WASHINGTON, D.C. 20549

~~_______________________________~~

FORM 10-Q

~~_______________________________~~

(Mark One)


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

2023

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

~~_______________________________~~

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)~~

(203) 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 Capital Market

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

Yes x ☒No o

◻

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

Yes x ☒No o

◻

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



Large accelerated filer	◻	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 of the Exchange Act). Yes o☐ No x

☒

As of ~~November 9, 2017,~~August 8, 2023, the number of shares of common stock outstanding was ~~10,028,763.~~27,562,298.

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~~June 30, ~~2017 (Unaudited)~~2023 (unaudited) and December 31, ~~2016~~2022		3

		~~Unaudited~~ Condensed Consolidated Statements of Operations for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022 (unaudited)		4

		~~Unaudited~~ Condensed Consolidated Statements of Stockholders’ Equity ~~(Deficit)~~ for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2023 and 2022 (unaudited)		5

		~~Unaudited~~ Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022 (unaudited)	6	7

		Notes to Unaudited Condensed Consolidated Financial Statements	8	9

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	32	28

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	39	33

Item 4.		Controls and Procedures	39	34

PART II.	Other Information	~~OTHER INFORMATION~~	41 35

Item 1.		Legal Proceedings	41	35

Item 1A.		Risk Factors	41	35

Item 6.2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~Exhibits~~	43 39

~~Signatures~~Item 3.	44Defaults Upon Senior Securities		39

Item 4.	Mine Safety Disclosures		39

Item 5.	Other Information		39

Item 6.	Exhibits		39

Signatures			41

~~PART I. FINANCIAL INFORMATION~~

Table of Contents

PART 1. FINANCIAL INFORMATION


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

Item 1. Condensed Consolidated Financial Statements

PRECIPIO, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

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


	June 30, 2023
	(unaudited)		December 31, 2022
ASSETS
CURRENT ASSETS:
Cash	$	2,573	$	3,445
Accounts receivable, net		884		1,036
Inventories		537		708
Other current assets		354		521
Total current assets		4,348		5,710

PROPERTY AND EQUIPMENT, NET		791		877

OTHER ASSETS:
Finance lease right-of-use assets, net		214		257
Operating lease right-of-use assets, net		722		763
Intangibles, net		13,293		13,768
Other assets		104		129
Total assets	$	19,472	$	21,504
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt, less debt issuance costs	$	27	$	255
Current maturities of finance lease liabilities		155		162
Current maturities of operating lease liabilities		225		199
Accounts payable		2,402		2,042
Accrued expenses		1,895		1,584
Deferred revenue		17		119
Total current liabilities		4,721		4,361
LONG TERM LIABILITIES:
Long-term debt, less current maturities and debt issuance costs		120		134
Finance lease liabilities, less current maturities		31		68
Operating lease liabilities, less current maturities		509		574
Total liabilities		5,381		5,137
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS’ EQUITY:
Preferred stock - $0.01 par value, 15,000,000 shares authorized at June 30, 2023 and December 31, 2022, 47 shares issued and outstanding at June 30, 2023 and December 31, 2022, liquidation preference of $46 at June 30, 2023		—		—
Common stock, $0.01 par value, 150,000,000 shares authorized at June 30, 2023 and December 31, 2022, 27,562,298 and 22,820,260 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively		275		228
Additional paid-in capital		111,371		108,371
Accumulated deficit		(97,620)		(92,297)
Total Precipio, Inc. stockholders’ equity		14,026		16,302
Noncontrolling interest in joint venture		65		65
Total stockholders’ equity		14,091		16,367
Total liabilities and stockholders’ equity	$	19,472	$	21,504

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)

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

(unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
SALES:
Service revenue, net	$	2,768	$	2,226	$	4,836	$	4,231
Other revenue		877		220		1,638		742
Revenue, net of contractual allowances and adjustments		3,645		2,446		6,474		4,973
Adjustment for allowance for doubtful accounts		(112)		(87)		(124)		(167)
Net sales		3,533		2,359		6,350		4,806
COST OF SALES:
Cost of service revenue		1,880		1,366		3,649		2,902
Cost of other revenue		282		220		581		428
Total cost of sales		2,162		1,586		4,230		3,330
Gross profit		1,371		773		2,120		1,476
OPERATING EXPENSES:
Operating expenses		3,663		3,206		7,438		8,718
OPERATING LOSS		(2,292)		(2,433)		(5,318)		(7,242)
OTHER (EXPENSE) INCOME:
Interest expense, net		(1)		(2)		(5)		—
Warrant revaluation		–		297		–		519
Gain on settlement of liability		–		–		–		1
Total other (expense) income		(1)		295		(5)		520
LOSS BEFORE INCOME TAXES		(2,293)		(2,138)		(5,323)		(6,722)
INCOME TAX EXPENSE		–		–		–		—
NET LOSS		(2,293)		(2,138)		(5,323)		(6,722)

Less: Net income attributable to noncontrolling interest in joint venture		–		(6)		–		(12)
NET LOSS ATTRIBUTABLE TO PRECIPIO, INC. COMMON STOCKHOLDERS	$	(2,293)	$	(2,144)	$	(5,323)	$	(6,734)

BASIC AND DILUTED LOSS PER COMMON SHARE	$	(0.09)	$	(0.09)	$	(0.22)	$	(0.30)
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING		24,362,785		22,708,708		23,790,491		22,708,648

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)

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

(unaudited)


	For the Three Months Ended June 30, 2023
	Preferred Stock			Common Stock			Additional						Noncontrolling
	Outstanding	Par		Outstanding	Par		Paid-in		Accumulated		Total		Interest in
	Shares	Value		Shares	Value		Capital		Deficit		Precipio, Inc.		Joint Venture		Total
Balance, April 1, 2023	47	$	—	23,364,086	$	233	$	109,254	$	(95,327)	$	14,160	$	65	$	14,225
Net (loss) income	—		—	—		—		—		(2,293)		(2,293)		—		(2,293)
Issuance of common stock in connection with purchase agreements, net of issuance costs	—		—	4,125,000		41		1,719		—		1,760		—		1,760
Issuance of common stock in connection with at the market offering, net of issuance costs	—		—	73,212		1		46		—		47		—		47
Stock-based compensation	—		—	—		—		352		—		352		—		352
Balance, June 30, 2023	47	$	—	27,562,298	$	275	$	111,371	$	(97,620)	$	14,026	$	65	$	14,091

	For the Six Months Ended June 30, 2023
	Preferred Stock			Common Stock			Additional						Noncontrolling
	Outstanding	Par		Outstanding	Par		Paid-in		Accumulated		Total		Interest in
	Shares	Value		Shares	Value		Capital		Deficit		Precipio, Inc.		Joint Venture		Total
Balance, January 1, 2023	47	$	—	22,820,260	$	228	$	108,371	$	(92,297)	$	16,302	$	65	$	16,367
Net (loss) income	—		—	—		—		—		(5,323)		(5,323)		—		(5,323)
Issuance of common stock in connection with purchase agreements	—		—	4,125,000		41		1,719		—		1,760		—		1,760
Issuance of common stock in connection with at the market offering, net of issuance costs	—		—	617,038		6		479		—		485		—		485
Stock-based compensation	—		—	—		—		802		—		802		—		802
Balance, June 30, 2023	47	$	—	27,562,298	$	275	$	111,371	$	(97,620)	$	14,026	$	65	$	14,091

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PRECIPIO, INC. AND ~~SUBSIDIARY~~SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(unaudited)


	For the Three Months Ended June 30, 2022
	Preferred Stock			Common Stock			Additional						Noncontrolling
	Outstanding	Par		Outstanding	Par		Paid-in		Accumulated		Total		Interest in
	Shares	Value		Shares	Value		Capital		Deficit		Precipio, Inc.		Joint Venture		Total
Balance, April 1, 2022	47	$	—	22,708,708	$	227	$	106,663	$	(84,684)	$	22,206	$	46	$	22,252
Net loss	—		—	—		—		—		(2,144)		(2,144)		6		(2,138)
Stock-based compensation	—		—	—		—		451		—		451		—		451
Balance, June 30, 2022	47	$	—	22,708,708	$	227	$	107,114	$	(86,828)	$	20,513	$	52	$	20,565

	For the Six Months Ended June 30, 2022
	Preferred Stock			Common Stock			Additional						Noncontrolling
	Outstanding	Par		Outstanding	Par		Paid-in		Accumulated		Total		Interest in
	Shares	Value		Shares	Value		Capital		Deficit		Precipio, Inc.		Joint Venture		Total
Balance, January 1, 2022	47	$	—	22,708,442	$	227	$	104,431	$	(80,094)	$	24,564	$	40	$	24,604
Net loss	—		—	—		—		—		(6,734)		(6,734)		12		(6,722)
Proceeds upon issuance of common stock from exercise of warrants	—		—	266		—		—		—		—		—		—
Stock-based compensation	—		—	—		—		2,683		—		2,683		—		2,683
Balance, June 30, 2022	47	$	—	22,708,708	$	227	$	107,114	$	(86,828)	$	20,513	$	52	$	20,565

See notes to unaudited condensed consolidated financial statements

~~UNAUDITED~~

Table of Contents

PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

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

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

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest $ 65
$ 48
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Purchases of equipment financed through capital lease —
49
Preferred unit dividend financed through exchange agreement —
433
Convertible bridge notes exchanged for long-term debt —
680
Series A and B preferred exchanged for long-term debt —
1,715
Conversion of bridges loans plus interest into common stock 1,787
—
Conversion of senior and junior notes plus interest into preferred stock and common stock 4,771
—



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

(unaudited)


	Six Months Ended June 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,323)	$	(6,722)

Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization		621		604
Amortization of operating lease right-of-use asset		99		93
Amortization of finance lease right-of-use asset		43		67
Amortization of deferred financing costs, debt discounts and debt premiums		1		2
Gain on settlement of liability		—		(1)
Stock-based compensation		802		2,683
Provision for losses on doubtful accounts		124		165
Warrant revaluation		—		(519)
Changes in operating assets and liabilities:
Accounts receivable		28		(595)
Inventories		171		(78)
Other assets		192		207
Accounts payable		353		692
Operating lease liabilities		(97)		(90)
Deferred revenue		(102)		(5)
Accrued expenses		311		(483)
Net cash used in operating activities		(2,777)		(3,980)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(54)		(106)
Net cash used in investing activities		(54)		(106)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on finance lease obligations		(44)		(95)
Issuance of common stock, net of issuance costs		2,245		—
Principal payments on long-term debt		(242)		(14)
Net cash flows provided by (used in) financing activities		1,959		(109)
NET CHANGE IN CASH		(872)		(4,195)
CASH AT BEGINNING OF PERIOD		3,445		11,668
CASH AT END OF PERIOD	$	2,573	$	7,473

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PRECIPIO, INC. AND ~~SUBSIDIARY~~SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS- CONTINUED

(Dollars in thousands)

(unaudited)


	Six Months Ended June 30,
	2023		2022
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest	$	18	$	19

SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY
Purchases of equipment financed through accounts payable		7		7
Operating lease right-of-use assets obtained in exchange for operating lease obligations		58		92

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PRECIPIO, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~

2022

1. BUSINESS DESCRIPTION

Business ~~Description~~

Description.

