Precipio Annual Report 2017

FY2017 Annual Report · Precipio

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10-K 1 tv489111_10k.htm FORM 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

⌧

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017

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
(State or other jurisdiction of
incorporation or organization)

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

91-1789357
(I.R.S. Employer
Identification No.)

06511
(Zip Code)

(203) 787-7888
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Common Stock, par value $0.01 per share

Name of Each Exchange On Which Registered

NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of

the Securities Act.

Yes # No ⌧

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or

Section 15(d) of the Exchange Act.

Yes # No ⌧

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 ⌧ No #

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

Yes ⌧ No #

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form10-K ⌧

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
Non-accelerated filer
Emerging growth
company

#
#
# (Do not check if a smaller reporting company) Smaller reporting company ⌧

Accelerated filer

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 ⌧

The aggregate market value of the voting and non-voting common equity held by non-affiliates of
the registrant based on the last reported closing price per share of Common Stock as reported on the
Nasdaq Capital Market on the last business day of the registrant’s most recently completed second quarter
was approximately $49.6 million.

As of March 31, 2018, the number of shares of common stock outstanding was 19,668,572.

PRECIPIO, INC.
Annual Report on Form 10-K
For the Year Ended December 31, 2017

INDEX

PART I.

Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Properties
Item 2.
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures

PART
II.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Item 5.
Purchases of Equity Securities
Item 6. Selected Consolidated Financial Data

Item 7.

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

Item 7A. Quantitative and Qualitative Disclosures About Market Price

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017 and
2016
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended
December 31, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and
2016
Notes to the Consolidated Financial Statements for the Years Ended December 31,
2017 and 2016
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures

Item 9.

Item 9A. Controls and Procedures
Item 9B. Other Information
PART
III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART
IV.
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary

Signatures

Page No.

4
11
22
22
22
25

25
26

26
38
39
39
41

86
86
87

87
95

99
100
101

102
105

106

PART I.
FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (this “Annual Report”), including Management’s Discussion &
Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks
and uncertainties. These statements are based on management’s current views, assumptions or beliefs of
future events and financial performance and are subject to uncertainty and changes in circumstances.
Readers of this report should understand that these statements are not guarantees of performance or results.
Many factors could affect our actual financial results and cause them to vary materially from the
expectations contained in the forward-looking statements. These factors include, among other things: our
expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices
of raw materials, insurance reimbursements, product pricing, foreign currency exchange rates, sources of
funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future
interest costs, future economic circumstances, business strategy, industry conditions and key trends, our
ability to execute our operating plans, the success of our cost savings initiatives, competitive environment
and related market conditions, expected financial and other benefits from our organizational restructuring
activities, actions of governments and regulatory factors affecting our business, projections of future
earnings, revenues, synergies, accretion or other financial items, any statements of the plans, strategies and
objectives of management for future operations, retaining key employees and other risks as described in our
reports filed with the Securities and Exchange Commission (the “SEC”). In some cases these statements are
identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,”
“project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or the negative of such terms and
other similar expressions.

You are cautioned not to place undue reliance on these forward-looking statements. The forward-
looking statements we make are not guarantees of future performance and are subject to various
assumptions, risks and other factors that could cause actual results to differ materially from those suggested
by these forward-looking statements. Actual results may differ materially from those suggested by these
forward-looking statements for a number of reasons, including those described in Item 1A, “Risk Factors,”
and other factors identified by cautionary language used elsewhere in this Annual Report.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether

as a result of new information, future events or otherwise, except as required by law.

The following discussion should be read together with our financial statements and related notes
contained in this Annual Report. Results for the year ended December 31, 2017 are not necessarily
indicative of results that may be attained in the future.

Item 1. Our Business

Business Description

Precipio, Inc., and Subsidiary, (“we”, “us”, “our”, the “Company” or “Precipio”) is a cancer
diagnostics company providing diagnostic products and services to the oncology market. We have
developed a platform designed to eradicate misdiagnoses 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 problem of cancer misdiagnosis. We also operate a research and development facility in Omaha,
Nebraska which will focus on the further development of ICE-COLD-PCR, or ICP, the patented
technology described further below, which was exclusively licensed by us from Dana-Farber Cancer
Institute, Inc., or Dana-Farber, at Harvard University. The research and development center will focus on
the development of this technology, which we believe will enable us to commercialize other technologies
developed by our current and future academic partners. Our platform connects patients, physicians and
diagnostic experts residing within academic institutions. Launched in 2017, the platform facilitates the
following relationships:

•

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: able to connect with academic experts to seek consultations on behalf of their patients
and 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: able to make themselves available for patients or physicians seeking access to
their expertise. Additionally, these experts have a platform available to commercialize their
research discoveries.

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

ICP was developed at Harvard University and is licensed exclusively by us from Dana-Farber.
This technology enables the detection of genetic mutations in liquid biopsies such as blood samples. The
field of liquid biopsies is a rapidly growing market aimed at overcoming the challenge of obtaining genetic
information related to disease progression and changes from sources other than a tumor biopsy.

Gene sequencing is performed on tissue biopsies taken surgically from the tumor site in order to
identify potential therapies that will be more effective in treating the patient. Surgical procedures involving
tissue biopsies have several limitations including:

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

•

Surgical access: various tumor sites are not always accessible (e.g. brain tumors), in which cases

no biopsy is available for diagnosis.

• Risk: patient health may not permit undergoing an invasive surgery; therefore a biopsy cannot be

obtained at all.

•

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

Additionally, there are several tumor-related limitations that provide a challenge to obtaining such

genetic information from a tumor, such as:

• Heterogeneous nature: a tissue sample from one area of the tumor may not properly represent the
tumor’s entire genetic composition; thus, the diagnostic results from a tumor may be incomplete or
non-representative.

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

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

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

Industry Problem

There is currently a significant problem with unpublicized rates of misdiagnosis across numerous
disease states (particularly in cancer) due to an inefficient and commoditized industry. We believe that the
diagnostic industry focuses primarily on competitive pricing and test turnaround times at the expense of
quality and accuracy. Increasingly complex disease states are met with eroding specialization rather than
increased expertise. According to a study conducted by the National Coalition of Health, this results in an
industry with cancer misdiagnosis rates up to 28%, which is failing to meet the needs of physicians,
patients and the healthcare system as a whole. New technologies offer improved accuracy; however, many
are either inaccessible or are not economically practical for clinical use. Despite much publicity of the
industry transitioning from fee-per-service to value-based payments, this transition has not yet occurred in
diagnostics. When a patient is misdiagnosed, physicians end up administrating incorrect treatments, often
creating adverse effects rather than improving outcomes. Insurance Providers, Medicare and Medicaid
waste valuable dollars on the application of incorrect treatments and can incur substantial downstream
costs. Most importantly however, patients pay the ultimate price of misdiagnosis with increased morbidity
and mortality. According to a report by Pinnacle Health, the estimated cost of misdiagnosis within the
healthcare system is $5 billion annually. We believe that the academic path of specialization produces the
critical expertise necessary to correctly diagnose disease and that academic institutions have an unlocked
potential to address this problem. Our solution is to create an exclusive platform that harnesses academic
expertise and proprietary technologies to deliver the highest standard of diagnostic accuracy and patient
care. Physicians, hospitals, payers and, most importantly, patients all benefit from more accurate
diagnostics.

Market

As a services and technology commercialization company, we currently participate in two
segments within the U.S. domestic oncology diagnostics market. The first is the clinical pathology services
market, which is estimated to be a $22 billion annual market and growing at an average 8% compound
annual growth rate. The second segment is the liquid biopsy reagents/kits market. According to the Piper
Jaffray report from September 2015, the domestic oncology liquid biopsy market estimate is over $28
billion per year and includes screening, therapy selection, treatment monitoring and recurrence. The current
market size for colon, lung and melanoma is 428,000 new cases per year and over 2.5 million people living
with cancer, creating a potential market opportunity of $8.2 billion. We believe additional opportunities
exist in clinical trials searching for low cost and high quality solutions for patient selection and treatment
monitoring.

Our Solution

Our Platform

Our platform is designed to provide physicians and their patients access to necessary academic
expertise and technology in order to better provide diagnoses. To our knowledge, we are the only company
focused on addressing the issue of diagnostic accuracy with an innovative, robust and scalable business
model by:

• Providing physicians and their patients access to world-class academic experts and

technologies.

• Leveraging the largest network of academic experts by adding numerous leading

academic institutions to our platform.

• Allowing payers to benefit from quality-based outcomes to their patients and increase the

likelihood of cost savings.

• Enabling cross-collaboration between physicians and academic institutions to advance

research and discovery.

Our exclusive agreement with the Department of Pathology at Yale University, or the Pathology
Services Agreement, is part of a unique platform that to our knowledge is not offered by other commercial
laboratories. Our customers are oncologists who biopsy their patients in order to confirm or rule out the
presence of cancer. After our customers send the samples to us, we conduct all the technical tests at our
New Haven facility. We then transmit the test results to the pathologists at Yale who have access to our
laboratory information system from their respective offices, enabling them to review and render their
diagnostic interpretation of the test results for reporting. In partnership with Yale, we have developed a
proprietary algorithm that is applied to each sample submitted to us for testing, resulting in our ability to
render a more precise and accurate diagnosis. The final results are prepared by Yale pathologists and
integrated into the final report by us, and are then delivered electronically through our portal to the
referring clinician. The patient’s insurance is billed for the services; we are paid for the technical work
done at our laboratory; and Yale pathologists are paid by us for their diagnostic interpretation.

In March 2017, we renewed the Pathology Services Agreement for an additional five-year term,
effective as of June 2016, through June 2021. Under the Pathology Services Agreement, the Yale
Department of Pathology may not provide the hematopathology services to any other commercial entity
that is our competitor. The Pathology Services Agreement allows for termination by either party (i) for
uncured breach by the other party, (ii) if either party has its respective license suspended or revoked, (iii) if
the insurance coverage of either party is canceled or modified, (iv) if we fail to maintain or meet the
requirements of Medicare conditions of participation, or (v) if we declare bankruptcy. The Pathology
Services Agreement also provides that if the performance by either party (i) jeopardizes the licensure or
accreditation of Yale or any Yale physician, (ii) jeopardizes either party’s participation in Medicare,
Medicaid or other federal, state or commercial reimbursement programs, (iii) violates any statute,
ordinance or otherwise is deemed illegal, (iv) is deemed unethical by any recognized body, agency or
association in the medical or laboratory fields, or (v) causes a substantial threat to Yale’s tax-exempt status,
then either party may initiate negotiations to amend the Pathology Services Agreement and the Agreement
will terminate if a mutually agreed amendment is not executed by the parties within 30 days.

ICE-COLD-PCR

ICP technology was developed at Dana-Farber and is licensed by us. ICP is a unique, proprietary,
patented specimen enrichment technology that increases the sensitivity of molecular based tests from
approximately 90-95% to 99.99%. Traditional molecular testing is done on tumor biopsies. These tests are
typically conducted at disease onset, when the patient undergoes a biopsy. In the typical course of

treatment, a patient is rarely re-biopsied, and therefore, genetic information is based solely on the initial
biopsy. Tumors are known to shed cells into the patient’s blood stream where they circulate alongside
normal cells; however, existing testing methodologies are not sufficiently sensitive to differentiate between
tumor and normal cells. The increased sensitivity provided by ICP allows for testing of genetic mutations
that occur within tumors to be conducted on peripheral blood samples, termed liquid biopsies. This
technical capability enables physicians to test for genetic mutations through a simple blood test rather than
an invasive biopsy extracted from the actual tumor. The results of such tests can be used for diagnosis,
prognosis and therapeutic decisions. The technology is encapsulated within a chemical (reagent) used
during the specimen preparation process, which enriches (amplifies) the tumor DNA detected within the
blood sample while suppressing the normal DNA. In addition to offering this technology as a clinical
service, we are developing panels that will be sold as reagent kits to other laboratories to enable this testing
in their facilities, thereby improving their test sensitivity and more accurate diagnoses via liquid biopsies.
The business model of selling reagents to other laboratories expands the reach and impact of our
technology while eliminating the reimbursement risks from running the tests in-house.

We license the ICP technology from Dana-Farber through a license agreement, (the “License
Agreement”). The License Agreement grants us an exclusive license to the ICP technology, subject to a
non-exclusive license granted to the U.S. government, in the areas of mutation detection using Sanger (di-
deoxy) sequencing and mitochondrial DNA analysis for all research, diagnostic, prognostic and therapeutic
uses in humans, animals, viruses, bacteria, fungi, plants or fossilized material. The License Agreement also
grants us a non-exclusive license in the areas of mutation detection using DHPLC, surveyor-endonuclease-
based mutation detection and second generation sequencing techniques. We paid Dana-Farber an initial
license fee and are required to make milestone payments with respect to the first five licensed products or
services we develop using the licensed technology, as well as royalties ranging from high single to low
double digits on net sales of licensed products and services for sales made by us and sales made to any
distributors. The License Agreement remains in effect until we cease to sell licensed products or services
under said agreement. Dana-Farber has the right to immediately terminate the License Agreement if (i) we
cease to carry on our business with respect to licensed products and services, (ii) we fail to make any
payments under the License Agreement (subject to a cure period), (iii) we fail to comply with due diligence
obligations under the License Agreement (subject to a cure period), (iv) we default in our obligations to
procure and maintain insurance as required by the License Agreement, (v) any of our officers is convicted
of a felony relating to the manufacture, use, sale or importation of licensed products under the License
Agreement, (vi) we materially breach any provision of the License Agreement (subject to a cure period), or
(vii) we or Dana-Farber become insolvent. We may terminate the License Agreement for convenience upon
180 days’ prior written notice.

Reimbursement

As cancer is more likely to be developed later in life, the largest insurance provider is Medicare,
which constitutes approximately 50% of our patients’ cases. Non-Medicare patients are typically insured by
private insurance companies who provide patient coverage and pay for patients’ health-related costs. These
private insurance companies will often adjust their rates according to the insurance rates annually published
by the Center for Medicare and Medicaid Services, or CMS. We, and other providers, typically bill
according to the codes relevant to the tests we conduct.

Our Products

Our initial product offering consists of clinical diagnostic services harnessing the expertise of the

Yale School of Medicine and the commercialization and application of ICP. Our clinical diagnostic
services focus on the diagnosis of different hematopoietic or blood-related cancers and the delivery of an
accurate diagnosis to oncologists, with demonstrated superior results through an exclusive partnership with
Yale. We intend to enter into additional partnerships with premiere academic institutions during 2018 that
will further broaden and strengthen our academic expert network. Our cutting-edge liquid biopsy
technology, ICP, enables detection of abnormalities in blood samples down to as low as .01%. Our
customers are oncologists, hospitals, reference laboratories, and pharma and biotech companies. This low-
cost technology enables our customers to conduct tests in-house using existing mutation detection
platforms. We believe we are the only current and economically viable option for liquid biopsy applications
and plan to cross-market technologies (such as ICP) and other services on our platform.

We built and obtained CLIA certification to operate our New Haven laboratory. The laboratory is
approximately 3,000 square feet and has several sub-departments such as flow cytometry, immune-
histochemistry, cytogenetics, and molecular testing. The laboratory is currently operated by five lab
technicians and is supervised by a laboratory manager and a medical director. Our laboratory is inspected
every two years by a Connecticut state-appointed inspector, and once approved, we are issued a CLIA-
certificate. Furthermore, the laboratory supervisor and medical director must conduct a self-inspection
every two years (rotating with the state inspection) and must submit those results to the state department of

health.
http://www.precipiodx.com/accreditations.html

Current

active

laboratory

certifications

can

found

The laboratory operations are governed by Standard Operating Procedure manuals, or SOPs,
which detail each aspect of the laboratory environment including the work flow, quality control,
maintenance, and safety. These SOPs are reviewed and approved annually and signed off by the laboratory
manager and medical director.

Our Strategy

Our objective is to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and
technology developed within academic institutions and to deliver quality diagnostic information to
physicians and their patients worldwide. To achieve this objective, our strategy is to focus our efforts on the
following areas:

• Clinical pathology services – we intend to continue building our platform by increasing
the number of academic experts available on our platform and partnering with other
academic institutions, allowing us to expand our portfolio of services to cover additional
types of cancer.

•

Ice-Cold PCR – we believe we can commercialize and develop new applications for our
ICP technology, including:

o Developing specific application panels for patient monitoring for treatment

resistance and disease recurrence;

o Building focused diagnostic and screening panels for initial disease identification;

o Leveraging our platform customers to generate demand for repeat, localized, in-

house liquid biopsy testing; and

o Applying ICP technology to other markets, such as pre-natal and companion

diagnostics.

• New product pipeline through outsourced research and development – we plan on
utilizing our partnerships with academic institutions to gain access to newly-developed
technologies. We also believe there is an opportunity to partner with biotechnology
companies to introduce their products into the U.S. market through our platform.

• Academic partnerships – we intend to leverage the intellectual expertise and
technologies developed within academic institutions. We believe we have validated this
model through our partnership with the Yale School of Medicine and are currently in the
process of adding new academic partners.

Competition

Our principal competition in clinical pathology services comes largely from two groups. The first
group consists of companies that specialize in oncology and offer directly competing services to our
diagnostic services. These companies provide a high level of service focused on oncology and offer their
services to oncologists and pathology departments within hospitals. Competitors in this group include
Genoptix, GenPath Diagnostics and Miraca Life Sciences. The second group consists of large commercial
companies that offer a wide variety of laboratory tests ranging from simple chemistry tests to complex
genetic testing. Competitors in this group include LabCorp and Quest Diagnostics. We believe that
companies in this industry primarily compete on price and rapid delivery of results. We have chosen to
focus on the increased quality and accuracy of the results we provide. Within the liquid biopsy market, our
competitors include Guardant Health and Trovagene, Inc.

Competitive Advantage

We capitalize on the intellectual expertise and technologies developed by experts within academic
institutions. While several industry papers report a case misdiagnosis rate as high as 28%, we believe that
leveraging academic expertise can significantly reduce this rate. In an initial data set of over 100 clinical
cases received and processed by us and with a diagnosis rendered by Yale pathologists, we believe less
than 1% have resulted in misdiagnosis. The diagnostic report provided by us was then requested by a
patient or the patient’s physician for a second opinion to be conducted by another laboratory. In these
instances, less than 1% were in disagreement with our report’s original diagnosis. Though less than 5% of
all cancer patients are treated in academic centers that benefit from this specialized expertise, the majority
of patients are diagnosed by commercial reference laboratories. These commercial laboratories and
diagnostic companies have broad access to and serve over 95% of all cancer patients; however, their lack of
specialized expertise results in significantly higher misdiagnosis rates. Academic institutions also invest
heavily in the development of new technologies, most of which is used internally and does not benefit
outside or commercial lab patients. Our platform provides all patients with access to these innovative
technologies developed by Yale and any other academic institutions we engage with in the future.

Government Regulation

The healthcare industry is subject to extensive regulation by a number of governmental entities at
the federal, state and local level. Laws and regulations in the healthcare industry are extremely complex
and, in many instances, the industry does not have the benefit of significant regulatory or judicial
interpretation. Our business is impacted not only by those laws and regulations that are directly applicable
to us but also by certain laws and regulations that are applicable to our payors, vendors and referral sources.

While our management believes we are in compliance with all of the existing laws and regulations
applicable to us, such laws and regulations are subject to rapid change and often are uncertain in their
application and enforcement. Further, to the extent we engage in new business initiatives, we must continue
to evaluate whether new laws and regulations are applicable to us. There can be no assurance that we will
not be subject to scrutiny or challenge under one or more of these laws or that any enforcement actions
would not be successful. Any such challenge, whether or not successful, could have a material adverse
effect upon our business and consolidated financial statements.

Among the various federal and state laws and regulations that may govern or impact our current

and planned operations are the following:

Medicare and Medicaid Reimbursement

Many of the services that we provide are reimbursed by Medicare and state Medicaid programs

and are therefore subject to extensive government regulation.

Medicare is a federally funded program that provides health insurance coverage for qualified
persons age 65 or older, some disabled persons, and persons with end-stage renal disease and persons with
Lou Gehrig’s disease. Medicaid programs are jointly funded by the federal and state governments and are
administered by states under approved plans.

Medicaid provides medical benefits to eligible people with limited income and resources and
people with disabilities, among others. Although the federal government establishes general guidelines for
the Medicaid program, each state sets its own guidelines regarding eligibility and covered services. Some
individuals, known as “dual eligibles”, may be eligible for benefits under both Medicare and a state
Medicaid program. Reimbursement under the Medicare and Medicaid programs is contingent on the
satisfaction of numerous rules and regulations, including those requiring certification and/or licensure.
Congress often enacts legislation that affects the reimbursement rates under government healthcare
programs.

Approximately 36% of our revenue for the year ended December 31, 2017 was derived directly
from Medicare, Medicaid or other government-sponsored healthcare programs. Also, we indirectly provide
services to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs
through managed care entities. Should there be material changes to federal or state reimbursement
methodologies, regulations or policies, our direct reimbursements from government-sponsored healthcare
programs, as well as service fees that relate indirectly to such reimbursements, could be adversely affected.

Healthcare Reform

In recent years, federal and state governments have considered and enacted policy changes
designed to reform the healthcare industry. The most prominent of these healthcare reform efforts, the
Affordable Care Act, has resulted in sweeping changes to the U.S. system for the delivery and financing of
health care. As currently structured, the Affordable Care Act increases the number of persons covered
under government programs and private insurance; furnishes economic incentives for measurable
improvements in health care quality outcomes; promotes a more integrated health care delivery system and
the creation of new health care delivery.

Employees

As of December 31, 2017, Precipio employed thirty-one (31) people on a full-time basis and two
(2) people on a part-time basis. Of the total, five (5) were in Executive Management, thirteen (13) were in
laboratory operations, three (3) were in Sales and Marketing, two (2) were in Customer Service and
Support, five (5) were in Research & Development, four (4) were in Accounting, Finance and
Reimbursement and one (1) was in Management Information Services.

Research and Development Expenses

For the years ended December 31, 2017 and 2016, we recorded $0.5 million and $0.0 million,
respectively, of research and development expenses. More information regarding our research and
development activities can be found in the section entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” under Item 7 of this Annual Report.

Compliance with Environmental Laws

We believe we are in compliance with current environmental protection requirements that apply to

us or our business. Costs attributable to environmental compliance are not currently material.

Our internet address is www.precipiodx.com. We attempt to have a variety of information
available for customers, development partners and investors. Our goal is to maintain the Investor Relations
website as a portal through which investors can easily navigate to find pertinent information about us,
including:

• Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and any amendments to those reports, as soon as reasonably practicable after we electronically file
that material with or furnish it to the Securities and Exchange Commission (“SEC”);
Information on our business strategies, financial results, and key performance indicators;

•
• Press releases on quarterly earnings, product and service announcements, legal developments, and

international news.

Merger Transaction

On June 29, 2017, Precipio (then known as “Transgenomic, Inc.”, or “Transgenomic”), completed
a reverse merger (the “Merger”) with Precipio Diagnostics, LLC, a privately held Delaware limited liability
company (“Precipio Diagnostics”) in accordance with the terms of the Agreement and Plan of Merger (the
“Merger Agreement”), dated October 12, 2016, as amended on February 2, 2017 and June 29, 2017, by and
among Transgenomic, Precipio Diagnostics and New Haven Labs Inc. (“Merger Sub”) a wholly-owned
subsidiary of Transgenomic. Pursuant to the Merger Agreement, Merger Sub merged with and into Precipio
Diagnostics, with Precipio Diagnostics surviving the Merger as a wholly-owned subsidiary of the combined
company (See Note 3 - Reverse Merger). In connection with the Merger, we changed our name from
Transgenomic, Inc. to Precipio, Inc., relisted our common stock under Precipio, Inc. on the National
Association of Securities Dealers Automated Quotations (“NASDAQ”), and effected a 1-for-30 reverse
stock split of our common stock. Upon the consummation of the Merger, the historical financial statements
of Precipio Diagnostics become the Precipio’s historical financial statements. Accordingly, the historical
financial statements of Precipio Diagnostics are included in the comparative prior periods. As a result of the
Merger, historical preferred stock, common stock, restricted units, warrants and additional paid-in capital,
including share and per share amounts, have been retroactively adjusted to reflect the equity structure of the
combined company, including the effect of the Merger exchange ratio. Pursuant to the Merger Agreement,
each outstanding unit of Precipio Diagnostics was exchanged for 10.2502 pre-reverse stock split shares of
Company Common Stock.

Item 1A. Risk Factors

The following risks and uncertainties, together with all other information in this Annual Report on
Form 10-K, including our consolidated financial statements and related notes, should be considered
carefully. Any of the risk factors we describe below could adversely affect our business, financial condition
or results of operations, and could cause the market price of our common stock to fluctuate or decline.

Risks Related to Our Business and Strategy

There is substantial doubt about our ability to continue as a going concern.

Our independent registered public accounting firm has issued an opinion on our consolidated
financial statements included in this Annual Report on Form 10-K that states that the consolidated financial
statements were prepared assuming we will continue as a going concern. Our consolidated financial
statements have been prepared using accounting principles generally accepted in the United States of
America applicable for a going concern, which assume that we will realize our assets and discharge our
liabilities in the ordinary course of business. We have incurred substantial operating losses and have used
cash in our operating activities for the past few years. For the year ended December 31, 2017, we had a net
loss of $20.7 million, negative working capital of $8.3 million and net cash used in operating activities of
$6.7 million. We are not current in making payments to all lenders and vendors. Our consolidated financial
statements do not include any adjustments to the amounts and classification of assets and liabilities that
may be necessary should we be unable to continue as a going concern. We also cannot be certain that
additional financing, if needed, will be available on acceptable terms, or at all, and our failure to raise
capital when needed could limit our ability to continue our operations. There remains substantial doubt
about the Company’s ability to continue as a going concern.

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
the development and
consider
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.

the substantial challenges, risks and uncertainties

inherent

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 December 31, 2017, we had cash of less than $0.5 million and our working capital was
approximately negative $8.3 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. Due to the timing of the filing
of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, we will not be eligible to file a
new Form S-3 registration statement until September 1, 2018. Our existing Form S-3 registration statement
expired in February 2018. This may have an adverse impact on our ability to raise additional capital.

We have incurred losses since our inception and expect to incur losses for the foreseeable future.

We have historically operated at a loss and have not consistently generated sufficient cash from
operating activities to cover our operating and other cash expenses. We have been able to historically
finance our operating losses through borrowings or from the issuance of additional equity. For the year
ended December 31, 2017, we had a net loss of $20.7 million, negative working capital of $8.3 million and
net cash used in operating activities of $6.7 million. Our ability to continue as a going concern is dependent
upon a combination of completing our planned development of the ICP technology, generating additional
revenue, improving cash collections, and, if needed, raising additional necessary financing to meet our
obligations and pay our liabilities arising from normal business operations as they come due. The outcome
of these matters cannot be predicted with any certainty at this time and raises substantial doubt that we will
be able to continue as a going concern.

We are continuing to integrate legacy internal controls over financial reporting into our financial
reporting framework.

Such changes have resulted, and may continue to result in changes in our internal control over
financial reporting results that materially affect our internal control over financial reporting. We continue
to integrate the business processes and information systems in effect prior to the reverse merger, including
internal controls. If we cannot provide reliable financial reports or detect and prevent fraud, our business
and operating results could be harmed, investors could lose confidence in our reporting financial
information, and the trading price of our common stock could drop significantly.

We have been, and may continue to be, subject to costly litigation.

We have been, and may continue to be, subject to legal proceedings. Due to the nature of our
business, we may be subject to a variety of regulatory investigations, claims, lawsuits and other
proceedings in the ordinary course of our business. The results of these legal proceedings cannot be
predicted with certainty due to the uncertainty inherent in litigation, including the effects of discovery of
new evidence or advancement of new legal theories, the difficulty of predicting decisions of judges and
juries and the possibility that decisions may be reversed on appeal. Such litigation has been, and in the
future could be, costly, time-consuming and distracting to management, result in a diversion of resources
and could materially adversely affect our business, financial condition and operating results.

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

Our products may never gain significant acceptance in the marketplace and, therefore, may never
generate substantial revenue or profits for us. Our ability to achieve commercial market acceptance for our
existing and future products will depend on several factors, including:

•

•
•

our ability to convince the medical community of the clinical utility of our products and their
potential advantages over existing diagnostics technology;
the willingness of physicians and patients to utilize our products; and
the agreement by commercial third-party payors and government payors to reimburse our
products, the scope and amount of which will affect patients’ willingness or ability to pay for our
products and will likely heavily influence physicians’ decisions to recommend our products.

In addition, physicians may rely on guidelines issued by industry groups, such as the National
Comprehensive Cancer Network, medical societies, such as the College of American Pathologists, or CAP,
or other key oncology-related organizations before utilizing any diagnostic test. Although we have a study

underway to demonstrate the clinical utility of our existing products, none of our products are, and may
never be, listed in any such guidelines.

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

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

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

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

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

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

Our success depends on our ability to develop new products and applications for our diagnostic
technology in existing and new markets, while improving the performance and cost-effectiveness of our
systems. New technologies, techniques or products could emerge that might offer better combinations of
price and performance than our current or future products and systems. Existing or future markets for our
products, as well as potential markets for our diagnostic product candidates, are characterized by rapid
technological change and innovation. It is critical to our success that we anticipate changes in technology
and customer requirements and successfully introduce new, enhanced and competitive technologies to meet
our customers’ and prospective customers’ needs on a timely and cost-effective basis. At the same time,
however, we must carefully manage the introduction of new products. If customers believe that such
products will offer enhanced features or be sold for a more attractive price, they may delay purchases until
such products are available. We may also have excess or obsolete inventory of older products as we

transition to new products and our experience in managing product transitions is very limited. If we do not
successfully innovate and introduce new technology into our product lines or effectively manage the
transitions to new product offerings, our revenues and results of operations will be adversely impacted.

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

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

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

We may experience temporary disruptions and delays in processing biological samples at our facilities.

We may experience delays in processing biological samples caused by software and other errors.
Any delay in processing samples could have an adverse effect on our business, financial condition and
results of operations.

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

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

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

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

integrate additional management, administrative, manufacturing and regulatory personnel;

•
• maintain sufficient administrative, accounting and management information systems and controls;

and
hire and train additional qualified personnel.

•

We may not be able to accomplish these tasks, and our failure to accomplish any of them could

harm our financial results.

We currently have limited experience in marketing products. If we are unable to establish marketing and
sales capabilities and retain the proper talent to execute on our sales and marketing strategy, we may not
be able to generate product revenue.

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

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

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

In June 2017, we completed our merger with Transgenomic. Integrating the operations of the
businesses of Transgenomic successfully or otherwise realizing any of the anticipated benefits of the
merger with Precipio, including anticipated cost savings and additional revenue opportunities, involves a
number of potential challenges. The failure to meet these integration challenges could seriously harm our
results of operations and the market price of our common stock may decline as a result.

