UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM ~~10‑Q~~10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended ~~March 31,~~September 30, 2019

	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
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

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

(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	Ticker symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	PRPO	The Nasdaq Stock Market LLC

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

Yes X No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes X No

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	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

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 ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒


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

As of ~~May 14,~~November 11, 2019, the number of shares of common stock outstanding was ~~5,919,681.~~7,430,117.

Table of Contents

PRECIPIO, INC.

INDEX

		Page No.

PART I.	Financial Information	3

Item 1.	Condensed Consolidated Financial Statements	3

	Condensed Consolidated Balance Sheets at ~~March 31,~~September 30, 2019 (unaudited) and December 31, 2018	3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018 (unaudited)	4

	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2019 and 2018 (unaudited)	67

	Notes to the Condensed Consolidated Financial Statements (unaudited)	78

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3644

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4149

Item 4.	Controls and Procedures	4150

PART II.	Other Information	4251

Item 1.	Legal Proceedings	4251

Item 1A.	Risk Factors	4352

Item 2.2.	Unregistered Sales of Equity Securities and Use of Proceeds	4453

Item 5.3.	Defaults Upon Senior Securities	53

Item 4.	Mine Safety Disclosures	54

Item 5.	Other Information	4454

Item 6.	Exhibits	4554

Signatures		4655

Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

PRECIPIO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)


		March 31, 2019				September 30, 2019
		(unaudited)		December 31, 2018		(unaudited)		December 31, 2018
ASSETS
CURRENT ASSETS:
Cash		$	302	$	381	$	1,683	$	381
Accounts receivable, net			801		690		693		690
Inventories			149		197		182		197
Other current assets			181		525		398		525
Total current assets			1,433		1,793		2,956		1,793

PROPERTY AND EQUIPMENT, NET			464		496		464		496

OTHER ASSETS:
Operating lease right-of-use assets			689		—		574		—
Intangibles, net			19,028		19,291		18,506		19,291
Other assets			25		25		25		25
Total assets		$	21,639	$	21,605	$	22,525	$	21,605
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt, less debt issuance costs		$	161	$	263	$	454	$	263
Current maturities of convertible notes, less debt discounts and debt issuance costs			3,129		4,377		34		4,377
Current maturities of finance lease liabilities			58		57		65		57
Current maturities of operating lease liabilities			221		—		210		—
Accounts payable			4,696		5,169		2,363		5,169
Accrued expenses			1,651		1,940		1,495		1,940
Deferred revenue			35		49		19		49
Other current liabilities			—		1,910		—		1,910
Total current liabilities			9,951		13,765		4,640		13,765
LONG TERM LIABILITIES:
Long-term debt, less current maturities and debt issuance costs			238		253		207		253
Finance lease liabilities, less current maturities			140		155		126		155
Operating lease liabilities, less current maturities			470		—		370		—
Common stock warrant liabilities			892		1,132		1,773		1,132
Derivative liabilities			—		62		—		62
Deferred tax liability			70		70		70		70
Other long-term liabilities			45		45		45		45
Total liabilities			11,806		15,482		7,231		15,482
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS’ EQUITY:
Preferred stock - $0.01 par value, 15,000,000 shares authorized at March 31, 2019 and December 31, 2018, 47 shares issued and outstanding at March 31, 2019 and December 31, 2018, liquidation preference at par value at March 31, 2019 and December 31, 2018			—		—
Common stock, $0.01 par value, 150,000,000 shares authorized at March 31, 2019 and December 31, 2018, 4,304,929 and 2,298,738 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively	(1)		43		23
Preferred stock - $0.01 par value, 15,000,000 shares authorized at September 30, 2019 and December 31, 2018, 47 shares issued and outstanding at September 30, 2019 and December 31, 2018, liquidation preference at par value at September 30, 2019 and December 31, 2018							—		—
Common stock, $0.01 par value, 150,000,000 shares authorized at September 30, 2019 and December 31, 2018, 7,136,117 and 2,298,738 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively							71		23
Additional paid-in capital	(1)		59,138		53,796		72,381		53,796
Accumulated deficit			(49,348)		(47,696)		(57,158)		(47,696)
Total stockholders’ equity			9,833		6,123		15,294		6,123
		$	21,639	$	21,605	$	22,525	$	21,605

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

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PRECIPIO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(unaudited)


	Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018		2019		2018
SALES:
Service revenue, net	$	910	$	791	$	1,020	$	808	$	3,125	$	2,498
Clinical research grants						–		13		–		75
Other		7		5		26		2		37		5
Revenue, net of contractual allowances and adjustments		917		796		1,046		823		3,162		2,578
less allowance for doubtful accounts		(204)		(84)		(262)		(173)		(723)		(399)
Net sales		713		712		784		650		2,439		2,179
COST OF SALES:
Service revenue		675		688		756		653		2,201		1,926
Clinical research grants						–		8		–		65
Total cost of sales		675		688		756		661		2,201		1,991
Gross profit		38		24
Gross profit (loss)						28		(11)		238		188
OPERATING EXPENSES:
Operating expenses		2,097		2,178		2,391		2,831		6,955		7,367
Impairment of goodwill		–		294		–		1,275		–		1,569
TOTAL OPERATING EXPENSES		2,097		2,472		2,391		4,106		6,955		8,936
OPERATING LOSS		(2,059)		(2,448)		(2,363)		(4,117)		(6,717)		(8,748)
OTHER INCOME (EXPENSE):
Interest expense, net		(23)		(8)		(97)		(120)		(298)		(176)
Warrant revaluation and modification		240		261
Warrant revaluation						563		176		(19)		760
Loss on modification of warrants						–		(143)		(1,128)		(143)
Derivative revaluation		23		–		–		117		(415)		116
Gain on settlement of liability, net		167		141		–		66		1,251		213
Gain on extinguishment of debt						–		284		–		284
Loss on litigation						–		–		(266)		–
Loss on issuance of convertible notes						–		(112)		(1,870)		(1,040)
Loss on settlement of equity instruments		–		(385)		–		–		–		(385)
		407		9		466		268		(2,745)		(371)
LOSS BEFORE INCOME TAXES		(1,652)		(2,439)		(1,897)		(3,849)		(9,462)		(9,119)
INCOME TAXES		–		–		–		–		–		–
NET LOSS		(1,652)		(2,439)		(1,897)		(3,849)		(9,462)		(9,119)

Deemed dividends related to beneficial conversion feature of preferred stock and fair value of consideration issued to induce conversion of preferred stock		–		(3,514)		–		–		–		(3,848)
TOTAL DIVIDENDS		–		(3,514)		–		–		–		(3,848)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(1,652)	$	(5,953)	$	(1,897)	$	(3,849)	$	(9,462)	$	(12,967)

BASIC AND DILUTED LOSS PER COMMON SHARE (1)	$	(0.48)	$	(7.10)
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING (1)		3,441,893		838,402
BASIC AND DILUTED LOSS PER COMMON SHARE					$	(0.31)	$	(2.49)	$	(1.85)	$	(10.30)
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING						6,186,119		1,546,814		5,104,397		1,258,507

~~(1)~~

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

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PRECIPIO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(unaudited)


	For the Three Months Ended March 31, 2019												For the Three Months Ended September 30, 2019
	Preferred Stock			Common Stock			Additional						Preferred Stock			Common Stock			Additional
	Outstanding	Par		Outstanding	Par		Paid-in		Accumulated				Outstanding	Par		Outstanding	Par		Paid-in		Accumulated
	Shares	Value		Shares (1)	Value (1)		Capital (1)		Deficit		Total		Shares	Value		Shares	Value		Capital		Deficit		Total
Balance, December 31, 2018	47	$	—	2,298,738	$	23	$	53,796	$	(47,696)	$	6,123
Balance, July 1, 2019													47	$	—	5,993,369	$	60	$	69,428	$	(55,261)	$	14,227
Net loss	—		—	—		—		—		(1,652)		(1,652)	—		—	—		—		—		(1,897)		(1,897)
Conversion of convertible notes into common stock	—		—	1,248,115		12		3,114		—		3,126	—		—	52,748		—		118		—		118
Issuance of common stock in connection with purchase agreements	—		—	758,076		8		1,718		—		1,726	—		—	1,090,000		11		2,750		—		2,761
Write-off debt premiums (net of debt discounts) in conjunction with convertible note conversions	—		—	—		—		315		—		315
Write-off debt derivative liability in conjunction with convertible note conversions	—		—	—		—		39		—		39
Write-off debt premiums in conjunction with convertible note conversions													—		—	—		—		(63)		—		(63)
Stock-based compensation	—		—	—		—		156		—		156	—		—	—		—		148		—		148
Balance, March 31, 2019	47	$	—	4,304,929	$	43	$	59,138	$	(49,348)	$	9,833
Balance, September 30, 2019													47	$	—	7,136,117	$	71	$	72,381	$	(57,158)	$	15,294

													For the Nine Months Ended September 30, 2019
													Preferred Stock			Common Stock			Additional
	For the Three Months Ended March 31, 2018												Outstanding	Par		Outstanding	Par		Paid-in		Accumulated
	Preferred Stock			Common Stock			Additional						Shares	Value		Shares	Value		Capital		Deficit		Total
	Outstanding	Par		Outstanding	Par		Paid-in		Accumulated
	Shares	Value		Shares (1)	Value (1)		Capital (1)		Deficit		Total
Balance, December 31, 2017	4,935	$	—	679,774	$	7	$	44,560	$	(31,542)	$	13,025
Balance, January 1, 2019													47	$	—	2,298,738	$	23	$	53,796	$	(47,696)	$	6,123
Net loss	—		—	—		—		—		(2,439)		(2,439)	—		—	—		—		—		(9,462)		(9,462)
Conversion of preferred stock into common stock	(4,888)		—	431,022		4		(4)		—		—
Conversion of convertible notes into common stock													—		—	2,439,173		24		7,366		—		7,390
Issuance of common stock in connection with purchase agreements	—		—	59,457		1		617		—		618	—		—	2,088,077		21		5,150		—		5,171
Issuance of common stock in exchange for cancelation of other current liabilities	—		—	120,983		1		1,896		—		1,897
Issuance of common stock upon exercise of warrants	—		—	20,000		—		225		—		225
Write-off debt discounts (net of debt premiums) in conjunction with convertible note conversions													—		—	—		—		(590)		—		(590)
Write-off debt derivative liability in conjunction with convertible note conversions													—		—	—		—		477		—		477
Proceeds upon issuance of common stock from exercise of warrants													—		—	310,200		3		1,572		—		1,575
Write-off warrant liability in conjunction with warrant exercises													—		—	—		—		2,364		—		2,364
Beneficial conversion feature on issuance of convertible notes													—		—	—		—		1,792		—		1,792
Stock-based compensation	—		—	—		—		82		—		82	—		—	—		—		455		—		455
Balance, March 31, 2018	47	$	—	1,311,236	$	13	$	47,376	$	(33,981)	$	13,408
Payment of fractional common shares in conjunction with reverse stock split													—		—	(71)		—		(1)		—		(1)
Balance, September 30, 2019													47	$	—	7,136,117	$	71	$	72,381	$	(57,158)	$	15,294

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

Table of Contents


	For the Three Months Ended September 30, 2018
	Preferred Stock			Common Stock			Additional
	Outstanding	Par		Outstanding	Par		Paid-in		Accumulated
	Shares	Value		Shares	Value		Capital		Deficit		Total
Balance, July 1, 2018	47	$	—	1,503,969	$	15	$	49,455	$	(37,272)	$	12,198
Net loss	—		—	—		—		—		(3,849)		(3,849)
Issuance of common stock in connection with purchase agreements	—		—	40,000		1		(1)		—		—
Issuance of common stock upon exercise of warrants	—		—	39,753		—		179		—		179
Beneficial conversion feature on issuance of convertible notes	—		—	—		—		528		—		528
Stock-based compensation	—		—	—		—		122		—		122
Balance, September 30, 2018	47	$	—	1,583,722	$	16	$	50,283	$	(41,121)	$	9,178

	For the Nine Months Ended September 30, 2018
	Preferred Stock			Common Stock			Additional
	Outstanding	Par		Outstanding	Par		Paid-in		Accumulated
	Shares	Value		Shares	Value		Capital		Deficit		Total
Balance, January 1, 2018	4,935	$	—	679,774	$	7	$	44,560	$	(31,542)	$	13,025
Net loss	—		—	—		—		—		(9,119)		(9,119)
Conversion of preferred stock into common stock	(4,888)		—	431,022		4		(4)		—		—
Issuance of common stock in connection with purchase agreements	—		—	99,457		2		616		—		618
Issuance of common stock in exchange for cancelation of other current liabilities	—		—	120,983		1		1,896		—		1,897
Issuance of common stock upon exercise of warrants	—		—	252,486		2		1,269		—		1,271
Beneficial conversion feature on issuance of convertible notes	—		—	—		—		1,604		—		1,604
Liability recorded related to equity purchase agreement repricing	—		—	—		—		—		(460)		(460)
Stock-based compensation	—		—	—		—		342		—		342
Balance, September 30, 2018	47	$	—	1,583,722	$	16	$	50,283	$	(41,121)	$	9,178

See notes to unaudited condensed consolidated financial statements

Table of Contents

PRECIPIO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)


	Three Months Ended March 31,				Nine Months Ended September 30,
	2019		2018		2019		2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,652)	$	(2,439)	$	(9,462)	$	(9,119)

Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization		277		352		838		972
Amortization of operating lease right-of-use asset		61		—		176		—
Amortization of finance lease right-of-use asset		15		—		46		—
(Accretion) amortization of deferred financing costs, debt discounts and debt premiums		(100)		1		(8)		70
Gain on extinguishment of debt						—		(284)
Gain on settlement of liability, net		(167)		(141)		(1,251)		(213)
Loss on settlement of equity instrument		—		385		—		385
Loss on litigation						266		—
Loss on issuance of convertible notes						1,870		1,040
Stock-based compensation		156		82		455		342
Impairment of goodwill		—		294		—		1,569
Provision for losses on doubtful accounts		204		84		724		394
Warrant revaluation and modification		(240)		(261)
Warrant revaluation						19		(617)
Loss on modification of warrants						1,128		—
Derivative revaluation		(23)		—		415		(116)
Changes in operating assets and liabilities:
Accounts receivable, net		(315)		94
Inventories, net		48		2
Accounts receivable						(727)		(322)
Inventories						15		(14)
Other assets		86		218		302		13
Accounts payable		(425)		(44)		(1,624)		526
Operating lease liabilities		(58)		—		(170)		—
Accrued expenses and other liabilities		254		228		(13)		573
Net cash used in operating activities		(1,879)		(1,145)		(7,001)		(4,801)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(3)		(5)		(49)		(66)
Net cash used in investing activities		(3)		(5)		(49)		(66)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on finance lease obligations		(14)		(12)		(44)		(44)
Payment of deferred financing costs						(120)		(138)
Payment of fractional common shares in conjunction with reverse stock split						(1)		—
Issuance of common stock, net of issuance costs		1,726		618		5,171		618
Proceeds from exercise of warrants		—		225		1,575		1,271
Proceeds from long-term debt		—		300		—		300
Proceeds from convertible notes		250		—		2,150		3,000
Principal payments on convertible notes		(50)		—		(50)		—
Principal payments on long-term debt		(109)		(116)		(329)		(342)
Net cash flows provided by financing activities		1,803		1,015		8,352		4,665
NET CHANGE IN CASH		(79)		(135)		1,302		(202)
CASH AT BEGINNING OF PERIOD		381		421		381		421
CASH AT END OF PERIOD	$	302	$	286	$	1,683	$	219

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest	$	8	$	6	$	27	$	37
SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY
Purchases of equipment financed through accounts payable		—		7		4		31
Equipment financed through finance lease obligations						23		107
Deferred debt issuance cost financed through accounts payable		—		31		—		57
Discount of 9% on issuance of convertible bridge notes						188		297
Other current liabilities canceled in exchange for common shares		—		1,897		—		1,897
Conversion of convertible debt plus interest into common stock		3,126		—		7,390		—
Beneficial conversion feature on issuance of convertible notes						1,792		1,604
Initial valuation of derivative liability recorded in conjunction with issuance of convertible notes						1,858		453
Initial valuation of warrant liability recorded in conjunction with issuance of convertible notes						—		1,925
Long-term debt exchanged for convertible notes						—		2,108
Liabilities exchanged for convertible notes		2,150		—		2,150		—
Prepaid insurance financed with loan						434		375
Accounts payable converted to long-term debt						—		74
Liability recorded related to equity purchase agreement repricing						—		460
Warrant liability canceled due to settlement of equity instruments		—		456		—		456
Right-of-use assets obtained in exchange for lease obligations		750		—		750		—
Amounts included in measurement of lease liabilities		72		—		144		—
Write-off warrant liability in conjunction with warrant exercises						2,364		—
Write-off of debt discounts (net of debt premiums) in conjunction with convertible note conversions		315		—		590		—
Write-off of derivative liability in conjunction with convertible note conversions		39		—		477		—

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PRECIPIO, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018

1. BUSINESS DESCRIPTION

Business Description.