Precipio, Inc., and ~~Subsidiary, (“we”~~its subsidiaries, (collectively, “we”, “us”, “our”, the “Company” or “Precipio”) is a healthcare solutions company focused on cancer diagnostics. The Company’s business mission is to address the pervasive problem of cancer misdiagnoses by developing solutions to mitigate the root causes of this problem in the form of diagnostic products, reagents and services. Misdiagnoses originate from aged commercial diagnostic cancer testing technologies, lack of subspecialized expertise, and sub-optimal laboratory processes that are needed in today’s diagnostic cancer testing in order to provide accurate, rapid, and resource-effective results to treat patients. Industry studies estimate 1 in 5 blood-cancer patients are misdiagnosed. As cancer diagnostic testing has evolved from cellular to molecular (genes and exons), laboratory testing has become extremely complex, requiring even greater diagnostic precision, attention to process and a more appropriate evaluation of the abundance of genetic data to effectively gather, consider, analyze and present information for the physician for patient treatment. Precipio sees cancer diagnostics ~~company providing~~as requiring a holistic approach to improve diagnostic data for improved interpretations with the intent to reduce misdiagnoses. By delivering diagnostic products, reagents and services that improve the accuracy and efficiency of diagnostics, leading to fewer misdiagnoses, we believe patient outcomes can be improved through the ~~oncology market. We~~selection of appropriate therapeutic options. Furthermore, we believe that better patient outcomes will have ~~built~~a positive impact on healthcare expenses as misdiagnoses are reduced. Better Diagnostic Results – Better Patient Outcome – Lower Healthcare Expenditures.

To deliver its strategy, the Company has structured its organization in order to drive development of diagnostic products. Laboratory and continue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technology developed within academic institutions and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratoryR&D facilities located in New Haven, Connecticut and ~~have partnered with~~Omaha, Nebraska house development teams that collaborate on new products and services. The Company operates CLIA laboratories in both the ~~Yale School of Medicine to capture the expertise, experience~~New Haven, Connecticut and ~~technologies developed within academia so that we can provide a better standard of~~Omaha, Nebraska locations providing essential blood cancer diagnostics to office-based oncologists in many states nationwide. To deliver on our strategy of mitigating misdiagnoses we rely heavily on our CLIA laboratory to support R&D beta-testing of the products we develop, in a clinical environment.

Our operating structure promotes the harnessing of our proprietary technology and ~~solve~~genetic diagnostic expertise to bring to market the ~~growing problem~~Company’s robust pipeline of ~~cancer misdiagnosis. We also operate~~innovative solutions designed to address the root causes of misdiagnoses.

Joint Venture.

The Company has determined that it holds a ~~research and development facility~~variable interest in Omaha, Nebraska which will focus on further development of ICE-COLD-PCR (“ICP”), the patented technology which was exclusively licensed by us from Dana-Farber Cancer Institute, Inc. (“Dana-Farber”) at Harvard University (“Harvard”). The research and development center will focus on the development of this technology, which we believe will enable us to commercialize other technologies developed by our current and future academic partners. Our platform connects patients, physicians and diagnostic experts residing within academic institutions. Launcheda joint venture formed 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~~April 2020 (the “Joint Venture”) 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~~primary beneficiary of the ~~tumor may not properly represent the tumor’s entire genetic composition; thus, the diagnostic results from a tumor may be incomplete and non-representative.~~

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

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

ICP is an enrichment technology that enables the laboratory to focus its analysis on the tumor DNA by enriching, and thereby “multiplying” the presence of, tumor DNA, while maintaining the normal DNA at its same level. Once the enrichment process has been completed, the laboratory genetic testing equipment is able to identify genetic abnormalities presented in the ctDNA, and an analysis can be conducted at a higher level of sensitivity, to enable the detection of such genetic abnormalities. The technology is encapsulated into a chemical that is provided in the form of a kit and sold to other laboratories who wish to conduct these tests in-house. The chemical within the kit is added to the specimen preparation process, enriching the sample for the tumor DNA so that the analysis will detect those genetic abnormalities.

~~Merger Transaction~~

On June 29, 2017, the Company (then known as “Transgenomic, Inc.”, or “Transgenomic”), completed a reverse merger (the “Merger”) with Precipio Diagnostics, LLC, a privately held Delaware limited liability companyvariable interest entity (“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”VIE”). See Note 32 - ~~Reverse Merger~~Summary of Significant Accounting Policies for ~~additional~~further discussion regarding consolidation of variable interest entities.

The Company is working with Poplar Healthcare PLLC (“Poplar”) to dissolve the ~~Merger.~~

Joint Venture with an effective date of December 31, 2022. This is expected to be completed in Q4 2023.

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~~For the six months ended June 30, ~~2017,~~2023, the Company had a net loss of ~~$10.7~~$5.3 million and net cash used in operating activities of $2.8 million. As of June 30, 2023, the Company had an accumulated deficit of $97.6 million and a negative working capital of ~~$12.6~~$0.4 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

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business plan, including generating additional revenue and avoiding potential business disruption due to the macroeconomic environment and the 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 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~~

~~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.~~

●

On April 14, 2023, the Company entered into a sales agreement with AGP, pursuant to which the Company may offer and sell its common stock having aggregate sales proceeds of up to $5.8 million, to or through AGP, as sales agent (the “AGP 2023 Sales Agreement”). The sale of our shares of Common Stock to or through AGP, pursuant to the AGP 2023 Sales Agreement, will be made pursuant to the registration statement (the “2023 Registration Statement”) on Form S-3 (File No. 333-271277), filed by the Company with the SEC on April 14, 2023, as amended by Amendment No. 1 filed by the Company with the SEC on April 25, 2023, and declared effective on April 27, 2023. As of the date the condensed consolidated financial statements were issued, we have received less than $1 thousand in gross proceeds through the AGP 2023 Sales Agreement from the sale of 500 shares of common stock. The Company has approximately $3.8 million available for future sales pursuant to the AGP 2023 Sales Agreement. See Note 7 Stockholders’ Equity, AGP 2023 Sales Agreement, for further discussion.

●

On June 8, 2023, the Company entered into a securities purchase agreement pursuant to which it received $2.0 million in gross proceeds through the sale of 4,125,000 shares of common stock and warrants to purchase shares of our common stock. Issuance costs were approximately $0.2 million and the Company intends to use the net proceeds for working capital and general corporate purposes. See Note 7 Stockholders’ Equity, Registered Direct Offering, for further discussion.

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 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~~June 30, 2023 and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022, 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~~2022 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 30, 2023. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year ~~2017.~~

~~Reclassifications.~~

Certain reclassifications were made to the 2016 financial statements to conform to current year financial statement presentation. These reclassifications had no effect on previously reported net earnings.

~~Principles of Consolidation.~~

2023.

The condensed consolidated financial statements include the accounts of Precipio ~~Inc.~~ and ~~our~~its wholly owned ~~subsidiary.~~subsidiaries, and the Joint Venture which is a VIE in which we are the primary beneficiary. Refer to the section titled “Consolidation of Variable Interest Entities” for further information related to our accounting for the Joint Venture. All ~~inter-company~~intercompany balances ~~and transactions~~ have been eliminated in consolidation.

~~Use~~

Table of ~~Estimates.~~Contents

Reclassification.

Certain reclassifications were made to the statements of cash flows related to splitting accruals and deferred revenue to separate lines in order to conform to the 2023 presentation. These reclassifications had no effect on previously reported retained earnings, net income, total assets or liabilities, or cash flows used in operating activities.

Recently Adopted Accounting Pronouncements.

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. The ~~preparation~~Company adopted this guidance on January 1, 2023. The adoption of this standard was not material to our condensed consolidated financial ~~statements requires management~~statements.

Recent Accounting Pronouncements Not Yet Adopted.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820) (“ASU 2022-03”). The amendments in ASU 2022-03 clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments in this Update also require additional disclosures for equity securities subject to contractual sale restrictions. The provisions in this Update are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company does not expect to early adopt this ASU. The Company is currently assessing the potential impact that the adoption of this ASU will have on its condensed consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in annual reporting periods ending after December 15, 2020. The Company is currently assessing the potential impact that the adoption of this ASU will have on its 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. Shares of the Company’s common stock underlying pre-funded warrants are included in the calculation of basic and diluted loss per share due to the negligible exercise price of the pre-funded warrants. Options, warrants and conversion rights pertaining to 14,183,186 and 4,600,457 shares of our common stock have been excluded from the computation of diluted loss per share at June 30, 2023 and 2022, respectively, because the effect is anti-dilutive due to the net loss.

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


	June 30,
	2023	2022
Stock options	4,636,043	3,660,457
Warrants	9,429,643	822,500
Preferred stock	117,500	117,500
Total	14,183,186	4,600,457

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Consolidation of Variable Interest Entities.

We evaluate any entity in which we are involved to determine if the entity is a VIE and if so, whether we hold a variable interest and are the primary beneficiary. We consolidate VIEs that are subject to assessment when we are deemed to be the primary beneficiary of the VIE. The process for determining whether we are the primary beneficiary of the VIE is to conclude whether we are a party to the VIE holding a variable interest that meets both of the following criteria: (1) has the power to make ~~estimates and assumptions~~decisions that most significantly affect the ~~reported amounts~~economic performance of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.

We have determined that we hold a variable interest in the Joint Venture, have the power to make significant operational decisions on behalf of the VIE and also have the obligation to absorb the majority of the losses from the VIE. As such we have also determined that we are the primary beneficiary of the VIE. The following table presents information about the carrying value of the assets and liabilities of the Joint Venture which we consolidate and ~~disclosure~~which are included on our condensed consolidated balance sheets. Intercompany balances are eliminated in consolidation and not reflected in the following table.


(dollars in thousands)	June 30, 2023		December 31, 2022
Assets:
Accounts receivable, net	$	224	$	335
Total assets	$	224	$	335
Liabilities:
Accrued expenses	$	17	$	50
Total liabilities	$	17	$	50
Noncontrolling interest in Joint Venture	$	65	$	65
Total stockholders' equity	$	127	$	127

3. LONG-TERM DEBT

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


	Dollars in Thousands
	June 30, 2023		December 31, 2022
Connecticut Department of Economic and Community Development (DECD)	$	161	$	176
DECD debt issuance costs		(14)		(15)
Financed insurance loan		—		228
Total long-term debt		147		389
Current portion of long-term debt		(27)		(255)
Long-term debt, net of current maturities	$	120	$	134

Department of Economic and Community Development.

On January 8, 2018, the Company entered into an agreement with the Connecticut Department of Economic and Community Development (“DECD”) by which the Company received 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 ~~liabilities~~includes interest paid monthly at ~~the~~3.25%. The maturity date of the ~~financial statements~~DECD 2018 Loan was extended to May 31, 2028 and the ~~reported amounts of net sales and expenses during~~modification did not have a material impact on the ~~reporting period. In addition, estimates and assumptions associated with the determination~~Company’s cash flows.

Amortization of the ~~fair value~~debt issuance costs were less than $1 thousand for the three months ended June 30, 2023 and 2022, respectively, and $1 thousand and $2 thousand for the six months ended June 30, 2023 and 2022, respectively.

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Financed Insurance Loan.

The Company finances certain ~~assets~~of its insurance premiums (the “Financed Insurance Loans”). In July 2022, the Company financed $0.4 million with a 5.99% interest rate and ~~related impairments require considerable judgment by management. Actual results could differ from~~is obligated to make payments on a monthly basis through June 2023. As of June 30 2023 and December 31, 2022, the ~~estimates~~Financed Insurance Loan’s outstanding balance of zero and ~~assumptions used~~$0.2 million, respectively, was included in ~~preparing these~~current maturities of long-term debt in the Company’s condensed consolidated ~~financial statements.~~

~~Risks~~balance sheet. A corresponding prepaid asset was included in other current assets.