Realizing the benefits of the merger will depend in part on the integration of information
technology, operations and personnel. These integration activities are complex and time-consuming and we
may encounter unexpected difficulties or incur unexpected costs, including:

•

•
•

•

our inability to achieve the cost savings and operating synergies anticipated in the merger,
including synergies relating to increased purchasing efficiencies and a reduction in costs
associated with the merger;
diversion of management attention from ongoing business concerns to integration matters;
difficulties in consolidating and rationalizing information technology platforms and administrative
infrastructures;
complexities associated with managing the geographic separation of the combined businesses and
consolidating multiple physical locations where management may determine consolidation is
desirable;

•

difficulties in integrating personnel from different corporate cultures while maintaining focus on
providing consistent, high quality customer service;
challenges in demonstrating to our customers that the merger will not result in adverse changes in
customer service standards or business focus; and
possible cash flow interruption or loss of revenue as a result of change of ownership transitional
matters.

We may not successfully integrate the operations of the businesses in a timely manner and may
not realize the anticipated net reductions in costs and expenses and other benefits and synergies of the
merger with Precipio Diagnostics to the extent, or in the timeframe, anticipated. In addition to the
integration risks discussed above, our ability to realize these net reductions in costs and expenses and other
benefits and synergies could be adversely impacted by practical or legal constraints on our ability to
combine operations.

Cybersecurity risks could compromise our information and expose us to liability, which may harm our
ability to operate effectively and may cause our business and reputation to suffer.

Cybersecurity refers to the combination of technologies, processes and procedures established to
protect information technology systems and data from unauthorized access, attack, or damage. We rely on
our information systems to provide security for processing, transmission and storage of confidential
information about our patients, customers and personnel, such as names, addresses and other individually
identifiable information protected by HIPAA and other privacy laws. Cyber-attacks are increasingly more
common, including in the health care industry. The regulatory environment surrounding information
security and privacy is increasingly demanding, with the frequent imposition of new and changing
requirements. Compliance with changes in privacy and information security laws and with rapidly evolving
industry standards may result in our incurring significant expense due to increased investment in
technology and the development of new operational processes.

We have not experienced any known attacks on our information technology systems that
compromised any confidential information. We maintain our information technology systems with
safeguard protection against cyber-attacks including passive intrusion protection, firewalls and virus
detection software. However, these safeguards do not ensure that a significant cyber-attack could not occur.
Although we have taken steps to protect the security of our information systems and the data maintained in
those systems, it is possible that our safety and security measures will not prevent the systems’ improper
functioning or damage or the improper access or disclosure of personally identifiable information such as in
the event of cyber-attacks.

Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers
and similar breaches can create system disruptions or shutdowns or the unauthorized disclosure of
confidential information. If personal information or protected health information is improperly accessed,
tampered with or disclosed as a result of a security breach, we may incur significant costs to notify and
mitigate potential harm to the affected individuals, and we may be subject to sanctions and civil or criminal
penalties if we are found to be in violation of the privacy or security rules under HIPAA or other similar
federal or state laws protecting confidential personal information. In addition, a security breach of our
information systems could damage our reputation, subject us to liability claims or regulatory penalties for
compromised personal information and could have a material adverse effect on our business, financial
condition and results of operations.

Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal tax
purposes is subject to limitation and risk that could further limit our ability to utilize our net operating
losses.

Under U.S. federal income tax law, a corporation’s ability to utilize its net operating losses, or
NOLs, to offset future taxable income may be significantly limited if it experiences an “ownership change”
as defined in Section 382 of the Internal Revenue Code, as amended. In general, an ownership change will
occur if there is a cumulative change in a corporation’s ownership by “5-percent shareholders” that exceeds
50 percentage points over a rolling three-year period. A corporation that experiences an ownership change
will generally be subject to an annual limitation on the use of its pre-ownership change NOLs equal to the
value of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt
rate (subject to certain adjustments). The annual limitation for a taxable year generally is increased by the
amount of any “recognized built-in gains” for such year and the amount of any unused annual limitation in
a prior year. On December 22, 2017, a law commonly known as the Tax Cuts and Jobs Act, or the TCJ Act,
was enacted in the United States. Certain provisions of the TCJ Act impact the ability to utilize NOLs
generated in 2018 and forward; any limitation to our annual use of NOLs could require us to pay a greater
amount of U.S. federal (and in some cases, state) income taxes, which could reduce our after-tax income
from operations for future taxable years and adversely impact our financial condition.

Reimbursement and Regulatory Risks Relating to Our Business

Governmental payers and health care plans have taken steps to control costs.

Medicare, Medicaid and private insurers have increased their efforts to control the costs of health
care services, including clinical testing services. They may reduce fee schedules or limit/exclude coverage
for certain types of tests that we perform. Medicaid reimbursement varies by state and is subject to
administrative and billing requirements and budget pressures. We expect efforts to reduce reimbursements,
impose more stringent cost controls and reduce utilization of testing services will continue. These efforts,
including changes in laws or regulations, may have a material adverse impact on our business.

Changes in payer mix could have a material adverse impact on our net sales and profitability.

Testing services are billed to physicians, patients, government payers such as Medicare, and
insurance companies. Tests may be billed to different payers depending on a particular patient’s medical
insurance coverage. Government payers have increased their efforts to control the cost, utilization and
delivery of health care services as well as reimbursement for laboratory testing services. Further reductions
of reimbursement for Medicare and Medicaid services or changes in policy regarding coverage of tests or
other requirements for payment, such as prior authorization or a physician or qualified practitioner’s
signature on test requisitions, may be implemented from time to time. Reimbursement for the laboratory
services component of our business is also subject to statutory and regulatory reduction. Reductions in the
reimbursement rates and changes in payment policies of other third party payers may occur as well. Such
changes in the past have resulted in reduced payments as well as added costs and have decreased test
utilization for the clinical laboratory industry by adding more complex new regulatory and administrative
requirements. As a result, increases in the percentage of services billed to government payers could have an
adverse impact on our net sales.

Our laboratories require ongoing CLIA certification.

The Clinical Laboratory Improvement Amendments of 1988, or CLIA, extended federal oversight
to virtually all clinical laboratories by requiring that they be certified by the federal government or by a
federally-approved accreditation agency. The CLIA requires that all clinical laboratories meet quality
assurance, quality control and personnel standards. Laboratories must also undergo proficiency testing and
are subject to inspections.

The sanctions for failure to comply with the CLIA requirements include suspension, revocation or
limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, cancellation or
suspension of the laboratory’s approval to receive Medicare and/or Medicaid reimbursement, as well as
significant fines and/or criminal penalties. The loss or suspension of a CLIA certification, imposition of a
fine or other penalties, or future changes in the CLIA law or regulations (or interpretation of the law or
regulations) could have a material adverse effect on us.

We believe that we are in compliance with all applicable laboratory requirements, but no

assurances can be given that our laboratories will pass all future certification inspections.

Failure to comply with HIPAA could be costly.

The Health Insurance Portability and Accountability Act, or HIPAA, and associated regulations
protect the privacy and security of certain patient health information and establish standards for electronic
health care transactions in the United States. These privacy regulations establish federal standards
regarding the uses and disclosures of protected health information. Our laboratories are subject to HIPAA
and its associated regulations. If we fail to comply with these laws and regulations we could suffer civil and

criminal penalties, fines, exclusion from participation in governmental health care programs and the loss of
various licenses, certificates and authorizations necessary to operate our patient testing business. We could
also incur liabilities from third party claims.

Our failure to comply with any applicable government laws and regulations or otherwise respond to
claims relating to improper handling, storage or disposal of hazardous chemicals that we use may
adversely affect our results of operations.

Our research and development [and manufacturing] activities involve the controlled use of
hazardous materials and chemicals. We are subject to federal, state, local and international laws and
regulations governing the use, storage, handling and disposal of hazardous materials and waste products. If
we fail to comply with applicable laws or regulations, we could be required to pay penalties or be held
liable for any damages that result and this liability could exceed our financial resources. We cannot be
certain that accidental contamination or injury will not occur. Any such accident could damage our research
and manufacturing facilities and operations, resulting in delays and increased costs.

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

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

Anti-Kickback Statute

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

Stark Law

Section 1877 of the Social Security Act, or the Stark Law, prohibits a physician from referring a
patient to an entity for certain “designated health services” reimbursable by Medicare if the physician (or
close family members) has a financial relationship with that entity, including an ownership or investment
interest, a loan or debt relationship or a compensation relationship, unless an exception to the Stark Law is
fully satisfied. The designated health services covered by the law include, among others, laboratory and
imaging services. Some states have self-referral laws similar to the Stark Law for Medicaid claims and
commercial claims.

Violation of the Stark Law may result in prohibition of payment for services rendered, a refund of
any Medicare payments for services that resulted from an unlawful referral, $15,000 civil monetary

penalties for specified infractions, criminal penalties, and potential exclusion from participation in
government healthcare programs, and potential false claims liability. The repayment provisions in the Stark
Law are not dependent on the parties having an improper intent; rather, the Stark Law is a strict liability
statute and any violation is subject to repayment of all amounts arising out of tainted referrals. If physician
self-referral laws are interpreted differently or if other legislative restrictions are issued, we could incur
significant sanctions and loss of revenues, or we could have to change our arrangements and operations in a
way that could have a material adverse effect on our business, prospects, damage to our reputation, results
of operations and financial condition.

False Claims Act

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

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

Civil Monetary Penalties Law

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

Intellectual Property Risks Related to Our Business

We cannot be certain that measures taken to protect our intellectual property will be effective.

We rely upon trade secrets, copyright and trademark laws, non-disclosure agreements and other
contractual confidentiality provisions to protect our confidential and proprietary information that we are not
seeking patent protection for various reasons. Such measures, however, may not provide adequate
protection for our trade secrets or other proprietary information. If such measures do not protect our rights,
third parties could use our technology and our ability to compete in the market would be reduced.

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

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

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

In some cases, we do not or may not control the prosecution, maintenance, or filing of the patents
or patent applications to which we hold licenses, or the enforcement of these patents against third parties.

As a result, we cannot be certain that drafting or prosecution of the licensed patents and patent applications
by the licensors have been or will be conducted in compliance with applicable laws and regulations or will
result in valid and enforceable patents and other intellectual property rights.

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

Third parties may in the future make claims challenging the inventorship or ownership of our
intellectual property. For example, third parties that have been introduced to or have benefited from our
inventions may attempt to replicate or reverse engineer our products and circumvent ownership of our
inventions. In addition, we may face claims that our agreements with employees, contractors, or consultants
obligating them to assign intellectual property to us are ineffective, or in conflict with prior or competing
contractual obligations of assignment, which could result in ownership disputes regarding intellectual
property we have developed or will develop and interfere with our ability to capture the commercial value
of such inventions. Litigation may be necessary to resolve an ownership dispute, and if we are not
successful, we may be precluded from using certain intellectual property, or may lose our exclusive rights
in that intellectual property. Either outcome could have an adverse impact on our business.

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

Although we try to ensure that our employees and consultants do not use the proprietary
information or know-how of others in their work for us, we may be subject to claims that we or our
employees, consultants or independent contractors have inadvertently or otherwise used or disclosed
intellectual property, including trade secrets or other proprietary information, of a former employer or other
third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such
claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or
personnel. Even if we are successful in defending against such claims, litigation could result in substantial
costs and be a distraction to management and other employees.

The testing, manufacturing and marketing of medical diagnostic devices entails an inherent risk of
product liability and personal injury claims.

To date, we have experienced no product liability or personal injury claims, but any such claims
arising in the future could have a material adverse effect on our business, financial condition and results of
operations. Potential product liability or personal injury claims may exceed the amount of our insurance
coverage or may be excluded from coverage under the terms of our policy or limited by other claims under
our umbrella insurance policy. Additionally, our existing insurance may not be renewed by us at a cost and
level of coverage comparable to that presently in effect, if at all. In the event that we are held liable for a
claim against which we are not insured or for damages exceeding the limits of our insurance coverage, such
claim could have a material adverse effect on our cash flow and thus potentially a materially adverse effect
on our business, financial condition and results of operations.

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

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

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

Further, if we have to use a substitute laboratory while our facilities were shut down, we could
only use another facility with established state licensure and accreditation under CLIA. We may not be able
to find another CLIA-certified facility and comply with applicable procedures, or find any such laboratory
that would be willing to perform the tests for us on commercially reasonable terms. Additionally, any new
laboratory opened by us would be subject to certification under CLIA and licensure by various states,
which would take a significant amount of time and result in delays in our ability to continue our operations.

Risks Related to Our Common Stock

The price of our common stock may fluctuate significantly, which could negatively affect us and holders
of our common stock.

There has been, and continues to be, a limited public market for our common stock, and an active
trading market for our common stock has not and may never develop or, if developed, be sustained. The
trading price of our common stock may be highly volatile and could be subject to wide fluctuations in
response to various factors, some of which are beyond our control. These factors include:

These factors include:

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actual or anticipated fluctuations in our financial condition and operating results:

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actual or anticipated changes in our growth rate relative to our competitors;
competition from existing products or new products that may emerge;
announcements by us, our academic institution partners, or our competitors of significant
acquisitions, strategic partnerships, joint ventures, collaborations, or capital commitments;
failure to meet or exceed financial estimates and projections of the investment community or that
we provide to the public and the revision of any financial estimates and projections that we
provide to the public;
issuance of new or updated research or reports by securities analysts;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
share price and volume fluctuations attributable to inconsistent trading volume levels of our
shares;
additions, transitions or departures of key management or scientific personnel;
disputes or other developments related to proprietary rights, including patents, litigation matters,
and our ability to obtain patent protection for our technologies;
changes to reimbursement levels by commercial third-party payors and government payors,
including Medicare, and any announcements relating to reimbursement levels;
announcement or expectation of additional debt or equity financing efforts;
sales of our common stock by us, our insiders, or our other stockholders; and
general economic and market conditions

These and other market and industry factors may cause the market price and demand for our
common stock to fluctuate substantially, regardless of our actual operating performance, which may limit
or prevent investors from readily selling their shares of our common stock and may otherwise negatively
affect the liquidity of our common stock. In addition, the stock market in general has experienced price and
volume fluctuations that have often been unrelated or disproportionate to the operating performance of
these companies. In the past, when the market price of a stock has been volatile, holders of that stock have
instituted securities class action litigation against the company that issued the stock. If any of our
stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a
lawsuit could also divert the time and attention of our management.

The price of our stock may be vulnerable to manipulation.

We believe our common stock has been the subject of significant short selling by certain market
participants. Short sales are transactions in which a market participant sells a security that it does not own.
To complete the transaction, the market participant must borrow the security to make delivery to the buyer.
The market participant is then obligated to replace the security borrowed by purchasing the security at the
market price at the time of required replacement. If the price at the time of replacement is lower than the
price at which the security was originally sold by the market participant, then the market participant will
realize a gain on the transaction. Thus, it is in the market participant’s interest for the market price of the
underlying security to decline as much as possible during the period prior to the time of replacement.

Because our unrestricted public float has been small relative to other issuers, previous short selling
efforts have impacted, and may in the future continue to impact, the value of our stock in an extreme and
volatile manner to our detriment and the detriment of our shareholders. Efforts by certain market
participants to manipulate the price of our common stock for their personal financial gain may cause our
stockholders to lose a portion of their investment, may make it more difficult for us to raise equity capital
when needed without significantly diluting existing stockholders, and may reduce demand from new
investors to purchase shares of our stock.

If we cannot continue to satisfy Nasdaq listing maintenance requirements and other rules, our securities
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.

On March 26, 2018, we received a letter from Nasdaq notifying us that for the past 30 consecutive
business days, the closing bid price per share of our common stock was below the $1.00 minimum bid price
requirement for continued listing on the Nasdaq Capital Market, as required by Nasdaq Listing Rule
5550(a)(2), or the Bid Price Rule. As a result, we were notified by Nasdaq that we are not in compliance
with the Bid Price Rule. Nasdaq has provided u with 180 calendar days, or until September 24, 2018, to
regain compliance with the Bid Price Rule.

To regain compliance with the Bid Price Rule, the closing bid price of our common stock must
meet or exceed $1.00 per share for a minimum of ten consecutive business days during the 180 day grace
period. If our common stock does not regain compliance with the Bid Price Rule during this grace period,
we will be eligible for an additional grace period of 180 calendar days provided that we satisfy Nasdaq’s
continued listing requirement for market value of publicly held shares and all other initial listing standards
for listing on The Nasdaq Capital Market, other than the minimum bid price requirement, and provide
written notice to Nasdaq of our intention to cure the delinquency during the second grace period. If we
meet these requirements, Nasdaq will inform us that we have been granted an additional 180 calendar days.
However, if it appears to Nasdaq that we will not be able to cure the deficiency, or if we are otherwise not
eligible, Nasdaq will provide notice that our securities will be subject to delisting.

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

Rule. However, there can be no assurance that we will be able to regain compliance.

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

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a limited availability for market quotations for our securities;

reduced liquidity with respect to our securities;

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

activity in the secondary trading market for our common stock;

limited amount of news and analyst coverage; and

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

In addition, we would no longer be subject to Nasdaq rules, including rules requiring us to have a

certain number of independent directors and to meet other corporate governance standards.

Increased costs associated with corporate governance compliance may significantly impact our results of
operations.

As a public company, we incur significant legal, accounting, and other expenses due to our
compliance with regulations and disclosure obligations applicable to us, including compliance with the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC, and
Nasdaq. The SEC and other regulators have continued to adopt new rules and regulations and make
additional changes to existing regulations that require our compliance. In July 2010, the Dodd-Frank Wall
Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant
corporate governance and executive compensation related provisions in the Dodd-Frank Act that have
required the SEC to adopt additional rules and regulations in these areas. Stockholder activism, the current
political environment, and the current high level of government intervention and regulatory reform may
lead to substantial new regulations and disclosure obligations, which may lead to additional compliance
costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our
management and other personnel devote a substantial amount of time to these compliance programs and
monitoring of public company reporting obligations, and as a result of the new corporate governance and
executive compensation related rules, regulations, and guidelines prompted by the Dodd-Frank Act, and
further regulations and disclosure obligations expected in the future, we will likely need to devote
additional time and costs to comply with such compliance programs and rules. These rules and regulations

will cause us to incur significant legal and financial compliance costs and will make some activities more
time-consuming and costly.

The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures
and internal control over financial reporting. We are continuing to develop and refine our disclosure
controls and other procedures that are designed to ensure that information required to be disclosed by us in
the reports that we file with the SEC is recorded, processed, summarized, and reported within the time
periods specified in SEC rules and forms, and that information required to be disclosed in reports under the
Exchange Act is accumulated and communicated to our principal executive and financial officers. Our
current controls and any new controls that we develop may become inadequate, and weaknesses in our
internal control over financial reporting may be discovered in the future. Any failure to develop or maintain
effective controls could adversely affect the results of periodic management evaluations and annual
independent registered public accounting firm attestation reports regarding the effectiveness of our internal
control over financial reporting, which we may be required to include in our periodic reports that we file
with the SEC under Section 404 of the Sarbanes-Oxley Act, and could harm our operating results, cause us
to fail to meet our reporting obligations, or result in a restatement of our prior period financial statements.
If we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over
financial reporting is perceived as inadequate, or that we are unable to produce timely or accurate financial
statements, investors may lose confidence in our operating results, and the price of our common stock
could decline.

We are required to comply with certain of the SEC rules that implement Section 404 of the
Sarbanes-Oxley Act, which requires management to certify financial and other information in our quarterly
and annual reports and provide an annual management report on the effectiveness of our internal control
over financial reporting. This assessment needs to include the disclosure of any material weaknesses in our
internal control over financial reporting identified by our management or our independent registered public
accounting firm. During the evaluation and testing process, if we identify one or more material weaknesses
in our internal control over financial reporting or if we are unable to complete our evaluation, testing, and
any required remediation in a timely fashion, we will be unable to assert that our internal control over
financial reporting is effective.

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

We have not paid dividends on our common stock in the past and do not expect to pay dividends on our
common stock for the foreseeable future. Any return on investment may be limited to the value of our
common stock.

No cash dividends have been paid on our common stock. We expect that any income received
from operations will be devoted to our future operations and growth. We do not expect to pay cash
dividends on our common stock in the near future. Payment of dividends would depend upon our
profitability at the time, cash available for those dividends, and other factors as our board of directors may
consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on
an investor’s investment will only occur if our stock price appreciates. Investors in our common stock
should not rely on an investment in our company if they require dividend income.

If securities or industry analysts do not publish research or reports about our business, or if they change
their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock relies in part on the research and reports that equity
research analysts publish about us and our business. We do not control these analysts. The price of our
common stock could decline if one or more equity research analysts downgrade our common stock or if
they issue other unfavorable commentary or cease publishing reports about us or our business:

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We currently lease approximately 7,630 square feet of laboratory and office space in New Haven,
Connecticut, which we occupy under a lease expiring in December 2021. We also lease approximately
5,300 square feet of laboratory space in Omaha, Nebraska, which we occupy under a lease expiring in May
2022. We believe that these facilities are adequate to meet our current and planned needs. We believe that
if additional space is needed in the future, we could find alternate space at competitive market rates as
needed.

Item 3. Legal Proceedings

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

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

Violations of these laws and regulations could result in expulsion from government healthcare
programs together with the 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.

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

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.

On February 25, 2016, the Board of Regents of the University of Nebraska (“UNMC”) filed a
lawsuit against Transgenomic in the District Court of Douglas County, Nebraska, for breach of contract and
seeking recovery of $0.7 million owed by us to UNMC. A $0.4 million liability was recorded and is
reflected in accrued expenses at December 31, 2016. We and UNMC entered into a settlement agreement
dated February 6, 2017, which included, among other things, a mutual general release of claims, and our
agreement to pay $0.4 million to UNMC in installments over a period of time. On September 8, 2017, we
and UNMC entered into a First Amendment to the Settlement Agreement with quarterly payments in the
amount of $25,000 due commencing on September 15, 2017 and ending on June 15, 2020 and a final
payment of $100,000 due on or before September 15, 2020. We made settlement payments totaling of
$50,000 during 2017 and a $0.3 million liability has been recorded and is reflected in accounts payable at
December 31, 2017.

On April 13, 2016, Fox Chase Cancer Center (“Fox Chase”) filed a lawsuit against us in the Court
of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania Civil Trial Division (the
“Court of Common Pleas”), alleging, among other things, breach of contract, tortious interference with
present and prospective contractual relations, unjust enrichment, fraudulent conversion and conspiracy and
seeking punitive damages in addition to damages and other relief. This lawsuit relates to a license
agreement Transgenomic entered into with Fox Chase in August 2000, as amended (the “License
Agreement”), as well as the assignment of certain of Transgenomic's rights under the License Agreement to
Integrated DNA Technologies, Inc. (“IDT”) pursuant to the Surveyor Kit Patent, Technology and Inventory
Purchase Agreement Transgenomic entered into with IDT effective as of July 1, 2014 (the “IDT
Agreement”). Pursuant to the terms of the IDT Agreement, Transgenomic agreed to indemnify IDT with
respect to certain of the claims asserted in the Fox Chase proceeding. On July 8, 2016, the Court of
Common Pleas sustained Transgenomic’s preliminary objections to several of Fox Chase’s claims and
dismissed the claims for tortious interference, fraudulent conversion, conspiracy, punitive damages and
attorney’s fees. Accordingly, the case was narrowed so that only certain contract claims and an unjust
enrichment claim remained pending against Transgenomic.

Chase has not caused the Action to be formally dismissed with prejudice as it is obligated per the
agreement. Also, on July 13, 2017 we entered into an agreement with its co-Defendant, IDT, regarding our
indemnity obligations to IDT for legal fees and expenses incurred in the Action pursuant to the terms of the
IDT Agreement in the amount of $139,000. During 2017, we made total payments to IDT in the amount of
$139,000 satisfying the agreement. As of December 31, 2017 there are no outstanding amounts owed by us
and we have no liabilities recorded within the accompanying consolidated balance sheets related to this
matter.

On June 23, 2016, the Icahn School of Medicine at Mount Sinai (“Mount Sinai”) filed a lawsuit
against Transgenomic in the Supreme Court of the State of New York, County of New York, alleging,
among other things, breach of contract and, alternatively, unjust enrichment and quantum merit, and
seeking recovery of $0.7 million owed by us to Mount Sinai for services rendered. We and Mount Sinai
entered into a settlement agreement dated October 27, 2016, which included, among other things, a mutual
general release of claims, and our agreement to pay approximately $0.7 million to Mount Sinai in
installments over a period of time. Effective as of October 31, 2017, we and Mount Sinai agreed to enter
into a new settlement agreement to restructure these liabilities into a secured, long-term debt obligation of
$0.5 million which includes accrued interest at 10% with monthly principal and interest payments of
$9,472 beginning in July 2018 and continuing over 48 months and to issue warrants in the amount of
24,900 shares, that are exercisable for shares of our common stock, on a 1-for-1 basis, with an exercise
price of $7.50 per share, exercisable on the date of issuance with a term of 5 years. We do not plan to apply
to list the warrants on the NASDAQ Capital Market, any other national securities exchange or any other
nationally recognized trading system. A $0.5 million liability has been recorded and is reflected in long-
term debt at December 31, 2017.

On December 19, 2016, Todd Smith (“Smith”) filed a lawsuit against us in the District Court of
Douglas County Nebraska, alleging breach of contract and seeking recovery of $2.2 million owed by us to
Smith for costs and damages arising from a breach of our obligations pursuant to a lease agreement
between the parties. On April 7, 2017, we entered into a settlement agreement with Smith related to the
early termination of our lease for a facility in Omaha, Nebraska. The agreement included, among other
things, a mutual general release of claims, and our agreement to pay approximately $0.6 million to Smith in
installments through October 2018. During the year ended December 31, 2017, we made payments totaling
$0.4 million and a $0.2 million liability has been recorded and is reflected in accounts payable at December
31, 2017.

On February 21, 2017, XIFIN, Inc. (“XIFIN”) filed a lawsuit against us in the District Court for
the Southern District of California alleging breach of written contract and seeking recovery of
approximately $0.27 million owed by us to XIFIN for damages arising from a breach of our obligations
pursuant to a Systems Services Agreement between us and XIFIN, dated as of February 22, 2013, as
amended and restated on September 1, 2014. On April 5, 2017, the court clerk entered default against the
Company. On May 5, 2017, XIFIN filed an application for entry of default judgment against us. During the
year ended December 31, 2017, we made payments totaling $0.1 million and a $0.2 million liability has
been recorded and is reflected in accounts payable at December 31, 2017.

CPA Global provides us with certain patent management services. On February 6, 2017, CPA
Global claimed that we owe approximately $0.2 million for certain patent maintenance services rendered.
CPA Global has not filed claims against us in connection with this allegation. During the year ended
December 31, 2017, we made payments of less than $0.1 million and a liability of approximately less than
$0.1 million has been recorded and is reflected in accounts payable at December 31, 2017.

On March 9, 2016, counsel for Edge BioSystems, Inc. (“EdgeBio”) sent a demand letter on behalf
of EdgeBio to us in connection with the terms of an Asset Purchase Agreement dated September 8, 2015
(the “EdgeBio Agreement”). EdgeBio alleges, among other things, that certain customers of EdgeBio
erroneously remitted payments to us, that such payments should have been paid to EdgeBio and that we
failed to remit these funds to EdgeBio in violation of the terms of the EdgeBio Agreement. On September
13, 2016, we received a demand for payment letter from EdgeBio’s counsel alleging that the balance due to
EdgeBio is approximately $0.1 million. On September 19, 2017 a summary of action from the Judicial
District of New Haven, CT for a judgement of $113,000 was issued. We and Edge-Bio reached an
agreement on payment and we paid $63,000 on December 21, 2017 with another $63,000 due within 180
days from the initial payment. A liability of approximately $0.1 million has been recorded and is reflected
in accounts payable at December 31, 2017.

On February 17, 2017, Jesse Campbell (“Campbell”) filed a lawsuit individually and on behalf of
others similarly situated against us in the District Court for the District of Nebraska alleging we 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. Although we intend
to defend the lawsuit, there can be no assurance regarding the ultimate outcome of this case. Given the
uncertainty of litigation, the legal standards that must be met for, among other things, class certification and
success on the merits, we are unable to estimate the amount of loss, or range of possible loss, at this time
that may result from this action. In the event that a settlement is reached related to these matters, the
amount of such settlement may be material to our results of operations and financial condition and may
have a material adverse impact on our liquidity.

On February 20, 2018, Crede Capital Group LLC (“Crede”) filed a lawsuit against us in the
Supreme Court of the State of New York for Summary Judgment in Lieu of Complaint requiring us to pay
cash owed to Crede. Crede claims that we breached a Securities Purchase Agreement and Warrant that
Crede entered into in connection with an investment in Transgenomic and that pursuant to those
agreements, we owed Crede the sum of $2,205,008. In addition to the aforementioned sum, Crede also
demanded that we pay an additional sum of $3,737.32 per day between the date of the summons and the
date that judgment is entered, plus interest. As previously disclosed by us, Crede had sent us a letter
claiming that we owed Crede $1.8 million. On March 12, 2018, we entered into a settlement agreement
with Crede pursuant to which we 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
settlement agreement. In accordance with the terms of the settlement agreement and in addition to the
agreement to pay, we have also executed and delivered to Crede an affidavit of confession of judgment.
Liabilities totaling approximately $1.9 million have been recorded with $1.1 million reflected in other
current liabilities and $0.8 million reflected in common stock warrant liability at December 31, 2017. On
March 19, 2018 we made the first scheduled payment of $175,000 to Crede.

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 $49,000. We are currently in discussions with Bio-Rad to reach payment
conditions. A liability of less than $0.1 million has been recorded in accounts payable at December 31,
2017.

Item 4. Mine Safety Disclosures

Not Applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities

Market Information. Since June 30, 2017, the trading date following the consummation of the

Merger, our common stock has traded on the Nasdaq Capital Market under the symbol “PRPO.”

Prior to the Merger, our common stock was traded on the Nasdaq Capital Market under the
symbol “TBIO.” Our common stock was suspended from trading on the Nasdaq Capital Market on
February 17, 2017 and on February 22, 2017, our shares began trading on the OTCQB exchange under the
ticker “TBIO” and remained on the QTCQB exchange until the date of the Merger. In connection with the
merger, our common stock commenced trading on the Nasdaq Capital Market under the symbol “PRPO.”

The following table sets forth the high and low closing prices for our common stock during each
of the quarters of 2017 and 2016. The over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
The per share prices reflect a 1-for-30 reverse stock split effected on June 13, 2017.

Quarter Ended March 31, 2018
First Quarter
Year Ended December 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$
$
$
$

1.30 $

0.48

33.60 $
16.86 $
20.10 $
2.23 $

32.41 $
21.92 $
17.36 $
11.04 $

7.80
4.90
1.80
1.08

16.20
15.00
8.37
4.75

Performance Graph. We are a smaller reporting company, as defined by Rule 12b-2 of the

Exchange Act, and are not required to provide the information required under this item.