Precipio, Inc., and its subsidiary, (“we”, “us”, “our”, the “Company” or “Precipio”) is a cancer diagnostics company providing diagnostic products and services to the oncology market. We have built and continue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technology developed within academic institutions and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located in New Haven, Connecticut and have partnered with the Yale School of Medicine to capture the expertise, experience and technologies developed within academia so that we can provide a better standard of cancer diagnostics and solve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which ~~will focus~~focuses 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~~focuses 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 2018, the platform facilitates the following relationships:

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

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

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

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 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 ~~March 31,~~September 30, 2019, the Company had a net loss of ~~$1.7~~$9.5 million, negative working capital of ~~$8.5~~$1.7 million and net cash used in operating activities of ~~$1.9~~$7.0 million. The Company’s ability to continue as a going concern over the next twelve months from the date of issuance of these condensed consolidated financial statements in ~~the~~this Quarterly Report on Form 10‑Q is dependent upon a combination of achieving its business plan, including generating additional revenue, and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due.

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

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funding will depend on a number of factors including, the prevailing market price of our common stock

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and the extent to which we are able to secure working capital from other sources. As of ~~April 30, 2019,~~the date of issuance of this Quarterly Report on Form 10-Q, we have already received $7.2 million in aggregate, including approximately $1.4 million from the sale of 328,590 shares of common stock to Lincoln Park during 2018, ~~$1.7~~$2.8 million and $5.2 million from the sale of ~~758,076~~1,090,000 and 2,088,077 shares of common stock to Lincoln Park during the three and nine months ended ~~March 31,~~September 30, 2019 and ~~$0.7~~$0.6 million from the sale of ~~240,000~~270,000 shares of common stock to Lincoln Park ~~during April 2019.~~from October 1, 2019 through

~~On April 16, 2019,~~the date of issuance of this Form 10-Q, leaving the Company ~~entered into a second amendment and restatement agreement amending and restating~~an additional $2.8 million to draw upon in the ~~terms of the 2018 Note Agreement (as first amended pursuant to the Amendment and Restatement dated November 29, 2018) (the "Amendment No.2 Agreement"). Amendment No.~~ coming year.~~2 Agreement~~ provided for the issuance of up to approximately $989,011 of additional notes together with applicable warrants (the “April 2019 Additional Notes and Warrants”) on substantially the same terms and conditions as the notes and warrants that were issued in connection with the original amendment and restatement. T~~he closing of the April 2019 Additional Notes provided the Company with approximately $900,000 of gross proceeds for the issuance of notes with an aggregate principal of approximately $989,011.~~

On May 14 2019, the Company entered into a securities purchase agreement (the “May 2019 Note Agreement”) with certain investors, pursuant to which the Company would issue up to approximately $1,098,901 in Senior Secured Convertible Promissory Notes along with warrants (the “May 2019 Transaction”). The closing of the May 2019 Transaction provided the Company with proceeds of $1,000,000 for the issuance of notes with an aggregate principal of $1,098,901.

Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern over the next twelve months from the issuance of these condensed consolidated financial statements in ~~the~~this Quarterly Report on Form 10‑Q. There can be no assurance that the Company will be able to successfully achieve its initiatives summarized above in order to continue as a going concern over the next twelve months from the date of issuance of ~~the~~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.

~~Nasdaq Compliance~~2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.

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

~~2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~

~~Basis of Presentation.~~

~~The accompanying condensed consolidated financial statements are presented in conformity with GAAP.~~ As required under GAAP, pursuant to the Reverse Stock Split,, unless otherwise indicated, the Company has adjusted all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying condensed consolidated financial statements.

The condensed consolidated balance sheet as of December 31, 2018 was derived from our audited balance sheet as of that date. There has been no change in the balance sheet from December 31, 2018, except for the retroactive adjustment to reflect the Reverse Stock Split. The accompanying condensed consolidated financial statements as of and for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018 are unaudited and reflect all adjustments (consisting of only normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position

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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 for the year ended December 31, 2018 contained in our Annual Report on Form 10‑K, filed with the Securities and Exchange Commission (the “SEC”) on April 16, 2019. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year 2019.

Recently Adopted Accounting Pronouncements.

In February 2016, the FASB issued ASU No. 2016‑02, Leases-Topic 842. The new standard amends the recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating leases and amends disclosure requirements associated with leasing arrangements. The new standard was adopted effective January 1, 2019, using a modified retrospective transition, and thus did not adjust comparative periods. The new standard provides a number of optional practical expedients in transition. The Company has elected the “package of practical expedients”, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight practical expedient. As a result of the adoption of Topic 842 the Company ~~has~~ recognized approximately ~~$0.7~~$0.7 million of lease liabilities and corresponding right-of-use (“ROU”) assets in its condensed consolidated balance sheet on the date of initial application. See Note 7 – Leases for additional information.

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In June 2018, the FASB issued ASU 2018-07 “Compensation—Stock Compensation (Topic 718)”, which expands the scope of Topic 718 to include share based payment transactions for acquiring goods and services from non-employees. The Company adopted this guidance on January 1, 2019. The adoption of this guidance was not material to our condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820)”, which modifies certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. This ASU is effective for reporting periods beginning after December 15, 2019. We are currently assessing the potential impact that the adoption of this ASU will have on our condensed consolidated financial statements.

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

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

Loss Per Share.

Basic loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted loss per share includes shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to ~~3,100,043~~1,725,719 and ~~633,766~~1,294,069 shares of our common stock have been excluded from the computation of diluted loss per share at ~~March 31,~~September 30, 2019 and 2018, respectively, because the effect is anti-dilutive due to the net loss.

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


	March 31,		September 30,
	2019	2018	2019	2018
Stock options	498,262	234,670	493,908	226,605
Warrants	917,563	394,919	909,189	617,460
Preferred stock	20,888	4,177	20,888	10,444
Convertible notes	1,663,330	—	301,734	439,560
Total	3,100,043	633,766	1,725,719	1,294,069

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3. LONG-TERM DEBT

Long-term debt consists of the following:


	Dollars in Thousands				Dollars in Thousands
	March 31, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Department of Economic and Community Development (DECD)	$	267	$	274	$	256	$	274
DECD debt issuance costs		(27)		(28)		(26)		(28)
Financed insurance loan		102		204		388		204
September 2018 Settlement		57		66		43		66
Total long-term debt		399		516		661		516
Current portion of long-term debt		(161)		(263)		(454)		(263)
Long-term debt, net of current maturities	$	238	$	253	$	207	$	253

Department of Economic and Community Development.

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

Debt issuance costs associated with the DECD 2018 Loan were approximately $31,000. Amortization of the debt issuance cost was ~~approximately~~less than $1,000 for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively, and approximately $2,000 for the nine months ended September 30, 2019 and 2018, respectively. Net debt issuance costs were ~~$27,000~~$26,000 and $28,000 at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively and are presented as a reduction of the related debt in the accompanying condensed consolidated balance sheets. Amortization for each of the next five years is expected to be approximately $3,000.

Financed Insurance Loan.

The Company finances certain of its insurance premiums (the “Financed Insurance Loans”). In July ~~2017 the Company financed $0.4 million with a 4.99 % interest rate and fully paid off such loan as of May 2018. In July~~ 2018, the Company financed $0.4 million with a 4.89% interest rate and fully paid off such loan as of July 2019. In July 2019, the Company financed $0.4 million with a 5.0% interest rate and will make monthly payments through ~~June 2019.~~May of 2020. As of ~~March 31,~~September 30, 2019 and December 31, 2018, the Financed Insurance Loans outstanding balance of ~~$0.1~~$0.4 million and $0.2 million, respectively, was included in current maturities of long-term debt in the Company’s condensed consolidated balance sheet. A corresponding prepaid asset was included in other current assets.

Settlement Agreement.

On September 21, 2018, the Company entered into a settlement and forbearance agreement with a creditor (the “September 2018 Settlement”) pursuant to which, the Company agreed to make monthly principal and interest payments to the creditor over a two year period, from November 1, 2018 to November 1, 2020, in full and final settlement of $0.1 million of indebtedness that was owed to the creditor on the date of the September 2018 Settlement. The settlement amount will accrue interest at the rate of 10% per annum until paid in full. The September 2018 Settlement outstanding balance of

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~~$0.1~~ approximately $0.1 million was included in long-term debt and accounts payable in the Company’s condensed consolidated balance sheet as of ~~March 31,~~September 30, 2019 and December 31, 2018, respectively.

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4. CONVERTIBLE NOTES

Convertible notes consist of the following:


	Dollars in Thousands				Dollars in Thousands
	March 31, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Convertible bridge notes	$	2,170	$	4,294	$	2,088	$	4,294
Convertible bridge notes discount and debt issuance costs		(1,053)		(1,111)		(2,054)		(1,111)
Convertible bridge notes premiums		91		647		—		647
Convertible promissory notes - Exchange Notes		—		630		—		630
Convertible promissory notes - Exchange notes debt issuance costs		—		(83)		—		(83)
Convertible promissory notes - Crede Note		1,450		—
Convertible promissory notes - Leviston Note		471		—
Total convertible notes		3,129		4,377		34		4,377
Current portion of convertible notes		(3,129)		(4,377)		(34)		(4,377)
Convertible notes, net of current maturities	$	—	$	—	$	—	$	—

Convertible Bridge Notes.

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

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

The Transaction consisted of a number of drawdowns. The initial closing on April 20, 2018 provided the Company with proceeds of $1,660,000, net of an original issue discount of 9% and before debt issuance costs, for the issuance of notes with an aggregate principal of $1,824,176 (the “April 2018 Bridge Notes”). The Company completed three additional drawdowns for aggregate proceeds of $1.3 million, net of an original issue discount of 9% and before debt issuance ~~cost,~~costs, for the issuance of notes with an aggregate principal of $1.5 million, ~~(the~~during the third quarter of 2018. Drawdowns included the following funding from the April 2018 Investors (i) $348,104 in July 2018 for Bridge Notes with an aggregate principal of $382,526, (ii) $495,955 in August 2018 for Bridge Notes with an aggregate principal of $545,005 and (iii) $495,941 in September 2018 for Bridge Notes with an aggregate principal of $544,990 (collectively, the “Q3 2018 Bridge Notes”).

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

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

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

The 9% discount associated with the April 2018 Bridge Notes was approximately $164,000 and was recorded as a debt discount. The Company also incurred legal and advisory fees associated with the April 2018 Bridge Notes of approximately $164,000 and these were recorded as debt issuance costs. The 9% discount associated with the Q3 2018 Bridge Notes was approximately $133,000 and was recorded as a debt discount.

As part of the initial closing, the April 2018 Investors received ~~243,223~~243,224 warrants to purchase shares of common stock of the Company (the “April 2018 Warrants”). that are exercisable at a 150% premium to the April 2018 Bridge Notes conversion price or $11.25. Half of such April 2018 Warrants had a five-year term and half had a one-year term. The Company reviewed the provisions of the April 2018 Warrants to determine the balance sheet classification of the April 2018 Warrants. The Company concluded that there is an obligation to repurchase the April 2018 Warrants by transferring assets and accordingly the warrants were classified as a liability. The April 2018 Warrants ~~had~~were valued using a Black-Scholes option pricing model with an initial value of approximately $1.1 million at the date of issuance and were recorded as a liability with an offset to debt discount. The April 2018 Investors received ~~196,337~~196,334 warrants to purchase shares of common stock of the Company in connection with the Q3 Bridge Note issuances (the “Q3 2018 Warrants”). with an initial exercise price of $11.25. Half of such Q3 2018 Warrants had a five-year term and half had a one-year term. The terms of the Q3 2018 Warrants are the same as the April 2018 Warrants and, as such, were classified as ~~liabilities,~~liabilities. The Q3 2018 Warrants were valued using a Black-Scholes option pricing model with ~~an offset to debt discount, and had~~ an initial value of approximately $0.7 million at the date of ~~issuance.~~issuance and were recorded as a liability with an offset to debt discount. See Note 9 ~~–Fair~~– Fair Value for further discussion.

On September 20, 2018, immediately after the final drawdown of the Bridge Notes, the Company entered into an agreement with the April 2018 Investors whereby the exercise price of all warrants issued to the April 2018 Investors in connection with both the 2018 Note Agreement and the Q3 ~~2018~~ Bridge Notes were amended from $11.25 to $7.50. ~~This~~The Company reviewed this repricing ~~was accounted for~~to determine the appropriate accounting treatment and concluded that the repricing would be treated as a ~~modification.~~modification of the warrant agreements. As the warrants related to the Bridge Notes are classified as liabilities, the change in fair value attributable to the repricing would be reflected in the subsequent measurement on the warrants. Management calculated the change in fair value due to repricing to be an expense of approximately $0.1 million which is included in warrant revaluation in the condensed consolidated statements of operations.

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

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The April 2018 Bridge Notes ~~contained a beneficial conversion feature valued at $1.1 million which was recorded as a debt discount with an offset to additional paid in capital at the note issuance date~~ and ~~the~~ Q3 2018 Bridge Notes both contained beneficial conversion features valued at ~~approximately~~$1.1 million and $0.5 million, respectively, which were recorded as debt discounts with an offset to additional paid in capital at the note issuance dates.

The Company reviewed the redemption features of the Bridge Notes and determined that there is a redemption feature (the “Bridge Notes Redemption Feature”) that qualifies as an embedded derivative. For the April 2018 Bridge Notes, the Company determined the initial fair value of the derivative at the time of issuance to be approximately $0.1 million which was recorded as a debt discount with an offset to derivative liability. For the Q3 2018 Bridge Notes, the Company determined the initial fair value of the derivatives at the time of issuance to be ~~less than~~approximately $0.1 million which was recorded as a debt discount with an offset to derivative liability. See Note 9 –Fair Value for further discussion.