4. ACCRUED EXPENSES OTHER CURRENT LIABILITIES.

Accrued expenses at June 30, 2023 and ~~Uncertainties.~~

~~Certain risks~~December 31, 2022 are as follows:


(dollars in thousands)	June 30, 2023		December 31, 2022
Accrued expenses	$	1,004	$	983
Accrued compensation		758		491
Accrued franchise, property and sales and use taxes		114		91
Accrued interest		19		19
	$	1,895	$	1,584

The Company recorded certain settled reductions in accrued expenses and ~~uncertainties~~accounts payable as gains which are ~~inherent~~included in ~~our day-to-day operations and~~gain on settlement of liability, net in the ~~process of preparing our financial statements. The more significant of those risks are presented below and throughout the notes to the unaudited~~ condensed consolidated ~~financial statements.~~

statements of operations. During the three months ended June 30, 2023 and 2022, there were no gains recorded on settlements of liability. During the six months ended June 30, 2023 and 2022, zero and $1 thousand, respectively, were recorded as a gain on settlement of liability.

5. COMMITMENTS AND CONTINGENCIES

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

PURCHASE COMMITMENTS

The Company has entered into purchase commitments for reagents from suppliers. These agreements started in 2011 and run through 2025. The Company and the suppliers will true up the amounts on an annual basis. The future minimum purchase commitments under these and other purchase agreements are approximately $0.8 million and $1.3 million at June 30, 2023 and December 31, 2022, respectively.

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 less than $0.1 million has been recorded and is reflected in accounts payable within the accompanying condensed consolidated balance sheets at June 30, 2023 and December 31, 2022.

LEGAL AND REGULATORY ENVIRONMENT

The healthcare industry ~~which~~ is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not ~~necessarily~~ limited to, matters such as licensure, accreditation, government healthcare program participation ~~requirements,~~requirement, reimbursement for patient services and Medicare and Medicaid fraud

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~~PRECIPIO, INC. AND SUBSIDIARY~~

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

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

and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers.

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

~~Fair Value.~~

~~Unless otherwise specified, book~~

6. LEASES

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 right-of-use (“ROU”) assets and lease liabilities as they are not reasonably certain of 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 ~~approximates fair value.~~of the 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 lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The ~~common stock warrant liability~~primary leases we enter into with initial terms of 12 months or less are for equipment.

The Company also recognizes ROU assets from finance leases in connection with its HemeScreen Reagent Rental (“HSRR”) program. For certain customers in the HSRR program, the Company leases diagnostic testing equipment and then subleases the equipment to the customer. Finance lease ROU assets and finance lease liabilities are recognized at the lease commencement date, and at the sublease commencement date the finance lease ROU asset is derecognized and 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~~as cost 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.~~

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

~~Service companies~~sales in the ~~health care industry typically grant credit without collateral to patients. The majority~~condensed consolidated statements 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 payersoperations. There were no derecognized finance lease ROU assets for administrative, financial, and analytical purposes. CPT codes are currently identified by the Centers for Medicare and Medicaid Services and third-party payors. The Company utilizes CPT codes for Pathology and Laboratory Services contained within codes 80000-89398.

~~Property and Equipment.~~

~~Depreciation expense related to property and equipment was less than $0.1 million for both~~ the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016. Depreciation expense during each period includes depreciation related~~2022, respectively. Where Precipio is the lessor, customers lease diagnostic testing equipment from the Company with the transfer of ownership to ~~equipment acquired under capital leases.~~

~~Goodwill and Intangible Assets.~~

~~As a result~~the customer at the end of the ~~Merger,~~lease term at no additional cost. For these contracts, the Company ~~recorded goodwill and intangible assets as part of its allocation of the purchase consideration. See Note 3 - Reverse Merger~~accounts for the ~~amounts recorded.~~

~~Goodwill~~

~~Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of the business acquired. See Note 3 - Reverse Merger~~arrangements as sales-type leases. The lease asset for the amount recorded. Goodwill is tested for impairment annually. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs that may indicate that the assets might be impaired. In assessing goodwill for impairment, the Company has the option to assess qualitative factors to determine whether events or circumstances indicate that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, for which the consolidated Company is considered one reporting unit. If thissales-type leases is the ~~case, then performing~~net investment in leased asset, which is recorded once the ~~quantitative goodwill impairment test~~finance lease ROU asset is ~~unnecessary. An entity can choose not to perform~~derecognized and a ~~qualitative assessment for any~~related gain or ~~all~~loss is noted. The net investment in leased assets was $0.1 million as of ~~its reporting units,~~June 30, 2023 and ~~proceed directly to the use~~December 31, 2022, respectively, and is included in other current assets and other assets in our condensed consolidated balance sheets.

Table 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. Contents

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	June 30, 2023		December 31, 2022
Assets:
Operating lease right-of-use assets, net	$	722	$	763
Finance lease right-of-use assets, net (1)		214		257
Total lease assets	$	936	$	1,020

Liabilities:
Current:
Current maturities of operating lease liabilities	$	225	$	199
Current maturities of finance lease liabilities		155		162
Noncurrent:
Operating lease liabilities, less current maturities		509		574
Finance lease liabilities, less current maturities		31		68
Total lease liabilities	$	920	$	1,003

(1)

As of June 30, 2023 and December 31, 2022, finance lease right-of-use assets included $5 thousand and $13 thousand, respectively, of assets related to finance leases associated with the HSRR program.

As of June 30, 2023 and December 31, 2022, the estimated future minimum lease payments, excluding non-lease components, are as follows:


(dollars in thousands)	Operating Leases		Finance Leases		Total
		June 30,		June 30,		June 30,
		2023		2023		2023
2023 (remaining)	$	136	$	45	$	181
2024		258		80		338
2025		224		65		289
2026		214		26		240
Total lease obligations		832		216		1,048
Less: Amount representing interest		(98)		(30)		(128)
Present value of net minimum lease obligations		734		186		920
Less, current portion		(225)		(155)		(380)
Long term portion	$	509	$	31	$	540

Other information as of June 30, 2023 and December 31, 2022 is as follows:


	June 30,	December 31,
	2023	2022
Weighted-average remaining lease term (years):
Operating leases	3.3	3.7
Finance leases	2.5	2.8
Weighted-average discount rate:
Operating leases	8.00%	8.00%
Finance leases	10.48%	10.31%

During the six months ended June 30, 2023 and 2022, operating cash flows from operating leases was $0.1 million, respectively, and operating lease ROU assets obtained in exchange for operating lease liabilities was $0.1 million, respectively.

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~~PRECIPIO, INC. AND SUBSIDIARY~~

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

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

stock. Each factor is assessed to determine whether it impacts the impairment test positively or negatively, and the magnitude of any such impact. During the three months ended September 30, 2017, the Company experienced a decline in its share price and a significant reduction in its market capitalization, as such the Company determined that an assessment of goodwill should be performed using the qualitative approach described above. Based on the qualitative assessment, the Company concluded that it was more likely than not that the fair value of the Company was less than its carry value. While there

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 $1.0approximately $0.1 million during the three months ended ~~September~~June 30, ~~2017.~~

~~Intangibles~~

~~We review our amortizable long-lived assets~~2023 and 2022, respectively, and $0.2 million for ~~impairment annually or whenever events indicate that~~ the ~~carrying amount of~~six months ended June 30, 2023 and 2022, respectively. These costs are primarily related to long-term operating leases for 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 the carrying amount of the asset (group). The amount of the loss would be determined by comparing the fair value of the asset to the carrying amount of the asset (group). There were no impairment charges during the nine months ended September 30, 2017.

In-process research and development (“IPR&D”) represents the fair value assigned to research and development assets that were not fully developed at the date of the Merger. Until the IPR&D projects are completed, the assets are accounted for as indefinite-lived intangible assets and subject to impairment testing. For the nine months ended September 30, 2017, there was no impairment of IPR&D.

~~Stock-Based Compensation.~~

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

~~Net Sales Recognition.~~

~~Revenue is realized and earned when all of the following criteria are met:~~

~~Persuasive evidence of an arrangement exists;~~

~~Delivery has occurred or services have been rendered;~~

~~The seller’s price to the buyer is fixed or determinable; and~~

~~Collectability is reasonably assured.~~

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

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

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

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

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

~~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~~

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) 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 Diagnostics are included in the comparative prior periods.

On the Closing Date, the outstanding common and preferred units of Precipio Diagnostics and certain debt of Precipio Diagnostics were converted into (i) 5,352,847 shares of Precipio common stock, together with cash in lieu of fractional units, and (ii) 802,920 shares of Precipio preferred stock with an aggregate face amount equal to $3 million.

~~In connection with the Merger, 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~~six months ended ~~September~~June 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~~2023 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 2021,2022, 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~~

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. Principal

Finance Lease Costs

Finance lease amortization 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 isexpenses 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.

~~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~~

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.~~

~~As a result of~~operations for the ~~merger, there was a change in ownership as defined in IRS § 382. Because of this change, use of a portion of the accumulated net operating losses~~three and ~~tax credit carryforwards will be eliminated~~six months ended June 30, 2023 and the remainder will be limited in future periods. Since the net deferred tax assets have a full valuation allowance recorded, any limitation generated from this calculation would not effect the current financial statements.

~~10.~~2022. The balances within these accounts are less than $0.1 million, respectively.

7. 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 On December 20, 2018, the Company’s shareholders approved the proposal to authorize the Company’s Board of Directors to, in its discretion, amend the Company’s Third Amended and Restated Certificate of Incorporation to increase the total number of authorized shares of common stock from 150,000,000 shares to 250,000,000 shares. The Company has not yet implemented this increase.

During the three and six months ended June 30, 2023 and 2022, the Company issued zero and 266 shares of its common stock, respectively, in connection with the Merger, the Company effected a 1-for-30 reverse stock split of its common stock. This reverse stock split became effective on June 13, 2017 and, unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying unaudited condensed consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split. Additionally, as a result of the Merger, the Company has recapitalized its stock. All historical preferred stock, common stock, restricted units, warrants and additional paid-in capital, including share and per share amounts, have been retroactively adjusted to reflect the equity structure of the combined company, including the effect of the Merger exchange ratio. Pursuant to the Merger Agreement, each outstanding unit of Precipio Diagnostics was exchanged for 10.2502 pre-reverse stock split shares of the Company's common stock.

~~During 2017, restricted stock~~ of zero and ~~59,563 shares were granted~~266 warrants, respectively. The warrant exercises during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, none of which vested prior~~2022 resulted in net cash proceeds to the ~~merger. Upon closing~~Company of zero and less than $1 thousand, respectively.

At The Market Offering Agreement

AGP Sales Agreement

On April 2, 2021, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), pursuant to which the Company was permitted to offer and sell its common stock, par value $0.01 per share (the “Common Stock”) (the “Shares”), having aggregate sales proceeds of up to $22.0 million. Shares can be sold either directly to or through AGP as a sales agent (the “AGP Sales Agreement”), from time to time, in an “at the market offering” (as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended) of the ~~merger, all~~Shares (the “2021 ATM Offering”). The Company is limited in the number of shares ~~fully vested. During 2017, 64,593~~it can sell in the 2021 ATM Offering due to the offering limitations currently applicable to the Company under General Instruction I.B.6. of Form S-3 and the Company’s public float as of the applicable date of such sales, as well as the number of authorized and unissued shares available for issuance, in accordance with the terms of the AGP Sales Agreement.

The sale of our shares of Common Stock to or through AGP, will be made pursuant to the registration statement (the “Registration Statement”) on Form S-3 (File No. 333-237445), which was declared effective by the Securities and Exchange Commission (the “SEC”) on April 13, 2020, for an aggregate offering price of up to $50.0 million.