Holders. At March 31, 2018, there were 19,668,572 shares of our common stock outstanding

and approximately 81 holders of record.

Dividends. No cash dividends have been paid on our common stock. We expect that any income
received from operations will be devoted to our future operations and growth. We do not expect to pay cash
dividends on our common stock in the near future. Payment of dividends would depend upon our
profitability at the time, cash available for those dividends, and other factors as our board of directors may
consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on
an investor’s investment will only occur if our stock price appreciates. Investors in our common stock
should not rely on an investment in our company if they require dividend income.

Issuer Purchases of Equity Securities. We made no purchases of our common stock during the

year ended December 31, 2017. Therefore, tabular disclosure is not presented.

Item 6. Selected Financial Data

We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of

1934, as amended, and are not required to provide the information required under this item.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This Annual Report on Form 10-K, including this Management’s Discussion and Analysis,
contains forward-looking statements. These statements are based on management’s current views,
assumptions or beliefs of future events and financial performance and are subject to uncertainty and
changes in circumstances. Readers of this report should understand that these statements are not guarantees
of performance or results. Many factors could affect our actual financial results and cause them to vary
materially from the expectations contained in the forward-looking statements. These factors include, among
other things: our expected revenue, income (loss), receivables, operating expenses, supplier pricing,
availability and prices of raw materials, insurance reimbursements, product pricing, sources of funding
operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest
costs, future economic circumstances, business strategy, industry conditions, our ability to execute our
operating plans, the success of our cost savings initiatives, competitive environment and related market
conditions, expected financial and other benefits from our organizational restructuring activities, actions of

governments and regulatory factors affecting our business, retaining key employees and other risks as
described in our reports filed with the Securities and Exchange Commission. In some cases these
statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,”
“intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or the negative
versions of these terms and other similar expressions.

You are cautioned not to place undue reliance on these forward-looking statements. The forward-
looking statements we make are not guarantees of future performance and are subject to various
assumptions, risks and other factors that could cause actual results to differ materially from those suggested
by these forward-looking statements. Actual results may differ materially from those suggested by the
forward-looking statements that we make for a number of reasons, including those described in Part I, Item
1A, “Risk Factors,” of this Annual Report on Form 10-K.

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.

Merger

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

Overview

Precipio, Inc., and Subsidiary, (“we”, “us”, “our”, the “Company” or “Precipio”) is a cancer
diagnostics company providing diagnostic products and services to the oncology market. We have built and
continue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the
intellect, expertise and technology developed within academic institutions and delivering quality diagnostic
information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located
in New Haven, Connecticut and have partnered with the Yale School of Medicine to capture the expertise,
experience and technologies developed within academia so that we can provide a better standard of cancer
diagnostics and solve the growing problem of cancer misdiagnosis. We also operate a research and
development facility in Omaha, Nebraska which will focus on further development of ICE-COLD-PCR, or
ICP, the patented technology which was exclusively licensed by us from Dana-Farber Cancer Institute,
Inc., or Dana-Farber, at Harvard University. The research and development center will focus on the
development of this technology, which we believe will enable us to commercialize other technologies
developed by our current and future academic partners. Our platform connects patients, physicians and
diagnostic experts residing within academic institutions. Launched in 2017, the platform facilitates the
following relationships:

•

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.

ICP was developed at Harvard and is licensed exclusively by us from Dana-Farber. The
technology enables the detection of genetic mutations in liquid biopsies, such as blood samples. The field
of liquid biopsies is a rapidly growing market, aimed at solving the challenge of obtaining genetic
information on disease progression and changes from sources other than a tumor biopsy.

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

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

•

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

• Risk: patient health may not permit undergoing an invasive surgery; therefore a biopsy cannot be

obtained at all.

•

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

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

•

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

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

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

technology is encapsulated into a chemical that is provided in the form of a kit and sold to other
laboratories who wish to conduct these tests in-house. The chemical within the kit is added to the specimen
preparation process, enriching the sample for the tumor DNA so that the analysis will detect those genetic
abnormalities.

Recent Developments

During the first quarter of 2018, we continued to further demonstrate the power of our value
proposition. In a study conducted with Yale, preliminary results showed a 4-fold superiority in arriving at
accurate diagnostic results, compared with the diagnoses conducted by outside pathology laboratories.
Additionally, we partnered with the molecular laboratory at the University of Pennsylvania to conduct a
parallel study to demonstrate the efficacy of IV-Cell, a proprietary reagent developed and patented by
Precipio.

As part of our ongoing work to further develop our product line, we launched several new
products and product-improvements related to our proprietary liquid biopsy technology, ICE-COLD PCR
(ICP). Among them, we launched our first lung cancer treatment resistance panel, both as a kit, and in our
laboratory. Additionally, we integrated a unique technology called High-Resolution Melt (HRM) into our
ICP kits, enabling a quick and cost-effective screen for the presence of mutations. HRM-enabled ICP kits
further improve ICP’s value proposition by both rapidly improving the potential turnaround time for testing
results, as well as substantially reducing the costs of testing.

These efforts drove further expansion on the commercial side of the business. During the first
quarter we established distribution partnerships with key local players in the Japanese, Brazilian, and
Indian markets. We believe these markets provide a tremendous opportunity for Precipio to expand into the
international markets where many patients pay out-of-pocket for their healthcare costs, thus rendering an
effective, low-cost technology for the monitoring of the tumor genetics. Additionally, we hired an
experienced VP of Sales to lead the domestic pathology sales team, and over the next several quarters we
plan to double our sales force to expand into other regions in the US.

From a corporate and financial perspective, this quarter saw us settle our final outstanding creditor
claims that carried over from the Transgenomic merger in mid-2017. We settled our claims with Crede
Capital, which joins other creditors who will be receiving payments over time, to enable us to manage cash
outlays while growing our business.

On March 26, 2018, we received written notice (or the Notice) from The Nasdaq Stock Market
LLC (or the Nasdaq) indicating that we are not in compliance with the minimum bid price requirement for
continued listing on the Nasdaq Capital Market. The Notice has no immediate effect on the listing of our
common stock, and our common stock will continue to trade on the Nasdaq Capital Market under the
symbol “PRPO” at this time. In accordance with Nasdaq Listing rules, we have a period of 180 calendar
days, or until September 24, 2018 to regain compliance. To regain compliance, the closing bid price of our
common stock must meet or exceed $1.00 per share for at least ten consecutive business days during this
180 calendar day period. (See Note 15 - Subsequent Events for additional information.)

Going Concern

The 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 December 31, 2017, the Company had a net loss of $20.7 million, negative working
capital of $8.3 million and net cash used in operating activities of $6.7 million. The Company’s ability to
continue as a going concern is dependent upon a combination of achieving its business plan, including
generating additional revenue, and raising additional financing to meet its debt obligations and paying
liabilities arising from normal business operations when they come due.

To meet its current and future obligations the Company has taken the following steps to capitalize

the business and successfully achieve its business plan:

• On January 8, 2018, the Company received gross proceeds of $400,000 when it entered into an
agreement with the Connecticut Department of Economic and Community Development by which
the Company received a grant of $100,000 and a loan of $300,000 with a payment term of ten
years.

• On February 8, 2018 the Company entered into an equity purchase agreement for the purchase of
up to $8,000,000 of shares of the Company’s common stock from time to time, at the Company’s
option. The initial sale of 721,153 shares of the Company’s common stock resulted in net proceeds
to the Company of approximately $709,000.

• On February 20, 2018 Crede Capital Group LLC (“Crede”) filed a lawsuit against the Company
claiming that the Company owed Crede $2.2 million. On March 12, 2018, the Company settled
with Crede for approximately $1.9 million and the settlement allows the Company to pay the $1.9
million over a sixteen month payment plan concluding in May 2019.

• On March 21, 2018, the Company entered into an agreement with investors of Series B and Series
C Preferred shares and warrants to convert their respective holdings into shares of the Company’s
common stock. Pursuant to the agreement, to incent such investors, the Company agreed to a
conversion price for such preferred stock and an exercise price of $0.75 per share of common
stock for such warrants and each investor agreed to convert its outstanding shares and exercise
certain amounts of warrants. As a result of this initiative the Company has substantially
restructured its equity structure, eliminating all but 47 shares of preferred stock and has removed a
significant impediment for the Company to grow its business, and as necessary, continue to raise
capital with more attractive terms. As of April 13, 2018, these transactions have resulted in net
cash proceeds to the Company of $0.2 million.

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

Results of Operations for the Years Ended December 31, 2017 and 2016

Net Sales. Net sales were as follows:

Service revenue, net
Clinical research grants
Other
Net Sales

Dollars in Thousands

Twelve Months Ended
December 31,

Change

2017

2016

1,392 $
278
53
1,723

1,723 $
—
—
1,723

(331 )
278
53
—

(19 %)
—
—
—

Net sales were flat for the year ended December 31, 2017 as compared to the same period in 2016.
As a result of the Merger, clinical research grants and other revenue increased by approximately $0.3
million in 2017 as compared to 2016. Clinical research grants are federal or state grants awarded to us to
fund salaries, fringe benefits, and the purchase of supplies and equipment for specific research and
development projects. This increase was off-set by a decrease in net service revenue. Net service revenue
decreased as a result of a decrease in patient diagnostic service revenue due to a decrease in cases
processed during the year ended December 31, 2017 as compared to the same period in 2016. We
processed 788 cases during the year ended December 31, 2017 as compared to 1,221 cases during the same
period in 2016, or a 35% decrease in cases. The decrease in volume is the result of turnover of key sales
personnel. The decrease in patient diagnostic service revenues was partially off-set by an increase in
contract diagnostic service revenue resulting from the Merger.

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 increased by $0.4 million for the year ended December 31, 2017 as compared to the same period in
2016. The increase is due to increased expenses as a result of the Merger in 2017 and increased
professional fees involved with the processing of patient tests during the year ended December 31, 2017.

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

Gross Profit

Dollars in Thousands

Twelve Months Ended
December 31,

Margin %

2017

2016

2017

2016

292 $

753

17 %

44 %

Gross margin was 17% of total net sales, for the year ended December 31, 2017, compared to 44%
of total net sales for the same period in 2016. The gross profit decreased by $0.5 million during the year
ended December 31, 2017 as compared to the same period in 2016 and was due to the increased cost of
diagnostic services discussed above.

Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees,
travel costs, facility costs and depreciation and amortization. Our operating expenses increased by $13.3
million to $15.8 million for the year ended December 31, 2017 as compared to the same period in 2016.
The increase in operating expenses reflects the increase in professional fees attributed to legal expenses
related to the Merger and increased compensation and other costs associated with the increased headcount
and additional facility resulting from the Merger. Additional increases in our general and administrative
expenses resulted from increased amortization related to acquired intangibles from the Merger and
expenses related to operating as a public company which did not exist in 2016. The increase during the year
ended December 31, 2017 also included a $9.3 million impairment of goodwill charge resulting from
impairment testing of goodwill during 2017.

Other Income (Expense). Other expense for the year ended December 31, 2017 and 2016 includes
interest expense of approximately $2.3 million and $0.5 million, respectively. The increase in interest
expense in the current year is due to $1.9 million of debt discounts and debt issuance costs that were
amortized to interest expense during 2017 related to our convertible bridge notes which were paid or
converted to common stock during the third quarter.

Also included in other income (expense) for the year ended December 31, 2017 are the following

items, each of which had no related income or expense for the year ended December 31, 2016:

• Expense of $0.2 million associated with the change in fair value of the common stock

warrant liability,

• Expense of $1.4 million in losses on extinguishment of debt and induced conversion of
convertible bridge notes primarily related to the conversion and payment of our convertible
bridge notes during the third quarter 2017,

•

Income of $2.1 million in net gain on settlement and restructuring of liability which includes
$0.9 million in gains on settlements of certain vendor liabilities and a gain of $1.2 million
from troubled debt restructurings,

• Expense of $0.6 million which resulted from recording a loss on settlement of equity

instruments, and

• Expense of $2.7 million for advisory fees related to the Merger.

Liquidity and Capital Resources

The 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 we
will realize our assets and discharge our liabilities in the ordinary course of business. We have incurred
substantial operating losses and have used cash in our operating activities for the past several years. For the
year ended December 31, 2017, we had a net loss of $20.7 million and negative working capital of $8.3
million. Our ability to continue as a going concern is dependent upon a combination of achieving our
business plan, including generating additional revenue, and raising additional financing to meet our debt
obligations and paying liabilities arising from normal business operations when they come due.

To meet our current and future obligations we have taken the following steps to capitalize the

business and successfully achieve our business plan:

• On January 8, 2018, the Company received gross proceeds of $400,000 when it entered into
an agreement with the Connecticut Department of Economic and Community Development
by which the Company received a grant of $100,000 and a loan of $300,000 with a payment
term of ten years.

• On February 8, 2018 the Company entered into an equity purchase agreement for the
purchase of up to $8,000,000 of shares of the Company’s common stock from time to time,
at the Company’s option. The initial sale of 721,153 shares of the Company’s common stock
resulted in net proceeds to the Company of approximately $709,000.

• On March 12, 2018, the Company settled an outstanding liability of approximately $1.9
million with Crede Capital Group LLC (“Crede”). The settlement allows the Company to
pay the $1.9 million over an agreed to sixteen month payment plan concluding in May 2019.
• On March 21, 2018, the Company entered into an agreement with investors of Series B and
Series C Preferred shares and warrants to convert their respective holdings into shares of the
Company’s common stock. Pursuant to the agreement, to incent such investors, the
Company agreed to a conversion price for such preferred stock and an exercise price of
$0.75 per share of common stock for such warrants and each investor agreed to convert its
outstanding shares and exercise certain amounts of warrants. As a result of this initiative the
Company has substantially restructured its equity structure, eliminating all but 47 shares of
preferred stock and has removed a significant impediment for the Company to grow its
business, and as necessary, continue to raise capital with more attractive terms. As of April
13, 2018, these transactions have resulted in net cash proceeds to the Company of $0.2
million.

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

Dollars in Thousands
2016

Change

2017

Current assets (including cash of $421 and $51, respectively)
Current liabilities
Working capital

1,742 $
10,036
(8,294 ) $

552 $
3,012
(2,460 ) $

1,190
7,024
(5,834 )

We completed the Merger on June 29, 2017 and in connection with the Merger we raised
approximately $1.2 million in gross proceeds. During the third quarter we completed an underwritten
public offering with net proceeds of approximately $5.0 million and during the fourth quarter we raised
additional funds from the sale of our Series C Preferred Stock and warrants to purchase our common stock.
Net proceeds from this offering were approximately $2.4 million. These proceeds were used to fund our
operating expenses and for payments on our debt and other liabilities. Also, during the fourth quarter of
2017, we entered into Settlement Agreements with certain Creditors pursuant to which we reduced our
liabilities by $1.2 million, we restructured the payment schedule of approximately $3.2 million in liabilities
so that they will be paid over a forty-eight month period with equal monthly installments beginning in July
2018, and we reached agreements whereby $1.9 million of liabilities will be canceled in February 2018 in
exchange for 1,814,754 shares of the Company’s common stock.

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

Analysis of Cash Flows - Years Ended December 31, 2017 and 2016

Net Change in Cash. Cash increased by $0.4 million during the year ended December 30, 2017,

compared to a decrease of $0.2 million during the year ended December 31, 2016.

Cash Flows Used in Operating Activities. The cash flows used in operating activities of $6.7
million during the year ended December 31, 2017 included a net loss of $20.7 million, a decrease in
accounts payable and accrued expenses and other liabilities of $0.5 million, an increase in accounts
receivable of $0.5 million and an increase in other assets of $0.1 million. These were partially offset non-
cash adjustments of $15.1 million. The cash flows used in operating activities in the year ended December
31, 2016 included the net loss of $2.2 million and an increase in accounts receivable of $0.3 million. These
were partially offset by an increase in accounts payable, accrued expenses and other liabilities of $1.0
million and non-cash adjustments of $0.6 million.

Cash Flows Used In Investing Activities. Cash flows used in investing activities were less than
$0.1 million and zero for the years ended December 31, 2017 and 2016, respectively. The cash used of less
than $0.1 million for the year ended December 31, 2017 included purchases of property and equipment of
$0.1 million partially offset by cash acquired as part of the Merger.

Cash Flows Provided by Financing Activities. Cash flows provided by financing activities totaled
$7.1 million for the year ended December 31, 2017, which included proceeds of $0.3 million from the
issuance of senior notes, approximately $1.3 million from the issuance of convertible notes, less than $0.1
million from the exercise of warrants and $7.8 million from the issuance of preferred stock. These proceeds
were partially offset by payments on our long-term debt of $0.8 million, payments on our convertible
bridge notes of $1.5 million, and payments of capital lease obligations and deferred financing costs of $0.1
million. Cash flows provided by financing activities during the year ended December 31, 2016 included
proceeds of $1.0 million from the issuance of convertible notes and other debt partially offset by $0.2
million of payments on our debt, capital lease obligations and for deferred financing costs.

Off-Balance Sheet Arrangements

At each of December 31, 2017 and December 31, 2016, 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

At December 31, 2017, our contractual obligations and other commitments were as follows:

Long term debt(1)
Interest(1)
Capital lease obligations(2)
Operating lease obligations(3)
Purchase obligations(4)

2018 2019 2020 2021 2022 Total
404 $ 3,416
808 $
$
21
3
163
33
817
203
664
138
431 $ 5,081

23
208
99
$ 1,051 $ 1,275 $ 1,185 $ 1,139 $

1 —
4
13
10

587 $
10
50
195
209

809 $
7
53
198
208

808 $

(1) See Note 6 - "Long-Term Debt" to our accompanying consolidated financial statements.
(2) See Note 9 - "Commitments and Contingencies" to our accompanying consolidated financial
statements.
(3) These amounts represent non-cancellable operating leases for operating facilities
(4) These amounts represent purchase commitments, including all open purchase orders

We have entered into certain operating leases and purchase commitments as part of our normal
course of business. See the accompanying consolidated financial statements and Note 9 - “Commitments

and Contingencies” in the Notes to consolidated financial statements for additional information regarding
our contractual obligations and commitments.

Critical Accounting Policies and Estimates

The following discussion and analysis of financial condition and results of operations are based
upon the Company’s consolidated financial statements, which have been prepared in conformity with
accounting principles generally accepted in the United States of America. The Company’s significant
accounting policies are more fully described in Note 2 of the notes to Consolidated Financial Statements.
Certain accounting estimates are particularly important to the understanding of the Company’s financial
position and results of operations and require the application of significant judgment by the Company’s
management and can be materially affected by changes from period to period in economic factors or
conditions that are outside the control of management. The Company’s management uses its judgment to
determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates
are based on historical operations, future business plans and projected financial results, the terms of
existing contracts, the observance of trends in the industry, information provided by customers and
information available from other outside sources, as appropriate. The following discusses the Company’s
critical accounting policies and estimates:

Revenue Recognition

Revenues for the year ended December 31, 2017 are comprised of service revenues from
diagnostic testing; 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.

Service revenues are comprised of patient diagnostic services for cancer as well as contract
diagnostic services for pharmacogenomics trials. Service revenue is recognized upon completion of the
testing process and when the diagnostic result is delivered to the ordering physician and/or customer. Net
patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors
and others for services rendered, including retroactive adjustment under reimbursement agreements with
third-party payors. Revenue under third-party payor agreements is subject to audit and retroactive
adjustment. Provisions for third-party payor settlements are provided in the period in which the related
services are rendered and adjusted in the future periods, as final settlements are determined.

Revenue from clinical research grant is recognized over time as the service is being
performed using a proportional performance method. The Company uses an "efforts based" method of
assessing performance. If the arrangement requires the performance of a specified number of similar acts
(i.e. test), then revenue is recognized in equal amounts as each act is completed.

Other revenues are comprised of the Company’s ICP technology kits sales to bio-pharma

customers and contracted project based technology evaluations.

For the year ended December 31, 2017, Service revenue represented 81% of our consolidated
revenues, the revenue attributable to clinical grants represented 16% and other revenues represented 3%.
For the year ended December 31, 2016, Service revenue represented 100% of our consolidated revenues.

Allowance for Contractual Discounts

We are reimbursed by payors for services we provide. Payments for services covered by payors
average less than billed charges. We monitor revenue and receivables from payors 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 payors. Accordingly, the total revenue and receivables reported in our financial
statements are recorded at the amounts expected to be received from these payors. 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
payor/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.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is based on estimates of losses related to receivable balances.
The risk of collection varies based upon the service, the payor (commercial health insurance and
government) and the patient’s ability to pay the amounts not reimbursed by the payor. We estimate the
allowance for doubtful accounts based upon several factors including the age of the outstanding
receivables, the historical experience of collections, adjusting for current economic conditions and, in some
cases, evaluating specific customer accounts for the ability to pay. Collection agencies are employed and
legal action is taken when we determine that taking collection actions is reasonable relative to the
probability of receiving payment on amounts owed. Management judgment is used to assess the
collectability of accounts and the ability of our customers to pay. Judgment is also used to assess trends in
collections and the effects of systems and business process changes on our expected collection rates. We
review the estimation process quarterly and make changes to the estimates as necessary. When it is
determined that a customer account is uncollectible, that balance is written off against the existing
allowance.

Accounts Receivable

Accounts Receivable results from diagnostic services provided to self-pay and insured patients,
project based testing services and clinical research. The services provide by the Company are generally
due within 30 days from the invoice date. Accounts receivable are reduced by an allowance for doubtful
accounts. In evaluating the collectability of accounts receivable, the Company analyzes and identifies
trends for each of its sources of revenue to estimate the appropriate allowance for doubtful accounts. For
receivables associated with self-pay patients, including patients with insurance and a deductible and
copayment, the Company records an allowance for doubtful accounts in the period of services on the basis
of past experience of patients unable or unwilling to pay for service fee for which they are financially
responsible. For receivables associated with services provided to patients with third-party coverage, the
Company analyzes contractually due amounts and provides an allowance, if necessary. The difference
between the standard rates and the amounts actually collected after all reasonable collection efforts have
been exhausted is charged against the allowance for doubtful accounts. Service revenues account for all
reported accounts receivable as of December 31, 2017 and 2016.

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date, based on the estimated fair value of
the award, and is recognized as expense over the grantee’s requisite vesting period on a straight-line basis.
For the purpose of valuing stock options granted to our employees, directors and officers, we use the Black-
Scholes option pricing model. We granted options to purchase an aggregate of 232,332 and zero shares of
common stock during the years ended December 31, 2017 and 2016, respectively. To determine the risk-
free interest rate, we utilized the U.S. Treasury yield curve in effect at the time of the grant with a term
consistent with the expected term of our awards. The expected term of the options granted is in accordance
with Staff Accounting Bulletins 107 and 110, and is based on the average between vesting terms and
contractual terms. The expected dividend yield reflects our current and expected future policy for dividends
on our common stock. The expected stock price volatility for our stock options was calculated by
examining the trading history for our common stock. We will continue to analyze the expected stock price
volatility and expected term assumptions and will adjust our Black-Scholes option pricing assumptions as
appropriate

Impairment of Long-Lived Assets and Goodwill

We assess the recoverability of our long-lived assets, which include property and equipment and
definite-lived intangible assets, whenever significant events or changes in circumstances indicate
impairment may have occurred. If indicators of impairment exist, projected future undiscounted cash flows
associated with the asset are compared to our carrying amount to determine whether the asset’s value is
recoverable. Any resulting impairment is recorded as a reduction in the carrying value of the related asset
in excess of fair value and a charge to operating results. For the year ended December 31, 2016, there was
no Long-Lived Assets recorded. We did not recognize any impairment charges related to long-lived assets
for the years ending December 31, 2017 and 2016.

Goodwill is not amortized, but is assessed for impairment on an annual basis or more frequently if
impairment indicators exist. We have the option to perform a qualitative assessment of goodwill to
determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying
amount, including goodwill and other intangible assets. If we were to conclude that this is the case, then we
must perform a goodwill impairment test by comparing the fair value of the reporting unit to its carrying
value. An impairment charge is recorded to the extent the reporting unit’s carrying value exceeds its fair
value, with the impairment loss recognized not to exceed the total amount of goodwill allocated to that
reporting unit. For the year ended December 31, 2017 goodwill impairment charges were $9.3 million.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2014-09, Revenue from Contracts with Customers and has subsequently issued
supplemental and/or clarifying ASUs (collectively “ASC 606”). ASC 606 outlines a five-step framework
that intends to clarify the principles for recognizing revenue and eliminate industry-specific guidance. In
addition, ASC 606 revises current disclosure requirements in an effort to help financial statement users
better understand the nature, amount, timing, and uncertainty of revenue that is recognized. ASC 606 may
be applied either retrospectively to each prior reporting period presented or use the modified retrospective
transition method with the cumulative effect of initial adoption recognized at the date of initial application.
Assessment of the new guidance is not anticipated to result in an opening balance sheet adjustment. The
Company will adopt the guidance in ASU 2017-09 as of January 1, 2018 and apply the modified
retrospective approach. The Company evaluated the impact of the adoption of this new revenue recognition
standard utilizing the five-step framework of ASC 606 for all services, that include laboratory testing
services provided to patients and customer related laboratory service contracts encompassing biomarker
testing services and clinical projects. The Company concluded that control of the laboratory testing services
is transferred to the customer at a point in time. As such, the Company shall continue to recognize revenue
for laboratory testing services at a point in time based on the delivery method (web-portal access or fax) for
patient’s laboratory report, per the contract. The Company also evaluated customer related biomarker
testing and clinical project services. The Company analyzed it’s “effort based” method of assessing
performance and concluded that it can reasonable measure progress towards satisfaction of the performance
obligation based upon the delivery of results. The Company concludes an adjustment will not be required
and a change to its current revenue recognition process and policy to adopt the new standard is not
necessary.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard amends the
recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating
leases and amends disclosure requirements associated with leasing arrangements. The new standard is
effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018.
Early adoption is permitted. The new standard must be adopted using a modified retrospective transition,
and provides for certain practical expedients. Transition will require application of the new guidance at the
beginning of the earliest comparative period presented. We are currently assessing the impact that the
adoption of this ASU will have on our consolidated financial statements.

In January 2017, FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test. It
is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted
for interim or annual goodwill impairment test performed with a measurement date after January 1, 2017.
The Company has adopted this standard and, as discussed above, performed impairment testing of goodwill
during the year ended December 31, 2017 which resulted in the Company recording a goodwill impairment
charge of $9.3 million.

a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be
accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For
freestanding equity classified financial instruments, the amendments require entities that present earnings
per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is
triggered. That effect is treated as a dividend and as a reduction of income available to common
shareholders in basic EPS. The amendments in Part II of ASU 2017-11 recharacterize the indefinite
deferral of certain provisions of Topic 480 that now are presented as pending content in the codification, to
a scope exception. Part II amendments do not have an accounting effect. The ASU 2017-11 is effective for
annual and interim periods beginning after December 15, 2018, with early adoption permitted. The
Company has early adopted this standard as of January 1, 2017 with the only impact being that the warrants
with down round provisions are classified within equity.

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 7A. 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.

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of
Precipio, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Precipio, Inc. (the “Company”) as of
December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ equity
(deficit) and cash flows for each of the two years in the period ended December 31, 2017, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016,
and the results of its operations and its cash flows for each of the two years in the period ended December
31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Explanatory Paragraph – Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will
continue as a going concern. As more fully described in Note 1, the Company has a significant working
capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations
and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company's financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements are free
of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.

/s/ Marcum LLP

Marcum LLP

We have served as the Company’s auditor since 2016.

Hartford,
April 13, 2018

PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2017 and 2016
(Dollars in thousands, except share data)

ASSETS

2017

2016

CURRENT ASSETS:

Cash
Accounts receivable, net
Inventories
Other current assets

Total current assets

PROPERTY AND EQUIPMENT, NET

OTHER ASSETS:
Goodwill
Intangibles, net
Other assets

Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

CURRENT LIABILITIES:

Current maturities of long-term debt
Convertible bridge notes, less debt discounts and debt issuance costs
Accounts payable
Current maturities of capital leases
Accrued expenses
Deferred revenue
Other current liabilities

Total current liabilities
LONG TERM LIABILITIES:

Long-term debt, less current maturities and discounts
Common stock warrant liability
Capital leases, less current maturities
Deferred tax liability
Other long-term liabilities
Total liabilities

STOCKHOLDERS’ EQUITY (DEFICIT):

Preferred stock - $0.01 par value, 15,000,000 and 1,294,434 shares
authorized at December 31, 2017 and December 31, 2016, respectively,
4,935 and 780,105 shares issued and outstanding at December 31, 2017
and December 31, 2016, respectively
Common stock, $0.01 par value, 150,000,000 and 1,806,850 shares
authorized at December 31, 2017 and December 31, 2016, respectively,
10,196,620 and 449,175 shares issued and outstanding at December 31,
2017 and December 31, 2016, respectively
Additional paid-in capital
Accumulated deficit

Total stockholders’ equity (deficit)

421 $
730
161
430
1,742

353

4,685
20,458
22
27,260 $

587 $
—
5,103
50
1,248
66
2,982
10,036

2,829
841
113
349
67
14,235

51
388
100
13
552

280

—
—
10
842

395
695
1,084
46
700
92
—
3,012

4,127
—
163
—
—
7,302

—

102
44,465
(31,542 )
13,025
27,260 $

4
4,376
(10,848 )
(6,460 )
842

See notes to consolidated financial statements.

PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2017 and 2016
(Dollars in thousands, except per share data)

SALES

Service revenue, net
Clinical research grants
Other
Revenue, net of contractual allowances and adjustments
less allowance for doubtful accounts
Net sales
COST OF SALES
Service revenues
Clinical research grants
Total cost of sales

Gross profit

OPERATING EXPENSES:
Operating expenses
Impairment of goodwill

TOTAL OPERATING EXPENSES
OPERATING LOSS
OTHER INCOME (EXPENSE):

Interest expense, net
Warrant revaluation
Loss on extinguishment of debt and induced conversion of convertible
bridge notes
Gain on settlement of liability, net
Gain on troubled debt restructuring
Loss on settlement of equity instruments
Merger advisory fees
Other, net

LOSS BEFORE INCOME TAXES
INCOME TAX EXPENSE
NET LOSS

2017

2016

1,702 $
278
53
2,033
(310 )
1,723

1,317
114
1,431
292

2,101
—
—
2,101
(378 )
1,723

970
—
970
753

6,488
9,315
15,803
(15,511 )

2,465
—
2,465
(1,712 )

(2,324 )
(226 )

(518 )
—

(1,391 )
877
1,181
(624 )
(2,676 )
—
(5,183 )
(20,694 )
—
(20,694 )

—
—
—
—
—
3
(515 )
(2,227 )
—
(2,227 )

DEEMED DIVIDENDS ON ISSUANCE OR EXCHANGE OF PREFERRED
UNITS
PREFERRED DIVIDENDS
TOTAL DIVIDENDS
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS

BASIC AND DILUTED LOSS PER COMMON SHARE
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF
COMMON STOCK OUTSTANDING

(12,431 )
(84 )
(12,515 )
(33,209 ) $

(1,422 )
(433 )
(1,855 )
(4,082 )

(7.16 ) $

(9.44 )

4,639,226

432,582

See notes to consolidated financial statements.

PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
For the Years Ended December 31, 2017 and 2016
(Dollars in thousands)

Preferred Stock

Common Stock

Balance, January 1, 2016

Net loss
Preferred dividends
Deemed dividends on exchange
of preferred
Exchange of preferred for notes and
warrants
Non-cash stock-based compensation
and vesting of restricted units

Balance, December 31, 2016

Net loss
Conversion of warrants into
preferred stock
Conversion of warrants into
common stock
Conversion of preferred stock into
common stock
Conversion of Senior and Junior
debt into preferred stock and
common stock
Conversion of bridge notes into
common stock
Issuance of common stock for
consulting services in connection
with the merger
Shares issued in connection with
business combination
Issuance of preferred stock
Issuance of warrants in conjunction
with issuance of side agreement
Issuance of warrants in connection
with restructuring of liability
Issuance of warrants in connection
with note default
Beneficial conversion feature on
issuance of bridge notes
Non-cash stock-based compensation
and vesting of restricted units

Balance, December 31, 2017

Outstanding
Shares
1,263,429 $
—
—

Par
Value

Outstanding
Shares

13
—
—

422,803 $
—
—

Par
Value
4 $
—
—

Additional
Paid-in
Capital
4,652 $
—
—

Accumulated
Deficit

Total

(6,766 ) $
(2,227 )
(433 )

(2,097 )
(2,227 )
(433 )

—

1,422

(1,422 )

—

(483,324 )

(5 )

—

(1,710 )

—

(1,715 )

—
780,105
—

—
8
—

26,372
449,175
—

—
4
—

12
4,376
—

12
—
(10,848 )
(6,460 )
(20,694 ) (20,694 )

8,542

—

— 1,958,166

(20 )

(2,527,879 )

(25 ) 4,217,408

(17 )

—

802,920

8 1,414,700

4,749

—

4,771

—

515,638

2,732

—

2,738

—

321,821

2,186

—

2,189

802,925
138,322

8 1,255,119
—
1

12
—

20,078
7,783

— 20,098
7,784
—

—

487

—

487

—

159

—

159

—

1,856

—

1,856

—
4,935 $

—
64,593
— 10,196,620 $

1
102 $

56
44,465 $

—

57
(31,542 ) $ 13,025

See notes to consolidated financial statements.

PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2017 and 2016
(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

Adjustments to reconcile net loss to net cash flows used in operating
activities:

2017

2016

(20,694 ) $

(2,227 )

Depreciation and amortization
Amortization of deferred financing costs and debt discount
Loss on extinguishment of debt and induced conversion of
convertible bridge notes
Gain on settlement of liability, net
Gain on settlement of troubled debt
Loss on settlement of equity instrument
Stock-based compensation and change in liability of stock
appreciation rights
Merger advisory fees
Impairment of goodwill
Provision for losses on doubtful accounts
Capitalized PIK interest on convertible bridge notes
Warrant revaluation

Changes in operating assets and liabilities:

Accounts receivable
Inventories
Other assets
Accounts payable
Accrued expenses and other liabilities
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:

Cash acquired in business combination
Purchase of property and equipment

Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations
Issuance of preferred stock
Payment of debt issuance costs
Proceeds from exercise of warrants
Proceeds from long-term debt
Proceeds from convertible bridge notes
Principal payments on convertible bridge notes
Principal payments on long-term debt

Net cash flows provided by financing activities

NET CHANGE IN CASH
CASH AT BEGINNING OF PERIOD
CASH AT END OF PERIOD

743
1,898

1,391
(877 )
(1,181 )
624

49
2,676
9,315
310
—
226

(495 )
(46 )
(99 )
500
(1,030 )
(6,690 )

101
(143 )
(42 )

(46 )
7,784
(25 )
25
315
1,365
(1,500 )
(816 )
7,102
370
51
421 $

112
33

—
—
—
—

12
—
—
378
85
—

(310 )
(17 )
(8 )
344
639
(959 )

—
—
—

(41 )
—
(10 )
—
525
455
—
(154 )
775
(184 )
235
51

SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid during the period for interest

107 $

126

SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION

Purchases of equipment financed through capital lease
Preferred unit dividend financed through exchange agreement
Convertible bridge notes exchanged for long-term debt
Series A and B preferred exchanged for long-term debt
Conversion of bridges loans plus interest into common stock
Conversion of senior and junior notes plus interest into preferred stock and
common stock
Deferred debt issuance cost
Beneficial conversion feature on issuance of bridge notes
Accrued merger cost
Issuance of warrants in conjunction with issuance of side agreement
Issuance of warrants in conjunction with convertible promissory note waiver
Issuance of warrants in conjunction with restructuring of liability
Purchases of equipment financed through accounts payable
Prepaid insurance financed with loan

—
—
—
—
1,787

4,771
64
1,856
10
487
15
159
2
183

49
433
1,120
1,715
—

—
—
—
—
—
—
—
—
—

See notes to consolidated financial statements.

PRECIPIO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016

BUSINESS DESCRIPTION

Business Description.

Precipio, Inc., and Subsidiary, (“we”, “us”, “our”, the “Company” or “Precipio”) is a cancer
diagnostics company providing diagnostic products and services to the oncology market. We have built and
continue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the
intellect, expertise and technology developed within academic institutions and delivering quality diagnostic
information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located
in New Haven, Connecticut and have partnered with the Yale School of Medicine to capture the expertise,
experience and technologies developed within academia so that we can provide a better standard of cancer
diagnostics and solve the growing problem of cancer misdiagnosis. We also operate a research and
development facility in Omaha, Nebraska which will focus on further development of ICE-COLD-PCR
(“ICP”), the patented technology which was exclusively licensed by us from Dana-Farber Cancer Institute,
Inc. (“Dana-Farber”) at Harvard University (“Harvard”). The research and development center will focus
on the development of this technology, which we believe will enable us to commercialize other
technologies developed by our current and future academic partners. Our platform connects patients,
physicians and diagnostic experts residing within academic institutions. Launched in 2017, the platform
facilitates the following relationships:

•

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

• Cost: surgical procedures are usually performed in a costly hospital environment. For example,

according to a recent study the mean cost of lung biopsies is greater than $14,000; surgery also
involves hospitalization and recovery time.

•

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

• Risk: patient health may not permit undergoing an invasive surgery; therefore a biopsy cannot be

obtained at all.

•

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

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

•

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

Merger Transaction

On June 29, 2017, the Company (then known as “Transgenomic, Inc.”, or “Transgenomic”),
completed a reverse merger (the “Merger”) with Precipio Diagnostics, LLC, a privately held Delaware
limited liability company (“Precipio Diagnostics”) in accordance with the terms of the Agreement and Plan
of Merger (the “Merger Agreement”), dated October 12, 2016, as amended on February 2, 2017 and
June 29, 2017, by and among Transgenomic, Precipio Diagnostics and New Haven Labs Inc. (“Merger
Sub”) a wholly-owned subsidiary of Transgenomic. Pursuant to the Merger Agreement, Merger Sub
merged with and into Precipio Diagnostics, with Precipio Diagnostics surviving the Merger as a wholly-
owned subsidiary of the combined company (See Note 3 - Reverse Merger). In connection with the Merger,
the Company changed its name from Transgenomic, Inc. to Precipio, Inc., relisted its common stock under
Precipio, Inc. on the National Association of Securities Dealers Automated Quotations (“NASDAQ”), and
effected a 1-for-30 reverse stock split of its common stock. Upon the consummation of the Merger, the

historical financial statements of Precipio Diagnostics become the Company's historical financial
statements. Accordingly, the historical financial statements of Precipio Diagnostics are included in the
comparative prior periods. As a result of the Merger, historical preferred stock, common stock, restricted
units, warrants and additional paid-in capital, including share and per share amounts, have been
retroactively adjusted to reflect the equity structure of the combined company, including the effect of the
Merger exchange ratio. Pursuant to the Merger Agreement, each outstanding unit of Precipio Diagnostics
was exchanged for 10.2502 pre-reverse stock split shares of Company Common Stock (the “Exchange
Ratio”). See Note 3 - Reverse Merger for additional discussion of the Merger.

Going Concern.

To meet its current and future obligations the Company has taken the following steps to capitalize

the business and successfully achieve its business plan:

• On March 21, 2018, the Company entered into an agreement with investors of Series B and Series
C Preferred shares and warrants to convert their respective holdings into shares of the Company’s
common stock. Pursuant to the agreement, to incent such investors, the Company agreed to a
conversion price for such preferred stock and an exercise price of $0.75 per share of common
stock for such warrants and each investor agreed to convert its outstanding shares and exercise
certain amounts of warrants. As a result of this initiative the Company has substantially
restructured its equity structure, eliminating all but 47 shares of preferred stock. As of April 13,
2018, these transactions have resulted in net cash proceeds to the Company of $0.2 million.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.

The consolidated financial statements include the accounts of Precipio, Inc. and our wholly owned

subsidiary. All inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates.

The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of net sales and expenses during
the reporting period. The most significant estimates and assumptions with regard to these consolidated
financial statements relate to the allowance for doubtful accounts, assumptions used within the fair value of
debt and equity transactions, contractual allowances and related impairments. These assumptions require
considerable judgment by management. Actual results could differ from the estimates and assumptions
used in preparing these consolidated financial statements.

Risks and Uncertainties.

Certain risks and uncertainties are inherent in our day-to-day operations and in the process of
preparing our financial statements. The more significant of those risks are presented below and throughout
the notes to the consolidated financial statements.

The Company operates in the healthcare industry which is subject to numerous laws and
regulations of federal, state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government healthcare program
participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and
abuse. Government activity has increased with respect to investigations and allegations concerning possible
violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and
regulations could result in expulsion from government healthcare programs together with the imposition of
significant fines and penalties, as well as significant repayments for patient services previously billed.
Management believes that the Company is in compliance with fraud and abuse regulations, as well as other
applicable government laws and regulations. While no material regulatory inquiries have been made,
compliance with such laws and regulations can be subject to future government review and interpretation as
well as regulatory actions unknown or unasserted at this time.

Fair Value.

Unless otherwise specified, book value approximates fair value. The common stock warrant

liability is recorded at fair value. See Note 12 - Fair Value for additional information.

Other Current Assets.

Other current assets of $0.4 million as of December 31, 2017 include prepaid assets of $0.1
million, prepaid insurance of $0.2 million and other receivables of $0.1 million. As of December 31, 2016,
other current assets consisted primarily of prepaid assets.

Concentrations of Risk.

From time to time, we may maintain a cash position with financial institutions in amounts that
exceed Federal Deposit Insurance Corporation insured limits of up to $250,000 per depositor per financial
institution. We have not experienced any losses on such accounts as of December 31, 2017.

Service companies in the health care industry typically grant credit without collateral to patients.
The majority of these patients are insured under third-party insurance agreements. The services provided by
the Company are routinely billed utilizing the Current Procedural Terminology (CPT) code set designed to
communicate uniform information about medical services and procedures among physicians, coders,
patients, accreditation organizations, and payers for administrative, financial, and analytical purposes. CPT
codes are currently identified by the Centers for Medicare and Medicaid Services and third-party payors.
The Company utilizes CPT codes for Pathology and Laboratory Services contained within codes 80000-
89398.

Inventories.

Inventories consist of laboratory supplies and are valued at cost (determined on an average cost
basis, which approximates the first-in, first-out method) or net realizable value, whichever is lower. We
evaluate inventory for items that are slow moving or obsolete and record an appropriate reserve for
obsolescence if needed. We determined that no allowance for slow moving or obsolete inventory was
necessary at December 31, 2017 and 2016.

Property and Equipment, net.

Property and equipment are carried at cost, net of accumulated depreciation and amortization.
Expenditures for maintenance and repairs are expensed as incurred. Depreciation and amortization are
computed by the straight-line method over the estimated useful lives of the related assets as follows:

Furniture and fixtures
Laboratory equipment
Computer equipment and software

Equipment under capital leases

5 to 7 years
3 to 9 years
3 to 7 years
5
10
to
years

For assets sold or otherwise disposed of, the cost and related accumulated depreciation and
amortization are removed from the accounts, and any related gain or loss is reflected in operations for the
period. Expenditures for major betterments that extend the useful lives of property and equipment are
capitalized.

Goodwill and Intangible Assets.

As a result of the Merger, the Company recorded goodwill and intangible assets as part of its

allocation of the purchase consideration. See Note 3 - Reverse Merger for the amounts recorded.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of
the business acquired. See Note 3 - Reverse Merger for the amount recorded. Goodwill is tested for
impairment annually. We perform this impairment analysis during the fourth quarter of each year or when a
significant event occurs that may indicate that the assets might be impaired. In assessing goodwill for
impairment, the Company has the option to assess qualitative factors to determine whether events or
circumstances indicate that it is not more likely than not that the fair value of a reporting unit is less than its
carrying amount, for which the consolidated Company is considered one reporting unit. If this is the case,
then performing the quantitative goodwill impairment test is unnecessary. An entity can choose not to
perform a qualitative assessment for any or all of its reporting units, and proceed directly to the use of the
quantitative impairment test. In assessing qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying amount, the relevant events and circumstances
that may impact the fair value and the carrying amount of a reporting unit are assessed. The identification
of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying
amount involve significant judgments by management. These judgments include the consideration of
macroeconomic conditions, industry and market considerations, cost factors, overall financial performance,
events which are specific to the company, and trends in the market price of our common stock. Each factor
is assessed to determine whether it impacts the impairment test positively or negatively, and the magnitude
of any such impact. During the year ended December 31, 2017, the Company experienced a decline in its
share price and a significant reduction in its market capitalization, as such the Company determined that an
assessment of goodwill should be performed using the qualitative approach described above. Based on the
qualitative assessment, the Company concluded that it was more likely than not that the fair value of the
Company was less than its carry value. While there were positive qualitative factors discovered during the
qualitative analysis, the instability of the market price of the Company’s common stock and the decline in
revenues were significant adverse factors that directed a full assessment. As part of its analysis, the
Company considered triggering events and compared its fair value with its carrying value. The analysis of
the fair value of the Company involved using the market capitalization and the discounted cash flow model.
Based on the analysis, the Company concluded that its carrying value exceeded its fair value and goodwill
impairment in the amount of $9.3 million was recorded for the year ended December 31, 2017.

Intangibles

We review our amortizable long-lived assets for impairment annually or whenever events indicate
that the carrying amount of the asset (group) may not be recoverable. An impairment loss may be needed if
the sum of the future undiscounted cash flows is less than the carrying amount of the asset (group). The
amount of the loss would be determined by comparing the fair value of the asset to the carrying amount of
the asset (group). There were no impairment charges during the year ended December 31, 2017.

In-process research and development (“IPR&D”) represents the fair value assigned to research and
development assets that were not fully developed at the date of the Merger. Until the IPR&D projects are
completed, the assets are accounted for as indefinite-lived intangible assets and subject to impairment
testing. For the year ended December 31, 2017, there was no impairment of IPR&D.

Debt Issuance Costs and Debt Discounts.

Debt issuance costs and debt discounts are being amortized over the lives of the related financings
on a basis that approximates the effective interest method. Both are presented as a reduction of the related
debt in the accompanying balance sheets. Deferred issuance costs increased by $1.8 million due to debt
issuance costs and debt discounts recorded in connection with the issuance of convertible bridge notes (see
Note 7 –Convertible Bridge Notes for further information). Net debt issuance costs and debt discounts were
zero and $65,048 at December 31, 2017 and 2016, respectively (net of accumulated amortization of zero
and $87,342, respectively). During the year ended December 31, 2017, the convertible bridge notes were
either extinguished through cash payments or converted to shares of the Company’s common stock. Upon
the payments and conversions, all remaining debt discounts and debt issuance costs associated with the
conversions were fully amortized to interest expense and debt discounts and debt issuance costs associated
with the portion paid in cash were amortized to interest expense up through the payment date (see Note 7 –
Convertible Bridge Notes for further discussion). Amortization expense was $1.9 million and $32,662 for
the years ended December 31, 2017 and 2016, respectively.

Stock-Based Compensation.

All stock-based awards to date have exercise prices equal to the market price of our common stock
on the date of grant and have ten-year contractual terms. Stock-based compensation cost is based on the fair
value of the portion of stock-based awards that is ultimately expected to vest. The Company utilizes the
Black-Scholes option pricing model for determining the estimated fair value for stock-based awards.
Unvested awards as of December 31, 2017 had vesting periods of up to four years from the date of grant.
None of the awards outstanding at December 31, 2017 are subject to performance or market-based vesting
conditions.

Net Sales Recognition.

Revenue is realized and earned when all of the following criteria are met:
Persuasive evidence of an arrangement exists;

•
• Delivery has occurred or services have been rendered;
•
• Collectability is reasonably assured.

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

We primarily recognize revenue for diagnostic services upon completion of the testing process.
Patient diagnostic service revenue is reported at the estimated net realizable amounts from patients, third-
party payors and others for services rendered, including retroactive adjustment under reimbursement
agreements with third-party payors. Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for third-party payor settlements are provided in the period in which the

related services are rendered and adjusted in the future periods, as final settlements are determined. We also
perform contract diagnostic services on a project by project basis as well as clinical research projects
sponsored by federal and state agencies. When we receive payment in advance, we initially defer the
revenue and recognize it when we deliver the service. These projects typically do not extend beyond one
year.

Deferred net sales included in the balance sheet as deferred revenue was less than $0.1 million as

of December 31, 2017 and 2016.

Taxes collected from customers and remitted to government agencies for specific net sales

producing transactions are recorded net with no effect on the income statement.

Accounts Receivable

Accounts Receivable result from diagnostic services provided to self-pay and insured patients,
project based testing services and clinical research. The payment for services provide by the Company are
generally due within 30 days from the invoice date. Accounts receivable are reduced by an allowance for
doubtful accounts. In evaluating the collectability of accounts receivable, the Company analyzes and
identifies trends for each of its sources of revenue to estimate the appropriate allowance for doubtful
accounts. For receivables associated with self-pay patients, including patients with insurance and a
deductible and copayment, the Company records an allowance for doubtful accounts in the period of
services on the basis of past experience of patients unable or unwilling to pay for service fee for which they
are financially responsible. For receivables associated with services provided to patients with third-party
coverage, the Company analyzes contractually due amounts and provides an allowance, if necessary. The
difference between the standard rates and the amounts actually collected after all reasonable collection
efforts have been exhausted is charged against the allowance for doubtful accounts.

Presentation of Insurance Claims and Related Insurance Recoveries.

The Company accounts for its insurance claims and related insurance recoveries at their gross
values as standards for health care entities do not allow the Company to net insurance recoveries against the
related claim liabilities. There were no insurance claims or insurance recoveries recorded during the years
ended December 31, 2017 and 2016.

Advertising Costs.

Advertising costs are expensed as incurred. Advertising costs charged to operations totaled $8,300

in 2017 and $12,900 in 2016.

Research and Development Costs.

All costs associated with internal research and development are expensed as incurred. These costs
include salaries and employee related expenses, operating supplies and facility-related expenses. Research
and development costs charged to operations totaled $0.5 million and zero for the years ended December
31, 2017 and 2016, respectively.

Income Taxes.

In 2016, Precipio Diagnostics was organized as a limited liability company and operated under the
default classification as a partnership until July 31, 2016. Effective August 1, 2016, Precipio Diagnostics
elected to be treated as a corporation for tax purposes and as such, a net deferred tax asset, prior to a
valuation allowance was created. The Company calculated an income tax provision for the remainder of the
year. Prior to August 1, 2016, income tax expense or benefits were calculated at the members’ level.

Deferred tax assets and liabilities are determined based on the differences between the financial
reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in
effect in the year the differences are expected to reverse. The effect on the deferred tax assets and liabilities
of a change in tax rates is recognized in the period when the change in tax rates is enacted.

A valuation allowance is established when it is determined that it is more likely than not that some
portion or all of the deferred tax assets will not be realized. A full valuation allowance has been applied
against the Company’s net deferred tax assets as of December 31, 2017 and 2016, due to projected losses
and because it is not more likely than not that the Company will realize future benefits associated with
these deferred tax assets.

Management’s conclusions regarding uncertain tax positions may be subject to review and
adjustment at a later date based upon ongoing analysis of, or changes in tax laws, regulations and
interpretations thereof as well as other factors. The Company’s policy is to record interest and penalties
directly related to income taxes as income tax expense in the accompanying consolidated statements of
operations, of which such amounts were immaterial for the years ended December 31, 2017 and 2016.

Common Stock Warrants.

The Company classifies the issuance of common stock warrants as equity any contracts that
(i) require physical settlement or net-stock settlement or (ii) gives the Company a choice of net-cash
settlement or settlement in its own stocks (physical settlement or net-stock settlement). The Company
classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to
net-cash settle the contract if an event occurs and if that event is outside of the Company’s control), or
(ii) gives the counterparty a choice of net-cash settlement or settlement in stock (physical settlement or net-
stock settlement).

Certain of our issued and outstanding warrants to purchase common stock do not qualify to be
treated as equity and accordingly, are recorded as a liability (“Common Stock Warrant Liability”). We are
required to present these instruments at fair value at each reporting date and any changes in fair values are
recorded as an adjustment to earnings.

Beneficial Conversion Features.

The intrinsic value of a beneficial conversion feature (“BCF”) inherent to a convertible note
payable, which is not bifurcated and accounted for separately from the convertible note payable and may
not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This
discount is amortized over the period from the date of issuance to the first conversion date using the
effective interest method. If the note payable is retired prior to the end of its contractual term, the
unamortized discount is expensed in the period of retirement to interest expense. In general, the BCF is
measured by comparing the effective conversion price, after considering the relative fair value of
detachable instruments included in the financing transaction, if any, to the fair value of the common shares
at the commitment date to be received upon conversion.

Deemed dividends are also recorded for the intrinsic value of conversion options embedded in
preferred shares based upon the differences between the fair value of the underlying common stock at the
commitment date of the transaction and the effective conversion price embedded in the preferred shares.
When the preferred shares are non-redeemable the BCF is fully amortized into additional paid-in capital
and preferred discount. If the preferred shares are redeemable, the discount is amortized from the
commitment date to the first conversion date.

Loss Per Share.

Basic loss per share is calculated based on the weighted-average number of common shares
outstanding during each period. Diluted loss per share includes shares issuable upon exercise of outstanding
stock options, warrants or conversion rights that have exercise or conversion prices below the market value
of our common stock. Options, warrants and conversion rights pertaining to 9,960,890 and 2,754,593

shares of our common stock have been excluded from the computation of diluted loss per share at
December 31, 2017 and 2016, respectively, because the effect is anti-dilutive due to the net loss.

The following table summarizes the outstanding securities not included in the computation of

diluted net loss per share:

Stock options
Warrants
Preferred stock
Convertible notes
Total

December 31,

2017

236,484
6,197,681
3,525,000
1,725
9,960,890

2016

3,430
1,971,058
780,105
—
2,754,593

Recent Accounting Pronouncements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting. The new standard simplifies several
aspects related to the accounting for share-based payment transactions, including the accounting for income
taxes, statutory tax withholding requirements, forfeitures and classification on the statement of cash flows.
This guidance is effective for fiscal years and interim periods within those fiscal years beginning after
December 15, 2016. The Company adopted ASU No. 2016-09 as of January 1, 2017. The adoption of this
guidance does not have a material effect on the Company’s financial position and results of operations.

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

In January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying
the Definition of a Business. ASU No. 2017-01 adds guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new
guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years. The Company adopted the new guidance on January 1, 2018, and will apply it to all applicable
transactions after the adoption date. The Company does not believe ASU No. 2017-01 will have a material
effect on its financial position and results of operations.

In May 2017, the FASB issued ASU 2017-09 “Compensation – Stock Compensation (Topic 718):
Scope of Modification Accounting”, which provides clarity and reduces both diversity in practice and cost
and complexity when applying guidance in Topic 718. This amendment provides guidance about which
changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718. The amendments are effective for all entities for annual periods, and interim
periods within those periods, beginning after December 15, 2017. The Company does not believe ASU No.
2017-09 will have a material effect on its financial position and results of operations.

In July 2017, FASB issued ASU No. 2017-11, Earning Per Share (Topic 260), Distinguishing
Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815), which was issued in two
parts, Part I, Accounting for Certain Financial Instruments with Down Round Features and Part II,
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain
Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.
Part I of ASC No. 2017-11 addresses the classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When determining whether certain financial
instruments should be classified as liabilities or equity instruments, a down round feature no longer
precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock.
The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result,
a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be
accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For
freestanding equity classified financial instruments, the amendments require entities that present earnings
per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is
triggered. That effect is treated as a dividend and as a reduction of income available to common
shareholders in basic EPS. The amendments in Part II of ASU 2017-11 recharacterize the indefinite
deferral of certain provisions of Topic 480 that now are presented as pending content in the codification, to
a scope exception. Part II amendments do not have an accounting effect. The ASU 2017-11 is effective for
annual and interim periods beginning after December 15, 2018, with early adoption permitted. The
Company has early adopted this standard as of January 1, 2017 with the only impact being that the warrants
with down round provisions are classified within equity. (See Note 7 - Convertible Bridge Notes and Note
11 - Stockholders' Equity).

REVERSE MERGER

On June 29, 2017 (the “Closing Date”), the Company completed the Merger with Precipio
Diagnostics, in accordance with the terms of the Merger Agreement. On the Closing Date, the outstanding
common and preferred units of Precipio Diagnostics and certain debt of Precipio Diagnostics were

converted into (i) 5,352,847 shares of Precipio common stock, together with cash in lieu of fractional units,
and (ii) 802,920 shares of Precipio preferred stock with an aggregate face amount equal to $3 million. Upon
the consummation of the Merger, the historical financial statements of Precipio Diagnostics became the
Company’s historical financial statements. Accordingly, the historical financial statements of Precipio
Diagnostics as of and for the year ended December 31, 2016 are included herein.

In connection with the Merger, on the Closing Date, Precipio also issued promissory notes and

shares of Precipio preferred and common stock in a number of transactions, whereby:

•

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

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

Precipio issued 107,056 shares of Precipio preferred stock to certain investors in exchange for
$400,000 in a private placement. Precipio also completed the sale of an aggregate of $800,000
of promissory notes pursuant to a securities purchase agreement.

Purchase Consideration

The estimated purchase consideration based on the value of the equity of Transgenomic, the

accounting acquiree, is as follows:

(dollars in thousands)
Legacy Transgenomic common stock
Fair value of preferred stock converted to common stock
Fair value of debt converted to common stock
Fair value of debt converted to preferred stock
Fair value of existing bridge notes
Fair value of warrants
Purchase consideration

6,088
49
2,398
9,796
1,275
1,996
$ 21,602

In estimating the purchase consideration above, Transgenomic used its closing stock price of
$6.80 as of the Closing Date. Transgenomic had 895,334 common shares outstanding prior to the Merger.
In connection with the Merger, Transgenomic preferred stock converted into 7,155 shares of Precipio
common stock and certain of Transgenomic debt and accrued interest converted into 352,630 shares of
Precipio common stock and 802,925 shares of Precipio preferred stock, face value $3.0 million with an 8%
annual dividend. At the Closing Date, the preferred stock had a fair value of $12.20 per share.

Allocation of Purchase Consideration

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

(dollars in thousands)
Current and other assets
Property and equipment
Goodwill
Other intangible assets(1)
Total assets
Current liabilities
Other liabilities
Total liabilities
Net assets acquired

(1) Other intangible assets consist of:

419
29
14,000
21,100
35,548
13,423
523
13,946
$ 21,602

(dollars in thousands)
Acquired technology
Customer relationships
Non-compete agreements
Trademark and trade name
Backlog
In-process research and development
Total intangibles

$ 18,990
250
30
40
200
1,590
$ 21,100

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

Unaudited pro forma information

The operating results of Transgenomic for the period after the Closing Date to December 31, 2017 have
been included in the Company's consolidated financial statements as of and for the year ended December
31, 2017.

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

Dollars in thousands, except per share amounts

Net sales
Net loss available to common stockholders
Loss per common share

PROPERTY AND EQUIPMENT

For the Years ended December 31,

2017

2016

2,687 $
(37,389 )
(4.95 ) $

3,280
(11,215 )
(1.70 )

A summary of property and equipment at December 31, 2017 and 2016 is as follows:

Furniture and fixtures
Laboratory equipment
Computer equipment and software
Equipment under capital leases
Construction in process

Less—accumulated depreciation and amortization

Total

2017

2016

9 $
181
307
296
115
908
(555 )
353 $

9
153
275
296
—
733
(453 )
280

Depreciation expense was approximately $0.1 million for both the years ended December 31,

2017 and 2016.

Depreciation expense during each year includes depreciation related to equipment acquired under

capital leases.

INTANGIBLES

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

Technology
Customer relationships
Backlog
Covenants not to compete
Trademark
IPR&D

Technology
Customer relationships
Backlog
Covenants not to compete
Trademark

Dollars in Thousands
December 31, 2017
Accumulated
Amortization

Net Book
Value

Cost
$ 18,990 $
250
200
30
40
1,590
$ 21,100 $

42
100
15
10
—

475 $ 18,515
208
100
15
30
1,590
642 $ 20,458

Estimated Useful Life
20 years
3 years
1 year
1 year
2 years

Until our in-process research and development projects are completed, the assets are accounted for
as indefinite-lived intangible assets and subject to impairment testing. For the year ended December 31,
2017, there was no impairment of IPR&D.

Amortization expense for intangible assets was $0.6 million during the year ended December 31,
2017. Amortization expense for intangible assets is expected to be $1.2 million, $1.0 million, $1.0 million,
$0.9 million and $0.9 million for each of the years ending December 31, 2018, 2019, 2020, 2021 and 2022,
respectively.

LONG-TERM DEBT

Long-term debt consists of the following:

Senior Notes
Senior Note debt issuance costs
Junior Notes
Connecticut Innovations - line of credit
Department of Economic and Community Development
(DECD)
DECD debt issuance costs
Webster Bank
Webster Bank debt discounts and issuance costs
Secured debt obligations
Financed insurance loan
Total long-term debt
Current portion of long-term debt
Long-term debt, net of current maturities

Senior and Junior Notes

Dollars in Thousands
December 31, 2017 December 31, 2016
3,270
— $
$
(9 )
—
584
—
162
—

—
—
—
—
3,233
183
3,416
(587 )
2,829 $

243
(30 )
328
(26 )
—
—
4,522
(395 )
4,127

During 2016, the Company raised $525,000 from members through the issuance of senior notes
which accrue interest at a rate of 12% and were payable at the sooner of the closing of a qualified public
offering, as outlined in the note agreement, or five years from date of issuance.