~~Table~~As detailed above, debt discounts and debt issuance costs related to the April 2018 Bridge Notes totaled $2.7 million. During the nine months ended September 30, 2018, since the costs exceeded the $1.8 million face amount of ~~Contents~~

the debt, the Company recorded $1.8 million of debt discount and debt issuance costs as a reduction of the related debt with the excess $0.9 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations. The total debt discounts and debt issuance costs related to the Q3 2018 Bridge Notes totaled $1.4 million, of which the Company recorded $1.3 million of debt discount and debt issuance costs as a reduction of the related debt with $0.1 million expensed as a loss on issuance of convertible notes in the condensed consolidated statements of operations. The debt discount and debt issuance costs will be amortized to interest expense over the life of the respective April 2018 Bridge Notes and Q3 2018 Bridge Notes on a basis that approximates the effective interest method. Amortization of the discount was zero for the three and nine months ended September 30, 2019. Amortization of the discounts was $59,000 and $68,000 for the three and nine months ended September 30, 2018 and is included in interest expense in the unaudited condensed consolidated statements of operations.

On ~~November 29, 2018,~~April 16, 2019, the Company entered into an amendment and restatement agreement ~~(the “Amendment~~(“Amendment No.2 Agreement”) amending and restating the terms of the 2018 Note ~~Agreement.~~Agreement (as first amended pursuant to the amendment agreement in November 2018 (the Amendment Agreement”)). The Amendment No. 2 Agreement provided the Company with approximately $900,000 of gross proceeds for the issuance of ~~up to $1,318,681~~notes with an aggregate principal of ~~additional~~$989,011 (the “April 2019 Bridge ~~Notes~~Notes”) together with applicable warrants, ~~in one or more tranches,~~ with substantially the same terms and conditions as the previously issued Bridge Notes and related ~~warrants.~~ warrants. The 9% discount associated with the April 2019 Bridge Notes was approximately $89,000 and was recorded as a debt discount. In connection with the April 2019 Bridge Note issuances, the Company issued to the investors 147,472 warrants to purchase shares of common stock of the Company with a five year term and exercise price of $5.40 (the “April 2019 Warrants”). The April 2019 Warrants had an initial value of approximately $1.0 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 9 – Fair Value for further discussion. The April 2019 Bridge Notes were issued to investors that previously participated in the 2018 Note Agreement.

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

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

Debt discounts and debt issuance costs related to the April 2019 Bridge Notes totaled $2.0 million. Since the costs exceeded the $1.0 million face amount of the debt at issuance, the Company recorded $1.0 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with the excess

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$1.0 million expensed as a loss on issuance of convertible notes in the condensed consolidated statements of operations during the nine months ended September 30, 2019.

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

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

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

In connection with the Amendment Agreement, during the fourth quarter of 2018, the Company completed two additional closings for aggregate proceeds of $1.1 million, net of an original issue discount of 9% and before debt issuance costs, for the issuance of notes with an aggregate principal of $1.2 million (collectively, the “Q4 2018 Bridge Notes”). Approximately $0.3 million of the $1.1 million of proceeds was received after December 31, 2018 and is included in other current assets on our condensed consolidated balance sheet at December 31, 2018. The 9% discount associated with the Q4 2018 Bridge Notes was approximately $108,000 and was recorded as a debt discount. In connection with the Q4 2018 Bridge Note issuances, the Company issued to the investors 300,114 warrants to purchase shares of common stock of the Company (the “Q4 2018 Warrants”), which had an initial value of approximately $0.7 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 9 – Fair Value for further discussion.

The Company reviewed the conversion option of the ~~Q4 2018~~May 2019 Bridge Notes and determined that there was a beneficial conversion feature with a value of approximately ~~$0.5~~$0.9 million which was recorded as a debt discount with an offset to additional paid in capital. The ~~Q4 2018~~May 2019 Bridge Notes also contain the Bridge Notes Redemption Feature ~~which had an initial fair value~~and the Company performed a valuation at the time of issuance which resulted in zero value, at that time, due to the high value of ~~approximately $15,000 which was recorded as~~the conversion feature and a ~~debt discount with an offset to derivative liability. See Note 9 – Fair Value for further discussion.~~limited upside from the redemption premium.

~~The total debt~~Debt discounts and debt issuance costs related to the ~~Q4 2018~~May 2019 Bridge Notes totaled ~~$1.4~~$2.0 million. Since the costs exceeded the $1.1 million face amount of ~~which~~the debt, the Company recorded $1.1 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with the excess $0.9 million expensed as a loss on issuance of convertible notes in the condensed consolidated ~~balance sheets as~~statements of ~~March 31, 2019 and December 31, 2018, respectively.~~

Atoperations during the time of the Amendment Agreement, the conversion price related to $3.3 million of previously issued Bridge Notes, the April 2018 Bridge Notes and Q3 2018 Bridge Notes, was amended and treated as an extinguishment of the related Bridge Notes. The Company removed the carrying value of the notes and recorded a new fair value of the notes (“New Debt”) which included a debt premium of $0.9 million at the time of the Amendment Agreement.nine months ended September 30, 2019.

Since the issuance of all the ~~New Debt, $2.3~~2018 and 2019 Bridge Notes, $4.5 million of the total ~~$4.5~~$6.6 million of ~~Bridge Notes,~~convertible bridge notes, plus interest, have been converted into a total of ~~1,112,762~~1,922,100 shares of common stock of the Company. This included the conversion of approximately ~~$2.1~~$0.1 million and $4.3 million of Bridge Notes, plus interest, converted into ~~1,019,430~~52,748 and 1,828,766 shares of common stock of the Company during the three and nine months ended ~~March 31,~~September 30, 2019, ~~and $0.2~~respectively.

As a result of the bridge note conversions, the Company wrote off approximately $0.5 million of ~~Bridge Notes, plus interest, converted into 93,333 shares of common stock of the Company~~derivative liability, with an offset to additional paid-in capital, during the ~~fourth quarter of 2018.~~nine months ended September 30, 2019.

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During the three and nine months ended ~~March 31,~~September 30, 2019 and 2018, the change in Bridge Note debt discounts and debt premiums was as follows:


(Dollars in thousands)	2019				For the Three Months Ended September 30,
		Debt Discounts		Debt Premiums	2019				2018
Beginning balance at January 1	$	1,111	$	647
						Debt Discounts		Debt Premiums		Debt Discounts		Debt Premiums
Beginning balance at July 1					$	(2,158)	$	—	$	(1,815)	$	—
Additions:						—		—		(1,337)		—
Deductions:
Amortization/accretion (1)		(58)		(160)
Amortization (accretion) (1)						41		—		59		—
Write-off related to note conversions (2)		—		(396)		63		—		—		—
Balance at March 31	$	1,053	$	91
Balance at September 30					$	(2,054)	$	—	$	(3,093)	$	—


	For the Nine Months Ended September 30,
	2019				2018
		Debt Discounts		Debt Premiums		Debt Discounts		Debt Premiums
Beginning balance at January 1	$	(1,111)	$	647	$	—	$	—
Additions:		(2,086)		—		(3,161)		—
Deductions:
Amortization (accretion) (1)		154		(167)		68		—
Write-off related to note conversions (2)		989		(480)		—		—
Balance at September 30	$	(2,054)	$	—	$	(3,093)	$	—

(1)

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

(2)

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

The remaining debt discounts of ~~$1.1 million and debt premiums of $0.1~~$2.1 million, as of ~~March 31,~~September 30, 2019, are expected to be fully amortized ~~during 2019.~~by the end of the second quarter of 2020.

Convertible Promissory Notes – Exchange Notes.

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

During 2018, the Company entered into Exchange Agreements (the “Exchange Agreements”) with three institutional investors (the “Holders”) pursuant to which the Company issued or shall issue convertible promissory notes, due January 1, 2021 (the “Exchange Notes”) in exchange (the “Exchange”) for amounts owed to the Holders pursuant to certain debt settlement agreements, dated October 31, 2017. AtDuring the ~~time of the Exchange Agreements,~~three and nine months ended September 30, 2018, $~~3.2~~2.1 million of Secured Debt Obligations were exchanged for ~~$2.8~~$1.8 million of Exchange Notes (the “Exchange Notes”). Pursuant to the terms of the Exchange Notes, the Company shall pay to the Holders the aggregate principal

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amount of the Exchange Notes in eighteen equal installments beginning on August 1, 2019 and ending on January 1, 2021.

The Company reviewed the Conversion Option and concluded that it meets the criteria for derivative accounting and requires bifurcation and separate accounting as a derivative. ~~The~~During the three and nine months ended September 30, 2018, the Company determined the initial fair value of the derivative at the time of issuance to be approximately ~~$0.4~~$0.2 million which was recorded as a debt discount with an offset to derivative liability. See Note 9 –Fair Value for further discussion.

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

Since the issuance of the Exchange Notes, the Holders have converted all $2.8 million into a total of 446,913 shares of common stock of the Company. This included the conversion of ~~approximately~~zero and $0.6 million of Exchange Notes converted into zero and 155,351 shares of common stock of the Company during the three and nine months ended ~~March 31,~~September 30, 2019, ~~and approximately $2.2 million of Exchange Notes converted into 291,562 shares of common stock of the Company during the fourth quarter of 2018.~~respectively.

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

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During the three months ended ~~March 31,~~September 30, 2019, there was no change in Exchange Note debt discounts. During the three months ended September 30, 2018 and the nine months ended September 30, 2019 and 2018, the change in Exchange Note debt discounts was as follows:

(Dollars in thousands)

2019
Beginning balance at January 1

$
83
Deductions:

Amortization (1)

(2)
Write-off related to note conversions (2)

(81)
Balance at March 31

$
—


(Dollars in thousands)
	For the Three Months Ended September 30, 2018
Beginning balance at July 1	$	—
Additions:		(241)
Deductions:
Amortization (1)		—
Write-off related to note conversions (2)		—
Balance at September 30	$	(241)


(Dollars in thousands)	For the Nine Months Ended September 30,
		2019		2018
Beginning balance at January 1	$	(83)	$	—
Additions:		—		(241)
Deductions:
Amortization (1)		2		—
Write-off related to note conversions (2)		81		—
Balance at September 30	$	—	$	(241)

(1)

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

(2)

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

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As a result of Exchange Note conversions, during the ~~conversions,~~nine months ended September 30, 2019, the Company ~~has also written~~wrote off approximately ~~$0.4~~$0.1 million of derivative liability with an offset to additional paid-in ~~capital, of which less than $0.1 million was~~capital. There were no derivate liability write offs during the three months ended ~~March 31, 2019.~~September 30, 2019 or during the three and nine months ended September 30, 2018.

Convertible Promissory Notes – Crede Note.

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

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

~~During the three months ended March 31,~~On April 16, 2019, the ~~Company made no payments on, and there were no conversions~~entire outstanding amount of $1.45 million was converted into 270,699 shares of common stock of the Company and as of September 30, 2019 the remaining amount due on the Crede ~~Note.~~Note was zero.

Convertible Promissory Notes – Leviston Note

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

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Leviston Note is required or permitted to be repaid pursuant to its terms. The Company, at its option, may redeem some or the entire then outstanding principal amount of the Leviston Note for cash.

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

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

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common stock as reported by Bloomberg, LP (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) for such trading day.

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

During the three and nine months ended ~~March 31,~~September 30, 2019, the Company made cash payments of zero and less than $0.1 million, respectively, on the Leviston ~~Note~~Note. During the three and ~~$0.2~~nine months ended September 30, 2019, zero and $0.7 million of the Leviston note was converted into ~~73,333~~zero and 184,357 shares of common stock of the ~~Company.~~Company, respectively. As of ~~March 31,~~September 30, 2019, the ~~$0.5 million outstanding balance of~~remaining amount due on the Leviston Note was zero. As of December 31, 2018, the Company had recorded liabilities related to Leviston of $0.5 million and $0.2 million which were included in ~~convertible notes~~other current liabilities and accrued expenses, respectively, in the ~~Company’s~~ condensed consolidated balance ~~sheets. There were no amounts outstanding related to this note as of December 31, 2018.~~sheet.

5. ACCRUED EXPENSES OTHER CURRENT LIABILITIES.

Accrued expenses at ~~March 31,~~September 30, 2019 and December 31, 2018 are as follows:


(dollars in thousands)	March 31, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Accrued expenses	$	1,365	$	1,583	$	1,087	$	1,583
Accrued compensation		187		118		317		118
Accrued interest		99		239		91		239
	$	1,651	$	1,940	$	1,495	$	1,940

~~During the three months ended March 31, 2019 and 2018, the~~The Company was able to reduce ~~approximately $0.2 million and $0.1 million, respectively, of~~ certain accrued expense and accounts payable amounts through negotiations with certain vendors to settle outstanding liabilities and the Company recorded athese amounts as gains ~~of $0.2 million in the first quarter of 2019 and $0.1 million in the first quarter of 2018~~ which are included in gain on settlement of liability, net. During the three and nine months ended September 30, 2019, zero and approximately $1.3 million, respectively, was recorded as a gain. Similarly, the Company recorded a net ingain of $0.1 million and $0.2 million during the ~~condensed consolidated statements of operations.~~three and nine months ended September 30, 2018, respectively.

Other current liabilities are as follows:


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

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

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As of the date of the Crede Agreement, the fair value of the common stock warrant liability related to Crede was revalued to approximately $0.4 million, resulting in a gain of $0.2 million included in warrant revaluation in the unaudited condensed consolidated statement of operations during the ~~three~~nine months ended ~~March 31,~~September 30, 2018. At the time of the Crede Agreement, the Company recorded $1.5 million in other current liabilities and $0.4 million in other long-term liabilities, thus replacing its previous $1.1 million in other current liabilities and $0.4 million common stock warrant liability. This resulted in the Company recording an additional loss of $0.4 million, which is included in loss on settlement of equity instruments in the unaudited condensed consolidated statement of operations ~~during~~for the ~~three~~nine months ended ~~March 31,~~September 30, 2018. During 2018, the Company paid approximately $0.5 million to ~~Crede. As~~Crede, with a remaining balance of $1.45 million as of December 31, ~~2018, the Company had recorded liabilities relating to Crede of $1.45 million in other current liabilities on the accompanying condensed consolidated balance sheets and, o~~2018. On January 15, 2019 the $1.45 million liability was replaced with the Crede Note.

As of December 31, 2018, the Company had recorded a liability of approximately $0.5 million related to an equity purchase agreement with Leviston, which is included in other current liabilities on our condensed consolidated

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balance sheet. On January 29, 2019, the Company entered into the Leviston Settlement pursuant to which the Company issued the Leviston Note in full satisfaction of the $0.5 million discussed above along with approximately $0.2 million of other obligations owed to Leviston which are included in accrued expenses in our condensed consolidated balance sheet at December 31, 2018. See Note 4 – Convertible Notes.

6. COMMITMENTS AND CONTINGENCIES

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

LITIGATIONS

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 the Company. On May 5, 2017, XIFIN filed an application for entry of default judgment against us.~~ A liability of $0.1 million iswas reflected in accounts payable within the accompanying condensed consolidated balance sheet at ~~March 31, 2019 and~~ December 31, ~~2018, respectively.~~2018. On April 19, 2019, the Company executed a settlement agreement with XIFIN pursuant to which the Company paid to XIFIN an agreed amount of $40,000 as settlement in consideration for total release from all outstanding amounts due and payable by the Company to XIFIN. The settlement amount was paid in full by the Company on April 19, 2019 ~~and there is no remaining amount due to XIFIN as of the filing of this Quarterly Report on Form 10-Q.~~.

CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we ~~owe~~owed approximately $0.2 million for certain patent maintenance services rendered. CPA Global has not filed claims against us in connection with this allegation. A liability of approximately less than $0.1 million has been recorded and is reflected in accounts payable within the accompanying condensed consolidated balance sheets at ~~March 31,~~September 30, 2019 and December 31, 2018.

On February 17, 2017, Jesse Campbell (“Campbell”) filed a lawsuit individually and on behalf of others similarly situated against us in the District Court for the District of Nebraska alleging we had a materially incomplete and misleading proxy relating to a potential merger and that the merger agreement’s deal protection provisions deter superior offers. As a result, Campbell alleges that we have violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a‑9 promulgated thereafter. The Company filed a motion to dismiss all claims, which motion was fully briefed on November 27, 2017. The Court granted the Company’s motion in full on May 3, 2018 and dismissed the lawsuit. The Eighth Circuit reversed the decision of the District Court and remanded the case back to the District Court. The parties filed a notice with the Court on ~~March 1,~~May 22, 2019, announcing that they had reached a settlement in principle. On June 21, 2019, the parties filed a stipulation of settlement, in which defendants are released from all claims and expressly deny that that they have committed any act or omission giving rise to any liability. The stipulation includes a settlement payment of $1.95 million, which will be primarily funded by our insurance. On July 10, 2019, the Court entered an order preliminarily approving the settlement. The settlement remains subject to final approval by the Court. The Company’s insurance policy includes a deductible of approximately $0.8 million and the Company has previously paid approximately $0.5 million in legal fees in connection with the litigation which have been applied to the deductible leaving approximately $0.3 million to be paid by the Company and approximately $1.7 million to be paid by the insurance company. During the three months ended September 30, 2019, both the Company and the insurance company paid their respective amounts to an escrow account where the funds will be held until they are approved for distribution at a fairness hearing of the Court which is scheduled for November 2019.

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~~of $39,000. A liability of approximately~~ $39,000 ~~has been~~that was recorded in accounts payable within the accompanying condensed consolidated balance sheet at ~~March 31, 2019 and~~ December 31, 2018. ~~On April 2,~~The obligation was paid in full during the second quarter 2019, the Superior Court issued a subpoena commanding the Company to appear before the Superior Court on May 13, 2019. Subsequent to April 2, 2019, the Company paid Bio-Rad approximately $39,000, plus interest, and there isresulting in no remaining amount due to ~~Bio-Rad as~~Bio-Rad.

Table of ~~the filing of this Quarterly Report on Form 10-Q.~~Contents

OTHER COMMITMENTS

On January 2, 2019, the Company entered into a settlement agreement with a third party service provider pursuant to which we agreed to pay the service provider an aggregate amount of approximately $0.6 million, plus accrued interest at a rate of 8%, pursuant to an agreed upon payment schedule, ending in September 2019, in consideration for the cancellation of an outstanding debt owed by the Company to the service provider in the aggregate amount of approximately $1.5 million (the “Owed Amount”)~~. Upon~~ which was recorded in accounts payable at December 31, 2018. During the three and nine months ended September 30, 2019, the Company made payments of zero and $0.6 million, respectively, to the service provider as payment in full of the ~~$0.6 million and compliance with the~~agreed upon payment ~~schedule, the~~schedule. The service provider ~~has agreed to waive~~waived the difference between the settlement amount and the Owed Amount and, ~~at that time~~as such, the Company ~~would record~~recorded a gain on settlement of approximately $0.9 ~~million. During~~million which is included in gain on settlement of liability, net in the ~~three~~condensed consolidated statements of operations for the nine months ended ~~March 31, 2019,~~September 30, 2019. There was no remaining balance due on the ~~Company made payments of $0.2 million to the service provider.~~ ~~A liability of approximately $1.3 million and $1.5 million has been recorded and is reflected in accounts payable within the accompanying condensed consolidated balance sheets~~Owed Amount at ~~March 31, 2019 and December 31, 2018.~~September 30, 2019.

LEGAL AND REGULATORY ENVIRONMENT

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

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.

7. LEASES

On January 1, 2019, the Company recorded initial ROU assets and corresponding operating lease liabilities of approximately $750,000 and a reversal of deferred rent and prepaid expenses of approximately $6,000 resulting in no cumulative effect adjustment upon adoption of Topic 842. The Company leases administrative facilities and laboratory equipment through operating lease agreements. In addition we rent various equipment used in our diagnostic lab and in our administrative offices through finance lease arrangements. Our operating leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common area or other maintenance costs). The facility leases include one or more options to renew, from 1 to 5 years or more. The exercise of lease renewal options is typically at our sole discretion, therefore, the renewals to extend the lease terms are not included in our ROU assets and lease liabilities as 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 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

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an initial term of 12 months or less are not recorded on the balance sheet. The primary leases we enter into with initial terms of 12 months or less are for equipment.

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

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


(dollars in thousands)	Classification on the Condensed Consolidated Balance Sheet	March 31, 2019		Classification on the Condensed Consolidated Balance Sheet	September 30, 2019

Assets:
Operating lease assets	Operating lease right-of-use assets	$	689	Operating lease right-of-use assets	$	574
Finance lease assets	Property and equipment, net		208	Property and equipment, net		201
Total lease assets		$	897		$	775

Liabilities:
Current:
Operating lease obligations	Current maturities of operating lease liabilities	$	221	Current maturities of operating lease liabilities	$	210
Finance lease obligations	Current maturities of finance lease liabilities		58	Current maturities of finance lease liabilities		65
Noncurrent:
Operating lease obligations	Operating lease liabilities, less current maturities		470	Operating lease liabilities, less current maturities		370
Finance lease obligations	Finance lease liabilities, less current maturities		140	Finance lease liabilities, less current maturities		126
Total lease liabilities		$	889		$	771

As of ~~March 31,~~September 30, 2019, the estimated future minimum lease payments, excluding non-lease components, are as follows:


(dollars in thousands)	Operating Leases		Finance Leases		Total		Operating Leases		Finance Leases		Total
Remainder of 2019	$	201	$	53	$	254	$	64	$	24	$	88
2020		242		46		288		242		62		304
2021		241		38		279		241		38		279
2022		47		32		79		48		32		80
2023		35		27		62		35		27		62
Thereafter		17		41		58		17		41		58
Total lease obligations		783		237		1,020		647		224		871
Less: Amount representing interest		(92)		(39)		(131)		(67)		(33)		(100)
Present value of net minimum lease obligations		691		198		889		580		191		771
Less, current portion		(221)		(58)		(279)		(210)		(65)		(275)
Long term portion	$	470	$	140	$	610	$	370	$	126	$	496

Other information as of ~~March 31,~~September 30, 2019:


Weighted-average remaining lease term (years):
Operating leases	~~3.2~~2.8
Finance leases	~~4.9~~4.3
Weighted-average discount rate:
Operating leases	8.00%
Finance leases	7.25%

During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, operating cash flows from operating leases was ~~$72,000~~$144,000 and ROU assets obtained in exchange for operating lease liabilities was $750,000.

Operating Lease Costs

Operating lease costs were less than $0.1 million and $0.2 million during the three and nine months ended September 30, 2019, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30,

1922

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~~Operating Lease Costs~~

~~Operating lease costs were $0.1 million during the three months ended March 31, 2019 and 2018.~~2018, respectively. These costs are primarily related to long-term operating leases for the Company’s facilities and laboratory equipment.

Finance Lease Costs

Finance leases are included in property and equipment, net and finance lease liabilities, less current maturities on the condensed consolidated balance sheets. The associated amortization expense and interest included in the condensed consolidated statements of operations for both the three and nine months ended ~~March 31,~~September 30, 2019 is less than $0.1 million, respectively.

8. STOCKHOLDERS’ EQUITY

Common Stock.

Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have 150,000,000 shares of common stock authorized for issuance. On 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 effected this increase.

On February 12, 2018, the Company issued 120,983 shares of its common stock in exchange for approximately $1.9 million of debt obligations. See Note 4 – Convertible Notes.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2018, the Company issued 208,000 shares of its common stock in connection with conversions of its Series B Preferred Stock and 223,022 shares of its common stock in connection with conversions of its Series C Preferred Stock. Aside from 4,000 shares of common stock issued in connection with conversions of its Series C Preferred Stock, all of the shares of common stock issued for the ~~three~~nine months ended ~~March 31,~~September 30, 2018 in connection with conversions of its Series B Preferred Stock and Series C Preferred Stock (together the “Preferred Stock”) were issued after the Company induced the holders of its Preferred Stock to convert their shares of Preferred Stock to shares of the company’s common stock (see below - Preferred Stock induced conversions).

During the three and nine months ended ~~March 31,~~September 30, 2018, the Company issued ~~20,000~~39,753 and 252,486 shares of its common stock, respectively, in connection with the exercise of ~~20,000 warrants.~~39,753 and 252,486 warrants, respectively. The warrant exercises resulted in net cash proceeds to the Company of approximately $0.2 million and $1.3 million during the three and nine months ended ~~March 31,~~September 30, 2018.

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

Also, during the three and nine months ended ~~March 31,~~September 30, 2019, the Company issued ~~1,248,115~~52,748 and 2,439,173 shares, respectively, of its common stock in connection with the conversion of convertible ~~notes.~~notes, plus interest, totaling $0.1 million and $7.4 million, respectively. See Note 4 – Convertible Notes.

2018 Purchase Agreement

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

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Company filed with the Securities and Exchange Commission (the “SEC”) and which was declared effective by the SEC on February 13, 2015 (the “Shelf Registration Statement”).

Leviston purchased 48,076 shares (the “Investor Shares”) of the Company’s common stock following the close of business on February 9, 2018, subject to customary closing conditions, at a price per share of $15.60 for approximately $750,000. The shares were sold pursuant to the Shelf Registration Statement. The Company incurred approximately $132,000 in costs which have been treated as issuance costs within additional paid-in capital in the accompanying unaudited condensed consolidated balance sheet.

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

In consideration of Leviston’s agreement to enter into the 2018 Purchase Agreement, the Company agreed to pay to Leviston a commitment fee in shares of the Company’s common stock equal in value to 5.25% of the total Aggregate Amount (the “Leviston Commitment Shares”), payable in three installments upon achieving certain milestones. The first installment of 1.75% was due on or before February 12, 2018 and this amount, of $140,000, was paid to Leviston through the issuance of ~~11,380~~11,381 shares of the Company’s common stock on February 12, 2018.

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

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

LP Purchase Agreement

On September 7, 2018, the Company entered into the LP Purchase Agreement, pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of $10,000,000 of common stock of the Company (subject to certain limitations) from time to time over the term of the LP Purchase Agreement. Pursuant to the terms of the LP Purchase Agreement, on the agreement date, the Company issued 40,000 shares of its common stock to Lincoln Park as consideration for its commitment to purchase shares of common stock of the Company under the LP Purchase Agreement (the “LP Commitment Shares”). Also on September 7, 2018, the Company entered into a registration rights agreement with Lincoln Park (the “LP Registration Rights Agreement”), pursuant to which on September 14, 2018, the Company filed with the SEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, 466,666 shares of common stock, which includes the LP Commitment Shares, that have been or may be issued to Lincoln Park under the LP Purchase Agreement. The Form S-1 was declared effective by the SEC on September 28, 2018. As of January 16, 2019, all shares registered under this S-1 had been sold and/or issued to Lincoln Park. On February 1, 2019, the Company filed with the SEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, an additional 1,000,000 shares of common stock that have been or may be issued to Lincoln Park under the LP Purchase Agreement. The Form S-1 was declared effective by the SEC on February 12, 2019. As of August 5, 2019, all shares registered under this S-1 had been sold

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and/or issued to Lincoln Park. On August 9, 2019, the Company filed with the SEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, an additional 1,800,000 shares of common stock that have been or may be issued to Lincoln Park under the LP Purchase Agreement. As of September 30, 2019, 990,000 shares registered under this S-1 had been sold and/or issued to Lincoln Park.

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

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

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

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

~~Between October 2, 2018 and December 31, 2018,~~As of the date of issuance of this Quarterly Report on Form 10-Q, we have already received $7.2 million in aggregate, including approximately $1.4 million from the sale of 328,590 shares of ~~the Company’s~~ common stock ~~were sold pursuant~~ to Lincoln Park during 2018, $2.8 million and $5.2 million from the ~~LP Purchase agreement for approximately $1.4 million. During~~sale of 1,090,000 and 2,088,077 shares of common stock to Lincoln Park during the three and nine months ended ~~March 31,~~September 30, 2019, ~~758,076~~respectively, and $0.6 million from the sale of 270,000 shares of ~~the Company’s~~ common stock ~~were sold pursuant~~ to Lincoln Park from October 1, 2019 through the ~~LP Purchase agreement for approximately $1.7 million.~~date of issuance of this Quarterly Report on Form 10-Q.

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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.

Series B Preferred Stock.

On August 25, 2017, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (“Series B Preferred Stock”) with the State of Delaware which designates 6,900 shares of our preferred stock as Series B Preferred Stock. The Series B Preferred Stock has a stated value of $1,000 per share and a par value of $0.01 per share. The Series B 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 2018 Purchase Agreement triggered the down round feature of the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from the reduced $21.00 per share price, related to the 2017 Series C issuance, to $15.60 per share. In connection with the down round

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adjustment, the Company calculated an incremental beneficial conversion feature of approximately $1.4 million which was recognized as a deemed dividend during the ~~three~~nine months ended ~~March 31,~~September 30, 2018 (“Deemed Dividend A”).

The 2018 Inducement Agreement, discussed below, triggered the down round feature of the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $15.60 per share to $11.25 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $40,000 which was recognized as a deemed dividend during the ~~three~~nine months ended ~~March 31,~~September 30, 2018 (“Deemed Dividend B”).

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

During the ~~three~~nine months ended ~~March 31,~~September 30, 2018, 2,340 shares of Series B Preferred Stock were converted into 208,000 shares of our common stock.

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

Series C Preferred Stock

On November 6, 2017, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (“Series C Preferred Stock”) with the State of Delaware which designates 2,748 shares of our preferred stock as Series C Preferred Stock. The Series C Preferred Stock has a stated value of $1,000 per share and a par value of $0.01 per share.

The conversion price of the Series C Preferred Stock contains a down round feature. The 2018 Purchase Agreement triggered the down round feature of the Series C Preferred Stock and, as a result, the conversion price of the Company’s Series C Convertible Preferred Stock was automatically adjusted from $21.00 per share to $15.60 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $0.8 million which was recognized as a deemed dividend ~~during~~at the ~~three months ended March 31, 2018~~time of the down round adjustment (“Deemed Dividend C”).

During the ~~three~~nine months ended ~~March 31,~~September 30, 2018, 2,548 shares of Series C Preferred Stock were converted into 223,022 shares of our common stock.

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At ~~March 31,~~September 30, 2019 and December 31, 2018, the Company had 2,748 shares of Series C designated and issued and zero shares of Series C outstanding.