Under the AGP Sales Agreement, Shares were permitted to be sold by any method permitted by law deemed to be an “at the market offering.” AGP will also be able to sell shares of Common Stock by any other method permitted by law, including in negotiated transactions with the Company’s prior written consent. Upon delivery of a placement notice and subject to the terms and conditions of the AGP Sales Agreement, AGP was required to use its commercially reasonable efforts consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations, and the rules of The Nasdaq Capital Market to sell the Shares from time to time based upon the Company’s instructions, including any price, time or size limits specified by the Company. AGP is not under any obligation to purchase any of the Shares on a principal basis pursuant to the AGP Sales Agreement, except as otherwise agreed by AGP and the Company

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~~Three~~

in writing and ~~Nine Months Ended September~~expressly set forth in a placement notice. AGP’s obligations to sell the Shares under the AGP Sales Agreement are subject to satisfaction of certain conditions, including customary closing conditions. The Company is not obligated to make any sales of Shares under the AGP Sales Agreement and any determination by the Company to do so will be dependent, among other things, on market conditions and the Company’s capital raising needs.

The Company agreed to pay AGP a cash fee of 3.0% of the aggregate gross proceeds from the sale of the Shares on the Company’s behalf pursuant to the AGP Sales Agreement. The AGP Sales Agreement contains representations, warranties and covenants that are customary for transactions of this type. In addition, the Company has provided AGP with customary indemnification and contribution rights. The Company also agreed to reimburse AGP for certain specified expenses, including the expenses of counsel to AGP. The offering of the Shares pursuant to the AGP Sales Agreement terminated upon the expiration of the Company’s Registration Statement on Form S-3 (File No. 333-237445).

During the three and six months ended June 30, ~~2017~~2023, we received net proceeds of $0.1 million and ~~2016~~

$0.5 million from the sale of 72,712 and 616,538 shares of common stock through the AGP Sales Agreement. There were ~~released to~~no sales of common ~~stock. We recorded~~ stock ~~compensation expense~~through AGP during the three and six months ended June 30, 2022.

As of the date of issuance of this Quarterly Report on Form 10-Q, we have received an aggregate of $15.6 million in net proceeds, after issuance costs of approximately ~~$28,000 related~~$0.5 million, from the sale of 5,202,561 shares of common stock pursuant to the ~~restricted~~AGP Sales Agreement.

AGP 2023 Sales Agreement

On April 14, 2023, the Company entered into a Sales Agreement with AGP, pursuant to which the Company may offer and sell from time to time shares (the “Shares”) of its common stock, ~~that vested during~~par value $0.01 per share (the “Common Stock”) to or through AGP, as sales agent (the “AGP 2023 Sales Agreement”), in an “at the ~~nine~~market offering” (as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended) of the Shares. AGP will be entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of Shares pursuant to the AGP 2023 Sales Agreement.

The sale of our shares of Common Stock to or through AGP, pursuant to the AGP 2023 Sales Agreement, will be made pursuant to the registration statement (the “2023 Registration Statement”) on Form S-3 (File No. 333-271277), filed by the Company with the SEC on April 14, 2023, as amended by Amendment No. 1 filed by the Company with the SEC on April 25, 2023, and declared effective on April 27, 2023, for an aggregate offering price of up to $5.8 million.

During the three and six months ended ~~September~~June 30, ~~2017.~~

On2023, we received net proceeds of less than $1 thousand, respectively, from the ~~Closing Date, Precipio Diagnostics received 7,356,170~~sales of 500 shares of ~~Precipio~~ common stock ~~from~~pursuant to the ~~conversion~~AGP 2023 Sales Agreement. As a result of ~~preferred~~sales already made through the AGP 2023 Sales Agreement and the Registered Direct Offering, mentioned below, the Company has approximately $3.8 million available for future sales pursuant to the AGP 2023 Sales Agreement.

Registered Direct Offering

On June 8, 2023, the Company, entered into a securities purchase agreement (the “Purchase Agreement”) with certain institutional investors (the “Purchasers”), pursuant to which the Company agreed to issue and sell to the Purchasers, in a registered direct offering (the “Registered Direct Offering”), an aggregate of: (i) 4,125,000 shares (the “Shares”) of its common stock, ~~senior~~$0.01 par value (the “Common Stock”), at a price of $0.45 per share, and ~~junior debt, bridge notes and warrants. Also, certain advisors of Precipio Diagnostics received 321,821~~(ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 319,445 shares of ~~Precipio common stock related~~Common Stock, at a price of $0.449 per Pre-Funded Warrant. The Company reviewed the provisions of the Pre-Funded Warrants to ~~services performed~~determine the balance sheet classification and concluded that these warrants are to be classified as equity and are not subject to remeasurement on each balance sheet date. The Pre-Funded Warrants are immediately exercisable, have an exercise price of $0.001 per share, and may be exercised at any time until all of the Pre-Funded Warrants are exercised in ~~connection~~full. As of June 30, 2023, no Pre-Funded Warrants have been exercised.

In a concurrent private placement (the “Private Placement” and together with the ~~Merger.~~Registered Direct Offering, the “Offering”), pursuant to the Purchase Agreement, the Company agreed to issue and sell to the Purchasers, for no additional consideration, warrants (the “RDO Common Warrants” and, together with the Shares and the Pre-Funded Warrants, the

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“Securities”) to purchase up to 8,888,890 shares of Common Stock. The Company reviewed the provisions of the RDO Common Warrants to determine the balance sheet classification and concluded that these warrants are to be classified as equity and are not subject to remeasurement on each balance sheet date. The RDO Common Warrants are exercisable beginning six months after the date of issuance, have an exercise price of $0.63 per share, and will expire December 12, 2028. The fair value of ~~these advisory shares was $2.2~~the RDO Common Warrants of approximately $3.5 million at the date of issuance was estimated using the ~~Merger~~Black-Scholes model which used the following inputs: term of 5 years; risk free rate of 3.89%; volatility of 143%; and ~~is included as a merger advisory fee expense~~share price of $0.45 per share based on the trading price of the Company’s common stock. The Company allocated $1.3 million of the issuance proceeds to the RDO Common Warrants based on the relative fair value of the RDO Common Warrants, Common Stock and Pre-Funded Warrants issued in the ~~accompanying financial statements.~~

~~As part~~Offering. A holder of Pre-Funded Warrants may not exercise the warrant if the holder, together with its affiliates, would beneficially own more than 4.99% (or, at the election of the ~~Merger, Precipio Diagnostics also received 200,081~~purchaser, 9.99%) of the number of shares of ~~Precipio common stock~~the Common Stock outstanding immediately after giving effect to such exercise. A holder of Pre-Funded Warrants may increase or decrease this percentage not in excess of 19.99% by providing at least 61 days’ prior notice to the Company.

The Registered Direct Offering resulted in gross proceeds to the Company of approximately $2.0 million. The net proceeds to the Company from the Registered Direct Offering are approximately $1.8 million, excluding any proceeds 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,~~may be received upon the ~~shares will remain with Precipio Diagnostics as part~~cash exercise of the ~~unissued pool. For any shares that remain unissued, it is~~RDO Common Warrants, after deducting the ~~intent~~financial advisor’s fees and estimated offering expenses payable by the Company. The Company intends to use the net proceeds from the Registered Direct Offering for working capital and general corporate purposes, which may include capital expenditures, research and development expenditures, regulatory affairs expenditures, clinical trial expenditures, acquisitions of new technologies and investments and others.

The Purchase Agreement contains customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company, ~~to allocate these to Precipio Diagnostics shareholders on a pro rata basis.~~

~~Also, upon completion~~other obligations of the ~~Merger, Transgenomic legacy stockholders had 1,255,119 shares~~parties, and termination provisions. Additionally, each of ~~Precipio common stock outstanding.~~

~~Upon~~the directors and executive officers of the Company, pursuant to lock-up agreements (the “Lock-Up Agreements”), agreed not to sell or transfer any of the Company securities which they hold, subject to certain exceptions, during the 90-day period following the closing of the ~~August 2017 Offering,~~Registered Direct Offering. The Purchase Agreement also requires the Company ~~issued 359,999~~to use commercially reasonable efforts to file a registration statement with the SEC to register the resale by the Purchasers of the shares of Common Stock issuable upon exercise of the RDO Common Warrants within thirty (30) days of the date of the Purchase Agreement. The Company filed this registration statement on Form S-1 (File No. 333-273172), which was declared effective by the SEC on July 19, 2023.

On June 7, 2023, the Company also entered into a financial advisory agreement (the “Financial Advisor Agreement”) with A.G.P./Alliance Global Partners (the “Financial Advisor”). Pursuant to the terms of the Financial Advisor Agreement, the Financial Advisor agreed to use its reasonable best efforts to arrange for the sale of the Securities. The Company paid the Financial Advisor a cash fee of $140,000 generated from the sale of the Shares and Pre-Funded Warrants.

The Financial Advisor Agreement contains customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the Financial Advisor, including for liabilities under the Securities Act of 1933, as amended (the “Securities Act”), other obligations of the parties, and termination provisions.

Pursuant to the Purchase Agreement, the Company has agreed that, subject to certain exceptions, (i) it will not issue any shares of common stock ~~upon conversion of $900,000 of its New Bridge Notes (See Note 6 - Convertible Bridge Notes) and 1,735,419~~or securities exercisable or convertible into shares of ~~its~~ common stock ~~upon conversion~~or to file any registration statement or amendment or supplement thereto for a period of ~~its Series A Senior stock (see below - Series A Senior Preferred Stock).~~

~~Also, during~~ninety (90) days following the ~~three months ended September 30, 2017,~~closing of the ~~Company issued 943,600 shares~~Offering and that (ii) it will not enter into a variable rate transaction for a period of ~~its common stock in connection with conversions~~one hundred eighty (180) days following the closing of ~~its Series B Preferred Stock (see below - Series B Preferred Stock).~~

~~Series A and Series B Preferred Stock.~~

~~Prior~~the Offering.

The Registered Direct Offering was made pursuant to the ~~Merger and~~2023 Registration Statement, as supplemented by a prospectus supplement dated June 9, 2023. There is $3.8 million of remaining availability under ~~Precipio Diagnostics,~~ the ~~Company had outstanding preferred units~~2023 Registration Statement.

Table of 367,299 for Series A and 412,806 for Series B as of December 31, 2016. These units have been recapitalized and are included in preferred stock. On the Closing Date, the outstanding preferred units for Series A and Series B, along with the related accumulated dividends, were converted into common shares of the Company.Contents

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 thousand 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 2017 Offering of 6,000 units~~an underwritten public 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 proceeds

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~~PRECIPIO, INC. AND SUBSIDIARY~~

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

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

received 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.

warrants.

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~~

There were no conversions of Series B Preferred Stock during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, 2,359~~2023 and 2022, respectively. At June 30, 2023 and December 31, 2022, the Company had 6,900 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~~designated and issued and 47 shares of Series B Preferred Stock outstanding.

~~Common Stock Warrants.~~

~~Prior to~~ Based on the ~~Merger, in connection with the line~~stated value 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~~$1 thousand per share and a conversion 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$0.40 per share, ~~subject to anti-dilution protection. Aegis acted as placement agent for~~ the ~~bridge financing and received Aegis Warrants to acquire 5,600~~outstanding 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 result of the Series B Preferred Stock ~~issued in the August 2017 Offering, the exercise price~~ ~~of the 2017 New Bridge Warrants was adjusted to$2.75 per share.~~

~~At issuance, the 2017 New Bridge Warrants had a fair value of $211,000 and~~at June 30, 2023 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. At the time the exercise price was adjusted, due to the down round provision, the Company calculated the fair value 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 of certain obligations by an entity controlled by Mark Rimer (a director of the Company), the Company issued to that entity Side Warrants to purchase an aggregate of 91,429 shares of the Company's common stock at an exercise price of $7.00 per share (subject to adjustment), with a fair value of $487,000 at the date of issuance. The Side Warrants have a term of 5 years and are exercisable as to 22,857 shares of the Company's common stock upon grant and as to 68,572 shares of the Company's common stock upon the entity’s performance of the assumed obligations. All performance obligations have been met and the Company has recorded merger advisory expense of $73,000 and $487,000 related to the Side Warrants during the three and nine months ended September 30, 2017, respectively.

