3. 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

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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	$	6,088
Fair value of preferred stock converted to common stock		49
Fair value of debt converted to common stock		2,398
Fair value of debt converted to preferred stock		9,796
Fair value of existing bridge notes		1,275
Fair value of warrants		1,996
Purchase consideration	$	21,602

In estimating the 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	$	419
Property and equipment		29
Goodwill		14,000
Other intangible assets(1)		21,100
Total assets		35,548
Current liabilities		13,423
Other liabilities		523
Total liabilities		13,946
Net assets acquired	$	21,602

(1)

Other intangible assets consist of:


(dollars in thousands)
Acquired technology	$	18,990
Customer relationships		250
Non-compete agreements		30
Trademark and trade name		40
Backlog		200
In-process research and development		1,590
Total intangibles	$	21,100

We determined the estimated fair value of the acquired technology 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
	For the Years ended December 31,
	2017			2016
Net sales	$	2,687		$	3,280
Net loss available to common stockholders	(37,389		)	(11,215		)
Loss per common share	$	(4.95	)	$	(1.70	)