Also during 2016, the Company restructured equity through a redemption and exchange
agreement by exchanging Member Equity comprised of Series A and Series B Convertible Preferred Units
in the amount of $2,147,716 (members’ initial investment of $1,715,000, plus declared dividends on these
preferred units of $432,716), and Convertible Bridge Notes of $1,120,000, plus accrued interest of $61,073
for new senior notes of $2,744,968 (“Senior Notes”) and new junior notes of $583,821 (“Junior Notes”).
The Senior and Junior Notes accrued interest at a rate of 12% and 15%, respectively, and had maturity
dates ranging from March 2021 to September 2021, or earlier based on certain qualifying events as outlined
in the note agreements.

During the year ended December 31, 2017, prior to the Merger, the Company raised $315,000
from members through the issuance of Senior Notes at a rate of 12% interest that were payable at the
sooner of the closing of a qualified public offering, as outlined in the note agreement, or five years from
date of issuance.

On the Closing Date of the Merger, the outstanding balance of $3,584,968 in Senior Notes and
$583,821 in Junior Notes, plus accrued interest of $602,373, were converted into 802,920 shares of
Precipio preferred stock and 1,414,700 shares of Precipio common stock. There were no Senior or Junior
Notes outstanding at December 31, 2017.

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

Connecticut Innovations, Incorporated

The Company entered into a line of credit on April 1, 2012 with Connecticut Innovations,
Incorporated (Connecticut Innovations), an entity affiliated with a director of the Company, for up to
$500,000 with interest paid monthly at 8%, due on September 1, 2018. Principal and interest payments
began February 1, 2013 and ranged from $7,436 to $12,206 until September 2016, when the Company
entered into a forbearance agreement to 1) defer monthly principal payments until October 2017 and 2)
make interest-only payments totaling $1,041 per month through October 2017. Pursuant to the forbearance
agreement, the Company was also restricted from any additional borrowings under the line of credit. The
line was secured by substantially all of the Company’s assets.

In connection with the Merger, the Company paid in full its loan obligations with Connecticut
Innovations. The outstanding balance was zero and $162,066 as of December 31, 2017 and 2016,
respectively.

Department of Economic and Community Development.

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

Webster Bank.

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

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

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

During the year ended December 31, 2017, the Company incurred a loss on extinguishment of
debt in the approximate amount of $53,000, related to the extinguishment of the Connecticut Innovations,
DECD and Webster Bank loans.

Secured Debt Obligations

In the fourth quarter of 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 warrants, with a fair value of
approximately $0.2 million, to purchase shares of the Company’s common stock. As a result of the
Settlement Agreements, the Company recorded a gain on troubled debt restructuring of $1.2 million and a
loss on extinguishment of liability of $0.2 million.

The Debt Obligations were restructured as follows:
into a scheduled
• The Company entered

long-term debt repayment agreement of
approximately $3.2 million, which includes interest of approximately $0.6 million, to be paid
in forty-eight equal monthly installments beginning in July 2018 (the “Secured Debt
Obligations”).

• Debt Obligations of $1.9 million were canceled in exchange for 1,814,754 shares of the
Company’s common stock with a weighted average price per share of $1.04 (the “Settlement

Common Shares”). The stock was issued in February 2018.

• Warrants to purchase 108,112 shares of the Company’s common stock at an exercise price of
$7.50 per share (the “Creditor Warrants”) were issued to certain Creditors. The Creditor
Warrants were issued in February 2018 and had a fair value of approximately $0.2 million at
the date of the Settlement Agreements.

The Company also entered into a Security Agreement (the “Security Agreement”), dated
October 31, 2017, with a collateral agent for the Creditors, pursuant to which the Company granted to the
collateral agent, for the benefit of the Creditors, a security interest in certain property of the Company to
secure its obligations under the Settlement Agreements.

Accounting for Settlement Agreements – Troubled debt

The Settlement Agreements for certain of the Creditors were accounted for as troubled debt
restructurings as the Creditors had granted concessions to the Company. Of the $6.3 million in Debt
Obligations, the accounts payable and accrued liability balances related to the troubled debt restructurings
totaled $5.2 million at the time of the Settlement Agreements. During the year ended December 31, 2017,
the Company recorded a gain on settlement of troubled debt restructuring of approximately $1.2 million
which is included in gain on troubled debt restructuring in the consolidated statements of operations. The
$1.2 million gain represents the carrying amount of the liability due to the Creditors in excess of the
undiscounted future cash flows. In connection with the accounting for these troubled debt restructurings the
Company recorded a liability of $3.2 million which represents the undiscounted future cash flows. As such,
the Company will not record interest in the amount of $0.6 million on the Secured Debt Obligations in the
future.

The full amount of the undiscounted future cash flow of the Secured Debt Obligations of
approximately $3.2 million includes interest of 10% accrued up to the first payment, plus interest over the
forty-eight months, resulting in an estimated monthly payment by the Company to the Creditors of
approximately $65,000 per month beginning in July 2018. At December 31, 2017, the $3.2 million of
Secured Debt Obligations is included in long-term debt in the Company’s consolidated balance sheet.

In connection with the Settlement Agreements, the Company agreed to issue, to certain of the
Creditors whose settlements were treated as troubled debt restructurings, Creditor Warrants to purchase
108,112 shares of the Company’s common stock at an exercise price of $7.50 per share. The Creditor
Warrants were issued on February 9, 2018 and are exercisable on the date of issuance and will expire five
years from the date of issuance. See Note 11 – Stockholders’ Equity (Deficit). The Company concluded
that the Creditor Warrants will be classified as equity. At December 31, 2017, the Company reviewed its
obligation to issue Creditor Warrants in the future and concluded that the Creditor Warrants will be treated
as issued for accounting purposes on the date of the Settlement Agreements. The fair value of the Creditor
Warrants, as determined by a Black-Scholes calculation, was approximately $158,000 on the date of the
Settlement Agreements and was recorded as additional paid-in capital. Subsequent changes in the fair value
will not be recognized as long as the warrants continue to be equity classified.

On February 12, 2018, the Company issued 1,814,754 Settlement Common Shares with a fair
value of approximately $1.9 million. As the Settlement Common Shares were not yet issued as of
December 31, 2017, the Company considered the appropriate treatment of its obligation to issue common
shares and concluded that the Settlement Common Shares will be measured at fair value on the date of the
Settlement Agreements. Accordingly, the Company recorded a liability of $1.9 million as of the date of the
Settlement Agreements. The Company has a $1.9 million liability included in other current liabilities in the
accompanying consolidated balance sheet as of December 31, 2017.

The transaction for the Secured Debt Obligations exchanged for Settlement Common Shares was
treated as an obligation to issue shares and represented a fixed dollar liability, in the amount of $1.9

million, being settled with a variable number of shares that equal the fixed dollar amount. Accordingly, the
Company recorded a liability on the Settlement Agreement date equal to the fair value of the shares issued
in February 2018. See Note 11 – Stockholders’ Equity (Deficit). Of the $1.9 million of debt canceled in
exchange for common shares, $0.6 million was related to Creditors accounted for as troubled debt
restructurings and $1.3 million was related Creditors treated as extinguishments as discussed below.

Accounting for Settlement Agreements – Extinguishment of liability

For Creditors where the settlement was not treated as a troubled debt restructuring, the accounting
was treated as an extinguishment. The accounts payable and accrued liability balances related to the
extinguishments totaled $1.1 million at the time of the Settlement Agreements. For these settlements, the
Company recorded a net loss during the year ended December 31, 2017 of approximately $0.2 million
equal to the difference between the carrying amount of the liability due to the Creditors and the fair value
of the consideration transferred to the Creditors. The loss of $0.2 million is included in net gain on
settlement of liability in the consolidated statements of operations.

Convertible Promissory Notes.

The Company, as part of the merger, assumed an Unsecured Convertible Promissory Note (the
“Note”) with an accredited investor (the “Investor”) in the aggregate principal amount of $125,000 and
interest accrues at a rate of 6% per year. The Note provided that two-thirds of the outstanding principal
amount of the Note was due upon the earlier to occur of the close of the Merger or June 17, 2017 (such
applicable date, the “Maturity Date”). The remaining one-third of the principal amount outstanding on the
Note was to be paid on the six month anniversary of the Maturity Date.

On the Maturity Date, the then outstanding aggregate amount owed on the Note of $143,041
($125,000 in principal amount and $18,041 of accrued interest) became due. Pursuant to the terms of the
Note, the Company’s failure to pay any principal or interest within 10 days of the date such payment is due
will constitute an event of default (the “Prospective Event of Default”). On June 21, 2017, the Investor
agreed to waive the Prospective Event of Default and agreed to further extend the Maturity Date of the
Note pursuant to a side letter to the Note (the “Side Letter”). The Side Letter provides that two-thirds of the
outstanding principal amount of the Note must be paid upon the earlier to occur of (1) the closing of a
public offering by the Company of either common stock, convertible preferred stock or convertible
preferred notes or (2) August 16, 2017 (such applicable date, the “Deferred Maturity Date”). On August 31,
2017, the Company made payment of $83,333, two-thirds of the then outstanding principal amount, which
was more than 10 days after the Deferred Maturity Date and constituted an event of default under the terms
of the Note (the “Deferred Maturity Date Event of Default”). The Investor agreed to waive the Deferred
Maturity Date Event of Default. In consideration of this waiver, the Company issued the Investor one
warrant to purchase 10,000 shares of the Company’s common stock, par value $0.01 per share (the
“Convertible Promissory Note Warrants”). See Note 11 – Stockholders’ Equity (Deficit). The issuance date
of the Convertible Promissory Note Warrants was October 3, 2017.

The remaining one-third of the principal amount outstanding on the Note must be paid on the six
month anniversary of the Deferred Maturity Date (the “Extended Maturity Date”). All accrued and unpaid
interest on the outstanding principal amount of the Note will be due and immediately payable on the
Extended Maturity Date, unless the Note is converted in which case such interest will be payable in shares
of the Company’s common stock as part of the conversion. As of October 31, 2017, the outstanding
principal amount due was $41,666 and accrued interest was approximately $20,000. The Investor entered
into a Settlement Agreement, as described above, through which the amount due to the Investor would be
settled with Settlement Common Shares. As of December 31, 2017, the $41,666 due to the Investor is
included in the Settlement Common Shares liability discussed above.

Financed Insurance Loan.

During the year ended December 31, 2017, the Company financed certain of its insurance
premiums (the “Financed Insurance Loan”). The original amount financed in July 2017 was $0.4 million
with a 4.99 % interest rate. The Company will make monthly payments through May 2018. As of
December 31, 2017, the Financed Insurance Loan outstanding balance of $0.2 million is included in current

maturities of long-term debt in the Company’s consolidated balance sheet and a corresponding prepaid
asset of $0.2 million is included in other current assets.

The aggregate future maturities required on long-term debt at December 31, 2017 are as follows:

Secured Debt Obligations
Financed Insurance Loan

2018 2019 2020 2021 2022 Total
404 $ 3,233
404 $
808 $
$
183 — — — —
183
404 $ 3,416
808 $
587 $

808 $

809 $

CONVERTIBLE BRIDGE NOTES.

Convertible Bridge Notes.

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

The convertible bridge notes had conversion terms of (i) convertible into Series C Preferred Units
of the Company (at a 30% discount) upon a Qualified Series C Financing (as defined in the note
agreement), (ii) at the option of the holders of a majority of the then-outstanding principal amount of the
notes, convertible into Series C Preferred Units of the Company (at a 30% discount) upon any other Series
C Financing, or (iii) if no such Qualified Series C Financing occurs, or no such optional conversion takes
place by the maturity date (as hereinafter defined), the convertible notes will be fully repaid by Company or
the notes and accrued and unpaid interest shall convert into Preferred Series B Units (at a 30% discount) of
the Preferred Series B conversion Price as defined in the operating agreement provided that notice is given
to the Company at least one day prior to maturity. In the event a Deemed Liquidity Event (merger, sale,
IPO, or transaction with exchange of 50% or more of voting power) the holders of the notes at their sole
discretion can (a) require the Company to pay an amount equal to two times the principal and accrued and
unpaid interest or (b) convert all unpaid principal and interest at a rate of 70% of the applicable
security. These notes were subordinated to Connecticut Innovations, DECD and Webster Bank.

In connection with the Merger, on the Closing Date, convertible bridge notes of $695,000, plus

$192,000 of accrued interest, were converted into 155,639 shares of Precipio common stock.

2017 New Bridge Notes I.

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

At the time of the Merger, the 2017 Bridge Notes were extinguished and replaced with convertible
promissory notes (the “2017 New Bridge Notes I”) with an original principal amount of $1.2 million in the
aggregate pursuant to an Exchange Agreement (the “Exchange Agreement”) entered into on the Closing
Date. The 2017 New Bridge Notes I had an annual interest rate of 8.0% and were due and payable upon the
earlier to occur of (i) October 1, 2017 or (ii) the closing of a Qualified Offering (as defined in the 2017
New Bridge Notes I). The 2017 New Bridge Notes I were convertible into shares of our common stock at
an initial conversion price of $3.736329 per share, subject to adjustment, and could be convertible into
shares of our preferred stock at the holder’s option if the Company did not complete a Qualified Offering
(as defined in the 2017 New Bridge Notes I) by October 1, 2017. The Company could redeem the 2017
New Bridge Notes I at any time in cash upon payment of a 20% premium, or $240,000. As the convertible
promissory notes were convertible into the Company's common stock at a conversion rate lower than the
fair market value of the common stock at the time of issuance, the Company recorded $989,000 as a
beneficial conversion feature, which was recorded as a debt discount in the balance sheet. The discount was
amortized using the effective interest method through the first conversion date of the 2017 New Bridge
Notes I. On August 28, 2017, these 2017 New Bridge Notes I were partially converted into the Company’s
common stock and the remaining were paid off, refer below for further discussion.

Pursuant to the Exchange Agreement, the 2017 Bridge Warrants were canceled and replaced with
new warrants to acquire 45,600 shares of our common stock (the “2017 New Bridge Warrants”). The initial
exercise price of the 2017 New Bridge Warrants was $7.50 (subject to adjustments). If the Company
completed a Qualified Offering (as defined in the 2017 New Bridge warrants), the exercise price of the
2017 New Bridge Warrants would become the lower of (i) $7.50, or (ii) 110% of the per share offering
price in the Qualified Offering, but in no event lower than $1.50 per share, which has been considered a
down round provision. At issuance, the 2017 New Bridge Warrants had a fair value of $211,000 and were
recorded as a debt discount to the related 2017 New Bridge Notes I, with the corresponding entry to
additional paid in capital as the warrants were considered classified as equity in accordance with GAAP. As
discussed in Note 2 of the accompanying consolidated financial statements, the Company early adopted
ASU 2017-11, which allowed the Company to treat the warrants as equity classified, despite the down
round provision.

2017 New Bridge Note II.

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

As the 2017 New Bridge Note II was convertible into the Company's common stock at a
conversion rate lower than the fair market value of the common stock at the time of issuance, the Company
recorded $656,000 as a beneficial conversion feature, which was recorded as a debt discount in the
accompanying balance sheet. The discount was amortized using the effective interest method through the
first conversion date of the 2017 New Bridge Note II. On August 28, 2017, this 2017 New Bridge Note II
was partially converted into the Company’s common stock and the remaining was paid off, refer below for
further discussion.

In connection with the bridge financing and the assumption of certain obligations by an entity
controlled by Mark Rimer (a director of the Company), the Company issued to that entity warrants (the
“Side Warrants”) to purchase an aggregate of 91,429 shares of the Company's common stock. See Note 11
– Stockholders’ Equity (Deficit) for a discussion on terms of the Side Warrants.

In addition, the agreement stipulated that if the Company were to consummate one or more rounds
of equity financing following July 1, 2017, with aggregate gross proceeds of at least $7 million, the
Company would be required to use a portion of the proceeds from such financing to repay the principal
amount of the 2017 New Bridge Notes, together with any premium and interest. See discussion below
regarding payment and conversion of the 2017 notes.

Conversion and Payment of the 2017 New Bridge Notes I and New Bridge Note II (collectively,

the “New Bridge Notes”).

On August 28, 2017, the Company completed an underwritten public offering (the “August 2017
Offering”) of 6,000 units consisting of one share of the Company’s Series B Preferred Stock and one
warrant to purchase up to 400 shares of the Company's common stock at a combined public offering price
of $1,000 per unit for gross proceeds of $6.0 million (see Note 11 - Stockholders' Equity (Deficit)).

At the time of the closing of the August 2017 Offering, the aggregate amount due to the holders of
the New Bridge Notes was $2,436,551 ($2,000,000 in principal, $400,000 for a 20% redemption premium
and $36,551 in accrued interest). Upon the closing of the August 2017 Offering, the Company made a cash
payment of $1,536,551 to extinguish certain notes and the remaining $900,000 of the Company’s New
Bridge Notes were converted into an aggregate of 359,999 shares of the Company's common stock (the
“Note Conversion Shares”) at a conversion price of $2.50 per share and 359,999 warrants to purchase the
Company's common stock (the “Note Conversion Warrants”). The Company issued the Note Conversion
Warrants to the holders of the New Bridge Notes as consideration for their election to convert their New
Bridge Notes into shares of the Company's common stock. The Company treated the $900,000 debt
conversion as an induced conversion and determined that the fair value of the consideration given in the
conversion exceeded the fair value of the debt pursuant to its original conversion terms by approximately
$1.0 million. This amount was recorded as an expense included in loss on extinguishment of debt and
induced conversion of convertible bridge notes in our consolidated statements of operations. The Company
also recorded a loss on extinguishment of debt of approximately $0.4 million related to the extinguishment
of the $1,536,551 portion paid in cash, which was also recorded as an expense within the loss on
extinguishment of debt and induced conversion of convertible bridge notes line in our consolidated
statements of operations. See Note 11 Stockholders’ Equity (Deficit) for discussion of the Note Conversion
Warrants.

Upon conversion and payment of the New Bridge Notes, all remaining debt discounts and debt
issuance costs associated with the conversions were fully amortized to interest expense and debt discounts
and debt issuance costs associated with the portion paid in cash were amortized to interest expense up
through the payment date. During the year ended December 31, 2017, debt discounts and debt issuance
costs amortized to interest expense were $1.9 million. As of December 31, 2017, the outstanding
convertible bridge notes balance was zero.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.

Accrued expenses at December 31, 2017 and 2016 are as follows:

Accrued expenses
Accrued compensation
Accrued interest

2016

2017
$ 1,122 $
126
—
$ 1,248 $

50
155
495
700

During the year ended December 31, 2017, the Company was able to reduce approximately $1.1
million of certain accrued expense and accounts payable amounts through negotiations with certain vendors
to settle pre-Merger liabilities. The Company recorded a gain of $1.1 million which is included in gain on
settlement of liability, net in the consolidated statements of operations.

Other current liabilities at December 31, 2017 and 2016 are as follows:

2017 2016

Obligation to issue common shares
Liability for settlement of equity instrument

$ 1,897 $ —
1,085
—
$ 2,982 $ —

As of December 31, 2017, the Company has recorded a liability related to its obligation to issue
shares of its common stock in the future. On February 12, 2018, the Company issued 1,814,754 Settlement
Common Shares with a fair value of approximately $1.9 million. See Note 6 – Long-Term Debt for
additional information.

On February 20, 2018, Crede Capital Group LLC (“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. Crede claimed that Precipio had breached a Securities Purchase
Agreement and Warrant that Crede entered into in connection with an investment in Transgenomic and that
pursuant to those agreements, Precipio owed Crede approximately $2.2 million. On March 12, 2018,
Precipio entered into a settlement agreement (the “Crede Agreement”) with Crede pursuant to which
Precipio agreed to pay Crede a total sum of $1.925 million over a period of 16 months payable in cash, or
at the Company’s discretion, in stock, in accordance with terms contained in the Crede Agreement. As a
result of the Crede Agreement, as of December 31, 2017, the Company has recorded a liability of $1.1
million included in other current liabilities on the accompanying consolidated balance sheets, as well as a
liability of $0.8 million included in common stock warrant liability on the accompanying consolidated
balance sheets related to warrants classified as liabilities that Crede is the holder of. See Note 12 – Fair
Value for additional information. During the year ended December 31, 2017, the Company recorded a loss
on settlement of equity instruments of approximately $0.6 million related to the Crede Agreement.

COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company entered into a sixty month operating lease beginning in January 2017, for its facility
in New Haven, Connecticut at a monthly rental rate of $13,400 to $14,600 and a sixty-one month operating
lease beginning in May 2017, for its facility in Omaha, Nebraska at a monthly rental rate of $2,300 to
$2,800.

The future minimum annual lease payments under these operating leases at December 31, 2017

are as follows:

Years Ending December 31,
2018
2019
2020
2021
2022
Total

$ 195,000
198,000
203,000
208,000
13,000
$ 817,000

The Company recognizes rent expense on a straight-line basis for all operating leases. Rent

expense was $0.2 million and $0.1 million for the years ended December 31, 2017 and 2016, respectively.

CAPITAL LEASES

The Company has entered into various capital lease agreements to obtain lab equipment. The

terms of the capital leases range from five to ten years with interest rates of 7.25%.

An analysis of the property acquired under capital leases at December 31, 2017 and 2016 is as

follows.

Classes of Property:

2017

2016

Lab equipment
Less accumulated amortization

$ 296,000 $ 296,000
(150,000 ) (102,000 )
$ 146,000 $ 194,000

Included in cost of diagnostic services is amortization expense related to equipment acquired under capital
leases of approximately $48,000 and $45,000 for the years ended December 31, 2017 and 2016
respectively.

The following is a schedule by years of future minimum lease payments under capital leases

together with the present value of the net minimum lease payments.

Years Ending December 31,
2018
2019
2020
2021
2022

Total capital lease obligations
Less: Amount representing interest
Present value of net minimum lease obligations
Less, current maturities of capital leases
Capital Leases, long term

$ 60,000
60,000
36,000
24,000
4,000

184,000
(21,000 )
163,000
(50,000 )
$ 113,000

PURCHASE COMMITMENTS

The Company has entered into purchase commitments for reagents from suppliers. These
agreements started in 2011 and run through 2022. The Company and the suppliers will true up the amounts
on an annual basis. The future minimum purchase commitments under these agreements are as follows:

Years ending December 31,
2018
2019
2020
2021
2022

OTHER CONTRACTUAL COMMITTMENTS

$ 209,000
208,000
138,000
99,000
10,000

The Company has a $1.925 million contractual commitment with Crede as a result of a settlement
agreement the Company reached with Crede on March 12, 2018. See Note 8 – Accrued Expenses And
Other Current Liabilities for details on the settlement. The following is a schedule by years of future
contractual payments under the settlement:

Years Ending December 31,
2018
2019
Total

$ 1,000,000
925,000
$ 1,925,000

LITIGATIONS

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.

During June 2017, prior to the Merger, Transgenomic entered into a settlement agreement with
Fox Chase (the “Agreement”) to pay $175,000 in three installments. In August 2017 we made two
payments, each in the amount of $60,000 and on October 3, 2017, we made a third and final payment in the
amount of $55,000. The three payments total $175,000 which resolved all outstanding claims in the
litigation brought in April 2016 by Fox Chase against Transgenomic in the Court of Common Pleas of
Philadelphia County (the “Action”). As of April 13, 2018, the case remains pending with the Court as Fox
Chase has not caused the Action to be formally dismissed with prejudice as it is obligated per the
agreement. Also, on July 13, 2017 we entered into an agreement with its co-Defendant, IDT, regarding our
indemnity obligations to IDT for legal fees and expenses incurred in the Action pursuant to the terms of the
IDT Agreement in the amount of $139,000. During 2017, we made total payments to IDT in the amount of
$139,000 satisfying the agreement. As of December 31, 2017 there are no outstanding amounts owed by us
and we have no liabilities recorded within the accompanying consolidated balance sheet related to this
matter.

24,900 shares, that are exercisable for shares of our common stock, on a 1-for-1 basis, with an exercise
price of $7.50 per share, exercisable on the date of issuance with a term of 5 years. We do not plan to apply
to list the warrants on the NASDAQ Capital Market, any other national securities exchange or any other
nationally recognized trading system. A $0.5 million liability has been recorded and is reflected in long-
term debt within the accompanying consolidated balance sheet at December 31, 2017.

On February 20, 2018, Crede Capital Group LLC (“Crede”) filed a lawsuit against us in the
Supreme Court of the State of New York for Summary Judgment in Lieu of Complaint requiring us to pay
cash owed to Crede. Crede claims that Precipio has breached a Securities Purchase Agreement and Warrant
that Crede entered into in connection with an investment in Transgenomic and that pursuant to those
agreements, we owed Crede the sum of $2.2 million. In addition to the aforementioned sum, Crede also
demanded that we pay an additional sum of $3,737.32 per day between the date of the summons and the
date that judgment is entered, plus interest. As previously disclosed by us, Crede had sent us a letter
claiming that we owed Crede $1.8 million. On March 12, 2018, we entered into a settlement agreement
with Crede pursuant to which we 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
Agreement. In accordance with the terms of the agreement and in addition to the agreement to pay, we have

also executed and delivered to Crede an affidavit of confession of judgment. Liabilities totaling
approximately $1.9 million have been recorded and are reflected in other current liabilities and common
stock warrant liability within the accompanying consolidated balance sheet at December 31, 2017. On
March 19, 2018 we made the first scheduled payment of $175,000 to Crede.

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. We are currently in discussions with Bio-Rad to reach payment
conditions. A liability of less than $0.1 million has been recorded in accounts payable within the
accompanying consolidated balance sheet at December 31, 2017.

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.

10.

INCOME TAXES

Impact of the Tax Cuts and Jobs Act

In 2016, Precipio Diagnostics was organized as a limited liability company and operated under the
default classification as a partnership until July 31, 2016. Effective August 1, 2016, Precipio Diagnostics
elected to be treated as a corporation for tax purposes and as such, a net deferred tax asset, prior to a
valuation allowance was created. The Company calculated an income tax provision for period from August
1, 2016 through December 31, 2016.

The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. Among other things,
the Act reduces the U.S. federal corporate tax rate from 34 percent to 21 percent, eliminates the alternative
minimum tax (“AMT”) for corporations, and creates a one-time deemed repatriation of profits earned
outside of the U.S. The tax rate reduction also resulted in a write-down of the net deferred tax asset of
approximately $1.0 million. With the exception of the IPR&D noted below, the write-down of the net
deferred tax asset related to the rate reduction resulted in a corresponding write-down of the valuation
allowance of approximately $1.3 million.

The Company recorded a deferred tax liability of $0.3 million as of December 31, 2017, related to
the acquisition of the IPR&D. This deferred tax liability was recorded to account for the book versus tax
basis difference related to the IPR&D intangible asset, which was recorded in connection with the Merger.
This deferred tax liability was excluded from sources of future taxable income, as the timing of its reversal
cannot be predicted due to the indefinite life of this IPR&D. As such, this deferred tax liability cannot be
used to offset the valuation allowance.

Deferred income taxes reflect the net effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. The Company’s net deferred tax assets relate primarily to its net operating loss carryforwards and
stock based compensation, offset by property and equipment and intangible assets. With the exception of
the IPR&D, the Company has recorded a full valuation allowance to offset the net deferred tax assets,

because it is not more likely than not that the Company will realize future benefits associated with these net
deferred tax assets at December 31, 2017 and 2016.

At December 31, 2017 and 2016, the Company had net deferred tax assets of $1.5 million and
$0.7 million, respectively, against which a valuation allowance of $1.8 million and $0.7 million,
respectively, had been recorded. The valuation allowance excluded the deferred tax liability for IPR&D
assigned as an indefinite life intangible asset for book purposes, also known as a “naked credit” in the
amount of $0.3 million at December 31, 2017. The change in the valuation allowance for the year ended
December 31, 2017 was an increase of $1.1 million. The increase in the valuation allowance for the year
ended December 31, 2017 was mainly attributable to the reverse merger with Transgenomic, for which the
Company obtained Transgenomic’s net operating losses, which were limited under the Internal Revenue
Code Section 382. In addition, the increase was offset due to the recognition of deferred tax liabilities
associated with the book versus tax basis difference of intangible assets purchased. There was also an
offsetting decrease attributable to a decrease in the corporate tax rate. Significant components of the
Company’s deferred tax assets at December 31, 2017 and 2016 are as follows:

Deferred tax assets:

Net operating loss and credit carryforwards
Accrued interest
Stock-based compensation
Other

Gross deferred tax assets
Deferred tax liabilities:

Property and equipment
Intangible assets
IPR&D intangible assets
Other

Gross deferred tax liabilities
Net deferred tax assets
Less valuation allowance
Net deferred liability

Dollars in Thousands

2017

2016

5,907 $
2
61
22
5,992

(32 )
(4,145 )
(349 )
—
(4,526 )
1,466
(1,815 )
(349 ) $

407
164
—
110
681

—
—
—
(16 )
(16 )
665
(665 )
—

The Company’s provision for income taxes for the year ended December 31, 2017 and for the
period from August 1, 2016 through December 31, 2016 relates to income taxes in states and other
jurisdictions and differs from the amounts determined by applying the statutory federal income tax rate to
the loss before income taxes for the following reasons:

Dollars in Thousands

Benefit at federal rate
Increase (decrease) resulting from:
State income taxes—net of federal benefit
Miscellaneous permanent differences
Warrant liability revaluation
Capitalized transaction cost
Impairment of goodwill
Enactment of Tax Cuts and Jobs Act
Change in valuation allowance
Total income tax expense (benefit)

For the period
from August 1,
2016 through
December 31, 2016
(421 )

2017
$

(7,331 ) $

(101 )
4
81
958
3,334
1,041
2,014
— $

(27 )
2
—
—
—
—
446
—

The income tax expense consists of the following at December 31, 2017 and 2016.

Federal:

Current
Deferred

Total Federal

State:

Current
Deferred

Total State

Foreign:

Current
Deferred

Total Foreign
Total Tax Provision

Dollars in Thousands
2017

2016

$
$

— $
—
— $

— $
—
— $
— $

—
—
—

—
—
—
—

The Company had approximately $27 million and $1.0 million of available gross federal and state
net operating loss (“NOL”) carryforwards as of December 31, 2017 and 2016, respectively. Section 382 of
the Internal Revenue Code, and similar state regulations, contain provisions that may limit the NOL
carryforwards available to be used to offset income in any given year upon the occurrence of certain events,
including changes in the ownership interests of significant stockholders. In the event of a cumulative
change in ownership in excess of 50% over a three-year period, the amount of the NOL carryforwards that
the Company may utilize in any one year may be limited. The Company reduced its tax attributes (NOLs
and tax credits) obtained from the Merger with Transgenomic and the limitation placed on the utilization of
its tax attributes, as a substantial portion of the NOLs and tax credits generated prior to the Merger will
likely expire unused.