~~August 2017 Offering Warrants~~

In connection with the August 2017 Offering, the Company issued 2,680,000 warrants at an exercise price of $3.00, which contains a down round provision. The August 2017 Offering Warrants were exercisable immediately and expire 5 years from date of issuance. The terms 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% of the Company’s outstandingconvertible into 117,500 shares of common stock after giving effect to such exercise, provided that, at the election of a holder and notice to the Company, such beneficial ownership limitation may be increased to 9.99% of the Company’s outstanding shares of common stock after giving effect to such exercise.

~~Representative Warrants~~

In accordance with the underwriting agreement for 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 date of the prospectus for the August 2017 Offering and expiring on a date which is no more than five years from the date of the prospectus for the August 2017 Offering. The fair value of the 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 Preferredstock.

Common Stock ~~section above, these were issued and recorded as deemed dividends.~~

~~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~~ 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~~June 30, ~~2017:~~

2023:


			Underlying	Exercise
	Issue Year	Expiration	Shares	Price
Warrants
(1)	2018	July 2023	29,343	$	5.40
(2)	2018	August 2023	41,806	$	5.40
(3)	2018	September 2023	40,719	$	5.40
(4)	2018	November 2023	75,788	$	5.40
(5)	2018	December 2023	51,282	$	5.40
(6)	2019	April 2024	147,472	$	5.40
(7)	2019	May 2024	154,343	$	9.56
(8)	2023	None	319,445	$	0.001
(9)	2023	December 2028	8,888,890	$	0.63
			9,749,088

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) - (6)These warrants were issued in connection with a 2018 securities purchase agreement, as amended.

(7) These warrants were issued in connection with convertible notes issued in May 2019.

(8) – (9) These warrants were issued in connection with the 2023 registered direct offering and concurrent private placement and are the pre-funded warrants and RDO common warrants discussed below.

There were 266 warrants exercised during the six months ended June 30, 2022 for proceeds to the Company of less than $1 thousand. During the six months ended June 30, 2022, the intrinsic value of the warrants exercised was less than $1 thousand.

During the three and six months ended June 30, 2023, 148,378 warrants expired, respectively. The warrants had been issued in connection with transactions that were completed in 2018.


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


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


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


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


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


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


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


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


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


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


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


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

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~~PRECIPIO, INC. AND SUBSIDIARY~~

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

~~Three~~

Pre-Funded Warrants. In connection with the Purchase Agreement in June 2023, the Company issued 319,445 Pre-Funded Warrants to purchase up to 319,445 shares of Common Stock, at a price of $0.449 per Pre-Funded Warrant. The Pre-Funded Warrants are immediately exercisable, have an exercise price of $0.001 per share, and ~~Nine Months Ended September~~may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. Shares of the Company’s common stock underlying Pre-Funded warrants are included in the calculation of basic loss per share due to the negligible exercise price of the Pre-Funded warrants.

RDO Common Warrants. In connection with the Purchase Agreement in June 2023, the Company issued 8,888,890 RDO Common Warrants to purchase up to 8,888,890 shares of Common Stock. The RDO Common Warrants are exercisable beginning six months after the date of issuance, have an exercise price of $0.63 per share, and will expire December 12, 2028.

Deemed Dividends

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 earnings per share.

There were no deemed dividends recorded during the three and six months ended June 30, ~~2017~~2023 and ~~2016~~

~~11.~~2022.

8. 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~~statements of ~~Operations.~~

operations.

Bridge Note Warrant Liabilities

During 2018 and 2019, the Company issued warrants in connection with the issuance of convertible notes. All of these warrants issuances were classified as warrant liabilities (the “Bridge Note Warrant Liabilities”).

The ~~2016~~Bridge Note Warrant ~~Liability is~~Liabilities are considered a Level 3 financial ~~instrument~~instruments and iswere valued using ~~a binomial lattice simulation~~the Black Scholes model. ~~This method is well suited to valuing options with non-standard features. Assumptions~~As of June 30, 2023, Bridge Note Warrant Liabilities outstanding were the result of convertible note issuances on various dates in 2018 and ~~inputs~~2019. The assumptions used in the valuation of the ~~common stock warrants include: our equity value, which was estimated using our stock price~~Bridge Note Warrant Liabilities include the following ranges: remaining life to maturity of ~~$2.16 as~~0.03 to 0.9 years; volatility rate of ~~September 30, 2017; volatility of 137%~~80% to 121%; and a risk-free ~~interest~~

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rate of ~~1.20%~~5.24% to 5.47%.

As of December 31, 2022, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of 0.3 to 1.4 years; volatility rate of 69% to 77%; and risk free rate of 4.42 to 4.76%.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, the changes in the fair value of the ~~liability~~warrant liabilities measured using significant unobservable inputs (Level 3) were less than $1 thousand, respectively.

The changes during the three and six months ended June 30, 2022 were comprised of the following:

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

~~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
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.~~


Dollars in Thousands

	Three Months Ended June 30, 2022
	Bridge Note
	Warrant Liabilities
Beginning balance at April 1	$	384
Total gains:
Revaluation recognized in earnings		(297)
Balance at June 30	$	87


Dollars in Thousands

	Six Months Ended June 30, 2022
	Bridge Note
	Warrant Liabilities
Beginning balance at January 1	$	606
Total gains:
Revaluation recognized in earnings		(519)
Balance at June 30	$	87

9. EQUITY INCENTIVE PLAN

The ~~Company's 2006 Equity Incentive Plan (the "2006 Plan") was terminated as to future~~Company currently issues stock awards ~~on July 12, 2016. The Company's~~under its 2017 Stock Option and Incentive Plan, as amended (the ~~"2017 Plan"~~“2017 Plan”) ~~was adopted by the Company's stockholders on June 5, 2017 and~~which will expire on June 5, 2027. The shares authorized for issuance under the 2017 Plan were 4,993,866 at June 30, 2023, of which 356,517 were available for future grant. The shares authorized under the 2017 Plan are subject to annual increases on January 1 by 5% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or such lessor number of shares determined by the Company’s Board of Directors or Compensation Committee. During the six months ended June 30, 2023, the shares authorized for issuance increased by 1,141,013 shares.

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 six months ended June 30, 2023, the Company granted stock options to purchase up to 1,100,600 shares of common stock at a weighted average exercise price of $0.62 per share. These awards have vesting periods of up to four years and had a weighted average grant date fair value of $0.59. The fair value calculation of options granted during the six months ended June 30, 2023 used the following assumptions: risk free interest rate of 3.66%, based on the U.S. Treasury yield in effect at the time of grant; expected life of six years; and volatility of 162% based on historical volatility of the Company’s common stock over a time that is consistent with the expected life of the option.

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

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

2023:


	Number of	Weighted-Average
	Options	Exercise Price
Outstanding at January 1, 2023	3,681,336	$	2.84
Granted	1,100,600		0.62
Forfeited	(145,893)		1.18
Outstanding at June 30, 2023	4,636,043	$	2.36
Exercisable at June 30, 2023	2,668,542	$	2.96

As of ~~September~~June 30, ~~2017,~~2023, there were ~~236,590~~4,076,932 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~~8.0 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~~

For the three and ~~nine~~six months ended ~~both September~~June 30, ~~2017 and 2016,~~2023, we recorded non-cash stock-based compensation expense for all stock awards of ~~less than $0.1~~$0.4 million and $0.8 million, respectively, within operating ~~expense.~~expense in the accompanying statements of operations. For the three and six months ended June 30, 2022, we recorded non-cash stock-based compensation expense for all stock awards of $0.5 million and $2.7 million, respectively, within operating expense in the accompanying statements of operations. As of ~~September~~June 30, ~~2017,~~2023, the unrecognized compensation expense related to unvested stock awards was ~~$0.4~~$2.8 million, which is expected to be recognized over a weighted-average period of ~~3.8~~2.3 years.

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

10. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE

ASC Topic 606, “Revenue from contracts with customers”

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

~~13. SUBSEQUENT EVENTS~~

~~Debt Settlement Agreements~~

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

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

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

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

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

~~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~~

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

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

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Nature of Contracts and Customers

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

Diagnostic testing

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

Clinical research grants

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

Biomarker testing and clinical project services

Control of the biomarker testing and clinical project services are transferred to ~~secure~~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.

Reagents and other diagnostic products

Control of reagents and other diagnostic products are transferred to the customer at a point in time and, as such, the Company recognizes these revenues at a point in time based on the delivery method. These revenues include revenues from reagent sets for our HSRR program and other product sales and are included in other revenue in our condensed consolidated statements of operations.

Equipment leasing

The Company accounts for sales-type leases within the scope of ASC 842, Leases, as ASC 606 specifically excludes leases from its ~~obligations~~guidance. The sales-type leases result in the derecognition of the underlying asset, the recognition of profit or loss on the sale, and the recognition of an investment in leased asset. Revenue from sales-type leases is recognized upfront on the commencement date of the lease and is included in other revenue in our condensed consolidated statements of operations. For the three and six months ended June 30, 2023 and 2022, revenue from sales-type leases was zero, respectively.

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Disaggregation of Revenues by Transaction Type

We operate in one business segment and, therefore, the results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Service revenue, net for the three and six months ended June 30, 2023 and 2022 was as follows:


	For the Three Months Ended June 30,
(dollars in thousands)	Diagnostic Testing
	2023		2022
Medicaid	$	5	$	12
Medicare		1,165		1,076
Self-pay		36		48
Third party payers		1,562		1,090
Service revenue, net	$	2,768	$	2,226


	For the Six Months Ended June 30,
(dollars in thousands)	Diagnostic Testing
	2023		2022
Medicaid	$	13	$	27
Medicare		2,045		2,050
Self-pay		116		97
Third party payers		2,662		2,057
Service revenue, net	$	4,836	$	4,231

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 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 the following types of transactions: diagnostic testing (“Diagnostic”), revenues from the Company’s ICP technology and bio-pharma projects encompassing genetic diagnostics (collectively “Biomarker”), revenues from clinical research grants from state and federal research programs and diagnostic product sales, including revenues from equipment leases and reagent sales associated with our HSRR program.

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, 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 periods ended June 30, 2023 and December 31, 2022, the deferred revenue was $0.1 million, respectively.

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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 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 and six months ended June 30, 2023 and 2022.


	For the Three Months Ended June 30,
(dollars in thousands)					Contractual Allowances and				Revenues, net of Contractual
	Gross Revenues				adjustments				Allowances and adjustments
	2023		2022		2023		2022		2023		2022
Medicaid	$	5	$	12	$	—	$	—	$	5	$	12
Medicare		1,165		1,076		—		—		1,165		1,076
Self-pay		36		48		—		—		36		48
Third party payers		5,442		3,793		(3,880)		(2,703)		1,562		1,090
		6,648		4,929		(3,880)		(2,703)		2,768		2,226
Other		877		220		—		—		877		220
	$	7,525	$	5,149	$	(3,880)	$	(2,703)	$	3,645	$	2,446


	For the Six Months Ended June 30,
(dollars in thousands)					Contractual Allowances and				Revenues, net of Contractual
	Gross Revenues				adjustments				Allowances and adjustments
	2023		2022		2023		2022		2023		2022
Medicaid	$	13	$	27	$	—	$	—	$	13	$	27
Medicare		2,045		2,050		—		—		2,045		2,050
Self-pay		116		97		—		—		116		97
Third party payers		9,277		7,178		(6,615)		(5,121)		2,662		2,057
		11,451		9,352		(6,615)		(5,121)		4,836		4,231
Other		1,638		742		—		—		1,638		742
	$	13,089	$	10,094	$	(6,615)	$	(5,121)	$	6,474	$	4,973

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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 is made to 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 and six months ended June 30, 2023 and 2022.