Preferred Stock induced conversions

On March 21, 2018, the Company entered into a letter agreement (the “2018 Inducement Agreement”) with certain holders of shares of the Company’s Series B Preferred Stock and Series C Preferred Stock (together the “Preferred Stock”), and warrants (the “Warrants”) to purchase shares of the Company’s common stock issued in the Company’s public offering in August 2017 and registered direct offering in November 2017. Pursuant to the 2018 Inducement Agreement, the Company and the investors agreed that, as a result of the issuance of shares of common stock pursuant to that Purchase Agreement, dated February 8, 2018, by and between the Company and the investor named therein, and effective as of the time of execution of the 2018 Inducement Agreement, the exercise price of the Warrants was reduced to $11.25 per share (the “Exercise Price Reduction”) and the conversion price of the Preferred Stock was reduced to $11.25 (the “Conversion Price Reduction”). As consideration for the Company’s agreement to the Exercise Price Reduction and the Conversion Price Reduction, (i) each investor agreed to convert the shares of Preferred Stock held by such investor into shares of Common Stock and (ii) one investor agreed to exercise 44,444 Warrants and another investor agreed to exercise 33,333 Warrants all as of the date of the 2018 Inducement Agreement. As discussed above, as of ~~March 31,~~September 30, 2019, all shares of Preferred Stock, except 47 shares of Series B Preferred Stock, were converted to shares of our common stock pursuant to the terms of the 2018 Inducement Agreement and 20,000 Warrants were exercised at the $11.25 exercise price.

The 2018 Inducement Agreement represented an inducement by the Company to convert shares of the Preferred Stock. The conversion price of the Preferred Stock and the exercise price of the Warrants were reduced from $15.60 per

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share to $11.25 per share, respectively. The Company calculated the fair value of the additional securities and consideration to be approximately $1.2 million (“Deemed Dividend D”). During the ~~three~~nine months ended ~~March 31,~~September 30, 2018, this amount was recorded as a charge to additional paid-in-capital and as a deemed dividend resulting in a reduction of income available to common shareholders in our basic earnings per share calculation.

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Common Stock Warrants.

The following represents a summary of the warrants outstanding as of ~~March 31,~~September 30, 2019:


			Underlying	Exercise				Underlying	Exercise
	Issue Year	Expiration	Shares	Price		Issue Year	Expiration	Shares	Price
Warrants Assumed in Merger
Warrants
(1)	2014	April 2020	832	$	1,800.00	2014	April 2020	832	$	1,800.00
(2)	2015	February 2020	1,588	$	1,008.00	2015	February 2020	1,588	$	1,008.00
(3)	2015	December 2020	272	$	747.00	2015	December 2020	272	$	747.00
(4)	2016	January 2021	596	$	544.50	2016	January 2021	596	$	544.50
(5)						2017	June 2022	2,540	$	41.25
Warrants
(5)						2017	June 2022	500	$	7.50
~~(5)~~(6)	2017	June 2022	2,540	$	41.25	2017	June 2022	6,095	$	105.00
~~(5)~~(7)	2017	June 2022	500	$	7.50	2017	August 2022	25,201	$	2.25
~~(6)~~(8)	2017	June 2022	6,095	$	105.00	2017	August 2022	4,000	$	46.88
~~(7)~~(9)	2017	August 2022	32,000	$	2.25	2017	August 2022	47,995	$	150.00
~~(8)~~(9)	2017	August 2022	4,000	$	46.88	2017	August 2022	9,101	$	7.50
(9)	2017	August 2022	47,995	$	150.00
(9)	2017	August 2022	9,101	$	7.50
(10)	2017	August 2022	16,664	$	2.25	2017	August 2022	16,664	$	2.25
(10)	2017	August 2022	7,335	$	2.25	2017	August 2022	7,335	$	2.25
(11)	2017	October 2022	666	$	2.25	2017	October 2022	666	$	2.25
(12)	2017	May 2023	25,037	$	2.25	2017	May 2023	—	$	2.25
(13)	2018	October 2022	7,207	$	112.50	2018	October 2022	7,207	$	112.50
(14)	2018	April 2019	121,611	$	7.50	2018	April 2023	69,964	$	5.40
(14)	2018	April 2023	121,611	$	7.50	2018	April 2023	121,552	$	5.40
(15)	2018	October 2022	15,466	$	11.25	2018	October 2022	15,466	$	11.25
(16)	2018	July 2019	25,501	$	7.50	2018	July 2023	14,671	$	5.40
(16)	2018	July 2023	25,501	$	7.50	2018	July 2023	14,672	$	5.40
(16)	2018	August 2019	36,333	$	7.50	2018	August 2023	36,334	$	5.40
(16)	2018	August 2023	36,333	$	7.50	2018	August 2023	36,334	$	5.40
(16)	2018	September 2019	36,333	$	7.50	2018	September 2023	19,816	$	5.40
(16)	2018	September 2023	36,333	$	7.50	2018	September 2023	20,903	$	5.40
(17)	2018	November 2023	138,941	$	5.40	2018	November 2023	75,788	$	5.40
(17)	2018	December 2023	161,172	$	5.40	2018	December 2023	51,282	$	5.40
(18)						2019	April 2024	147,472	$	5.40
(19)						2019	May 2024	154,343	$	9.56
			917,563					909,189

(1)

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

(2)

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

(3)

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

(4)

These warrants were issued in connection with an offering which was completed in January 2016. Of the remaining outstanding warrants as of ~~March 31,~~September 30, 2019, 357 warrants are recorded as a liability, See Note 9 – Fair Value for further discussion, and ~~238~~239 are treated as equity.

(5)

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

(6)

These warrants were issued in connection with the Merger.

(7)

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

(8)

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

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(9)

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

(10)

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

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(11)

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

(12)

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

(13)

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

(14)

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

(15)

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

(16)

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

(17)

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

(18)

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

(19)

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

August 2017 Offering Warrants

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

As a result of the Series C Preferred Offering, the exercise price of the August 2017 Offering Warrants was adjusted to $21.00 per share.

In February 2018, as a result of 2018 Purchase Agreement, the exercise price of the August 2017 Offering Warrants was adjusted to $15.60. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provisions on the warrants to be approximately $62,000 and recorded this as a deemed dividend (“Deemed Dividend E”). In addition, as a result of the 2018 Inducement Agreement, the exercise price of the August 2017 Offering Warrants was further adjusted to $11.25 as a result of the Exercise Price Reduction discussed above.

In April 2018, as a result of the 2018 Note Agreement, the exercise price of the August 2017 Offering Warrants was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $63,000 and recorded this as a deemed dividend (“Deemed Dividend L”).

There were ~~zero~~6,800 and ~~20,000~~146,666 August 2017 Offering Warrants exercised during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, respectively, for proceeds to the Company of ~~zero~~approximately $15,000 and ~~$225,000,~~$795,000, respectively. During the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, the intrinsic value of the August 2017 Offering Warrants exercised was ~~zero.~~$36,000 and $420,000, respectively.

Note Conversion Warrants

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

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

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the 2018 Note Agreement, the exercise price of the Note Conversion Warrants was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $10,000 and recorded this as a deemed dividend (“Deemed Dividend M”).

Convertible Promissory Note Warrants

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

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

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

Series C Warrants

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

In February 2018, as a result of the 2018 Purchase Agreement, the exercise price of the Series C Warrants was adjusted to $15.60. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $58,000 and recorded this as a deemed dividend (“Deemed Dividend J”). In addition, as a result of the 2018 Inducement Agreement, the exercise price of the Series C Warrants was further adjusted to $11.25 as a result of the Exercise Price Reduction discussed above.

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

There were zero and 25,037 Series C Warrants exercised during the three and nine months ended September 30, 2019, respectively, for proceeds to the Company of zero and $56,000, respectively. During the nine months ended September 30, 2019, the intrinsic value of the Series C Warrants exercised was approximately $43,000. There were

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34,487 and 105,820 Series C Warrants exercised during the three and nine months ended September 30, 2018, respectively, for proceeds to the Company of approximately $155,000 and $476,000, respectively. During the nine months ended September 30, 2018, the intrinsic value of the Series C Warrants exercised was approximately $294,000.

Creditor Warrants

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

April 2018 Warrants

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

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

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

Advisor Warrants

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

Q3 2018 Warrants

In connection with the issuance of bridge notes during the third quarter of 2018, the Company issued 196,340 warrants with an exercise price of $11.25 at time of issuance (the “Q3 2018 Warrants”). At the time of issuance, half of these Q3 2018 Warrants had a five-year term and half had a one-year term. The Q3 2018 Warrants had a fair value of approximately $0.7 million and were recorded as a liability with an offset to debt discount. In September 2018, the exercise price was modified to $7.50. The Company calculated the change in fair value due to repricing to be an expense of approximately $0.1 million which is included in warrant revaluation in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2018.

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

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

Q4 2018 Warrants

In connection with the issuance bridge notes during the fourth quarter of 2018, the Company issued 300,115 warrants with an exercise price of $5.40 at time of issuance and a five-year term (the “Q4 208 Warrants”). At the time of issuance, the Q4 2018 Warrants had a fair value of approximately $0.7 million and were recorded as a liability with an offset to debt discount.

There were zero and 173,045 Q4 2018 Warrants exercised during the three and nine months ended September 30, 2019, respectively, for proceeds to the Company of zero and $934,000, respectively. During the nine months ended September 30, 2019, the intrinsic value of the Q4 2018 Warrants exercised was approximately $489,000.

April 2019 Warrants

In connection with the issuance of the April 2019 Bridge Notes, the Company issued 147,472 warrants with an exercise price of $5.40 and a five-year term. At the time of issuance, as discussed in Note 4 - Convertible Notes, the April 2019 Warrants had a fair value of approximately $1.0 million and were recorded as a liability with an offset to debt discount.

May 2019 Warrants

In connection with the issuance of the May 2019 Bridge Notes, the Company issued 154,343 warrants with an exercise price of $5.40 and a five-year term. At the time of issuance, as discussed in Note 4 - Convertible Notes, the May 2019 Warrants had a fair value of approximately $0.9 million and were recorded as a liability with an offset to debt discount.

Deemed Dividends

As discussed above, certain of our preferred stock and warrant issuances contain down round provisions which require us to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.

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There were no deemed dividends during the ~~three~~nine months ended ~~March 31,~~September 30, 2019. The following represents a summary of the dividends recorded for the ~~three~~nine months ended ~~March 31,~~September 30, 2018:


	Amount Recorded		Amount Recorded
Deemed Dividends	(in thousands)		(in thousands)

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

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

For the three months ended March 31, 2018	$	3,514
Dividends resulting from the 2018 Note Agreement
Deemed Dividend K				216
Deemed Dividend L				63
Deemed Dividend O				45
Deemed Dividend M				10
Deemed Dividend N				*

For the nine months ended September 30, 2018			$	3,848

* Represents less than one thousand dollars

9. FAIR VALUE

FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our condensed consolidated financial statements.

FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:

Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;

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

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

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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. 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 of operations.

2016 Warrant Liability

~~The~~In the Merger, the Company assumed ~~the~~a warrant liability related to warrants issued in January 2016 (the “2016 Warrant ~~Liability in the Merger~~Liability”) and it represents the fair value of such warrants, ~~issued in January 2016,~~ of which, 357 warrants remain outstanding as of ~~March 31,~~September 30, 2019.

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

The 2016 Warrant Liability is considered a Level 3 financial instrument and was valued using the Monte Carlo methodology. As of ~~March 31,~~September 30, 2019, assumptions and inputs used in the valuation of the 2016 Warrant Liability include: remaining life to maturity of ~~1.75~~1.3 years; annual volatility of ~~142%~~141%; and a risk-free interest rate of ~~2.27%~~1.74%. As of December 31, 2018, assumptions and inputs used in the valuation of the 2016 Warrant Liability include: remaining life to maturity of two years; annual volatility of 176%; and a risk-free interest rate of 2.48%.

~~2018~~Bridge Note Warrant Liabilities

During 2018 and 2019, the Company issued ~~243,223~~243,224 of April 2018 Warrants, 15,466 of Advisor Warrants, ~~196,337~~196,340 of Q3 2018 Warrants, ~~and 300,114~~300,115 of Q4 2018 Warrants, 147,472 of April 2019 Warrants and 154,343 of May 2019 Warrants. All of these warrants issuances were classified as warrant liabilities (the ~~“2018~~“Bridge Note Warrant Liabilities”). See Note 4 - Convertible Notes for further discussion of each warrant.

The ~~2018~~Bridge Note Warrant Liabilities are considered Level 3 financial instruments and were valued using the Black Scholes model. As of ~~March 31,~~September 30, 2019, assumptions used in the valuation of the ~~2018~~Bridge Note Warrant Liabilities include: remaining life to maturity of ~~0.05~~2.56 to ~~4.76~~4.62 years; annual volatility of ~~97%~~149% to ~~163%~~158%; and risk free rate of ~~2.21%~~1.56% to ~~2.44%~~1.61%.

During the three and nine months ended ~~March 31,~~September 30, 2019 and 2018, the change in the fair value of the warrant liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:

Dollars in Thousands

Three Months Ended March 31, 2019


2016 Warrant

2018 Warrant

Total Warrant

Liability

Liabilities

Liabilities
Beginning balance at January 1

$
116

$
1,016

$
1,132
Total gain:






Revaluation recognized in earnings

(23)

(217)

(240)
Balance at March 31

$
93

$
799

$
892

Three Months Ended March 31, 2018


2016 Warrant

2018 Warrant

Total Warrant

Liability

Liabilities

Liabilities
Beginning balance at January 1

$
841

$
–

$
841
Total gain:






Revaluation recognized in earnings

(261)

–

(261)
Deductions – warrant liability settlement

(456)

–

(456)
Balance at March 31

$
124

$
–

$
124


Dollars in Thousands
	Three Months Ended September 30, 2019
	2016 Warrant		Bridge Note		Total Warrant
	Liability		Warrant Liabilities		Liabilities
Beginning balance at July 1	$	86	$	2,250	$	2,336
Additions:		–		–		–
Total (gains) losses:
Revaluation recognized in earnings		(7)		(556)		(563)
Modification recognized in earnings		–		–		–
Deductions – warrant exercises		–		–		–
Balance at September 30	$	79	$	1,694	$	1,773

	Three Months Ended September 30, 2018
	2016 Warrant		Bridge Note		Total Warrant
	Liability		Warrant Liabilities		Liabilities
Beginning balance at July 1	$	124	$	882	$	1,006
Additions:		–		720		720

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Total (gains) losses:
Revaluation recognized in earnings		–		(176)		(176)
Modification recognized in earnings		–		143		143
Balance at September 30	$	124	$	1,569	$	1,693


Dollars in Thousands
	Nine Months Ended September 30, 2019
	2016 Warrant		Bridge Note		Total Warrant
	Liability		Warrant Liabilities		Liabilities
Beginning balance at January 1	$	116	$	1,016	$	1,132
Additions:		–		1,858		1,858
Total (gains) losses:
Revaluation recognized in earnings		(37)		56		19
Modification recognized in earnings		–		1,128		1,128
Deductions – warrant exercises		–		(2,364)		(2,364)
Balance at September 30	$	79	$	1,694	$	1,773

	Nine Months Ended September 30, 2018
	2016 Warrant		Bridge Note		Total Warrant
	Liability		Warrant Liabilities		Liabilities
Beginning balance at January 1	$	841	$	–	$	841
Additions:		–		1,925		1,925
Total (gains) losses:
Revaluation recognized in earnings		(261)		(499)		(760)
Modification recognized in earnings		–		143		143
Deductions – warrant liability settlement		(456)		–		(456)
Balance at September 30	$	124	$	1,569	$	1,693

Derivative Liabilities.

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

Bridge Notes Redemption Feature

At the time of the Bridge Note issuances, the Company recorded derivative instruments as liabilities with an initial fair value of approximately $0.3 million. The valuations were performed using the “with and without” approach,

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whereby the Bridge Notes were valued both with the embedded derivative and without, and the difference in values was recorded as the derivative liability. See Note 4 - Convertible Notes for further discussion.