At December 31, 2017 and 2016, and as a result of the limitations under Section 382 of the
Internal Revenue Code, the Company had a total of unused federal tax net operating loss carryforwards
with expiration dates as follows:

2036
2037
Total Federal

2016

Dollars in Thousands
2017
$ 17,781 $
9,109
$ 26,890 $

967
—
967

The Company has adopted guidance on accounting for uncertainty in income taxes which clarified
the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet
before being recognized in the financial statements as well as guidance on de-recognition, measurement,
classification and disclosure of tax positions. There are no material uncertain tax positions that would
require recognition in the financial statements. The Company is obligated to file income tax returns in the
U.S. federal jurisdiction and various U.S. states. Since the Company had losses in the past, all prior years
that generated NOLs are open and subject to audit examination in relation to the NOL generated from those
years. Our evaluation of uncertain tax positions was performed for the tax years ended December 31, 2014
and forward.

11.

STOCKHOLDERS’ EQUITY (DEFICIT)

Common Stock.

Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we

currently have 150,000,000 shares of common stock authorized for issuance.

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

Restricted stock of 59,563 shares were granted during the year ended December 31, 2017, none of
which vested prior to the merger. Upon closing of the merger, all shares fully vested. During 2017, 64,593
shares were released to common stock. We recorded stock compensation expense of approximately
$28,000, within operating expense in the accompanying statements of operations, related to the restricted
stock that vested during the year ended December 31, 2017.

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

As part of the Merger, Precipio Diagnostics also received 200,081 shares of Precipio common
stock that have not been issued yet. These shares were originally held for future issuance to advisors
pending completion of certain performance obligations, however, these obligations were not met. The
shares remain with Precipio Diagnostics as part of the unissued pool. For any shares that remain unissued,
it is the intent of the Company to allocate these to Precipio Diagnostics shareholders on a pro rata basis.

Upon completion of the Merger, Transgenomic legacy stockholders had 1,255,119 shares of

Precipio common stock outstanding.

Upon the closing of the August 2017 Offering, the Company issued 359,999 shares of its common
stock upon conversion of $900,000 of its New Bridge Notes (See Note 7 - Convertible Bridge Notes) and
1,735,419 shares of its common stock upon conversion of its Series A Senior stock (see below - Series A
Senior Preferred Stock).

Also, during the year ended December 31, 2017, the Company issued 1,550,485 shares of its
common stock in connection with conversions of its Series B Preferred Stock (see below - Series B
Preferred Stock) and 142,857 shares of its common stock in connection with conversions of its Series C
Preferred Stock (see below - Series C Preferred Stock).

On February 12, 2018, the Company issued 1,814,754 shares of its common stock in exchange for
approximately $1.9 million of debt obligations. The $1.9 million in obligations is included in other current
liabilities in the accompanying consolidated balance sheet as of December 31, 2017. See Note 8.

Series A and Series B Preferred Stock.

Prior to the Merger and as of December 31, 2016, under Precipio Diagnostics, the Company had
outstanding preferred units of 367,299 for Series A and 412,806 for Series B (collectively, the "Precipio
Diagnostics Preferred Stock"). These units were recapitalized and were included in preferred stock. On the
Closing Date, the outstanding preferred units for the Precipio Diagnostics Preferred Stock, along with the
related accumulated dividends, were converted into common shares of the Company.

In March 2016, the Company entered into a redemption and exchange agreement with certain
member's relating to their 275,237 Preferred A Units and 208,087 Preferred B Units, related to the Precipio
Diagnostics Preferred Stock. Under the terms of the agreement, the unit holders would exchange their units
in the Company for the issuance of debt. The aggregate purchase price per the agreement was the member's
initial investment of $750,000 for Preferred A Units and $965,000 for Preferred B Units, along with a
preferred return of 8%, recorded as a dividend in the amount of $432,716. In addition to the debt issued as
consideration for the members' preferred units

Preferred Stock.

The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred
stock in one or more series, from time to time, with such designations, powers, preferences and rights and
such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by
the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the
determination or fixing of the following with respect to shares of such class or any series thereof: (i) the
number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date;
(iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for
the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and
provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional
preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a
preference over the common stock as to the payment of dividends. We have no current plans to issue any
additional preferred stock. Classes of stock such as the preferred stock may be used, in certain
circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons
seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any
additional preferred stock issued by the Company could have an adverse effect on the rights of the holders
of the common stock.

Series A Senior Preferred Stock.

In connection with the Merger, the Company filed a Certificate of Designation with the Secretary
of State of the State of Delaware on June 29, 2017, designating 4,100,000 shares of the Company’s
Preferred Stock, par value $0.01 per share, as Series A Senior Convertible Preferred Stock ("Series A
Senior") and establishing the rights, preferences and privileges of the new preferred stock. Generally, the
holders of the Series A Senior stock are entitled to vote as a single voting group with the holders of the
Company's common stock, and the holders of the Series A Senior stock are generally entitled to that
number of votes as is equal to the number of whole shares of the Company's common stock into which the
Series A Senior stock may be converted as of the record date of such vote or consent.

So long as the shares of Series A Senior stock are outstanding certain actions will require the
separate approval of at least two-thirds of the Series A Senior stock, including: changes to the terms
(requires three-fourths approval) of the Series A Senior stock, changes to the number of authorized shares
of Series A Senior stock, issuing a series of preferred stock that is senior to the Series A Senior stock,
changing the size of the board of directors, certain changes to the capital stock of the Company, bankruptcy
proceedings and granting security interests in the Company’s assets.

The Series A Senior stock will be convertible into the Company's common stock at any time at the
then applicable conversion price. The initial conversion price for the Series A Senior stock issued in
connection with the Merger and the other transactions described herein is $3.736329, but will be subject to
anti-dilution protections including adjustments for stock splits, stock dividends, other distributions,
recapitalizations and the like. Additionally, each holder of the Series A Senior stock will have a right to
convert such holder's Series A Senior stock into securities issued in any future private offering of the
Company's securities at a 15% discount to the proposed price in such private offering.

The Series A Senior stock will be entitled to an annual 8% cumulative payment in lieu of interest
or dividends, payable in-kind for the first two years and in cash or in-kind thereafter, at the option of the
Company. The Series A Senior stock also will be entitled to share in any dividends paid on the Company's
common stock.

As discussed in Note 3 - Reverse Merger, in connection with the Merger, the Company issued 1)
to holders of certain Transgenomic secured indebtedness, 802,925 shares of Series A Senior stock in an
amount equal to $3 million, 2) to holders of certain Precipio Diagnostic indebtedness, 802,920 shares of
Series A Senior stock in an amount equal to $3 million and 3) to certain investors, 107,056 shares of Series
A Senior stock in exchange for $400,000 in a private placement.

We determined that there was a beneficial conversion feature in connection with the issuances of
the Series A Senior stock since the conversion price of $3.736329 was at a discount to the fair market value
of the Company's common stock at issuance date. The Series A Senior stock is non-redeemable and as a
result, the Company recognized the full beneficial conversion feature in the amount of $5.2 million as a
deemed dividend at the time of issuance.

Upon the closing of the August 2017 Offering, all of the Company’s outstanding Series A Senior
stock converted into an aggregate of 1,712,901 shares of the Company's common stock, at the existing
conversion rate of one share of Common Stock for one share of Series A Senior stock (the “Conversion”).
The Company also issued an aggregate of 22,518 shares of Series A Senior stock to these holders, which
shares represented the Series A Preferred Payment (as defined in the Company’s Certificate of Designation
of Series A Senior Convertible Preferred Stock) accrued through the date of Conversion and immediately
converted into an aggregate of 22,518 shares of the Company's common stock in connection with the
Conversion. The Company issued warrants (the “Series A Conversion Warrants”) to purchase an aggregate
of 856,446 shares of Common Stock to these former holders of Series A Senior stock as consideration for
the conversion of their shares of Series A Senior stock into shares of Common Stock. The Company treated
this as an induced conversion of the Series A Senior stock.

At the date of the Conversion, the fair value of the Series A Conversion Warrants was
approximately $1.4 million. The Company determined that the $1.4 million represented the excess fair
value of all consideration transferred to the Series A Senior holders as compared to the fair value of the
Series A Senior stock pursuant to its original conversion terms. The $1.4 million was recorded as a deemed
dividend at the time of the Conversion.

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

At December 31, 2017, the Company had designated, issued and outstanding shares of Series A

Senior in the amount of 4,100,000, 1,712,901 and zero, respectively.

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).

On August 28, 2017, the Company completed the August 2017 Offering of 6,000 units consisting
of one share of the Company’s Series B Preferred Stock, which is convertible into 400 shares of common
stock, par value $0.01 per share, at a conversion price of $2.50 per share, and one warrant to purchase up to
400 shares of common stock (the “August 2017 Offering Warrants”) at a combined public offering price of
$1,000 per unit. The August 2017 Offering included the sale of 280,000 August 2017 Offering Warrants
pursuant to the over-allotment option exercised by Aegis Capital Corp. (“Aegis”) for $0.01 per share or
$2,800. The Offering was completed pursuant to the terms of an underwriting agreement dated as of

August 22, 2017 (the “Underwriting Agreement”) between the Company and Aegis. The net proceeds
received by the Company from the sale of the units was approximately $5.0 million, after deducting
underwriting discounts and estimated offering expenses, which have been recorded as stock issuance costs
within additional paid in capital.

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

The conversion price of the Series B Preferred Stock contains a down round feature. As discussed
in Note 2 of the accompanying consolidated financial statements, the Company early adopted ASU 2017-
11, which allowed the Company to treat the preferred stock as equity classified, despite the down round
provision. The Company will recognize the effect of the down round feature when it is triggered. At that
time, the effect would be treated as a deemed dividend and as a reduction of income available to common
shareholders in our basic earnings per share calculation.

In November 2017, the down round feature of the Series B Preferred Stock was triggered at the
time of the Company’s issuance of its Series C Preferred Stock and, as a result, the conversion price of the
Series B Preferred Stock was reduced from $2.50 per share to $1.40 per share. In connection with the down
round adjustment, the Company calculated an incremental beneficial conversion feature of approximately
$2.0 million which was recognized as a deemed dividend at time of the down round adjustment.

During the year ended December 31, 2017, 3,613 shares of Series B Preferred Stock were

converted into 1,550,485 shares of our common stock.

At December 31, 2017, the Company had designated, issued and outstanding shares of Series B in

the amount of 6,900, 6,900 and 2,387, respectively.

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.

On November 2, 2017, the Company entered into a Placement Agency Agreement (the
“Placement Agreement”) with Aegis Capital Corp. for the sale on a reasonable best efforts basis of 2,748
units, each consisting of one share of the Company’s Series C Preferred Stock, convertible into a number of
shares of the Company’s common stock equal to $1,000 divided by $1.40 and warrants to purchase up to
1,962,857 shares of common stock with an exercise price of $1.63 per share (the “Series C Warrants”) at a
combined offering price of $1,000 per unit, in a registered direct offering (the “Series C Preferred
Offering”). The Series C Preferred Stock includes a beneficial ownership blocker but has no dividend rights
(except to the extent dividends are also paid on the common stock). The securities comprising the units are
immediately separable and were issued separately.

The gross proceeds to the Company from the sale of the Series C Preferred Stock and Series C
Warrants, before deducting the placement agent fee and other estimated offering expenses payable by the
Company and assuming no exercise of the Series C Warrants, were $2,748,000. The offering closed on
November 9, 2017.

For purposes of recording this transaction, the gross proceeds of $2.8 million from the Series C
Preferred Offering were allocated to the Series C Preferred Stock and the Series C Warrants based on their
relative fair values at the date of issuance. The portion allocated to the Series C Preferred stock was $1.5
million with the remaining $1.3 million allocated to the Series C Warrants. As a result of the allocation of
the proceeds, we determined that there was a beneficial conversion feature in connection with the issuance
of the Series C Preferred Stock since the calculated effective conversion price was at a discount to the fair
market value of the Company's common stock at issuance date. The Company recognized the full
beneficial conversion feature in the amount of $1.2 million as a deemed dividend at time of issuance.

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

During the year ended December 31, 2017, 200 shares of Series C Preferred Stock were converted
into 142,857 shares of our common stock. At December 31, 2017, the Company had designated, issued and
outstanding shares of Series C in the amount of 2,748, 2,748 and 2,548, respectively.

Liquidation Preferences.

The following is the liquidation preferences for the Company’s preferred stock;

The Series B Preferred Stock and Series C Preferred Stock have identical terms regarding
liquidation preferences. Upon any liquidation, dissolution or winding-up of the Corporation, whether
voluntary or involuntary, the holders shall be entitled to receive out of the assets of the Corporation an
amount equal to the par value, plus any accrued and unpaid dividends thereon, for each share of Preferred
Stock before any distribution or payment shall be made to the holders of the Common Stock, and if the
assets of the Corporation shall be insufficient to pay in full such amounts, then the entire assets to be
distributed to the holders shall be ratably distributed among the holders in accordance with the respective
amounts that would be payable on such shares. If all amounts were paid in full; and thereafter, the holders
shall be entitled to receive out of the assets, whether capital or surplus, of the Corporation the same amount
that a holder of Common Stock would receive if the Preferred Stock were fully converted to Common
Stock which amount shall be paid pari passu with all holders of Common Stock.

For Series A Senior preferred stock, upon any liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, the Holders shall be entitled to receive out of the assets of
the Corporation an amount equal to the greater of the (A) the sum of (1) 1.5 times the Series A Stated
Value as adjusted for any stock dividends, combinations or splits with respect to such shares plus (2) all
accrued but unpaid Series A Preferred Payments through the Liquidation Event, as adjusted for any stock
dividends, combinations or splits with respect to such shares and (B) such amount per share of the Series A
Preferred as would have been payable had each share been converted into Common Stock immediately
prior to such Liquidation Event.

Common Stock Warrants.

Prior to the Merger, in connection with the line of credit with Connecticut Innovations, the
Company issued warrants to purchase 8,542 Series A Preferred shares of the Company, which were
classified as an equity warrant, at an exercise price of $2.93 per unit, subject to adjustments as defined in
the warrant agreement. The warrants were valued at $6,000 at the date of the grant utilizing the Black-
Sholes model (volatility 40%, expected life 7 years, and risk free rate .36%). The value of the warrants was
treated as a debt discount. At the Merger date, the warrants were exercised for $25,000 and then converted
into shares of Precipio common stock.

In connection with the Webster Bank agreement, the Company issued 7 years warrants to purchase
20,000 Series B Preferred shares of the Company. At the Merger date, Webster Bank declined to exercise
their warrants and, per the terms of the warrant agreement, the warrants were retired.

During 2016, Precipio Diagnostics issued common warrant units, which allows the holders to
collectively purchase common units of the Company, representing approximately 60% of the Company at
the time of exercise. At the time of issuance, this represented 1,958,166 common units. The common
warrant units had a $0.00 exercise price with a ten year expiration date. The common warrant units were

classified as equity awards and the fair value upon issuance was calculated utilizing a discounted cash flow
analysis to value the Company's equity and an option pricing method to allocate the value of the equity.
The fair value of the warrants was determined directly utilizing the option pricing method as the exercise
price was $0.00. The aggregate value of the common warrant units was $1,421,738, which was considered
a deemed dividend. At the time of the Merger, these warrants were converted into 1,958,166 shares of
Precipio common stock.

Warrants Assumed in Merger

At the time of the Merger, Transgenomic had a number of outstanding warrants related to various
financing transactions that occurred between 2013-2016. Details related to year issued, expiration date,
amount of underlying common shares and exercise price are included in the table below.

2017 New Bridge Warrants

During the year ended December 31, 2017, prior to the Merger, Transgenomic completed the sale
of the 2017 Bridge Notes in the amount of $1.2 million and the issuance of the 2017 Bridge Warrants to
acquire 40,000 shares of the Company's common stock at an exercise price of $15.00 per share, subject to
anti-dilution protection. Aegis acted as placement agent for the bridge financing and received Aegis
Warrants to acquire 5,600 shares of Transgenomic common stock at an exercise price of $15.00 per share.
The Aegis Warrants are identical to the 2017 Bridge Warrants except that the Aegis Warrants do not have
anti-dilution protection. (See Note 7 - Convertible Bridge Notes).

In connection with the Merger, the holders of the 2017 Bridge Notes, the 2017 Bridge Warrants
and the Aegis Warrants agreed to exchange the 2017 Bridge Notes, the 2017 Bridge Warrants and the
Aegis Warrants for 2017 New Bridge Notes and the 2017 New Bridge Warrants to acquire 45,600 shares of
our common stock. (See Note 7 - Convertible Bridge Notes). The initial exercise price of the 2017 New
Bridge Warrants was $7.50 (subject to adjustments). These warrants had a one-time down round provision
that if the Company completed a Qualified Offering (as defined in the 2017 New Bridge Warrants), the
exercise price of the 2017 New Bridge Warrants would become the lower of (i) $7.50 or (ii) 110% of the
per share offering price in the Qualified Offering, but in no event lower than $1.50 per share. As a result of
the Series B Preferred Stock issued in the August 2017 Offering, the exercise price of the 2017 New Bridge
Warrants was adjusted to $2.75 per share, and the down round provision for these warrants no longer exists
after this adjustment.

At issuance, the 2017 New Bridge Warrants had a fair value of $211,000 and were recorded as a
debt discount to the related 2017 New Bridge Notes I, with the corresponding entry to additional paid in
capital as the warrants were considered classified as equity in accordance with GAAP. At the time the
exercise price was adjusted, due to the down round provision triggered by the August 2017 Offering, the
Company calculated the fair value of the down round provision on the warrants to be approximately
$12,000 and recorded this as deemed dividend.

Side Warrants

In connection with the bridge financing and the assumption of certain obligations by an entity
controlled by Mark Rimer (a director of the Company), the Company issued to that entity Side Warrants to
purchase an aggregate of 91,429 shares of the Company's common stock at an exercise price of $7.00 per
share (subject to adjustment), with a fair value of $487,000 at the date of issuance. The Side Warrants have
a term of 5 years and are exercisable as to 22,857 shares of the Company's common stock upon grant and as
to 68,572 shares of the Company's common stock upon the entity’s performance of the assumed
obligations. All performance obligations have been met and the Company has recorded merger advisory
expense of $487,000 related to the Side Warrants during the year ended December 31, 2017.

August 2017 Offering Warrants

In connection with the August 2017 Offering, the Company issued 2,680,000 warrants at an
exercise price of $3.00, which contain a down round provision. The August 2017 Offering Warrants were
exercisable immediately and expire 5 years from date of issuance. The terms of the August 2017 Offering
Warrants prohibit a holder from exercising its August 2017 Offering Warrants if doing so would result in

such holder (together with its affiliates) beneficially owning more than 4.99% of the Company’s
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.

As a result of the Series C Preferred Offering, the exercise price of the August 2017 Offering
Warrants was adjusted to $1.40 per share. 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 $211,000 and
recorded this as a deemed dividend.

Representative Warrants

In accordance with the underwriting agreement for the August 2017 Offering, the underwriter
purchased 60,000 warrants, with an exercise price of $3.125, for an aggregate price of $100. The
Representative Warrants are exercisable beginning one year after the date of the prospectus for the August
2017 Offering and expiring on a date which is no more than five years from the date of the prospectus for
the August 2017 Offering. The fair value of the warrants at date of issuance of approximately $113,000 was
treated as a stock issuance cost and recorded as a reduction to additional paid in capital.

Series A Conversion Warrants

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

Note Conversion Warrants

Upon the closing of the August 2017 Offering, $900,000 of the Company’s New Bridge Notes
were converted into an aggregate of 359,999 shares of the Company's common stock and 359,999 Note
Conversion Warrants. The Note Conversion Warrants have an exercise price of $3.00 per share and a five
year term. The exercise price contains a down round provision. The conversion of the Company's New
Bridge Notes was treated as an induced conversion and at the date of the conversion the Company recorded
an expense of approximately $1.0 million which is included in loss on extinguishment of debt and induced
conversion of convertible bridge notes in our consolidated statements of operations (See Note 7 -
Convertible Bridge Notes).

As a result of the Series C Preferred Offering, the exercise price of the Note Conversion Warrants
was adjusted to $1.40 per share. 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 $28,000 and recorded this as a
deemed dividend.

Convertible Promissory Note Warrants

On August 31, 2017, the Company made a payment of $83,333, two-thirds of the then outstanding
principal amount, which was more than 10 days after the Deferred Maturity Date and constituted an event
of default under the terms of the Note (the “Deferred Maturity Date Event of Default”). The Company
received a waiver for the Deferred Maturity Date Event of Default. As discussed in Note 6 – Long-Term
Debt, in connection with the waiver obtained, the Company issued the Convertible Promissory Note
Warrants to purchase 10,000 shares of the Company’s common stock. The issuance date of the Convertible
Promissory Note Warrants was October 3, 2017. They have an exercise price of $3.00 per share, which
contain a down round provision, and were exercisable immediately and expire 5 years from date of
issuance. The fair value of the warrants at date of issuance of approximately $15,000 was recorded as
interest expense and included in the consolidated statements of operations for the year ended December 31,
2017.

As a result of the Series C Preferred Offering, the exercise price of the Convertible Promissory
Note Warrants was adjusted to $1.40 per share. 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 $1,000 and
recorded this as a deemed dividend.

Series C Warrants

In connection with the Series C Preferred Offering, the Company issued 1,962,857 warrants at an
exercise price of $1.63, 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.

The following represents a summary of the warrants outstanding as of December 31, 2017:

Expiration

Issue Year
Warrants Assumed in Merger
(1) 2013
(2) 2014
(3) 2015
(4) 2015
(5) 2015
(6) 2016

January 2018
April 2020
February 2020
December 2020
January 2021
January 2021

Warrants
(7) 2017
(8) 2017
(9) 2017
(10) 2017
(11) 2017
(12) 2017
(13) 2017
(14) 2017

June 2022
June 2022
August 2022
August 2022
August 2022
August 2022
October 2022
May 2023

Underlying
Shares

Exercise
Price

23,055 $
12,487 $
23,826 $
4,081 $
38,732 $
29,168 $

270.00
120.00
67.20
49.80
36.30
36.30

45,600 $
91,429 $
2,680,000 $
60,000 $
856,446 $
359,999 $
10,000 $
1,962,857 $
6,197,681

2.75
7.00
1.40
3.125
10.00
1.40
1.40
1.63

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

These warrants were issued in connection with an offering which was completed in January 2013.

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

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

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

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

These warrants were issued in connection with an offering which was completed in January 2016.

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

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

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

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

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

discussed above.

(12)

(13)

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

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 above.

(14)

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

In the fourth quarter of 2017, the Company entered into Settlement Agreements with certain of its
accounts payable and accrued liability vendors (the “Creditors”) pursuant to which the Company agreed to
issue, to certain of its Creditors, 108,112 warrants to purchase 108,112 shares of the Company’s common
stock at an exercise price of $7.50 per share. The warrants were issued in February 2018. See Note 6 –
Long-Term Debt.

12.

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
consolidated financial statements.

FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs)

used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:

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

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

Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs

market participants would use in pricing the asset or liability.

Common Stock Warrant Liabilities.

Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify

to be treated as equity and, accordingly, are recorded as a liability.

2016 Warrant Liability

The Company assumed the 2016 Warrant Liability in the Merger and it represents the fair value of
Transgenomic warrants issued in January 2016, of which, 25,584 warrants remain outstanding as of
December 31, 2017. We are required to record these instruments at fair value at each reporting date and
changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are
reported in other income (expense) in our consolidated Statement of Operations.

The 2016 Warrant Liability is considered a Level 3 financial instrument and was valued using the
Monte Carlo methodology. Assumptions and inputs used in the valuation of the common stock warrants
include: remaining life to maturity of three years; annual volatility of 136%; and a risk-free interest rate of
1.98%.

During the year ended December 31, 2017, the change in the fair value of the liability measured

using significant unobservable inputs (Level 3) were comprised of the following:

Dollars in Thousands

Beginning balance at January 1

Additions - liability assumed in the Merger
Total (gains) or losses:

Recognized in earnings

Balance at December 31

For the Year Ended
December 31, 2017
—
$
615

226
841

13.

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 will expire on June 5, 2027. There are 666,666 shares of
common stock reserved for issuance under the 2017 Plan.

The Plan is administered by the Compensation Committee of the Board of Directors (the
“Committee”), which has the authority to set the number, exercise price, term and vesting provisions of the
awards granted under the Plan, subject to the terms thereof. Either incentive or non-qualified stock options
may be granted to employees of the Company, but only non-qualified stock options may be granted to non-
employee directors and advisors. However, in either case, the Plan requires that stock options must be
granted at exercise prices not less than the fair market value of the common stock on the date of the grant.
Options issued under the plan vest over periods as determined by the Committee and expire 10 years after
the date the option was granted.

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 consolidated statements of operations over the service period of the awards. 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.

Stock Options.

During the year ended December 31, 2017, The Company granted stock options to employees and
directors to purchase up to 232,332 shares of common stock at a weighted average exercise price of $1.85.
These awards have vesting periods of three to four years and had a weighted average grant date fair value
of $1.59. The fair value calculation of options granted during 2017 used the follow assumptions: risk free
interest rates of 1.87% to 2.01%, based on the U.S. Treasury yield in effect at the time of grant; expected
life of six years; and volatility of 118% based on historical volatility of the Company’s common stock over
a time that is consistent with the expected life of the option.

The following table summarizes stock option activity under our plans during the year ended

December 31, 2017:

Outstanding at January 1, 2017

Granted
Forfeited

Outstanding at December 31, 2017
Exercisable at December 31, 2017

Number of

Options
24,600 $
232,332
(20,448 )
236,484 $
13,161 $

Weighted-Average
Exercise Price

107.83
1.85
68.39
7.12
93.27

As of December 31, 2017, there were 180,645 options that were vested or expected to vest with an

aggregate intrinsic value of zero and a remaining weighted average contractual life of 9.6 years.

During both of the years ended December 31, 2017 and 2016, we recorded compensation expense
for all stock awards of less than $0.1 million within operating expense in the accompanying statements of
operations. As of December 31, 2017, the unrecognized compensation expense related to unvested stock
awards was $0.3 million, which is expected to be recognized over a weighted-average period of 3.6 years.

Stock Appreciation Rights (“SARs”)

As of December 31, 2017, zero SARs shares were outstanding. During year ended December 31,
2017, the SARs liability decreased approximately $8,000 and at December 31, 2017, no liability was
recorded in accrued expenses since there were no shares outstanding.

14.

SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE

Sales

Revenue includes service revenue (patient diagnostic services and contract diagnostic services)
and clinical research grants. The following table summarizes service revenue, net of contractual
allowances, for the years ended December 31, 2017 and 2016:

Service revenue
Less: contractual allowances and adjustments
Service revenue, net

2016

2017
$ 2,565 $ 3,385
(863 ) (1,284 )
$ 1,702 $ 2,101

The following summarizes by payer type for the years ended December 31, 2017 and 2016:

Medicaid
Medicare
Self-pay
Third party payers
Contract diagnostic services

2016

2017
$

25
39 $
688
569
253
103
500 1,135
—
491
$ 1,702 $ 2,101

Revenue from the Medicare and Medicaid programs account for a portion of the Company’s
patient diagnostic service revenue. Laws and regulations governing those programs are extremely complex
and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates
will change by a material amount in the near term.

Revenue from clinical research grants are federal or state grants awarded to the Company to fund
salaries, fringe benefits, and the purchase of supplies and equipment for specific research and development
projects. Clinical research grant revenue of $0.3 million in 2017 includes grants from the National Cancer
Institute of the National Institutes of Health and from the State of Nebraska Department of Economic
Development. The project activities involved development of ICE COLD-PCR to interrogate multiple
genes taken from blood samples. The grant period ended December 31, 2017.

The Company recognized revenue from three and two customers in 2017 and 2016, respectively,
that represented in the aggregate 50 percent (ranging from 15 to 20 percent) and 33 percent (ranging from
15 to 18 percent) of net revenues, respectively. No other customers represented 10% or greater of net
revenue.

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 for the years ended December 31, 2017 and

2016:

Medicaid

2017
$

2016

37 $

Medicare
Self-pay
Third party payers
Contract diagnostic services
Other

Less allowance for doubtful accounts
Accounts receivable, net

232
256
63
53
881
1,066
—
445
—
—
$ 1,857 1,198
(810 )
(1,127 )
388
730 $
$

15.

SUBSEQUENT EVENTS

Loan Agreement

On January 8, 2018, the Company received gross proceeds of $400,000 when it entered into an
agreement with the Connecticut Department of Economic and Community Development (the “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 has a maturity date of January 27,
2028 and an annual interest rate of 3.25% with principal and interest payments due monthly.

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 Company’s 2017 Stock Option and Incentive Plan (the
“2017 Plan”) to:

•

increase the aggregate number of shares authorized for issuance under the 2017 Plan by
5,389,500 shares to 6,056,166 shares and cumulatively increased on January 1, 2019 and on
each January 1 thereafter by the lesser of the annual increase for such year or 500,000 shares;
increase the maximum number of shares that may be granted in the form of stock options or
stock appreciation rights to any one individual in any one calendar year and the maximum
number of shares underlying any award intended to qualify as performance-based
compensation to any one individual in any performance cycle, in each case to 1,000,000
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.

Equity Purchase Agreement

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

Sales of the Company’s common stock, if any, may be made in sales deemed to be “at-the-
market” equity offerings as defined in Rule 415 promulgated under the Securities Act of 1933, as amended
(the “Securities Act”), at a purchase price equal to 97.25% of the volume weighted average sales price of
the common stock reported on the date that Leviston receives a capital call from the Company.

Leviston purchased 721,153 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 $1.04. The shares were sold pursuant to the Shelf Registration Statement. The net proceeds to the
Company from this sale were approximately $744,000.

In consideration of Leviston’s agreement to enter into the 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 “Commitment Shares”), payable as follows: 1.75% on or before

February 12, 2018. This amount, of $140,000, was paid to Leviston through the issuance of 170,711 shares
of the Company’s common stock on February 12, 2018; 1.75% on the third calendar day after the date on
which the registration statement on Form S-1 that the Company plans to file with the SEC is declared
effective by the SEC; and 1.75% on the thirtieth calendar day after the date on which such registration
statement on Form S-1 is declared effective by the SEC.

The Company agreed to pay to Leviston, on each day that Leviston receives a capital call from the
Company, all expenses associated with depositing, clearing, selling and mailing of the stock certificates, a
fee of 0.75% of any amount purchased by Leviston. Also, the Company paid $35,000 to Leviston for a
documentation fee for preparing the Purchase Agreement. Leviston will refund the Company $15,000 if
certain future conditions are met.