	For the Three Months Ended June 30,
	Revenues, net of
(dollars in thousands)	Contractual Allowances				Allowances for doubtful
	and adjustments				accounts				Total
	2023		2022		2023		2022		2023		2022
Medicaid	$	5	$	12	$	(2)	$	(6)	$	3	$	6
Medicare		1,165		1,076		(23)		(27)		1,142		1,049
Self-pay		36		48		(4)		—		32		48
Third party payers		1,562		1,090		(83)		(54)		1,479		1,036
		2,768		2,226		(112)		(87)		2,656		2,139
Other		877		220		—		—		877		220
	$	3,645	$	2,446	$	(112)	$	(87)	$	3,533	$	2,359


	For the Six Months Ended June 30,
	Revenues, net of
(dollars in thousands)	Contractual Allowances				Allowances for doubtful
	and adjustments				accounts				Total
	2023		2022		2023		2022		2023		2022
Medicaid	$	13	$	27	$	(6)	$	(13)	$	7	$	14
Medicare		2,045		2,050		(23)		(51)		2,022		1,999
Self-pay		116		97		(12)		—		104		97
Third party payers		2,662		2,057		(83)		(103)		2,579		1,954
		4,836		4,231		(124)		(167)		4,712		4,064
Other		1,638		742		—		—		1,638		742
	$	6,474	$	4,973	$	(124)	$	(167)	$	6,350	$	4,806

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 operating expenses in the condensed consolidated statements of operations.

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

Accounts Receivable

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

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The following summarizes the ~~Settlement Agreement.~~

mix of receivables outstanding related to payer categories:


(dollars in thousands)	June 30, 2023		December 31, 2022
Medicaid	$	24	$	34
Medicare		1,199		1,124
Self-pay		239		291
Third party payers		1,424		1,888
Contract diagnostic services and other		476		53
	$	3,362	$	3,390
Less allowance for doubtful accounts		(2,478)		(2,354)
Accounts receivable, net	$	884	$	1,036

The ~~Creditor Warrants have a per share exercise price~~following table presents the roll-forward of ~~$7.50,~~the allowance for doubtful accounts for the six months ended June 30, 2023.


			Allowance for
			Doubtful
(dollars in thousands)			Accounts
Balance, January 1, 2023			$	(2,354)
Collection Allowance:
Medicaid	$	(6)
Medicare		(23)
Self-pay		(12)
Third party payers		(83)
		(124)
Bad debt expense	$	—
Total charges				(124)
Balance, June 30, 2023			$	(2,478)

Customer Revenue and Accounts Receivable Concentration

Our customers are ~~exercisable on~~oncologists, hospitals, reference laboratories, physician-office laboratories, and pharma and biotech companies. Customers that accounted for 10% or greater of our net sales or accounts receivable for the identified periods is as follows:

Net sales

Accounts receivable, as of

Three Months Ended

Six Months Ended

June 30,

December 31,

2023

2022

2023

2022

2023

2022

Customer A

Customer B

Customer C

* represents less than 10%

11. SUBSEQUENT EVENTS

The Company has evaluated events and transactions subsequent to June 30, 2023 through the date of ~~issuance~~this Quarterly Report on Form 10-Q, and ~~will expire five years from~~there are no other events to report other than what has been disclosed in the ~~date~~condensed consolidated financial statements.

Table of ~~issuance.~~Contents

~~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 share of the Company’s Series C Convertible Preferred Stock, par value $0.01 per share (the “Series C Preferred Stock”), convertible into a number 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.

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

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

Forward-Looking Information

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis, contains forward-looking statements. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, insurance reimbursements, product pricing, foreign currency exchange rates, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest and inflation costs, future economic circumstances, business strategy, industry conditions and key trends, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, our ability to comply with the listing requirements of the Nasdaq Capital Market, expected financial and other benefits from our organizational restructuring activities, geopolitical uncertainties with the ongoing Russia and Ukraine conflict, actions of governments and regulatory factors affecting our business, projections of future earnings, revenues, synergies, accretion or other financial items, any statements of the plans, strategies and objectives of management for future operations, retaining key employees and other risks as described in our reports filed with the Securities and Exchange ~~Commission.~~Commission (the “SEC”). 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~~such 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,~~2022, which we filed with the Securities and Exchange Commission ~~(the~~

~~“SEC”)~~ on ~~July 31, 2017.~~March 30, 2023. Results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 are not necessarily indicative of results that may be attained in the future.

~~Merger~~

~~On June 29, 2017, or~~

Overview

We are a healthcare solutions company focused on cancer diagnostics. Our business mission is to address the ~~Closing Date,~~pervasive problem of cancer misdiagnoses by developing solutions to mitigate the ~~Company (then known~~root causes of this problem in the form of diagnostic products, reagents and services. Misdiagnoses originate from aged commercial diagnostic cancer testing technologies, lack of subspecialized expertise, and sub-optimal laboratory processes that are needed in today’s diagnostic cancer testing in order to provide accurate, rapid, and resource-effective results to treat patients. Industry studies estimate 1 in 5 blood-cancer patients are misdiagnosed. As cancer diagnostic testing has evolved from cellular to molecular (genes and exons), laboratory testing has become extremely complex, requiring even greater diagnostic precision, attention to process and a more appropriate evaluation of the abundance of genetic data to effectively gather, consider, analyze and present information for the physician for patient treatment. We view cancer diagnostics as ~~Transgenomic, Inc., or Transgenomic), completed~~requiring a ~~reverse merger, or the Merger, with Precipio Diagnostics, LLC, a privately held Delaware limited liability company, or Precipio Diagnostics, in accordance~~holistic approach to improve diagnostic data for improved interpretations 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. Pursuantintent to the Merger Agreement, Merger Sub merged with and into Precipio Diagnostics, with Precipio Diagnostics surviving the Merger as a wholly-owned subsidiary of the merged company. In connection with the Merger, the Company changed its name from Transgenomic, Inc. to Precipio, Inc. and effected a 1-for-30 reverse stock split of its common stock. Upon the consummation of the Merger, the historical financial statements of Precipio Diagnostics become the Company's historical financial statements. Accordingly, the historical financial statements of Precipio Diagnostics are included in the comparative prior periods.

~~Overview~~

~~Precipio, Inc., and Subsidiary, (“we”, “us”, “our”, the “Company” or “Precipio”) is a cancer diagnostics company providing~~reduce misdiagnoses. By delivering diagnostic products, reagents and services that improve the accuracy and efficiency of diagnostics, leading to fewer misdiagnoses, we believe patient outcomes can be improved through the ~~oncology market. We~~selection of appropriate therapeutic options. Furthermore, we

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believe that better patient outcomes will have ~~built~~a positive impact on healthcare expenses as misdiagnoses are reduced. Better diagnostic results – Better Patient Outcome – Lower Healthcare Expenditures.

To deliver our strategy, we have structured our organization in order to drive development of diagnostic products. Laboratory and continue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technology developed within academic institutions and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratoryR&D facilities located in New Haven, Connecticut and Omaha, Nebraska house development teams that collaborate on new products and services. The Company operates CLIA laboratories in both the New Haven, Connecticut and Omaha, Nebraska locations providing essential blood cancer diagnostics to office-based oncologists in many states nationwide. To deliver on our strategy of mitigating misdiagnoses we rely heavily on our CLIA laboratory to support R&D beta-testing of the products we develop, in a clinical environment.

In April 2020, we formed a Joint Venture with Poplar. Poplar provides specialized laboratory testing services to a nationwide client base of gastroenterologists, dermatologists, oncologists, urologists, gynecologists and their patients. The business purpose of the Joint Venture is to facilitate and capitalize on the combined capabilities, resources and healthcare industry relationships of its members by partnering, promoting and providing oncology services to office based physicians, hospitals and medical centers. Under the terms of the Joint Venture, Precipio SPV has a 49% ownership interest in the Joint Venture, with Poplar having a 51 % ownership. We have ~~partnered with the Yale School of Medicine to capture the expertise, experience and technologies developed within academia so~~determined that we ~~can provide~~hold a ~~better standard~~variable interest in the Joint Venture and that we are the primary beneficiary of ~~cancer diagnostics and solve~~ the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which will focus on further development of ICE-COLD-PCR, or ICP, the patented technology which was exclusively licensed by us from Dana-Farber Cancer Institute, Inc., or Dana-Farber, at Harvard University. The research and development center will focus on the development of this technology, which we believe will enable us to commercialize other technologies developed by our current and future academic partners. Our platform connects patients, physicians and diagnostic experts residing within academic institutions. Launched in 2017, the platform facilitates the following relationships:

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 limitationsJoint Venture. Due to this ~~process. First, surgical procedures have several limitations, including:~~

~~Cost: surgical procedures are usually performed in a costly hospital environment. For example, according~~determination, we consolidate the Joint Venture. See Note 2 - Summary of Significant Accounting Policies to ~~a recent study the mean cost of lung biopsies is greater than $14,000; surgery also involves hospitalization and recovery time.~~

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

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

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

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

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

~~The following discussion should be read together with~~ our consolidated financial statements ~~and related notes contained~~appearing elsewhere in this ~~Quarterly Report. Results~~report for further discussion. We are working with Poplar to dissolve the ~~three and nine months ended September 30, 2017 are not necessarily indicative~~Joint Venture with an effective date of ~~results that may~~December 31, 2022. This is expected to be ~~attained~~completed 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~~. 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~~

Q4 2023.

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~~For the six months ended June 30, ~~2017, we~~2023, the Company had a net loss of ~~$10.7~~$5.3 million and net cash used in operating activities of $2.8 million. As of June 30, 2023, the Company had an accumulated deficit of $97.6 million and negative working capital of ~~$12.6~~$0.4 million. ~~Our~~The Company’s ability to continue as a going concern over the next twelve months from the date the condensed consolidated financial statements were issued is dependent upon a combination of achieving ~~our~~its business plan, including generating additional revenue, and raising additional financing to meet ~~our~~its debt obligations and paying liabilities arising from normal business operations when they come due.

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

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

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

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

●

On April 14, 2023, the Company entered into a sales agreement with AGP, pursuant to which the Company may offer and sell its common stock having aggregate sales proceeds of up to $5.8 million, to or through AGP, as sales agent (the “AGP 2023 Sales Agreement”). The sale of our shares of Common Stock to or through AGP, pursuant to the AGP 2023 Sales Agreement, will be made pursuant to the registration statement (the “2023 Registration Statement”) on Form S-3 (File No. 333-271277), filed by the Company with the SEC on April 14, 2023, as amended by Amendment No. 1 filed by the Company with the SEC on April 25, 2023, and declared effective on April 27, 2023. As of the date the condensed consolidated financial statements were issued, we have received less than $1 thousand in gross proceeds through the AGP 2023 Sales Agreement from the sale of 500 shares of common stock. The Company approximately $3.8 million available for future sales pursuant to the AGP 2023 Sales Agreement.

●

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 )

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

Table 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.Contents

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

Results of Operations for the Three Months Ended June 30, 2023 and 2022

Net Sales. Net sales were as follows:


	Dollars in Thousands
	Three Months Ended
	June 30,				Change
	2023		2022		$		%
Service revenue, net, less allowance for doubtful accounts	$	2,656	$	2,139	$	517	24	%
Other		877		220		657	299	%
Net Sales	$	3,533	$	2,359	$	1,174	50	%

Net sales for the three months ended June 30, 2023 were approximately $3.5 million, an increase of $1.2 million as compared to the same period in 2022. During the three months ended June 30, 2023, patient diagnostic service revenue increased $0.5 million as compared to the same period in 2022. This increase was due to a greater number of cases processed in the current year period. We processed 1,614 cases during the three months ended June 30, 2023 as compared to 1,009 cases during the same period in 2022, or a 60% increase in cases. The increase in revenue due to increased cases processed was partially offset by a decrease in the Company’s revenue per case in the current year period. Other revenue increased by $0.7 million for the three months ended June 30, 2023 as compared to the same period in 2022. The other revenues were primarily related to increased sales of our HemeScreen product as a result of a greater number of customers purchasing reagents during the current year period.