Conversion Option

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

During the three months ended ~~March 31,~~September 30, 2019, the change in the fair value of the derivative liabilities was zero. During the three months ended September 30, 2018 and the nine months ended September 30, 2019 and 2018, the

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change in the fair value of the derivative liabilities measured using significant unobservable inputs (Level 3) was comprised of the following:

(Dollars in thousands)

Three Months Ended March 31, 2019

Bridge Notes

Redemption

Conversion

Total Derivative

Feature

Option

Liabilities
Beginning balance at January 1

$
30

$
32

$
62
Deductions:

—

(39)

(39)
Total (gain) loss:






Revaluation recognized in earnings

(30)

7

(23)
Balance at March 31

$
—

$
—

$
—


(Dollars in thousands)
	Three Months Ended September 30, 2018
	Bridge Notes
	Redemption		Conversion		Total Derivative
	Feature		Option		Liabilities
Beginning balance at July 1	$	143	$	—	$	143
Additions:		69		241		310
Total loss:
Revaluation recognized in earnings		(96)		(20)		(116)
Balance at September 30	$	116	$	221	$	337

~~There were no derivative liabilities in the first quarter of 2018.~~


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

	Nine Months Ended September 30, 2018
	Bridge Notes
	Redemption		Conversion		Total Derivative
	Feature		Option		Liabilities
Beginning balance at January 1	$	—	$	—	$	—
Additions:		212		241		453
Total loss:
Revaluation recognized in earnings		(96)		(20)		(116)
Balance at September 30	$	116	$	221	$	337

10. EQUITY INCENTIVE PLAN

The Company's 2006 Equity Incentive Plan (the "2006 Plan") was terminated as to future awards on July 12, 2016. The Company's 2017 Stock Option and Incentive Plan (the "2017 Plan") was adopted by the Company's stockholders on June 5, 2017 and there were 44,444 shares of common stock reserved for issuance under the 2017 Plan. The 2017 Plan will expire on June 5, 2027.

Amendment of the 2017 Stock Option and Incentive Plan

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

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

increase the maximum number of shares that may be granted in the form of stock options or stock appreciation rights to any one individual in any one calendar year and the maximum number of shares

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underlying any award intended to qualify as performance-based compensation to any one individual in any performance cycle, in each case to 66,666 shares of common stock; and

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

Stock Options.

The Company accounts for all stock-based compensation payments to employees and directors, including grants of employee stock options, at fair value and expenses the benefit in operating expense in the condensed consolidated statements of operations over the service period of the awards. The Company records the expense for stock-based compensation awards subject to performance-based milestone vesting over the remaining service period when

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management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model, which requires various assumptions including estimating stock price volatility, expected life of the stock option, risk free interest rate and estimated forfeiture rate.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, the Company granted stock options to purchase up to ~~276,700~~285,364 shares of common stock at a weighted average exercise price of ~~$2.25.~~$2.37. 100,000 of the stock options granted during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 were awards subject to performance-based milestone ~~vesting and no expense was recorded for these options during the three months ended March 31, 2019.~~vesting.

The following table summarizes stock option activity under our plans during the ~~three~~nine months ended ~~March 31,~~September 30, 2019:


	Number of	Weighted-Average		Number of	Weighted-Average
	Options	Exercise Price		Options	Exercise Price
Outstanding at January 1, 2019	224,895	$	15.90	224,895	$	15.90
Granted	276,700		2.25	285,364		2.37
Forfeited	(3,333)		2.10	(16,351)		7.22
Outstanding at March 31, 2019	498,262	$	8.40
Exercisable at March 31, 2019	74,836	$	24.75
Outstanding at September 30, 2019				493,908	$	8.30
Exercisable at September 30, 2019				122,074	$	17.92

As of ~~March 31,~~September 30, 2019, there were ~~392,398~~400,949 options that were vested or expected to vest with an aggregate intrinsic value of ~~zero~~approximately $0.1 million and a remaining weighted average contractual life of ~~9.4~~8.9 years.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2018, there were ~~219,101~~224,365 options granted with a weighted average exercise price of ~~$10.65~~$10.50 and ~~196~~13,526 options forfeited with a weighted average exercise price of ~~$1,653.45.~~$32.40.

For the three and nine months ended ~~March 31,~~September 30, 2019, ~~and 2018,~~ we recorded compensation expense for all stock awards of $0.2 million and ~~$0.1~~$0.5 million, respectively, within operating expense in the accompanying statements of operations. For the three and nine months ended September 30, 2018, we recorded compensation expense for all stock awards of $0.1 million and $0.3 million, respectively. As of ~~March 31,~~September 30, 2019, the unrecognized compensation expense related to unvested stock awards was ~~$2.3~~$2.0 million, which is expected to be recognized over a weighted-average period of ~~2.8~~2.3 years.

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11. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE

ASC Topic 606, “Revenue from contracts with customers”

The Company follows the guidance of ASC 606 for the recognition of revenue from contracts with customers to transfer goods and services. The Company performed a comprehensive review of its existing revenue arrangements following the five-step model:

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

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

Step 3: Determine the transaction price. Sub-steps include variable consideration, constraining estimates of variable consideration, the existence of a significant financing component in the contract, noncash consideration and consideration payable to a customer.

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

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

Nature of Contracts and Customers

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

Diagnostic testing

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

Clinical research grants

Control of 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 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.

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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 nine months ended ~~March 31,~~September 30, 2019 and 2018 were as follows (prior-period amounts are not adjusted under the modified-retrospective method of adoption):


	For the Three Months Ended March 31,												For the Three Months Ended September 30,
(dollars in thousands)	Diagnostic Testing				Biomarker Testing				Total				Diagnostic Testing				Biomarker Testing				Total
	2019		2018		2019		2018		2019		2018		2019		2018		2019		2018		2019		2018
Medicaid	$	3	$	12	$	—	$	—	$	3	$	12	$	10	$	15	$	—	$	—	$	10	$	15
Medicare		394		134		—		—		394		134		373		288		—		—		373		288
Self-pay		4		26		—		—		4		26		5		48		—		—		5		48
Third party payers		356		131		—		—		356		131		490		289		—		—		490		289
Contract diagnostics		—		—		153		488		153		488		—		—		142		168		142		168
Service revenue, net	$	757	$	303	$	153	$	488	$	910	$	791	$	878	$	640	$	142	$	168	$	1,020	$	808


	For the Nine Months Ended September 30,
(dollars in thousands)	Diagnostic Testing				Biomarker Testing				Total
	2019		2018		2019		2018		2019		2018
Medicaid	$	22	$	38	$	—	$	—	$	22	$	38
Medicare		1,217		703		—		—		1,217		703
Self-pay		20		94		—		—		20		94
Third party payers		1,297		639		—		—		1,297		639
Contract diagnostics		—		—		569		1,024		569		1,024
Service revenue, net	$	2,556	$	1,474	$	569	$	1,024	$	3,125	$	2,498

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.

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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 three types of transactions: diagnostic testing (“Diagnostic”), and clinical research grants from state and federal research programs, and other revenues from the Company’s ICP technology and bio-pharma projects encompassing genetic ~~diagnostics.~~diagnostics (collectively “Biomarker”).

Deferred revenue

Deferred revenue, or unearned revenue, refers to advance payments for products or services that are to be delivered in the future. The Company records such prepayment of unearned revenue as a liability, as revenue that has not yet been earned, but represents products or services that are owed to a customer. As the product or service is delivered over time, the Company recognizes the appropriate amount of revenue from deferred revenue. For the period ended ~~March 31,~~September 30, 2019 and December 31, 2018, the deferred revenue was ~~$35,000~~$19,000 and $49,000, 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 nine months ended ~~March 31,~~September 30, 2019 and 2018.


	For the Three Months Ended March 31,												For the Three Months Ended September 30,
(dollars in thousands)					Contractual Allowances and				Revenues, net of Contractual								Contractual Allowances and				Revenues, net of Contractual
	Gross Revenues				adjustments				Allowances and adjustments				Gross Revenues				adjustments				Allowances and adjustments
	2019		2018		2019		2018		2019		2018		2019		2018		2019		2018		2019		2018
Medicaid	$	3	$	15	$	—	$	(3)	$	3	$	12	$	10	$	30	$	—	$	(15)	$	10	$	15
Medicare		394		137		—		(3)		394		134		373		293		—		(5)		373		288
Self-pay		4		26		—		—		4		26		5		48		—		—		5		48
Third party payers		1,017		317		(661)		(186)		356		131		1,701		713		(1,211)		(424)		490		289
Contract diagnostics		153		488		—		—		153		488		142		168		—		—		142		168
		1,571		983		(661)		(192)		910		791		2,231		1,252		(1,211)		(444)		1,020		808
Clinical research grants and other		7		5		—		—		7		5		26		15		—		—		26		15
	$	1,578	$	988	$	(661)	$	(192)	$	917	$	796	$	2,257	$	1,267	$	(1,211)	$	(444)	$	1,046	$	823


(dollars in thousands)	For the Nine Months Ended September 30,
					Contractual Allowances and				Revenues, net of Contractual
	Gross Revenues				adjustments				Allowances and adjustments
	2019		2018		2019		2018		2019		2018
Medicaid	$	25	$	71	$	(3)	$	(33)	$	22	$	38
Medicare		1,234		722		(17)		(19)		1,217		703
Self-pay		20		94		—		—		20		94
Third party payers		4,289		1,561		(2,992)		(922)		1,297		639
Contract diagnostics		569		1,024		—		—		569		1,024
		6,137		3,472		(3,012)		(974)		3,125		2,498
Clinical research grants and other		37		80		—		—		37		80
	$	6,174	$	3,552	$	(3,012)	$	(974)	$	3,162	$	2,578

Allowance for Doubtful Accounts

The Company provides for a general allowance for collectability of services when recording net sales. The Company has adopted the policy of recognizing net sales to the extent it expects to collect that amount. Reference FASB 954‑605‑45‑5 and ASU 2011‑07, Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debt, and the Allowance for Doubtful Accounts. The change in the allowance for doubtful accounts is directly

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related to the increase in patient service revenues. The following table presents our reported revenues net of the collection allowance and adjustments for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018.

For the Three Months Ended March 31,

Revenues, net of

(dollars in thousands)

Contractual Allowances

Allowances for doubtful

and adjustments

accounts

Total


2019

2018

2019

2018

2019

2018
Medicaid

$
3

$
12

$
(3)

$
(11)

$
—

$
1
Medicare

394

134

(59)

(20)

335

114
Self-pay

4

26

—

—

4

26
Third party payers

356

131

(142)

(53)

214

78
Contract diagnostics

153

488

—

—

153

488

910

791

(204)

(84)

706

707
Clinical research grants and other

7

5

—

—

7

5

$
917

$
796

$
(204)

$
(84)

$
713

$
712

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	For the Three Months Ended September 30,
	Revenues, net of
(dollars in thousands)	Contractual Allowances				Allowances for doubtful
	and adjustments				accounts				Total
	2019		2018		2019		2018		2019		2018
Medicaid	$	10	$	15	$	(10)	$	(15)	$	—	$	—
Medicare		373		288		(56)		(43)		317		245
Self-pay		5		48		—		—		5		48
Third party payers		490		289		(196)		(115)		294		174
Contract diagnostics		142		168		—		—		142		168
		1,020		808		(262)		(173)		758		635
Clinical research grants and other		26		15		—		—		26		15
	$	1,046	$	823	$	(262)	$	(173)	$	784	$	650


	For the Nine Months Ended September 30,
	Revenues, net of
(dollars in thousands)	Contractual Allowances				Allowances for doubtful
	and adjustments				accounts				Total
	2019		2018		2019		2018		2019		2018
Medicaid	$	22	$	38	$	(22)	$	(38)	$	—	$	—
Medicare		1,217		703		(183)		(105)		1,034		598
Self-pay		20		94		—		—		20		94
Third party payers		1,297		639		(518)		(256)		779		383
Contract diagnostics		569		1,024		—		—		569		1,024
		3,125		2,498		(723)		(399)		2,402		2,099
Clinical research grants and other		37		80		—		—		37		80
	$	3,162	$	2,578	$	(723)	$	(399)	$	2,439	$	2,179

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.

~~The following summarizes the mix of receivables:~~

(dollars in thousands)

March 31, 2019

December 31, 2018
Medicaid

$
81

$
82
Medicare

782

633
Self-pay

106

108
Third party payers

1,540

1,382
Contract diagnostic services

204

193
Other

—

—

$
2,713

$
2,398
Less allowance for doubtful accounts

(1,912)

(1,708)
Accounts receivable, net

$
801

$
690

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The following summarizes the mix of receivables:


(dollars in thousands)	September 30, 2019		December 31, 2018
Medicaid	$	99	$	82
Medicare		764		633
Self-pay		75		108
Third party payers		2,071		1,382
Contract diagnostic services		116		193
	$	3,125	$	2,398
Less allowance for doubtful accounts		(2,432)		(1,708)
Accounts receivable, net	$	693	$	690

The following table presents the roll-forward of the allowance for doubtful accounts for the ~~three~~nine months ended ~~March 31,~~September 30, 2019.


			Allowance for
			Doubtful
(dollars in thousands)			Accounts
Balance, January 1, 2019			$	(1,708)
Collection Allowance:
Medicaid	$	~~(3)~~(22)
Medicare		~~(59)~~(183)
Third party payers		~~(142)~~(518)
~~Service revenue, net~~		~~(204)~~(723)
Bad debt expense	$	—(1)
Total charges				~~(204)~~(724)
Balance, ~~March 31,~~September 30, 2019			$	~~(1,912)~~(2,432)

~~12. SUBSEQUENT EVENTS~~

~~Convertible Notes~~

~~Through the issuance date of this Report on Form 10-Q, approximately~~ $3.7 million of the total $4.1 million of convertible notes that were outstanding at March 31, 2019, plus interest, has been converted into a total of approximately 1,061,069 shares of common stock of the Company.

~~April 2019 Note Issuance.~~

~~On April 16, 2019, the Company entered into the Amendment No.2 Agreement amending~~Customer Revenue and ~~restating the terms of the 2018 Note Agreement (as first amended pursuant~~Accounts Receivable Concentration

Customer revenue and accounts receivable concentration amounted to the ~~Amendment and Restatement dated November 29, 2018). The Amendment No.~~ ~~2 Agreement~~ ~~provides~~following for the issuance of up to approximately $989,011 of April 2019 Additional Notes and Warrants on substantially the same terms and conditions as the notes and warrants that were issued in connection with the original amendment and restatement. The April 2019 Additional Notes and Warrants shall be purchased no later than May 31, 2019, and were subscribed for by investors that previously participated in the 2018 Note Agreement. Upon issuance of the April 2019 Additional Notes, the Company will calculate any debt issuance costs, including possible beneficial conversion features, and record them as a reduction of the debt in its condensed consolidated balance sheet, similar to the Bridge Notes that the Company issued during 2018 (see Note 7 – Convertible Notes). identified periods.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Percentage of net sales by customer:
Customer A	18	%	17	%	23	%	36	%
Customer B	11	%	*		*		*

* represents less than 10%

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

On April 16, 2019, the initial closing of April 2019 Additional Notes provided the Company with approximately $900,000 of gross proceeds for the issuance of notes with an aggregate principal of approximately $989,011. ~~As part of the transaction, the investors also received 146,520 warrants to purchase common stock of the Company~~ ~~exercisable at a price of $5.40~~.