Because the Company’s existing registration statement on Form S-3 expired on February 13, 2018
and, due to the timing of the filing of the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2017, the Company will not be eligible to file a new Form S-3 registration statement until
September 1, 2018, the Company agreed to prepare and file with the SEC a registration statement on Form
S-1 the (“S-1 Registration Statement”), by April 15, 2018 and to use reasonable best efforts to cause the S-
1 Registration Statement to be declared effective by the SEC within ninety days thereafter. If the Company
does not file the S-1 Registration Statement with the SEC by April 15, 2018, the Company will be required
to pay to Leviston liquidated damages in the amount of $100,000, and liquidated damages on a sliding scale
each day thereafter. The Company is also required to pay liquidated damages of $100,000 on each event of
default under
the Purchase Agreement. The Company has provided Leviston with customary
indemnification rights under the Purchase Agreement.

As a result of the issuance of the Investor Shares, the conversion price of the Company’s Series C
Preferred Stock was automatically adjusted from $1.40 per share to $1.04 per share, the conversion price of
the Company’s Series B Convertible Preferred Stock was automatically adjusted from $1.40 per share to
$1.04 per share and the exercise price of certain warrants to purchase shares of the Company’s common
stock that contain down round provisions was automatically adjusted to $1.04 per share.

Issuance of Common Stock

On February 12, 2018 the Company issued 1,814,754 shares of its common stock, par value $0.01
per share to several of its trade creditors that are unaffiliated with the Company in exchange for
cancellation of an aggregate of $1.9 million of indebtedness to such trade creditors. (See Note 6 – Long-
Term Debt for additional information). The shares were issued pursuant to the Company’s Shelf
Registration Statement.

Preferred Stock induced conversions

On March 21, 2018, the Company entered into a Letter Agreement (the “Agreement”) with certain
holders (the “Investors”) 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, par value $0.01 per share (“Common Stock”), issued in the Company’s public offering in
August 2017 and registered direct offering in November 2017. Pursuant to the 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 Agreement, the exercise price of the Warrants was
reduced to $0.75 per share (the “Exercise Price Reduction”) and the conversion price of the Preferred Stock
was reduced to $0.75 (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 in increments of up to 4.99%
of the shares of Common Stock outstanding as of the date of the Agreement and (ii) one Investor agreed to
exercise 666,666 Warrants and another Investor agreed to exercise 500,000 Warrants in increments of up to
4.99% of the shares of Common Stock outstanding as of the date of the Agreement, in each case in
accordance with the beneficial ownership limitations set forth in the Company’s Certificate of Designation
of Preferences, Rights and Limitations of Series B Convertible Preferred Stock, the Company’s Certificate
of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock and the

Warrants. These transactions resulted in net cash proceeds to the Company of $0.2 million as of April 13,
2018.

Nasdaq Delisting Notice

On March 26, 2018, Precipio, Inc. received written notice (the “Notice”) from The Nasdaq Stock
Market LLC (“Nasdaq”) indicating that, based on the closing bid price of the Company’s common stock for
the preceding 30 consecutive business days (February 9, 2018 to March 23, 2018) that the Company is not
in compliance with the $1.00 minimum bid price requirement for continued listing on the Nasdaq Capital
Market (the “Minimum Bid Price Requirement”), as set forth in Nasdaq Listing Rule 5550(a)(2). The
Notice has no immediate effect on the listing of Precipio’s common stock, and its common stock will
continue to trade on the Nasdaq Capital Market under the symbol “PRPO” at this time.

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), Precipio has a period of 180 calendar
days, or until September 24, 2018 to regain compliance with the Minimum Bid Price Requirement. To
regain compliance, the closing bid price of Precipio’s common stock must meet or exceed $1.00 per share
for at least ten consecutive business days during this 180 calendar day period.

If Precipio is not in compliance with the Minimum Bid Price Requirement by September 24, 2018,
Nasdaq may provide Precipio with a second 180 calendar day period to regain compliance. To qualify for
the second 180 calendar day period, the Company would be required to (i) meet the continued listing
requirement for the Nasdaq Capital Market for market value of publicly held shares and all other initial
listing standards for the Nasdaq Capital Market, except for the Minimum Bid Price Requirement, and (ii)
notify Nasdaq of its intent to cure its noncompliance with the Minimum Bid Price, including by effecting a
reverse stock split, if necessary. If Precipio does not indicate its intent to cure the deficiency or if it does
not appear to Nasdaq that it would be possible for the Company to cure the deficiency, Precipio would not
be eligible for the second 180 calendar day period, and its common stock would then be subject to delisting
from the Nasdaq Capital Market.

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

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

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10-K, 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 as of December 31, 2017.

(b)

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining an adequate system of internal
control over financial reporting. Our system of internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the United
States of America.

Our internal control over financial reporting includes those policies and procedures that:
• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
our transactions and dispositions of our assets;
• provide reasonable assurance that our transactions are recorded as necessary to permit
preparation of our financial statements in accordance with accounting principles generally
accepted in the United States of America, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and our directors; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial
statements.

Because of its inherent limitations, a system of internal control over financial reporting can
provide only reasonable assurance and may not prevent or detect misstatements. Further, because of
changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our
system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are
identified.

Management has conducted, with the participation of the Chief Executive Officer and Chief
Financial Officer, an assessment, including testing of the effectiveness, of our internal control over

financial reporting as defined in Rule 13(a)-15(f) under the Exchange Act as of December 31, 2017.
Management’s assessment of internal control over financial reporting was conducted using the criteria in
the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”). Based on that assessment, management has concluded that the
Company’s internal control over financial reporting is effective.

(c)

Changes in internal control over financial reporting

There has been no change in our internal control over financial reporting during the quarter ended
December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met, and therefore, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any,
within a company have been detected. We do not expect that our disclosure controls and procedures or our
internal control over financial reporting are able to prevent with certainty all errors and all fraud.

We are continuing to integrate legacy internal controls over financial reporting into our financial
reporting framework. Such changes have resulted, and may continue to result in changes in our internal
control over financial reporting results that materially affect our internal control over financial reporting.
Management has increased the Company’s technical accounting abilities through the hiring of consultants
experienced in such matters, and as such, material weaknesses related to complex transactions have been
alleviated. Other than the changes that have and may continue to result from such integration, there has
been no change in our internal control over financial reporting during the year ended December 31, 2017
that
affect,
or
our internal control over financial reporting.

has materially

to materially

reasonably

affected,

likely

We continue to integrate the business processes and information systems in effect prior to the

reverse merger, including internal controls.

As a smaller reporting company, the Company is not required to include in this Annual Report a
report on the effectiveness of internal control over financial reporting by the Company’s independent
registered public accounting firm.

Item 9B. Other Information

None.

Part III

Item 10. Directors, Executive Officers and Corporate Governance

Board of Directors

NAME
Ilan Daniel
Michael Luther

David Cohen
Douglas Fisher

Jeffrey Cossman

Samuel Riccitelli

Mark Rimer

Position

AGE
46
61

Chief Executive Officer and Director
Director, Member of Audit Committee and Compensation

Committee

59
41

Director
Director, Member of the Compensation Committee and

Audit Committee

Director, Member of the Compensation Committee and
the Nominating and Corporate Governance Committee
Chairman, Director, Member of the Audit Committee and
the Nominating and Corporate Governance Committee
Director, Member of the Compensation Committee and
the Nominating and Corporate Governance Committee

Set forth below is information concerning the age, principal occupation, employment and
directorships during the past financial year and positions within the Company of each director, and the year
in which he first became a director of the Company.

Samuel Riccitelli, Chairman, age 59. Mr. Riccitelli has been an independent consultant since
February 2017. Mr. Riccitelli served as President and Chief Executive Officer from October 2012 to
February 2017 and on the Board of Directors since June 2014 of Miragen Therapeutics, Inc. (formerly
Signal Genetics, Inc.), a publicly traded molecular diagnostic company. From July 2011 to October 2012,
Mr. Riccitelli was an independent consultant. From October 2001 to June 2011, he served as the Executive
Vice President and Chief Operating Officer of Genoptix, Inc., a publicly traded diagnostic services
company focused on the needs of community hematologists and oncologists. From 1995 to 2001, he served
in a number of research and development and general management leadership positions for Becton,
Dickinson and Company. From 1989 to 1994, he served in several positions at Puritan-Bennett
Corporation, including, most recently, as general manager. Mr. Riccitelli has served as a member of the
board of directors of Orthopediatics, Inc. since December 2017. Mr. Riccitelli also served on the Board of
Directors of Exagen Diagnostics, Inc. from October 2011 to September 2014. He received a B.A. in
Biology from Washington and Jefferson College and a M.S. Eng. degree from The University of Texas in
Mechanical & Biomedical Engineering. Mr. Riccitelli was appointed as director of the Company since the
Merger on June 2017. We believe Mr. Riccitelli’s deep experience in the diagnostics field, chiefly as COO
of Genoptix, one of the industry’s leading diagnostic companies; as well as his experience as CEO of
Signal Genetics, a publicly-traded diagnostics company, provides substantial executive experience in both
the industry, and knowledge of public markets.

Mark Rimer, age 36. Mr. Rimer has been a partner at Kuzari Group, a boutique private investment
group with a broad mandate to invest in full or partial buy-outs, growth capital, and venture capital across a
broad range of industries since September 2009. Mr. Rimer serves on the Board of Directors of several
companies, including Precipio, and is actively involved in business development roles at numerous
portfolio companies. Prior to joining Kuzari, Mr. Rimer worked for a London-based private equity group,
RP Capital Group, managing a number of investments across several emerging markets. Mr. Rimer is a
Chartered Accountant, earned an undergraduate degree in Politics and Economics from Bristol University
and an MBA from the NY Stern School of Business. Mr. Rimer was appointed as director of the Company
in March 2012. Mr. Rimer has been an investor in Precipio from its inception. He brings with him not only
a strong financial, accounting and investment background, but also a deep familiarity with the Company’s
business model and its evolution over the years.

Jeffrey Cossman, M.D., age 70. Dr. Cossman was a founder of and served as Chief Executive
Officer and Chairman of the Board at United States Diagnostic Standards, Inc. from 2009 to 2014, and as a
member of the Board of The Personalized Medicine Coalition from 2008 to 2014. Prior to that, he served as
Chief Scientific Officer and as member of the Board of Directors of The Critical Path Institute, and as
Medical Director of Gene Logic, Inc. He was Professor and Chairman of the Department of Pathology at
Georgetown University Medical Center where he held the Oscar Benwood Hunter Chair of Pathology and
he served as Senior Investigator in Hematopathology at the National Cancer Institute. He is currently a
medical advisor to Epigenomics AG. Dr. Cossman holds a B.S. from the University of Michigan and an
M.D. from the University of Michigan Medical School. He is board-certified in pathology and trained in
pathology and hematopathology at the University of Michigan, Stanford University and the National
Institutes of Health. Dr. Cossman was appointed as director of the Company since September 2017. The
Board believes that, as former chair of the department of pathology of Georgetown University, a premier
academic institution, Dr. Cossman provides significant insight and guidance as to how the company should
execute on its model. Furthermore, his experience in the molecular field is significant to the Company’s
strategy.

Douglas Fisher, M.D., MBA, age 41. Dr. Fisher is currently an Executive in Residence at
InterWest Partners LLC, a venture capital firm, where he has worked since March 2009. Dr. Fisher also
works and serves as the Chief Business Officer at Sera Prognostics, Inc. since January 2015. Prior to
joining InterWest, Dr. Fisher served as Vice President of New Leaf Venture Partners LLC, a private equity
and venture capital firm, from January 2006 to March 2009. Prior to joining New Leaf, Dr. Fisher was a

project leader with The Boston Consulting Group, Inc., a global management consulting firm, from
November 2003 to February 2006. He currently serves on the board of Obalon Therapeutics, Inc.,
Gynesonics, Inc. and Indi Molecular, Inc., and previously served on the board of QuatRx Pharmaceuticals
Company, Cardiac Dimensions, PMV Pharmaceuticals, Inc. and Sera Prognostics, Inc. Dr. Fisher holds an
A.B. and a B.S. from Stanford University, an M.D. from the University of Pennsylvania School of
Medicine and an MBA from The Wharton School of Business at the University of Pennsylvania. Mr. Fisher
was appointed as director of the Company since September 2017. Dr. Fisher’s diverse background as both a
physician, and an investor in biotech markets, is extremely beneficial to the Board in planning the
Company’s strategic growth and how to approach and manage the financial markets.

David Cohen, age 59. Mr. Cohen is the Chief Operating Officer and co-owner of Standard Oil of
Connecticut, Inc., the largest independent petroleum retailing company in Connecticut. He founded several
highly successful ventures, including: Standard Security Systems, a provider of electronic security services;
ResCom Energy, a multi-state supplier of deregulated electricity; Moneo Technology Solutions, a provider
of security and network infrastructure solutions; and My Gene Counsel, a cancer bioinformatics company.
Mr. Cohen is also a highly experienced investor in numerous start-up and early stage businesses. He
currently serves on the Boards of: eBrevia, Emme Controls, Foresite MSP, My Gene Counsel, The Platt &
LaBonia Company, and Sirona Medical Technologies. Mr. Cohen holds a B.A. from Harvard College and
an MBA from the Harvard Business School. Mr. Cohen was appointed as director of the Company since
November 2017. Mr. Cohen brings to the Board a wealth of experience as a serial entrepreneur that has
built several successful companies, as well as a strong investment track record. Mr. Cohen has been an
early-stage investor in Precipio and brings his deep familiarity of the business to help guide management
and the Board in its strategy.

Michael Luther, PhD, age 61. Dr. Luther has served as President and Chief Executive Officer of
Bantam Pharmaceutical, LLC, a pharmaceutical company focused on the discovery and development of
compounds to treat cancer with a focus on RNA translation, since March 2016. From October 2013 to
October 2015, Dr. Luther was Senior Vice President and General Manager, Discovery and Development
Services, at Albany Molecular Research, Inc. (NASDAQ: AMRI), a global contract research and
manufacturing organization offering drug discovery, development and manufacturing services, where he
was responsible for the strategic, operational and business development activities for Albany Molecular
Research, Inc.’s global discovery and development divisions. From August 2012 to September 2013, Dr.
Luther was Corporate Vice President of Global Discovery Research Services at Charles River Laboratories
(NYSE: CRL), a global provider of products and services to pharmaceutical and biotechnology companies,
government agencies and academic institutions, where he served as the general manager of the firm’s
discovery business unit, including developing and implementing strategic and operating plans. Prior to his
role at Charles River, from March 2009 to August 2012, he was President and a member of the Board of
Directors of the David H. Murdock Research Institute, a non-profit contract research organization located
in Kannapolis, North Carolina, where he led and directed all activities of the institute, including applied
research and development activities. From November 2006 to March 2009, Dr. Luther held the position of
Vice President and Site Head at Merck Frosst, a pharmaceutical company in Montreal, Canada, focused on
the delivery of Phase I product candidates from target to clinic for novel therapeutics in respiratory and
metabolic disorders. Prior to Merck Frosst, from 1991 to 2006, he held positions of increasing
responsibilities at GlaxoSmithKline, a global healthcare company that researches and develops a broad
range of innovative medicines and brands, culminating in his appointment as Vice President, High
Throughput Biology. Dr. Luther holds a Bachelor of Science degree in Biology and Chemistry from North
Carolina State University, a Master in Business Administration from Duke University, Fuqua School of
Business, and a Ph.D. in Biophysical Chemistry from Saint Louis University School of Medicine. He
served as a member of the Board of Directors of Islet Sciences, Inc., a biopharmaceutical company (OTC:
ISLT), from March 2014 to June 2015. The Board selected Dr. Luther to serve as a director because it
believes he possesses valuable experience in the healthcare and pharmaceutical industries and extensive
strategic, scientific and business experience in such industries, which brings a unique and valuable
perspective to the Board. Dr. Luther was appointed as director of the Company since April 2014.

Ilan Danieli, age 46. Mr. Danieli was the founder of Precipio Diagnostics LLC and has been its
chief executive officer since 2011. Mr. Danieli assumed the role of Director of Precipio, Inc at the time of
the Merger. With over 20 years managing small and medium-size companies, some of his previous
experiences include COO of Osiris, a publicly-traded company based in New York City with operations in
the US, Canada, Europe and Asia; VP of Operations for Laurus Capital Management, a multi-billion dollar
hedge fund; and various other entrepreneurial ventures. Mr. Danieli holds an MBA from the Darden School
at the University of Virginia, and a BA in Economics from Bar-Ilan University in Israel.

Code of Business Conduct and Ethics

Our Board has adopted a code of ethical conduct that applies to our principal executive officer,
principal financial officer and senior financial management. This code of ethical conduct is embodied
within our Code of Business Conduct and Ethics, which applies to all persons associated with our
Company, including our directors, officers and employees (including our principal executive officer,
principal financial officer, principal accounting officer and controller). The Code of Business Conduct and
Ethics is available in the Investor Relations section of our website at www.precipiodx.com. In order to
satisfy our disclosure requirements under Item 5.05 of Form 8-K, we will disclose amendments to, or
waivers of, certain provisions of our Code of Business Conduct and Ethics relating to our chief executive
officer, chief financial officer, chief accounting officer, controller or persons performing similar functions
on our website promptly following the adoption of any such amendment or waiver. The Code provides that
any waivers of, or changes to, the Code that apply to the Company’s executive officers or directors may be

made only by the Audit Committee. In addition, the Code includes updated procedures for non-executive
officer employees to seek waivers of the Code.

Involvement in Certain Legal Proceedings

No director, executive officer, promoter or person of control of our Company has, during the last
ten years: (i) been convicted in or is currently subject to a pending criminal proceeding (excluding traffic
violations and other minor offenses); (ii) been a party to a civil proceeding of a judicial or administrative
body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or
final order enjoining future violations of, or prohibiting or mandating activities subject to any Federal or
state securities or banking or commodities laws including, without limitation, in any way limiting
involvement in any business activity, or finding any violation with respect to such law, nor (iii) any
bankruptcy petition been filed by or against the business of which such person was an executive officer or a
general partner, whether at the time of the bankruptcy or for the two years prior thereto.

We are not engaged in, nor are we aware of any pending or threatened, litigation in which any of
our directors, executive officers, affiliates or owner of more than 5% of our common stock is a party
adverse to us or has a material interest adverse to us.

Corporate Governance

Board Leadership Structure

Our Board has determined that having an independent director serve as the Chairperson of the
Board is in the best interests of our stockholders. Our Chairperson of the Board is Samuel Riccitelli. Ilan
Danieli, CEO, is the only member of our Board who is not an independent director. We believe that this
leadership structure enhances the accountability of our CEO to the Board and strengthens the Board’s
independence from management. While both Mr. Riccitelli and Mr. Danieli are actively engaged in
significant matters affecting our Company, such as long-term strategy, we believe splitting these leadership
positions enables Mr. Danieli to focus his efforts on running our business and managing our Company
while permitting Mr. Riccitelli to focus on the governance of our Company, including Board oversight.

Director Attendance at Meetings

Our Board conducts its business through meetings of our Board, both in person and telephonic,
and actions taken by written consent in lieu of meetings. During the year ended December 31, 2017, our
Board held four meetings. All directors attended at least 75% of the meetings of our Board and of the
committees of our Board on which they served during 2017.

Our Board encourages all directors to attend our annual meetings of stockholders unless it is not

reasonably practicable for a director to do so.

Committees of our Board of Directors

Our Board has established and delegated certain responsibilities to its standing Audit Committee,

Compensation Committee and Nominating and Corporate Governance Committee.

Audit Committee

We have a separately designated standing Audit Committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Audit
Committee’s primary duties and responsibilities include monitoring the integrity of our financial
statements, monitoring the independence and performance of our external auditors, and monitoring our
compliance with applicable legal and regulatory requirements. The functions of the Audit Committee also
include reviewing periodically with our independent registered public accounting firm the performance of
the services for which they are engaged, including reviewing the scope of the annual audit and its results,
reviewing with management and the auditors the adequacy of our internal accounting controls, reviewing
with management and the auditors the financial results prior to the filing of quarterly and annual reports,
reviewing fees charged by our independent registered public accounting firm and reviewing any
transactions between our Company and related parties. Our independent registered public accounting firm
reports directly and is accountable solely to the Audit Committee. The Audit Committee has the sole
authority to hire and fire the independent registered public accounting firm and is responsible for the
oversight of the performance of their duties, including ensuring the independence of the independent
registered public accounting firm. The Audit Committee also approves in advance the retention of, and all
fees to be paid to, the independent registered public accounting firm. The rendering of any auditing services
and all non-auditing services by the independent registered public accounting firm is subject to prior
approval of the Audit Committee.

The Audit Committee operates under a written charter which is available in the Investor Relations
section of our website at www.precipiodx.com. The Audit Committee is required to be composed of
directors who are independent under the rules of the SEC and the listing standards of The Nasdaq Stock
Market LLC (“NASDAQ”).

The current members of the Audit Committee are directors Mr. Riccitelli, the Chairperson of the
Audit Committee, Dr. Fisher and Dr. Luther, all of whom have been determined by the Board to be
independent under the NASDAQ listing standards and rules adopted by the SEC applicable to audit
committee members. The Board has determined that Mr. Riccitelli, Dr. Fisher and Dr. Luther each qualifies
as an “audit committee financial expert” under the rules adopted by the SEC and the Sarbanes Oxley Act of
2002. The Audit Committee met one time during 2017 and did not take any actions by written consent.

REPORT OF THE AUDIT COMMITTEE

Precipio’s management is responsible for the preparation of the its financial statements and for
maintaining an adequate system of internal controls and processes for that purpose. Marcum LLP
(“Marcum”) acts as Precipio’s independent registered public accounting firm and they are responsible for
conducting an independent audit of Precipio’s annual financial statements in accordance with auditing
standards generally accepted in the United States of America and issuing a report on the results of their
audit. The Audit Committee is responsible for providing independent, objective oversight of both of these
processes.

The Audit Committee has reviewed and discussed Precipio’s audited financial statements for the
year ended December 31, 2017 with management of Precipio and with representatives of Marcum. The
Audit Committee's discussions with Marcum also included the matters required by Auditing Standard No.
16, Communications with Audit Committees, as adopted by the Public Company Accounting Oversight
Board (PCAOB). In addition, the Audit Committee received the written disclosures and the letter from
Marcum required by applicable requirements of the PCAOB regarding its communications with the Audit
Committee concerning independence, and has discussed with Marcum its independence from Precipio and
its management.

Based on the foregoing, the Audit Committee has recommended to the Board of Directors, and the
Board of Directors has approved, that the audited financial statements of Precipio for the year ended
December 31, 2017 be included in the Company’s Annual Report on Form 10-K for filing with the SEC.

Mr. Samuel Riccitelli
Michael A. Luther, Ph.D.
Douglas Fisher, MD

Compensation Committee

The primary duties and responsibilities of our standing Compensation Committee are to review,
modify and approve the overall compensation policies for the Company, including the compensation of the
Company’s Chief Executive Officer and other senior management; establish and assess the adequacy of
director compensation; and approve the adoption, amendment and termination of the Company’s stock
option plans, pension and profit sharing plans, bonus plans and similar programs. The Compensation
Committee may delegate to one or more officers the authority to make grants of options and restricted stock
to eligible individuals other than officers and directors, subject to certain limitations. Additionally, the
Compensation Committee has the authority to form subcommittees and to delegate authority to any such
subcommittee. The Compensation Committee also has the authority, in its sole discretion, to select, retain
and obtain, at the expense of the Company, advice and assistance from internal or external legal,
accounting or other advisors and consultants. Moreover, the Compensation Committee has sole authority to
retain and terminate any compensation consultant to assist in the evaluation of director, Chief Executive
Officer or senior executive compensation, including sole authority to approve such consultant’s reasonable
fees and other retention terms, all at the Company’s expense.

The Compensation Committee operates under a written charter which is available on our website
at www.precipiodx.com. All members of the Compensation Committee must satisfy the independence
requirements of NASDAQ applicable to compensation committee members.

The Compensation Committee currently consists of directors Dr. Luther, Mr. Rimer, Dr. Cossman
and Dr. Fisher. Dr. Luther was Chairperson of the Compensation Committee form the Merger date to
February 8, 2018. On February 8, 2018, Dr. Fisher was appointed Chairperson of the Compensation
Committee. Each of the Compensation Committee members has been determined by the Board to be
independent under NASDAQ listing standards applicable to compensation committee members. The
Compensation Committee met two times during 2017 and did not take any actions by written consent.

Nominating and Corporate Governance Committee

The Nominating and Corporate Governance Committee identifies, reviews and evaluates
candidates to serve on the Board; reviews and assesses the performance of the Board and the committees of
the Board; and assesses the independence of our directors. The Nominating and Corporate Governance
Committee is also responsible for reviewing the composition of the Board’s committees and making
recommendations to the entire Board regarding the chairpersonship and membership of each committee. In
addition, the Nominating and Corporate Governance Committee is responsible for developing corporate
governance principles and periodically reviewing and assessing such principles, as well as periodically
reviewing the Company’s policy statements to determine their adherence to the Company’s Code of
Business Conduct and Ethics.

The Nominating and Corporate Governance Committee has adopted a Director Nominees
Consideration Policy, whereby Board candidates are identified primarily through suggestions made by
directors, management and stockholders of the Company. We have implemented no material changes to the
procedures by which stockholders may recommend nominees for the Board. The Nominating and
Corporate Governance Committee will consider director nominees recommended by stockholders that are
submitted in writing to the Company’s Corporate Secretary in a timely manner and which provide
necessary biographical and business experience information regarding the nominee. The Nominating and
Corporate Governance Committee does not intend to alter the manner in which it evaluates candidates,
including the criteria considered by the Nominating Committee, based on whether or not the candidate was
recommended by a stockholder. The Board does not prescribe any minimum qualifications for director
candidates, and all candidates for director will be evaluated based on their qualifications, diversity, age,
skill and such other factors as deemed appropriate by the Nominating and Corporate Governance
Committee given the current needs of the Board, the committees of the Board and the Company. Although
the Nominating and Corporate Governance Committee does not have a specific policy on diversity, it
considers the criteria noted above in selecting nominees for directors, including members from diverse
backgrounds who combine a broad spectrum of experience and expertise. Absent other factors which may
be material to its evaluation of a candidate, the Nominating and Corporate Governance Committee expects
to recommend to the Board for selection incumbent directors who express an interest in continuing to serve
on the Board. Following its evaluation of a proposed director’s candidacy, the Nominating and Corporate
Governance Committee will make a recommendation as to whether the Board should nominate the
proposed director candidate for election by the stockholders of the Company.

The Nominating and Corporate Governance Committee operates under a written charter which is
available on our website at www.precipiodx.com. No member of the Nominating and Corporate
Governance Committee may be an employee of the Company and each member must satisfy the
independence requirements of NASDAQ and the SEC.

The Nominating and Corporate Governance Committee currently consists of directors Dr.
Cossman, Mr. Riccitelli and Mr. Rimer, each of whom has been determined by the Board to be independent
under NASDAQ listing standards. The Nominating and Corporate Governance Committee did not meet or
take any actions by written consent during 2017.

Oversight of Risk Management

Risk is inherent with every business, and how well a business manages risk can ultimately
determine its success. We face a number of risks, including economic risks, financial risks, legal and
regulatory risks and others, such as the impact of competition. Management is responsible for the day-to-
day management of the risks that we face, while our Board, as a whole and through its committees, has
responsibility for the oversight of risk management. In its risk oversight role, our Board is responsible for
satisfying itself that the risk management processes designed and implemented by management are
adequate and functioning as designed. Our Board assesses major risks facing our Company and options for
their mitigation in order to promote our stockholders’ interests in the long-term health of our Company and
our overall success and financial strength. A fundamental part of risk management is not only
understanding the risks a company faces and what steps management is taking to manage those risks, but
also understanding what level of risk is appropriate for us. The involvement of our full Board in the risk
oversight process allows our Board to assess management’s appetite for risk and also determine what
constitutes an appropriate level of risk for our Company. Our Board regularly includes agenda items at its
meetings relating to its risk oversight role and meets with various members of management on a range of
topics, including corporate governance and regulatory obligations, operations and significant transactions,
risk management, insurance, pending and threatened litigation and significant commercial disputes.

While our Board is ultimately responsible for risk oversight, various committees of our Board
oversee risk management in their respective areas and regularly report on their activities to our entire
Board. In particular, the Audit Committee has the primary responsibility for the oversight of financial risks
facing our Company. The Audit Committee’s charter provides that it will discuss our major financial risk
exposures and the steps we have taken to monitor and control such exposures. Our Board has also
delegated primary responsibility for the oversight of all executive compensation and our employee benefit
programs to the Compensation Committee. The Compensation Committee strives to create incentives that
encourage a level of risk-taking behavior consistent with our business strategy.

We believe the division of risk management responsibilities described above is an effective
approach for addressing the risks facing our Company and that our Board’s leadership structure provides
appropriate checks and balances against undue risk taking.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act and the rules of the SEC require our directors, certain officers
and beneficial owners of more than 10% of our outstanding common stock to file reports of their ownership
and changes in ownership of our common stock with the SEC. We believe all Section 16 reports were filed
in a timely manner during 2017.

Information Regarding Executive Officers

A list of our section 16 executive officers and executive management together with biographical
information appears below.

Executive Management

NAME
Ilan Danieli
Carl R. Iberger

AGE

Position

46
65

Chief Executive Officer
Chief Financial Officer

Mr. Danieli was the founder of Precipio Diagnostics LLC and was the Chief Executive Officer of
Precipio Diagnostics LLC since 2011. Mr. Danieli assumed the role of Chief Executive Officer of Precipio,
Inc. at the time of the Merger. With over 20 years managing small and medium-size companies, some of
his previous experiences include COO of Osiris, a publicly-traded company based in New York City with
operations in the US, Canada, Europe and Asia; VP of Operations for Laurus Capital Management, a multi-
billion dollar hedge fund; and in various other entrepreneurial ventures. Ilan holds an MBA from the
Darden School at the University of Virginia, and a BA in Economics from Bar-Ilan University in Israel.

Mr. Iberger was named Chief Financial Officer in October 2016. For the years 1990 through 2015,
Mr. Iberger held the positions of Chief Financial Officer and Executive Vice President at Dianon Systems,
DigiTrace Care Services and SleepMed, Inc. Mr. Iberger has significant diagnostic healthcare experience in
mergers and acquisitions, private equity transactions, public offerings and executive management in high
growth environments. Mr. Iberger holds a Masters Degree in Finance from Hofstra University and a
Bachelor of Science Degree in Accounting from the University of Connecticut.

Executive Management
Name
Stephen Miller
Ahmed Zaki Sabet
Ayman A. Mohamed

Age
51
32
33

Chief Commercial Officer
Chief Operating Officer
SVP R&D and Laboratory Operations

Positon with the Company

Mr. Miller currently serves as the Chief Commercial Officer of Precipio, joining Precipio from
Transgenomic Inc. where he served as SVP & General Manager since 2013. Mr. Miller has over 25 years’
experience in the diagnostic and biotechnology sectors, with in-depth experience in developing and
implementing business strategies. Mr. Miller also has broad experience successfully leading sales,
marketing, reimbursement and business development. Prior to joining Precipio, Mr. Miller held executive
commercial positions at BG Medicine and Mira Dx. He also held a variety of key positions within Athena
Diagnostics with responsibilities for reimbursement, corporate accounts, business development, marketing
and sales. His last position with Athena was as the Vice President of Sales & Marketing as that company
grew from $6 million to over $100 million in sales. Mr. Miller received a B.A. in Business Psychology
from Miami University.