Cost of Sales. Cost of sales includes material and supply costs for the patient tests performed, costs related to HSRR products and other direct costs (primarily personnel costs, pathologist interpretation costs and rent) associated with the operations of our laboratory. Cost of sales increased by $0.6 million for the three months ended June 30, 2023 as compared to the same period in 2022.

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


	Dollars in Thousands
	Three Months Ended
	June 30,				Margin %
	2023		2022		2023		2022
Gross Profit	$	1,371	$	773	39	%	33	%

Gross margin was 39% of total net sales, for the three months ended June 30, 2023, as compared to 33% of total net sales for the same period in 2022. Gross profit was approximately $1.4 million and $0.7 million during the three months ended June 30, 2023 and 2022, respectively. The gross profit increased during the three months ended June 30, 2023, as compared to the prior year period, as a result of increases in case volume and revenue. We operate a fully staffed CLIA and CAP certified clinical pathology and molecular laboratory. As such, it is necessary to maintain appropriate staffing levels to provide industry standard laboratory processing and reporting to ordering physicians. An increase in case volume will enable our laboratory to yield economies of scale and to leverage fixed expenses.

Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs, stock-based compensation costs and depreciation and amortization. Our operating expenses increased by $0.5 million to $3.7 million for the three months ended June 30, 2023 as compared to the same period in 2022. The increase

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included an increase of $0.3 million in general and administrative expenses, which was due to an increase in legal and professional fee expenses, an increase of $0.2 million increase in sales and marketing expenses due mainly to increased personnel costs as we expanded our product sales force starting in the second half of 2022 and an increase in research and development expenses of $0.1 million. These increases were partially offset by a decrease of $0.1 million in stock-based compensation expenses for the three months ended June 30, 2023.

Other (Expense) Income. We recorded net other expense of $1 thousand for the three months ended June 30, 2023 which was related to net interest expense. During the three months ended June 30, 2022, we recorded net other income of $0.3 million which was primarily attributable to non-cash income recorded on warrant revaluations.

Results of Operations for the Six Months Ended June 30, 2023 and 2022

Net Sales. Net sales were as follows:


	Dollars in Thousands
	Six Months Ended
	June 30,				Change
	2023		2022		$		%
Service revenue, net, less allowance for doubtful accounts	$	4,712	$	4,064	$	648	16	%
Other		1,638		742		896	121	%
Net Sales	$	6,350	$	4,806	$	1,544	32	%

Net sales for the six months ended June 30, 2023 were approximately $6.4 million, an increase of $1.5 million as compared to the same period in 2022. During the six months ended June 30, 2023, patient diagnostic service revenue increased $0.6 million as compared to the same period in 2022. This increase was due to a greater number of cases processed in the current year period. We processed 2,810 cases during the six months ended June 30, 2023 as compared to 2,006 cases during the same period in 2022, or a 40% increase in cases. Other revenue increased by $0.9 million for the six months ended June 30, 2023 as compared to the same period in 2022. The other revenues were primarily related to increased sales of our HemeScreen product as a result of a greater number of customers purchasing reagents during the current year period.

Cost of Sales. Cost of sales includes material and supply costs for the patient tests performed, costs related to HSRR products and other direct costs (primarily personnel costs, pathologist interpretation costs and rent) associated with the operations of our laboratory. Cost of sales increased by $0.9 million for the six months ended June 30, 2023 as compared to the same period in 2022.

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


	Dollars in Thousands
	Six Months Ended
	June 30,				Margin %
	2023		2022		2023		2022
Gross Profit	$	2,120		1,476	33	%	31	%

Gross margin was 33% of total net sales, for the six months ended June 30, 2023, as compared to 31% of total net sales for the same period in 2022. Gross profit was approximately $2.1 million and $1.5 million during the six months ended June 30, 2023 and 2022, respectively. The gross profit increased during the six months ended June 30, 2023, as compared to the prior year period, as a result of increases in case volume and revenue. We operate a fully staffed CLIA and CAP certified clinical pathology and molecular laboratory. As such, it is necessary to maintain appropriate staffing levels to provide industry standard laboratory processing and reporting to ordering physicians. An increase in case volume will enable our laboratory to yield economies of scale and to leverage fixed expenses.

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$1.3 million to $7.4 million for the six months ended June 30, 2023 as compared to the same period in 2022. The decrease included a decrease of $0.3 million in general and administrative expenses, which was due to a decreases of $0.1 million in personnel costs, $0.1 million in legal and professional fee expenses and $0.1 million in other expenses, and a decrease of $1.9 million in stock-based compensation expenses for the six months ended June 30, 2023. These decreases were partially offset by a $0.8 million increase in sales and marketing expenses due mainly to increased personnel costs as we expanded our product sales force starting in the second half of 2022 and an increase in research and development expenses of $0.1 million.

Other (Expense) Income. We recorded net other expense $5,000 for the six months ended June 30, 2023 which was related to net interest expense. During the six months ended June 30, 2022, we recorded net other income of $0.5 million which was primarily attributable to non-cash income recorded on warrant revaluations.

Liquidity and Capital Resources

Our working capital positions were as follows:


	June 30, 2023		December 31, 2022		Change
Current assets (including cash of $2,573 and $3,445 respectively)	$	4,348	$	5,710	$	(1,362)
Current liabilities		4,721		4,361		360
Working capital	$	(373)	$	1,349	$	(1,722)

During the six months ended June 30, 2023 we received net proceeds of $2.2 million from sale of 4,742,038 shares of our common stock through purchase agreements and at the market offerings. The Company has approximately $3.8 million available for future sales pursuant to the AGP 2023 Sales Agreement.

Analysis of Cash Flows ~~- Nine~~– Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~

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

2022


	Six Months Ended June 30,
	2023		2022		Change
Net cash used in operating activities	$	(2,777)	$	(3,980)	$	1,203
Net cash used in investing activities		(54)		(106)		52
Net cash provided by (used in) financing		1,959		(109)		2,068
Net change in cash	$	(872)	$	(4,195)	$	3,323

Cash Flows Used in Operating Activities. The cash flows used in operating activities of ~~$4.5~~approximately $2.8 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 included a net loss of ~~$10.7~~$5.3 million and a decrease in operating lease liabilities and deferred revenue of $0.2 million. These were partially offset by a decrease in inventories of $0.2 million, a decrease in other assets of $0.2 million, an increase in accounts payable of $0.3 million, an increase accrued expenses of $0.3 million, and non-cash adjustments of $1.7 million. The non-cash adjustments included $0.1 million for the change in provision for losses on doubtful accounts. We routinely provide a reserve for doubtful accounts as a result of having limited in-network payer contracts. The other non-cash adjustments to net loss of approximately $1.6 million include, among other things, depreciation and amortization, warrant revaluations and stock-based compensation. The cash flows used in operating activities of approximately $4.0 million during the six months ended June 30, 2022 included a net loss of $6.7 million, an increase in accounts receivables of $0.6 million, a decrease accrued expenses and other liabilities of ~~$1.1~~$0.5 million, ~~and~~ an increase in ~~accounts receivable~~inventories of $0.1 million and a decrease in operating lease liabilities of $0.1 million. These were partially offset by a decrease in other assets of $0.2 million, an increase in accounts payable of ~~$0.5~~$0.7 million and non-cash adjustments of ~~$5.9~~$3.1 million. ~~The cash~~

Cash Flows Used In Investing Activities. Cash flows used in operating activities in the first nine months of 2016 included the net loss of $1.3 million and an increase in accounts receivable of $0.3 million. These were partially offset by an increase in accounts payable, accrued expenses and other liabilities of $0.5 million and non-cash adjustments of $0.5 million.

~~Cash Flows Provided by Investing Activities.~~ ~~Cash flows provided by~~ investing activities were $0.1 million ~~and zero~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016, respectively. The $0.1 million for the nine months ended September 30, 2017 was cash acquired as part~~2022, respectively, resulting from purchases of ~~the merger transaction.~~property and equipment.

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Cash Flows Used in or Provided by Financing Activities. Cash flows provided by financing activities totaled ~~$4.7~~$2.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, which included ~~proceeds~~$2.2 million of ~~$0.3 million~~proceeds 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. These proceeds were~~common stock partially offset by payments on our long-term debt and finance lease obligations of ~~$0.8~~$0.2 million. Cash flows used by financing activities totaled $0.1 million for the six months ended June 30, 2022, which included payments on our ~~convertible bridge notes of $1.5 million,~~long-term debt and ~~payments of capital~~finance lease obligations ~~and deferred financing costs~~ of $0.1 million. ~~Cash flows provided by financing activities during~~

For further information regarding the ~~nine months ended September 30, 2016~~Company’s future funding requirements, see the Going Concern disclosure in Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements included ~~proceeds of $0.6 million from the issuance of convertible notes and other debt partially offset by $0.1 million of payments~~with this Quarterly Report on ~~our debt, capital lease obligations and for deferred financing costs.~~

Form 10-Q.

Off-Balance Sheet Arrangements

At each of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~,2022, other than certain purchase commitments of approximately $0.8 million and $1.3 million, respectively, 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.

The purchase commitments are mostly for laboratory reagents used in our normal operating business.

Contractual Obligations and Commitments

We have entered into certain operating leases and purchase commitments as part of our normal course of business. See the accompanying unaudited condensed consolidated financial statements and Note 8 - “Contingencies” in the Notes

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

occurred during the six months ended June 30, 2023, as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission on March 30, 2023.

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 are discussed in our Annual Report on Form10-K for the fiscalyear ended December31, 2022, filed with the Securities and ~~estimates, see~~Exchange Commission on March 30, 2023.

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 consolidated Financial Statements and Note 1 of the audited financial statements and notes thereto of Precipio Diagnostics for the year ended December 31, 2016 contained in our current report on Form 8-K/A, filed with the Securities and Exchange Commission (the “SEC”) on July 31, 2017.

~~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

Inflation generally affects us with increased cost of labor and operating supplies. We do not believe that price inflation ~~or deflation~~ had a material adverse effect on our financial condition or results of operations during the periods presented.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

2023.

Changes in Internal Control over Financial Reporting

We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended ~~September~~June 30, ~~2017~~2023 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

The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirement, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers.

Violations of these laws and regulations could result in expulsion from government healthcare programs together with the ~~accompanying unaudited condensed consolidated financial statements~~imposition of significant fines and ~~Note 8 - “Contingencies”~~penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

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 ~~Notes to unaudited condensed consolidated~~same reporting period for amounts in excess of management’s expectations, our financial statements for ~~additional information regarding~~such reporting period could be materially adversely affected. In general, the resolution of a legal ~~proceedings.~~

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.

The Company is involved in legal proceedings related to matters, which are incidental to its business and 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.

CPA Global provides us with certain patent management services. As previously reported, 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 less than $0.1 million has been recorded and is reflected in accounts payable within the accompanying condensed consolidated balance sheets at June 30, 2023 and December 31, 2022.


~~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, 2022, 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,~~2022, and other filings we make with the Securities and Exchange Commission, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report on Form 10-Q 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. AsAt June 30, 2023, we had working capital of ~~September~~negative $0.4 million. For the six months ended June 30, ~~2017 and December 31, 2016,~~2023, we ~~have~~had an ~~accumulated total~~operating cash flow deficit of ~~approximately $21.5~~$2.8 million and ~~$10.8 million, respectively. For the nine months ended September 30, 2017 and the fiscal year ended December 31, 2016, we had~~ a net loss ~~and comprehensive loss attributable to common stockholders~~ of ~~approximately $19.8 million and $4.1 million, respectively. To date,~~$5.3 million. For the period ended June 30, 2023, we have experienced negative cash flow from development of our diagnostic technology, as well as from the costs associated with establishing a laboratory and building a sales force to market our products and services. We expect to incur substantial net losses ~~for the foreseeable future to~~through at least 2023 as we further develop and commercialize our diagnostic technology. We also expect that our selling, general and

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administrative expenses will continue to increase due to the additional costs associated with market development activities and expanding our staff to sell and support our products. Our ability to achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or, if achieved, sustain profitability.

