are uncertain. While we can only estimate the financial ~~reporting,~~impacts to our business, based on current data, we have ~~identified~~experienced business interruptions in certain urban markets ranging from 30% to 85%. With the ~~following deficiencies~~understanding that it is extremely difficult to project the full and ongoing impact of state-by-state quarantine and shelter-in-place orders, we ~~believe~~anticipate that such rules and restrictions on businesses will continue through the second quarter of 2020 and quite possibly beyond, in various degrees, as the country re-opens state by state, county by county and city by city. Returning to ~~be material weaknesses: (i) our lack~~normalcy is conditioned on many factors surrounding the control and or eradication of expertise necessary to validate the proper accounting 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 we do not have contracts with certain payors 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, ifCOVID-19. As such, we are unable to ~~successfully remediate these material weaknesses and if we are unable~~provide additional insight on the impact to produce accurate and timely financial statements, our stock price may be materially adversely affected and we may be unable to maintain compliance with applicable stock exchange listing requirements. Effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business at this time.

Going forward, we expect that challenges to our business will continue. We have been and will continue to be prudent in managing through this economic crisis. Digital connectivity is now fundamental to the continuity of our business operations. We continually engage our employees and customers in keeping safe. We monitor adherence to governmental guidelines. We have employed remote work where possible. In this unchartered time, we recognize the need for frequent and transparent communication to all parties. As necessary, we will provide additional information related to this economic condition, including the impact to our future operating results due to downturns in global economies and financial markets.

We face risks related to the Paycheck Protection Program loan (PPP Loan), which could negatively impact our financial position.

On April 23, 2020, the Company entered into the Promissory Note evidencing an unsecured $787,200 loan under the PPP. The PPP was established under the recently congressionally-approved CARES Act and is administered by the U.S. Small Business Administration. The PPP Loan to the Company is being made through Webster Bank, N.A.

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The term of the PPP Loan is two years. The interest rate on the PPP Loan is 1.00% and payments shall be ~~harmed, investors could lose confidence in our reported financial information,~~deferred for the first six months of the term of the loan. Under the terms of the CARES Act, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the ~~trading price~~maintenance of employee and compensation levels. The Company intends to use all or a significant majority of the PPP Loan amount for qualifying expenses but no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. If forgiveness is not granted, the PPP Loan, in whole or in part, will need to be repaid by the Company, which could have an adverse effect on our ~~common stock could drop significantly.~~

future cash flows and financial position.

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 3. Default Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

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.

~~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

~~SIGNATURES~~

Table of Contents

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

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: May 14, 2020	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: May 14, 2020	~~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	)