Mr. Sabet is a founder of Precipio Diagnostics, LLC and was named Chief Operating Officer of
Precipio, Inc. in June 2017 after serving as Vice President Operations for Precipio Diagnostics, LLC since
2011.

Mr. Mohamed is a founder of Precipio Diagnostics, LLC and was named Senior Vice President
R&D and Laboratory Operations of Precipio, Inc. in June 2017 after serving as Vice President of Precipio
Diagnostics, LLC since 2011.

Review and Approval of Related Person Transactions

We recognize that related person transactions can present potential or actual conflicts of interest
and create the appearance that our decisions are based on considerations which may not be in our best
interests or the best interests of our stockholders. Accordingly, as a general matter, we prefer to avoid
related person transactions. Nevertheless, we recognize that there are situations where related person
transactions may be in, or may not be inconsistent with, our best interests. Pursuant to the Audit Committee
Charter, the Audit Committee is responsible for reviewing and overseeing related-party transactions as
required by NASDAQ and SEC rules. Related persons include our directors, executive officers, 5%
beneficial owners of our common stock or their respective immediate family members. Our Board will also
review related party transactions in accordance with applicable law and the provisions of our Third
Amended and Restated Certificate of Incorporation, as amended.

In addition, our Audit Committee has adopted a written Related Party Transactions Policy. Under
our Related Party Transactions Policy, if any director or executive officer or any immediate family member
or related entity of a related person proposes to enter into a transaction, or if the Company proposes to enter
into a transaction with a 5% beneficial owner of our common stock, then, prior to entering into such
transaction, the related person must notify the Company’s Compliance Officer (currently, the Interim Chief
Financial Officer) and provide sufficient knowledge regarding the proposed transaction as is reasonably
available to assist the Compliance Officer in determining whether approval of the Audit Committee is
required. The Audit Committee must review and consider any proposed related person transaction, and the
Audit Committee will only approve the transactions it deems are fair to and in the best interests of the
Company. Additionally, the Audit Committee may ratify transactions that were previously unapproved if it
finds the transactions are fair to and in the best interests of the Company. There are no related party
transactions to report during fiscal year 2017.

Director Independence

Our Company is governed by our Board. Currently, each member of our Board, other than Ilan
Danieli, Chief Executive Officer, is an independent director and all standing committees of our Board are
composed entirely of independent directors, in each case under NASDAQ’s independence definition
applicable to boards of directors. For a director to be considered independent, our Board must determine
that the director has no relationship which, in the opinion of our Board, would interfere with the exercise of

independent judgment in carrying out the responsibilities of a director. Members of the Audit Committee
also must satisfy a separate SEC independence requirement, which provides that they may not accept
directly or indirectly any consulting, advisory or other compensatory fee from us or any of our subsidiaries
other than their directors’ compensation. In addition, under SEC rules, an Audit Committee member who is
an affiliate of the issuer (other than through service as a director) cannot be deemed to be independent. In
determining the independence of members of the Compensation Committee, NASDAQ listing standards
require our Board to consider certain factors, including but not limited to: (1) the source of compensation of
the director, including any consulting, advisory or other compensatory fee paid by us to the director, and
(2) whether the director is affiliated with us, one of our subsidiaries or an affiliate of one of our
subsidiaries. Under our Compensation Committee Charter, members of the Compensation Committee also
must qualify as “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986,
as amended (the “Code”), and as “non-employee directors” for purposes of Rule 16b-3 under the Exchange
Act. The independent members of the Board are Michael A. Luther, Jeffery Cossman, M.D., Douglas
Fisher, M.D., David Cohen, Mark Rimer and Samuel Riccitelli.

Information Regarding Executive Officers

Our section 16 Executive Officers, their ages and their respective positions are identified above in

Item 1.

Family Relationships

There are no family relationships between or among any of our executive officers or directors.

Item 11. Executive Compensation

The information set forth under the captions “Director Compensation,” “Named Executive Officer
Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation
Committee Report” is incorporated herein.

2017 EXECUTIVE COMPENSATION
Summary Compensation Table

The following table sets forth compensation awarded to, paid to or earned by our “named

executive officers” for services rendered during fiscal years 2017 and 2016.

Name and Principal Position

Year

Salary
($)

Option
Awards
($)(1)

All Other
Compensation
($)

Total ($)

Ilan Danieli (2)
Chief Executive Officer

Carl R. Iberger (5)
Chief Financial Officer

2017 250,000 106,666
-
2016 200,000

11,979 (3) 368,645
17,234 (4) 217,234

2017 200,000 106,666
-
53,750
2016

-
-

306,666
53,750

(1) The amounts in this column reflect the aggregate grant date fair value of the stock option awards granted
during the respective fiscal year as computed in accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 718, excluding the effect of estimated
forfeitures. The amounts shown do not correspond to the actual value that will be recognized by the named
executive officer. The assumptions used in the calculation of these amounts are included in Note 13
“Equity Incentive Plan” to the consolidated financial statements for the year ended December 31, 2017.

(2) Mr. Danieli was appointed our Chief Executive Officer effective as of June 29, 2017. No employment
contract has been executed at the time of this filing. Prior to the merger, Mr. Danieli was the Chief
Executive Officer of Precipio Diagnostics since November 2011.

(3) Amounts paid to Mr. Danieli in 2017 consisted of $11,979 in health insurance premiums.

(4) Amounts paid to Mr. Danieli in 2016 consisted of $13,634 in health insurance premiums and $3,600 in
auto allowance.

(5) Mr. Iberger was appointed our Chief Financial Officer effective June 29, 2017. Prior to the merger, Mr.
Iberger was the Chief Financial Officer of Precipio Diagnostics since October 1, 2016.

2017 Grants of Option Plan-Based Awards

The following table sets forth certain information with respect to grants of plan-based awards in
fiscal year 2017 to our named executive officers and directors. The stock option awards granted in fiscal
year 2017 were granted under the Company’s 2017 Stock Option and Incentive Plan, as amended (the
“2017 Plan”). During the year ended December 31, 2017, no other equity awards were granted to our
named executive officers and directors. See the notes below the table for details on option vesting
schedules.

All Other
Option Awards:
Number of
Securities
Underlying
Options (#)

Grant Date

Exercise or
Price of Option
Awards ($/sh) (1)

Grant Date Fair
Value of Option
Awards ($)(2)

9/26/17

66,666

1.87

106,666

9/26/17

66,666

1.87

106,666

Name

Ilan Danieli

Stock options (3)

Carl R. Iberger

Stock options (3)

(1) The exercise price of the stock awards represents the fair market value of our common stock on the date
of grant as defined in the 2017 Plan.

(2) The amount in this column reflects the aggregate grant date fair value of each stock award granted to our
named executive officers and directors during the fiscal year as computed in accordance with ASC 718,
excluding the effect of estimated forfeitures. The amounts shown do not correspond to the actual value that
will be recognized by the named executive officer. The assumptions used in the calculation of these
amounts are included in Note 13 “Equity Incentive Plan” to the consolidated financial statements for the
year ended December 31, 2017.

(3) 25% of the options shall vest on the first anniversary of the grant and thereafter the reminder shall vest
by 36 equal monthly installments (total of 4 years) and so long as the executive officer remains an
employee of the Company or a Subsidiary on such dates.

Outstanding Equity Awards at Fiscal 2017 Year-End

The following table provides certain information concerning outstanding option awards held by
our named executive officers as of December 31, 2017. As of December 31, 2016, no other equity awards
granted to our named executive officers were outstanding.

Stock Option Awards

Name

SARs and Option
Award Grant Date

Number of Securities
Underlying Unexercised
Options (#) (Exercisable)

Number of Securities
Underlying
Unexercised Options
(#) (Unexercisable)

Option Exercise Price
($)

Option Expiration
Date

Ilan
Danieli
Carl
Iberger

9/26/2017

66,666

1.87 9/26/2027

(1) The award vests over a four year period. Twenty-five per cent of the options vest on the first
anniversary of the grant and thereafter the reminder shall vest by 36 equal monthly installments (total of 4
years) and so long as the executive officer remains an employee of the Company or a Subsidiary on such
dates.

Fiscal Year 2017 Option Exercises and Stock Vested

No stock options were exercised by either of our named executive officers during fiscal year 2017.

Agreements with Our Named Executive Officers

No employment agreements have been entered into for Ilan Danieli, Chief Executive Officer, or
Carl R. Iberger, Chief Financial Officer, as of the date of this filing. The Company intends to enter into
employment agreements with the named officers but no date has been established by the Board of Directors
at this time.

Compensation Risk Analysis

We have reviewed our material compensation policies and practices for all employees and have
concluded that these policies and practices are not reasonably likely to have a material adverse effect on us.
While risk-taking is a necessary part of growing a business, our compensation philosophy is focused on
aligning compensation with the long-term interests of our stockholders as opposed to rewarding short-term
management decisions that could pose long-term risks.

DIRECTOR COMPENSATION

It is our Board’s general policy that compensation for independent directors should be a mix of
cash and equity-based compensation. As part of a director’s total compensation, and to create a direct
linkage between corporate performance and stockholder interests, our Board believes that a meaningful
portion of a director’s compensation should be provided in, or otherwise based on, the value of appreciation
in our common stock.

Our Board has the authority to approve all compensation payable to our directors, although our
Compensation Committee is responsible for making recommendations to our Board regarding this
compensation. Additionally, our Chief Executive Officer may also make recommendations or assist our
Compensation Committee in making recommendations regarding director compensation. Our Board and
Compensation Committee annually review our director compensation.

Cash Compensation

Directors who are also our employees are not separately compensated for serving on the Board
other than reimbursement for out-of-pocket expenses related to attendance at Board and committee
meetings. Independent directors are paid an annual retainer of $20,000 and receive reimbursement for out-
of-pocket expenses related to attendance at Board and committee meetings. Independent directors serving
on any committee of the Board are paid an additional annual retainer of $2,500 unless they are also a
chairperson of a committee. The chairperson of the Audit Committee receives an additional annual retainer
of $8,000 and the chairperson of any other committee receives an additional annual retainer of $4,000.

In 2017, the directors were granted a non-qualified option to purchase 7,000 shares of our
common stock. The options vest in full on the third anniversary of the grant date. A complete list of the
grants is set and their terms are set out below.

Director Summary Compensation Table

The following table provides information regarding our compensation for non-employee directors
during the year ended December 31, 2017. Directors who are our employees did not receive compensation
for serving on the Board or its committees in fiscal year 2017.

Name

Samuel Riccitelli
David Cohen
Michael A. Luther, Ph.D.
Douglas Fisher
Mark Rimer
Jeffrey Cossman
Robert M. Patzig(2)

Fees Earned or Paid
in Cash(3) ($)

Option Awards ($) (1) Total ($)
11,200 55,200
8,190 38,190
11,200 56,200
11,200 53,200
11,200 50,200
11,200 53,200
11,200 41,200

44,000
30,000
45,000
42,000
39,000
42,000
30,000

(1) The amounts reflected in this column reflect the grant date fair value of each option award granted
during 2017, as determined in accordance with FASB ASC Topic 718. Actual table with grant
dates and details appear below.

(2) Mr. Patzig resigned from the Board effective November, 8 2017, and the option awards included

in this table were canceled as of that date.

(3) Directors are accruing cash compensation and no compensation has been paid to date.

Equity Compensation Plan Information

The following equity compensation plan information summarizes plans and securities approved

and not approved by security holders as of December 31, 2017.

(b)

(a)
Number of
securities to be
issued upon
exercise of
outstanding options,
warrants and rights

Weighted-average
exercise price of
outstanding
options, warrants
and rights

(c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a) )

236,484 (1) $

—
236,484 $

7.12

—
7.12

441,334 (2)

—
441,334

PLAN CATEGORY

Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total

(1) Includes shares of our common stock issuable upon exercise of options to purchase common stock

awarded under our 2006 Plan and 2017 Plan.

(2) All shares of our common stock available for future issuance are from our 2017 Plan. The 2006 Plan

was terminated as to future awards on July 12, 2016.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

The following table provides information known to the Company with respect to beneficial
ownership of the Company’s common stock by its directors, by its named executive officers, by all of its
current executive officers and directors as a group, and by each person the Company believes beneficially
owns more than 5% of its outstanding common stock as of March 31, 2018. Percentage ownership
calculations for beneficial ownership for each person or entity are based on 19,668,572 shares outstanding
as of March 31, 2018. The number of shares beneficially owned by each person or group as of March 31,
2018 includes shares of the Company’s common stock that such person or group had the right to acquire on
or within 60 days after March 31, 2018, including, but not limited to, upon the exercise of options, warrants
to purchase common stock or the conversion of securities into common stock. Except as otherwise
indicated in the table below, addresses of named beneficial owners are in care of Precipio, Inc., 4 Science
Park, New Haven, CT 06511.

Name of Beneficial Owner
Randal J. Kirk (1)

Executive Officers and Directors:
Ilan Danieli (2)
Carl R. Iberger (3)
Jeffrey Cossman, M.D. (4)
Michael A. Luther (5)
David S. Cohen (6)
Samuel Riccitelli (4)
Mark Rimer (7)
Douglas Fisher, M.D. (4)
All executive officers and directors as a group (8 persons) (8)

Number of Shares
Beneficially
Owned

Percent of Class

1,768,915

8.8 %

169,714
17,060
15,776
16,110
1,086,647
15,776
1,252,673
15,776
2,589,532

*
*
*
*
5.5 %
*
6.3 %
*
13.1 %

Represents beneficial ownership of less than 1% of the shares of Common Stock.

(1)

Consists of (i) 1,359,121 shares of Common Stock and (ii) 409,794 shares of Common Stock
issuable upon exercise of warrants to purchase shares of Common Stock that are currently
exercisable. Based solely on information provided to the Company by the stockholder and
disclosed in a Schedule 13D/A filed on September 5, 2017. The total of the shares of Common
Stock and the warrants to purchase shares of Common Stock are held by the following companies:
Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC, Third Security Incentive
2010 LLC and Third Security Staff 2014 LLC. These companies are managed by Third Security,
LLC, which is managed by Randal J. Kirk. Mr. Randal J. Kirk could be deemed to have indirect
beneficial ownership of these shares. The business address of these beneficial owners is 1881
Grove Avenue, Radford, Virginia 24141.

(2)

(3)

(4)

(5)

(6)

(7)

Consists of 169,714 shares of Common Stock owned by IDP Holdings, LLC. Mr. Danieli is the
sole member and manager of IDP Holdings, LLC.

Consists of 17,060 shares of Common Stock owned by Mr. Iberger.

Consists of 15,776 shares of Common Stock issuable upon the exercise of stock options that are
exercisable or will become exercisable within 60 days after March 31, 2018.

Consists of 16,110 shares of Common Stock issuable upon the exercise of stock options that are
exercisable or will become exercisable within 60 days after March 31, 2018.

Consists of (i) 860,881 shares of Common Stock; (ii) 210,379 shares of Common Stock issuable
upon exercise of warrants to purchase shares of Common Stock that are currently exercisable; and
(iii) 15,387 shares of Common Stock issuable upon the exercise of stock options that are
exercisable or will become exercisable within 60 days after March 31, 2018. Based on information
provided to the Company by the stockholder and disclosed in a Schedule 13G filed on July 11,
2017. The business address for David S. Cohen is 299 Bishop Avenue, Bridgeport, Connecticut
06610.

Consists of (i) 686,874 shares of Common Stock held by Chenies Investor LLC; (ii) 340,913
shares of Common Stock held by Chenies Management LLC; (iii) 4,179 shares of Common Stock
held by Precipio Employee Holdings, LLC; (iv) warrants to purchase 175,390 shares of Common
Stock held by Chenies Investor LLC; (v) warrants to purchase 29,541 shares of Common Stock
held by Chenies Management LLC; and (vi) 15,776 shares of Common Stock issuable upon the
exercise of stock options that are exercisable or will become exercisable within 60 days after
March 31, 2018 held directly by Mr. Rimer. Mr. Rimer is managing member of Chenies Investor
LLC and Chenies Management LLC. Based on information provided to the Company by the
stockholder and disclosed in a Schedule 13D/A filed on October 17, 2017.

(8)

Includes shares which may be acquired by executive officers and directors as a group within 60
days after March 31, 2018 through the exercise of stock options or warrants.

Item 13. Certain Relationships and Related Transactions, and Director Independence

We have been a party to the following transactions since January 1, 2017 in which the amount
involved exceeded or will exceed $120,000, and in which any director, executive officer or holder of more
than 5% of any class of our voting stock, or any member of the immediate family of or entities affiliated
with any of them, had or will have a material interest.

Between March 2017 and June 2017, Mr. Cohen, a member of our Board of Directors, purchased
convertible promissory notes, or the Notes, from us in an aggregate principal amount of $225,000 and
bearing interest at 8% per year. In connection with the closing of our underwritten public offering in
August 2017, or the Offering, the aggregate principal amount under the Notes, together with approximately
$50,000 in accrued interest and a redemption payment in accordance with the terms of the Notes, converted
into 110,027 shares of our common stock and warrants to purchase 110,027 shares of our common stock.

In connection with the Merger with Precipio Diagnostics, LLC in June 2017, we issued to Mr.
Cohen 562,708 shares of our common stock and 158,940 shares of our Series A Senior Convertible
Preferred Stock, or Series A Preferred Stock, in respect of the units of Precipio Diagnostics, LLC held by
Mr. Cohen. In June 2017, Mr. Cohen also purchased 26,764 shares of Series A Preferred Stock for
approximately $100,000. In connection with the closing of the Offering, all of our Series A Preferred Stock
converted into shares of common stock, including shares of Series A Preferred Stock issued to the holders

of Series A Preferred Stock as the Series A Preferred Payment (as defined in our Certificate of Designation
of Series A Senior Convertible Preferred Stock), and we issued warrants to purchase shares of our common
stock to the former holders of Series A Preferred Stock as consideration for the conversion of their shares
of Series A Preferred Stock into shares of common stock. As a result of the foregoing transactions, we
issued to Mr. Cohen 188,146 shares of our common stock and warrants to purchase 92,852 shares of
common stock.

Between March 2017 and June 2017, Mr. Rimer, a member of our Board of Directors and an
affiliate (“Mr. Rimer”), purchased convertible promissory notes, or the Notes, from us in an aggregate
principal amount of $75,000 and bearing interest at 8% per year. In connection with the closing of our
underwritten public offering in August 2017, or the Offering, the aggregate principal amount under the
Notes, together with approximately $17,000 in accrued interest and a redemption payment in accordance
with the terms of the Notes, converted into 29,880 shares of our common stock and warrants to purchase
29,880 shares of our common stock.

100

In connection with the Merger with Precipio Diagnostics, LLC in June 2017, we issued to Mr.
Rimer 963,857 shares of our common stock and 257,147 shares of our Series A Senior Convertible
Preferred Stock, or Series A Preferred Stock, in respect of the units of Precipio Diagnostics, LLC held by
Mr. Rimer. In June 2017, Mr. Rimer also purchased 69,586 shares of Series A Preferred Stock for
approximately $260,000. In connection with the closing of the Offering, all of our Series A Preferred Stock
converted into shares of common stock, including shares of Series A Preferred Stock issued to the holders
of Series A Preferred Stock as the Series A Preferred Payment (as defined in our Certificate of Designation
of Series A Senior Convertible Preferred Stock), and we issued warrants to purchase shares of our common
stock to the former holders of Series A Preferred Stock as consideration for the conversion of their shares
of Series A Preferred Stock into shares of common stock. As a result of the foregoing transactions, we
issued to Mr. Cohen 332,909 shares of our common stock and warrants to purchase 166,454 shares of
common stock. In addition, in connection with the Merger, the Company issued Mr. Rimer Side Warrants
to purchase an aggregate of 91,429 shares of the Company's common stock at an exercise price of $7.00 per
share (subject to adjustment).

Family Relationships

There are no family relationships between or among any of our executive officers or directors.

Item 14. Principal Accountant Fees and Services

Independent Registered Public Accounting Firm

The following table shows information about fees that were billed or were expected to be billed by

Marcum LLP, our independent registered public accounting firm, for each of the last two fiscal years.

Audit fees
Audit-related fees
Tax fees
Total fees

2017

2016

353,790 $
9,015
3,560
366,365 $

203,000
7,965
24,065
235,030

Audit Fees. Audit fees consist of services rendered for the audit of our financial statements.

Audit-Related Fees. Audit-Related Fees consist of fees for assurance and related services that are
reasonably related to the performance of the audit and the review of our financial statements and which are
not reported under Audit Fees.

Tax Fees. Tax services consist primarily of planning, advice and compliance, or return

preparation, for U.S. federal, state and local, as well as international jurisdictions.

All Other Fees. None.

Pre-Approval of Audit and Non-Audit Services

Under the Audit Committee Charter, the Audit Committee is required to pre-approve all audit and
non-audit services to be provided to us by our independent registered public accounting firm and its
member firms. All services provided by our independent registered public accounting firm in 2017 were
pre-approved by the Audit Committee.

101

Part IV

Item 15. Exhibits, Financial Statement Schedules

(a) The following documents are filed as part of this report:

Financial Statements. The following financial statements of the Registrant are included in
response to Item 8 of this report:

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets of the Registrant and Subsidiary as of December 31, 2017 and 2016.

Consolidated Statements of Operations of the Registrant and Subsidiary for the years ended
December 31, 2017 and 2016.

Consolidated Statements of Stockholders’ Equity (Deficit) of the Registrant and Subsidiary for the
years ended December 31, 2017 and 2016.

Consolidated Statements of Cash Flows of the Registrant and Subsidiary for the years ended
December 31, 2017 and 2016.

Notes to Consolidated Financial Statements of the Registrant and Subsidiary.

Financial Statement Schedules.

All financial statement schedules are omitted because the information is inapplicable or presented
in the notes to the financial statements.

Exhibits. The following exhibits are filed as required by Item 15(a)(3) of this report. Exhibit
numbers refer to the paragraph numbers under Item 601 of Regulation S-K:

102

2.1

2.2

2.3

3.1

3.2

3.3

3.4

3.5

4.1

4.2

4.3

4.4

4.5

4.6

10.1

10.2

10.3

10.4

10.5

10.6

Agreement and Plan of Merger, dated October 12, 2016 by and among Transgenomic, Inc.,
New Haven Labs Inc. and Precipio Diagnostics, LLC (incorporated by reference to Exhibit 2.1
of the Company’s Form 8-K filed on October 13, 2016).
First Amendment to Agreement and Plan of Merger, dated as of February 3, 2017 by and
among Transgenomic, Inc., New Haven Labs Inc. and Precipio Diagnostics, LLC
(incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K filed on February 2,
2017).
Second Amendment to Agreement and Plan of Merger, dated as of June 27, 2017 by and
among Transgenomic, Inc., New Haven Labs Inc. and Precipio Diagnostics, LLC
(incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K filed on June 30, 2017).
Third Amended and Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 of the Company’s 8-K filed on June 30, 2017).
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Company’s
Form 8-K filed on June 30, 2017).
Certificate of Elimination (incorporated by reference to Exhibit 3.3 of the Company’s Form 8-
K filed on June 30, 2017).
Certificate of Designation for Series B Preferred Stock (incorporated by reference to Exhibit
3.1 of the Company’s Form 8-K filed on August 31, 2017).
Certificate of Designation for Series C Preferred Stock (incorporated by reference to Exhibit
3.1 of the Company’s Form 8-K filed on November 6, 2017).
Form of Certificate of the Company’s Common Stock (incorporated by reference to Exhibit 4
of the Company’s Registration Statement on Form S-1 (Registration No. 333-32174) filed on
March 10, 2000).
Form of Offering Warrant (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-
K filed on August 23, 2017).
Form of Underwriter Warrant (incorporated by reference to Exhibit 4.2 of the Company’s
Form 8-K filed on August 23, 2017).
Form of Conversion Warrant (incorporated by reference to Exhibit 4.3 of the Company’s
Form 8-K filed on August 23, 2017).
Form of Warrant (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed
on November 6, 2017).
Form of Warrant (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed
on November 13, 2017).
License Agreement between the Company and Dana-Farber Cancer Institute dated October 8,
2009 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed on
November 5, 2009).
Waiver Letter Agreement by and among the Company, Potomac Capital Partners, L.P., MAZ
Partners, LP, David Wambeke and Craig-Hallum Capital Group, LLC dated as of January 10,
2017 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on January
17, 2017).
First Amendment to Unsecured Convertible Promissory Note by and among the Company and
MAZ Partners LP, dated as of January 17, 2017 (incorporated by reference to Exhibit 10.1 of
the Company’s Form 8-K filed on January 20, 2017).
Termination and Tenth Amendment to Loan and Security Agreement, dated as of February 3,
2017, by and among Third Security Senior Staff 2008 LLC, as administrative agent and a
lender, the other lenders party thereto and the Company (incorporated by reference to Exhibit
10.1 of the Company’s Form 8-K filed on February 2, 2017).
Promissory Note, dated February 2, 2017 between the Company and Precipio Diagnostics,
LLC (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on February
3, 2017).
Securities Purchase Agreement, dated as of April 13, 2017 by and between the Company and
the investors set forth on Schedule A attached thereto (incorporated by reference to Exhibit

10.7

10.8

10.9

10.10

10.1 of the Company’s Form 8-K filed on April 17, 2017).
Form of Promissory Note, issued by the Company to certain investors, dated as of April 13,
2017 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on April 17,
2017).
Form of Warrant to Purchase Common Stock, issued by the Company to certain investors,
dated as of April 13, 2017 (incorporated by reference to Exhibit 10.3 of the Company’s Form
8-K filed on April 17, 2017).
Precipio Diagnostics, LLC Subordinated Promissory Note, issued by Precipio to the
Company, dated as of April 13, 2017 (incorporated by reference to Exhibit 10.4 of the
Company’s Form 8-K filed on April 17, 2017).
Subordination Agreement, dated as of April 13, 2017, by and between the Company and
Webster Bank, National Association (incorporated by reference to Exhibit 10.5 of the
Company’s Form 8-K filed on April 17, 2017).

103

10.11

10.12†

10.13†

10.14†

10.15†

10.16

10.17

10.18

10.19

10.20

10.21

10.22

10.23#

10.24

10.25

10.26

10.27

10.28

10.29

Side Letter to extend Maturity Date of Unsecured Convertible Promissory Note by and
between the Company and MAZ Partners LP, dated as of June 21, 2017 (incorporated by
reference to Exhibit 10.1 of the Company’s Form 8-K filed on June 27, 2017).
Amended and Restated 2017 Stock Option and Incentive Plan (incorporated by reference to
Annex D of the Company’s Definitive Proxy Statement on Schedule 14A filed on December
29, 2017).
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors (incorporated
by reference to Exhibit 10.2 of the Company’s Form 8-K filed on June 28, 2017).
Form of Non-Qualified Stock Option Agreement for Company Employees (incorporated by
reference to Exhibit 10.3 of the Company’s Form 8-K filed on June 28, 2017).
Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.4 of the
Company’s Form 8-K filed on June 28, 2017).
Securities Purchase Agreement with the Private Placement Purchasers (incorporated by
reference to Exhibit 10.1 of the Company’s Form 8-K filed on June 30, 2017).
Investors’ Rights Agreement (incorporated by reference to Exhibit 10.2 of the Company’s
Form 8-K filed on June 30, 2017).
Exchange Agreement (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K
filed on June 30, 2017).
New Bridge Securities Purchase Agreement (incorporated by reference to Exhibit 10.4 of the
Company’s Form 8-K filed on June 30, 2017).
Form of New Bridge Promissory Note (incorporated by reference to Exhibit 10.5 of the
Company’s Form 8-K filed on June 30, 2017).
Form of New Bridge Warrant (incorporated by reference to Exhibit 10.6 of the Company’s
Form 8-K filed on June 30, 2017).
Form of Side Warrant (incorporated by reference to Exhibit 10.7 of the Company’s Form 8-K
filed on June 30, 2017).
Amended and Restated Pathology Services Agreement, dated March 21, 2017, by and between
the Company and Yale University (incorporated by reference to Exhibit 10.1 of the
Company’s Form 8-K/A filed on July 31, 2017).
Lease, dated July 11, 2017, by and between the Company and Science Park Development
Corporation (incorporated by reference to Exhibit 10.2 of the Company’s Form 8K/A filed on
July 31, 2017).
Underwriting Agreement, dated August 22, 2017, by and among the Company and the
underwriters party thereto (incorporated by reference to Exhibit 1.1 of the Company’s Form 8-
K filed on August 23, 2017).
Placement Agency Agreement, dated as of November 2, 2017, by and between Precipio, Inc.
and Aegis Capital Corp. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-
K filed on November 3, 2017). ‘
Debt Settlement Agreement, dated October 31, 2017, by and among Precipio, Inc., the
Creditors and Collateral Services, LLC (incorporated by reference to Exhibit 10.1 of the
Company’s Form 8-K filed on November 6, 2017).
Security Agreement, dated October 31, 2017, by and between Precipio, Inc. and Collateral
Services LLC, in its capacity as collateral agent for the Vendors (as defined therein)
(incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on November 6,
2017).
Amendment, dated November 9, 2017, to Placement Agency Agreement, dated November 2,
2017, by and between Precipio, Inc. and Aegis Capital Corp. (incorporated by reference to
Exhibit 10.1 of the Company’s Form 8-K filed on November 13, 2017).

21.1* Subsidiaries of the Company.
23.1* Consent of Marcum LLP.

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

104

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

* Filed herewith

** Furnished herewith

Confidential treatment has been requested or granted for certain information contained in this
exhibit. Such information has been omitted and filed separately with the Securities and
Exchange Commission.

† Indicates a management contract or any compensatory plan, contract or arrangement.

Item 16. Form 10-K Summary

None.

105

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on this 13th day of April 2018.

Precipio, Inc.

By:

/s/ ILAN DANIELI
Ilan Danieli,
Chief Executive Officer (Principal Executive Officer)

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

Signature

Title

Date

/s/ Ilan Danieli
Ilan Danieli

Director and Chief Executive Officer
(Principal Executive Officer)

April 13, 2018

/s/ Carl R. Iberger
Carl R. Iberger

Chief Financial Officer
(Principal Financial and Accounting Officer)

April 13, 2018

/s/ Samuel Riccitelli
Samuel Riccitelli

Chairman of the Board of Directors

April 13, 2018

/s/ Michael A. Luther
Michael A. Luther

Director

/s/ Mark Rimer
Mark Rimer

Director

/s/Douglas Fisher, M.D.
Douglas Fisher, M.D.

Director

/s/ Jeffrey Cossman, M.D.
Jeffrey Cossman, M.D.

Director

/s/ David Cohen
David Cohen

Director

106

April 13, 2018