Because of the numerous risks and uncertainties associated with further development and commercialization of our diagnostic technology and any future tests, we are unable to predict the extent of any future losses or when we will become profitable, if ever.

We may never become profitable and you may never receive a return on an investment in our securities. An investor in our securities must carefully consider the substantial challenges, risks and uncertainties inherent in the development and commercialization of tests in the medical diagnostic industry. We may never successfully commercialize our diagnostic technology or any future tests, and our business may fail.

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

As of ~~September~~June 30, ~~2017, our~~2023, we had cash ~~balance was $0.4~~of $2.6 million and our working capital was ~~approximately~~ negative ~~$12.6~~$0.4 million. Due to our recurring losses from operations and the expectation that we will continue to incur losses in the future, we ~~will~~may 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~~In future periods, when we seek additional capital, we may seek to sell additional equity and/or debt securities or to obtain a credit facility, which we may not be able to do on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates, restrict or cease our operations or obtain funds by entering into agreements on unattractive terms.

We ~~will need to obtain stockholder approval of the shares issued and issuable~~are not currently in ~~our November 2017 registered direct offering before we can raise additional capital.~~

Our Series C Certificate of Designation prohibits us from issuing any shares of common stock or securities convertible or exercisable into common stock at a price per share below the then effective conversion price of our Series C Preferred Stock, subject to certain

exceptions, or entering into any agreement or making any public announcement with respect to such a dilutive issuance, until we have filed a proxy statement under Section 14(a) of the Exchange Act or information statement pursuant to Section 14(c) of the Exchange Actcompliance 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 regulationsminimum bid price rule of the Nasdaq Capital ~~Market. In addition,~~Market, and if we cannot regain and maintain compliance, our securities may be delisted, which could negatively impact the price of our securities and hinder our ability to raise capital.

On October 28, 2022, we received a letter from the Nasdaq Capital Market (“Nasdaq”) notifying us that for the past 30 consecutive business days, the closing bid price per share of our common stock was below $1.00, the minimum bid price requirement for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). As a result, Nasdaq notified us that we were not in compliance with the ~~placement agency agreement~~Bid Price Rule. The notice from Nasdaq has no immediate effect on the listing of the shares of our common stock. Nasdaq provided us until April 26, 2023 to regain compliance with the Bid Price Rule.

On April 27, 2023, Nasdaq notified us that we are eligible for an extension to comply with the Bid Price Rule until October 23 2023, by which date we must evidence compliance for at least ten consecutive business days along with compliance of other Nasdaq listing rules. If compliance cannot be demonstrated by October 23, 2023, Nasdaq will provide written notification that our common stock will be delisted. In the event of such a notification, we may appeal Nasdaq’s determination, but there can be no assurance Nasdaq would grant any such request for continued listing.

We are presently evaluating various courses of action to regain compliance with the Bid Price Rule but 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;

●

reduced activity in the secondary trading market for our common stock;

●

reduced or limited amount of news and analyst coverage; and

●

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

These factors could result in lower prices and larger spreads in the bid and ask prices for our ~~November 2017~~common stock and would substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us.

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Our internal control over financial reporting and our disclosure controls and procedures may not prevent all possible errors that could occur.

The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate, and weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations and annual independent registered ~~direct offering, or~~public accounting firm attestation reports regarding the ~~November Offering,~~effectiveness of our internal control over financial reporting, which we ~~have agreed, until~~may be required to include in our periodic reports that we file with the ~~later of (i) 90 days after the closing date~~SEC under Section 404 of the ~~November Offering,~~Sarbanes-Oxley Act, and ~~(ii) the date on which Stockholder Approval has been obtained, not~~could harm our operating results, cause us to ~~issue, enter into any agreement~~fail to ~~issue~~meet our reporting obligations, or ~~announce the issuance or proposed issuance~~result in a restatement 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.our prior period financial statements. If we are not able to ~~obtain Stockholder Approval~~demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate, or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results, and the price of our common stock could decline. In addition, in June 2023, our registered public accounting firm agreed to a ~~waiver~~settlement with the SEC with respect to certain matters relating to systemic quality control failures and violations of audit standards in connection with audit work for hundreds of special purpose acquisition company (SPAC) clients beginning at the latest in 2020 and continuing through 2022. We are actively monitoring the situation but do not currently believe this settlement will affect our financial statements.

We are required to comply with certain of the ~~foregoing restriction under~~SEC rules that implement Section 404 of the ~~placement agency agreement, we will not be able~~Sarbanes-Oxley Act, which requires management to ~~raise additional capital~~certify financial and ~~we may have to significantly delay, scale back or discontinue~~other information in our quarterly and annual reports and provide an annual management report on the ~~development and/or commercialization of one or more~~effectiveness of our ~~product candidates or restrict or cease our operations.~~

~~We have identified~~internal control over financial reporting. This assessment needs to include the disclosure of any material weaknesses in our internal control over financial reporting ~~that could,~~identified by our management or our independent registered public accounting firm. During the evaluation and testing process, if ~~not remediated, result in material misstatements in our financial statements.~~

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

~~Based on~~we are unable to complete our evaluation, ~~of internal control over financial reporting,~~testing, and any required remediation in a timely fashion, we ~~have identified the following deficiencies~~will be unable to assert that we believe to be material weaknesses: (i) our lack 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 is effective.

These developments could make it more difficult for us to retain qualified members of our Board of Directors, or qualified executive officers. We are ~~discovered~~presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result. To the extent these costs are significant, our general and administrative expenses are likely to increase.

The sale or issuance of our common stock to, or through, AGP, or otherwise, may cause significant dilution and the sale of the shares of common stock acquired by AGP or others, or the perception that such sales may occur, could cause the price of our common stock to fall.

On April 14, 2023, we entered into a sales agreement with AGP, pursuant to which we may offer and sell our Common Stock, having aggregate sales proceeds of up to $5.8 million, to or through AGP, from time to time, in an at-the-market offering (the “2023 ATM Offering”). We are limited in the number of shares it can sell in the 2023 ATM Offering due to the offering limitations currently applicable to the Company under General Instruction I.B.6. of Form S-3 and the Company’s public float as of the applicable date of such sales, as well as the number of authorized and unissued shares available for issuance, in accordance with the terms of the AGP 2023 Sales Agreement. Sales to, or through, AGP by us could result in substantial dilution to the interests of other holders of our common stock. Additionally, the sale of a substantial number of shares of our common stock, or the anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.

From April 14, 2023 through June 30, 2023, we received less than $1 thousand in gross proceeds through the AGP 2023 Sales Agreement from the sale of 500 shares of Common Stock. The Company has an additional $3.8 million available for future sales pursuant to the AGP 2023 Sales Agreement.

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We have issued a substantial number of warrants and equity awards from our ~~consolidated financial statements~~equity plans which are exercisable into shares of our common stock which could result in substantial dilution to the ownership interests of our existing stockholders.

As of June 30, 2023, approximately 9,749,088 shares of our common stock were reserved for issuance upon exercise or conversion of outstanding warrants. Additionally, 4,636,043 shares of our common stock were reserved for issuance upon exercise of outstanding stock options. The exercise or conversion of these securities will result in a significant increase in the number of outstanding shares and substantially dilute the ownership interests of our existing stockholders. The shares underlying the equity awards from our equity plans are registered on a Form S-8 registration statement. As a result, upon vesting these shares can be freely exercised and sold in the public market upon issuance, subject to volume limitations applicable to affiliates. The exercise of options and the subsequent sale of the underlying common stock could cause a decline in our stock price. As of June 30, 2023, our outstanding warrants included 319,445 shares of our common stock reserved for issuance upon exercise of pre-funded warrants, which are already included in our calculation of our weighted average common shares outstanding.

Sales of a substantial number of shares of our common stock in the public market after the registered direct offering and concurrent private placement of June 2023 could cause our stock price to fall.

We sold 4,125,000 shares of common stock, pre-funded warrants to purchase 319,445 shares of common stock and warrants to purchase 8,888,890 shares of common stock in our June 2023 registered direct offering and concurrent private placement. The sales of a substantial number of the shares and/or the exercise and sale of a substantial number of the pre-funded warrants and common warrants in the public market or the perception that these sales might occur could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may ~~contain material misstatements,~~have on the prevailing market price of our common stock. In addition, the sale of substantial amounts of our common stock could adversely impact the price of our common stock. The sale, or the availability for sale, of a large number of shares of our common stock in the public market could cause the price of our common stock to decline.

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

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

For more information, see “Risk Factors – Reimbursement and Regulatory Risk Relating to ~~produce reliable financial reports~~Our Business – We may become subject to the Anti-Kickback Statute, Stark Law, False Claims Act, Civil Monetary Penalties Law and ~~are important~~may be subject to ~~helping prevent financial fraud. If~~analogous provisions of applicable state laws and could face substantial penalties if we ~~cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence~~ fail to comply with such laws” in our ~~reported financial information, and~~Annual Report on Form 10-K for the ~~trading price~~year ended December 31, 2022.

Table of ~~our common stock could drop significantly.~~Contents

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

~~None other than~~

During the three months ended June 30, 2023, we did not have any sales ~~previously disclosed in our~~of unregistered securities except as detailed under Item 3.02 on the Company's Current ~~reports~~Report on Form 8-K, filed on ~~April 17, 2017,~~ June ~~27, 2017 and June 20, 2017.~~

12, 2023.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. 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~~Pre-Funded Warrant (incorporated by reference to ~~Exhibit 4.1 of~~ the Company’s Current Report on Form 8-K filed on ~~August 23, 2017)~~June 12, 2023).
~~4.2~~
4.2	Form of ~~Underwriter~~Common Warrant (incorporated by reference to ~~Exhibit 4.2 of~~ the Company’s Current Report on Form 8-K filed on ~~August 23, 2017)~~June 12, 2023).
~~4.3~~
10.1	~~Form of Conversion Warrant~~Sales Agreement, dated April 14, 2021, by and between Precipio, Inc. and A.G.P./Alliance Global Partners (incorporated by reference to ~~Exhibit 4.3 of~~ the Company’s Current Report on Form 8-K filed on ~~August 23, 2017)~~April 17, 2023).

~~31.1~~ 10.2+	Securities Purchase Agreement, dated June 8, 2023, by and between Precipio, Inc. and the Purchaser (incorporated by reference to the Company’s Current Report on Form 8-K filed on June 12, 2023).

10.3	Form of Lock-Up Agreement (incorporated by reference to the Company’s Current Report on Form 8-K filed on June 12, 2023).

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		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

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101.PRE
~~101.PRE~~		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104	Cover Page Interactive Data File – formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.

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

+ Pursuant to Item 601(a)(5) of Regulation S-K, schedules have been omitted and will be furnished on a supplemental basis to the SEC upon request.

~~SIGNATURES~~

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PRECIPIO, INC.

Date: August 11, 2023	By:		/S/ ILAN DANIELI
		~~PRECIPIO, INC.~~ Ilan Danieli

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


Date: August 11, 2023	~~November 20, 2017~~ By:	~~By:~~	/S~~/ CARL IBERGER~~ S/ MATTHEW GAGE
		Matthew Gage
	~~Carl Iberger~~	Interim Chief Financial Officer (Principal Financial and Accounting 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	)