~~May 2019 Note Issuance.~~

On May 14, 2019, the Company entered into the May 2019 Note Agreement and May 2019 Transaction, pursuant to which the Company would issue up to approximately $1,098,901 in Senior Secured Convertible Promissory Notes along with warrants. The number of warrants is equal to the number of shares of common stock issuable upon conversion of the notes based on the conversion price at the time of issuance. The warrants have a five year term.The May 2019

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	September 30,		December 31,
	2019		2018
Percentage of total accounts receivable by customer:
Customer A	10	%	23	%
Customer B	11	%	*

* represents less than 10%

~~Note Agreement includes customary representations, warranties and covenants by the Company and customary closing conditions.~~

12. SUBSEQUENT EVENTS

The ~~Transaction consists of a series of unregistered Senior Secured Convertible Notes (the “May~~Company has evaluated events and transactions subsequent to September 30, 2019 ~~Bridge Notes”), bearing interest at a rate of 8% annually~~through the date the condensed consolidated financial statements were issued and ~~an original issue discount of 9%. The May 2019 Bridge Notes~~there are ~~convertible at a price of $7.12 per share, provided that (a) if the notes are not repaid within 180 days of the note’s issuance date or (b) upon a Registration Statement (as defined~~no other events to report other than what has been disclosed in the May 2019 Note Agreement) being declared effective, whichever occurs earlier, the conversion price shall be adjusted to 80% of the lowest volume weighted average price during the prior 10 days, subject to a minimum conversion price of $2.25 per share.condensed consolidated financial statements.

The closing of the May 2019 Transaction provided the Company with proceeds of $1,000,000, net of an original issue discount of 9% and before debt issuance costs, for the issuance of notes with an aggregate principal of $1,098,901.

The May 2019 Bridge Notes are payable by the Company on the earlier of (i) April 16, 2020 or (ii) upon the closing of a qualified offering, namely the Company raising gross proceeds of at least $7,000,000 (the “Maturity Date”). At any time, provided that the Company gives 5 business days written notice, the Company has the right to redeem the outstanding principal amount of the May 2019 Bridge Notes, including accrued but unpaid interest, all liquidated damages and all other amounts due under the May 2019 Bridge Notes, for cash as follows: (i) an amount which is equal to the sum of 105% if the Company exercises its right to redeem the May 2019 Bridge Notes within 90 days of the initial closing, (ii) 110% if the Company exercises its right to redeem the May 2019 Bridge Notes within 180 days of the initial closing, or (iii) 115% if the Company exercises its right to redeem after 180 days from the initial closing.

The terms of the May 2019 Note Agreement also stipulate that upon written demand by one of the investors after August 22, 2019, the Company shall file a registration statement within thirty (30) days after written demand covering the resale of all or such portion of the conversion shares for an offering to be made on a continuous basis pursuant to Rule 415. The registration statement filed shall be on Form S‑3 or Form S‑1, at the option of the Company. If the Company does not file a registration statement in accordance with the terms of the May 2019 Note Agreement, then on the business day following the applicable filing date and on each monthly anniversary of the business day following the applicable filing date (if no registration statement shall have been filed by the Company in accordance herewith by such date), the Company shall pay to the investors an amount in cash, as partial liquidated damages, equal to 1% per month (pro-rata for partial months) based upon the gross purchase price of the May 2019 Bridge Notes (calculated on a daily basis) under the May 2019 Note Agreement.

~~The obligations under the May 2019 Bridge Notes are secured, subject to certain exceptions and other permitted payments by a perfected security interest on the assets of the Company.~~

~~The 9% discount associated with the May 2019 Bridge Notes was approximately $98,901 and was recorded as a debt discount.~~

As part of the closing of the May 2019 Note Agreement, the investors received 154,343 warrants to purchase 154,343 shares of common stock of the Company (the “May 2019 Warrants”), exercisable at $9.56.

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

Forward-Looking Information

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

You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons, including those described in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q and 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 financial statements, related notes and Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which we filed with the Securities and Exchange Commission on April 16, 2019. Results for the three and nine months ended ~~March 31~~September 30, 2019 are not necessarily indicative of results that may be attained in the future.

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Overview

Precipio, Inc., and its subsidiary, (“we”, “us”, “our”, the “Company” or “Precipio”) is a cancer diagnostics company providing diagnostic products and services to the oncology market. We have built and continue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technology developed within academic institutions and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located in New Haven, Connecticut and have partnered with the Yale School of Medicine to capture the expertise, experience and technologies developed within academia so that we can provide a better standard of cancer diagnostics and solve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which will focus on further development of ICE-COLD-PCR (“ICP”), the patented technology which was exclusively licensed by us from Dana-Farber Cancer Institute, Inc. (“Dana-Farber”) at Harvard University (“Harvard”). The research and development center will focus on the development of this technology, which we believe will enable us to commercialize other technologies developed by our current and future academic

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

~~Recent Developments~~

~~Nasdaq Compliance~~

On March 26, 2019, we were notified by the Listing Qualifications Staff of The Nasdaq Stock Market LLC that we did not meet the minimum closing bid price requirement of $1 for continued listing, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). On April 25, 2019 we filed a Certificate of Amendment to our Third Amended and Restated Certificate of Incorporation (the “Certificate of Amendment”) with the Secretary of State of Delaware, pursuant to which we effected a 1-for-15 reverse stock split (the “Reverse Stock Split”) of our issued and outstanding common stock. The Reverse Stock Split became effective as of 5:00 p.m. (Eastern Time) on April 26, 201~~9, and our common stock began trading on a split-adjusted basis on the Nasdaq Capital Market at the market open on~~ ~~April 29, 2019. On May 15, 2019, we received notification from Nasdaq that the Company’s stock price was in compliance with the Bid Price Requirement, and that the matter is now closed~~.

~~April 2019 Notes~~

On April 16, 2019, the Company entered into the second amendment an restatement (the “Amendment No.2 Agreement”) amending and restating the terms of the 2018 Note Agreement (as first amended pursuant to the Amendment and Restatement dated Nov 29, 2019) The Amendment No. ~~2 Agreement~~ provides for the issuance of up to approximately $989,011 of April 2019 Additional Notes and Warrants on substantially the same terms and conditions as the notes and warrants as of the notes and warrants that were issued in connection with the original amendment and restatement. The April 2019 Additional Notes and Warrants shall be purchased no later than May 31, 2019, and were subscribed for by the investors that previously participated in the 2018 Note Agreement.

On April 16, 2019, the initial closing of April 2019 Additional Notes provides the Company with approximately $900,000 of gross proceeds for the issuance of notes with an aggregate principal of approximately $989,011. ~~As part of the transaction, the investors also received 146,520 warrants to purchase common stock of the Company~~ ~~exercisable at a price of $5.40~~

~~May 2019 Notes~~

On May 14, 2019, the Company entered into the May 2019 Note Agreement pursuant to which the Company issued approximately $1,098,901 in May 2019 Bridge Notes with proceeds of $1,000,000, net of an original issue discount

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~~of 9% and before debt issuance costs.~~ ~~As part of the closing of the May 2019 Note Agreement, the investors received 154,343 warrants to purchase 154,343 shares of common stock of the Company, exercisable at $9.56.~~

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 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 ~~March 31,~~September 30, 2019, the Company had a net loss of ~~$1.7~~$9.5 million, negative working capital of ~~$8.5~~$1.7 million and net cash used in operating activities of ~~$1.9~~$7.0 million. The Company’s ability to continue as a going concern over the next twelve months from the date of issuance of this ~~form~~Quarterly Report on Form 10-Q is dependent upon a combination of achieving its business plan, including generating additional revenue, and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due.

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

The Company has entered into a purchase agreement with Lincoln Park (the “LP Purchase Agreement” ~~or “Equity Line”~~), pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of $10.0 million of common stock of the Company (subject to certain limitations) from time to time over the term of the LP Purchase Agreement. The extent we rely on Lincoln Park as a source of funding will depend on a number of factors including, the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. As of ~~April 30, 2019,~~the date of issuance of this Quarterly Report on Form 10-Q, we have already received $7.2 million in aggregate, including approximately $1.4 million from the sale of 328,590 shares of common stock to Lincoln Park during ~~the fourth quarter of~~ 2018, ~~and $2.4~~$5.2 million from the sale of ~~998,076~~2,088,077 shares of common stock to Lincoln Park during ~~2019.~~the nine months ended September 30, 2019 and $0.6 million from the sale of 270,000 shares of common stock to Lincoln Park from October 1, 2019 through the date of issuance of this

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~~On April 16, 2019,~~Quarterly Report on Form 10-Q, leaving the Company ~~entered into a second amendment and restatement agreement amending and restating~~an additional $2.8 million to draw upon in the ~~terms of the 2018 Note Agreement (as first amended pursuant to the Amendment and Restatement dated Nov 29, 2019) (the "Amendment No.2 Agreement"). Amendment No.~~ coming year.~~2 Agreement~~ provided for the issuance of up to approximately $989,011 of additional Notes together with applicable Warrants (the “April 2019 Additional Notes and Warrants”) on substantially the same terms and conditions as the notes and warrants as of the notes and warrants that were issued in connection with the Amendment and Restatement. T~~he closing of the April 2019 Additional Notes provided the Company with approximately $900,000 of gross proceeds for the issuance of notes with an aggregate principal of approximately $989,011.~~

Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern over the next twelve months from the date of issuance of this Quarterly Report on Form 10-Q. There can be no assurance that the Company will be able to successfully achieve its initiatives summarized above in order to continue as a going concern. The accompanying 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.

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Results of Operations for the Three Months Ended ~~March 31,~~September 30, 2019 and 2018

Net Sales. Net sales were as follows:


	Dollars in Thousands								Dollars in Thousands
	Three Months Ended								Three Months Ended
	March 31,				Change				September 30,				Change
	2019		2018		$		%		2019		2018		$		%
Service revenue, net, less allowance for doubtful accounts	$	706	$	707	$	(1)	-	%	$	758	$	635	$	123	19	%
Clinical research grants										—		13		(13)	(100)	%
Other		7		5		2	40	%		26		2		24	1,200	%
Net Sales		713		712		1	-	%	$	784	$	650	$	134	21	%

Net sales for the three months ended ~~March 31,~~September 30, 2019 were approximately ~~$0.7~~$0.8 million, ~~which is flat~~an increase of $0.1 million as compared to the same period in 2018. During the three months ended ~~March 31,~~September 30, 2019, service revenue increased due to patient diagnostic service revenue which had an increase of ~~$0.3~~$0.1 million as compared to the same period in 2018 due to an increase in cases processed. We processed ~~360~~445 cases during the three months ended ~~March 31,~~September 30, 2019 as compared to ~~140~~436 cases during the same period in 2018, or a ~~157%~~2% increase in cases. The increase in volume is the result of increased sales personnel. This increase was offset by a decrease $0.3 million in contract diagnostic service revenue for the three months ended March 31, 2019 as compared to 2018 due to the fact that there were fewer contract projects being performed during the current year.

Cost of Sales. Cost of sales includes material and supply costs for the patient tests performed and other direct costs (primarily personnel costs and rent) associated with the operations of our laboratory and the costs of projects related to clinical research grants (personnel costs and operating supplies). Cost of sales was $0.8 million and $0.7 million for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively. Cost of sales in the current year period, as compared to prior year, included an increase in patient diagnostic costs ~~and a decrease in contract diagnostic costs~~ which are ~~both~~ in line with the changes in related revenues discussed above.

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

Dollars in Thousands

Three Months Ended

March 31,

Margin %


2019

2018

2019

2018

Gross Profit

$
38

$
24

5
%
3
%


	Dollars in Thousands
	Three Months Ended
	September 30,				Margin %
	2019		2018		2019		2018
Gross Profit (Loss)	$	28	$	(11)	4	%	(2)	%

Gross margin was 5%4% of total net sales, for the three months ended ~~March 31,~~September 30, 2019, compared to 3%negative 2% of total net sales for the same period in 2018. The gross profit was less than $0.1 million during the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively.

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decrease of $1.3 million in impairment of goodwill and a decrease of $0.5 million in legal and other professional fees. These decreases were partially offset by an increase of $0.1 million in personnel costs due to a higher headcount.

Other Income (Expense). Other income, net was $0.5 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively, and included income from warrant revaluations of $0.5 million and less than $0.1 million, respectively. Additionally, in 2018, the Company had income from derivative revaluations of $0.1 million. During the three months ended September 30, 2018, other income also included $0.1 million from gain on settlement of liability and $0.3 million from gain on extinguishment of debt. These items were partially offset by a loss on issuance of convertible notes of $0.1 million. Interest expense was $0.1 million for the three months ended September 30, 2019 and 2018, respectively.

Results of Operations for the Nine Months Ended September 30, 2019 and 2018

Net Sales. Net sales were as follows:


	Dollars in Thousands
	Nine Months Ended
	September 30,				Change
	2019		2018		$		%
Service revenue, net	$	2,402	$	2,099	$	303	14	%
Clinical research grants		—		75		(75)	(100)	%
Other		37		5		32	640	%
Net Sales	$	2,439	$	2,179	$	260	12	%

Net sales for the nine months ended September 30, 2019 were approximately $2.4 million, an increase of $0.3 million as compared to the same period in 2018. During the nine months ended September 30, 2019, patient diagnostic service revenue had an increase of $0.8 million as compared to the same period in 2018 due to an increase in cases processed. We processed 1.250 cases during the nine months ended September 30, 2019 as compared to 959 cases during the same period in 2018, or a 30% increase in cases. The increase in volume is the result of increased sales personnel. This increase was offset by a decrease of $0.5 million in contract diagnostic service revenue and a decrease of $0.1 million in clinical research grants for the nine months ended September 30, 2019 as compared to 2018.

Cost of Sales. Cost of sales includes material and supply costs for the patient tests performed and other direct costs (primarily personnel costs and rent) associated with the operations of our laboratory and the costs of projects related to clinical research grants (personnel costs and operating supplies). Cost of sales was $2.2 million and $2.0 million for the nine months ended September 30, 2019 and 2018, respectively. Cost of sales in the current year period, as compared to prior year, included an increase in patient diagnostic costs offset by a decrease in contract diagnostic and clinical grant costs which are in line with the changes in related revenues discussed above.

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


	Dollars in Thousands
	Nine Months Ended
	September 30,				Margin %
	2019		2018		2019		2018
Gross Profit	$	238		188	10	%	9	%

Gross margin was 10% and 9% of total net sales for the nine months ended September 30, 2019 and 2018, respectively, and the gross profit was approximately $0.2 million during the nine months ended September 30, 2019 and 2018, respectively.

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Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs and depreciation and amortization. Our operating expenses decreased by $2.0 million to $7.0 million for the nine months ended September 30, 2019 as compared to the same period in 2018. This decrease is a result of a decrease in impairment of goodwill of ~~$0.3~~$1.6 million, ~~and a decrease in general and administrative expenses of $0.4 million due to~~ a decrease in legal and other professional ~~fees.~~fees of $0.9 million, a decrease in other operating costs of $0.3 million and a decrease in amortization of acquired intangibles of $0.1 million. The decreases were partially offset by a ~~$0.2~~$0.8 million increase ~~in selling expenses~~personnel costs due ~~increased~~to a higher headcount and ~~increased~~an increase of $0.1 million in stock compensation ~~costs of $0.1 million.~~costs.

Other Income (Expense). Other ~~income,~~expense, net was ~~$0.4~~$2.7 million and ~~less than $0.1~~$0.4 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, respectively, and included interest expense of $0.3 million and $0.2 million, respectively, expense from warrant and derivative revaluations of $0.4 million and income from warrant and derivative revaluations of ~~$0.2~~$0.7 million, respectively, a loss on issuance of convertible notes of $1.9 million and ~~$0.3~~$1.0 million, respectively, and ~~income from gain on settlement of liabilities of $0.2 million and $0.1 million, respectively.~~

The other income items were partially offset by the following expenses: interest expense, net was $23,000 and $8,000 during the three months ended March 31, 2019 and 2018, respectively, and for the three months ended March 31, 2018, other expense included $0.4 million of expense from a loss recorded on settlement of equity ~~instruments.~~instruments of zero and $0.4 million respectively. Additionally, in 2019, the Company had a $1.1 million loss on modification of warrants and a $0.3 million loss on litigation.

~~Table~~During the nine months ended September 30, 2019 and 2018, the other expense items were partially offset by gains on settlements of ~~Contents~~

liabilities of $1.3 million and $0.2 million, respectively, and a gain on extinguishment of debt of zero and $0.3 million, respectively.

Liquidity and Capital Resources

Our working capital positions were as follows:


	Dollars in Thousands						Dollars in Thousands
	March 31, 2019		December 31, 2018		Change		September 30, 2019		December 31, 2018		Change
Current assets (including cash of $302 and $381 respectively)	$	1,433	$	1,793	$	(360)
Current assets (including cash of $1,683 and $381 respectively)							$	2,956	$	1,793	$	1,163
Current liabilities		9,951		13,765		(3,814)		4,640		13,765		(9,125)
Working capital	$	(8,518)	$	(11,972)	$	3,454	$	(1,684)	$	(11,972)	$	10,288

During the ~~first quarter of~~nine months ended September 30, 2019 we received gross proceeds of ~~$1.7~~$5.2 million from sale of ~~758,076~~2,088,076 shares of our common stock, $1.6 million from the exercise of 310,200 warrants and $2.1 million from the issuance of convertible notes. We also converted $7.4 million of convertible notes, including interest, into 2,439,173 shares of our common stock.

Analysis of Cash Flows – ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2019 and 2018

Net Change in Cash. Cash ~~decreased~~increased by ~~$0.1~~$1.3 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and ~~2018, respectively.~~decreased by $0.2 million during the nine months ended September 30, 2018.

Cash Flows Used in Operating Activities. The cash flows used in operating activities of approximately ~~$1.9~~$7.0 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 included a net loss of ~~$1.6~~$9.5 million, an increase in accounts receivable of ~~$0.3~~$0.7 million, ~~and~~ a decrease in accounts payable of ~~$0.4~~$1.6 million and a decrease in operating lease liabilities of $0.2 million. These were partially offset by ~~an increase~~a decrease in ~~operating lease liabilities and accrued expenses and~~ other ~~liabilities~~assets of ~~$0.2~~$0.3 million and non-cash adjustments of ~~$0.2~~$4.7 million. The non-cash adjustments to net loss include, among other things, depreciation and amortization, changes in provision for losses on doubtful accounts, warrant and derivative revaluations, stock based compensation, ~~and~~ gains on settlements of ~~liabilities.~~liabilities and losses on the issuance of convertible notes. The cash flows used in operating activities in the ~~three~~nine months ended ~~March 31,~~September 30, 2018 included the net loss of ~~$2.4~~$9.1 million and ~~a decrease~~an increase in accounts ~~payables~~receivable of ~~$0.1~~$0.3 million. These were partially offset by ~~a decrease~~an increase in accounts ~~receivable of $0.1 million, a decrease in other assets of $0.2 million, an increase in~~payable, accrued expenses and other liabilities of ~~$0.2~~$1.1 million and non-cash adjustments of ~~$0.8~~$3.5 million. The non-cash adjustments to net loss include, among other things, depreciation and amortization, impairment of goodwill, changes in provision for losses on doubtful accounts, warrant revaluations, stock based compensation, and gains or losses on settlements of liabilities.

Cash Flows Used In Investing Activities. Cash flows used in investing activities were ~~$3,000 and $5,000~~approximately $0.1 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, respectively, resulting from purchases of property and equipment.

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Cash Flows Provided by Financing Activities. Cash flows provided by financing activities totaled ~~$1.8~~$8.4 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2019, which included proceeds of ~~$1.7~~$5.2 million from the issuance of common stock, $1.6 million from the exercise of warrants and ~~$0.3~~$2.1 million from the issuance of convertible notes. These proceeds were partially offset by payments on our long-term debt and convertible notes of ~~$0.1~~$0.4 million and payments for our finance lease obligations and deferred financing costs of $0.1 million. Cash flows provided by financing activities totaled ~~$1.0~~$4.7 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2018, which included proceeds of $0.6 million from the issuance of common stock, $0.3 million from the issuance of long-term debt, $3.0 million from the issuance of convertible notes and proceeds of ~~$0.2~~$1.3 million from the exercise of warrants. These were partially offset by ~~$0.1 million of~~ payments on our long-term debt of $0.3 million and ~~finance~~payments for our capital lease ~~obligations.~~obligations and deferred financing costs of $0.2 million.

Off-Balance Sheet Arrangements

At each of ~~March 31,~~September 30, 2019 and December 31, 2018, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations and Commitments

No significant changes to contractual obligations and commitments occurred during the ~~three~~nine months ended ~~March 31,~~September 30, 2019, as compared to those disclosed in our Annual Report on ~~form~~Form 10‑K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission on April 16, 2019.

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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. Our critical accounting policies are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission on April 13, 2019.

Recently Issued Accounting Pronouncements

See the accompanying unaudited condensed consolidated financial statements and Note 2 - “Summary of Significant Accounting Policies” in the Notes to unaudited condensed financial statements for additional information regarding recently issued accounting pronouncements.

Impact of Inflation

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

Item 3. Quantitative and Qualitative Disclosure about Market Risk

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

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to management including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. In 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 the desired control objectives, and no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of ~~March 31,~~September 30, 2019.

Changes in Internal Control over Financial Reporting

We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended ~~March 31,~~September 30, 2019 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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 the Company. On May 5, 2017, XIFIN filed an application for entry of default judgment against us.~~ A liability of $0.1 million iswas reflected in accounts payable within the accompanying condensed consolidated balance sheet at ~~March 31, 2019 and~~ December 31, ~~2018, respectively.~~2018. On April 19, 2019, the Company executed a settlement agreement with XIFIN pursuant to which the Company paid to XIFIN an agreed amount of $40,000 as settlement in consideration for total release from all outstanding amounts due and payable by the Company to XIFIN. The settlement amount was paid in full by the Company on April 19, 2019~~and there is no remaining amount due to XIFIN as of the filing of this Quarterly Report on Form 10-Q.~~.

CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owe approximately $0.2 million for certain patent maintenance services rendered. CPA Global has not filed claims against us in connection with this allegation. A liability of approximately less than $0.1 million has been recorded and is reflected in accounts payable within the accompanying condensed consolidated balance ~~sheet~~sheets at ~~March 31,~~September 30, 2019 and December 31, 2018.

On March 21, 2018, Bio-Rad Laboratories filed a lawsuit against us in the Superior Court Judicial Branch of the State of Connecticut for Summary Judgment in Lieu of Complaint requiring us to pay cash owed to Bio-Rad in the amount of ~~$39,000. A liability of~~ $39,000 ~~million has been~~that was recorded in accounts payable within the accompanying condensed consolidated balance sheet at ~~March 31, 2019 and~~ December 31, 2018. ~~On April 2,~~ Subsequently, the obligation was paid in full during the second quarter of 2019, the Superior Court issued a subpoena commanding the Company to appear before the Superior Court on May 13, 2019. Subsequent to April 2, 2019, the Company paid Bio-Rad approximately $39,000, plus interest, and there isresulting in no remaining amount due to Bio-Rad as of the filing of this Quarterly Report on Form 10-Q.

LEGAL AND REGULATORY ENVIRONMENT

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previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

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Item 1A. Risk Factors

As disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, there are a number of risks and uncertainties that may have a material effect on the operating results of our business and our financial condition. The following information updates, and should be read in conjunction with, the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report and our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

We have incurred losses since our inception and expect to incur losses for the foreseeable future. We cannot be certain that we will achieve or sustain profitability.

We have incurred losses since our inception and expect to incur losses in the future. As of ~~March 31,~~September 30, 2019, we had a net loss of ~~$1.7~~$9.5 million, negative working capital of ~~$8.5~~$1.7 million and net cash used in operating activities of ~~$1.9~~$7.0 million. To date, we have experienced negative cash flow from development of our diagnostic technology, as well as from the costs associated with establishing a laboratory and building a sales force to market our products and services. We expect to incur substantial net losses for the foreseeable future to further develop and commercialize our diagnostic technology. We also expect that our selling, general and administrative expenses will continue to increase due to the additional costs associated with market development activities and expanding our staff to sell and support our products. Our ability to achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or, if achieved, sustain profitability.

Because of the numerous risks and uncertainties associated with further development and commercialization of our diagnostic technology and any future tests, we are unable to predict the extent of any future losses or when we will become profitable, if ever. We may never become profitable and you may never receive a return on an investment in our securities. An investor in our securities must carefully consider the substantial challenges, risks and uncertainties inherent in the development and commercialization of tests in the medical diagnostic industry. We may never successfully commercialize our diagnostic technology or any future tests, and our business may fail.

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

As of ~~March 31,~~September 30, 2019, our cash balance was ~~$0.3~~$1.7 million and our working capital was approximately negative ~~$8.5~~$1.7 million. Due to our recurring losses from operations and the expectation that we will continue to incur losses in the future, we will be required to raise additional capital to complete the development and commercialization of our current product candidates and to pay off our obligations. To date, to fund our operations and develop and commercialize our products, we have relied primarily on equity and debt financings. When we seek additional capital, we may seek to sell additional equity and/or debt securities or to obtain a credit facility, which we may not be able to do on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates, restrict or cease our operations or obtain funds by entering into agreements on unattractive terms.

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We are subject to concentrations of revenue risk and concentrations of credit risk in accounts receivable.

We have had certain customers whose revenue individually represented 10% or more of our total revenue, or whose accounts receivable balances individually represented 10% or more of our total accounts receivable.

For the three months ended September 30, 2019, two customers represented approximately 29% of our total revenue and for the three months ended September 30, 2018 one customer accounted for 17% of our total revenue. For the nine months ended September 30, 2019 and 2018, one customer accounted for 23% and 36% of our total revenue, respectively. We expect to maintain the relationship with these customers, however, the loss of, or significant decrease in demand from, any of our top customers could have a material adverse effect on our business, results of operations and financial condition.

At September 30, 2019 and December 31, 2018, one customer accounted for 10% and 23% of our total accounts receivable, respectively, and another customer accounted for 11% and less than 10% our total accounts receivable, respectively. The business risks associated with this concentration, including increased credit risks for these and other customers and the possibility of related bad debt write-offs, could negatively affect our margins and profits. Additionally, the loss of any of our top customers, whether through competition or consolidation, or a disruption in sales to such a customer, could result in a decrease of the Company’s future sales, earnings and cash flows. Generally, we do not require collateral or other securities to support our accounts receivable and while we are directly affected by the financial condition of our customers, management does not believe significant credit risks exist at September 30, 2019.

If we cannot continue to satisfy Nasdaq listing maintenance requirements and other rules, our common stock may be delisted, which could negatively impact the price of our securities.

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

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

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

None.

Item 3. Default Upon Senior Securities

Not applicable.

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Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~Convertible Note Issuance~~None.

On May 14, 2019, the Company entered into a securities purchase agreement (the “May 2019 Note Agreement”) with certain Investors, pursuant to which the Company would issue up to approximately $1,098,901 in Senior Secured Convertible Promissory Notes along with warrants (the “May 2019 Transaction”). The number of warrants is equal to the number of shares of common stock issuable upon conversion of the notes based on the conversion price at the time of issuance. The warrants have a five-year term. The May 2019 Note Agreement includes customary representations, warranties and covenants by the Company and customary closing conditions.

The Transaction consists of a series of unregistered Senior Secured Convertible Notes (the “May 2019 Bridge Notes”), bearing interest at a rate of 8% annually and an original issue discount of 9%. The May 2019 Bridge Notes are convertible at a price of $7.12 per share, provided that (a) if the notes are not repaid within 180 days of the note’s issuance date or (b) upon a Registration Statement (as defined in the May 2019 Note Agreement) being declared effective, whichever occurs earlier, the conversion price shall be adjusted to 80% of the lowest volume weighted average price during the prior 10 days, subject to a minimum conversion price of $2.25 per share.

The terms of the May 2019 Note Agreement also stipulates that upon written demand by one of the Investors after August 22, 2019, the Company shall file a registration statement within thirty (30) days after written demand covering the resale of all or such portion of the conversion shares for an offering to be made on a continuous basis pursuant to Rule 415. The registration statement filed shall be on Form S‑3 or Form S‑1, at the option of the Company. If the Company does not file a registration statement in accordance with the terms of the May 2019 Note Agreement, then on the business day following the applicable filing date and on each monthly anniversary of the business day following the applicable filing date (if no registration statement shall have been filed by the Company in accordance herewith by such date), the Company shall pay to the Investors an amount in cash, as partial liquidated damages, equal to 1% per month (pro-rata for partial months) based upon the gross purchase price of the May 2019 Bridge Notes (calculated on a daily basis) under the May 2019 Note Agreement.

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~~The obligations under the May 2019 Bridge Notes are secured, subject to certain exceptions and other permitted payments by a perfected security interest on the assets of the Company.~~

~~The 9% discount associated with the May 2019 Bridge Notes was approximately $98,901 and was recorded as a debt discount.~~

As part of the closing of the May 2019 Note Agreement, Investors received 154,343 warrants to purchase 154,343 shares of common stock of the Company (the “May 2019 Warrants”), exercisable at $9.56.

The Company relied on the exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, or Rule 506 of Regulation D, as a transaction by an issuer not involving a public offering, for purposes of the private placement.

Item 6. Exhibits

(a)

Exhibits



~~10.1~~		~~Form of 8% Senior Secured Convertible Promissory Note, dated May 14, 2019.~~

~~10.2~~		~~Form of Warrant to Purchase Common Stock dated May 14, 2019.~~

~~10.3~~		~~Form of Security Agreement by and among the Company and the investors named therein, dated May 14, 2019.~~

~~10.4~~		~~Form of Securities Purchase Agreement by and among the Company and the Purchasers named therein, dated May 14, 2019.~~

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

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

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

32.2*		Certification of Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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

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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: ~~May 16,~~November 13, 2019	By:	/S/ ILAN DANIELI
		Ilan Danieli
		Chief Executive Officer (Principal Executive Officer)


Date: ~~May 16,~~November 13, 2019	By:	/S/ CARL IBERGER
		Carl Iberger
		Chief Financial Officer (Principal Financial Officer)

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Dollars in Thousands
	Three Months Ended March 31, 2019
	2016 Warrant		2018 Warrant		Total Warrant
	Liability		Liabilities		Liabilities
Beginning balance at January 1	$	116	$	1,016	$	1,132
Total gain:
Revaluation recognized in earnings		(23)		(217)		(240)
Balance at March 31	$	93	$	799	$	892

	Three Months Ended March 31, 2018
	2016 Warrant		2018 Warrant		Total Warrant
	Liability		Liabilities		Liabilities
Beginning balance at January 1	$	841	$	–	$	841
Total gain:
Revaluation recognized in earnings		(261)		–		(261)
Deductions – warrant liability settlement		(456)		–		(456)
Balance at March 31	$	124	$	–	$	124